One of the main causes of the subprime and credit crisis was the failure to recognize the possibility of risk. Today, I heard a good sign. While discussing a business transaction with other parties, the issue of default risk was seriously evaluated by everyone. Two years ago, everyone would have said ABC Bank is bulletproof and their guarantee is good enough – without any thought.
Thursday, October 30, 2008
A man with good intentions can do a huge amount of damage. According to a story in today's Hartford Courant, there is a movement to federalize the approval of new electrical transmission lines. Without getting into the pros/cons, a quote by an opponent of new transmission lines caught my eye.
"Opponents say they're determined to see the lines installed underground, no matter what the cost to all electricity customers." At least they admit it. With Connecticut residents already paying among the highest prices for electricity, I am glad to hear they don't care about us at all. So if everyone's electric bill went up by $100 per month, they would be fine with that? If people couldn't get electricity, they are cool with that?
Last week, I purchased $5K of TIPS during the treasury auction using my account at Fidelity account. Now that the auction is concluded, I actually bought $5K in bonds for a total of $4,620.44. I seem to have made $1.42 in accrued interest. I did not pay any commission.
This was my first attempt at purchasing individual bonds. I don't like bond funds (especially government ones) because the fund value can drop as interest rates change. With the individual bond, they interim value might vary from day to day; however, I will get the full face value (plus an inflation kicker) back when the bond matures.
Wednesday, October 22, 2008
How can a housepainter get a $350K plus home? Reading a story about the California housing debacle in the WSJ, I couldn't contain my rage. Basically, a bank gave a loan with nothing down to a housepainter who takes home $3,000 per month. The initial payment: $2,000 per month. While the borrowers are not blameless, anyone who participated in giving them a loan should go to jail.
Money Quote: A California state housing agency also chipped in a $11,200 loan toward the Pedrozas' purchase. Ms. Pedroza figured that with her husband bringing home $3,200 a month as a house painter, the family could afford the monthly mortgage payment of about $2,000. Ms. Banuelos, a college student, said the payments were affordable for her husband, who also had ample work as a house painter.
Thursday, October 16, 2008
Monday, October 13, 2008
If you invest in Municipal Bonds, I strongly recommend against placing any money in New York State bonds or New York City bonds. Simply put, the crippling losses on Wall Street are going to devastate their budgets.
Given the entitlement structure they maintain, the bad union contracts with state/muni workers, and massive pension obligations, it will be difficult for them to make the cuts needed to balance their budgets.
Sunday, October 12, 2008
Saturday, October 11, 2008
One of the major reasons the stock market continues to tank is forced selling by hedge funds. It works like this:
1. Investors give the fund managers $100m to invest;
2. Prime Brokers lend the fund managers an additional $900m "on margin" to invest;
3. In good times, this leverage allows investors to ramp up profits as a $100m investment grows on a $1B base;
4. In good times, all this "buying" power drives up prices.
5. In bad times (that would be now):
- As the fund "loses" money, it's leverage begins to grow, the lenders get nervous and want their money back and/or more collateral from the fund;
- As the fund "loses" money, the investors get nervous and pull their money out;
- The combination of lenders pulling back on loans and the redemptions by investors forces the fund to liquidate its holdings;
This combination forces prices down. As prices fall, they are forced to sell more investments. Essentially, it becomes a giant snowball of selling as all the funds are forced to liquidate.
While I tend to favor free markets, I think hedge funds add little to the greater good and actually harm the markets as they add volatility. For that reason, I am starting to think they should be banned. At the very least, their ability to leverage up their positions should be severely limited.
What do you think?
Thursday, October 9, 2008
Life in the insurance industry simply blows. We spent most of the day watching our stock price go down the crapper. If this keeps up much longer, I may be able to buy my entire company with the amount of money in my coin jar.
Simply put, I am holding onto my job for dear worth. My wife and I are eliminating all unnecessary spending – all of it. Preparing for the worst.
Tuesday, October 7, 2008
While I enjoy my Amex Blue Cash card, I don't like the fact I will receive my cash back at roughly the same time I will get my tax refund (hopefully) and my annual bonus (if I am really lucky). Looking at it now, I think Amex would have a winning card if it offered the Amex Blue Christmas Card.
- Identical to the Blue Cash Card except;
Cash Back Transaction occurs every December 1st allowing customers to fund some of their holiday spending.
Today, I dropped $25 for a new deposit stamp for my wife and I's joint checking account. Despite this frivolous spend, I am looking at ways to reduce "monthly spends."
- I am cutting back dramatically on my golf expenditures;
- I will move to cut our cable bill by $50 per month by the end of the year;
- We are moving our stuff out of storage saving $75 per month; and
Eliminating all subscriptions except for the Wall Street Journal.
Sunday, October 5, 2008
For my long term savings, I keep about $5,000 in a Vanguard with all of it parked in a Tax-Free Money Market Mutual Fund. Much to my surprise, this month's interest payment is almost double last month's interest. Even without the tax benefit, it is yielding 5.67% on a 7-day basis according to Barron's. Clearly, the market is demanding a huge risk premium. Since this is my "safe money," I am considering moving it to the federal MM fund.
Talking with co-workers and friends, I see a definite trend of cutbacks. For me, less golf, eating out, optional home repairs have become the order of the day. To save $100 per month on storage, my wife and I intend to shoehorn more stuff into our very small house (and her mom's storage locker at her apartment). Bottom line, we have moved into a world of fewer extras.
Tonight, we are making turkey taco meat for dinner. By making almost 2lbs, I can take my lunch to work 3 times this week.
What are you cutting back on?
In follow up to my post on fear in the Insurance Industry, I am writing to provide insight on the rage felt by many of us who work in the insurance industry.
- Executive Compensation – for many companies, layoffs, reduced compensation, and/or no bonus' are going to be a reality in 2008 and 2009. Those of us lucky to survive will have to do "more with less." Nevertheless, it never seems like executive pay ever goes down.
- Accountability – even if the top executives are held accountable (and fired) for the failures that put our companies at risk, new top executives will be hired who make more money than those they replace. Often the departing execs take nice golden parachutes with them. If we get canned, we get 2 weeks per year with the company. The Lehman rank and file got nothing.
- Harry "Peabrain" Reid – by making unfounded allegations that a Life insurer was about to go bankrupt, he took $20 billion out of the market caps of good companies. Poor Hartford Financial took the worst of it. While my company (P&C) wasn't affected, his idiotic comments make us want to scream.
Next: Up my take on how the chaos in the industry will affect the consumer.
Saturday, October 4, 2008
Friday, October 3, 2008
Bottom line, everyone I know is cutting back. Although my company is still hiring and our line of business is allegedly doing well, we all work in the financial services industry and know what can happen quickly. On the one hand, some of our key competitors have taken major beatings and opportunities to expand are everywhere. On the other hand, could we be next?
One of my coworkers deferred a bathroom renovation, I deferred a cosmetic repair until Spring, and others are taking similar steps to cut back on cash outlays.
Tomorrow, I will post Part 2: Insurance Industry – Rage from Employee View
Thursday, October 2, 2008
- Reid publically states a major insurer could go bankrupt and all the life companies go into a nosedive. HIG went down 32% as everyone thinks it is the "one." Can you say irresponsible?
- Whether you support or do not support the bailout, it is the most important vote this year. How do congressidiots act, they trade their votes for pork such as a racetrack and children's arrows. Republican or democrat, they should be tossed from office immediately.