Archive for October, 2005
Today we’ll have the second half of Geoff Beckstrom’s article on investing, so I’ll be brief.
Bernanke is going to be confirmed. Bank on it (ha ha). What he will do then is anyone’s guess. Some are discussing his being willing to take a break from rate hikes. It is devoutly to be wished, but I wouldn’t bet on it. Next week we’ll take an alternative view of things and talk about how rising home mortgage rates negatively impact housing prices, and what has to happen in the broader economy to make that negative impact as small as possible. It’s the kind of analysis you only get here.
Before getting to the predictions, we want to point out that last Friday I predicted that Harriet Miers would withdraw her name from nomination for the Supreme Court. Add that prediction to the “correct” column. We are now lobbying for Janice Rogers Brown, or if you hate women, how about Danny Julian Boggs, who despite his name is Hispanic. Here’s the thing. There are enormous numbers of very qualified candidates. The conservative bench is wide and deep, and it has on it ranks of women and minorities who are articulate, bright, and very well qualified. How Harriet Miers got the nod among so many, I have no idea. Or maybe I do.
Predictions for the weekend:
Tonight CSU loses to New Mexico by a field goal (sorry, Ray)
No Supreme Court appointment is made this weekend
BYU destroys Air Force 45-17
Now that the White Sox have won the World Series, following the Red Sox winning last year, the Cubs become the hot favorite to win the whole thing next season
Northwestern beats Michigan in a game where over 100 points are scored
Georgia beats Florida in a game where fewer than 20 points are scored
My brother’s Washington Redskins take 1st place in the NFC East by beating the Giants
Steve’s Denver Broncos beat the Philly Eagles by 1
On with Investment Advice from Geoff Beckstrom… (read Part One here)
Rule #4 – The difference between gambling and speculation. People have told me time and time again that its bad business to ever compare gambling and investing, it scares away clients. I disagree; I think it is an excellent comparison. For example, if you go to a casino and sit at a black jack table you bet on your hand, if you win you double your money, if you lose you lose all your money. However, on a given day I can “gamble” that the dollar (or oil, or bond rates, or the Yen, or any individual stock) will go up or down. If I am right, I may double my money, I may earn some percentage of my money, I may more than double my money. If I am wrong, I can set a predetermined amount of money I am willing to lose, I do not lose all of my money. Secondly, depending on the number of decks used, number of people at the table and the house rules each black jack hand has more or less a 50-50 chance. The “odds” of a particular investment going up or down (or not moving in value at all) change on a regular basis. The key is to learn how to predict those odds and to “bet” win the odds are in your favor and be strong enough to not play when the odds are not in your favor. Casinos would not be open for very long if there was a system that allowed players to know that “red” had a 70% of being hit when ever three consecutive blacks came up. Players would sit at roulette tables for hours waiting to see three straight blacks and would then bet big on red knowing they would win more then twice as often as losing.
Rule #5 – Earning money matters. Who owns a Lexmark printer? I do. It’s a great printer and a great company. Lexmark stock (LXK) has dropped in the last month from $65 to $42. Want to know why? Lexmark announced that for the third quarter for this year they will earn about $500 million dollars rather than $980 million dollars as was expected. I won’t go into the details of why the sales number was cut almost in half, but needless to say, if you’re considering buying a stock, Id take a look at Lexmark right now. People will continue to buy printers and Lexmark will continue to make them.
On the flip side. Google is now at $320 per share. How does Google make money? Advertising. How else? If you don’t know the answer to that question than you should not be buying any shares of Google. Companies can only have high share prices for so long when they aren’t making any money.
Rule #6 – The only “economy” or “market” that matters is YOURS. The Nasdaq may be down, the Dow may be down, talking heads may be crying rivers over how bad the US economy is and mortgage rates may be going up. None of this matters if your economy (read – budget) is in good shape. The opposite is true as well.
Rule #7 – Markets ARE NOT efficient or in other words people overreact and you can profit from it. Stocks will generally go much higher than they should on good news and drop much more than they should on bad news, you can make a lot of money acting on this rule and recognizing when it happens.
Enough of the rules- I have many more but I’m afraid I’ve already bored most of you. Ill conclude with my investing philosophy even with a few how to’s.
First – learn basic accounting. The only way you can manage your own finances or examine the finances of a possible investment is to know what a Balance Sheet and P&L is and how to read them. My suggestion is that you create a Balance Sheet and P&L for your own family budget.
Second – Concentrate on Net Worth. I know a lot of people (and a lot of stocks) that earn a lot of money and aren’t worth anything. You can earn a million dollars in a year but if you spend two million and have another three million in debt……you’re not doing any good. On the flip side, you can earn $30,000 a year and if you are willing to live within a budget and you’re willing to learn some investing techniques, you can within a few years, build an investment portfolio that will allow you to earn that same $30,000 a year without having to go to work everyday. How much you are worth (assets minus liabilities) is more important than how much you earn (cash flow).
As long as this has been, I have not even begun to scratch the surface. I do not mean in any way to use Chris’ request for a guest writer to be a blatant solicitation, my hope is that you may find some of this educational or at least have been given some things to think about.
A list of stocks that I am watching and why – (DO NOT buy any of these stocks just because you read them here)-
Home Depot – HD – There is going to be A LOT of construction in Mississippi and Louisiana and Texas and supplies have to be bought somewhere.
Lowes – LOW – Same as Home Depot
XOG, ETO – Two large oil companies that have land based (not shore or off shore based) oil rigs which have not been affected by hurricanes.
Lexmark – LXK – Lexmark is on sale, see rule #7.
Hope you have found this useful. If not let Chris know so he can permanently banish me from what has otherwise been a civilized and entertaining blog.
Thought I would start off today with a digest of links and info for your perusal. On mortgages, there are at least three blogs I can now recommend: Oakland Real Estate, Sacramento Real Estate (CA is ahead of the curve on these things), and especially a tiny-but-growing blog from Lansing, MI – The Pacesetter Mortgage Blog – and I want to especially call your attention to a great post David Porter wrote about mortgage prequals. We have added Dave’s blog to our blogroll, and recommend it to you.
There are reams of data coming in on Ben Bernanke, and as far as I can sort it out, nobody really knows what the guy’s going to do. Alert Reader Gordon sent us 2 analyses from the Wall Street Journal, but it’s on their subscription site, which you have to pay for. We don’t steal content, so we’ll just quote a couple of graphs and link you to the subscription site where you can get the whole story.
From Arthur Laffer (a fellow I respect): “Ben Bernanke, Bush 43′s selection for Fed chairman, stands on the shoulders of giants (in Mr. Volcker’s case, this is literally true). Mr. Bernanke was my first choice for the Fed chair and has all the traits needed to be great. He’s got his Ph.D., is incredibly scholarly, and has lots of practical experience, having served a three-year stint as a member of the Board at the Fed itself and as chairman of the president’s Council of Economic Advisers. But above and beyond his résumé, Ben Bernanke has the temperament to be the Fed chairman. Anyone who has ever heard him speak knows he is careful and deliberative, and not prone to panic.
I have never witnessed or even read about an economy that comes close to the excellence of the current U.S. economy. In spite of all the rhetoric to the contrary, it just doesn’t get any better. We need a Fed chairman who understands the importance of not rocking the boat, who is stable, solid and sticks to basics. Ben Bernanke is the right person at the right time.”
From Edward Chancellor (a fellow I don’t like much): “The White House’s announcement of a replacement for Alan Greenspan as Fed chairman has been awaited with growing suspense. Yesterday’s nomination of Ben Bernanke appears something of an anticlimax. The stock market rose slightly on the news. Yet if the current chairman of the Council of Economic Advisers is confirmed by the Senate and takes over in late January, the markets will have plenty of time to reassess this initial judgment.
The former Princeton professor is deemed to have adapted quickly to the ways of Washington and Wall Street. Mr. Bernanke is being sold as a safe pair of hands. According to President Bush, he “commands deep respect in the global financial community.” His nominee, the president added, was “the right man to build on the record Alan Greenspan has established.” The favorable reaction of the markets supports Mr. Bush’s first claim, while his personal record suggests that a Bernanke-led Fed would represent a continuation of the Greenspan era.”
So maybe I ought to revise my opinion. But so far, I’m not going to. Laffer is one of the gurus of the Say’s Law Supply-Side Revolution, but his support for Bernanke is incompatible with Greenspan’s recent moves, assuming (as he does) that Bernanke will continue the Fed’s current course.
For the uninitiated, we here at the Group continue to believe that the economy is not doing very well and that continued rate hikes will lead to a rise in inflation and a recession in the broader economy. We believe that Greenspan ought to have chopped rates recently rather than raising them. We believe that the current enormous rise in short-term ARM product rates (the rate on some 3-year ARMs right now is higher than the 30-year fixed) is unnecessary and harmful and that a downturn in housing markets will lead to a recession as sure as God made little green apples.
We make these analyses largely for our investors, who are looking at long-term rates trying to forecast what to do with real-estate holdings. Currently, we can recommend only a couple of things – there are still some good deals to be had in the foreclosure/flip market, though those are harder to come by and require cash and patience, and there are profits to be had in new construction, especially in houses above $250,000. Other than that, buy a house, pay it down, get cash in hand and wait. If the recession comes, the market will be flooded with foreclosures and “distressed” properties that can be had for a song.
No matter the market, there’s money to be made somewhere.
And finally, we promised this some time ago but only now got around to posting it: we have a guest article by Geoff Beckstrom, one of our clients and a blogger we like. First half today, second half tomorrow. Enjoy.
My Investment Philosophy and Rules
I worked as a stockbroker and investment advisor for six years before leaving the industry completely disillusioned. You can read my blog (not updated daily, but usually 3 times a week) at www.gbfx.blogspot.com
The financial media much like the sports media and news media takes advantage of the fact that most people believe what they are told and do not investigate the facts themselves.
First the disclaimer – None of this article is a solicitation to purchase or sell any security. This article is written for educational and entertainment purposes only. You are responsible for any gain or loss received from any actions you take financially.
Please note that I am only throwing in small tidbits I’ve picked up over the last 10 or so years in this industry. If you are interested in learning more please contact me and I’d be happy to answer any further detailed questions.
Now my investment rules-
Rule #1 – The answer to EVERY investment question is – “it depends”. What that means is that every investor must find their own investment philosophy and strategy. I have had a number of investing clients who after earning 15-20% returns in a single month, take all their money away from my management after a month when they lost 5%. Other investors have stayed with me after losing over half of their money in a high risk trade and more than made all of it back over time. You need to know your own personal financial intelligence and emotional maturity before you go into any investment strategy.
Rule #2 – The SEC is NOT your friend and Mutual Funds are NOT your friend. These two are in bed together and their interest is NOT to make you money but to make themselves money and to keep you as ignorant as possible. I’m not anti-government and I’m not anti-mutual funds. If spending 4 or 5 hours to study a stock before making a purchase is too much work for you and if you’re not willing to pay for the services of an investment advisor then mutual funds are perfect for you, one step better than keeping your money in the bank. I’ve never owned a mutual fund, I will never own a mutual fund and I don’t recommend to any of my clients to own a mutual fund. I know millionaires who became such from real estate, from hard money loans, from day trading and from starting their own business and selling a product and/or service. I have never met anyone who became wealthy from owning mutual funds.
Rule #3 – “Bulls climb the stairs but Bears jump out the windows”. Bull markets are going up, bear markets are going down. Markets drop must faster than they rise. I have made much more money when things have dropped than when they are rising.
To be continued….
So it’s not a rumor after all. Bush introduced Ben Bernanke today as his nominee for Fed Chair. He appears to be more qualified than Harriet Miers, which isn’t saying much, but if I were you, I’d still be looking into food and water storage against future hard times.
Here’s Bernanke’s article in the Wall Street Journal from earlier this summer. It’s not a bad read, and I probably ought not to make him out to be the Wicked Witch of the West. The general philosophy of central banking makes it really hard to have a fellow in charge that is a true Austrian, so I suppose I should just be glad he’s being appointed by Bush instead of Kerrey. At least Bush has actually had a job. Well, okay, but he knows someone that has.
Markets opened flat but bonds dropped like a rock when it was floated that Ben Bernanke would become the next Fed Chair. This is how screwed up the markets are. We have a rumor that Bernanke will be named to replace Greenspan, and since he is a Greenspan disciple, the bond markets take this as a bad sign.
So much for Greenspan’s reputation as an inflation-fighter.
The stock market is behaving healthily, though, so the news is not uniformly bad.
Let’s look at the current market situation in real-estate and mortgages as it affects Joe Sixpack:
If you have a 30-year fixed loan at 7% or higher, you probably ought to look at refinancing.
If you have an ARM with 2 years or less to run, you definitely should look at refinancing.
If you have an option ARM, fully variable loan, depending on your prepay penalty you ought to check into moving to a fixed rate.
If you are thinking of buying a house in the next year, the time to start looking is right now. House prices tend to fall through the winter and rise in the spring.
If you are an investor looking to realize $20,000 or more profit in the next year, your best bet in Utah at the moment is to build a house in the $250,000 range.
Currently, rates for verified-income, owner-occupied properties are 6.125% on a 30-year fixed, 5.375% on a 15-year fixed, 5.875% on a 5/1 ARM, and we’re not even discussing other options except under duress. Construction financing, however, is easier than ever to get and requires no payments during the construction phase. We have a couple of no-down construction investors that can get you digging in around two weeks. That’s the hottest part of the market right at the moment.
Predictions for the weekend were mixed. Harriet Miers did not withdraw, which I’m just telling you right now is a mistake, and the Broncos actually lost on the last play of the game. Texas did beat Texas Tech, but by way more than 14, and they trailed in the first quarter, CSU did win the Border War, but not by a field goal, BYU did lose to Notre Dame, but by 26, not by a special-teams play, and the Colts won big, but only by 18, not 28.
The White Sox won both home games. That one was right on.
On Saturday night we watched Roberto Benigni’s masterpiece La Vita é Bella, which I wholeheartedly recommend to anyone with a soul. I’ve been reading a lot recently about Hungary in World War II, which might have been the worst place on earth to be. The Hungarians started as part of the Axis, then tried to make peace in 1943, had to fight the Germans to keep from being occupied in 1944, lost, then had to fight the Russians to keep from being occupied in 1945, and lost again. The Swiss Delegation reports that Budapest was hit harder than Stalingrad.
Oh, humanity. What a rare thing it is.
Let’s start with the market news today, which is summed up in the Empire State manufacturing index, which purports to show economic conditions for manutfacturers. Last month it was at 15.58. This month’s forecast was for 17.1. The actual number was 12.08. Bond traders reacted by saying “well, yeah, but the Fed’s going to keep raising rates, so what the heck, let’s keep selling.” And they did.
And people say economics is confusing.
The weekend was great, thanks for asking, and my little Charlotte turned 4 on Friday. There’s nothing whatever in the world to compare with the joy of a hug from one of my little girls, unless it’s a hug from one of my wonderful sons. Or my wife.
But BYU thwacking CSU comes pretty close. The Cougars unveiled their Bo Schembechler-style running game and just ran over the Rams 24-14. So my score prediction was wrong but the winner was correct.
The other predictions ALL CAME IN. Notre Dame lost in the final seconds (by 3, not by 2, and it wasn’t a field goal), we are still #1 on Technorati, the White Sox actually pushed the Angels right over the brink, and the Astros have the Cardinals one game away from the end of their season as well, just as predicted.
So my credibility as an economist is just shot. You can’t get this much stuff correct and hope to keep any sort of street cred in a field as often incorrect as economics.
I’ll try to do worse this week.