Monday, October 30, 2006

Return the Power of the Purse to the People

A very enlightened article from the Canadian press (interestingly not very well published in the US) covers some of the looming problems for our economy.

"There are serious problems and no easy solutions - and the hard solutions include raising taxes and cutting benefits, the kind of talk that can doom a politician's career. "

I've been saying for some time now that the three big issues facing us as a country over the next 15-30 years are: Social Security, Medicare and Taxes.

Social Security needs to be adjusted. You'll note that I said adjusted not privatized. You will have to pay in more, get back less at retirement and probably defer retirement until you are 70+. Social Security is the easy one to fix.

Personal income taxes need to be raised on those making over $500,000/year. Maybe the number is $750,000 or $1,000,000 but the top tax rate needs to be edged up to help offset the surge of spending since 2000. I know one day when I'm running for a Senate seat in 2018, this post will come back to haunt me, but you have to face facts and the current tax rate for high wage earners is too low to support our spending. Raising taxes is hard but doable.

Medicare is a mess. I don't know how to fix Medicare and I'd love to hear a good idea on how to fix Medicare.

Oh and by the way our interest payments are increasing every year and we can't refinance with Ditech.com.

The problem with this sort of big picture thinking is that it requires someone to look beyond the current election cycle. This is where I think we need to propose something bold. Something almost radical. Let's take the power of the purse away from Congress.

Congress should continue to legislate, but it seems that all of the corruption, scandal, waste and mismanagement in Congress seems to be tied to their ability to dish out pork. Well, if we take that role out of their hands, Congress should immediately improve in its ability to legislate.

I propose that the next President (Republican or Democrat, it makes no difference) should establish a bi-partisan group of business leaders, accountants, finance professionals to serve terms of 15 years. They will control all spending during this period and determine real financial and tax policies to right this ship. Without a bold move like this I don't see how we'll ever make the necessary changes needed to improve our financial outlook before it is too late.

Below are a couple of quotes from the article that might jolt us into action.

"Their basic message is this: the U.S. national debt is currently US$8.5 trillion and it could reach $46 trillion or more over the next few decades, adjusted for inflation, if the status quo doesn't change. That's almost as much as the total net worth of every person in the U.S. - Bill Gates, Warren Buffett and those Google guys included.

And every year that nothing is done about it, Walker says, the problem grows by $2 trillion to $3 trillion."

Pass this on to Senator McCain, Senator Clinton, Senator Obama, Governor Richardson, etc, etc. If you can think of a politician with political aspirations in 2008 mention this idea. Maybe, just maybe, they'll wake up before it's too late.

Recommend this post to DIGG, FARK and Delicious. Maybe the power of the web will make someone notice that the acme anvil is falling off the cliff and our foot is still tied to it. Beep, Beep!

Friday, October 27, 2006

Housing Market a Drag on Economic Growth

Hmmm, where have I heard this before? Housing and a bloated trade deficit slowing economic growth?

Housing Market a Drag on Economic Growth

WASHINGTON (AP) --Economic growth slowed to a crawl in the third quarter, advancing at a pace of just 1.6 percent, the worst in more than three years.

The latest snapshot of the economy, released by the Commerce Department on Friday, showed that the slumping housing market figured prominently in the economy's dramatic loss of momentum. Investment in homebuilding was cut by the biggest amount since early 1991.

The reading on gross domestic product was weaker than the 2.1 percent pace many economists were forecasting. ''The housing bubble burst and that really knocked down growth,'' said Joel Naroff, president of Naroff Economic Advisors.

The third quarter's 1.6 percent growth rate was the weakest since the first quarter of 2003, when the economy grew at a 1.2 percent annual rate.

The economy's softness in the third quarter stemmed in large part from the cool down in the once-hot housing market.

Spending on home building dropped at a rate of 17.4 percent in the third quarter. That was the biggest drop since the first quarter of 1991 when such spending was sliced at a 21.7 percent pace.

Weak inventory building by businesses and the bloated trade deficit also played roles in weighing down economic activity in the third quarter.

Thursday, October 26, 2006

Greatest Clock in the world......

I've mentioned before that I'm a bit of a graph/chart geek. This clock is the coolest thing I've seen in some time. It's a remarkably simple, yet elegant representation of our movement along a time line.

This guy should be taking his code to Sharper Image and selling clocks like this for $69.99 next year.

Check out the clock here.

The Big Picture...

So, here we sit watching bad news pile up on the tape and the market keeps chugging higher. I'm sometimes seen as a purveyor of gloom and doom for the economy in the US, but clearly there is a disconnect between stocks and the economic reality today. So what gives?

This is a mirror image of 2002. In 2002, no news, no matter how positive was good for the mkts. Instead stocks ground lower every day. Today, bad news no matter how bad (how about losing $6 billion in 3 mths Ford) can't take a stock down. There are two main drivers of this ---

--- Most money today is being run by investment professionals that are followers not leaders and they are desperately chasing performance to enhance their year-end numbers. In 2005, it was easy to invest in commodities or commodity stocks and let it ride. In 2006, they've had to work a bit and now they are all chasing performance which might end very badly.

--- Most money managers are overly-obsessed with Fed Interest Rate moves. They continue to believe that there is a single variable model showing lower interest rates = higher stock prices.

My advice to sophisticated investors now is to trade the market short-term to the upside, but to use all profits to build substantial short positions. for 2007 and 2008.

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Re: Exxon's profits - yes it is unreal to earn $10 billion in a quarter, but it is the nature of the beast. Their cost per barrel doesn't change and when the price per barrel in the open market went up, their profits went up on the same trajectory. Don't blame Exxon, blame the 25yr-old oil trader in NY that pushed up prices because he thought he was a hurricane expert.

Tuesday, October 24, 2006

Money Mag/CNN's Rules to Grow Rich By...

An interesting tool to flip through for some general lifetime financial tips. Some are worthwhile tips while others are not exactly brain surgery....

1. For return on investment, the best home renovation is to upgrade an old bathroom. Kitchens come in second.

The return on investment on a mid-range bath modernization is 102% of its cost. Kitchens can add about 90% of their costs to the home's value.

So in summary, for every $1 you spend on your bathroom expect to get $1.02 back. Thank you very little. I'll put that $1 in the bank and get $1.05 back this year without having to sell my house.

3. Spend no more than 2 1/2 times your income on a home. For a down payment, it's best to come up with at least 20%.

Many buyers in recent years have stretched the limits of affordability, and have bypassed the traditional 20% down model.

This should be law. If you make $200k/yr you have no business buying a million dollar house.

5. Never hire a roofer, driveway paver or chimney sweep who is going door to door.

Huh? Do people still go door-to-door? If you need financial advice like this you have bigger problems in life than worrying about how you are going to retire rich.

11. If you don't understand how an investment works, don't buy it.

This is particularly true of insurance products which tend to be aggressively pushed locally. Buy 1 S&P Index Fund and 1 Bond fund and forget it.

22. Resist the urge to buy the latest computer or other gadget as soon as it comes out. Wait three months and the price will be lower.

Better yet wait a year or two and the price will plummet. You will be able to get a fully loaded laptop this xmas for $399. 37" Flat screens will be $999. 4GB MP3 players are under $80. Wait and spend the extra $$$ on that new bathroom :)

25. When you shop for electronics, don't pay for an extended warranty. One exception: It's a laptop and the warranty is from the manufacturer.

I'd even exclude laptops. If you spend $400 on a great laptop from HP it's not worth it to give BestBuy $150 for a warranty. If the laptop fails in 3 yrs go buy a new one when the price point is $199.

National Housing Picture.....

Nontraditional’ mortgages rise as overall origination falls
A slowing housing market has put a damper on first-mortgage origination volume for the first half of the year, an industry survey released Monday shows.

First-mortgage origination volume decreased 16 percent in the first half of 2006, while strong demand continued for interest-only and payment-option mortgages, or so-called “nontraditional” mortgages, according to a survey from the Mortgage Bankers Association trade group.

Interest-only loans accounted for 26 percent of originations in the first half of 2006.

The trade group said that subprime loans made up 19 percent of all originations in the first half of the year.

The average loan amount for subprime loans during the survey period was $200,167, a 7 percent increase from the second half of 2005.

Fifty-five percent of subprime originations during the first half of 2006 were for refinance purposes. !!!!!!!!!
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When the banks start getting stiffed by their borrowers remember this piece of info - 55% of subprime (risky) originations were refinancing!! These risky borrowers were probably locking in better fixed rates, but that doesn't mean they will be able to make the payments. Just another reason to stay really short the mortgage market.

Tuesday, October 17, 2006

The Real Estate Ripple...

Yesterday I came across some surprisingly frank comments from a realtor in Florida. Florida as a Real Estate market is deflating remarkably fast. I hope you didn't buy a condo in Naples or Miami last year.... I'll let Mr. Morgan's comments speak for themselves.

"Since my recent article in Barron's, I have received dozens of calls from builders, bankers, buyers and investment groups perched like vultures. Let me give you a sampling of a few calls.

Public Builder - Called me to find them bulk buyers with the ability to buy out all remaining units in developments they cannot sell. They are willing to sell at cost. I told them they were about 10% over the current distress market, and they didn’t even hesitate. They said, fine. Drop the price 10% and we’ll pay a 5% commission to you. Just help us get rid of this inventory.

Condo Developer - They have a 600 unit project that is 100% up for resale. This means no one is going to close when the building is completed in January. Every single buyer will walk from their 20% deposits. The developer will simply going to turn the keys over to the bank. And the bank will take a massive hit that will have the Feds on top of them in the blink of an eye.

Townhome Developer - Asked me to resell 132 units that they had sold a year ago for an average of $400,000 a unit. All of their buyers have notified them that they will not close. Unfortunately, even a year ago in the heated market these units were only worth about $250,000. Now, the units will not command more than $175,000 . . . if they’re lucky.

Real Estate Agent - She sold 10 of the 132 units I just mentioned to her friends, family, banker and co-workers (FORMER friends, family and co-workers). They’re all going to walk away from their $40,000 deposits, so they don’t lose $250,000. The developer will be stuck with 132 units that are not worth what it cost to build them.

Homeowner - This one really hurts, and this is the next wave of the massive tidal wave hitting this industry. As surfers know, the third set is the biggest. This homeowner purchased her home for $390,000 plus $15,000 in closing costs. It is now worth maybe $300,000. Their interest only ARM is scheduled for refinancing. The bank told them they need to come up with additional cash to cover the drop in equity. But they don’t have the $75,000 the bank wants. And even if they sell for $300,000 and clear $280,000, they can’t pay off their $390,000 mortgage balance. You see, their mortgage was 100% and it was interest only. They are going to walk away from the house and give it to the bank. The bank, if they are lucky, will sell the house for $300,000 less commissions and expenses. Maybe they will net out at $280,000. The math is simple. The bank, at best, will lose at least $110,000 on a $390,000 mortgage. That’s a 28% loss . . . IF they can sell at $300,000.

If you look at 1998, the total exposure to mortgage and home equity loans was about 25 percent. In the last quarter, the third quarter, it had risen to 37 percent.” I sold three homes last week for one public builder. Each of these homes sold for 40% less than the same homes sold a year ago. How about all of those neighbors when it comes time to refinance? The appraiser is going to look at current sales prices, and the bank is going to ask for additional funds to meet the equity requirements."

That is some ugly, ugly stuff. So the next time you hear someone say "We're only looking for a 5-10% adjustment in prices" remember this post.

On the flip side there will be some tremendous values in condos in Florida in 5 yrs :)

Monday, October 16, 2006

Anyone Linking through for the 10 Financial Commandments - Scroll down

I'm closing in on 5,000 visits since Feb 06. Now I know 4,752 of those are my mom, but still thanks to the other 248 of you.......oops I forgot the rest of the family visits 2x per week or 174 visits, so thanks to the other 74 of you that visited :)

The 10 Financial Commandments are below.

Bookmark Grindstone Financial and tell your friends..........

Hedge Funds are Sharing Information....Gasp!!

This lead story in today's New York Times probably has more than a few people nervous in Greenwich and on Wall St.

"The Movie Gallery case provides a window onto the growing power of hedge funds in financial markets, and raises questions about their role in how information flows on Wall Street. Hedge funds have become a dominant force in the New York and London stock exchanges, and now account for roughly half of all trading in those markets. But they also have recently become major players in the more opaque debt market, which includes bonds as well as loans, and is more than one and a half times as big as the stock market.

“If hedge funds are privy to inside information and they invest in different securities all over the capital structure, this raises lots of concerns” said Alistaire Bambach, assistant director for the Northeast regional office of the S.E.C. She declined to comment on any open investigation.

The power shift in the loan market has prompted the trade association for lenders to develop new guidelines, to be announced today, governing how confidential and material — meaning potentially market-moving — nonpublic information is used.

Lending was once a clubby world dominated by banks, which are highly regulated and go to great lengths to separate their various lines of businesses. To keep bankers from possibly sharing inside information with traders, some banks even separate their divisions on different floors and use coded identification tags to restrict access.

“Hedge funds have become a dynamic force in Chapter 11 cases,” said Harvey R. Miller, vice chairman at Greenhill & Company and the former head of the bankruptcy and reorganization group at Weil, Gotshal & Manges. “Where you used to have a syndicate of banks, today you have a syndicate that is mostly hedge funds, and it would appear they have different objectives than a syndicate of banks used to have. Their horizons are much shorter.”

Two quick observations:

1) In 2005 EVERYONE was hot for commodities - gold, oil, copper, etc - and frequent readers will know that I believe the hedge funds pushed prices up 20-30% above their natural levels. Well in 2006 it has been all about debt. Every time I speak to an industry contact they are begging me to help them understand debt instruments. These guys are in way over their head.

2) If you take away information edge, every hedge fund goes out of business. Their entire game is this - the big boys (the Yankees/Red Sox of the Hedge Fund world) get the call first "Movie Gallery is sucking wind", they put on a position and call the second tier of funds (White Sox, Dodgers, Mets) who put on a position and call the third tier (Phillies, Blue Jays), who put on a position and call ......... well you get the idea.

With hedge funds accounting for 1/2 of all trading there is no way Wall Street will let this business model change. Right or wrong (and it's most definitely wrong) this is the nature of the beast.

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Update - CNN actually ran the "Why have oil prices dropped?" story. About 2 weeks ago, I said it was no hurricanes, no Iran chatter, changing the Goldman Unleaded futures weighting and Hedge Funds bailing like they were going down on the Titanic. CNN concurs.....

"By late summer, hedge funds and other investors had poured billions into long positions in oil, gasoline, natural gas and the rest of what traders call the "energy complex," all betting on a replay of the severe 2005 hurricane season that sent prices soaring in the wake of Katrina and Rita. But one day after oil reached a monthly high of $76.98 a barrel on Aug. 7, government meteorologists downgraded their hurricane forecast and cautioned that a repeat of 2005 was "unlikely."

That announcement, combined with the end of the summer driving season and a recalibration of the Goldman Sachs commodity index that reduced the weighting of gasoline, prompted speculators to head for the exits even faster than they'd piled in.

According to Joel Fingerman of Chicago-based OilAnalytics.net, between the peak of $77 a barrel in August and the October low of just under $58, traders dumped nearly 40 million barrels (a 20 percent drop) from their long positions. The volatile gasoline market showed an even sharper decline - with traders cutting long positions from 32 million barrels in midsummer to just 1.7 million in October.

"Whatever you want to call it - speculators, fast money, hot money - a big part of the drop in crude that we've seen this year is because of selling by hedge funds," says Merrill Lynch technical analyst Mary Ann Bartels."

Sunday, October 15, 2006

The 10 Financial Commandments...

I'm lifting the framework for this comment from a pretty good cartoonist and his comments on the 9 keys to everything you need to know about financial management. Scott Adams is the creator of the Dilbert line of comics and for a cartoonists the simplicity of his ideas is pretty appealing to most investors....My comments are in italics
  1. Make a will - With access to will creation software like Willmaker there is no reason not to have done this. It's a 2 hour process for most people.
  2. Pay off your credit cards - I add to this ALL DEBT. Before you start thinking about investing you have to pay off all non-mortgage debt. Cars, consolidation loans (yikes!), student loans (unless the interest rate is below 5%), etc, should all be gone before you can do anything else.
  3. Get term life insurance if you have a family to support - Term is the best value if you have a family to support. If not, don't bother.
  4. Fund your 401k to the maximum - This assumes that you have good investment options. Assuming you invest in a low-fee index fund, I'd agree with this statement.
  5. Fund your IRA to the maximum - Obviously.
  6. Buy a house if you want to live in a house and can afford it - I like where this is ranked in terms of importance. A home is a way to own the property where you live, but it should NOT be considered a major piece of your investment portfolio. Too many people are risking their financial future by being overweight expensive real estate. The other key point is "If you can afford it". I'd say if you can afford it with a traditional 20-30% down and a traditional 30 yr mortgage. If the answer is no to traditional financing than you can not afford the house.
  7. Put six months worth of expenses in a money-market account - One day it is going to rain and it's nice to have access to cash until you get back on your feet.
  8. Take whatever money is left over and invest 70% in a stock index fund and 30% in a bond fund through any discount broker and never touch it until retirement - Ah, we finally get to investing and......... an index fund?? Well, the truth of the matter is that index funds are consistent, low cost ways to invest. Every broker will tell you something different, but that is because their livelihood is dependent on you believing them. The only people with any edge in the market are blackbox technicians and super smart money managers that have information flowing to them 24/7. If you can't follow the market 24/7, then you should invest in index funds.
  9. If any of this confuses you, or you have something special going on (retirement, college planning, tax issues), hire a fee-based financial planner, not one who charges a percentage of your portfolio - I agree that you should hire a fee based planner if you need a check-up but their value-add is limited.
  10. Track your expenses for a month - Put it all on paper and the $4 coffee or the $2 bagel will start to add up. You have to track and categorize every expense to make this worthwhile, but I think it's well worth the effort.

I wish it was more complicated, but it's really not. Unfortunately, because soooo many people have vested interests in trying to separate you from your money the appeal of such a simple plan would be lost on stockbrokers, insurance agents, real estate agents, financial planners, and banks.

Cheers!

Wednesday, October 11, 2006

Oil, Oil Everywhere and Prices Just Keep Falling...

Well, it seems the Oil at $100/barrel!! guy has finally taken his seat next to the Dow 36,000!!! guy and the BUY A CONDO IN NAPLES!! girl in the timeout chair.

As I said in the spring, the global economic backdrop supports oil around $55/barrel and anything above that is fear of hurricanes, war with Iran and 29yr-old hedge fund managers chasing the dream.

Cheney et al stopped bad mouthing Iran, Goldman lowered their weighting of Unleaded Futures in the commodity index, there wasn't a single meaningful hurricane in 2006 and poof --- Oil is heading to $55. But wait, OPEC is going to enforce quotas!! Trust me, all of these countries cheat and that is why the market didn't buy their quota press release today.

So, this is the situation - the global economic outlook is actually weakening so oil should continue to slide toward $50. Anything lower than that and OPEC will get serious, but I think we're going straight to $50. In fact, the November elections and hedge fund managers with itchy trigger fingers (who might start dumping positions in mid-Nov) could really impact prices as well (There is a 20% chance we're in the $40's by 2007).

This of course is good news for consumers, Walmart, and Applebee's because now that you're saving $7/fill up on gas we know you won't save your new found wealth. You and I and every other "Spend 'til we drop American" will spend the $$$ as fast as possible which should help some low-end consumer related stocks.

I stay as politically neutral as possible on this blog, but I'll point out that if the Democrats seize control of either the House or the Senate, look for Iran to become a MAJOR issue again very soon. I'd expect the Republicans to turn up the heat to make the Dems look weak on Terrorism (bonus points if you can tell me how the two are related!! lol) before the 08 election cycle begins.

This could mean a real threat of military showdown in 07/08. If that happens - Oil is at $80 again in a flash. Just one investment opportunity to watch for as you watch the pundits spin themselves silly on election night.

Cheers!

Alcoa: A Canary in the Coal Mine?

Alcoa will probably pressure the Dow this morning as they kicked off earnings season with a very poor miss. The story here - lower prices for their product and higher production costs - might be a consistent theme among commodity plays in the coming quarters.

As "weakness in its downstream business related to softening in the housing construction and automotive markets" hampered results I'd be scouring the markets for other stocks that serve housing and auto markets to look for shorts, attractive puts or calls to write.

From a more macro perspective, I am a believer that the scenario facing Alcoa is going to be increasingly pervasive across all facets of the US economy. Weak demand will hamper pricing, while inflation (it's real despite the government's assertions that ex-inflation there is no inflation) is going to really start pushing Cost of Goods up for many companies.

Alcoa is the most recent example of this scenario but it won't be the last.

Cheers!

Monday, October 09, 2006

For the Uber-Geek in you...

There is a 99% chance that if you're reading about financial matters on some random blog that you do not care who or what a Youtube is. But, for your children and your grandchildren it is a ubiquitous source of copyrighted video that can be rapidly access and shared around the globe.

Just a month or so after debuting their own video service, Google has decided to buy Youtube. I could go on for months how I hate this deal, but I think Google has a little bit of Microsoft paranoia going on right now and they are afraid of getting "googled" (to come out of nowhere and become the most dominant brand in the universe in 5 yrs) themselves. So I guess they figure it's a $1.65 billion insurance policy.

I'd say there is a 50% chance that Youtube's main source of good content (copyrighted video) is pulled in the next couple of years. Add to that the unreal amount of ads they will start forcing on young people that generally have the attention span of a fruit fly and you can see why I hate this deal.

BTW - Does no one remember this deal from the glory days in 1999???


Yahoo completes Broadcast.com acquisition

Yahoo today said its $5.04 billion acquisition of Internet audio and video streaming company Broadcast.com is a done deal, and it will begin integrating multimedia services throughout the Yahoo network.

Broadcast.com's content and services will be integrated during the third quarter of 1999.
The acquisition, first announced in April, will create an independent Yahoo Broadcast Services unit, allowing corporate customers to take advantage of Webcasting services and allowing advertisers and merchants to incorporate video and audio in their marketing.

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All this deal did was introduce the world to Mark Cuban. Thanks Yahoo....


"Why don't you ask the kids in Tiananmen square,
Was fashion the reason why they were there?"

Thursday, October 05, 2006

Re-Post: When is a Dow RECORD close not that important?

I decided to repost this article from earlier this week because it is increasingly relevant now that the Dow has surpassed it's earlier high.

DOW NEARS NEW RECORDS!!!
Let's break this down - if an index is just now reaching new highs after 6 years, do you know what that really means? That means that the index is actually FLAT over the last 6 yrs and if you adjust for inflation you are probably down about 10-14%.

But the fact remains that there is a decent chance that at some point over the next month we might close above our previous high. This will be a lead story in every paper and both political parties will run out to claim credit for the resurgent economy. Please, please don't fall for that. If you learn anything from reading my rantings it is that there is always a much more interesting story behind the scenes.

Here is that story - the Dow is a flawed price weighted index - I won't bore you with the details, but a high priced stock carries more weight. Of the 30 stocks that comprise the index 20 companies (like GM, Intel, Microsoft, IBM, Coke, Walmart) are DOWN from their 2000 prices. And furthermore, 16 of those 20 stocks are down a staggering 20% or more (4 were down 50% or MORE!!!).

To offset the weakness of these stocks you had to have some pretty stellar performance - that was achieved through a 60% gain for Exxon ($3 gas was good for someone), an 80% gain for Boeing (war is good for someone), a 99% gain for United Technology (war is really, really good for others), a 150% gain for Caterpillar (lots of backhoes sold to help overbuild condos in Las Vegas and Pheonix), and a 220% gain for Altria (Marlboro's are good for someone).

So as you can see, the "strength" of the Dow's resurgence has been concentrated in just a handful of companies - Energy, Defense Contractors, Construction and the old Phillip Morris. Not exactly a growth engine for a 21st Century Economy.

So if and when we do close above our 2000 prices on the Dow remember where that "strength" came from.

*** In the interest of full disclosure - I own shares in Altria - yippee for me, huh!!

Also an update on why gas prices have fallen........
In August, the major commodity index maintained by Goldman Sachs changed their weighting system to reduce the weight of Unleaded Gasoline from 8% to 2.3%. This might sound like a minor change but billions of dollars around the world march in lockstep with these indices and when Goldman made this change Unleaded Gas futures fell 8% in a day. There has been no major reason given for this change by Goldman, but it is the clearest indication yet as to why gas is lower at the pump. There are some conspiracy theories out there on the web, but I'll let you indulge your tinfoil hat theories on your own.


The next Google?

In 1999 - 2000, I saw maybe 15-20 companies trying to be the next Google. This was before Google became a $125 billion company, just imagine how many companies are trying to re-invent the wheel now.

My advice to anyone looking at investing in these companies is to smile politely and say next as quickly and as firmly as you can. The latest company getting buzz is in PRE-LAUNCH (meaning they've got a great idea, but no real company or plan to defeat GOOG) and is called Powerset. It's an interesting read over at Venturebeat on Powerset. What I find so intriguing is their focus on natural language search. You have be a moron to not be able to figure out how to get the search result you want with Google. In their example they say "Books by Children" won't produce results of books written by children. However, if you modify the search to Child authors or young authors, you get excellent results in 0.15 seconds.

Remember - be quick, be firm, NEXT............

FDIC comments on NYS economy...

Unfortunately or fortunately NY State's finances remain very closely tied the whims of the financial markets. The fall FDIC report is a great summary of what we see statewide. Rochester/Binghamton continue to lose jobs while NYC and Syracuse (why? Lockheed contract maybe?) are adding jobs. I highlighted a couple of interesting stats including a comment on building/housing that should be VERY interesting to watch in the coming months.

Steady job growth continues in New York aided by strong growth in the financial sector

  • The New York unemployment rate was 4.7 percent in August and continued to approximate the U.S. average. More than 117,000 new workers joined the state’s labor force through August 2006 year to year.
  • A weaker housing sector could dampen statewide job growth. However, jobs related to residential and commercial real estate represent a slightly smaller share of the state’s net new jobs since June 2002 (13 percent) than the nation (20 percent).
* I'd argue that that both of these numbers grossly underestimate the importance of real estate and related industries to the economy. All mortgage lenders, lawyers, and bankers fall under service jobs, Home Depot clerks under retail, etc, etc. The residential and commercial real estate job market is not limited to guys swinging hammers and selling real estate.

Finally, the most interesting stat is housing permits down 14% y-o-y and multifamily dwelling permits down 19% y-o-y.

Tuesday, October 03, 2006

The REALLY Big Picture...

When conversations shift at your cocktail parties this weekend to tax policy, trade deficits, dollar imbalances and monetary policy (admit it - that's what you really want to be talking about instead of the latest episode of Deal or No Deal) your eyes could glaze over or you might just have the most insightful comment of the night courtesy of Grindstone Financial.

There has been increasing financial press coverage of the US/World and US/China trade imbalances. An op-ed piece here and a nice summary here are good primers on the subject.

In a nutshell, the lack of fiscal discipline exercised by all levels of government - federal, state, local - has led to a massive amount of debt held overseas ($1 Trillion in China, $880 billion in Japan). When the interest on this debt was running 1% it was inconvenient, but not a huge issue. As rates are nearing 5% it's becoming a serious issue. If (when) rates hit 6%, 7%, or 8%+ this will be a full blown crisis.

Now here's the fun part: Most 8th graders with a primer in economics 101 can figure out how to fix this -

* You MUST Raise Taxes
* Recognize and allow inflation to rise
* The dollar has to fall further vs. world currency
* US workers face more wage cuts
and/or
* US consumers have to curtail their spending

Now I ask you in today's political environment, who is going to have the #^$#% to tell the truth and make these recommendations? Could you imagine the ad?

"My Fellow Americans we have spent beyond our means and today the Chinese Collection Agency informed me that we have to raise your taxes 15%, cut the value of the $ by 10%, cut your salary by 10% and you are banned from Walmart, Target, Costco and any restaurants that end in the ee's sound (Chili's, Applebees, etc) until further notice".

There would be riots in the streets before our country would accept a truthiness laced statement like that. So, the REALLY big picture is bleak, but don't expect anyone to tell you that.

** Remember the Dow hit a new high (note my previous post that the resurgent Dow is due entirely to Exxon, Boeing, United Tech, Caterpillar and Altria).

"You Can't Afford to Be Neutral on a Moving Train"

Monday, October 02, 2006

Real Estate Agents as Financial Advisors???

Let's ignore for the moment that prior to 2004, becoming a Real Estate agent was a career akin to coffin salesman or a used car dealer.

As housing prices have begun to stall out around the country local news teams have begun to do their own "investigative reporting" into this trend. For the most part this involves a reporter calling the real estate agent that sold them their overpriced condo last year to hear the calming tones "Real Estate is local. Our market is unique. Any downturn is destined to be short-lived. Real Estate remains a blah, blah, blah".

Would you go to Ford dealer to ask him about the new Toyota Prius? Of course not, because the Ford dealer has a vested interest in selling his products.

Well, asking a real estate agent about real estate is like asking a bartender if you should buy the $4 domestic or the $8 imported beer. Real estate agents feel the end of the party is near and they are doing their best to control the damage by circulating the message that "all is well, nothing to see here, move along".

One real estate agent on Channel 10 last night actually said "Well, this is normally a slow period anyway as kids start school...." You see, this is why you are a real estate agent. When the statistics came out showing a national decline in home prices y-o-y, it was for a comparable month in 2005 and thus any impact of seasonality would be wiped out because we are comparing apples-to-apples.

As it relates to the local markets, we still have over 2,000 listings in the NNY MLS. This is the most I can recall in the past 5 years. There is clearly a little boomlet in Watertown taking place, but this boom in retail establishments is likely to be short-lived and service jobs (while clearly a growing portion of our economy - UNFORTUNATELY) tend to be very unstable and low-paying. Beyond the increase in service jobs there is no meaningful change in the fiscal landscape in Northern New York and I'll put two forecasts into writing:

1) Many, many of the proposed housing developments planned for Jefferson county will be shelved in the next 2-3 years.

2) Within a year we will see year over year price declines in existing home sales in Jefferson County.

Finally, regarding housing despite what everyone tells you it is not an investment. At most, I want no more than 10% of any clients assets allocated to real estate. However, I'm told time and time again "my home is my nest egg". If your perceived value of your home minus your mortgage is more than 10% of your net worth, you either have too much riding on the value of your home or insufficient investements elsewhere.

I've been wrong before and I'll be wrong again, but you don't ask a mechanic for a prescription to treat your bad back and I would not listen to financial advice offered up by real estate "professionals".

Sunday, October 01, 2006

Allow me to introduce myself.....

After an extended absence I'm back, but Don't Call It a Comeback!! I've been here for years..

It might take a couple nights to get my groove back so bear with me. Here we go.....

Gas/Oil

Here is the deal - There was once a brilliant financial mind that wrote in April of this year....

1) Major oil companies are drilling like mad right now and they will bring online lots of new supply over the next 2-5 yrs. More supply = lower prices

2) The double whammy of real estate slowdown and rising interest rates is going to severely crimp growth in the US economy. Weaker US economy = lower prices

3) A slowdown of our economy will reduce manufacturing output and economic growth in China and the rest of the Asian developing world. Reduced economic activity in Asia = lower prices.

Kudos to those that could see this coming. In addition, there are a couple of other factors at play

- big hedge funds are rotating out of commodities and into credit derivatives (mark my words - this is the death knell for our economy)

- there is some speculation that we stopped filling the Strategic Petroleum Reserve

- And for whatever reason (political or otherwise) the rhetoric vs. Iran has come to a screeching halt.

These factors have all helped to lower the cost of a fill-up from $42.50 to $36.75. Now what to do with all that new found wealth?? Super-size two more Big Mac meals? Get a couple of outdated shirts from Kohl's Clearance rack?

The reality is gas gets way to much blame on the way up and way too much credit on the way down. Gas will, in my opinion continue to fall for the foreseeable future (at least through the first week of November, unless Iran does something to stir things up) because OUR ECONOMY IS IN REAL TROUBLE. I'll go into a further discussion of the economic risks facing us in posts later this week.

Stay tuned........


DOW NEARS NEW RECORDS!!!
Let's break this down - if an index is just now reaching new highs after 6 years, do you know what that really means? That means that the index is actually FLAT over the last 6 yrs and if you adjust for inflation you are probably down about 10-14%.

But the fact remains that there is a decent chance that at some point over the next month we might close above our previous high. This will be a lead story in every paper and both political parties will run out to claim credit for the resurgent economy. Please, please don't fall for that. If you learn anything from reading my rantings it is that there is always a much more interesting story behind the scenes.

Here is that story - the Dow is a flawed price weighted index - I won't bore you with the details, but a high priced stock carries more weight. Of the 30 stocks that comprise the index 20 companies (like GM, Intel, Microsoft, IBM, Coke, Walmart) are DOWN from their 2000 prices. And furthermore, 16 of those 20 stocks are down a staggering 20% or more (4 were down 50% or MORE!!!).

To offset the weakness of these stocks you had to have some pretty stellar performance - that was achieved through a 60% gain for Exxon ($3 gas was good for someone), an 80% gain for Boeing (war is good for someone), a 99% gain for United Technology (war is really, really good for others), a 150% gain for Caterpillar (lots of backhoes sold to help overbuild condos in Las Vegas and Pheonix), and a 220% gain for Altria (Marlboro's are good for someone).

So as you can see, the "strength" of the Dow's resurgence has been concentrated in just a handful of companies - Energy, Defense Contractors, Construction and the old Phillip Morris. Not exactly a growth engine for a 21st Century Economy.

So if and when we do close above our 2000 prices on the Dow remember where that "strength" came from.

*** In the interest of full disclosure - I own shares in Altria - yippee for me, huh!!

Later....