Tuesday, March 24, 2009

The Missing Man

So I was reading some of the commentary about the new Geithner plan, and the one thing that struck me (particularly as I read this) is that we still haven't see anything cogent about the valuation of these "troubled assets".

At the end of the day, I think the banks ARE currently insolvent BUT I think they can survive this. The key will be getting those assets off their books. YES, they will be insolvent. Get over it. As Steve Randy Waldman said over at Interfluidity the other day, they were insolvent before, during the S&L crisis. Insolvency isn't the issue. A few years of reasonable earnings w/o dividend payouts and public markets recapitalization -- as James Surowiecki has advocated (see the Interfluidity post for the links to Surowiecki) -- and I think many (not all) of the current banks survive in some form. Obviously, the industry will see huge structural changes in other ways, but overall, I don't think we risk losing too many of the existing banks. Yes, the banking system needs to be fundamentally overhauled, and personally, I think Glass-Steagall needs to make a return, but that's a conversation for another day.

Aside: The ones I think we DO lose would appear to be interesting shorts. :) Figuring out those names is left as an exercise to the reader. That's what the comments are for! I'll start with WFC.

What worries me most is whether Geithner's new plan will attempt to do what Hank Paulson's original plan(s) attempted to do - bailout the banks with unrealistic valuations of these assets. I don't think too many private investors will be interested in overpaying to take these assets off the balance sheets of the banks. I know I wouldn't be interested in overpaying for distressed assets. The marks they carry are because they are distressed! So I am particularly curious to see when and how this question is answered. If anyone out there reading has anything to share, speculation or otherwise, please do share!

I already think this bounce is setting up a huge shorting opportunity. However, until this question is answered, we're still in what Upside would call a Wile E. Coyote moment, not realizing there's no ground underfoot but still running. If this question isn't answered well AND soon, gravity kicks in with a vengeance! Of course, that's not to say that gravity won't kick in just because. It is "The Market" after all.

Finally, realize that I am only speaking about this plan right now. So many people seem to have forgotten about the BIG elephant in the room, the REAL missing man. There will be a next leg down, I'm fairly certain. And the banks will continue to be insolvent. Whether that turns into a liquidity problem is To Be Determined. All bets are off on any of the existing private banking institutions surviving once the leg down kicks in.

Until next time...

UPDATE: Looks like I spoke a bit too soon, but still, I personally want more detail.

Monday, March 23, 2009

Random Thought

Sounds like portfolio insurance all over again, at least to me. This gave me a good laugh. Liquidations like this, across asset classes, are happening the world 'round.


Friday, March 20, 2009

Trading the 401(k)

There are plenty of reasons NOT to do this, but I would expect that many personal finance bloggers do so to some degree. Definitely not all, but the number is surely non-zero. Even respected professionals such as Teresa Lo advise against it for most people. However, the opportunity is just too good to pass up. This is the first of potentially many instances in which I plan to do this over the coming years.

To start, due to the almost 20% bounce off recent market lows, my 401(k) is has gained slightly over $5000 in value. Not a huge amount, true, but hardly non-trivial. So it seemed like a good time to lock in some of these gains. I am a believe that we have not seem the bottom of this bear market, and this is simply a violent bear market rally. As well, the numbers I've seen in my 401(k) strongly suggest that to me.

I started by rebalancing completely out of my employer's equity fund. I have been greatly disturbed that my employer pays 401(k) contributions as equity. I already draw my paycheck from this company. Being doubly long by holding such a significant amount of equity (about 6.37% of the total value of the account) on top of my income is a worrisome state. Thankfully, I was able to sell all of my current holdings, which are up 10.7% since the last time I updated my asset allocation spreadsheet. Future contributions will still be made in stock, but this I can't stop so there's no sense in worrying about it.

Next, I liquidated all holdings, both equity and fixed income. With the exception of the bond funds, all of the holdings are up double digits in the last few weeks. (I last updated my spreadsheet earlier this month.) I think a decline is imminent across most equity markets worldwide, and I want to accumulate as much dry powder as possible for future deployment. Hopefully, I will lock in significant gains and more importantly, avoid the downside after this rally fizzles out.

For the record, the holdings in my 401(k) were up as follows: US small cap equities up 16.66%; emerging market equities up 13.06%; international mid-cap equities up 12.38%; US large cap equities up 15.39%; US large cap equity index up 14.85%; international large cap equity index up 16.57%; US real estate up 20.27%.

Anyway, we'll see how this works out. I don't anticipate significant upside movement on any of my holdings, and if I'm able to avoid the next leg down, then I'll have the resources to acquire even larger blocks of shares on the way back up. Mind you, I think it will be a long way back up, several years in the making, but I'd like to take a value investing approach to this, while exercising some downside risk mitigation.

Wish me luck!

Yielding to Logic

That's what I have done with my latest transfer of funds.

How so?

Some of you will recall a plan I outlined almost exactly one year ago. That plan involved paying off my AmEx at a slower rate while I amassed my emergency savings. Now I am ending that plan and focusing on reducing the balance on my card.

So you may be asking what has changed since then?

First and foremost, I achieved my savings goal for 2008. I currently have $20,142 in emergency funds. While I will not completely terminate my Direct Deposit into that account, I am turning down the savings rate to about $150/month from $1000. The remaining funds will be divided among a savings account for travel expenses and for paying down my card.

Second, the return of principal I expected last year never materialized. Thus, due to fees, the AmEx balance has grown much faster than I originally expected or intended. That was a failure of management on my part. I needed to pay closer attention to this situation, and adjust my plan as soon as the payment clearly was not going to be made. This mistake is a learning experience and will not be repeated.

Third, as will soon be detailed, my trading adventures recently have been a less successful than expected. Thus, paying off the card has a higher ROI than shorting AXP or riding the volatility of FAZ. (I have been positive on my AXP shorts, but I haven't had the funds to control enough shares to make huge returns. FAZ, on the other hand, has stopped me out more times than I care to count.)

Fourth is the emotional and psychological component. In the year since that last blog post, the balance on the AmEx has grown pretty steadily. Even after I moved to my current apartment and stopped paying my rent on my card, I just have not been able to pay down the balance as quickly as originally anticipated. That outstanding balance is an albatross around my net worth. At this point, with other goals accomplished, it is now time to address this situation. As I previously mentioned, money is an emotional topic, and how each of us manages our finances is very personal. This charge card balance has finally reached a point of personal pain for me, and now is the time for salve.

By transferring out of my investment account so that I can use the funds to pay down the AmEx balance. While once upon a time, I had it under control, it has become abundantly clear that I am doing more harm than good but allowing this balance to continue living. The rate at which it is accumulating interest is overwhelming my ability to service the debt at a level I feel comfortable with. (To be sure, I could continue doing what I am doing, and technically it would not be hard, but I hate the feelings associated with it. Psychosomatic? Probably.)

Fifth, having a written goal to pay off the card has focused my mind. While it will not be a simple process, if I am going to achieve this goal by year end, I have to commit myself to it. That means doing everything I can to allocate the necessary funds. Some of that will likely come from additional income. Some of those funds will come from re-allocating income from my job, and part of it will come from reducing the balance against which fees are assessed. No matter how this comes together, I MUST perform activities which support this goal given its importance to me.

I have already transferred half of my cash balance from my trading account back into my checking account. From there, it will be applied against my AmEx balance; that transaction should complete today, Friday, 20 March 2009. Along with the coming shift to reduced savings, I estimate that I should have this card paid down before the end of August. I think I can probably be even more aggressive, but there's no sense in creating suffering just to serve a goal. This single payment will reduce my outstanding balance by 46%.

On top of re-arranging my income stream to pay down the card, there are a few places where "found money" comes into play. I have a 5 year, $1000 CD coming due this month. When it does, I will transfer those funds into my checking account and then make an additional payment to my AmEx. I also expect to be repaid about $1600 that I lent to a friend last year. That money can either augment the savings I am assembling for travel spending later this year or, depending on the potential cost of those trips, I may just apply the money to the AmEx.

A bonus to this entire scenario is that I will probably earn enough Membership Rewards points to pay for at least one of the flights I am preparing for. That takes some of the edge off of the pain of scraping together the almost $22,000 that I owe. That alone is a huge win.

Anyway, that's the plan which has been put into action. I'll keep you updated on the progress.

Until next time...

Thursday, March 12, 2009

The Fall of CNBC

So I've been catching up on this story about Bubblevision, since I don't have television service. (Only FiOS Internet access, but it's great so far.) It is truly entertaining, both to watch the video as well as reading some of the analysis to come out of it.

What can I say? I popped my cherry on CNBC. I've been watching them, to some degree, since the early 1990s. Even after discovering Bloomberg TV, and watching hopefully for CNNfn to grow into being somewhat entertaining (before its demise), I kept coming back to CNBC.

But then, last year, there was a shift. A large motivator for that shift had to do with the realization that CNBC guilty of propagating bad information in various ways. However, I also became clear about what I was seeking from CNBC, and how it no longer served a central role in providing that. What I was seeking was information. Specifically, I was trying to find ways into the knowledge flow.

You see, this entire world of finance is based on information. A friend of mine used to have the following quote as his e-mail signature:

"Information - the currency of the future."

This was around 1993, so long after the release of "Wall Street", wherein Gordon Gekko first expounds on the importance of information. For a neophyte such as myself, at that time, I could not appreciate the sheer brilliance and importance of Gekko's lines regarding information. Even after being exposed to the above quote, it never hit me, through all the intervening years, just how critical the right information is to success in this world. I'm not sure when it finally landed, but I felt amazingly stupid for not "getting it" sooner. (Rightfully so!)

CNBC has always represented the regular man's access to the information flow of the world of finance, and Wall Street in particular. The very embodiment of the concept of "democratization" of information. At least, so I and many others thought. We didn't know what we didn't know.

CNBC's role in my life has slowly been usurped by the Internet, in particular the many excellent resources I list along the right hand navigation bar, and most powerfully, By Twitter. Sometime since early last year, the light bulb came on. I got it. And since then, CNBC was no longer just wrong. It was pretty much irrelevant, becoming more entertainment than information. All Jon Stewart did was highlight this for regular people, and they probably still won't really get it. The power brokers, on the other hand, have clearly been aware of this for a long time.

I don't miss CNBC, because there was never enough substantive information to miss (unlike the devolution of the Wall Street Journal over the past 10 - 15 years). It's clear as day. CNBC doesn't matter. Whether it ever will again, or even should, if a wholly different question. Sure, it will always have its place on trading floors/desks, among the financial cognoscenti, and the regular man. It is a tool - a very blunt tool - but a tool with some uses. Without sound, it is a decent breaking news tool and ticker. (Bloomberg's colors make it far too difficult to read their ticker quickly, IMO.) Yet the prominence and stature will never return, at least not for me.

Such is life.

Saturday, March 07, 2009

Net Worth Update - 07 March 2009

I apologize for the delay in posting this, but life has a way of catching up with you. Ya know?

As of 7 March 2009, my net worth is $57276.53. In a word, it sucks. However, there has been progress on various fronts.

First, I've been able to build my emergency account back up to $20111.07 from close to $15000. Those funds were transferred into my brokerage account for trading purposes. Now that I'm back over 20K, I will redirect the $1000 that I currently Direct Deposit into that account toward my American Express debt. Paying down the AmEx to $0 is one of my goals for 2009. (And no, I was not extended the offer to cancel my card and pay off all of the debt in one shot.)

Second, if not for the need to put $999.37 worth of work into my almost 10 year old car, my balance would be less than $20K. Such is life! However, it is thrilling to really make some progress on cutting that balance down. Once I start moving funds away from the emergency savings account and toward that goal, the balance should decrease even faster. Just thinking about it is energizing (but that could also be the feeling of my body burning more fat *shrug*)!

Third, I'm getting back into the mode of reducing unnecessary expenses. My total food expenditures for February 2009 came to. I think I ate out twice, and both of those were with friends whom I hadn't caught up with in a while. (In one case, said friend is recently unemployed so I picked up the tab. In the other case, we split the bill.) I recently canceled my Zagat.com subscription because I hadn't used it since I signed up (again) in April 2008. I'm considering dropping my WSJ.com subscription and possibly my Barrons.com subscription. I love Barron's, even more than WSJ.com, but I read neither as much as I used to. I may keep Barron's and dump the WSJ since I despise the re-designed WSJ.com site. This is pretty much what I expected once Dow Jones was acquired by News Corp. I will also be canceling 2 domain name registrations with Network Solutions. These are names that I will no longer use for a business idea that I am no longer interested in pursuing. Thus, I'll let those expire at year end. Since the majority of the current calendar year is already accounted for, I hope to find another way to monetize those domain names via domain parking or some other means

Fourth, I underspent most of my targets, with the exception of food costs. (Quelle surprise!) I only spent $126.65 on gasoline against an expense target of $400; $56.01 on medical expenses, against a target of $75; $21.60 on entertainment (a lift ticket for snowboarding) against a target of $100; and $1315.84 on rent and housing costs, against a target of $1369. Food, on the other hand, hit me for $610.99, against a target of $500 per month.

In the coming months, I'll spend some time balancing my food expenses against all the other priorities I have. Key among them will be saving for both emergencies and fun, as well as food costs. Having food at home and cooking has been very kind to me, though. Once I get a acclimated to cooking, I expect that my food costs will moderate and possibly decrease. We will see.

I also anticipate moving back to the same city that I lived in prior to moving to my current apartment. In doing so, I look forward to a reduction in my insurance costs. All of my insurances increased noticeably - car, renter's and the personal articles insurance policy on my laptop. I guess that has to do with moving into a "less safe" county. Too bad it also happens to be the wealthiest (by income) predominantly Black county in the entire nation. So very sad. I hope, with the current state of the economy and the number of empty residential properties on the market, that I can find a reasonable rent in downtown Silver Spring. I think my historically good (and improving) credit, solid income, and increased supply of rental units and moderate to decreased demand for said units will work in my favor.

Overall, my goals are coming together. I attribute some of this to posting my goals around my apartment. The above blog post is taped to the wall above the head of my bed, on my refrigerator door, and on the mirror of my bathroom.

Anyway, that's a small peek into my current financial situation. I like how things are progressing. I'll keep you posted as the situation develops, so keep reading and commenting.

Until next time...

Friday, March 06, 2009

What's Missing in the Market: Panic

You know, I could be short all day and not have a problem with it. Really. However, given the statistical history of the markets, there are so much better opportunities for making money being long in a rising market which has solid fundamentals AND technicals underpinning it. Everybody wants to be early, no one wants to be late. I, for one, can stand to be late, if it means probability is working in my favor. This is a war of attrition. Capital preservation is the order of the day, if you're not trading.

The one thing I am noticing, and I see it in today's closing, is the lack of absolute panic. There has been fear, true, but it seems like everyone is trying to call the bottom (except for the people I follow/listen to, who are just trading along). There's been a lot of knife catching, and I should know, as my trading report will show. But most of what I see is people just waiting - hoping? - for the turnaround to start "any day now" so they keep buying the dips, just to jump out later for a loss. It's such a Pavlovian response. It would be funny if it didn't indicate just how long and drawn out this tape will be.

Now, don't get me wrong...there are a lot of pieces which need to come together for a sustainable rally to take hold. Most of those pieces are non-existent currently, which is why a bottom is really no closer. Given all the factors I've seen, and even with my respect for Jeremy Grantham and John Hussman, I'm staying out of the long side right now (with the exception of my primary thesis around commodities). Long is so, so wrong right now. Doesn't even feel right. We get closer to a bottom, true, but I think all of the knife catchers will find that the knife still has yet to reach the floor. THAT'S when I plan to pick it up.

I just don't see enough panic to say that all of the suckers have been cleared out. Yes, TLT is racking up gains (though it is off its highs), and TBT is getting its ass handed to it most days. Savings are up, but they can go up more. People don't even realize what else is coming down the pike, and insurance is SO fucked up I'm shocked and scared (just when I thought I had a good handle on the scope of our problems). But there's still too much hope out there. A lot more people need to get crushed to clear out the dead and create space for rebuilding. A LOT MORE.

That is all.

Selection Bias

Just great!

This is one of the problems with hedge funds. They have a bad year and just stop reporting data to the few databases which exist to collect data about hedge fund returns.

All this does is make overall industry returns look better, because there are fewer negative data points among the data that is reported.

I would imagine most of the databases anonymize data at some point. If not, they should. However, managers need to be willing to step up and let their returns be known (even anonymously if that's the only way) for the sake of the industry. It won't stop the bloodletting, and as some seem to think, we could easily be on our way back to 5000 funds (50% attrition). No matter what, the integrity of the data is of utmost importance to re-establish trust in the industry and in managers. This is one of several market oriented, non-governmental reforms that the global (and especially US) hedge fund industry needs to undertake.

That is all for now. Later!