Investing Curiouscatblog

Category: Investing

  • Add to Your 401(k) and IRA

    The recent performance of investments can be discouraging. However, the most damaging reaction to your financial future is to reduce your contributions to retirement savings. IRAs and 401(k)s are great ways to save for retirement. In fact the recent performance has convinced me to increase my contributions. This is for two reasons.

    First, I had been somewhat optimistic in my guesses about investment returns. The current decline means that investments in the S&P 500 have returned about 0% over the last 10 years. That is a horrible performance and it will take many years to even bring that up to a bad performance. So if you reduce your long term investment performance expectations you need to add more while you are working (or reduce your retirement expectations – or work longer).

    Second, I think now is a very good time (long term) to be investing. I think the declines in the markets (both the stock market and real estate market) now provide good investment opportunities. Of course I could be wrong but I am willing to make investments based on this believe. And I believe there are plenty of place real estate prices may still be too high, but I believe there are also good buys.

    A third reason worth considering is the damage done to the economy over the last 10 years and the costs of dealing with that today. Those costs are going to have long term impacts. Likely the economy will be stressed paying for the over-indulgences of the past for quite a long time. That means the risks to those in that economy will increase. And therefore having larger reserves is a wise course of action to survive the rough times ahead. Those rough times include a substantial risk of inflation. Investing to protect against that risk is important.

    I would recommend starting with at least a 200 basis point increase in retirement contributions. For example, if you were saving 10% for retirement, increase that to 12%. If you have not added to your IRA for 2008, do so now (you have until April 15th to do so). In fact, if you haven’t added to your IRA for 2009, do so now.

    Related: How Much Will I Need to Save for Retirement? – Nearly half of all workers have less than $25,000 in retirement savings – Investing – What I am Doing Now

  • Using Capitalism in Mali to Create Better Lives

    Don’t let the talking heads on TV convince you that capitalism is about corrupt businessmen that think they are entitled to loot companies. That is about the powerful accepting money from their golfing buddies to share the loot among themselves. Capitalism is about places like Trickle Up, micro-finance, appropriate technology and entrepreneurs making better lives for themselves and their families. Donate to Trickle Up (I do).

    Related: High School Student Provide Clean Water Solution – Creating a World Without Poverty – Microfinancing Entrepreneurs – Ignorance of Capitalism

  • Federal Reserve to Buy $1.2T in Bonds, Mortgage-Backed Securities

    I make a point of showing the discount rate changes by the Fed don’t translate to mortgage rate changes. I do so because many people think the discount rate does directly effect mortgage rates. But the Fed announced today, actions that actually do impact mortgage rates.

    Federal Reserve to Buy $1.2T in Bonds, Mortgage-Backed Securities

    The central bank will increase its purchases of mortgage-backed securities by $750 billion, on top of a previously announced $500 billion. It also will double its purchases of debt in Fannie Mae and Freddie Mac to $200 billion. Those steps are intended to lower mortgage rates. The announcement of the previous purchases pushed mortgage rates down a full percentage point.

    If you are looking at refinancing your mortgage now (or soon) might be a good time, rates were already very low and will be declining. And if you own long term bonds you just got a nice increase in your value (bond prices move up when interest rates move down).

    Related: Lowest 30 Year Fixed Mortgage Rates in 37 Years – Low Mortgage Rates Not Available to Everyone – Why do we Have a Federal Reserve Board?

  • China A-Share Premium

    World-Beating China Rally Doomed by PetroChina’s Hong Kong Gap

    Shares in the yuan-denominated CSI 300 Index traded at 16.2 times earnings this month, compared with 8.6 times for 43 mainland companies in Hong Kong. PetroChina Co., the country’s biggest company, fetches twice the valuation in China as in Hong Kong.
    …
    Restrictions on foreign and local investment that prevent arbitrage with H shares helped make mainland equities more expensive.

    It is pretty odd that there is such a large premium that local Chinese investors must pay to own stocks in the same companies available to foreign investors. There has been a discount on the Hong Kong shares (H-shares), of maybe 20-30%, for years. But it seems that either the H-shares are cheap or the Chinese shares are too expensive (or maybe a little of both). I am positive on the outlook for China both in the short and long term. Though investments there do have substantial risks (as they do anywhere). I would imagine this premium for Chinese (A-shares) should also largely disappear over the next decade as the market is allowed to become one (and at least allow arbitrage between to the two markets to reduce the premium).

    Related: Capitalism in China – Easiest Countries for Doing Business 2008 – China and USA Exports and Imports Drop Sharply

  • 12 Stocks for 10 Years – March 2009 Update

    I originally setup the 10 stocks for 10 years portfolio in April of 2005. The stock market has declined quite a bit since that time. Four of the 12 stocks currently have positive returns and 8 have losses (the market is down 8% annually). I still feel very happy with the makeup of this portfolio overall. The current stocks, in order of return:

    Stock Current Return % of sleep well portfolio now % of the portfolio if I were buying today
    Amazon – AMZN 91% 10% 8%
    Google – GOOG 49% 15% 12%
    Templeton Dragon Fund – TDF 40% 10% 10%
    PetroChina – PTR 11% 10% 10%
    Cisco – CSCO -17% 6% 8%
    Toyota – TM -21% 9% 11%
    Templeton Emerging Market Fund – EMF -25% 4% 5%
    Danaher – DHR -28% 6% 9%
    Intel – INTC -35% 5% 7%
    Tesco – TSCDY -38% 0% 10%
    Pfizer – PFE -45% 6% 6%
    Dell -73% 4% 4%

    At this point I am most positive on Google, Toyota and Templeton Dragon Fund. I am still wary of Dell; it has fallen 73%. I have not sold any Dell, still the percentage of the actual portfolio invested in Dell has dropped to 4%, I have also reduced the amount I would invest now to 4% (and I am leaning to selling it). I am satisfied with Pfizer, at this price and yield. (and also like having some exposure to health care).

    In order to track performance I setup a marketocracy portfolio but had to make some minor adjustments. The current marketocracy calculated annualized rate or return (which excludes Tesco) is -4.2% (the S&P 500 annualized return for the period is -8.3%) – marketocracy subtracts the equivalent of 2% of assets annually to simulate management fees – as though the portfolio were a mutual fund – so without that the return is about -2.2%). The portfolio is beating the S&P 500 by 4.1% annually (which is actually quite good, though still that means just losing less than the S&P 500. Also it is a bit confused due to to Tesco not being included. View the current marketocracy Sleep Well portfolio page.

    Related: 12 Stocks for 10 Years Update – June 2008 – 12 Stocks for 10 Years Update (Feb 2008) – posts on stocks – investing books
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  • Over Half of 2008 Foreclosures From Just 35 Counties

    More than half of the nation’s foreclosures last year took place in 35 counties

    Those counties, spread over a dozen states, accounted for more than 1.5 million foreclosure actions last year, a USA TODAY analysis of figures compiled by the real estate listing firm RealtyTrac shows — more than were recorded in the entire United States just two years earlier.
    …
    A few of the 35 counties leading the foreclosure boom are in already-distressed areas around Detroit and Cleveland. But most are clustered in places such as Southern California, Las Vegas, Phoenix, South Florida and Washington, where home values shot up dramatically in the first half of the decade, then began to crumble.
    …
    The worst-hit counties are home to about 20% of U.S. households, but accounted for just over 50% of the nation’s foreclosure actions last year, driving most of the national increase. And even among those places, a few stand out: Eight counties in Arizona, California, Florida and Nevada were the source of about a quarter of the nation’s foreclosures last year.

    In more than 650 other counties – about a fifth of the nation – the number of foreclosure actions actually dropped since 2006.

    Related: Freezing Mortgage Rates – Nearly 10% of Mortgages Delinquent or in Foreclosure – Jumbo Loan Defaults Rise at Fast Pace – Ignorance of Many Mortgage Holders

  • Making Money Buying Distressed Mortgages

    Ex-Leaders at Countrywide Start Firm to Buy Bad Loans

    PennyMac, whose full legal name is the Private National Mortgage Acceptance Company, also received backing from BlackRock and Highfields Capital, a hedge fund based in Boston. It makes its money by buying loans from struggling or failed financial institutions at such a huge discount that it stands to profit enormously even if it offers to slash interest rates or make other loan modifications to entice borrowers into resuming payments.

    Its biggest deal has been with the Federal Deposit Insurance Corporation, which it paid $43.2 million for $560 million worth of mostly delinquent residential loans left over after the failure last year of the First National Bank of Nevada. Many of these loans resemble the kind that Countrywide once offered, with interest rates that can suddenly balloon. PennyMac’s payment was the equivalent of 38 cents on the dollar, according to the full terms of the agreement.

    Under the initial terms of the F.D.I.C. deal, PennyMac is entitled to keep 20 cents on every dollar it can collect, with the government receiving the rest. Eventually that will rise to 40 cents.
    …
    Phone operators for PennyMac — working in shifts — spend 15 hours a day trying to reach borrowers whose loans the company now controls. In dozens of cases, after it has control of loans, it moves to initiate foreclosure proceedings, or to urge the owners to sell the house if they do not respond to calls, are not willing to start paying or cannot afford the house. In many other cases, operators offer drastic cuts in the interest rate or other deals, which PennyMac can afford, given that it paid so little for the loans.
    …
    But a PennyMac representative instead offered to cut the interest rate on their $590,000 loan to 3 percent, from 7.25 percent, cutting their monthly payments nearly in half, Ms. Laverde said.

    This is one way the economy cleans up messes. A foolish organization lends money (or buys mortgages, loans…) to lots of people that couldn’t pay back and they then sell those loans at a big discounts. The new owners of the loans now have this mortgage that the homeowner can’t afford. But the cost of the mortgage to them wasn’t anywhere near the amount the homeowner owes. So the new buyer can make a great deal of money just by getting the homeowner to start paying again (even if it is at a much lower rate). They can also make money by foreclosing and then selling the property but truthfully if they can get the homeowner to pay that is likely a much better quick profit for them (and they can then sell the performing loan to someone else – I would imagine). Who knows if PennyMac will make a ton of money this way, but I fully expect many organizations to do so.

    Related: Nearly 10% of Mortgages Delinquent or in Foreclosure – Learning About Mortgages – How Much Further Will Housing Prices Fall? – Jumbo v. Regular Fixed Mortgage Rates: by Credit Score

  • FreeWave: Successful Company in Difficult Times

    It is easy with the existing economic news to think things are bleak everywhere. But even in the current climate companies find success. Founded in 1993, FreeWave Technologies is a world leader in the innovative design and manufacture of ISM Band radios and wireless data solutions. Their data-transmitting radios span the globe from the Middle East to Mount Everest to the Amazon Rainforest to Antarctica to New York. They are used by defense contractors, oil and gas companies, city and county municipalities and industrial manufacturers.

    The privately held company is based in Boulder, Colorado, the company offers network design, pre-installation engineering services and manufactures its own radios (manufacturing them in Boulder).

    FreeWave’s increase in revenues of 112 percent from 2003 to 2007. The company has paid this bonus every six months since the first one was paid in July 1995. Over the past year, FreeWave has invested in expanding its facility to accommodate more staff; growing its manufacturing space and capabilities; dedicating more resources and technology to its product development; increasing its customer and partner training; and, investing in marketing and sales.

    Boulder company shares $9 million with employees

    The Boulder-based company says it has had profits every month since it hired its first employee in 1995. There have been no layoffs. Employees get company-funded retirement plans and bonuses based on profits and growth.

    And there’s more: As part of a $113 million private-equity investment deal in 2007, FreeWave is sharing $9 million of investors’ money with its fewer than 100 employees as a reward for the company’s success. Shares are divvied up based on individual performance.

    Related: Another Great Quarter for Amazon (July 2007) – Great Google Earnings (April 2007) – Curious Cat Investing Books – $60 Million Bonus – For all Staff – Family Business Gives $6.6 million in Bonuses to Workers

  • House of Cards – Mortgage Crisis Documentary

    A documentary of the mortgage crisis by CNBC: House of Cards. It is a bit slow and simple but still for people that don’t really understand the basics of what happened it is interesting.

    Related: Nearly 10% of Mortgages Delinquent or in Foreclosure – Ignorance of Many Mortgage Holders (2007) – How Not to Convert Equity – mortgage terms

  • I Wouldn’t Sell Oil at These Prices

    Oil has fallen to $40 a barrel from nearly $140 less than a year ago. Now that $140 level was the result of a huge spike in the price. But if I owned a bunch of oil (as a country or a company) I sure wouldn’t want to sell it at $40. I would much rather just keep it in the ground and sell it later.

    OPEC has reduced quotas in an attempt to react to the global recession. But it strikes me as bad management to sell your resources at these low levels. Now you might have to sell some to service debt and meet fixed expenses. But continuing to sell at these levels instead of just keeping it in the ground and waiting a year or two (or longer) just seems like a very shortsighted action.

    Now you would have great difficulty acting on my opinion if you don’t plan ahead. To do so you would need to bank profit when you are selling at high prices so you can ride out low prices without being forced to sell to meet your obligations. And it seems many countries are unable to do that. And my guess is many oil company contracts require production based on what the country wants done.

    It just doesn’t seem to me that the I would do much better waiting to sell my oil than sell it at these prices.

    Related: Forecasting Oil Prices – Oil Consumption by Country – South Korea To Invest $22 Billion in Overseas Energy Projects – Curious Cat Science and Engineering Blog posts on energy