Investing Curiouscatblog

Category: Investing

  • Leverage, Complex Deals and Mania

    Anyone involved in finance should understand mania in the markets. It is not a shock that financial markets do irrational things. They do so very frequently. Anyone who has not read, Manias, Panics, and Crashes: A History of Financial Crises, should do so. Leverage often is a catalyst that turns bad investments into panics that damage the economy. A previous post on this topic: Misuse of Statistics – Mania in Financial Markets.

    Enron was the pit canary, but its death went unheeded

    Just as Enron packaged bad investments into a private equity fund run by its chief financial officer, Wall Street packaged mortgages given to people who couldn’t afford the payments into sleek new instruments called RMBS and CDOs. But Enron’s machinations couldn’t make the losses go away, and Wall Street’s shiny acronyms can’t turn a defaulted mortgage into good money.

    As for the lessons we’ve forgotten, how about this one: financial statements aren’t supposed to be fairytales.
    …
    when all was booming, Wall Streeters said they deserved their pay because the market said they were worth it. But now things are falling apart, they say the market doesn’t work, and we need to stop short-selling, and taxpayers need to pony up. If there is a tiny bit of good in all this, it’s that Wall Street, although it was complicit in the Enron mess, managed to walk away relatively unscathed. This time, Wall Street has brought itself down.

    I think the odds that Wall Street has brought itself down is very low. Even that the ludicrous excesses of Wall Street are at risk is very unlikely. Perhaps for a few years their might be some restraints put on excesses. But most likely politicians will respond to huge payments by arranging favors for those that want to bring excesses back. If this can be prevented that would be great, but I doubt it will.

    Related: Investing books – Tilting at Ludicrous CEO Pay – Losses Covered Up to Protect Bonuses

  • Record Home Price Declines

    Since the S&P/Case-Shiller 20 city home price index peaked in June 2006 it has fallen 19.5%. In the year ending July 2008 the decline was 16.3%. That is a record drop. In that year Las Vegas declined 29.9%, Phoenix 29.3% and Miami 28.2%. For the largest cities: New York City declined 7.4%, Los Angeles 26.2%, Chicago 10% and Dallas 2.5% (the second lowest decline – Charlotte declined 1.8%); Houston and Philadelphia, the 4th and 5th largest cities are not included in the 20 city index.

    Only one city shows a decline in housing values since January, 2000: Detroit is down nearly 7%. Washington is up 95% since January, 2000 (even with a 15.8% decline in the last year), Los Angels and New York are tied for second at 93% increases. The 20 city index is up 66% from January 2000 to July 2008.

    The S&P/Case-Shiller Composite of 20 Home Price Index is a value-weighted average of the 20 metro area indices for single family homes.

    Source: Record Home Price Declines (pdf)

    Related: Housing Prices Post Record Declines – Home Price Declines Exceeding 10% Seen for 20% of Housing Markets – Fourteen Fold Increase in 31 Years – The Ever Expanding House – Coming Collapse in Housing?

  • SEC Temporarily Bans Short-selling Financial Stocks

    SEC to temporarily ban short-selling: report

    The U.S. Securities and Exchange Commission intends to temporarily ban short-selling, The Wall Street Journal reported Thursday night. It’s unclear if the commission has approved the move, the Journal reported. SEC Chairman Christopher Cox, Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson were briefing congressional leaders Thursday night. The U.S. move would follow a similar action by U.K. regulators on Thursday.

    Wow, that would be very surprising to me (especially if you asked more than a month ago the chances of this happening). But given these crazy times I can believe it. I wish they just properly regulated short selling the last 10 years (the failure to do so has been very disappointing). And I would be against banning short selling unless there were a very extreme situation. I don’t see that are necessary now, but I have far from all the details so maybe it is warranted now (though I am skeptical).

    Update: SEC Halts Short Selling of Financial Stocks

    Under normal market conditions, short selling contributes to price efficiency and adds liquidity to the markets. At present, it appears that unbridled short selling is contributing to the recent, sudden price declines in the securities of financial institutions unrelated to true price valuation. Financial institutions are particularly vulnerable to this crisis of confidence and panic selling because they depend on the confidence of their trading counterparties in the conduct of their core business.

    Given the importance of confidence in financial markets, the SEC’s action halts short selling in 799 financial institutions.

    Related: Naked Short Selling – Shorting Using Inverse Funds – Investor Protection Needed

  • Stock Market Decline

    Watching your new worth decline isn’t fun. But when investing over the long term you will have some good periods and some bad periods. Diversification can help smooth out the extremes but the markets are often driven by emotion. And those emotions (greed, fear…) cause extreme price swings. I am getting ready to invest more in the market. I don’t know how much further we will go down, or if we are at the bottom now (unlikely). But there are investments I am happy to own at these prices. The main reason I don’t buy more is the limitation of my capital. And I would rather buy in slowly so if prices decline I can get more for my money.

    Not surprisingly the stocks I am looking at are those in the 12 stocks for 10 years portfolio. I am looking at buying more Templeton Dragon Fund, Toyota and Google for myself now. I am happy to be able to buy more of these stocks for the long term. It is not fun to see my net asset value decrease but that does provide some opportunities for buying stocks at lower prices. They may turn out to be bargains, or maybe they will drop much further. That only time will tell, but I am happy to add to those positions at these prices.

    On the overall market I am waiting and watching. But I am leaning now toward moving more of my long term investing into stocks – I am already over-weighted there compared to the conventional wisdom but that is my style. I am willing to take more risk with a long long term investment portfolio. As the time frame shrinks (and the assets grow) I believe in reducing the risk profile for the overall portfolio (though I still believe conventional wisdom over-emphasizes price volatility risk (compared to inflation risk, for example). This market does have real potential for creating serious long term problems, which is why I need to think more (and get more information) about the long term implications.

    Related: Investment Risks – books on investing – Does a Declining Stock Market Worry You? – Uncertain Economic Times

  • Allocations Make A Big Difference

    Why Allocations Make A Big Difference

    the closer you get to the time when you want to cash in your investments, the safer you want to get with those investments. Traditionally, stocks are very volatile (ranging from -15% to 20% annual return), while bonds are pretty stable (returning 4-8% consistently).

    Good advice, but I believe people need to be much more careful with bonds than many people believe. Long term bonds can be volatile (both due to interest rate and other risks). And with interest rates low this risk is higher. The duration of your bonds (as well as credit/business risk) is a very important factor (the longer the duration the higher the interest rate risk).

    I also think the importance of asset allocation increases as your assets increase and the goal gets closer (normally retirement but also could be a child’s education fund…). And I think you need to look at more than just stocks versus bonds (different types of stocks, real estate… are important considerations). I discussed some possible retirement account allocations possibilities for early in life in a previous post.

    Related: Lazy Portfolio Results – Investing books – Roth IRA – Dollar Cost Averaging

  • Disease Prevention For Healthy America

    Disease Prevention Called a Better Bet

    The report from the Trust for America’s Health, a nonprofit health advocacy group, found that programs encouraging physical activity, healthy eating and no smoking were a better investment than those concentrating primarily on treatment.

    The results are laid out in a state-by-state breakdown.The District, the researchers found, would save $9.90 for every dollar invested, or $57 million over five years. Maryland would save $6 for every dollar, for $332 million over five years, and Virginia would save $385 million — $5.20 for every dollar spent.

    The researchers arrived at their numbers by calculating potential decreases in several chronic diseases based on a $10 investment per person. They found that community health programs could reduce rates of diabetes and high blood pressure by 5 percent within two years and reduce the incidence of some forms of cancer and arthritis within 10 to 20 years.

    The current health care system is not working. It is far too costly. It is not effective. It is a disease management system not a health care system. The damage to the economy of this broken health care system is huge.

    Related: Prevention for a Healthier America Report – posts on improving the health care system – Improving health care portal

  • More Americans Working Into Late 60’s and Beyond

    Americans working past retirement

    While the average retirement age remains 63, that standard may soon be going the way of the gold watch — a trend expected to accelerate as baby boomers close in on retirement without sufficient savings.
    …
    Twenty-nine percent of people in their late 60s were working in 2006, up from 18 percent in 1985, according to the Bureau of Labor Statistics. Nearly 6 million workers last year were 65 or over. Over the next decade, the number of 55-and-up workers is expected to rise at more than five times the rate of the overall work force, the BLS reported.
    …
    Working another three years — from 62 to 65, for example — and continuing to save 15 percent of salary could raise annual income from investments by 22 percent. Make it five years and boost savings contributions still higher — even better.

    Putting off retirement also may enable people to delay when they start taking Social Security benefits, which can significantly increase payments.

    “The longer the delay, the better” financially, said Fahlund. “To me the ideal would be 70, because you get the biggest Social Security benefit possible and all those additional years of employment. And it keeps you going mentally and physically too.”

    The economic reality is retiring at 62 is not realistic for most people today. Retirement age has barely budged at life expectancy has increased by 20 years. I have long felt the best practice for the economy is to provide part time work to transition into retirement. This allows people to slow down their work lives, but not completely leave it behind. And the financial benefits are very helpful to all those that did not save enough early in their lives.

    Related: Retirement Delayed, Working Longer – Our Only Hope: Retiring Later – Many Retirees Face Prospect of Outliving Savings – Retirement Savings Survey Results – Saving for Retirement – Spending Guidelines in Retirement – Tips To Allow Retiring Sooner

  • Google’s Underwater Cables

    I respect the management of Google. They are not tied to conventional ways of thinking. When they bought huge amounts of dark fiber (fiber optic cable that had been laid down in the internet bubble period, but was sitting unused). I figured they had made good investments while the cable was very cheap (pennies on the dollar). I watch with interest as they continue to build their own (with partners) fiber network. I am guessing this may be partially because they are smart enough to know the business oligopolies providing internet infrastructure will try to exploit their positions and government cannot be counted out to play their proper regulatory role, which is required in a capitalist system. And partially due to their huge bandwidth needs and projections for future growth.

    And since those oligopolies are not very effective companies (that rely largely on paying politicians, in order to undermine the proper role of government in a capitalist system, to gain government granted monopolist profits). That increases the benefit of Google buying into their own distribution network since excess capacity can likely be sold at a large profit: the competing companies are so used to charging monopoly prices leaving lots of room for profit. The second point can be debated but I don’t think if the economy functioned properly, with intelligently regulated natural monopolies providing internet bandwidth, I doubt Google would invest in this, but, of course, I could be wrong.

    About the Unity bandwidth consortium

    Collectively we just signed an agreement to build a new high-bandwidth subsea cable system linking the U.S. and Japan (more detail in the press release). This cable system, named Unity, will address increasing broadband demand by providing more capacity to sustain the unprecedented growth in data and Internet traffic between Asia and the U.S.

    Google stretching underwater comms cable?

    says a comms-happy research outfit dubbed TeleGeography, Eric Schmidt and crew are planning a second cable system that would connect Japan to Guam, Hong Kong, the Philippines, Thailand, and Singapore.
    …
    Meanwhile, ITWeb reports that Google is looking to run a third underwater cable to South Africa.

    I own Google stock.

    Related: Monopolies and Oligopolies do not a Free Market Make – Challenges in Laying Internet Fiber Under Oceans – Plugging America’s Broadband Gap – Not Understanding Capitalism

  • 8 Million New Potential Victims of Identity Theft

    8 million victims in the world’s biggest cyber heist

    The attack scooped up the personal details of every single customer that has booked into one of Best Western’s 1312 continental hotels since 2007.
    …
    Although the security breach was closed on Friday after Best Western was alerted by the Sunday Herald, experts fear that information seized in the raid is already being used to pursue a range of criminal strategies. These include:

    Armed with the numbers and expiry dates of customers’ credit cards, fraudsters are equipped to make multiple high-value purchases in their victims’ names before selling on the goods.

    Bundled together with home addresses and other personal details, the stolen data can be used by professional organised criminal gangs which specialise in identity theft to apply for loans, cards and credit agreements in the victims’ names.

    Because the compromised information included future bookings, the gang now has the capacity to sift through the data and sell “burglary packs”, giving the home addresses of local victims and the dates on which they are expected to be away from their home.

    Although the nature of internet crime makes it extremely difficult to track the precise details of the raid, the Sunday Herald understands that a hacker from India – new to the world of cyber-crime – succeeded in bypassing the system’s security software and placing a Trojan virus on one of the Best Western Hotel machines used for reservations. The next time a member of staff logged in, her username and password were collected and stored.

    It is important to do what you can to protect yourself from identity theft. Unfortunately if large companies fail to protect your private information you are left to cope with the consequences. As far as I can tell from reading the article it seems to be saying those staying or reserving lodging at Best Western hotels in Europe are those in danger of identity theft.

    Related: Credit Freeze Stops Identity Theft Cold – Budget Lodging Worldwide – Curious Cat security related posts

  • Naked Short Selling

    Short selling is when you sell something before you buy it (you try to sell high and then buy low later, instead of buying low and then selling high later). In order to sell short, you are required to borrow the shares that you then sell. So if I own 1,000 shares of Google (I wish), I could lend them to someone to sell. Nothing happens to my position, it is just that those shares are now allocated to that short sale. If I sell them then the short seller has to go borrow them elsewhere or buy the stock to close their position. In general the borrowing is either from brokers that hold shares for individuals or from large institution (mutual funds, insurance companies…).

    However from everything that I read it appears the SEC hasn’t bothered to actually enforce this law much. There was a bunch of excitement recently when the SEC announced it would bother to enforce the law to protect a few large banks, many of whom are said to practice naked short selling but didn’t like it when that was done to their stock. As you can see, this does make the SEC look pretty bad, when they chose to enforce a law, not in all circumstances, but only to protect a few of those who actually take advantage of the SEC’s failure to enforce the law to make money.

    CEOs Launch Web Site To Protect Short Sellers

    In 2005, the SEC required the publishing of the daily threshold lists, which include companies that have a high degree of FTDs [failure to deliver – stocks sold short with the promise they would borrow the shares but they then don’t]. Brokers are mandated 13 days to resolve any FTDs after landing on the lists. Despite this, some companies have been there for hundreds of days, with millions of failed shares.

    Some people find the whole concept of short selling bad since it is based on making money on stock price declines. I don’t feel that way and believe it can help the market. But it requires regulators that actually do their jobs and enforce laws. A favorite tacit of those who seek to keep open special ways for themselves to benefit from abusing the system is to try and make things seem complex. The recent SEC order saying they would enforce the intent of the law to protect a few powerful banks from the behavior many (or most) practice themselves for years shows that it isn’t that complicated.

    Adding the decision not to enforce the requirement to borrow shares to their recent decision to eliminate the requirement that short sales take place on down ticks in price (a measure put in after the 1929 stock market crash to not have short sellers accelerate market declines and insight panic seems like a really bad combination).

    Related: Shorting Using Inverse Funds – Monopolies and Oligopolies do not a Free Market Make – Fed Continues Wall Street Welfare – SEC data on “failures to deliver”