More on the bailout - a different point of view

September 30, 2008 - by J2R

One of the blogs I like and respect, Dr Housing Bubble, has a different view on the bailout.

This bill was a pathetic attempt at smuggling money to Wall Street from Main Street although it was under the guise as help for the common person. Even with all the new modifications in the 110 page updated bill there were so many loopholes, that it was only a matter of days before Wall Street gamed the system. “Some CEO compensation” or the lack of clarity in how assets would be priced were main sticking points.

I consider myself to be reasonable, and that’s why I like reading different points of views (that are able to “reasonably” argue their points).

I do understand Dr Housing Bubble’s point of view and why the main population is against the bailout.

I also agree that if the mainstream media is pushing for this bailout, then that itself should be considered a red flag. The mainstream media has been wrong over and over in regards to our economy, so why trust them now?

I’m not trusting them. I’m reading blogs from writers like John Mauldin.

We’re not talking about car loans or new home mortgages. Banks still have money to make these small loans, especially if they are for prime people. That’s how they make money. But we’re not talking about them. We’re talking about insolvable assets.

Let’s say I have a friend that has $10,000. This friend lent that money to 10 people @ $1,000 each for a good interest rate. Historically, these loans are good, so I decide to purchase these loans from him.

So now I have 10 I.O.U.s that could possibly return the $10k with a nice profit. Normally, I would be able to resell these I.O.U.s if I needed the cash right away for some reason.

However, a crisis in the market hits and no one is buying I.O.U.s anymore, even if they are good, because they just don’t trust anyone.

Now, I’m stuck with good I.O.U.s that I can’t sell.Now add 7 zeroes to my example.

It’s a simple and most likely flawed explanation, but it illustrates my point.

Capitalism is driven by debt. What would of capitalism if small entrenenours weren’t able to loan money and start their first restaurant or their first home based business?

I don’t disagree that the plan might have had loopholes. Honestly, I didn’t check all of the plan’s details, but overall, I do think we need a plan.

Let’s stop calling it a bailout plan. Let’s call it a Economy Stabilization Plan. And that’s something that we really need right now.

Posted in Finances No Comments »

The bailout: we’re not bailing Wall Street, but the Main Street

September 29, 2008 - by J2R

It’s been a while since my last post. I’m going through some changes in life. I’ll be leaving my current job in two weeks and starting a new one with a new role.

I’m excited as well as scared. Changes can be good, but they also can be bad. Things are stable for me now. I have a good job, make good money and a great work environment. But this is an opportunity that I would regret not taking. Regretting NOT doing something is worse than regretting doing something.

But I had to blog about this bailout.

The general public is against the bailout. “Why should we use our tax money to bail out those Wall Street executives?”

However, things are not as simple as they seem. First of all, this isn’t a bail out plan. It’s an Economic Stabilization Plan.

It’s so complicated, that I’ll simply quote John Mauldin instead of trying to explain it:

Why do we need this Stabilization Plan? Why can’t the regular capital markets handle it? The reason is that the problem is simply too big for the market to deal with. It requires massive amounts of patient, long-term money to solve the problem. And the only source for that would be the US government.

There is no reason for the taxpayer to lose money. Warren Buffett, Bill Gross of PIMCO, and my friend Andy Kessler have all said this could be done without the taxpayer losing money, and perhaps could even make a profit. As noted above, these bonds could be bought at market prices that would actually make a long-term buyer a profit. Put someone like Bill Gross in charge and let him make sure the taxpayers are buying value. This would re-liquefy the banks and help get their capital ratios back in line.

Why are banks not lending to each other? Because they don’t know what kind of assets are on each other’s books. There is simply no trust. The Fed has had to step in and loan out hundreds of billions of dollars in order to keep the financial markets from collapsing. If you allow the banks to sell their impaired assets at a market-clearing fair price (not at the original price), then once the landscape is cleared, banks will decide they can start trusting each other. The commercial paper market will come back. Credit spreads will come down. Banks will be able to stabilize their loan portfolios and start lending again.

Again, the US government is the only entity with enough size and patience to act. We do not have to bail out Wall Street. They will still take large losses on their securities, just not as large a loss as they are now facing in a credit market that is frozen. As noted above, there are many securities that are being marked down and sold far below a rational price.

If we act now, we will start to see securitization of mortgages, credit cards, auto loans, and business loans so that the economy can begin to function properly.

What happens if we walk away? Within a few weeks at most, financial markets will freeze even more. We will see electronic runs on major banks, and the FDIC will have more problems than you can possibly imagine. The TED spread and LIBOR will get much worse. Businesses which use the short-term commercial paper markets will start having problems rolling over their paper, forcing them to make difficult cuts in spending and employment. Larger businesses will find it more difficult to get loans and credit. That will have effects on down the economic food chain. Jim Cramer estimated today that without a plan of some type, we could see the Dow drop to 8300. That is as good a guess as any. It could be worse. Home valuations and sales will drop even further.

The average voter? They will see stock market investments off another 25% at the least. Home prices will go down even more. Consumer spending will drop. What should be a run-of-the-mill recession becomes a deep recession or soft depression.  Yes, that may be worst-case scenario. But that is the risk I think we take with inaction.

A properly constructed Stabilization Plan hopefully avoids the worst-case scenario. It should ultimately not cost the taxpayer much, and maybe even return a profit. The AIG rescue that Paulson arranged is an example of how to do it right. My bet is that the taxpayer is going to make a real profit on this deal. We got 80% of AIG, with what is now a loan paying the taxpayer over 12%, plus almost $2 billion in upfront fees for doing the loan. That is not a bailout. That is a business deal that sounds like it was done by Mack the Knife.

This deal needs to be done by Monday. Every day we wait will see more and more money fly out the doors of the banks, putting the FDIC at ever greater risk. Panic will start to set in, moving to ever smaller banks. Frankly, we are at the point where we need to consider raising the FDIC limits for all deposits for a period of time, until the Stabilization Plan quells the panic.

I understand that this is a really, really bad idea according classical free-market economic theory. You know me; I am as free market as it comes. But I also know that without immediate action a lot of people are really going to be hurt. Unemployment is not a good thing. Losses on your home and investments hurt. It is all nice and well to talk about theories and contend the market should be allowed to sort itself out; and if we have a deep recession, then that is what is needed. But the risk we take is not a deep recession but a soft depression. The consequences of inaction are simply unthinkable.

Joe, I am telling you that the markets are screaming panic. Yes, Senator Richard Shelby has his 200 economists saying this is a bad deal. But they are ivory tower kibitzers who have never sat at a trading desk. They have never tried to put a loan deal together or had to worry about commercial paper markets collapsing. I am talking daily with the people on the desks who are seeing what is really happening. Shelby’s economists are armchair generals far from the front lines. I am talking to the foot soldiers who are on the front lines.

Every sign of potential disaster is there. You and the rest of the House have to act. It has to be bipartisan. This should not be about politics (even though Barney Frank keeps talking bipartisan and then taking partisan shots, but I guess he just can’t help himself). It should be about doing the right thing for our country and the world. I know it will not be fun coming back to the district. Talking about TED spreads and LIBOR will not do much to assuage voters who are angry. But it is the right thing to do. And I will be glad to come to the town hall meeting with you and help if you like.

With your help, we will get through this. In a few years, things will be back to normal and we can all have stories to tell to our grandkids about how we lived through interesting times. But right now we have to act.

For his complete article: “Who’s Afraid of a Big, Bad Bailout?“

Posted in Uncategorized 1 Comment »

Do you really need all the stuff you have?

August 10, 2008 - by Tati

We finally moved from the hotel where we had stayed for almost a month. That hotel experience was awful. I hated it. I am very picky and that hotel was dirty and disgusting. Everyday I had to make the bed with my own sheets, covers, and pillows. Now we are living in an almost beautiful townhouse. It’s probably all the more cute because that hotel experience was just awful. I wrote before of all the difficulty we had that had pushed us out of our old house, and I had become very attached to it. Although the present move represents a change in lifestyle, I think I’m doing just fine living in the townhouse.

But, would you know, we have no idea of how long we will be living here, because this building is under foreclosure too! The owner rented to us, but we just don’t know how long. What does it depend on? It depends on the bank.

Because of this situation I couldn’t unpack all my stuff. Everything is still in the garage, furniture packed over furniture, boxes over boxes. But it’s interesting to look back now and see how complicated our lives were, when we were living in the house with four bedrooms. Joie de vivre!

But simplicity is the key. We realize now that we do not need too much to live well. We had t o pass through some difficult days to see how much we had complicated our lives. I think I had too much of everything, too many cd’s — what I would never listen to for years; too many kitchen tools that I never used. I don’t like to cook anyway, so why did I buy so many cooking things?

The townhouse we are living in now is almost empty and I have never been so happy, almost nothing to clean. I have more time now since I have less things to take care of. Even my husband does not need all the tools he had in his garage that he rarely used. It’s rather sad how much we had complicated our lives and to realize this now. We lost many years of our lives collecting, buying, and cleaning things.

But yes, it is undeniable. I do miss our house. Unfortunately we learn things through tough times and we learn how to make readjustments and get use to them. We also learn different values, lifestyles. Are we being forced or are we choosing?

Well, I’m satisfied to an extent. We are safe for awhile. If anyone knows how to deal with an upcoming bank foreclosure, like the one expected on this townhouse, what can we do? Please advise!

Posted in Uncategorized 4 Comments »

Be honest with your finances, even if they’re bad.

July 24, 2008 - by J2R

Tauton Suicide

Carlene Balderrama was losing her house to foreclosure. A few hours before the auction, she shot herself.

Facing foreclosure is something that millions of Americans are facing right now. It’s stressing and really take a toll on you. Balderrama couldn’t handle that pressure and killed herself, leaving a letter behind asking her husband and son to use the insurance money to pay the house.

While a truly sad story, the surprising part was that her husband wasn’t aware of the foreclosure. Carlene handled the finances in the house, and clearly didn’t share the financial troubles they were going through with her family.

We should always be hones with our finances.

First and foremost, with ourselves. Be honest with yourself. Don’t try to be someone you can’t afford to be. Don’t buy fancy clothes or fancy cars if you can’t afford them.

In addition, we should also be honest with the ones living with us. I understand Carlene might not have shared the troubles with her family, keeping them in fantasy land. Maybe she didn’t want to disappoint them. But that’s what a family is for. Not only to give us support when we need, but also to help us figure a way out of situations like this.

I’m not suggesting that they could’ve saved the house from foreclosure had her told her family about the financial issues, but I think there’s a chance that her family might have rallied, together. They might have decided to budget things together. The husband might have decided to cut on some of his hobbies or the son might have tried to get a job (or a second job).

There are too many unknowns, but what I’m pretty sure, is that had Carlene shared her troubles with her family, she wouldn’t have had all the pressure on her.

Truly a sad story.

Posted in Family, Finances 2 Comments »

Hacked

July 24, 2008 - by J2R

I got hacked!

A friend of mine was telling me his site was hacked. There were tons of links to a pharma site hidden in his footer.

So I checked this site, and there it was in the source of the page. Tons of links to this pharma site. I’m not listing the url of the site, since the whole point is to not give him any links.

I’m still not sure where the flaw is (if it’s a bug in Wordpress or my hosting company).

For now, I updated Wordpress from 2.5.1 to 2.6 and will check it again in a few days. Hopefully it was a wordpress issue and not a flaw in my hosting company.

Posted in Uncategorized 2 Comments »

Is now a good time to buy a house?

July 8, 2008 - by J2R

Up until a few months ago, I was recommending everyone looking for a house to wait because prices would still drop.

While I still believe house prices will continue to drop, I have changed my mind regarding waiting to buy a house.

This article from CNN Money echoes my thoughts.

House prices will probably keep dropping. Unemployment keeps rising. Credit is harder to get. Foreclosure numbers keep increasing. There are just too many factors contributing to a higher supply of homes, which eventually causes prices to drop.

So why did I change my mind and think this might actually be a good time to buy a house? Because while prices might still keep dropping, there are a lot of good bargains out there. And more importantly, because interest rates are low now, but probably not for too long.

As the article mentioned above states, interest rates are likely to rise in the near future. With oil prices reaching new highs ($140 a barrel as of June 26th), inflation has become a real, real worry for the Feds.

With oil at $140, inflation is not just a US concern anymore, but also for the rest of the world. China will have to raise their prices, so no more cheap toys for us. Vietnam will have to raise their prices, so no more cheap clothes for us. India will have to raise their prices, so no more cheap outsourcing work to them.

It is very likely that the Feds will raise interest rates in Q3. So if even if you end up paying a bit more for the house, at least you can afford it now, which might not be the same case with a higher interest rate.

So do the math. If you can afford a house with a 30 year fixed rate, consider it.

Posted in Uncategorized 3 Comments »

It’s easier to blame others

June 14, 2008 - by J2R

This will be a “guest post” from a friend that is going through some tough times. Like many americans, she lost her home, her husband is working 2 jobs to get ends to meet and she’s having a hard time finding jobs.

Beautiful house, new cars, unlimited funds available to be borrowed… She thought the good times would last forever… It’s what I called “the invincibility complex“. Unfortunately for her and her son in law, it didn’t.

She has quite an interesting life. Straight from a Mexican Soap Opera script. I’m trying to get her to be a regular blogger here, so let’s cross our fingers. But for now, just a guest  post from her:

In the last few months I have heard a lot criticism about the United States where people blame the current economic crisis for everything bad that has recently happened in their lives. Yesterday I spoke to my son-in-law about this issue. He is returning to his country after living here like a king for nearly 10 years. He complained that he had lost those 10 years of his life pursuing the so-called American Dream.

My son-in-law had been provided with one fantastic beginning. Ten years ago, he received from his father both a house and a business, a store, to take care of and prosper. But, like many people who do not budgeted themselves carefully, he spent more money than he had made. He hadn’t paid proper attention to his business and his customers, and he became obsessed with ebay, and opened up large accounts with major companies that he could not afford.

I told him that even though the country was going through an economic crisis, his losses could not be blamed on America’s faults. But even this crisis, I believe, is due in large part to a lot of personal mistakes that people had made, and their inability to change and overcome their personal failures.

In my case, my husband received an inheritance. We bought a house, and because he did not look for a better job like he could have, we wound up refinancing and refinancing to pay the ever-increasing mortgage. We later sold that house and then bought another one much more expensive, thanks to me! We were still unable to find good jobs and again took out loans. Now in the midst of the mortgage crisis, we are again selling our house, but for much less than what we paid for it.

So who is to blame for this debacle, the United States? No, I think not. I blame my husband and myself. But I thank God for giving us the opportunity to go on after such a difficult experience, because even though I am still looking for work, my husband has found two good jobs, and we have reached a positive level of maturity, hope, and forbearance. I am still looking for work, but know that together, my husband and I will find a way to improve our lives. We have made some bad mistakes, but most importantly, we have learned from them. The future still holds dear for us and we haven’t given up.

They made mistakes and are going through tough times, but I applaud my friend for taking responsibility and learning from her mistakes instead of blaming others and running away like her son in law did. He took the easy way out.

Another lesson that we can learn from her story is that we all love to think that we’ll have a shoulder to support us in tough times. She thought she could count on family and friends, but as I write this post, she’s packing her stuff without a place to go. She’ll probably end up in a motel 6 for a few nights while trying to find an apartment at a reasonable price to rent.

We all have to be prepared for emergencies. Some of us are lucky to have support and help in tough times. But we can’t count on them. They might be going through tough times themselves.

I take her stories to heart. At the time I only have about 2 months of emergency funds. And I’m not working as hard on building it up, so that’s something I MUST change, My goal is to have 9 to 12 months in a combination of short term CDs and high yield savings.

Posted in Finances, Lifestyle 6 Comments »

Carnival of Personal Finance #152

May 13, 2008 - by J2R

And we’re in the 152nd Carnival of Personal Finance as well !

Posted in Carnivals, Finances No Comments »

Don’t chase the highest yield

May 7, 2008 - by J2R

In these times of low interest rates, those of us that actually save money are having a hard time with our not-so-high-anymore yield accounts.

I remember a year ago when some savings accounts were yielding 5%.

I used to chase them. I had an account at ING yielding somewhere around 4.65%. I chased a higher yield and opened an account at Citi (5.05%) and then later at E-Trade when it offered the 5% yield I wanted while Citi lowered theirs.

It wasn’t worth chasing the highest yield. Now I have 3 savings accounts to manage and monitor.

A year later, ING (out of my 3 saving accounts) is actually the one with the highest yield now.

Consumerist.com (a favorite site of mine) lists current high yield savings accounts with their rates.

The bottom line is: open a high yield savings account, but don’t make the rate your main criteria. Pick a bank that you’re comfortable with, that provides good customer service and a great online experience (security, online statements, bill pay, etc).

Most likely, in a year, the bank currently giving the highest yield won’t be the top one anymore.

Furthermore, the difference you will be giving up (probably less than 1%) will be such a small difference (3.6% @ OneUnited vs my 3% @ ING) and won’t be worth chasing it.

Posted in Consumer, Finances 3 Comments »

Tracking Portfolio Performance vs SP500 in Excel

May 2, 2008 - by J2R

 Most professionals recommend you only check your statements once or twice a year to balance them. Checking them too frequently might cause you to do stupid things, like sell your stocks when the market is down and buy them when the market is high. You can’t be emotional when investing, and when you check your portfolio too often, you’re bound to do stuff that/when you shouldn’t.

 Easier said than done. I know what I need to do, but I’m still obsessed about daily performance, net performance, annualized performance and even performance against the S&P500.

 Managing my portfolio in Excel would be too cumbersome without being able to automatically update stock prices. I tried Web Queries, but it wasn’t really what I wanted. So I tried Google docs. Google Spreadsheet is just amazing. I could track my overall portfolio’s performance in real time (using Googlefinance function). Stock prices are updated every few secs without any intervention. Just sit back and relax obssess. However, in addition to my daily and total net gains, I wanted to track my annualized gains. Google Docs provides the XIRR function that calculates annualized gains, but because it doesn’t have Lookup tables, the setup became quite cumbersome. Also, for complex spreadsheets with too many lookups, the spreadsheet became quite slow to use.

 Google Docs wasn’t perfect, but it was still my best solution.

 That is, until I found MSN Money Stock Quote Add In. It’s an Add In that allows you to update all your stock quotes from the internet. Unlike GoogleFinance, it doesn’t refresh prices automatically. You have to run the plugin for it to connect and refresh your stock prices and you can only do it every 5 minutes. Not a big deal. I was more than willing to give up real time stock updates for all the power of Excel.

 And here’s how you can do it: 

 Note that I’m using Excel 2007. 

First Step - Download and install the MSN Stock Quote add in

After you install it, you can access its help pages for more reference.

Here’s a summary:

MSNStockQuote(Symbol,Property,CountryCode)

Symbol   is a stock symbol (for example: “MSFT”, “AOL”, “IBM”, “AAPL”).

Property   is a piece of information regarding the stock, such as Ask Price or Close Price. This is an optional parameter. If omitted, the default is Last Price. You can either type the indicated property as text, or use a value from 1 to 25 to represent the property you want to return.

And the function reference:

Step 2 - Track your Transactions

The next step is to create a separate “table” for each stock you own so you can track your transactions. This is only necessary for more detailed performance tracking, like annualized (where you need cashflow) and return vs any index.

You need to name your tables in a specific pattern that includes the stock ticker. This is to simplify your summary table that will need to know which table to look for transactions.

In my case, I named them “Stock_” and the stock ticker symbol. For example, to track my Citigroup (yaiks) stock transactions, I created a table named “Stocks_C”.

click on the image above to expand it

It’s a pretty straight forward transactions table. The only kink I added to it was the closing SPY price for the day. For those that don’t know, SPY is used to track the S&P500 index.

For the table’s Total Row, I calculate the total number of Stocks (Qty) and the total Purchase Cost with the well known SUM function.

I also had to enter today’s date and today’s current value of my holding as part of my Cash Flow (to calculate annualized returns), so I used the TODAY() and the MSNStockQuotes functions. Don’t forget that for Cash Flow, you need to use positive and negative numbers to differentiate between deposits and withdrawls. With detailed information about each transaction, the total cost, the total number of stocks and my current position, I had everything I needed.

Step 3 - Summary - Putting it all together

Now that our Transaction tables are setup, we can finally set our Summary table up.

click on the image above to expand it

All the formulas in this table are based on the first row (the stock ticker), so to add a new stock to our Summary table, we simply have to copy one of the rows and update the ticker symbol. That is why we named the tables as “Stocks_” and the ticker symbol in the first place. We use the INDIRECT function so that we can dynamically figure out the right Transaction table to access based on the ticker symbol (Columnb B).

You’ll notice that at the top, I have SPY and its latest price. I’ll use this to calculate my hypothetical Current Value had I invested in SPY.

Tracking the performance vs the S&P 500 requires a little bit more work. Basically, the way I did this was by figuring out how many SPY (Spyder ETF that tracks the S&P index) stocks I could’ve purchased had I purchased them instead of my stocks. For that, I had to track the closing price for SPY for each transaction I had. A bit of work, but totally worth it to know whether your portfolio is actually beating or losing to the S&P500 index.

So there you go. If you’re an Excel fan, this is one great way to track your portfolio performance using Excel.

Posted in Finances, Investment 3 Comments »