Posted by Doug Rice on Tue, Mar 23, 2010 @ 10:31 AM
Data released today by the National Association of Realtors on US home sales in February showed a decline of 0.6% and inventory surged by the most for the January-February period in 20 years.
But what may be more telling is that all-cash sales remain at a extraordinary percent of the total at 27%. Typically, all-cash sales fall around 10% of total sales.
What can we learn from this?
First, any data that hits a long term high or low water mark or is outside the ordinary deserves special note. To find a clue about the future, think about why this unusual event happened and what is likely to push it back toward the average.
Second and more specifically, housing prices are being supported by a tax credit that is about to expire and many of the buyers are speculators that are going to want to sell again in the future. So while those homes are off the books for now, they will come eventually.
The good news here is that the all-cash speculators can sit and wait without default. So there will be fewer bankruptcies going forward.
But the bad news is that there will be lower demand going forward and higher supply, so prices will naturally decline for some period of time.
Speculators paying all cash can wait for years for the market to rise. If you can't, prepare accordingly.
Posted by Doug Rice on Wed, Mar 17, 2010 @ 11:47 PM
It's not often we clearly see an iceberg through the windshield filled with our foggy future, but Meredith Whitney says she has seen one when she said, "The housing market surely will double dip."
When we hear such comments there are two things that we need to think about before we accept or reject what they have said.
The first is, "How credible is the source and what bias might they have?"
The second is, "How did they come to their conclusion and do we agree or disagree with their method and findings?"
In this case, Ms. Whitney's resume is solid in both education and professional experience. She was named "Power Player of 2008" by CNBC beating out Warren Buffett, Ben Bernanke, and everyone else. 
More importantly she runs her own firm which means her bias is to being correct as it will reflect directly on her. In other words, she might not be right, but she's not trying to pull the wool over our eyes or mislead us in any way. If she says it, she believes it. (This is way less prevalent that you might like to think).
I also love the fact she married a professional wrestler. To me, this means that this is a strong person that makes her own decisions and isn't looking for approval from outsiders. And she has what we all should be looking for: independent thoughts.
So if we don't dismiss her comments out of hand, then we need to understand why she thinks this way and see if we agree.
Her reason is that the housing market has been supported by government programs, such as loan modifications and buying of Mortgage Backed Securities (MBS), and as those programs are coming to an end, a lot of supply will hit the market.
Basically, it's more supply, less demand, prices fall, in this case, AGAIN.
Is that true? Well, yes the Fed has said quite clearly they are ending the mortgage support. If they do, will others pick up the slack? Probably not as there isn't any profit in it for them to modify loans unless the government is forcing them or sponsoring it. So this is pretty clear analysis to me.
Does that sound logical and right? Yea, probably does.
But can we find hard evidence to confirm our suspicion that she's really on to something?
In a previous post, I addressed wall of mortgage resets coming. That clearly showed evidence that a ton more mortgages are going to get hit with large resets, which will mean defaults for many or most of them. This will happen in the next year or two.
Read this again, then think consider that Ms. Whitney is an expert in this and has built her reputation on being right.
What can you learn from this?
It's likely that there will be another housing downturn, plan accordingly.
More importantly, there are at minimum two things to think through when you hear someone make a prediction in such clear language.
One is who they are, why they are saying it (bias) and make a judgment call about their credibility.
Two is how did they come to their conclusion and can you find evidence to confirm or reject it. Evidence counts, hoping they are right or wrong doesn't.
Remember: Hope is not an investment strategy.
Posted by Doug Rice on Mon, Mar 01, 2010 @ 12:23 PM
Warren Buffett, the Oracle of Omaha and the second richest person in the world, released his annual shareholder letter recently.
This is required reading for any investment professional. They already know that.
You should read it too. But assuming you won't, I will try to summarize the salient points from which you can learn and apply to your own situation.
In case you aren't aware Mr. Buffett has a partner and consigliere in Charlie Munger.
And that's where we'll start.
Mr. Munger's sharp mind has been written about for quite sometime as he clearly sees through the fog and cuts to the chase. His recent article entitled, "Basically, It's Over" isn't to be taken lightly.
Again, THIS IS MUST READING for anyone concerned about the world around us.
He calls it a parable about how one nation came to financial ruin. Clearly this as a warning shot across the bow of our current economic brouhaha.
Pessimistic? Yes.
Too pessimistic? Maybe.
Clearly on point with a valuable message? Duh! Of course.
Expect nothing less from Mr. Munger.
Here's here's a quick take on this:
- People with a vested interest don't care about much else. It's difficult to fix our problems because to do so would impact the profiteering of someone else. To protect those profits, they make political contributions to prevent the fix. Hence, same old, same old. Which won't work forever, because...
- Avoiding trouble doesn't make it go away. Our health care situation is untenable long term as is our fascination of short term "casino" profits over long term wealth creation. But...
- This can go on for a long time. We won't collapse overnight, again. We almost did that just a short time ago. So we have a bit of time until it will happen again. However we are clearly still speeding toward a cliff. If we don't change our course...
- It will very likely will come to a sorrowful conclusion. The longer we continue on our current road, the more painful the conclusion will be. And if course isn't going to change, you need to...
- Make sure you aren't sorrowful when it concludes. If leaders won't listen to BenFranklin LeeKwonYou Volkker (read the article to understand this reference), they aren't going to listen to you or me. So your best move is to stay abreast of the situation and use our understanding of it to your advantage.
(Warning... this requires real work - actually reading and thinking. If you are out of practice at either, now is the time to start training.)
So is it basically over?
Clearly not for Mr. Munger or Mr. Buffett.
I am doing what I can to make sure it's not over for me either.
Hopefully, it won't be over for you. But that depends on you.(Did you read the article yet? Again, work required. You might want to start there.)
Posted by Doug Rice on Mon, Feb 22, 2010 @ 05:01 PM
The Capitan of the Titanic was asleep in his cabin when they hit the iceberg.
In today's dangerous waters, it's tough to get any sleep at all because of icebergs like this: High Yield Debt Refunding Requirements
A recent Moody's report says, "U.S. speculative-grade issuers face more than $800 billion in refunding requirements over the next five years, including $555 billion in bank credit facilities and $250 billion of bonds. About 995 of our 1,300 speculative-grade issuers have debt maturing over this period. The enormous amount of debt due over the next five years stems from a robust period of refinancing and leveraged buy-out activity prior to summer 2007."
The tidal wave of junk bond refinancing that will need to take place is concerning as the market may not be in a position to absorb such debt or have the risk appetite for it.
This comes as the Fed, as will other global banks, will very likely be increasing interest rates or may already have, so even if the debt can be rolled over, the price isn't certain at all.
But assuming someone will to lend them money at some price, this can impact the other debt markets and a crowding out could occur. This means other needy folks can't borrow the money they want or need. All of which slows the economy going forward.
More Yuck!
What this means to you
Right this minute, nothing. The debt has been rolled over and we are in another eye of the hurricane waiting for the next wall to see how hard it will hit us.
This is really just another lesson in looking out the foggy windshield and looking for things that might need to be avoided in the future.
Like icebergs of junk bonds.
Posted by Doug Rice on Fri, Feb 12, 2010 @ 11:20 AM
Financial pressure runs rampant these days.
If you aren't feeling it, you know someone who is.
In a 'do better,' 'accumulate more,' 'keep up or catch up,' and 'whatever you do don't let them see you sweat' culture, pressure is accepted as a given. But when a major crisis happens, the pressure is magnified.
More people lose jobs, all assets tank, debt increases and pressure mounts to very unhealthy and unproductive levels. For those feeling excessive financial pressure, here are three ways that you can find some relief.
1. Communicate: Under stress, it's more comfortable to sweep the problem under the rug and only clean up the mess when it gets out of hand. This increases the pressure, especially in couples. To relieve that pressure, clean house, and get the problems out in the open.
When communication opens up, get beyond griping and venting about the past, and move toward forgiving past actions, both in others and in yourself.
Where you are now and how you move forward is what really matters. Relief for many can stem from just talking it through.
2. Plan: If your previous financial plan worked, you wouldn't be feeling pressure. So the obvious thing to do is revise and update your plan and begin working it.
Analyze what happened, where you are now, and update where realistically you want to be and can go in the future. While the path to this new future will still have some bumps, moving forward should relieve feelings of hopelessness and despair.
This may start with a cash flow statement, a new budget, a net worth calculation, or something less mathematical such as reviewing credit card statements or discussing job options. Just having new goals will allow some forward movement and that can relieve the quandary about what to do.
3. Work: Idle minds dwell on past events, often reliving them, which can lead to increasing pressure.
One way to relieve this pressure is to stay focused on what you are doing and work harder to be more productive. Increasing your output will not only take your mind off your troubles, but it will also move you toward improving your situation.
If you are working at capacity, then consider what you are working on and its impact on your situation. You might find that you could be more productive doing something else.
A sense of accomplishment works wonders for relieving pressure. While the common advice of laughter and exercise will work wonders for relieving pressure, more specific actions may be more useful in this current financial environment.
The macro economy is beyond your control, but the things you do control can make a big difference. By increasing your communication, revising your financial plan, and increasing your productivity, you may find relief from your current financial pressures.
Posted by Doug Rice on Tue, Feb 09, 2010 @ 10:48 AM
Bill Gates writes a blog.
Who knew?
It's called the Gates Notes and he covers what he's thinking, learning and doing.
While it might be interesting to some to find out what he is doing to help with Malaria in Africa, education in America, or system development to deal with the next pandemic - I assure you he is doing stellar work in all those areas and more - what it more useful for most of us is insight into how he thinks and acts.
If you had all the money in the world, which he actually does, then what would you do with your time?
Let's see... Work on your golf game? Travel to far away lands? Have lunch on your private yacht while playing cribbage at $1 million a point? Go to glamorous events cloaked in charities to reduce the guilt from your gluttony?
Maybe.
What most people wouldn't do is study economics.
After all, once you have all the money you could ever need, haven't you actually conquered economics?
In a recent post in his blog, thegatesnotes.com, Bill Gates says that he has been learning from the Great Lectures from the Teaching Company. He started with the sciences; biology, geology, medicine. The moved to history and then economics.
Why this matters to you
Learning isn't something you do in school and forget.
Some of us have forgotten that.
We live in a complicated world bulging with information. At no time in history has it been so easy to learn something new. But with all the opportunity available to us comes another problem.
How do we choose what we spend our limited time on learning?
Do we learn software to do our taxes? Do we learn how to manage our investments? Do we learn new skills so we can progress in our job? Do we learn about our health, our wealth, or our military stealth?
(Sorry, I couldn't find anything else that rhymed with wealth and health and the rhythm seemed to need three terms.)
The point is that time is limited, energy is limited, but the amount you are capable of learning is unlimited.
Overwhelming choice often leads to no choice at all and a confused mind typically says no.
So we blow it off, don't bother learning anything, and just keep doing what we are doing, hoping that things will work out.
To overcome this, start slow with a topic you like, that is fairly simple, and are interested in. Then start learning more about it. No midterms. No cramming. Just learning. Scan the web, watch some pod casts, read a book.
There's something I bet most haven't done lately. READ a BOOK.
Just narrow it down to one thing and start somewhere.
Once in the habit of continually learning, it's highly likely your life will change - for the better.
Try it and see.
If the richest guy in the world spends his time doing it, then shouldn't you give it a try?
Posted by Doug Rice on Wed, Nov 04, 2009 @ 11:30 PM
The Federal Reserve bascially kicked the can down the road with their announcement after the November 4, 2009 meeting. They only made minor changes to the language, as you can see below, and the only thing they made crystal clear is that they don't see inflation on the horizon.
FOMC meetings offer opportunity to not just talk about financial markets but also critical thinking and learning new skills. If you took the last statement and used Word to compare it to this statement, you would see exactly what has changed. Viewing the information in this way not only eliminates the middle man and their filter or bias, but also provides a faster more productive way to see what has changed.
Many financial analysts use this comparison method to see what changes quarter over quarter in company statements. You can use it in your work as well. Any document that gets updated regularly can be copy/pasted to see what the differences are. It's faster and more accurate than trying to remember or figure out what changed.
To do this open Word, go to Review tab, then Compare. Select the two docs and viola! Really helpful in some situations.
Here's the result of today's meeting vs. the meeting from September 23, 2009:
