Wednesday, February 27, 2008

Your Money or Your Life

I began writing this several months ago, as the story of my dying real estate partnership was beginning to unfold. It was really an exercise in venting, but after the latest developments, let it serve as a warning to anyone considering partnering with anyone in any venture.

OMFG! For the love of God, don't do it! Your money or your life? It might just be the latter. Or worse, it might end up being the next MF's life, when you have to kill his dumb ass for causing you to lose money and sleep.


Its not supposed to be this difficult. Why do humans insist on complicating simple and straightforward matters?

Some months ago, some of you may recall that my real estate partners and I decided to dissolve our LLC. We just had too many disagreements about strategy, direction, and how to DO this business. A real estate business that buys one house in a calendar year is a not a real estate business. You can't even deny that away. I've come closer to doing more deals on my own, in the last 6 months, than the LLC has in the last 15 months. Its pretty pathetic, actually.

So now we find ourselves trying to extricate ourselves from further self-inflicted damage, in the form of losing every penny of our initial investment of $11,200 each. Now, I've come to terms with this money being gone. Personally, I'd rather just get out and be happy then drag this monster along any longer. Needless to say, I have my accountant on the case as to how to profit (or at least benefit) from losing $10,000 again. Now, I'd love to find a way to get something back, but I am not at all attached to this outcome. My sanity just isn't worth the price.

Anyway, it seems that every property gets vacated by the crappy tenants, usually leaving behind a few thousand dollars in damages and no revenue coming in. So we end up spending what little money we have getting each house back in rentable condition. Since December, we've lost 2 tenants, sold the best property (to one of the partners, no less), and had the last property inspected multiple times by Section 8 (each leading to failure) because the previous owner was a slumlord. 3 properties generating no revenue. How much worse can it get? I'll tell you how - having to put in more cash to keep this monster alive.

My goal at this point is to get out with as little additional out of pocket expense as possible. Right now, we're scheduled to have a meeting -- the first in months -- next week to discuss the current situation. I've already recommended that someone call our loan servicers and start negotiating some agreement so that we don't risk foreclosure. Of course, our loans were securitized so dealing directly with the lenders is nigh impossible. Once I can get a straight answer on our asking prices, I'll start posting online ads for each property. I hope that doesn't take too much longer. Finally, I've been tapping my network of friends and investors to see if anyone knows someone looking to acquire properties in Baltimore. They all require some work, but keeping this in mind, we're willing to adjust the sales prices accordingly. Somehow, it seems like I'm the only one concerned. I guess that means I won't be asked to put up any cash later on; everyone else seems to have that covered.

What a mistake! Don't do it, guys. Just save yourself the hassle. Partnerships are a losing proposition. I'm not sure what the winning answer is, but I can tell you quite a bit about how not to do it. Don't partner with people you haven't personally known for some time. Start with a small project, work it all the way through, and see how everyone responds. Ideally, from your interaction, you'll know that the partners all think almost identically about the business and how it should be conducted.

Better yet, just go it alone.

Saturday, February 23, 2008

2007 Federal Income Tax Prep


If ever there was a subject that people (or maybe just Americans) love to hate, taxes has to be it. However, in the last few years, as I have looked at the Federal income tax more closely, not only do I see and appreciate their usefulness, but I have actually found the tax system to be quite beneficial to me.

(I also think that the Federal income tax is part of a conspiracy that includes the Federal Reserve, to be clear, and that it equates to robbery of the citizenry. However, in the current environment, I look at them for what a Federal tax could accomplish, if it were implemented in line with the founding principles laid out of the US Constitution. I know it sounds contradictory, so maybe I'll tackle that in another post. Continuing on...)

Now, I hate the process of doing taxes. Its just too complex. However, if you're willing to take some time, there is really no justification for most people paying any Federal income tax in a given year, simply on the basis of the current tax law and average income levels. You just have to do your research and spend some time planning. (It does take effort.) For me, that takes the form of reading the tax columns that run in the WSJ every so often, even taking notes on interesting or potentially useful tips. It also helps that my accountant (aka my mother) has been doing taxes for others for years. I can quite easily bounce things off her, or ask her to research a particular topic for me. Now that she's working for a non-profit tax preparation group as well, she's exposed to even more tax information which is powerfully useful. If I can find a way to start using the official software that the non-profit she is working for uses (and is endorsed by the IRS, according to her), that might even give me more of a leg up. I try to understand the tax laws to a reasonable degree, so that I can figure out how to use them to my advantage.

Finally, the best thing I ever did to get comfortable with my taxes is sitting down, with a pencil and tax forms, and doing my taxes for tax year 2003 or 2004. I may have done it manually both years, but I can't recall exactly. However, having to read the stupid booklet that comes with the 1040 was very insightful. Since I did that, I think I've paid taxes 2 years in the last 4 or 5. Every year I get better at finding ways to get my money back. My biggest concern now is not turning it over in the first place! However, I recommend that everyone do their taxes by hand - no computer, no software, no websites - at least once. Read the book(s). Use a pencil to do a draft then once all the numbers look sane, pull out a second set of forms and do the real version in ink. Even with my moderately complex return in 2003 (or 2004), it only took about 45 minutes to do the whole thing. Even 2 hours of time is worth it. Doing the process by hand makes you much more familiar with the intricacies and all the little ways the IRS helps you avoid paying the US government. I was amazed at how many ways there were to reclaim my money and you will be too! With every iteration, you learn new, powerful ways to minimize paying that you hadn't considered.

For tax year 2007, I sat with my mother and went through my American Express year end statement, identifying every REI related un-reimbursed expense, every charitable contribution, everything that is potentially deductible, and boy is there is a lot. Combined with maxing out the 401(k) every year, which gets my adjusted gross income (AGI) down to the levels where I can contribute to a Roth IRA, these expenses are pretty much going to guarantee a decent refund. Even better, in some twisted way, is that I don't have the return completed for my real estate partnership yet, and with the losses we took last year, that should increase my refund even more! Woo hoo! (Uhh, umm, yeah.)

Anyway, I feel good to have started that process, so I can get it over with before April arrives. And I thank American Express for their beautiful web site and online functionality. Along with the reduced complexity of my investments in 2007, and a new accountant doing the books for the partnership, this should be a much smoother process with a happier ending. Go go un-reimbursed deductions!

Until next time...

Friday, February 22, 2008

CMBX Says Commercial Real Estate Looking Dodgy

I don't think I'd normally mention this (WSJ sub req'd) if not for the deja vu I experienced on the way home tonight. While driving from DC into MD, a short simple drive, I heard an ad from the National Association of Realtors about how now is a great time to buy commercial property and how you should enlist a Realtor(TM) to do so. Heh! If this isn't a sign that the low default rates of the commercial RE market are not long for this world, I don't know what is.

Now, the WSJ article makes the point that default rates are at historic lows, and since the CMBX tracks prices on credit default swaps and not actual cash bonds, its a bit difficult to really say that this is an indicator of problems in the market. Fair points, true. The article also points how trading in the commercial cash securities has dried up, while speculators may be shorting the CMBX and thus driving the CDS prices higher. Finally, it talks about how the ABX indices showed similar behavior last year before all the oxygen got sucked out of that market (along with the liquidity).

Now, I am one to believe that even with speculators going short in this market, there is real stress (and thus opportunity) here. First, the best historical precedent for this behavior *IS* the cratering that ABX showed last year. The indices haven't existed long enough to have a history during times of market stress, so unlike the rating agencies and how they evaluated sub-prime derived securities, we can and should look at the performance of other similar indices to get a sense of what may happen. (Nothing is guaranteed, but some information beats no information any day.)

Also, if default rates are at historic lows, in a time of market stress, does anyone seriously think they are going lower? Mean reversion, anyone?!?!?! Now, the article talks about defaults climbing to 4x the historic average, which seems a bit high but we did just have a massive credit bubble so is it really so far fetched to think that 6 - 8% is outside of the realm of possibility? I think not. Maybe not probable, but definitely possible.

The NAR radio spot was the kicker, though? Why is the NAR advertising for purchases of commercial real estate on DC 101? I've heard some really dodgy ads on DC 101, admittedly, but this one screams "Sell!!!" Isn't this the same NAR that has been promoting that any and every time is the perfect time to buy a house? Not really, if you don't have 20%+ for your down payment and spotless, perfect credit. (1 out of 2 ain't bad :) Ha ha!) And while commercial may not yet be experiencing the kind of pain we've seen in residential, isn't there a well known lag here. I think Calculated Risk has put it at about 6 months, although that's clearly not a perfect number. However, I think it is about time for the cockroaches to start appearing in the commercial real estate kitchen. And where there's one...

Just my thoughts. If you happen to hear the ad (or similar ad), let me know what you think. Until next time...

Thursday, February 21, 2008

First Net Worth Update of 2008

Man, you wanna talk about a post that is overdue!

So how did I do in 2007?

In a word - crappy.

So let's take a look at where I am now. Most of this is relevant because I added some of these positions, or wrote off others, in the waning days of 2007. Until the recent re-balancing, nothing much had moved in my portfolio in a while.

The first major change is that I took on some debt. Technically, its not mine, I am just the co-signer. However, it would be a bit dishonest to leave it off entirely, since in the worst case scenario, I am responsible for paying back $35,000 USD in debt being used to fund a friend's college education. Its a real leap of faith, and I know all the arguments against co-signing on any one's behalf. I've watched my father perform many acts of financial bravery (stupidity?) helping out various siblings over the course of my lifetime. However, this person was in a very tight squeeze with no other options, and I decided to step up and lend my credit to their situation. Hopefully, I won't get screwed. Either way, $35,000 is a significant hit to a low six figure net worth, so as you can imagine, I am now back under $100,000 in net worth. That is counting the nearly $11,000 that is yet unspent, and hopefully will remain that way. In a pinch, being able to pay that back immediately will be useful. Now I need to find a good high yield savings account for that money. The FOMC cuts have seriously put a damper on my savings yield.


On the plus side, I should be able to eliminate the vast majority of my almost $12,000 in credit card debt in a few weeks. Its about that time for 2007's bonus to be paid, and since I don't yet have that new job I've been searching for, I'll be collecting from my current employer. That will be a significant boost to the net worth position. Most of that debt was incurred on a spending spree starting back in October 2006, and most of it was spent trying to cheer myself up from the rather disgustingly painful year of 2007. While some of that spending did lead to some decent memories, as is the case for most shopping-as-therapy, there is nothing substantial to show for it. Some of it also represents other investments, such as Gold level membership in the DC Real Estate Investors Association (DC REIA) and payment for credit management services from Success Credit Services. So not all of it represents feckless, reckless spending, just *most* of it. There won't be any more of that in 2008. (And since I have (had?) a legitimate interest in a real estate investment company, both of those will be deductible, un-reimbursed expenses for 2007!)

Obviously, with the market turmoil of the past few weeks, my 401(k)'s have taken it in the ass. We're not talking about balls deep, like the Nasdaq plunge of 2000 - 2002 (78%), but the head is securely in. The flip side is that this same turmoil made for some great entry points (no pun intended) for the closed end municipal bond fund, emerging market bond fund and emerging market equities fund that I picked up last week. I'm a bit overweight in all 3 categories now, but I will just bulk up in other asset classes over the coming weeks and months to re-establish balance. I still have a hole in the international fixed income allocation, but I think my next target is commodities. I am severely underweight my target exposure to commodities. I plan to get some metals and agricultural exposure. I think I'm a bit light on cash as well after the most recent purchases, so I'll work that back up. Thankfully, my emergency fund has been rebuilding all along - slowly.

I'm still overweight Japan. I know you're probably wondering "Why Japan of all places?" but I think there are some good value opportunities in Japan. Nothing is guaranteed, of course, and it could end up becoming (being?) a value trap. However, we're looking long term here, and I am clipping a small coupon along the way. Value investing + dividend investing = better downside protection + increased total return. This weighting will re-balance as I direct funds into other assets over time. Of course, my 401(k) contributions do a lot of the heavy lifting in this arena automatically.

My CD ladder is still chugging along at sucky rates of return. 1 more rung expires in a few weeks, and that money will either get directed toward some commodity investments or paying down the remainder of the credit card balance. Most likely, the latter.

I've turned down the contribution rate on the 401(k) to 10% from maxed out so I that have a bit more funds available to handle this debt, and eventually, possibly move out of my current apartment. I'm not sure how that will work out quite yet, but if I do move out, then I want to be able to get a new apartment for myself (alone) while (somehow) handling my responsibility to cover the expenses of this current apartment. This stems from some of those same personal issues from last year. That one is still up in the air, so I won't get into too much detail as yet. Hopefully, it won't come to that since it will have dramatic impact on my savings rate until September. That would be most unfortunate given my aggressive savings goals for this year. I'm not sure about subletting, but it is an option I could and should discuss with my roommate if things come to that.

Update: As of right now, moving out appears highly unlikely. I've got a nice Mexican standoff with my roommate.

Overall, we're copacetic. While this new debt is a bitch, most other things are in good order and silently plugging away. The high yield savings account will get a reprieve, as I expect to tap it less for emergency funds. I won't be taking any trips anytime soon; I don't think I've scheduled to take any this year. The 401(k), while not building as aggressively, will still be putting away a significant percentage of my pre-tax earnings. I'll re-balance regularly, as usual, to take advantage of extreme valuation swings, like those we've seen in Treasuries since the middle of last year.

My current allocations are 20% US small cap equities, 15% international mid cap equities, 8.5% US large caps, 10% international small caps, 7.5% US fixed income, 5% international large cap equities, 7% emerging market equities, 5% international and emerging market fixed income, 5% US inflation protected fixed income, 9% commodities, 2.5% REITs (real estate securities - I could go higher here since I don't own any real estate for personal or business reasons but I've been a bit overweight for years), 3% cash and 2.5% municipals. I know its very diverse and seemingly unwieldy, but I've designed the portfolio to scale; I want it to be prepared to be BIG even though right now it is small.

So the net worth tally is, as of this writing, on 21 Feb 2008, $82334.94. That is a decrease of 13.33% from my first net worth post of last year. Completely unacceptable! You've seen my ideas for recovering from this cock-up, but I'll recap here: [1] new, better paying job, [2] rein in spending, especially trivial spending related particularly to travel, and [3] stop performing acts of financial bravery/stupidity on behalf of others. I can definitely get back above $100,000 in net worth this year, but it will require commitment and focus.

Until next time...

Monday, February 18, 2008

Regaining Perspective II

So what is left after my last post? What else do I have consuming my time now that I am freeing myself of the other obligations I have built up in the last 5 years?

Well, first is a new employer. I think I have expressed in previous postings that I am quite dissatisfied and unfulfilled in my current employment situation. Not only have I spent 5 years doing what I have been doing, with no real change in the technical aspects of the work, but I have watched a lot of good people leave as the overall technical ability of the group I work in degrades. I've passed up opportunities for promotion that can hardly be considered opportunities; longer hours for less pay, with only title inflation, is hardly an opportunity. To paraphrase what my mentor told me last week, NEVER, under any circumstances, move backwards in compensation or responsibility.

I realized that I seek the opportunity to actually have an impact on organizations. It is close to impossible to have an impact on an organization that has over 400,000 employees. You're just another cog in the wheel. That's not the level I want to play at. Also, there is HUGE cultural gap between what I desire and what I have. I have worked in much smaller enterprises, and even a startup, and I like the small, dynamic, hungry environment much more than the bureaucratic, political, large company environment. I don't do politics, as anyone who knows me can attest. In a small company, you can have a direct impact on the survival and success of the organization. You interact with everyone - executives, middle management, technical staff at all levels, customers, vendors - out of necessity. I love that! So that's where I plan to return -- to an entrepreneurial, startup environment.

Another important facet of this career shift is making a move into a sales oriented role, preferably pre-sales engineering. The reason for this change is twofold: [1] a pre-sales engineering position will allow me to interact closely with customers, helping to solve their problems and really having an impact on their success and [2] such a role will enable me to be compensated at the level I believe I deserve to be compensated at. Sales is completely performance driven, and while I am not a salesperson nor do I wish to be, I wish to be involved in the sales process. Sales is the most highly compensated group in any company. However, I want to also remain technically oriented and hands on to a certain degree; pre-sales appears to be the best way to straddle these 2 worlds.

Outside of the search for a new career, the other major project I have in my life is my software company. I believe I previously described the state of this endeavor, and it is the subject of the tag entitled "The Business". However, recently I parted ways with my partner, due largely to the fallout of the personal issues (of my own creation, admittedly) which erupted last year. However, I think this is a good thing. While my ex-partner is very talented and intelligent, it is critical that whomever I work with will be willing and able to work with me. At times, the business will be stressful. It will require focus and commitment. It also requires trust, and unfortunately, she and I parted due to concerns about integrity and ethics. Thing that I did, which I had apologized for and attempted to clean up with those I hurt, did not sit well with her, and I became evil incarnate in her eyes. Such is life. However, now I have the time to focus on the vision as I see it living, and I can bring in the resources that I think are appropriate. Also, my partner was a bit inexperienced, and while that may not have been a problem given how intelligent and thoughtful she is, I do know that now I have access to very deep talent benches across the technology industry, people that I have known for years who are proven and experienced. There won't be any "stepping on toes" if I bring in outsiders; I don't have to worry about offending or disrespecting her technical ability or judgment.

This is a real "swing for the fences" startup opportunity, and its going to force me to get my hands dirty in a lot of ways - writing code; doing server stuff; negotiating partnerships, advisory relationships and the like; seeking funding; and all the other various startup type activities. But now, success or failure is squarely in my hands and I look forward to the challenge. I have a few advisors in mind, people whom I've called on since the beginnings of this project back in 2006. I also have a few contacts who might be willing to lend a hand to implementing this project on several mobile platforms. So now, I have to finish the design work and start assembling the prototype. Wish me luck!

I have a few other software projects I am working on, some of which could probably turn around very quickly and could possibly be built into enterprises -- either software product companies or consultancies. The first focus of my attention is the FIX (Financial Information eXchange) protocol. I want to try some things and see if I can get them to market to address some perceived weaknesses in both the market and the product. We'll see how this goes. Lots of documentation reading lies ahead.

So that's what I'm up to, filling the space I have created by reducing my involvement with the blood-sucking activities that have been killing me (by choice) for the last few years. Maybe blood sucking is a harsh description, but they weren't adding value to my life in any significant way, and hadn't in a long time. Sort of like corn ethanol, they have required more energy (or vitality, enjoyment, or time) as input than they were creating as output.

Anyway, its time to get back to work. I have some documentation to read. Until next time...

Sunday, February 17, 2008

Regaining Perspective I

It is amazing how much drudgery and stupidity one can allow themselves to get snowed under with. Anyone who has been reading this blog since early last year is well aware of how much shite has been going on in my life that was effectively pointless, or worse. Now that I have begun a systematic process of eliminating all of this non-supportive, non-productive activity, I find myself with increasing amounts of time to actually create value for myself and others. Its great! Just in the last few days, I've been able to sit down and look at several projects with some degree of depth. I've been able to much around on with them, read documentation and release notes, download software libraries, think about architecture, and other things I have been angry at myself for not doing because I didn't have the time. (More accurately, I didn't create the time, but that's a different conversation.)

I urge everyone to spend some quality time really thinking about everything in your life, every project or activity, every commitment, every membership, and honestly evaluating how much that project/activity/membership contributes to your life. Does it support your personal, professional, spiritual, social, family or other goals? I mean, does it really promote and advance these areas of your life?

If not, its time to dump it. Maybe it did support your goals - once. Once. But it might not anymore. Maybe you'll find that your involvement, which you and/or others originally viewed as a positive, has become detrimental instead. Maybe its just out of alignment with your values. Whatever the case, it is now a liability and should be eliminated. Will it be easy? Probably not. Especially once your ego chimes in and starts telling you why you shouldn't give up, just hang in there, cajoling you about what others will think, etc. Honestly, who gives a damn? If its not supporting what you're about, you need to get rid of it and find people, activities, and commitments which are supportive.

This is just my recommendation, speaking as someone who is digging out of a failed real estate investment partnership; no longer performing somewhat lucrative computer consluting (not a typo) outside of my regular employment; and is cutting back his "volunteer" role with the university computer lab which effectively trained him as a technologist, where he seeks (sought?) to share his expertise with a new generation of budding engineers.


Because as warm and fuzzy as it sounds to volunteer to teach a new generation of students about technology, to provide guidance and mentoring for them, it really just became a time sink with no visible reward. For personal reasons, my presence became polarizing and divisive instead of unifying, causing promising students to stay away instead of drawing them in (or so I was told). There were other "issues" to arise out of it, but what I've described here is a significant part of the situation. After 5 years, I can't say that I have anything to show for the time. I don't know if any of the students "got it", although I imagine 1 or 2 have. However, I'm going to be completely authentic here and say that 1 or 2 isn't really worth it. It sounds nice and good to say "as long as I have had an impact on 1 student's life, then it was worth it". That's total bullshit! If I only wanted to impact 1 person, I could have just sent some money to a charity, I could do that online with a credit card in very little time, and its tax deductible. To boot, that money would probably be able to help more than 1 person. So its a crock; the point was to impact tens of students lives, if not hundreds. 1 or 2 is NOT enough to make the expenditure of time and effort worth it. Sorry.

As nice as it was to make $80 per hour working on relatively simple computer problems for a dentist (never mind how helpful it was during times of personal financial crisis, or even just to juice my savings efforts), its not what I want to do with my life. I find no joy working on Windows, or anything remotely Windows related. I hate Windows. $80 per hour couldn't, and never will, change that. Add to that all the hours spent during days when I had to go to work that night, and the amount of lost sleep (with the corresponding deleterious effects on my health), and it just is not worth it. (Mind you, that last description was for a different customer, my most troublesome customer, not the "Golden Client" who was paying $80 per hour.) Supplemental income is all good and fine, but some things really are more important. Physical health and mental wellbeing are two things which fit that description.

As much as the idea of being a real estate mogul sounded good, as good as the prospects looked at the outset, and as tempting as the idea is of building a real estate dynasty which could be passed down to our progeny, it became clear that this group was as good as dead. Two of us wanted to make lots of offers, lowball offers on as many properties as possible, and negotiate from there. The other 3 wanted to only make offers they knew they would win. However, if you're winning every offer, you're likely overpaying. If I wanted to overpay for real estate, I'd have bought that $350,000 townhouse across the street from Ft. Meade in August 2006 and called it a lifetime. Investors are supposed to be smarter than that. The same 2 of us wanted to come up with a set number of offers we would make - as a group - every week. The other 3 were unwilling to even commit to that! Hell, I could have accepted if some of them had said "the number I commit to is 0". At least that would have been a number. But as soon as the question was asked -- "how many offers will you commit to making every week?" -- people got defensive and angry, as if being asked to commit to something was a burden. However, if you're unable to put constraints around your goals, then you're not serious about them. Deadlines, parameters, and definite tangible results are designed to enforce accountability. So these 3 partners didn't even want to be held accountable for doing what real estate investors do, which starts with making offers on properties! Even in breaking up, the same 2 partners were willing to simply be bought out, while the other 3 again claimed "all or nothing" - either its all 5 of us, or none of us. WTF?!?! That is an unhelpful way of being. Its not like we're talking about jumping on a grenade to save your comrades here. This is business. If they wanted to continue the business, they could have just bought us out, or had new partners do so. A completely unnecessary situation has ensued. But considering that its seemed that not only were my views (as 1 of the 2 partners who wanted to follow the local RE guru strategies) deemed irrelevant, but I was the person being called on to handle grunt work during the day. Why? Because all of the other partners have day jobs and families. So not only was I not being listened to, I'm also awake in the middle of the day, accelerating the breakdown of my health, while my partners are at work. Then I'd try to go to my job at night. This in particular has led to the health problems I've dealt with for the last month. Disagreement on strategy, disregard for one's health, and failure to act like investors is a not a recipe for success, which is why this endeavor had to get deadpooled. So I am going to lose $11,200 but my sanity is worth far more. (Yes, I'd prefer to at least get my investment back, but as this is not likely, its not even worth thinking about.)

(NOTE: I'm pissed right now! Blogger took it upon itself to "disappear" the text I've already written. It would be nice of this autosave function had some sort of versioning capability. What I've written below is not nearly as good as what I originally wrote. Dammit!!!!)

The point is that life is too short. You really need to take a step back and evaluate whether the activities you engage in, the people you engage with, and the commitments you make, are really adding value to your life. (I contend that even when you are contributing to others, whether by volunteering in some way or working in your church or however you do it, there is some benefit you derive as well. It does not need to be financial. If you like the feeling of being able to help others, and volunteering gives you that, then you are benefiting.) If these activities, people and commitments are not adding value to your life, then you may want to consider reducing their presence in your life, or restructuring your involvement with them, or even cutting them out entirely. In life, you need to create an infrastructure that supports you, your goals and your life as you choose to create your life. Things which are not supportive of the life you are creating for yourself should be considered expendable, or as my man Gordon Gekko might say "The rest is just conversation." So take a look and figure out what works, what doesn't, what supports you and what impedes you, and then choose to get rid of it - or not. Its your choice to make. I'll say that for myself, the upside of this process has already been shown and dividends are already being reaped, after having just started in the last 2 weeks.

Believe me, its worth it.

As for what's left, and why, I'll make that the topic of another post.

Until next time, gentle readers...

Monday, February 11, 2008


Woo hoo!

I feel smart!

I just decided to coast on over to just in time, it so happens, to find this little gem from Brent Arends in the R.O.I. column, suggesting just the move I made this morning. Although I didn't pick up a BlackRock closed end muni fund, a closed end muni fund I did purchase. I think I'll compare mine to his and see which one looks better. If I take a haircut on mine while I hold it, I probably won't bother with the wash sale. Its really not that big a deal for me.

Now I just wish bonds were a wee bit easier to trade for small investors like me. There might be some real treasures out there in the municipal market waiting to get discovered!

Oh well.

Rebalancing Day is here!!

This one has a been quite a bit overdue, but I've been massively procrastinating with my health issue. Fuck, that even sounds like a cop out to me!

Since it has been a quiet night at the office, I decided to go through my investment holdings. I know that the Pimco funds have been racing ahead as the subprime, mortgage, credit market, whatever-the-hell-you-wanna-call-it crisis has been oozing through the financial system. Given their extensive holdings in US Treasuries, it was time to harvest some profits on those funds, and pick up some of the weaker players in the old 401(k). The new 401(k) is pretty crappy, so I haven't quite matched their investment options against real bloody funds.

Damn you, employer, damn you!!!

Once markets open, I'll be able to put in 3 buy orders for some funds to round out my bond exposure outside the retirement accounts. I found a nice closed end muni fund that I think I'm going to pick up some shares in, and 2 international and emerging market bond funds. My fixed income exposure has been weaker than I'd like. Also, international rates will probably be slower to fall than in the US, so those holdings still have some time to benefit from declining rates overseas. Its a longer term play, probably about where the Pimco fund holdings were a year or so ago.

In a soon-to-be-written post, I'll discuss my actual method of rebalancing. I haven't automated it yet, but I should look into doing so. A computer could probably do a much better job of figuring this stuff out, or at least a faster one.

Until next time...

Saturday, February 09, 2008

A Victory for the Credit Rating Market

Just a few days ago I wrote this, and now the WSJ surprises me with this piece (sub req'd). I recalled hearing that Egan-Jones had become a "nationally recognized statistical rating organization" or NR-SRO. This is the pass that Moody's, S&P and Fitch alone had until recently. My understanding is that if you are an NR-SRO designated credit rating firm, you effectively cannot be sued for providing inaccurate ratings because the act of providing your ratings is considered a public service.

This is joyous news! It would be ideal if at least 1 new NR-SRO were chosen. The more competition in the space, the better, as I previously stated. Egan-Jones' business model is much less controversial, since they are retained by their clients to rate credits. They do not get paid by the issuer, as the Big 3 do, so there is no conflict of interest or "ratings shopping" when dealing with them. Also, Egan-Jones just provides their rating - which as Moody's and S&P have stated throughout the subprime debacle, is just an opinion - without having a vested interest in their client's use of that rating. Whether the client is going long or short on the credit that they hire Egan-Jones to rate is unimportant.

So now maybe we'll see some real competition in this market. It won't be easy, but Egan-Jones has been fighting to obtain NR-SRO status for years. Their business model is different and there will be some adjustment required by the market. However, it should be clear that this is a positive development. Look at what happened when the market relied only on ratings from 3 firms, all of whom take payment for their ratings from the issuers of the debt they are rating. While not being the only culprit in this financial calamity, the Big 3 played a central role due to the laziness of investors and the blind faith put into their ratings. Hopefully, now things will start to shift back in the direction of meaningful, trustworthy ratings.

Sunday, February 03, 2008

Three is Not Enough

I'm all for personal and corporate responsibility, with regard to investments. If you don't know what you're buying, you shouldn't be buying it. Thus, if you take a loss, you deserve it for getting in over your head.

However, seeing something like this lets you know that the oligarchy of S&P, Moody's and Fitch must be broken. It amazes me that these corporate treasurers would be allowed to keep their jobs. However, I think so many companies are going to end up writing off investments which are backed by RMBS, CMBS and derived structures that they'll all be able to keep their jobs since everyone will be guilty. Lawson or Sun or Ciena or Bristol-Myers -- all of them would end up hiring from the same pool of treasurer candidates who all put their previous firms' cash into these mortgage backed investments which had better yields than Treasuries and "are almost as good as cash".


So really, I don't get why FASB doesn't take responsibility for this issue. We need more credit rating firms than this troika. There needs to be more competition in this market. (Just as there needs to be more competition in the market for auditors; they need to take up that argument as well IMO.) Too many people, at too many levels, have gotten away with "well, it carried a AAA rating from...", and personally, they deserve the losses they are facing for basically doing no research. However, if these 3 companies actually had to earn their keep, instead of it being given to them by Federal government mandate, maybe the ratings would mean something right now and fewer poor schlubs would be staring down losses on the back of such a pathetic excuse.

Hmmm. This topic leads me to another question. Where are the HFs? We know distressed debt is attracting lots of capital these days. I wonder if any funds are slipping into the treasurer's office to negotiate away some of these packages of auction-rate securities, at steep discounts of course? Or at the companies just holding on to them after writing them off (off, not just down) and looking for the recovery? Just curious!

Citadel, anyone?

Until next time...