Monday, March 31, 2008

NYT Interview with Paul O'Neill

A brief interview in the NY Times Magazine. I liked this guy when he became Treasury secretary, and I still like him. The best quote is the last one, about his being fired.

On Why I Have Not Yet Purchased a House

I'm not sure how I originally came across this article, probably from a blog I was reading the other day, but it was a must read. So once I finally got around to it, all I can say is that I've found my long lost brother!! Finally, a short but thorough explanation of the myths around home buying. I just have to comment on these points, and this post will become an eternal reference for anyone that tells me to buy a house. That way I can avoid telling them to fugg off.

Let's look at #1 and #3 together. I swear that so few people actually do the math on owning a house. I actually sat down and created a simple model, based on a rough estimate of costs for my parent's house. While it was not perfect -- no model is -- it gave (and continues to give) me a good sense of how all the pieces fit together. That is why I refuse to buy a house until the cost of owning, on a monthly basis, is within 10% of my complete rental expense. (That might be too tight a window, but I'm open to re-considering it.)

Continuing with this thought, I really don't see how so many people missed the fact that increasing home prices would lead to increased tax assessments. We can forget the fact that assessments generally occur at intervals of 2 - 3 years for most jurisdictions. (I know there's got to be a jurisdiction somewhere that assess annually but I don't know of any off of my head.) Even if you own your house outright, the taxes have to be paid every year. There's no escaping that; its a fixed. (Fixed in that its not going away, although clearly the assessment can change or be challenged. Go Larry Ellison!)

Myth #5 really pisses me off. Unfortunately, I'm going to paraphrase Robert Kiyosaki here, because this is one area where I agree with him. Your own house is a liability. Nothing more. It surely is not an investment. Now, the house may be the largest "asset" that most people own, and ever will own, but a house is not an investment. I'd be hard pressed to even count it for most purposes, once you consider the illiquidity of a house, but I guess we can let that one slide for accounting purposes. At no point, and in no way, should a house be considered an investment if YOU live in it. Its shelter. Like any other purchase, it should be evaluated based on its cost effectiveness at providing that. Now, if you have the incremental income or marginal wealth to afford the excess cost of the more expensive house, by all means, go for it. I would. But if you just need a place to live, then a house should considered purely on that merit.

Finally, myth #2. I'm not sure which myth I hate the most, but it probably is this one. The mortgage interest deduction is a DEDUCTION. Its not a credit! That means you have to spend more to increase the amount of the deduction, as the deduction is calculated by multiplying your marginal rate times the amount of the mortgage interest you paid. To put what the author said in a different way, how much money are you saving if you pay $1.00 to make $0.30 (or $0.38 even)? If you can't figure out THAT math, you deserve to be broke.

Whew! Such an emotional topic. It really shouldn't be. Either the numbers make sense or they don't, and they haven't made sense in a long time - at least since 2002 if not longer. So now, when some bonehead tells me to buy a house, I can point them here. Yay!!!

A house is to be lived in. Whatever you do in the location you call home, that's fine. But please do not confuse that structure to be an investment, or even a good deal. When the total cost annually -- principal, interest, taxes, insurance (so-called PITI), maintenance, and utilities -- is reasonably close to the cost of renting -- in my case, rent, a parking space, and utilities -- then I'll jump in with both feet, but not a moment sooner.

Saturday, March 29, 2008

Life is Giant Lego Set

Yes, it is. You can create whatever outcome you desire, you just have to put all the pieces together in some creative way. The onus is really on you to build and create whatever you want for your life. The only person you can hold responsible for the condition of your life, whether your life looks the way you'd like it to (or not), is you.

I just had to throw this up on here, as this saying came to me discussing the future with one of my students the other day.

Okie, I go now...

Thursday, March 27, 2008

DB9 Sighting

I just had to throw this one in, because this happens so infrequently these days. When I lived in SoCal, I'd see some exotic car every day, usually a Ferrari or a Lamborghini. But even Aston Martins were definitely more prevalent in the car state than they are in the Washington, DC metro area - DEFINITELY!

Yesterday morning, Wednesday, 26 March, I was making a run up Interstate 95 to one of the local big, well known malls. Around the exit for MD Route 32, a white car merged into traffic. At first, I thought it was simply a Jaguar XK, which is nothing special, even with the new body. However, after a quick second glance, I realized I was in the presence of a far more gracious auto - an Aston Martin DB9.

Anyway, at first, I wasn't sure which Aston I was seeing. Given that the Vanquish is gone, and the Vantage looks to be the entry level model, I had to choose from between the DBS and the DB9. I dropped back just enough to see the DB9 markings on the tail. I will admit, the car is very sweet to look at. This particular vehicle was a convertible with a beige top. Very nice for the mid-range Aston, if a bit unassuming. I think I'll have to test drive one ASAP. Alas, I did not follow him very long as he seemed to be taking a leisurely pace to his destination, while I was a it more intentional with my driving. That said, I will definitely be on the lookout for Astons, as I have noticed a small uptick in their numbers, even in DC. Will the trend hold? We shall see!

It is disturbing that the new Vantage is a platform car, based on the same fundamental engineering components as the new Jaguar XK. Now that Aston is free of Ford, I hope the design teams over there are cranking up the luxury of that model. Mistaking a low end Aston Martin for the top of the line Jaguar should never happen. Both nameplates have too much history, but until recently they were both tied together under the same dying parent. I can't wait to see what comes out of Aston on the low end in the future.

On that final note...good morning, gentle readers...

Q1 Goal Status Update

Here it is!

First, let's get this writedown out of the way.

The crux of the matter is that I co-signed for 2 student loans for an erstwhile friend who was in dire straits. The idea was that this would cover this person for a full year of studies, long enough to put other plans in place for a longer term solution. When the loan came due, the borrower would be responsible for paying it back, in full; thus, I was donating my credit score to this person so they could get the loan which otherwise would be completely unattainable. This is the kind of thing I have been known to do for my friends, as many of my closest friends are well aware.

However, you'll notice the wording above is "erstwhile friend", as this person has done some things outside the spirit of the agreement we made when we took out these loans. It has been a huge violation of trust which lacks integrity (using my personal definition of integrity, not a morality based definition). So at this point, I just wrote off the full amount of the loans; I am considering them liabilities in full. Now, I have implored (and will continue to implore) this person to remember the agreement and make sure they pay back the loan when the time comes. I pray that this happens. However, being a realist, I know that it may not. I knew that going in and I accept responsibility, in full, for the outcome. However, considering the investment in trust and that no one, not even blood family, was willing to step up and support this person in their time of need, I am hoping that this person will fulfill the commitment they originally promised themselves too. If not because of the relationship we used to have, then in the interest of making their words actually mean something, for their word to carry weight in the physical world. Doing what you said you would do when you said you would do it is how I define integrity. We'll see how it turns out, but right now, that $35,000 counts against my net worth.

Now that THAT story is told, let's move on to the interesting stuff.

First, the power of re-balancing has been in full effect. While my retirement accounts have suffered along with everyone else's, they are doing reasonably well in the current environment. I re-balance frequently, usually once per month to once per quarter, depending on circumstances. As I said a loooong time ago, I am fundamentally an asset allocator. I consider my overall strategy to be an alpha overlay, or "core and explore", if you will. So while I am looking at adding some commodity exposure into my portfolio (as part of the overall asset allocation), I consider that exposure to be a fundamental component. My planned option strategies, however, would be alpha overlays, looking to add incremental alpha to the betas - alternative and market - within the portfolio.

Anyway, I see that re-balancing again is in order, but I am seeing strength in the old 401(k) that my employer used to offer before it was, in turn, acquired by a larger competitor. Even my current 401(k) is showing signs of being up about 9% more than I was expecting. It was a pleasant surprise to note as I was updating my spreadsheet.

My next move will be to start getting my existing credit card debt a lot lower, and implementing some covered call and put strategies on selected stocks. I've also had my eye on a small semiconductor firm that has some interesting prospects. I haven't finished my research, but instead of picking up the stock directly, I think I may just use a call strategy for now. The leverage is just to great to ignore.

As things stand, my net worth is just shy of $71,000 which aligns with the last net worth update I wrote, since the last $11,000 of the $35,000 was moved out from the shared bank account setup with by my friend-cum-acquaintance. Since I took that $11,000 out of the assets column of my personal balance sheet and made it into a liability, my net worth decreased by the same amount.

At this point, you're probably wondering if there is anything GOOD to report now. I would answer that question in the affirmative. First, my asset allocation appears to be performing as desired, if not expected. While I've felt the market's recent downdrafts, I haven't taken the hits nearly as hard as I might otherwise due to the broad diversification in the portfolio and the frequent re-balancing. I also accomplished one of my personal goals for the year on Thursday, 13 March by taking my last 2 snowboard runs of the season on a green trail, Sneaky Pete, at Liberty Mountain. This was awesome personally because I sat out most of the season for health reasons, recovering just in time to get back on the slopes early this month. I also just did not expect myself to ride greens until the new season starts in December.

I'm also progressing very steadily toward my goal of amassing $20,000 in emergency funds by the end of the year, having only $6500 to go (approximately). I increased my Direct Deposit into that account by $150/month since I chose not to renew my membership in my real estate investment association. I can re-join at the same level in the future, when I am prepared to dedicate the time to real estate investing. With regard to building my cash savings (which is always critical at times of market turmoil such as what we've experienced lately), I am looking at some ways to goose my returns with minimal risk - that is, to increase my risk-adjusted absolute returns on my cash. I think I've found the right vehicle, as it is something I've talked about in the past. I'll unveil it later, once I've put some funds to work.

I have not found a new, rewarding and fulfilling employment as yet, but I have managed to make my existing job more rewarding. How, you ask? Well, given that my employer is a big Cisco Systems partner/customer, I am taking advantage of that relationship to bolster my professional experience. For years, I've wanted to earn my Cisco Certified Networking Associate (CCNA) certification; I am not in the process of pursuing it. I plan to have it in hand by 30 June 2008. So I guess the new job goal has been supplanted by earning my CCNA, although I am still looking and I will make the jump for a really great opportunity.

On the investment front, I am also looking to wade back into the futures trading pool. I'll probably open an account with a broker that has a good reputation in this arena -- Lind-Waldock comes to mind -- and start out slowly. Again, this is an alpha overlay strategy, even though commodities are supposed to represent 9% of my portfolio. Futures trading is inherently riskier than purchasing a gold or metals ETF and holding, and the leverage just adds to the excitement. So I want to get my overall core portfolio tightened up before getting into this. It will likely be a project for the second half of the year.

Wow! That was a hefty update. See, I haven't been slacking (entirely). I'm really focused on unwinding these other ventures, namely the consulting and real estate partnership, along with my CCNA studies. I'm also winding down my volunteer activities with the student run computer lab I work with, and that is taking quite a bit of energy on my part too. Combine all of that with my regular work schedule and re-instituting a regular workout schedule, and you see that things are still hectic with the K. Energy has neither been created nor destroyed, simply redirected. I am a living example of the physical law of conservation of energy.

Until next time, boys and girls....

Tuesday, March 25, 2008

Dereliction of Duty

Yes, I know I've been out of it recently. I apologize. Life caught up with me.

I'll be back later today with some new stuff. And looking around the blogosphere, I'm seeing a lot of goal status updates. I guess I'll throw mine into the mix, which includes a bit more on the personal writedown I'm taking and its impact on the net worth figures. (Ugly!)

Until next time...I haven't gone anywhere...

Sunday, March 16, 2008


Eyelashes are falling out again. Dammit!!

We now return to you to your previously scheduled broadcast, already in progress...

Wednesday, March 12, 2008

Talking Down the Book

Woo hoo!

Ajit Jain is talking about increased defaults in municipal bonds, calling Vallejo, CA and Jefferson County, AL as the "tip of the iceberg" among municipalities. Now, that's true. If defaults across fixed income products are at record lows, then it makes sense that defaults will increase in all of these products - RMBS, CMBS, corporates, high yield, municipals, what have you. Its basic math. However, how great is it that he goes before Congress and says this? I'll have to see what tomorrow's action looks like in the closed end municipal funds. Sounds like an opportunity to accumulate one of my longer term holdings.

(For the unfamiliar, Ajit Jain is one of the top honchos at Berkshire Hathaway on the insurance side. It appears he is now the head of Berkshire Hathaway Assurance Corp., the new municipal bond insurer that BRK built to siphon off business from MBIA, FGIC, and all the other monolines.)

Speaking of accumulating, I picked up a few bucks worth of SPXJX the other day, just in time to see a nice pop. Now, its a Japan value fund so it doesn't make sense to trade it. This is a long term investment, and I didn't want to burn up all of my dry powder on SPXJX. Especially since I'm digging into a new small cap tech stock and I want to be able to pick up a few hundred or even a thousand shares of that one. I'll speak on that investment a little more in the future, after I make the move (or not), because it looks like a really nice opportunity.

I know I've said a few times that I like Japan on a long term basis. It is a really long term investment. So I plan to continue accumulating when opportunities present themselves and there are no other worthwhile investments I can make at the time. We'll see if I fall into a value trap. And if I find a better fund, then I'll trade out of SPXJX into it but so far, I haven't found any other Japanese value funds that I find compelling.

Until next time...

Going Short

It would be very nice to find an efficient way to short Treasuries. Gotta look into that a bit. I don't know that I have the capital for that kind of trade, but MAN do I think its a short term winner. Negative real rates + dollar devaluation would seem to make this a no-brainer. I think all along the curve there is opportunity, but probably more so at the middle of the curve out to the long end.

Whatcha think?

Tuesday, March 11, 2008

EconWeekly's Look at How Spanish Mortgages Work

An interesting look at how the Spanish RE market is different. Sensible, I think, is a more accurate word, at least with regard to capital constraints and securitization. I love this kinda of stuff!

More to come. I'm getting caught up on my backlog. Watch for the hook...

Tuesday, March 04, 2008

Subprime Meets Inflation

I'm sure some of you have seen this one over at Barry Ritholtz's blog already, or wherever it was originally published, but in case you haven't, here's the link. This is an instant classic! I'm not even sure how I feel about this, or how I should feel. All I know is that I don't think I'd want to be either the banker or the homeowner. I wonder if the poor guy can get a Euro denominated loan from Jay-Z. Even worse, in a historical sense, is the wheelbarrow remark. If that doesn't show the US headed in the direction of Weimar Germany, I don't know what else does. (Yeah, Barry's got the link to the original over at The Big Picture.)