Monday, June 12, 2006

Advice for the Class of 2006...

Really this goes out to all the grads that never had a parent willing or able to have a real face to face conversation on $$$.

I'm paraphrasing an article in today's NY Times with some of the bullets.....

* Say this with me - NEVER, EVER Play the lotto, scratch-offs or other crack-like state lotteries. These things are taxes disguised as entertainment which unfairly capitalize on the poor who have little understanding of their workings. The lottery provides a nice paycheck to the schools of our state every year, but it is not your duty to subsidize the schools until you are a property owner. When you are starting out the lottery may look tempting but run in the other direction. If you want to gamble ask for my tips on options pricing.....

* Make your own coffee. Say you spend just $3.50 every workday for your latte or mocha frappachino. If you drank the free office brew instead, you'd have more than $11,500 to play with after 10 years.

By the same logic, if you smoke, now is a good time to quit. Doing so will save you on average $25,600 over 10 years not to mention the enormous burden you will eventually be on my healthcare system if you keep smoking.

* Live within your means - This is hard in today's age of play now, pay later, but it's in your best interest. If you really need that new pair of jeans pay cash or earn the money to pay cash. Avoid credit card debt like the plague. More young adults are hurting their financial futures by excessive use of credit than we know.


Thursday, June 08, 2006

So I'm not always this right...

The market tanks and rallies back over 180pts today? That's the classic definition of a tradeable rally noted at 9:12 this morning. I'm still looking to be long in the VERY short term as we bounce along for a couple of days.

I still look for a 15-30% decline in the mkts over the coming 2 yr period but for the next day or so we could be looking up (we got back about 1% of my 4% target today).

Image from Clayton last night. That was an amazing sunset........

Charge It Nation...

This recent Forbes article speaks to an issue near and dear to my heart the creaking of the American Financial system under the weight of mountains of consumer debt.

"Americans increased their borrowing in April at the fastest pace in 10 months as credit card spending and auto loans both picked up.

The Federal Reserve reported Wednesday that consumer borrowing rose at an annual rate of 5.9 percent in April, a significant increase from a tiny 0.8 percent gain in March.

The increase in dollar terms was $10.6 billion, which pushed total consumer credit to a record $2.17 trillion. The Fed's measurement of consumer credit does not include mortgages and other loans secured by real estate.

Economists are predicting that consumer spending, which accounts for two-thirds of total economic activity, will slow in coming months as gasoline costing around $3 per gallon leaves consumers less to spend in other areas."

I would disagree with the last point. I argue that $3 gas is actually a cause of more consumer debt purchases. Who fills up a car at $3/gallon with cash? Not I. Also, I argue that the pending collapse of the real estate market will sap any excess consumer spending.

The best real estate advice I ever received was from a banker at my first job in NJ "Take the other side of whatever Trump is doing". For the record Trump is building like a madman right now.

The thesis for the markets still holds...

My expectation that we've seen the highs for this "bull" market still hold. We've seen considerable weakness in the past couple of weeks and while I was clearly off by a couple of weeks (I expected it to start on or around 6/1) the directional call was correct.

I'd look for some consolidation in here - maybe even a tradeable rally based on the unemployment #'s and the news from Iraq. At some point in the next week (by 6/16) I'd expect us to pick up 2-4%, but the buyers will quickly run out of steam and I'd expect another leg down in the back half of June.

It is important to watch emerging markets as well they have been getting creamed in the past month.

Oil is also starting to slip (now under $70) which again fits the thesis that a global slowdown in the world economies will lead to lower oil prices.


Thursday, June 01, 2006

Momma MAKE Your Babies Grow Up To Be Hedge Fund Managers.....

Hedge Funds. When I say the words most eyes glaze over like I'm speaking French-Canadian. Hedge Funds in general refer to private investment funds which use unconventional strategies to achieve above average returns (in theory).

Where Hedge Funds really excel is at paying themselves. While a traditional mutual fund might struggle to get you to agree to a 1% fee, hedge funds have convinced the world that their brilliant investing style warrants a 2-5% management fee and 20%-40% of all gains generated!!

In the current market (2003 to present) this has made many of the top managers rich and look like geniuses far beyond their skill level.

According to an article in Alpha Magazine in 2005, the SALARY of the top hedge fund managers ranged from a paltry $130 million (there was actually a tie for 25th place) to a whopping $1.5 billion!!

The next time your kids are foaming at the mouth over how much money Jay-Z or Eminem made last year (I think they were both under $30 million) point out that the 26th best math geek on Wall Street make $130 million last year and see if that jumpstarts their interest in algebra.

I can't defend these pay packages. For the most part these people are being paid well for being in the right place at the right time. The real value will come in 2007-09 if they can continue to post 20% returns for investors in a weak market.

Congratulations to all those that made the list and to those that didn't, well that new Gulfstream G5 will just have to wait another year.

Housing and Stock Market recaps...

Since I began the blog back in February I've been talking about the precarious position of the US economy. The housing slowdown will impact the US consumer at a time when long-term rates have to rise to continue to fuel our government spending.

The more I have read about the real estate markets around the US, the more I'm convinced that we are not heading for a soft landing and the prospects of a real estate crash (prices down 40-50%) is very real. Consider some numbers from selected markets and some national data:

* Nationally, the number of new homes for sale stands at over 550k units. Only twice in the last 35 yrs have we ever had as many as 450k units for sale. Current inventory of new homes is 20%+ above the historical peak. Also, this figure does not take into account the tremendous inventory of condos and townhouses for sale or existing homes for sale.

* Inventory of homes for sale in Northern NJ is up 60% since January 1st!!!

* Mortgage rates are at 4 year highs and climbing. I still think we might see 7.5% by year-end which will completely kill the housing market.

* In Northern Virginia, a part of the Washington DC metro area, the number of active listings was 2,983 in April 2005, which increased by 241% to 10,038 in April 2006!!

The real estate bubble is bursting and you don't want to be the last one into this party because the clean-up will be ugly.


The stock market has been all over the map. I was off by about 2 weeks - I really expected the market to start cracking around now 6/1, but it started early. I'm looking for a little of a reflex rally to really get short, because the signs are there that we are really top heavy in the market.

Our economy is so interconnected today that you can not overlook the importance of stock market moves. If, as I expect the market is weak in 2007 and 2008, look for dramatic reductions in tax revenues which will lead to hard choices come budget time for Congress. A Congress which apparently has never seen a spending bill they didn't like.

Finally, all those days of paying $3/gallon for gas appear to be catching up with the lower end of the economy. It's annoyance for most, but when $3 gas went from an aberration to permanent reality it severely curtailed spending for some (see Walmart's recent weak outlook). Again, I think gas will fall in 2007/2008 (assuming the hurricane's stay out of the gulf) but if you're house goes down in value 40%, your job is at risk b/c of budget cuts and your retirement portfolio goes down 20% with the market, is it really a good thing to be paying $2/gallon of gas?