Understanding the Fed

A VERY nice, but brief, piece of work over on the Trading Goddess' blog about how the Federal Reserve of the US works. A must read!

I Call B.S.!!!!

Why do people insist that Goldman Sachs and Morgan Stanley will fall under the "tougher regulatory scrutiny" of the Federal Reserve when the Fed hasn't been tough or shown evidence of having a spine since Volcker was the chairman? I just don't get the unbridled inanity of these remarks. Is it only professional journalists that say such stupid things?

That is all.

PE Liquidations among Endowments

I'm wondering if any non-Ivy schools are taking advantage of this opportunity to acquire stakes in private equity funds on the secondary market. This isn't the first that we've heard of this story, and it likely won't be the last. However, if any endowments were sitting on some liquidity, this is sounds like a decent entry point with some well respected PE names.

*cough* Howard U.? *cough*

Of course, what is more likely is that these non-Ivy or non-first tier endowments are probably trying to liquidate their portfolios too. So sad.

These first tier endowments are getting hit by MTM accounting rules too? If smaller endowments can't get at least 50% off, then something is terribly wrong! At 50% or greater discounts, some of the LBOs of the last few years sound fairly reasonable. But its going to take even greater discounting to squeeze $120B in assets into $40B of investable capital.

When I originally started writing this post, Harvard had not yet reported their latest results. Down 22% (WSJ.com sub req'd) since the start of the fiscal year. Wow!

I contend that there is plenty of alpha out there to be gained, but it will take creativity, negotiation skills, and iron will to earn it. The days of easy alpha (more accurately, alternative beta) are over for the near future. Is this one way some of the second tier endowments can catapult their results into the stratosphere? Hell if I know! But I can fell the abundance of opportunity, and it gets more pronounced with every leg down. The question is who will take advantage of it?

Inflation FTW!

I don't know why so many people think the Fed actually cares about preventing/stopping inflation when the Fed's primary role over the course of the last 95 years has been to manufacture inflation. I mean, come on, what would have you think the Fed is seeking to fight inflation? It can't be the last 26 or more years of credit creation led by the Fed (mostly on Greenspan's watch). With the dollar worth 5% of its value in 1913, the year of the Fed's founding, it can't be that either.

Am I missing something? Why do people still think the Fed has a mandate to fight inflation? If they did, they are horribly incompetent and inept at that job and thus should be taken out and shot. I am a firm believer in Hanlon's Razor, but even this level of stupidity doesn't make sense. I can't see how 95 years worth of ineptitude can be justified unless...its not ineptitude at work but intention.

Capitalism at Work

THIS is what capitalism looks like. Not the pseudo-capitalism, Gordon Gekko wanna-be greed driven shite that has overtaken the Western world for the last few decades.

I honestly believe that if more company owners and managers behaved in the fashion described in this article, unions would not have the kind of traction that they do (did?). Capitalism shouldn't be about maximizing profit at any and all costs. It should be about creating a win for everyone - employees (probably more so employees than anyone), customers (strong second), management, and the community (indirectly through the already named constituencies as well as through direct involvement of the corporation).

I have nothing against unions, personally, but I don't believe in them. I also get that unions derive their leverage from their role as self-appointed defenders of the common man. Unions would largely be unnecessary if the "leaders" of corporations weren't always trying to fuck over their employees (among others). Management creates an adversarial environment and then wonders why the unions are so hostile toward them. How stupid do you have to be? If managements spent more time attempting to share the company's success with all involved in creating that success -- serving the employees, customers, vendors and families -- they'd probably not have to worry about unionization creeping into their workforces. If they spent as much time and energy on enriching those same customers, employees, vendors, et. al, I think a lot of wasted time and energy could be directed into profitable ventures.

(I admit to oversimplifying a bit, but probably not too much. "Getting over" is a human trait. It transcends cultures, nationalities, race, gender, and every other division you can think of. However, it doesn't work, as Nas reminds us. So why bother trying to "get over on someone" if its not a long term strategy for real success?)

Historically, tech companies have been the embodiment of this ideal (more so than old line industrials, anyway). The technology industry has a reputation as a meritocracy, which encourages people to give their all in the (deserved) expectation that they will be compensated commensurately with their contribution. That ideal IS the very definition of service. While the tech industry doesn't get it perfect, they are still much closer than more established industries. This probably explains the lack of presence of unions within technology companies to a large degree (although not exclusively).

Anyway, just something for all of you to think about. I'm feeling the spirit of Earl Nightingale wash over me these days, but the more I think about "The Strangest Secret", the more I see that Earl was spot on. Take care of others, and you will be taken care of. Universal, karmic law.

Just too bad that Ken Lay and the rest of those Enron cocksuckers didn't get their just desserts -- violent anal rape -- in prison. Well, you can't win 'em all!

Saving and Investing Seminar at Howard University on Wednesday

Yours truly has been invited to speak at Howard University next week. Specifically, for the Saving and Investing Seminar being presented by the Student Council of the College of Engineering, Architecture and Computer Sciences (CEACS). (Don't blame me. I didn't make up the name.) The president of the student council is one of my former "students" from my technical advisory days, so I guess he trusts me with the minds of his peers.

*grin*

I have to admit to having a very palpable feeling of fear at the thought of speaking before a group of college students. This is a bit weird, as I have done these types of engagements in the past (just with smaller groups). I guess the fear has to do with being tapped as some sort of "expert" on finance topics. While I appreciate that, I am just feeling a bit nervous about the whole thing, as this is the first time that I have been asked to speak.

Don't misunderstand. I love sharing what I do know. I like helping people prepare for all of the potential issues that may arise. I want to help people move to a position where they don't have to worry about money. Simple math shows that speaking to a group is way more effective at spreading my message (me - message?) than individual consultations. So this would seem to be a natural progression for me. Still, I am (slightly) worried.

I do look forward to this event though. Personally, I take the fear as a signal that I should do this, that it is to be embraced and not avoided. That mantra has been serving me well this year. We'll see how it works out in this instance as well. So if you happen to be in the DC metro area next Wednesday around 7:00 PM, drop by the Lewis K. Downing School of Engineering building at Howard University to hear what I have to say. There will be a special guest as well, in the form of the estimable Ginger from Girls Just Wanna Have Funds. So if saving, investing, (personal) finance, and other such subjects appeal to you, you are welcome to come hear what we have to say. Make sure to introduce yourself as well. I know I personally like to know who is deriving benefit from this blog, and what I can do to increase its value to everyone.

Peace!

The 51% Solution

This is what it comes down to in investing -- being right just a bit more often than being wrong, and when we're right, pressing our advantage. Easy in theory, but extremely complex and nuanced in practice.

A big point that many professional traders emphasize is that the greater your advantage (and we're talking in basis points here, realistically - 5+ bps - against your opponents), the more you need to press. Even Charlie Munger will tell you that when an opportunity comes along, you need to put as much weight behind that trade as possible. (See #6 from the following list of his rules for investment success, about asset allocation.)

Ask John Paulson.

Ratings Agencies: A New Model

One of the fundamental breakdowns of this credit crisis was in the ratings agencies (technically, the Nationally Recognized Statistical Rating Organizations - NRSROs).

This article over on the Financial Times gives a nice overview of the growth of Moody's and the NRSROs, especially in the structured finance arena. You should check it out, twice if you're not really a follower of the market.

The big takeaway from this whole crisis, on the NRSRO side, is that the appropriate compensation model for the NRSROs is for their customers to be the buyers of bonds and other credit products. Additionally, they should probably be private versus public organizations, much like SC Johnson. Many firms are public that have no good reason to be. I am all for public markets, but when a firm serves such a large public role, being publicly traded is probably a handicap as opposed to a benefit. Adding a touch of the Google internal stock market is probably a good idea for these private firms, but their shares do not need to trade on public markets. I really don't get this desire for firms to be public, except if they are struggling. Maybe all those LBO targets are on to something? (About being private, anyway. It sure isn't their business processes.)

As for the point of credit buyers paying the ratings firms, this is ideal because they are the ones who ultimately will benefit from the research. The current structure invites severe moral hazard. The FT articles mentions that the complexity of rated products forced growth in the size of Moody's in order to rate these large entities and the esoteric products coming into the credit market. Well, maybe scale was required, but the flip side of the subscription model is that if a corporation will not allow the NRSRO to rate its product -- if the corporation willfully decreases transparency into its credit quality -- then a suitable discount must be applied in the market to compensate for the lack of information. This is the ONLY model that makes sense. Without the information, the opacity should force the market to discount the bonds, commercial paper, convertibles, or structured product being sold (or underwritten) by the corporation. That's not fair -- its just plain good sense and good business!

The final concern becomes the models themselves. As has been widely noted, the NY Times covered this recently. The models are just mathematical equations. They have no position on this subject; they are merely tools, and like any tool, they can be misused or misunderstood by those wielding them. Human frailty (and that damn good sense) come into play here again. The Times piece looks at how quickly humans were willing to set aside their reason in the pursuit of compensation, or assume that the real world was accurately reflected by the models.

The models were not then, and are not now, the problem. The problem is the gatekeepers wielding the models. Once a flaw - a programming bug, or worse, a design flaw - was found, anything rated with that software should have been re-rated. The decision to NOT re-rate those issues should be considered an act of negligence, possibly willful and criminal negligence. Models will evolve if their creators update them. Secondly, if any product has little to no history, then you cannot reasonably rate it based on historical performance of any other product.

So if you're out there in the credit market in any way, you owe it to yourself to do SOME credit analysis on any product you might buy. Whether we're talking bond funds, or direct investment in credit products, you have to understand what you're buying on some level. Credit analysis is more difficult than equity analysis. Such is life.

So to wrap this (very late) missive up, the ratings agencies can serve a useful function. However, their role of being public watchdogs, a la the press, must be honored. Otherwise, that role is better subsumed within a unified regulator (whenever the SEC and CFTC merge), and let's face it - we don't want that. This is something that is probably better suited to government functionally than most other tasks it takes on, but it still should be a market function. Government could provide credit research and publish it, for free even, but would that research be very good? Could it be subverted? A market system for credit research will go a longer way to promoting the transparency and lack of conflict that investors deserve. Adding that value should come with a price.

Selling Online Real Estate

Since my grandiose plans from about a year ago to turn some of the domains I own into businesses never came to fruition, I have decided to re-park them. Given the (somewhat) amazing response that has been generated with the currently parked domains, and the fact that the 4 domains I just listed were generating no income, it would be absurd to continue keeping them in reserve.

I currently have 7 domains listed, including one semi-premium domain (a .net) and a truly premium domain (a choice .com). We'll see how these do being parked. They performed fairly well up until de-listing them last summer, so I think this could be promising. Not lucrative, but at least they should cover their registration and other holding costs.

Until next time...

Woo Hoo!

I just made $22.01 for July - October from parking some domains with Sedo. Very nice.

The Effective End of an Industry

It occurred to me yesterday that, as we approach the the $1,000,000,000,000 mark in losses from this mortgage induced economic and credit crisis, the size of the global hedge fund industry is estimated at somewhere between $1.5T and $2T in assets under management. (Or at least, it was prior to this crisis.)

So, if we really do hit $1.5T in losses as some of the extreme estimates have stated, we will have effectively wiped out the ENTIRE hedge fund industry. The ensuing liquidation will drive down prices on many financial assets, and drive quite a few people out of jobs.

Politicians really need to be careful what they wish for.

Quote of the Week

From Felix Salmon at Portfolio:

"If you want to save money, save money. Don't place too much trust in the market to make your money grow, since there's a good chance the market will end up moving in entirely the wrong direction."

Paying Yourself First

So I finally received my Federal tax refund earlier this week. I think it actually came yesterday, IIRC. $2484. Not bad. So I deposited it along with $15 that I have saved in the last week.

(On an unrelated note, my personal saving has really declined recently. I haven't carried as much cash in the last few months, and in the interest of fitness, I have stopped eating as much junk food, especially from vending machines. So I guess the drop in cash saving is a positive sign. I did increase my automated saving recently, however, to $700 per pay period. That's effectively 30% of my monthly net income.)

Anyway, I decided to take a bit of time this morning to do some saving. Of the almost $2500 I deposited on Wednesday, $1250 was transferred to my brokerage account so that I can re-balance my Satellite Portfolio. Another $500 was transferred to my emergency savings account, which replaces $500 I transferred out a few weeks ago as an insurance policy on some upcoming spending. Depending on how my automated payments on my secondary credit card go, I may transfer another $500 over there and really be $500, not just at break even.

*shrug*

So $1750 has been allocated to savings of some sort out of almost $2500. I think that's respectable. The additional $500 may be icing or, even more likely, I will put it against my accumulated debt on my primary card. (The secondary card is now encased in ice. More on that in my October update.)

Whatever is left from the $2500 will be used to fund my snowboard. I estimate about $249 left over, all told.

The whole point here is that you must pay yourself first. It feels great, and that should be enough reason for anyone to do it. Second, you can't help others (if you are so inclined) if you yourself need help. Eliminating your debt, having your retirement saving locked up, having an investment program, and emergency savings is all about positioning yourself to do with your time - your life - that which is important to YOU. Money is the tool to that end. Whatever is left, and there should be something left, do with as you please. That's the payoff for successfully completing the other phases. Indeed, you need to build that into the overall picture so that you have a bit of motivation.

Its like working out. I work out to improve and show respect for my body. Your body is a loaner that is taken if you don't treat it right. However, we all have something we like which is diametrically opposed to a fitness goal. It may be food in general, or a specific cuisine, beer or other alcoholic beverages, or laziness. So you have to build your program to take these factors into account. Your financial program should never feel like punishment, otherwise you will subvert yourself in rebellion. That serves NO ONE, least of all YOU. Build in the slack. You should enjoy everything, both the act of saving and investing, accumulating and growing your wealth, along with the act of spending what you have accumulated on those things that are important to you. (Things that are NOT important to you should ruthlessly and efficiently be cut out of your life, with extreme prejudice.)

Also, every victory should be celebrated. Why? Because it represents CHOICE. A choice to do something that supports the achievement of your goal. (You do have written goals, with deadlines and implementation plans, right?) You have chosen your goal over other available options. Celebrate the process of moving closer to your goals all the time!

So how are you paying yourself first? And how are you rewarding yourself for doing so?

Money Clubs

While I don't like the name (just a personal thing), this is a great idea for anyone having problems with their finances.

In order to achieve any goal, you must first gain clarity around that goal. That means the goal must be well defined, succinctly, measurable (e.g. quantifiable), achievable, and all that other good SMART stuff. As Napoleon Hill said, "A goal is a dream with a deadline". How important are your dreams to you?

You have to create an environment conducive to achieving the goal. That means creating support structures, as we like to say at Landmark Education. In the arena of money, creating a group like this is an ideal structure for the achievement of a financial goal (or goals). While the article does not go into heavy detail, the basics are there along with pointers to specific resources.

Those who follow me on Twitter know that I have an intense workout schedule, Monday through Friday, usually starting at 10:00 AM for an hour to 90 minutes. I also hired a personal trainer through my gym, to coach me on matters that I was unfamiliar with, and generally push me harder than I am inclined to push myself. (Even better, he has taught me HOW to push myself harder - safely - so I don't absolutely have to depend on him in perpetuity for that role.) These are all parts of the support structure I have created to achieve the fitness goals I have for the rest of my life.

The final piece, and the piece that this article is suggesting and encouraging, is creating a group of like minded individuals with similar goals. With these people, you share your successes and failures, coach each other, congratulate each other, and help each other grow toward the goal. My group takes the form of an e-mail list with about 9 of my really good friends around the country. And it works. By creating this group, not only have I enhanced my overall fitness, but I have people who will hold me accountable (along with my trainer) for doing so on an ongoing basis. I learn from these guys, I let them know how close I am to my 5 clearly defined goals (which I shared with them), and I share what I have found with them so they might benefit from my experience. I think we've created a supportive environment for all, and I love that. The same can be done with your financial goals, if you really want it.

The same concept applies in personal finance. If you're not where you want to be, and you're honestly committed to achieving a goal, then you NEED to do this! Period. It is one piece of the puzzle.

My only request is that you don't lie to yourself. In order to lie to others, you have to start by lying to yourself. Now, lying is a sign of disrespect for the person in its own right. (I'm not making judgments about anyone for doing so, but just consider that by itself.) However, by lying to yourself, you are showing your disrespect for YOURSELF (just as working in a job you hate and not working to create a job you love is disrespectful to your mind, or not exercising and eating poorly is disrespectful to your body). If you won't show yourself the respect of honesty -- no matter how bad it "looks" or "feels" to do so -- then no one else will, and rightfully so. You aren't deserving of respect from others beyond basic human respect for your existence.

The final consideration is that lying to yourself typically leads to wasting your time. There is no resource on this planet of more value than your time. EVERYONE gets the same 24 hours in a day, and what you create with that time is your choice. However, lying to yourself, for any and all reasons, will lead you down the path of pursuing activities that waste your time. Treasure your time, because it is the one resource you can NEVER get back.

So, on that note, go create your support structures. Start with a "money club". Please!? What's the worst that could happen?

NOTE: Whatever the voice in your head is saying in response to that question, I call BULLSHIT! Most bad things only happen in our minds, and we spend our lives avoiding theoretical bad shit. Go get a real world problem which exists in physical time and space, THEN we can talk.

I can't wait to hear about more of these popping up all over. Its so very overdue.

Okie, I go to sleep now. G'night all, and until next time...

Negative Crack Spread

The FT Alphaville has a piece on the negative crack spread. I'm not going to get into explaining what the crack spread is here, since the article does a much better job. However, it does make me wonder what trade might be available in the next 3 - 6 months in the energy futures market. Buy the RBOB, while going short WTI?

Just sayin'.

Amen!

I have no idea how I missed this originally, but I think it was because I was in Las Vegas when this was published by David Merkel.

Simply put, this is the best definition of how Capitalism SHOULD work that I've seen in written form. (I don't like using the word "should" in any context, but it seems appropriate in this case.)

Granted, it does not always work like that. Maybe not even most of the time, at least in this period of world history. However, I don't think Capitalism is dead. On life support maybe, but not dead. The greedy, self-centered and selfish bastards took over and have been running the show for far too long. However, there are still people out there interested in creating the most value for others -- providing service -- in exchange for the money those people are willing to part with.

Pricing is a great measure of the service you're providing people. By definition, if you are lowering your prices, it is because you are not offering enough value to your customers to garner the higher price. Instead of racing to the bottom, you need to figure out how to move up the value chain. No, its not easy, but nothing worth doing is. (And when something is easy or perceived to be easy, too many people start doing it, looking to get rich. See the dot com boom and real estate investing/speculation in the last 10 years. THAT's the definitive contrarian indicator, when everyone is trying to make money in a given arena.)

So I have to hand it to David Merkel with this well timed post. Too bad I'm finding it a month after its original publication.

Now back to creating some value, somehow, for someone...

Oh Well

I was so looking forward to making a rebalancing buy in my trading account today, but my cash balance conspired against it. No matter. Next week will give me an opportunity to rebalance for November.

I did pick up some additional PMF at $12.30 per share. I'll be slowly buying into that over the coming weeks as well.

I know I've been delinquent for the last week, but I'll be updating over the course of the week. There's a lot of catching up to do regarding the last 2 months, and lots of stuff to share with you all.

Later.

Deleveraging Academia

The WSJ has an article about the impact of the credit crunch on colleges. It appears that the effects are being felt all through the academic complex.

Good!

Higher education has been one of the most mis-priced and overvalued products in this country. The rate of increase in college costs has been flatly absurd. Why? Too much money.

For the longest time, colleges and universities have been overpriced. The price inflation we've seen for college education was completely ridiculous, fueled by easy government grants, loans and other spending. Isn't that the kind of government spending that leads to inflation - spending that creates no marginal increase in value? Sure seems like it. We're not talking Weimar Germany yet, but still, the entire college financing market has been able to increase in cost at insane rates of growth on the back of cheap money, mostly in the form of debt.

It had to come to an end. Good riddance.

I think there is a lot more to come - a lot more layoffs, more construction to be postponed, and other crazy spending by universities to reign in costs. No longer will they be able to finance this madness with 6% annual tuition increases, because shortly there will be few (if any) with the capacity to pay. Definitely not from the "middle class".

And socioeconomic stratification will get worse.

I feel sorry for anyone who was counting on getting loans to pay for any kind of higher education. Its going to be ugly, but it is long overdue.

Is Anyone In Charge Here?

THIS (WSJ.com sub req'd) is abso-fucking-lutely absurd!

Doesn't anybody realize that artificial demand is what caused this problem in the first bloody place? The whole point is that real, market clearing prices need to be found for houses. This is so simple even I get it! WTF?

People need to start saving for the things they want to buy, and that includes houses. That means getting your 20% or greater down payment, and having a way to cover not just PI (principal + interest) but TI (taxes + insurance) as well, and maintenance costs, furniture, utilities, landscaping or yard work, and all the other associated expenses that no one ever seems to take into account. And don't forget to factor in inflation and increasing tax rates as well.

Get over it already!

Beware the Second Order Effects!

A nice piece, several days old, by John Dizard over at the Financial Times. Not sure where I picked this one up, but thanks to whomever supplied it!

If nothing else, the moral of this story is "beware those second-order effects". It seriously takes conscious thought to catch this stuff, and I figure 99.99% of the planet is technically unconscious so...we should be surprised that we get the results we do.

Beware those second order effects!

An Old Market Hand Speaks

Nice interview with Seth Glickenhaus here (WSJ.com sub req'd). Definitely worth a few minutes to read. I'd say it was spot on, but then I'd probably be gushing.

Clicked

This has been floating around in my mind for a while, but it all just came together right now as I finished reading the Bloomberg article referenced in my last post.

Whenever you hear someone make an analogy between almost any advanced derivative or structured product and some simpler product, the simpler product is almost always a call option. There is almost a 100% chance that the simpler product will be an option of some sort, but usually, it is a call option. If THAT doesn't convince you to just trade the underlying options directly, I don't know what does.

Just a thought.

Laziness Insurance

So I'm finally catching up on some reading, post-vacation. After getting about halfway through this piece of reporting at Bloomberg.com, I'm once again led to wonder who the hell would buy a principal protected note. Ever. From anyone.

The Japanese and Chinese investors, apparently, and as usual. Somehow they seem to embrace a product just as it is getting ready to implode.

Think about this shite. After some term, you are guaranteed - GUARANTEED - to get back your principal. Return of principal versus return on principal. Fair enough. However, did no one calculate the loss due to inflation?

No laughing!

If you're that inclined to lose money, why not just get a regular bank account (in the US)? I don't know what the HK folks had at their disposal, but somehow I imagine there were safer products, plain vanilla products, available for purchase. The whole notion of principal protection, while it sounds good, should more accurately be considered an insurance policy against doing one's research. We see how well that works out. Doing the research improves your odds.

(It made sense in my head. Hopefully it makes sense when you read it. If not, that's what the comments are for.)

So what have we learned, if nothing else, childrens?

1. To hell with the bells and whistles. If you don't understand the product, and most importantly, the risks attendant with investing in the product, you don't purchase it. Salient advice for all time.

2. The game IS risk management. This is a world of probability. While it could be said I am re-stating #1, I don't fully agree. You must always be present to the risks around you, because EVERYTHING, even the safest of activities, have some level of risk. Look at the swap spreads on US Treasuries to see what I mean - even the "risk-free" investment has risk. Can you live with the risk? Can you hedge it? Because you can't eliminate it.

3. Beware asset gathering. Any firm which has rumors swirling around it that introduces a high return product is probably trolling for funds. So consider this, and be sure about where you land in the capital structure if said firm goes tits up. Basically, see #1. If BSC had already been chewed through, and you're an unsecured investor in Lehman Brothers, the #4 investment bank, you're next in line to be chewed through. So if you MUST buy, buy quality, and that means buy Goldman unsecured products. Duh!

4. Don't bet what you can't afford to lose. This goes for the $100 I blew in Vegas playing craps this past week, and it goes for the $2B US that those suc...investors in Hong Kong will be blessed to recover. (I'd say lucky, but you create your own luck.)

5. Do your homework. Swap spreads and the death of BSC should have told people to avoid Lehman structured debt products.

6. Homie don't play dat!

Oh, and if you ever feel the need to be separated from your money that badly, just give it to me. I accept PayPal donations. At least that way, you know its going to a good cause - liquor and women, although not necessarily in that order.

:)

G'night, all!

Thinking about CDS

Not like this is due to happen anytime soon, but I do have to wonder when shorting CDS becomes a viable strategy?

Just a thought...

Or how about a company shorting its own CDS, maybe through a shell or subsidiary?

Natural Progression?

As a bit of a follow up to my last post, I leave you all with this. I guess I'm cautiously pessimistic, overall.

Oh My God

I'm angry.

Sitting in my room in the Monte Carlo hotel on the Las Vegas strip, I've been watching the absurdity of the last few days. Needless to say, I'm disgusted. However, that's not why I'm writing this. I'm writing this because for some reason, the elected officials in DC are getting on my nerves with all of the political pandering we've seen. However, its not their fault. They're doing what they were chosen to do, with a bit of criminality thrown in for good measure.

(Thank you, America, for voting in these cocksuckers! Just had to throw that in. YOU got the politicians YOU DESERVE. I hope you're proud of yourselves, American public, you fucktards!)

Moving on, everyone wants to know what should be done. I think its pretty obvious that there is no "right" answer. Shit is fucked. All of that said, here's what makes sense to me given that we live in a world of probability. (Nothing makes that clearer than walking around the casinos in this town.)

First, the bills hitting the congress need to be simplified. I don't honestly care about the numbers being bandied about. We long ago passed the point of those being relevant. Plenty of people have already noted that the $700B is a ROLLING number. Once $700B is burned, a next $700B is up. The $700B is the amount outstanding that Treasury could put to work at any given moment. THAT'S ALL. So I wish people would get off that one. Just make it a cool trillion even. The amount is somewhat irrelevant. Its a question of what happens to it - how is it used - that matters the most.

Second, the notion that Treasury should not have oversight is patently absurd. Paulson had a better chance of getting a blowjob from an electrical socket than getting that one through. If it somehow has crept back in...well, see paragraph 3 above. No, he wasn't elected, but his boss was. Utter bullshit that should be thrown out.

Third, the purchases by Treasury should be at market price. I think Merrill put down a $0.05 price on its most recent sale. Hey, at $0.05, I'm a buyer of as much of that paper as possible. Hell, that's a 95% markdown or better. I doubt 95% of the mortgages in any securitized deal are going to hell. 50% - maybe. 30% - likely. 80% - oh please! If you want private buyers to come in with capital, the price has to be right. Getting these illiquid assets off the books of public commercial financing institutions is the order of the day. Allowing the Treasury to buy this crap from the banks at par - THAT is a monumental mistake which will accelerate the downfall of the American empire. I don't know who Hank was blowing (or being blown by) to put that fuckery into the measure, but THAT is my biggest problem. The folks sitting on this debt either need to put a bullet in their own heads and be done, or sell that shit for the best amount they can get. The writing is on the wall. Will their brains be as well? If the price is $0.05, then dammit, sell and move on.

Now, what the hell is with all of this partisan politics adding pork to these bills? Again, thank you America! You have no one to argue against about greed when clearly, by virtue of the fact that your elected officials are sticking in amendments and other dick sucking measures into this legislation. You know, this is one of those times (like, well, really, EVERY OTHER TIME) when legislators shouldn't be playing sides, state against state, pork against pork. These motherfuckers need to be doing the best for the ENTIRE NATION, not sucking their constituents' dicks on some bullshit. How come no one is calling in to make sure that shit doesn't pass? Because YOU, American public, are a greedy, selfish, self-centered motherfucker who doesn't honestly give a flying fuck about anyone else in this country except yourself. I guess we can nickname you Gordon Gekko. You want a better outcome? Get the legislators to remove all the bullshit and get the bill down to the basic, fundamentals to address this ONE ISSUE.

But where are you when it comes to making that call? Absent. As expected.

You know what is really upsetting about this whole thing isn't that the politicians are doing what they are doing. They're mostly pathetic cocksmokers pandering for votes anyway. Expecting more from them at this point is useless. However, the dicks they are trying to suck -- their constituents' -- aren't out there instructing them to do the BEST thing for the NATION. No, the constituents are out there saying that the pols should be fucking over the next American so that they can sleep well, have their cake and eat it too. The pols are just doing as they have been instructed.

I'm inclined to ask people how it feels to be greedy, evil bastard motherfucker willing throw your fellow American under the bus. But I don't even know that there's a point to that. If you people actually gave a shit about anyone other than yourselves, you'd be encouraging - nay, screaming for - your representatives and senators to cut out the bullshit and whittle down the bill to the simplest incarnation to address the short term credit market liquidity problem. PERIOD.

But considering there is no heart left among the populace, I don't see that happening. You people want it nice and easy. Fuck, if everything were meant to be easy, everyone would do it. If marriage were easy, no one would get divorced. If saving were easy, everyone would have 6 - 12 months of funds put away for an emergency and no credit card debt. (Not saying I'm perfect here. Just making the point, plain and simple.) If college were easy, more than 25% of the population would have college degrees. If being healthy and fit were easy, less of you people would be clinically obese, overweight, and about to drop dead due to your inability or unwillingness to be disciplined about exercise and eating in a healthy manner. Worthwhile shit is hard to do. That's the price of doing it. At the end, you're supposed to feel good about overcoming whatever you had to overcome to win the ring. That's how it works.

This is the most difficult economic problem to face this nation in a long fucking time, and the easy solutions were passed over decades ago. So get over it. You - yes, you, American public - chose this course with your willingness to be forgo difficulty, your willingness to throw your fellow man under the bus so you could get what you wanted, and your willingness to believe that the economic fundamentals of the last 300+ years of capitalism had been suspended in your favor.

I laugh when I hear people talk about the character of the American public. It sure hasn't been on display in my lifetime. If you people want to start claiming any sort of high ground, then the simple fact is that you need to take your medicine. The American public - everyone, myself included - created this problem. There is no easy way out. So just deal with it and get to the other side as quickly as possible. It won't be easy. That doesn't mean that good companies need to go to zero because of the over-emotional American investor. But the pain has to be felt, lifestyles have to be adjusted downward, and EVERYONE has to de-lever. That's all there is to it.

If you're really up to it, then do it! Fuck talking about it. BE ABOUT IT.

Or don't. It really is your choice. But if you're not going to take the pain; prepare for emergencies; cut your standard of living; eliminate your debt; put your foot on the neck of the politicians in Washington, DC; bust your ass adding or creating value at your employer or in your business; and otherwise tighten your belts, then realize that the shit only GETS WORSE from here.

What are you going to do?

Ahhh, I feel much better now. Time to see what's going on outside of my room.

Randomness

I like Marc Faber, and his analysis seems to be generally good, but man does he like to hear himself talk. Just answer the damn question, Marc. 20% in US dividend paying shares. 10% in gold. The rest in Treasuries, presumably preferring TIPS. Got it.

See how simple that is, Marc?

Yes, this has nothing to do with anything. I'm definitely tired. But I'm back.

G'night, all.

Woo Hoo!

Yes, I did just post. I've been on vacation in Las Vegas for the last week. I thought I said that, but maybe not.

Anyway, I've got some thoughts on some of the things we've been seeing out there in the markets and the economy generally. Not very original thoughts really. Maybe that's the liquor. Or the women. Or the lack of sleep.

Eh.

Anyway, I haven't forgotten you all. I'm getting back into the swing of things. Stay with me.

Damn!

Its really time to get out of this country. That's really all that I can think of now.

Thanks to P. Kedrosky for this one.

The Story of LIBOR

I am fascinated by the inputs to, machinations of, and outputs from the global financial system. That's why I love this kind of behind the scenes, in depth coverage of something as arcane as LIBOR. (Well, I guess its not arcane in this world, but among "normal" people, a group I've never been accused of belonging to, it is.) It gives you a sense of what really goes on in calculating LIBOR, dollar LIBOR in particular. And FINALLY, an explanation of "eurodollar"! Very cool indeed.

New FDIC Insurance Calculator

Very nice! Hat tip to Bob Brinker.

Buffett's Latest Buy

This is really just a stream of consciousness post.

A friend of mine sent along a recent Market Mover's post by Felix Salmon over at Portfolio. Anyway, in reading this, especially the comments, it occurred to me that Buffett will probably ditch the trading operation. Now, I'm not sure who the buyer might be, but considering that trading likely had something to do with making Constellation Energy the target it became, weakening it and increasing the collateral requirements, I can't see MidAmerican holding on. It seems a bit too volatile for Berkshire.

I think about the General Re acquisition some years ago. It took a long time, but Buffett unwound a bunch of contracts that Ge Re had entered into which increased the overall corporate risk exposure. I'll go dig up that story if I have some time. The same forces would appear to come into play now with CEG. Buffett will keep the parts that generate free cash and sell off the bits that detract more than they add, slowly if necessary but quickly otherwise. At least, that's the first thing that comes to my mind.

Thoughts?

Its all about risk management, baby. I think that, if nothing else, is the lesson of the week.

General Blog Updates

You'll notice quite a few additions to the right hand navigation here. I've added a few blogs that really are must-reads, and moved around a few other sites. DealBreaker and FINalternatives really needed to go under the News heading. Instead of just Investing, we now have Trading and Investing. Too much specialization is a dangerous thing.

Yes, this site really is an aggregator for me. Instead of trying to remember all these sites, or even using deli.cio.us or another social bookmarking site, I just use this blog. It just seems easier and contextually appropriate.

Anyway, hopefully I'll have some connectivity at home tonight, for the first time in about 3 weeks, so I can post more frequently AND comfortably. As always, there is more to come...

Investing in Endowments - The Dream that Will Never Be

I LOVE this idea from Felix Salmon about alumni being able to invest in their alma mater's endowments. Its innovative, its different, and it will never happen in our lifetimes. However, I love it.

As John Mauldin is one to point out, regular people should be allowed to invest in alternatives as a way of enhancing returns in their retirement portfolios (or whatever other funds they allocate to the alternatives space). You can find his 2003 congressional testimony on the subject here.

I imagine the biggest problems would be the administration of small(er) investor accounts and the accredited investor rules. You could attack the first problem by allowing minimum investments of greater than 6 figures, say $250K+. The second problem requires US government intervention, which makes it almost impossible to see how one would ever get past this limitation.

I also imagine many larger endowments would want to avoid the kind of incessant inquiries that small investors would bring with them. No matter how experienced those investors are, they are probably going to require or request some level of hand holding, and endowments likely aren't interested in such time sinks. The larger endowments (Harvard and Yale in particular) would not need to resort to this kind of asset gathering; it would purely be a "perk" offered to alumni. There are plenty of smaller institutions, with smaller endowments, that would probably seek to use this re-configuration of the landscape to draw assets and increase their management fees. The new laws would have to take this into account. It makes sense if this structure only imposes fees on profits when the investor withdraws, and reduces the management fees. Endowment investors shouldn't be paying standard hedge fund management fees, especially when the endowments are non-profit organizations and they employ their own managers. A range of 0.5% - 1.25% in fees seems appropriate, based on whether the endowment managers are in-house (lower) or outsourced (higher).

Even so, investing in your university's endowment, with the management fee going to your university, would be a nice way to contribute and still benefit from the expertise the university employs. (That is, if the endowment is large enough to employ in-house investment managers and strategists. If they outsource significant amounts of their endowment management, then this idea is probably unworkable.) Maybe all the drama which led to the founding of Convexity Capital by Jack Meyer could have been avoided if those vocal alumni had been able to invest alongside the endowment, instead of watching from the sidelines. Felix's idea has some obvious tax benefits as well, and if one did not need the money from the endowment, they could let it ride or donate it to the university easily. Brilliant!

Anyway, I had to comment on that idea. I'd love to see alumni offered this kind of investment opportunity. It would sure take a lot of work to make it happen though, which makes me cautiously pessimistic that it would ever occur. (Thanks to Paul Vixie for that phrase, one of my favorite quotes of all time, received from him in personal e-mail!)

Still, how awesome would this be if it became real! A man can dream, can't he?

Until next time, peeps!

Movin' On Up!

When your largest provider of vendor financing starts pulling back, you have a problem. I think I've said this a few times recently. It was truly inevitable.

While mortgage rates have climbed recently, I think you've only seen the beginning. They have not yet begun to increase!

On another note, it totally makes sense for PIMCO to invest in agencies, no matter how Mish feels about it. PIMCO is in business to make money, for their clients, shareholders (vis-a-vis Allianz), and by extension, themselves. They are in a position to hold the bonds and get made whole (or at least a decent return on invested capital) when the US eventually nationalizes the GSEs. That's their job, right? To make money. I don't see why Bill Gross and PIMCO should be faulted for attempting to follow their mandate. Its a perfectly reasonable position for them given their business.

The part I find most interesting is that if foreign holders of agency debt are unloading, is the US Federal government going to be as interested in taking care of the debtholders, PIMCO among them? Hmmm. It makes me wonder. The Feds have to take care of the people who are holding US government debt of all stripes, even though I think eventually the damn will break and the Treasury rates will soar. For now, the Fed are just trying to maintain as much control as possible. Taking care of China and Japan is in order given the scenario, and anyone (such as PIMCO) can go along for the ride if they choose. I just wonder if Japan has also been selling out of its positions in agencies? In every trade, there's a buyer and seller, but its easier to screw over your populace than a foreign government that facilitates your shell games.

No matter how you slice it, rates are going up. I stand by that assertion.

Longing...

I soooo need to get back to London! Fuggin' amazing are those photos! That's all that can be said.

The Four Horsemen of the Market

Brief but nice profile over at MarketWatch of 4 investment personalities that are definitely non-mainstream. Hussman and Grantham, in particular, I find to be very solid thinkers and lucid writers. If you aren't reading Hussman's weekly commentary, you should click on the link in the right sidebar and do so. Now! As for Grantham, you have to register over at GMO but its free and they publish commentary and research from time to time. Managing the kind of money they do, its probably not high on their priority list to publish much of anything for non-paying customers.

Anyway, go check it out, and read Hussman and Grantham's writings when they come out!

Later.

Quick Apology

Yes, I've been out of it. No, I have no excuse. Don't need one. Its called life. I can happily report that I have successfully moved most of my personal belongings into my new, $416/month cheaper, apartment. There will be more discussion of this in the near future, and its impact on my overall finances. I may also finish my July update, as a few surprises popped up recently which modified the picture but not in an overwhelming way. Or I may just continue forward with the August snapshot. Who knows!?!?

Anyway, I will write again soon. Now, its time to go home, where I have no Internet connectivity, to read documentation and source code for the FIX protocol and watch the end of "Wall Street". (There will be a review coming as well. I've seen the damn movie too many times to not analyze it on this blog.) Depending on how much this caffeine continues powering me, I may work on valuing some multi-unit properties I'm considering putting an offer in on. We'll see!

Cheers!

A Response to Teresa Lo

If you've been following things around here for a while, you'll recall that back in April I wrote a post which was effusive in its praise for Teresa Lo's series on building your own investment portfolio. Little did I know that Teresa would comment on that very post. I was honored.

In her comment, she asked me

Now that you've decided to reduce the number of asset classes, I was wondering how you plan to allocate the funds? Do you use a certain formula?

to which I had no response at the time. There were some other matters that had my attention, so I never really gave the question extensive thought. What I did know was that I liked the satellite portfolio that Teresa describes in the series. So much so that I planned to copy it outright. (What was that about great artists stealing?) While I would imagine that any portfolio that InvivoAnalytics constructs for a client would have slightly different components, the overall idea and simplicity of this portfolio is ideal. I know that I have too many components to my current portfolio, and while I like them all, there has to be a better way.

First, I have liquidated all the holdings in my taxable account. As I've previously stated, I use the aggressive allocation from 401khelp.com for my 401(k). So this interpretation of the satellite portfolio will truly be the "explore" portion of my overall investment holdings, while the "core" remains in my 401(k).

So, to answer the question, I return to the original inquisitor...I have purchased a subscription to InvivoAnalytics.com's Portfolio Strategy service!

Now, this may seem like a cop out, but I considered the following factors. First, I was planning to use the same investments anyway. Two, Teresa and Pete have put in the time and effort to come up with the algos to perform the asset allocation, rebalancing, and other processes which I would otherwise have to implement manually, and their processes are targeted at the same ETFs. Third, I'm busy. I am working on several projects outside of my investing, some of which I've talked about on this blog. There is just not enough time, and consequently not enough value I could add with the time available, to make the investment pay off. The work has already been done, so I should use it. Fourth, I didn't have to pay directly out of my pocket; I was able to pay with blog earnings. Its a minor point, but anything that reduces the friction in this kind of decision is "A Good Thing".

So Teresa, I think you already know the answer to the question by now.

That said, here's the breakdown from Monday:

• VXF - 16.88%
• EEM - 14.18%
• GSG - 9.92%
• FXF - 28.13%
• TLT - 30.89%

Now, some things to keep in mind before anyone rushes off to implement this allocation. First, these are the allocations from InvivoAnalytics.com's Strategic Performance Portfolio. They are designed to be implemented in a trading account, since they rebalance the allocations weekly. Thus, you'll want to reduce your friction as much as possible.

Also keep in mind that these are not core retirement portfolio holdings and allocations. InvivoAnalytics.com has services for a core portfolio which is designed to be implemented within your primary retirement account, primarily targeted at 401(k)s. As I have mentioned before, I use the aggressive asset allocation from 401khelp.com in my 401(k), with a few tweaks for a more defensive posture in this market (primarily, more international exposure for a greater risk/return profile, more cash, so I have some dry powder, and less real estate exposure for obvious reasons). If you're looking for a core 401(k) asset allocation from Invivo, the Strategic Performance Portfolio is NOT it.

Part 8 of Building You Investment Portfolio discusses some of the details of how the dynamic algorithm works (at a high level).

(Yes, those numbers change every week, so while you're getting a free ride for this past Monday, by next Monday the numbers will be different. You shouldn't buy in the middle of the week anyway, but wait until the next allocations come out next Monday. However, you have to be a subscriber to find out what those will be!)

So all of that said, thank you again Teresa for coming up with these model portfolios and giving me time back to generate alpha in other ways!

Until next time...

Crazy Random Thought

Given that the stimulus checks have mostly flowed through the system, into people's gas tanks and back to the Middle East, AND that consumers are still hurting, it would be interesting to see what impact is had by the delay. I mean, how much time did those checks buy?

It would be interesting if the real contraction, put off by the stimulus package, starts close enough (but before) the November election to have an impact on the outcome. Will energy markets have calmed down enough by then to reduce the possible pain on the McCain camp (by virtue of his association, however loose, with the sitting President)? Will the run-up to winter combined with increasing unemployment, leading up to the election, favor Obama? Where is the Black Swan?

Just something that came to mind as I prepare to go to sleep for a few hours.

Later, my peoples!

Apologies

I have to apologize to all of the readers of this blog. My connectivity at home has been crappy for the past few weeks, and I haven't had time to troubleshoot it. Considering that I am moving out of my current residence by the end of the month, it really hasn't been high on the priority list to do so. Finding connectivity outside of the home is also troublesome because I'm often on the move and for some reason, in places where I don't have connectivity or I'm not staying long enough to utilize it.

(Don't even get me started on the matter of using connectivity at work. That's more than enough trouble as-is.)

I'm actually preparing some posts about my final July net worth and financials, including my (so far) thwarted attempts at adding options trading to my brokerage account, and a few thoughts on the general economy. So I'm still here, but to paraphrase Gertrude Stein, there's no here here.

Thanks for hanging in there. I'll work on being more communicative about all issues in the future.

Beautiful Day

So I just ran the preliminary numbers for July and things look good. Entertainment kicked me in the ass, but I saw more movies this month than in the entire rest of the year combined. Add in the costs for Projekt Revolution, and I took a big L in this category. However, not all is bad. My calculations are based on a rent payment of $2150 (even though my portion is only $1650; the rest is paid by my roommate). So if we consider that I spent $229.91 on entertainment this month, and subtract out the $500 difference between my rent charge on my credit card and my actual portion, we find that I am really up $270.09.

Not too shabby.

As well, running calculations for my food expenses (overshot my budget of $600 by $48.38 although some of that probably should fall under entertainment), medical expenses (only charged $14.10 against a budget of $75) and fuel expenses (charged $257.84 against a budget of $700) yields a savings of $454.68. That figure includes subtracting out the food overage from the medical and transportation budget savings. This amount has now been transferred to my emergency account, for use on my trip to Trinidad for Carnival next year. I think I've covered over 50% of the expected expenses for that trip in the last 2 months of savings. Its a very nice feeling.

I'll have more on this later, but right now, I'm off to the movies. :)

Cheers!

Regrettable Comments by Bank CEOs

How rich! Pure comedy, I swear. I don't often link to Portfolio, but this one is worth a mention just for the humor factor.

New Private Racetrack in NY

I saw this and almost started crying. Just to be able to spend a day racing at this club would be a phenomenal experience. Of course, I imagine its Bring Your Own Supercar (BYOS) even at a daily pass rate of $2500. Since I happen to be short of the supercar, I guess I'll just have to read the news coverage, if any.

Analyst Arbitrage

Well, not exactly, but it sounded good. :)

Seriously though, I was reading this piece in the SJ Mercury News about Frank Quattrone's return to technology finance, and something that Frank was reported to have said caught my attention. Here's the paragraph from the article:

But the result has been that a large number of analysts have left investment banks to join hedge funds and private equity firms, Quattrone said. The remaining analysts have focused on covering bigger corporations, rather than small start-ups, because there's no money and little recognition in covering the smaller companies, he said.

At first blush, you may agree with Frank. However, that analysis is counter intuitive to me. While what Frank said here may be true (I don't know), it appears to me to offer an opportunity for someone to profit. See, if there is less analyst coverage of smaller tech firms (especially those with real businesses, revenues and profits), then a studious operator can use the lack of coverage to their advantage.

Every trader, portfolio manager, or even small investor, is looking for an edge. The analyst rules implemented in the wake of the Blodget and Grubman scandals create a vacuum of public information around small companies, according to Frank. So the operator who is peering into the cracks, doing the due diligence, and sniffing out the promising companies that have minimal or no analyst coverage, has a better chance of finding a "hit" before the market does. Its a perfect arbitrage play. Of course it takes courage to do, but isn't that the point? The successful operators feel fear like everyone else, but they don't let that fear stop them from making good, well reasoned investments (or trades). So the operator that steps into this information void, spends the time learning about the company, and generates an investment thesis for it is taking a huge risk. However, that risk is mitigated somewhat by the fact that s/he's got a larger margin of safety to work with while the stock is undiscovered.

None of this means that our hypothetical operator can't be wrong. The investment thesis could be bogus. The timing could be sub-optimal. Any number of things can go wrong; that is the risk of the market. However, finding an unloved gem is the kind of investment everyone wants to make. So analysts' failures to cover these small companies creates an opening for the intelligent and courageous operator to profit handsomely. Shouldn't we be glad that these information arbitrage opportunities are being created? If we are the competent and capable operator, we should be giving thanks and showing gratitude for such situations, so I would think.

I don't feel bad for the sell-side analysts. If their work is any good, they'll get known for it. Meredith Whitney and Dick Bove come to mind. The good analysts will have options. Hell, even the less-than-best analysts will probably land on their feet too, usually within a hedge fund or private equity firm, as Quattrone acknowledges, or some other buy-side entity. The analysts creating forgettable research will fade into obscurity within their firms, and the typical retail investor will probably place (misguided) value in/on their work. I don't see how life is so bad for our sell-side analyst. Will it be as easy as it was during the go-go 90s? No. Will it orders of magnitude harder for them to make a living? I doubt.

Its too easy to tag along on the words of the great Frank Quattrone, given his reputation and past success. I think Frank misses the mark on this one, though. However, Frank wasn't a trader. He was a banker. As such, he probably never had to consider this issue too closely. In Frank's world, the sell-side coverage was probably proof that he was doing his job (and well). It probably justified the expense that the IPOing startup went through to work with Quattrone and his gang at CSFB. All of this would serve to burnish Frank's reputation as the go-to banker, which made him more prized and valued by whichever firm employed him.

I don't know if he's just looking at this void through the eyes of a banker, or if he has really evaluated the pros and cons of the reduction in sell-side coverage for smaller stocks (across industries, but especially in technology). I hope he has, and that he saw something I missed. In that case, I would LOVE to know what I overlooked. However, I don't get the feeling, from reading this (very) short article, that he did that evaluation.

Until next time, good people...

Covered Bonds and Bank Failure

So does anyone REALLY know what happens to covered bonds if their issuing bank defaults? I ask because based on the brief description from Bloomberg.com, Wikipedia, and the European Covered Bond Council, it sounds like a securitization that has to stay on the books of the issuer. Now, if the issuer fails, what happens to the bonds? I mean, it sounds like they are already overcollateralized, which is how they get the superior ratings, but I haven't seen any mention of the outcome of issuer failure. Maybe I just need to read a bit more.

However, these things sound pretty attractive so far, if you can look past the fact that a NRSRO had to issue the rating on the bond. As we know, until recently, the 2 NRSROs that the market listened to most closely were Moody's and Standard & Poor's. Their collective track record on ratings isn't exactly spotless. Still, these covered bonds that are already trading (not necessarily those of FNM and FRE, should they actually come into being) sound promising based on their yields. I sense a lot of fear around these things, just based on the the names of the issuers, and that indicates a potential opportunity to me.

At times like this, I wish I had access to a Bloomberg!

Financial IQ Test Score

64.

That's including the bonus point. Not nearly as good as I thought, but it shows me what I need to work on. Credit/debt, shopping, and financial planning would appear to be my weak points. Time to get to work, it is.

I encourage everyone to roll on over to Moolanomy and take the test. I printed it out to make it easier to record my results next to each question. Do whatever works for you, but then turn that knowledge into action!

Until next time...

Trading Up

Well, it took me forever and a bloody day, but I finally got my options application in to the mail today. Yay me! We'll see whether I get approved. Cross your fingers. Since I don't plan to write any options, and especially not puts, I think it should be ok.

I'm also looking to lighten up some of my funds today or tomorrow. We'll see how things look near the close. I plan to close out my TREMX, PRMSX and RPIBX, as I prepare to trade into Teresa Lo's satellite portfolio (with a few minor differences).

Anyway, more on this to come. I need to go sleep!

Thoughts of IndyMac

This is exactly why I scoffed and avoided any bank offering a rate greater than the rate HSBC has been offering for their online savings accounts. It was pure asset gathering, as these institutions, in their race to the bottom, were trying to generate enough lendable capital to generate enough revenue to offset the risk of failure. As if there was enough time for such machinations to work! E*Trade Bank and Capital One come to mind as well, along with IndyMac.

Eurozone Birthrates

I'm not an economist, and I'm thankful for that, but this just makes me think that the eurozone has MUCH bigger problems than the ECB's monetary policy. I mean, they're pretty fscked anyway with the collapse of credit and housing markets in their most dynamic economies (never mind what's happened to everyone else -- German banks?). I wonder if they can pull off the trick of getting their economies to slow down faster than their birthrates?

I guess I should just be glad I'm where I am. Barely.

Damn You Japan!

Sold off SPXJX at $14 yesterday. Good riddance!

Preliminary June Analysis

Since I had some time before going to sleep, I figured I'd try to throw together some quick and dirty reports about June's financial performance. So far, things look good. I spent $405.84 on food, when my budget allows for $600. I spent $201.04 on gas, which is WAY beneath my ceiling of $794.62. If not for the Misc category, which blew a complete hole in my numbers, things would look great. Add to that the fact that I will be moving next month, so by September my rent will drop from $1650 per month to $1234 for my own 2 bed/1 bath apartment, and I'd say things are in excellent shape.

Anyway, I plan to work with the numbers a bit more and get a better idea on what worked and what didn't. My new diet seems to have had a very positive impact on my finances, if I had to take a guess from these numbers. I front load carbohydrates and finish the day with a salad. Even with a pre-packaged salad, I'm not loading up on sugar-laden food which becomes fat while I sleep. Those pre-packaged salads cost only a few dollars as well, so I can buy a bunch of them for work and still leave room in my budget for eating out the rest of the week (if I choose). Sweet!

Anymore, more to come. Until next time...

Heads Up

I know I've been off my game recently. However, I do have a new update coming soon. Now that the first half is done, its time for a quarterly wrap up and some other activities. Also, there is a big position sale in my future. Gotta love tax loss selling! I don't see Japan going anywhere significant anytime soon, so...

Stay tuned!

Separation of Powers

I have started a new blog called "What De Rass?" This is where you'll be able to find my personal ramblings. All finance oriented chatter will stay here, but I'll move the bulk of my non-finance related postings over there. Things seem cleaner that way.

Those of you who come here probably don't give a damn about my life or what goes on inside my head beyond the conversations about finance, money and alpha (when they break out). Thats all good and fine, and this is the place that you'll stay. For those of you who harbor any interest in me beyond finance and my take on it, feel free to check out "What De Rass?" and even let me know what you think.

Have a good day, all!

Silver Lining

It looks like Mexico might have some medication for the real estate woes in Texas.

You have to admit, that's pretty funny. Mexico, of all basket case economies, has enough liquidity flowing through its veins to stanch the bleeding here. There are so many things racing through my head -- humor among them -- as I think about this.

What I Want...

...is a short play on social networking. How many fuggin' social networking sites do we need? I know I sure don't need that many, and I probably need more than the average human. (Not as many as Kedrosky, but more than average. THAT dude needs his own personal social network.)

I wish there were a nice index I could short, but none of these fuggin' sites is public (and most probably have no chance of ever being public). In fact, fugg a short. Just buy puts on the index. I need a derivative contract.

Hi5? Facebook? LinkedIn? Friendster? Ok, ok, ok. I'm good. I don't need Multiply or MyYearBook or whatever the hell other social networks are lurking out there. Fuggggg man, just leave it alone already!

One of my students asked me about his idea for a social network the other day. I went on a rant about the business, basically telling him that he'd be better off doing it as a hobby unless he had a clear business case and heartless, soulless dedication to that objective. (As Gekko said, if you need a friend, get a dog.) I sure hope he doesn't go through with it. Talk about a waste of talent and time.

Stop with the social networks, please, for the love of God and all that holy!

Does Not Compute

Something about Felix's argument doesn't compute, but my brain is a bit too cloudy to take this on right now. I need some sleep.

Yes, credit enhancement has generally been the name of the game with muni issuers and monolines. The issuers were trying to get their issuance costs down (e.g. their yields), knowing full well that the primary buyers of their product were likely not going to spend a lot of time doing credit analysis. Even doing 1 issue would be problematic for a small investor, never mind the universe of muni credits in the marketplace. Guys like Tom make a lot of money (and spend a lot of time) doing that research. People like me, however? Not so much.

So what am I missing here? Yes, credit enhancement in an era of diminished trust in the ratings agencies is probably absurd. However, you have to play to your audience. The rating agency problem will, hopefully, start getting sorted out with new entrants to the market. I don't see this world changing drastically.

Of course its nuts that munis, with their historical default rates, were not being compared evenly with corporate credits. However, I think your state treasurer probably was working with a small budget, and any way to shave a few hundred thousand in coupon payments annually was (and is) significant. All of those costs (and savings) flow directly to the bottom line.

In the longer run, the market will likely morph. Higher quality credits will probably go without insurance. Lower quality issues will probably still seek it out. I doubt the market will disappear, but shrinkage seems highly likely to me. For these issuers, making those costs evaporate is probably the key reason for the demand for insurance. Now, I may be missing something from my limited vantage point. Please, someone, clue me in if I have missed something. Basically, I think Felix is being a bit too cynical on this one. Ratings arbitrage occurs, sure, but I think the primary motivator for many of these treasurers is keeping their costs low. For a relatively small outlay (especially for larger issuers), they could get that, with the higher rating being gravy (an effect rather than a cause).

Does that make sense to anyone other than me? I hope it does. Maybe I'll expound on this after I get some rest.

Until then, dear readers...insurance - don't leave home without it!

Inflation is Fuggin Bad when...

...the Japanese start spending.

Need I say more?

It's Official!

My $20,000 savings goal has officially been accomplished! The latest account balance is $20,275.82 after my latest direct deposit (at a rate of $250 every pay period) and $51.65 in interest.

Gawd, saving money is addictive!

I'm preparing my next credit card payment for this week, and it will be substantially bigger than usual. I love progress! I'm happy. (I'd be happy without this, but there are just 2 more things to be be happy about.)

Until next time, cheers!

Goal Shifting

While reading over my 2008 goals last night, I came to the realization that 2 of my goals (1 each of the regular and stretch) are no longer goals of mine. I just no longer desire to work on them. So, in order to have my environment reflect my reality, I am updating my 2008 goals appropriately.

Regular Goals --

Personal: Learn to snowboard with enough proficiency that I can tackle a green trail by 31 Dec 2008. (Success)
Personal: Accumulate $20,000 in emergency funds by 31 Dec 2008. (Success)
Personal: Achieve $150,000 in net worth by 31 Dec 2008.
Personal: Save $15,000 for a house down payment by 31 Dec 2008.
Personal: To find and accept an offer on a new, rewarding and fulfilling job by 29 Feb 2008.
Business: Unwind my real estate investing partnership by 30 Jun 2008, including all asset sales.
Business: Hand off my consulting customers to responsible, attentive, competent person with high integrity by 30 Apr 2008.
Business: To ship a prototype of our application running on Windows Mobile and the iPhone by 30 Sep 2008.

Stretch Goals --

Personal: Read 50 books by 31 Dec 2008.
Personal: Accumulate $30,000 in emergency funds by 31 Dec 2008.
Business: To have a beta release of our application running on Windows Mobile and the iPhone by 31 Dec 2008.

As you can see, successful goal completions are identified in blue text. My mobile software idea is a much lower priority for me right now, so I have struck through the 2 goals related to it. However, I do have a new fixation, software-wise, and I plan to work on that opportunity more and the mobile device software less.

That's all for now. Peace!

Monday's 2 Year Treasury Yield Spike

Bespoke Investment Group has a post about Monday's huge jump in 2 year Treasury yields. Using this as an indicator for a trade is a non-starter, at least against the overall market. The returns over the time periods researched are too small to justify the risk. It would be interesting to see the returns for various industry sectors. Also, it would be cool to see how long it takes each sector AND the index to breakdown after the jump.

Hmmm.

See, I Didn't Forget You!

Wow, it really has been a long time since I last posted. It seems like just yesterday that I had posted 5 times in a single afternoon. Ahhh, the power of focus!

I have truly been remiss these last 2 weeks. I apologize again. However, its spring! I've been working to maximize my fun factor this summer. DC Carnival is coming up, and some really good parties with it. I plan to hit a bunch of amusement parks and ride roller coasters until I can't stand. I'm going to hang out with my second cousin and his family who I have ignored for years even though they live a short distance from me. Projekt Revolution is also coming to town a short time after my birthday, and since I missed Linkin Park earlier this year, I will not miss this! Finally, I plan to save enough dough to make it back to Trinidad for Carnival next year!

Anyway, I'll quickly go over the latest. Look for some posts in the near future which examine some of these at length.

On the real estate partnership front, it looks like we have an offer for one of our houses. I couldn't be happier about that, if it keeps me from having to liquidate my investment account to put money into the company. We'll see. The guy should be e-mailing over the contract later today.

By the end of this week, my $20,000 savings goal will be accomplished. I'm now thinking of other ways to increase my savings, and this promotion that JLP mentions over on his blog sounds cool. I might just enter it just because. As for saving, I think I've mentioned that I Direct Deposit funds into my savings account, about $150 per paycheck now. That's only been reduced so I can focus on paying down my credit card (and start getting my points).

Anyway, I do play those savings games with myself. The ones I've played for as long as I can recall involve saving any bills of a certain denomination that land in my wallet. For a long time, that was $1 bills. Maybe 18 months ago or so, I upgraded to $5 bills, and I don't see myself going to $10 bills anytime soon. Those fives are pretty hard to keep, but it does reduce the impetus to spend. I think I had $15 in change left over from this past Saturday when I went to the Capital Jazz Festival, and all of it was in fives. Added to the $100 I did not spend, that will be a nice bump when I deposit it later this week. (I took $200 out of the bank for the festival, and the remainder became my spending money for the week.)

I also save change religiously. I started that as a kid. My father would tell, if not force, me to deposit coins into a jar that he kept in his closet. At some point, we would have a father-son bonding session by counting and wrapping all of the change. Since my father wasn't the most emotionally expressive of chaps, this really was a highlight for me, just being able to spend time with him while I got a lesson in saving (unbeknown to me). Now, I do the same thing using an empty Whitman's sampler box. All savings get transferred to my savings account; none of it is ever used for spending. Besides, I build large cushions into my budget, so that I should never go over my monthly spending limit in any category. Anything extra is for saving.

My next plan will be to transfer the delta between my monthly budget limits and my actual spending into my savings account. I've usually just let those amounts sit in my checking account, or spent them without thinking. However, I want to make my saving more active. Passive saving is easy and find and I highly recommend it to all, but I think of how much I haven't saved that I could have if I had started this plan sooner. Oh well, such is life.

I'm also in the market for a new living space. My lease is up at the end of August, and I have found 2 prospective apartments. The cost difference is only $56 between the two, but once is brand new and the other is quite a bit older. Since I do work out almost daily and I relish the convenience of a fitness center on the property, I'm trying to get a feel for how the older place will renovate theirs. $56 per month is not hugely significant, but I am willing to sacrifice that money for convenience and modern equipment. I really want to get back to my workout routine from when I lived in Orange County, CA. Back then, thanks to my man G, I started working out a few times a week. That grew into an obsession, and I'd workout for 90 minutes before work, then 90 minutes in the afternoon before returning to the office to hack until 11 or 12. After doing 2 hours of cardio plus some running or practicing shots on the basketball court, then some light weights EVERY DAY, I made some serious strides in my fitness. It only took 2 months of that routine to show a difference, but I didn't measure my progress since I found out that I absolutely LOVED it just as a personal challenge. Go figure. The kid who rarely exercised growing up (out of fear on his parents' part that he might induce his own death vis-a-vis a massive Sickle Cell crisis) loves exercising.

Anyway, I digress. Continuing on...

So I expect to save between $300 and $400 a month in rent while at the same time reducing my commute distance. How's that for a plan? I'm soooo looking forward to it. Right now, I think I'll take 1/3 of those funds and increase my monthly savings, divide 1/3 over the various categories of my spending plan, and use the remaining 1/3 to pay down my credit card debt that much faster.

As I said, I look forward to espousing on some of these ideas a bit more extensively in the future. I'm also planning to talk a bit more about financial technology, and hopefully I'll be able to rub brains with some of the better bloggers/thinkers on the subject. I definitely see my career turning in that direction. Of course I'll keep you posted on that. There should also be some progress on the investing front, such as getting that option trading sorted out, and formalizing my analysis. I've been rather haphazard about analyzing my trades, doing research, and generally learning more about investing, trading, and finance. That has to come to an end, and I hope you'll join me for the adventure.

So much for quick, eh? Ah well. You know I love you all!

Until next time, y'all...

Net Worth Update

I haven't done one of these recently, so let's get caught up...

First, I've been re-working my asset allocation to be in line with Teresa Lo's satellite portfolio from her series on building your own investment portfolio. I'll have more to say on that shortly, along with my response to her comment, I promise!

Since I should officially achieve my goal of $20,000 in emergency savings by the middle of June, I will be adjusting my Direct Deposit into that account to a slower rate of accumulation. I have explained why I spent so much effort building up that account in a previous post, so I won't rehash it here. However, with this change, I will refocus my efforts on paying down the credit card debt which has been dogging me since last year. It feels great to finally attack this issue, but I absolutely wanted to make sure I was positioned in case of an emergency. I've dipped into my emergency funds for non-emergency situations a bit too often in the last year.

Since I decreased my withholding a few weeks ago as well, this latest change means that I can ratchet up my 401(k) contributions again. That holds benefits on 2 fronts. First, I'll reduce my adjusted gross income (AGI) which will reduce my overall taxable income while allowing me to take home more money with every paycheck. Second, I'll still be able to maintain some accruals to my emergency account, just at a slower pace, so that I can focus on the debt re-payment. I also get the benefit of freeing up some capital to direct into my self-directed Roth IRA. I'm going to have to give some thought as to what I'll do with that account. I had considered doing tax lien and tax sale investments, but we'll see. I'm not sure at this point.

(As an aside, I just received an e-mail reminder to increase my 401(k) contribution amount to 15% in 2 days. For this, I love technology!)

The one blemish on this record was alluded to in my most recent post, that being the need to buy my way out of the horribly flawed real estate partnership to which I belong. If I do have to put up money to get out of this albatross of an investment, I am prepared to put up as much as $10,000. On further thought, I may be able to put up even more IF it guarantees certain outcomes, such as refinancing the loan which is in my name. That house actually has a tenant in it now (its the only occupied house in the portfolio) so there should be coverage on the note. If I can force a refinance of the mortgage into the LLC's name, thus clearing me, I could put more funds into the LLC. As long as I can get out of this situation once and for all, I'll be happy. You will continue to hear more about this in the coming weeks. I set a deadline to be out of this position by the end of June.

I expect to take a potentially significant hit to my net worth due to the real estate partnership unwind, but my psyche will thank me for it. Doing so will also help me accomplish one more of my 2008 goals. Honestly, the best part is that I probably CAN pull that off and not be too terribly hurt by doing so. I have to be grateful for having the resources to do that, should the situation actually come to that. Thank God for a good job with good income from a solid, large company!

(Wow, did I really say that? I guess I did.)

Anyway, that's the story. Not exactly pretty, but it could be a lot worse. So now for the numbers...

My current net worth works out to $75,271.80. That includes a writedown to $0 of the real estate investment and the $35,000 in student loans I co-signed for. Actually, my investments, both in my taxable account and my 401(k), have done fairly well this year. I have unrealized gains of 29.48% on PRMSX, 10.96% on TREMX, 2.87% on PMF, and 2.7% on RPIBX. All of those are held in my taxable brokerage account. As for the 401(k), it is a bit difficult to calculate the change in individual positions. Its down 4.9% on the year, but I doubt much of that is due to the foreign equities even though they make up 47.1% of my 401(k).

Long ago, I wrote down the value of my car to $5000, and added $50 for the value of my old laptop. I may need to drop that back to $0 again though, in the pursuit of intellectual honesty. I'll check eBay first. My CC debt has been on the rise, although as I said, there will be immediate moves to reverse that. The CC debt is in the neighborhood of $15,000 currently. My brokerage account, as noted, has performed rather well. Once I start re-balancing into the positions in my re-designed portfolio, I plan to sell off large chunks of the existing holdings. I'll end up paying short term capital gains taxes, but I'll gain simplicity. As well, those gains will be heavily offset by previous investment losses and the continuing losses on the real estate partnership.

Anyway, that's everything I can think to mention, at least regarding the net worth situation. If anyone has questions or concerns, or anything was unclear, feel free to post in the comments.

Until next time, all...cheers!