Wednesday, July 12, 2006

The Upside to Rising Rates...

I'm constantly amazed by complaints from people that local banks are still only paying 1% interest on their savings. The banks will only pay what the market demands and right now they know that you (their loyal, local customers) are not pulling out your money despite their paltry offerings.

For example

* Watertown Savings is now offering 1.25% on their standard savings account.
* Keybank offers an impressive 0.2% rate on their savings accounts.

The point is with little competition to force the banks to up their payouts the rates will not budge. Granted these banks do offer competitive rates if you are willing to lock up your money with them for the next 12-36 mths in a CD. That's not a good strategy in my opinion.

However, in the emerging world of online banking rates are very competitive.

Here Emigrant Direct is paying 5%.
HSBCDirect is paying 5.05%
and Citibank is paying 5%.

These banks are always competing for more press (ie, "The HIGHEST RATE in the nation") so when Citibank upped their rate to 5%, HSBC moved theirs to 5.05% a day later. This type of competition benefits consumers and you should take advantage of it.

Yes you will lose the pleasure of rushing to the bank by 4pm to catch the teller before she closes, but the rewards are worth it ;)

Given that the stocks have only returned about 3% over the past 8 yrs, 5% in an FDIC insured account looks pretty good.


Monday, July 10, 2006

Jefferson County Home Prices Up 57.1%!!

Okay, so I keep ranting that the sky is falling and the NYS Association of Realtors comes out to say that

"Jefferson County led the state in median sales price growth, recording an increase of 57.1 percent compared to the same period a year earlier."

57%!! Are you kidding? That is roughly 20 years of home price appreciation in a single year.

Unfortunately, we don't have access to all of the data to see if some specific sales skewed the data (I suspect commercial sales of land in LeRay and Outer Arsenal St. may have pumped up the numbers meaningfully). But let's assume the numbers represent traditional home sales. What could drive up prices by such an absurd amount?

Clearly limited supply or increased demand must be the main factors, right?

Let's look at supply. Today there are roughly 2,050 listings in the Northern New York MLS. I've watched the MLS fairly closely over the past couple of years and it has historically had 1,200-1,400 listings. There appears to be almost 50% MORE inventory today than there was last year.

Huh? But if supply is up than prices should be FALLING not rising, right?

Well, let's look at demand. This is harder to quantify. Realtors - who are in the business of making demand look strong ALL THE TIME - continue to cite the increased demand for housing from Fort Drum's expansion.

I'd love for someone to give me some hard facts to back this up. To the casual observer it seems many soldiers are single (not homebuyers), almost all soldiers make a very modest income (should not be homebuyers) and many soldiers transfer frequently (should not be homebuyers). To my eye, I'd guess that maybe 10% of the military population should be buying homes because they plan to live in the North Country for 10+ yrs and they can afford an inflated home price with rising mortgage rates. I'm very suspect that Ft. Drum is driving demand. I think perception is driving demand.

People in Northern NY have watched friends and family around the US get paper rich on real estate over the past 5 yrs and they want a piece of the action. Couple this with the local media's obsession to beat you over the head with one message "Ft. Drum is EXPANDING, BLAH, BLAH...." and you get a perception that home prices are going up and going to stay up.

Just in the past few weeks I've seen many asking prices taking steep dives as people realize that there is little real housing demand in NNY.

I'm afraid that too many families are putting their financial futures at risk in the hopes of reaping the benefits of investing in a home. Buy a home because you need a place to live, it should not be viewed as an investment vehicle.

Thursday, July 06, 2006

Oil, Oil Everywhere But Not a Drop to Drink...

Oil was once again making headlines this week as crude topped $75/barrel. The economist in all of you is probably saying "Well of course, supply is limited and demand is sky high so prices are rising". Well, that's what logic would say and that would be wrong.

According to the latest data out of the US Dept of Energy - Crude oil inventories stand at 341.3 million, leaving them 3.6 percent higher than last year. HUH??? Inventories are HIGHER THAN LAST YR?

``Inventories are ample; there's plenty of supply,'' Kyle Cooper, director of research at IAF Advisors in Houston, said yesterday.
Gasoline Declines

Okay, but surely gas inventories are lower even if crude inventories are up. "U.S. stockpiles of the motor fuel rose after imports jumped 33 percent to 1.27 million barrels" Inventories are up 33%???????

``If demand continues, there's a very good chance we could see prices try to test the $80 level,'' said Peter Beutel, president of Cameron Hanover Inc., a New Canaan, Connecticut energy consultant.

So, Inventories are "ample" perhaps even a bit excessive. Why am I still paying $3.00/gallon?

"Prices leapt July 5 after North Korea test-fired at least seven missiles in breach of a United Nations moratorium on the testing of long-range weapons."

Are you kidding me? This guy should have zero credibility on the world stage, but unfortunately our missteps in Iraq, our distraction with Iran and our lack of credibility on the global stage make the oil markets susceptible to the whims of a nutcase with 6 nukes and no means for delivering them.

Just wait until we hit the heart of hurricane season and a Cat 5 is churning in the Gulf of Mexico. $3 gas might look like a bargain.


Wednesday, July 05, 2006

How Can We Stem the Flight of Young Adults From Upstate New York?

The title of a recent article in the NY Times was The Flight of Young Adults in Upstate NY and it really struck a chord with me as someone that left the area as young adult only to return later in life. Clearly the population of upstate NY has been in a long steady decline for sometime, but I think the general consensus was that we were losing seniors to the south, but this data seems to reflect that migration patterns are even more pronounced among young adults.

This trend has HUGE financial implications for our state as we get older but our population of working adults shrinks yielding a smaller tax base.

The one caveat is that this article talks in broad terms about UPSTATE NY and clearly Jefferson County is bucking this trend to a small degree with increases in troop #'s stationed at Ft. Drum, but for the most part Ft. Drum is just a drop in the overall Upstate bucket.

My Question of the Day is this: What can reverse this trend? What can we change about Upstate NY to make it an attractive place for someone to bring their families?

I know the answer is simple - attract new industry, improve the schools, etc, etc, but people have been talking about that for 40 yrs.

I have some ideas, but I'd love to hear from you first - If you're the governor of NY what do you do today to stop the flight of young adults from Upstate NY?

I've pasted the majority of the NY Times article below b/c it is difficult to see old articles on their site.


Upstate New York is staggering from an accelerating exodus of young adults, new census results show. The migration is turning many communities grayer, threatening the long-term viability of ailing cities and raising concerns about the state's future tax base.

From 1990 to 2004, the number of 25-to-34-year-old residents in the 52 counties north of Rockland and Putnam declined by more than 25 percent. In 13 counties that include cities like Buffalo, Syracuse and Binghamton, the population of young adults fell by more than 30 percent. In Tioga County, part of Appalachia in New York's Southern Tier, 42 percent fewer young adults were counted in 2004 than in 1990.

Over all, the upstate population grew by 1.1 percent in the 1990's — slower than the rate for any state except West Virginia and North Dakota.

Population growth upstate might have lagged even more but for the influx of 21,000 prison inmates, who accounted for 30 percent of new residents. During the first half of the current decade, the pace of depopulation actually increased in many places.

David Shaffer, president of the Public Policy Institute, which is affiliated with the Business Council of New York State, described the hemorrhaging of young adults as "the worst kind of loss."

"You don't just magically make it up with new births," he said. "These are the people who are starting careers, starting families, buying homes."

In almost every place upstate, emigration rates were highest among college graduates, producing a brain drain, according to separate analyses of census results for The New York Times by two demographers, William Frey of the Brookings Institution and Andrew A. Beveridge of Queens College of the City University of New York. Among the nation's large metropolitan areas, Professor Frey said, Buffalo and Rochester had the highest rates of what he called "bright flight."

While the chronic economic woes upstate have been of growing concern for a decade or more, the accelerating departure of young people is considered particularly alarming.

As more young people depart, the population is aging. In Broome County, which includes Binghamton in the Southern Tier, the median age rose to 38.2 in 2004 from 33.3 in 1990.
"The number of upstate residents 45 or older increased by 15.3 percent, even as the number of young people, on whom they rely to hold jobs and pay taxes, went down sharply," Mr. Wilmers of M & T Bank said.

In Syracuse, total population losses may have been stanched since 2000 as children have returned to take care of aging parents, jobs have become available in more diverse fields and housing prices have become more affordable. "It's given us some hope that we're going to arrest the continuing decline of young people," said Mr. Davis, of the Metropolitan Development Association there.

Welcome Back!

Sorry for the slow posting over the past few weeks. Back in some of my earliest posts I described how the combination of rising rates, inflation, a weaken US dollar, falling real estate prices, a tapped out consumer and the weak job growth since 2001 were setting the stage for a financial market instability in the US in 2006 - 2008.

This thesis has continued to play out in rapid succession over the past 7 weeks. While we have had the occassional rally here and there to stem the downward slide the bias has clearly been negative as of late.

So please excuse the lengthy welcome back post, but I thought it might make sense to revisit some of these issues as they are becoming increasingly important for investors (and ulitmately consumers).

Rising Rates - Bernake is in no man's land. He needs/wants to stop raising rates, but the data keeps telling him to push on. I'm leaning toward one more hike followed by a pause of 2-3 meetings. I think this is a flawed strategy, but to be frank I don't have a better option. The markets might go crazy when the Fed says it's done. Seriously, we could be up 5-10% in the blink of an eye, but I view that as the last hurrah and a perfect entry point for long-dated market puts.

Inflation - I really wish these gov't nerds that keep preaching there is no core inflation would actually try to go buy something. As long as you don't have to buy any construction material, healthcare supplies or services, anything related to higher education, gas, food, real estate, etc, etc, I'm sure you would view the world as having little inflation, but for the rest of us inflation is here in a real way. Inflation has two causes increased demand or increased production cost. Thus, far production cost has been the primary driver, but I fear that by the time the fed figures out that Inflation is real - production costs will be falling and demand might be falling off a cliff (consider housing for example). Thus the Fed might start fighting a battle which is long over causing more damage to our economy.

Real Estate - Well, the word is finally out. The great Real Estate Boom is over. But here's the problem - this asset class is still in serious flux. Rising rates will pinch hundreds of thousands of new homeowners in 2006-08, just as the homebuilders flood the market with new inventory. If you are one of the few, the proud, the debt free homeowners of America stand up and take a bow, you are unlikely to be affected. If you plan on owning your home for another 20 years you too will also be spared. If you bought your house pre-2005 in Upstate NY, the damage should be minimal. However, if you bought a 4 bdrm colonial in Westchester in 2005 for $1.5 million with an adjustable rate mortgage - ouch.

I've said it before, but I think it is worth repeating the financial risks many families have undertaken in the pursuit of larger homes than they can afford (the standard # is that your fixed monthly debts - cars, credit cards, mortgage, student loans - should not exceed 25% of your net income) has the potential to shake the entire financial foundation of our country. When this gets really bad think of everyone in the real estate food chain that will have less $$$ to spend - Real Estate Agents, Mortgage brokers, electricians, carpenters, painters, plumbers, Home Depot employees, etc, etc.....

The world isn't coming to an end, but I'm a bit concerned about the near-term financial health of our nation. I would not want to be President in 2008. That person is going to have some very, very hard spending cuts/tax increase decisions to make.