Become a Better Investor

The Orlando Sentinel has sad story about condo flippers in Miami. They put down $100,000 on a pre-construction condo and now either they lose their deposit or they close on a $585,000 1 bedroom condo thats worth less than $500,000.

The sad part is that people fall for these get-rich quick schemes in every cycle. It happened in Miami during the last boom. It happened in the stock market in 2000. Its been happening regularly for over 400 years in every country. If these flippers had only read Extraordinary Popular Delusions and the Madness of Crowds, they would've realised that they're not geniuses, only the last fools to be left holding the bag.

Unfortunately, I was once such a fool. Taken in by the stock market in 1999 and fooled in 2000. Luckily I learnt my lesson early in life when I had little to risk and many years to implement my new found wisdom. I feel sorry for those that learnt this lesson late in life like the retirees of Enron. Life isn't fair.

But that doesn't mean you do not do your homework. Your job as an investor is to know your investment inside and out. But also you need to understand the psychology of investing. Human psychology is the common uniting thread across all investment sectors. If it weren't for human intervention, stock prices would move only 4 times a year - after quarterly earnings are released.

Read all you can about the economy, the stock market and the world in general. Eventually you will become a better investor.

Related Readings:
1. Books that broaden your mind

How To Start A Vending Machine Business

If you've ever wondered how much money the vending machine guy at your office makes, here's an excellent post by GeniusTypes on how he got into the vending machine business.

It all started with having an open mind and buying a route from someone who had lost interest for well below what it was worth.

You'll see this theme repeated in many successful investment stories.

Every so often you'll see ads in the local paper about the company that sells large office-type vending machines holding a presentation. Apparently, the charge $1000 each and it takes a long time to recoup your investment. Most of the buyers give up and sell them for $100-$200 each and the second owner usually has better luck.

GeniusTypes kept his initial investment low by understanding how to value the business to begin with. He thus guaranteed his success by keeping a large margin of safety.

He immediately saw where he could cut costs to increase his net income. He also followed up on some leads and expanded his route and thus the value of his business.

Also note how he takes the positive aspects from Robert Kiyosaki's books and doesn't dwell on whether the book is based on fact or fiction.

Check out these cheap vending machines.

Yield On 10 Year TBill Keeps On Dropping

Even though the past few sessions in the stock market have been rather choppy, the yield on the 10 year treasury has steadily dropped over the past several weeks.



Ever since the subprime mortgage issue led to a global liquidity crunch and subsequent stock market correction, the yield has been steadily dropping. This means that large institutions have been selling equities and moving money into safe US treasuries. It doesn't matter if they get only 4.5% (as of today's closing price), but at least they know they'll get the principle back.

There seems to be a repricing of risk in the market. Any stock that is deemed to be risky has dropped in the past 6 weeks.

On the other hand, safe stocks like Warren Buffett's Bershire Hathaway (BRK) has been rewarded and its stock price is up nearly 10%.

Lets see how long this flight to safety continues. If you have the courage to be greedy when other are fearful, you can make a lot of money.

Happy Investing!

How The Carry Trade Really Works

Here's a really, really good video on how the carry trade works and what implications it has on global asset prices and the global financial stability.




I think the carry trade will have to reverse at some point in the near future. Trees do not grow to the skies and financial excesses do not last forever. When the average man on the street with no financial education starts talking or investing in a particular sector, it usually marks the end of that run. (In 2000 I overheard my hair-dresser talking about internet stocks - I should've sold then. In early 2005, I overheard some guys at the movie theater talking about getting into the local real estate market - I sold then and I'm glad I did!)

With Japanese housewives partaking in the carry-trade now, I think its safe to say that we're pretty close to the end of the cycle of cheap, easy money. I sold some USD and bought Yen and I've also invested some money in Japanese investments (a REIT and a stock ETF).

Related Posts:

Are Jim Cramer's Stock Picks Worthless?

According to a recent article by Barron's Magazine title The Cramer Effect (& Defect), readers who follow Jim Cramer's stock picks from his show are more than likely to lose money in the long run.

We also looked at a database of Cramer's Mad Money picks maintained by his Website, TheStreet.com. It covers only the past six months, but includes an astounding 3,458 stocks — Buys mainly, punctuated by some Sells. These picks were flat to down in relation to the market. Count commissions and you would have been much better off in an index fund that simply tracks the market.

When we asked Cramer and CNBC for their own records of Mad Money's stock-picking performance, they had more excuses than a Tour de France cyclist dodging a blood test. They complained that the list from YourMoneyWatch.com contained some stocks from the program's "Lightning Round," in which Cramer gives a quick analysis and a buy or sell decision on stocks phoned in live by viewers. These, they argued, shouldn't count in our tally.

CNBC officials also said that viewers should buy Cramer's picks a week after they're aired. They said that the show is mainly educational, and not just about stock-picking. In the end, they said we should focus only on the tiny universe of stock selections — about 12 a week — that Cramer researches the most. And we should do it only for the issues picked this year. CNBC analyzed these stocks, and said that if held for one month, they beat the S&P by 0.8%, or 1.7% after two months. They offered no results for the year-to-date.

It turns out that CNBC did its analysis incorrectly, and that the stocks beat the S&P by 0.4% in one month and 1.2% over two months. CNBC measured the stocks' performance against the average performance of the S&P year-to-date, instead of against the performance of the S&P from the date of each stock pick. Also, it included more than 100 recently recommended stocks that weren't held for the full one- or two-month holding period that CNBC claimed.

More important, the stocks fell short of the S&P by a statistically significant 2.2% through last week.

Our question is: How are viewers supposed to know that they should pay attention only to this subset of stock picks each week and ignore the thousands of others that Cramer makes on his show?

Then there's the day-after-pop phenomenon. Our analysis of Cramer's picks over the past two years, from YourMoneyWatch.com, showed that, on average, the stocks jumped 2% the day after he mentioned them. From there, they usually moved sideways or down for the following 30 trading days (see chart). This offered an opportunity to make money — 5% to 30% a year — by selling Cramer's selections short.

Cramer agrees that there is a shorting opportunity in the temporary effect he has on stocks — a trade that he'd jump on if he still were at a hedge fund. "If you short the bump, you will do well," he said last week. "I've said it on the show many times."

I really don't think people should be taking stock tips from a guy who has about a minute to analyze the stocks on his show. He may be a really smart guy but how can he properly evaluate a stock in the short time period he has?

I hope there aren't too many people who base their stock investing solely based on his recommendations. But if they're that ignorant or lazy, I guess they get what they deserve!

Prosper Update

I started lending money on Prosper.com about 10 months ago. I started out with a total of $1900 in my account. I've been mainly targeting people with D and E credit who seem have steady jobs but got into the payday loan trap and can't get out. My average interest rate is about 19.4% right now and I usually lend out the minimum $50.

I've been reinvesting all the interest payments I've received. So far I've made loans to 40 people and I've had 2 defaults and 1 currently late loan - two of which were from Prosper's auto-pay, which I don't really recommend using. One of the defaults had a B rating!

Currently my account is worth about $2106, which gives me an annualized return of about 13%. Not bad at all.

If I don't have any more defaults, this might increase slightly. Even if I get 1 more default, I should still get an annualized rate of 9%, which is about twice what I get in a savings account.

Why should Visa and Mastercard make all the money!

How To Sell a $14 Book For $2,500

Previously, I had mentioned a $2,500 book by Monhish Pabrai called Mosaics:Perspectives on Investing and how I was hoping I could find my own signed copy to hawk on Amazon.

Well, I did find it and after jumping through several hoops I was finally approved as a seller on Amazon.com. (Don't know what the issue was, just some technical difficulties on their end).

Not only did I find a signed copy, I also happened to have an unsigned copy too!

I'm selling the autographed copy for $2,395 (don't want to be too greedy!). Here's the link on Amazon.com. If anyone's interested, contact me directly and I'll let it go for $2,200 with free FEDEX shipping.

I'm not sure what sort of people buy these kind of books. But I know they exist. Someone spent $395 and bought the unsigned edition a few days ago. I know that for a fact because I got a $23 commission from Amazon on the sale of that book(thanks whoever you are!).

I just read Pabrai's latest book, The Dhandho Investor: The Low - Risk Value Method to High Returns and its really very, very good. I'll write a review on it shortly.

And yeah, the title of this post is a bit misleading. ;-)

The Raging Bull

For all of you that enjoyed (or maybe were horrified by) Jim Cramer's emotional outburst, here's a spoof on that. Its really funny, check it out.





You can catch more of these entertaining videos on Minyanville.com

Its Official: Hell Freezes Over

Last week, hell froze. The Financial Times reports:

In a rare unplanned investor call, the bank revealed that a flagship global equity fund had lost over 30 per cent of its value in a week because of problems with its trading strategies created by computer models. In particular, the computers had failed to foresee recent market movements to such a degree that they labeled them a ‘25-standard deviation event’ - something that only happens once every 100,000 years or more.

"We are seeing things that were 25-standard deviation events, several days in a row," said David Viniar, Goldman’s chief financial officer.

Losses in the Goldman fund could go over $1.5 billion. But heck, everyone makes mistakes. And even a great mathematician such as James Simons, founder of Renaissance Technologies, takes a loss from time to time. Simons used to do math for the Pentagon. Then, he discovered that he could make billions running a math-based hedge fund. But last week, Simons was forced to write a letter to his investors. His fund lost about 9% in the first few days of August...and now Simons says, “we cannot predict the duration of the current environment.

So apparently, math whizzes find they don't know which way the market is going, despite all their fany financial modeling and risk calculation and mitigation through the use of derivates.

No matter what kind of math you do, sometimes things take you by surprise.

According to Nassim Nicholas Taleb’s latest best seller, The Black Swan: The Impact of the Highly Improbable , improbable events with infinitely small odds of occurrance seem to occur every so often, especially in the financial markets. And with disastrous results!

And if this wasn't enough, Sentinel Management Group, with $1.6 Billion under "management" has frozen access to Money Market Accounts!
According to the Chicago Tribune,

"If you attempt to withdraw money from Sentinel, they will tell you they will not honor that request," said lawyer Jeffrey Barclay, who represents some of the futures brokers and investment pools whose money is frozen at Sentinel.

With $1.6 billion under management, Sentinel had advertised itself as an ultrasafe cash manager for people in the futures industry, corporate treasurers and well-to-do individuals.

Now the company is saying nothing publicly and has taken down its Web site. "We are not taking any media calls," said a person who answered the phone at Sentinel on Wednesday.

What is the world coming too?

Related Readings:

1. The Black Swan: The Impact of the Highly Improbable

2. Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets

3. When Genius Failed: The Rise and Fall of Long-Term Capital Management

Is The US On The Verge Of Collapse?

According to the Financial Times.

The U.S. government is on a burning platform of unsustainable policies, and practices with fiscal deficits, chronic health care underfunding, immigration and overseas military commitments threatening a crisis if action is not taken soon.

David Walker, comptroller general of the U.S.,issued the unusually downbeat assessment of his country’s future in a report that lays out what he called chilling long-term simulations. These include dramatic tax rises, slashed government services and the large-scale dumping by foreign governments of holdings of U.S. debt.

Drawing parallels with the end of the Roman empire, Mr. Walker warned there were striking similarities between America’s current situation and the factors that brought down Rome, including declining moral values and political civility at home, an overconfident and overextended military in foreign lands and fiscal irresponsibility by the central government.

Very chilling indeed!

Before you start thinking that David Walker is some crackpot lunatic, here's his bio straight off the US Government Accountability Office website.

As Comptroller General, Mr. Walker is the nation's chief accountability officer and head of the U.S. Government Accountability Office (GAO), a legislative branch agency founded in 1921. GAO's mission is to help improve the performance and assure the accountability of the federal government for the benefit of the American people. Over the years, GAO has earned a reputation for professional, objective, fact-based, and nonpartisan reviews of government issues and operations.

Related Readings:

1. Empire of Debt: The Rise of an Epic Financial Crisis

2. The Coming Collapse of the Dollar and How to Profit from It: Make a Fortune by Investing in Gold and Other Hard Assets

Are MBA's Over-rated?

According to this interesting article,an MBA isn't all its cut out to be.

While having that M.B.A. might give you a boost, the reality is that the degree generally isn't a guarantee or indicator of your future success. Business success has more to do with leadership, talent and a drive for excellence than it does with having a degree from a prestigious university. An M.B.A. can help you get your foot in the door, but according to Peter D. Crist, chairman of Crist Associates executive search firm, "it's instinct, it's hard work, and it's raw intelligence" that will really help you get ahead.

It references this article in Businessweek, which is also worth checking out.

Counter Argument to China's Threat To Dumping US Dollars/Treasuries/

A few days ago,China threatened to offload its Billions of US Treasuries in retaliation to any US imposed trade tariffs.

One of the newsletters I read regularly is from John Mauldin who doesn't think its likely that China will follow through with their threat.

China has an estimated $900 billion in US dollar reserves. There is no doubt that if they did decide to sell a few hundred billion here or there, they could push the dollar down against all currencies and not just the renminbi. That would also have the effect of increasing US interest rates on not just government bonds, but mortgages, car loans and all sorts of consumer credit.

Given the current state of the credit markets, that is not something that would be welcome. But it is not likely for several reasons. First, it is not in their best interests to do so. It would hurt the Chinese as much as the US, as it would devalue their entire dollar portfolio and clearly do damage to their number one export market - the US consumer.

Secondly, it is unlikely that the US will actually be able to get such legislation passed into law. Even if such legislation passed Congress (an admitted possibility) it would be vetoed by President Bush. That means that any real change would not be possible until some time in the middle of 2009.

The renminbi has already increased almost 10% in the last two years since the Chinese started their policy of a crawling peg. For reasons I outlined at length a few weeks ago, it is likely that the Chinese are going to increase that pace over the next two years, for their own internal reasons. A higher renminbi valuation helps them slow their economy down from its way too fast pace of growth that is evident today. (If you would like to see that analysis, click here.)

By the time any real legislation could get passed, the renminbi will be very close to the level where the China bashers in Congress want to see it, if it is not already floating. Hardly enough to want to start a trade war at that time.

But let's look at what the bi-partisan economic illiterates in Congress are actually advocating. First, they whine about lost American jobs. But a 25% higher renminbi is not going to bring any manufacturing jobs back. China is no longer the low cost labor market. There are other Asian countries with lower labor costs. We just will not be able to competitively manufacture products that have high unskilled labor costs.

But we will continue to manufacture high value added items in a host of industries where skill and talent are required. Even though manufacturing as a percentage of US GDP is down, our actual level of exports and manufactured products is up by any measure. It is easy to write about the closing of a plant, and it makes the headlines, but the fact is that free trade has created more jobs by far than we have lost.

Secondly, if our cost of imports were to rise by 20-25%, that cannot be understood as anything but inflationary. And it would not just be Chinese products, but the products of all developing countries. Many Asian countries manage (manipulate) their currencies to keep them competitive against each other and the Chinese. You can bet that if the renminbi rises another 20%, there is the real prospect that they all will.

And much of what China and the rest of Asia produces is bought by those on the lower economic rungs of the US ladder. So, if Congress gets its way, they would be advocating putting pressure on those least capable of paying higher prices. But no one lobbies for the little guy. Congressional members can pander to their local unions and businesses without having to answer for what would be higher prices.

And higher prices means more inflation which means that interest rates have to be higher than they should, which means higher mortgage rates, etc. Protectionism has a very high cost. Free markets create more jobs everywhere.

Finally, we should hope the Chinese continue to allow their currency to rise slow and steady. Neither country needs the turmoil a rapid rise would induce. The world needs a stable China. We are watching world credits markets freeze up because things went very bad very quickly in the relatively small subprime world. A 20% drop in the dollar in a few months would be even more catastrophic. Senators Lindsey Graham and Chuck Schumer are competing to be this century's Smoot and Hawley that creates a depression from trade wars where none should be.

The danger in all this is that politicians who have little economic literacy create a hostile environment with their rhetorical poison, with both sides feeling the need to play to their "home crowd." That is a very dangerous environment.

It won't happen, but I would like to see the following question asked in the presidential debates to those (like Hillary Clinton, Obama and Dodd, etc.) who basically advocate a weaker dollar.

"Why are you advocating a weak dollar policy? Why do you want American wage earners to pay 25% more for the goods we buy from foreign countries? Do you really think there is no connection between the value of the Chinese currency and the rest of the currencies of the world? Do you think American consumers need to send even more money overseas and get less for our dollars? Do you think the American consumer is so well off they can afford to pay more and that it will have no affect on the US economy? Do you realize that a 25% lower dollar will mean a rise in world oil prices? Do you think there is no connection between the value of the dollar and US prosperity?"

Mortgage Lenders Squeeling Like Pigs: WAMU First To Cry Uncle

Despite Ben Bernanke's optimism that the sub-prime issues wouldn't spread to the rest the of the economy, not only is it spreading to the rest the of the economy, its become our favorite export to global economies too!

The resulting liquidity crunch has already begun. Many banks just announced that they'll no longer accept loans through brokers. This is to reduce the additional cost of having a middle-man.

Washington Mutual also announced that its Jumbo loans would be priced at 8%. OUCH! Basically, WAMU is having a tough time reselling these loans on the secondary market (to unsuspecting pension and hedge funds) so they've jacked up the rates on these.

As of 2007, a jumbo loan (in most parts of the country) is a loan thats over $417,000 for a single-family residence.

Unfortunately, with the median home price in San Diego is over $500,000. (Not sure of the exact figures but its dropping from the peak). This means the average family has a jumbo loan on their median-priced home.

It was ok when rates where 4.5%, but now when rates are at 8%, the corresponding home payment will jump 43%!!!! I don't know about you, but I'd be looking to move if my home payment rose 40%+.

I think as the rates rise and loans become more difficult to get, home prices will start falling faster than they have in the past 2 years. Many people are still in denial about dropping home prices in SoCal - but this looks like the beginning of the end. I wouldn't be surprized if rates fall another 25% of where they are today.

China Pulls Out The Heavy Ammunition!

According to the Telegraph,

The Chinese government has begun a concerted campaign of economic threats against the United States, hinting that it may liquidate its vast holding of US treasuries if Washington imposes trade sanctions to force a yuan revaluation.

Two officials at leading Communist Party bodies have given interviews in recent days warning - for the first time - that Beijing may use its $1.33 trillion (£658bn) of foreign reserves as a political weapon to counter pressure from the US Congress. Shifts in Chinese policy are often announced through key think tanks and academies.

Described as China's "nuclear option" in the state media, such action could trigger a dollar crash at a time when the US currency is already breaking down through historic support levels.

It would also cause a spike in US bond yields, hammering the US housing market and perhaps tipping the economy into recession. It is estimated that China holds over $900bn in a mix of US bonds.

China has been subsidizing the consumption of the US consumer & homeowner to the tune of nearly $1 Trillion. They send us all kinds of stuff and in return we give them pieces of green paper that aren't really backed by anything, except the promise to pay more of the green stuff!

And now, to appease special interest groups clamoring about loss of manufacturing jobs, our 'faithful' senators are trying to pass a bill enacting trade tariffs against China in retaliation for currency manipulation. The good thing about special interest groups are that they are usually represent single-agenda constituents. The politicians give them the one thing that they want, and they're assured their vote. And if they can spread the cost of giving them the thing they desire over a large base, less people are likely complain.

In this case, the cost is higher inflation for all of us. And if China follows through with its promise, you'll see much higher interest rates that will negatively affect the housing industry and the economy pushing us into recession.

We're currently experiencing an economy divergence. A poor country like China is lending money to our government by buying our Treasury notes. You could say its effectively funding our government spending. This is enabling us to enjoy the low-interest environment of the past several years.

This is not a normal occurrence. Typically rich countries lend money to poor countries. This phenomena should result in a natural rebalancing of the currencies where China's currency strengthens against the US Dollar. Given time, this will occur without any help from our politicians.

Henry Paulson, the US Tresaury Secretary, said any such sanctions would undermine American authority and "could trigger a global cycle of protectionist legislation".

Yet another example of why the government shouldn't interfere in economic policy. It usually never does any good, it creates friction and the burden always falls on the tax-payer.

Meanwhile, Hillary Clinton in a show of brilliance said

foreign control over 44pc of the US national debt had left America acutely vulnerable.

Great, maybe Bill can fork over the $50 million he's made and buy up some of it.

Related Posts:
How Trade Trariffs Hurt The Economy

A New Kind Of Nigerian Scam?

I recently got an email from a reader that I think I should share with you. It involves a new kind of scam and you need to be aware of it.

Hi: I have a question regarding real estate fraud. I have an ad on a website selling my property (for OVER $550K) online. The web co. forwards me an email from someone named Dr. Earl Spencer inquiring if the property is still available. It is.

He then wants maps and info about the area. I send them to dr_earl_spencer1995@yahoo.com . Then he says I should consider the property sold and he wants my HELOC account number to send a wire transfer for the funds to purchase.

My next email was to inform him that all transactions were to take place thru my attorney; but his email address was closed. Next morning he CALLS me to say that he's emailed me with another address to send him the account information. I told him that I reported him as a spammer to the listing website, and they were banning his email address from their site.

His next email address comes to me RIGHT THRU their website again: dr_earl_spencer@uk2.net . (He claims that the first web closed down and this was his work email. He still wants my HELOC account number or I should run to the bank quickly and open one. He obviously didn't get my last email about working through my lawyer.

Then he says that his client is very happy with the property and is willing to pay $600,000 us dollars for it ($25,000 more than I was asking), and he wanted to wire $1 million into my account and use the $400,000 that was left to pay for renovations on the property and to pay the man I talked to and was emailing me, because he was the real estate agent. I then sent him my lawyer's name, address, and phone number, thinking that would get rid of him; but he emailed me this morning saying his client was delighted and needed the email address of my lawyer so he could start the contract proceedure and then move to the wire transfer. My lawyer thought he was scammer the first time I talked to her; she was not available today. My bank has assured me that you cannot wire money "into" a heloc account that was opened for only 1/10th of what he wants to put in there.

What do I do with this guy now? i'm kind of thinking my lawyer doesn't want to deal with this, period.

I need your opinion on this. I feel he is a scammer, but I have no experience with this kind of thing. Do you think there is any chance of him being legit.? His wording and mis-spellings were very un- professional. What do I do now. And who do I report him to? I gave him no information, and no wire tranfers have taken place, SO TECHNICALLY THERE WAS NO FAUD COMMITTED...YET.. Thank you for your time.

This is a scam. There is absolutely no chance in hell of him being legit.

Legitimate buyers want to see a property, want to check title, want title insurance and they want to go through a legitimate escrow company or attorney. Never give out details of you bank account or lines of credit (secured or unsecured) to anyone via email EVER. And never to anyone you don't know.

This is similar to a scam on ebay. The winner of an auction will send you a cashiers check for twice the item (usually an expensive item) and the suspecting honest buyer will send the item and the extra money back. A month later the bank notifies that the check was fraudulent and takes the full amount out of your account. So now you've lost the item and the extra money!

I recently got an email that appeared to be from Monster.com, but it wasn't. Apparently they found my email from Monster.com and had a 'transfer manager' position
for me. They have clients in the US (they're based out of the UK) and since they can't wire money to them, they'd wire it to me and I'd re-wire it out to the company. I basically should email my bank account information to them along with a copy of my drivers license and I'd get to keep 10% of the money their clients sent through me. Yeah right!

Today, the only people who can't do international wires are people who sell illegal narcotics. Even illegal aliens can send money back to their countries through Western Union.

I contacted Monster.com and they confirmed it was a fraudulent email. They also sent me a link to the FBI's website for reporting such cases of fraud. Unfortunately I deleted it, but this is a serious matter and you should always report it. Remember
there are gullible people who unfortunately fall victim to these sort of crimes every day.

You can get a list of common frauds on the FBI site.

Don't let the bad guys get away. You can and should report all internet-related crimes here
http://www.ic3.gov/.

$5 Million Just Ain't Enough!

The New York Times has an article about "poor" millionaires in Silicon Valley, working 70 hrs a week, just to get by.

Some of them having networths ranging from $5 million to $10 million, but are still working 60+ hrs a week.

Silicon Valley is thick with those who might be called working-class millionaires — nose-to-the-grindstone people like Mr. Steger who, much to their surprise, are still working as hard as ever even as they find themselves among the fortunate few.

Mr. Kremen estimated his net worth at $10 million. That puts him firmly in the top half of 1 percent among Americans, according to wealth data from the Federal Reserve, but barely in the top echelons in affluent towns like Palo Alto, Menlo Park and Atherton. So he logs 60- to 80-hour workweeks because, he said, he does not think he has nearly enough money to ease up.

“You’re nobody here at $10 million,” Mr. Kremen said earnestly over a glass of pinot noir at an upscale wine bar here.

“People around here, if they have 2 or 3 million dollars, they don’t feel secure,” said David W. Hettig, an estate planner based in Menlo Park who has advised Silicon Valley’s wealthy for two decades.

“You look around,” Mr. Barbagallo said, “and the pressures to spend more are everywhere.” Children want the latest fashions their peers are wearing and the most popular high-ticket toys. Furniture does not seem up to snuff once you move into a multimillion-dollar home. Spouses talk, and now that resort in Mexico the family enjoyed so much last winter is not good enough when looking ahead to next year. Summer camp, a full-time housekeeper, vintage wines, country clubs: the cost of living bloats.

To Mr. Milletti, it all looks like a marathon with no finish line.

“Here, the top 1 percent chases the top one-tenth of 1 percent, and the top one-tenth of 1 percent chases the top one-one-hundredth of 1 percent,” he said.

“You try not to get caught up in it,” he added, “but it’s hard not to.”

At what point is your wealth enough? Seems pretty sad to be worth $10 million and not being able to feel you'll achieved a right to take some time off!

Is the purpose of life to keep working and keep accumulating more toys until you just drop dead?

Turning Japanese

Here's some interesting info from Bill Bonner, author of Empire of Debt: The Rise of an Epic Financial Crisis

The Fed is still talking about the risk of inflation...while the risk of deflation rises daily. Deflation happens when liquidity dries up. Suddenly, money disappears. Lenders don’t lend. Spenders don’t spend. The velocity of money declines as everyone holds on to what he’s got...fearful of losing it.

When this happens even the feds can’t do much about it. They have their printing presses...but they have no good way of getting the money into the hands of people who will move it around. The usual way is through the credit markets. The Federal Reserve pushes down short-term interest rates, for example, enabling lenders to offer money at lower rates.

But when a deflationary mentality takes hold of people, the last thing they want to do is to borrow money. They’re afraid that they might not be able to pay it back. Besides, in deflation, consumer prices fall. So the money they pay back will be more valuable than the money they borrowed. Their effective, or real, interest rate will be much higher than the nominal rate they are paying.

As prices fall, consumers become even more reluctant to spend. They begin to see that they’ll get a better deal if they wait. They turn Japanese.

That is the nightmare that haunted Ben Bernanke when he took over at the Fed. It is what prompted him to announce that “the Fed has a technology...called a printing press...” with which it can print up dollars at almost zero cost...and if need be, the Fed can drop dollars from helicopters in order to get the money into circulation.

Of course, this was a fanciful description of monetary policy. Let the Fed scatter dollar bills from helicopters and the U.S. dollar would fall faster than the currency in Zimbabwe, where inflation is said to be running at 100,000% per year. Some things just have to run their course – like hyperinflation, for example. Once it begins it continues until the currency is completely destroyed. Deflation, too. Once begun, it is hard to stop...for the cure if often worse than the disease.

The Japanese economy was strong when prices began to fall in 1989. First stocks fell. Then property. Then consumer prices. All prices came down. And each falling price strengthened deflation’s grip on the Nippon economy. People hoarded money. You practically had to hold a gun to the consumer’s head to get him to spend. And business investment? Takeovers? Leveraged buyouts? All came to a stop.

But Japan could afford deflation. People had savings – lots of savings. And the economy always enjoyed a trade surplus. Nor was there any large subprime lending problem.

Can America afford a liquidity crunch...a credit contraction...a deflation? We don’t know...but if we were Ben Bernanke, we might want to make sure the printing presses and helicopters were in good running order.

Are we turning Japanese? I really think so!

Video: Cramer Frothing At The Mouth

Here's an interesting video of Jim Cramer imploring Ben Bernanke to stick his head out of the Fed window and see whats happening in the markets. Pretty amazing for a 52 year old man to get so worked up over a lousy rate hike. I think he might be losing it!






I wouldn't be surprized if he had an stroke on tv one of these days! Not sure what he was implying when he said that "they" called him off the air imploring him to do something. Were these people he's referring to bond managers or hedge fund managers? And what is he supposed to do? Call his buddies in the white house or the Fed office and convince them to cut rates? Or was this spectacle it?

Will the Fed cut rates to help the economy?

I think they will pretty soon, but that will weaken the dollar even further (and hopefully strenghten gold). But atleast all those people who couldn't afford to buy their homes without super-low rates and ultra-lax lending criteria and who are now faced with losing them will be able to continue the farce a little longer.

What do you guys think?

A Better Way To Lend Money To Friends & Family

Lending money to friends and family can be a strain on the relationship (not to mention your finances). Seeing that you're doing well, everyone wants to hit you up for a small loan. If its a short-term thing its fine, but if you're worried about the borrowers ability to repay your loan either due to poor financial responsiblity or income limitations it sometimes becomes difficult to say no.

One way is to steer them towards micro-finance sites like Prosper.com. Tell them that if they sign up on Prosper, you'll contribute as much as you can towards their request and also give you a recommendation.

This helps you in several ways:

1. It doesn't sound like you're saying no. You're trying to help them and will even
contribute towards their loan.

2. You get paid interest. This is based on their credit history. The better they're
credit history, the lower the rate.

3. You don't have to keep on asking them when they'll repay you and they don't have to avoid you because they feel like stiffing you. (Isn't it amazing how people who don't have enough money to repay you still seem to have enough money to spend on movies and fine dining?)

4. Their credit is on the hook if they don't repay you. Even if you lose money, atleast they didn't get away without incurring some loss. You don't even have to bug them. Prosper will pass on the info to collections after a few months of non-payment.

Prosper is also currently running a promotion. If they sign up using the referral link, both you get $125. If they join your group, you get group rewards which can be a % of the loan and an ongoing % of the monthly payments! If you refer a lender, then you both get $25.

You can even borrow money from friends and family this way. If you need a small loan just sign up on Prosper and forward your request to your friends. The smallest amount they can lend you is $50. If your friends can't lend you $50, you need to find richer friends or (more likely) to work on your image!

Riskest Real Estate Markets In The US

A lot of people are wondering where to invest in order to catch the next real estate boom. I don't have a ready answer for that, but Forbes magazine was nice enough to tell us where the riskiest markets are.

1. Miami, Fla.

Due in part to escalating insurance costs, Miami produced a price-to-earnings ratio that was sixth highest. Despite a loan-to-value rating around national averages, a high vacancy rate of 3.5%, and a 43% share of adjustable rate mortgages was enough to propel Miami to the top of the list of riskiest housing markets.

2. Orlando, Fla.

Its moderate price-to-earnings ratio didn't do enough to set off an astronomical vacancy rate (over 5%) and scores in the bottom third for 90%-plus loan-to-value mortgages and share of adjustable-rate mortgages. Strong local economic indicators like job growth and immigration significantly mitigate the risk, but the city is in a vulnerable position.

3. Sacramento, Calif.

A high vacancy rate of 3.3%, which ranked 10th worst, the seventh highest price-to-earnings ratio despite consecutive quarters of falling prices, and a share of adjustable-rate mortgages in excess of 50% made Sacramento the riskiest investment in California. A very low number of loan-to-value ratios above 90% means the market can bear the stress of continued price drops should the local economy take time to absorb the slump.

4. San Francisco, Cailf.

More than 70% of the market's residential loans over the last year were adjustable-rate mortgages, which puts San Francisco in a very vulnerable position should interest rates rise. A middle-of-the-pack vacancy rate of 2.4% is well above healthy, which means that any future price dips for the highest price-to-earnings ratio market could hurt.

5. San Diego, Calif.

San Diego has the lowest share of mortgages with loan-to-value ratios above 90%, which bodes well for any future price decreases, suggesting the city can stand some short term strain. Its problems are a 2.8% vacancy rate, the nation's third-highest price-to-earnings ratio despite prices not yet reaching a trough, and above-90% loan-to-value and adjustable-rate mortgage shares--among the top three in the nation.

6. Phoenix, Ariz.

There isn't one poison-pill measurement for Phoenix. A high 3.1% vacancy rate hurts, but so does the 10th-worst price-to-earnings ratio, despite significant downward price pressures over the last year. Adjustable-rate mortgages rank eighth-highest of cities measured and loan-to-value ratios above 90% are in the middle of the pack. The question is whether Phoenix's labor force and local economy, which is highly tied to the building industry, can sustain a prolonged slump.

7. Kansas City, Mo.

Things look dicey for Kansas City. Vacancy is above 4%, and the share of mortgages with loan-to-value ratios above 90% is the worst of the cities measured. The housing market is strained and ill-equipped to handle any future price declines. At least, with its low price-to-earnings ratio, mortgage costs are little compared with what one could earn renting the property.

8. Cincinnati, Ohio

The share of adjustable-rate mortgages and those with loan-to-value ratios above 90% usually have an inverse relationship. Not in Cincinnati. The city has the 5th-highest share of 90%-plus loan-to-value mortgages and, at 30%, an above-average share of adjustable-rate mortgages. This exposes the market to both price-decrease problems as well as interest-rate hikes.

9. Chicago, Ill.

Chicago is a traditionally stable market, but is currently under pressure. Its 2.3% vacancy rate isn't unmanageable, nor is its price-to-earnings ratio, which is the 12th highest nationally. Chicago's problem is a very high share of adjustable-rate mortgages (45%) and a middle-of-the-road share of mortgages with loan-to-value ratios above 90%. Having a high share of one is sustainable if there's a low share of the other, but in a scenario like this, both lenders and borrowers have elevated risk.

10. Denver, Colo.

Vacancy is high, at 3.7% - it's the list's fifth worst, which means that the city has a ways to go before it experiences price recovery. Adjustable-rate mortgages comprise 40% of Denver's mortgages, which exposes a market that's already struggling to problems if interest rates should increase.

I'm not sure if I'd invest in any of these cities, but just in case there are any concerns, they've also included the Most Overpriced Cities. The top three cities are

1. San Diego
2. Miami
3. Sacramento

which incidentally are also amongst the least affordable, along with Los Angeles and San Francisco.

I definitely wouldn't be buying in any of these 5 markets, whether for investment or as a personal residence.

In other interesting news today, Beazer Homes (BZH) is rumored to be facing bankrupcy.

American Home Mortgage (AHM) was up today, jumping from $1.25 to ~$4.60. It closed the day with news that it would close down tomorrow and the stock dropped in After-Hours trading back to a $0.72.

CFC and WCI, both of which I lost money on shorting too early were down and are likely to head lower in the long term. In the short term they'll probably bounce, just like IYR. I had sold naked calls on IYR, which I closed out on Tuesday for a decent profit. Since then IYR has bounced up again. I look for another entry point and buy SRS instead this time.

There's Still No Inflation But Milk Is $4/Gallon

Today's post is from the Mogambo Guru, who expresses his frustration at the inflation we're seeing in basic food products. Although Bernanke has said that inflation might become a concern, the Federal Reserve is still maintaining its stance that core inflation is contained. (Just like how the subprime lending problems was contained to about $250 Billion USD and how it might potentionally disrupt the entire global economey!!!!)

BEING FED BIGGER BREAD PRICES
by The Mogambo Guru

Peter Schiff of Euro Pacific Capital writes, "In current theory, the excess cash piling up around the world is like manna from heaven. Don't believe the hype. Liquidity is merely a euphemism for inflation. Asset prices, including stocks, are simply rising to reflect the diminished value of the currencies in which they are traded. Wealth is not being created, merely re-priced."

Well, I don't know where Mr. Schiff lives, but around here, it's not wealth that is being re-priced, but poverty. As the inflation in the prices of everything continues to outstrip "income after taxes and deductions", standards of living are being eroded because people can't buy as much stuff as they used to; their relatively static stream of discretionary income has lost buying power against rapidly rising prices.

For example, from the Financial Times we read that inflation is finally affecting food, and that Hovis bread said it was "preparing to raise bread prices for the second time in six months. The pending increase - which the company attributed to rising wheat costs - is merely the latest in a series of price increases food and drink companies have been trying to pass on to consumers this year. The series has seen costs of making bread, beer, yoghurt and chocolate as well as dozens of others packaged food products become increasingly expensive."

I know what you are thinking. You are thinking, "Who cares about bread? I don't need no stinkin' bread! I can eat pizza!", which is wrong, whereas you would have been correct if you had instead thought "I don't need no stinkin' bread! I can eat the bodies of dead animals that I find alongside the highway!"

And indeed you could, as the current market price of road kill is still a very economical zero, which may explain why it is not included in the Lehman Brothers' ingredients cost index, which "covers cocoa, coffee, oats, tea, soyabeans and milk, among other commodities and which is based on spot rates." This index, in case you were wondering, "rose 14.9% in the first half of the year", which "follows a 16.5% increase in the second half of 2006." Yikes! Prices of foodstuffs are up over 30% in twelve months? Yow!

And what is the biggest gainer? "The biggest increase has occurred in powdered milk prices. These have nearly doubled compared with the same period a year ago. Barley prices have also shot up 53%, while corn prices are up 68%."

So it is no wonder that people are complaining about prices! And you may be interested to learn the surprising fact that these afflicted people are, paradoxically, not the least bit interested in, or appreciative of, being educated that their inflation problems are all self-inflicted, as they are the same drooling morons that elected the Congressional morons that have spent us into the Hell Of Crushing Debt (HOCD) and allowed the Federal Reserve to create wildly excessive amounts of money and credit to make that grotesque orgy of spending possible!

To prove it to yourself, the next time somebody says that prices are going up and that they are having a hard time making ends meet, carefully observe their reaction when you politely and respectfully go up to them and, by way of education for their benefit, say, "Shut your damned stupid mouth, you ugly little troll! Your problems are all self-inflicted, as you are the same drooling 'I Love Big Government Creating Perpetual Entitlements' moron that elected the Congressional morons that have spent
us into the Hell Of Crushing Debt (HOCD) and who conveniently looked the other way while the damnable Federal Reserve created the money and credit to make that stupid, bankrupting spending possible! It's your own fault, you ignorant little commie creep! You committed economic suicide, and in doing so have economically murdered the rest of us, you filthy piece of stupid, greedy, Leftist crap!"

He's always good for a laugh!

Indan Rupee Likely To Get Stronger

According to Chris Gaffney, Vice President at EverBank.com

What do you think the best performing currency among the 10 most active currencies traded in Asia this year? If you take away the Thai Baht which is no longer freely traded, it has been the Indian Rupee which is up almost 10% since the beginning of the year. India's central bank, who is not happy with the currencies appreciation, had no choice but to raise rates yesterday to try and stem inflation. The central bank raised rates .5% yesterday and told lenders to set aside more cash to cover deposits. These moves are designed to drain liquidity from the credit markets and try to stem the inflow of capital which is increasing inflationary pressures. India's economy continues to grow at nearly 9 percent per year, second only to China in growth of the major asian economies.

The problem the central bank faces is similar to what has occurred in NZD over the past few months. The central bank will raise rates to fight inflation, but also wants to limit the appreciation of their currency. They have been trying to do both by raising interest rates at the same time as they are buying dollars and selling rupee to try and stem the rise of the currency. This can't last, they just don't have the deep pockets of China or Japan. I believe they will have to let the currency continue to increase, good news for the holders of rupee.

The Rupee has been holding steady at Rs. 40.50 for a few months now. But it looks like eventually the central bank won't be able to continue its manipulations and the Rupee will continue strengthening against the Dollar.

In India, real estate prices have been skyrocketing and there has been high wage and price inflaion. With the weakening Dollar, will offshoring tech jobs continue to make sense? Setting up an Office building is becoming increasingly more expensive, with commercial land in minor Metros reaching $2,000/sq ft! If this continues, it'll be cheaper to hire employees in the US! (So long as we go the Walmart route and don't provide them with health insurance) Maybe the weakening Dollar isn't so bad for the economy after all?