Tuesday, July 7, 2009

Government Legislation is Stiffling Innovation

Larry Kudlow talks about growth from ingenuity, small business, entrpreneurial endeavor, new business opportunity and suggest that may be the solution to the current financial mess. My question is how can small businesses grow with the SEC breathing down their necks this government is so restricitive in its rules and regulations. A good regulatory system would have seen Mozzillo dumping his stock as fast as the market would absorb it, they would have seen Madoff accountant had an office the size of a shed..... yet they choose to focs on attacking the little guy as they are cheaper to beat up and can't defend themselves as well.

Where was the SEC when the rating agencies were selling bonds made up of toilet paper as "AAA" Surely they are the root cause of the current crisis as we trusted them not to be self serving.

It can cost many hundreds of thousands of dollars to raise money making it only accessible to large funds and established groups who have no benefit and no intention of changing status quo. The system needs to be changed if America is to rise to greatness again and the economy is to achieve any kind of recovery

P.S. has anyone notice Obama quietly overturns all his big highly public bills like the salary cap.... didnt see him making a big deal of that repeal....

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Wednesday, June 24, 2009

Goldman Analyses Its Risk Exposure

Understandig Limitations of Risk Reporting

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Sunday, June 21, 2009

Why Americas Future & The Electric Train Are Inherently Linked

The electric train represents a significant factor in the "greening" and self sufficiency of America. With much of the country connected to rail networks freight can be moved with great ease and far more importantly by electric locomotives. Electric trains have all their torque available all of this time, one of the primary advantages of the electric motor, therefore they can pull more cargo per motor. All the necessary rolling stock already exists, much of the track is in place and therefore the only intial cost for freight would be new engines. If the power for these trains is generated by wind farms and solar power plants you will see a rapid reduction in emissions and gasoline usage.

High speed rail links connecting downtown Boston, New York, Philadelphia and Washington at 200-250mph is a very real and exciting prospect... San Francisco, Los Angeles, San Diego and Las Vegas are similarly connectable. Mass transit systems moving the major distances allow true electric cars of limited range to be practical. A car rental and Taxicab company could keep fleet of vehicles that have a 2-300 mile range without difficulty and seeing as little travel would be by freeway. There is significantly more cost involved in creating these high speed lines as existing track is often not of good enough quality or designed for high speed. However France, Japan and many other companies have found their investment in high speed trains an incredible long term investment. However compared to the cost of a plane, gas, maintenance and new runways and terminals it really might not be that expensive. Especially when you consider how much quicker the entire journey time would be on such short distances when compared to flying in the modern era with enhanced security and commute times into major cities from outlying airports.

Significant alternative energy generation facilities and railroads represent large capital projects, employ large workforces and help the current fiscal crisis as they are infrastructure/ capital intensive but very low risk. With gas prices potentially increasing due to drilling and exploration costs as well as increased demand airlines will become increasingly costly to operate. Personal vehicles will again see operating costs rising but the true suffering will again fall on the transport industry that was crippled by the burden of high fuel prices. Transport and trucking companies failed at an incredible pace from 2007-2008. Short haul became the backbone of the industry with companies hauling within state or loadsharing.

Energy independence for the United States is not just based on finding more domestic oil, the sources are finite, it is not based on running multi billion dollar pipelines from Alaska - it is about rethinking the system. The current system is not working, it is broken and it needs to be fixed. Some of the solutions may be quite radical..... but so was the Panama and Suez canals, the cross continental railroad, even the Great Wall of China and other such grand ventures and visions when they were proposed. Yet those projects made nations great, they allowed nations to prosper and they did so by changing the way freight was moved and people interacted and connected.

One major power project that will change the world will be a spiders web of power lines connection Alaska, Siberia, Finland and North Eastern Canada. The distances are great yet the cross sharing of alternatively generated power to countries based upon varying demand due to time of day could solve many of the existing problems. Plus cables travelling in deep cold water will be far more efficient and conductive - plate techtonics should play a more limited impact too.

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Friday, June 19, 2009

The Stock Market and Retirees

Perhaps the group most at risk during the current period of financial markets turmoil are retirees or near-retirees. Unlike younger generations, this generation cannot afford to wait for stocks to rebound in the "long-term".

For retirees, financial ruin means that they outlive their assets. The largest risk of financial ruin for retirees lies in the stock market. If a retiree is forced to liquidate assets during a down stock market cycle, the results could be devastating.

Here is why. Many financial advisors will use an average annual 4% withdrawal rate for retirees from their pool of assets, which is a reasonable assumption. Now using this assumption, let's look at the prior bear market cycle to the current one.

For 17 years, beginning in 1966, the stock market was flat and the economy experienced the highest inflation on record. There are few financial advisors who use this period for their glossy illustrations. Here is why they don't.

According to William Bernstein's 2002 book - "Four Pillars of Investing" - NO asset allocation model avoided bankruptcy when a 4% withdrawal rate is applied to a $1 million portfolio using stock market returns from that time period! Simply stated, if retirees were in the stock market at that time with a large portion of their assets, they were wiped out.

We may perhaps be facing a similar time period and most retirees were ill prepared for the current bear market. Data from the Employee Benefit Research Institute showed that more than 30% of rear-retirees or those in their early retirement years had more than 80% of their money invested in stocks at the beginning of the current crisis.

According to mutual fund firm T. Rowe Price, if a person gets negative returns in the first five years after retirement, the odds of outliving your money over the next 30 years more than double from 26% to 57%. Unfortunately, I'm sure there are many retirees who now fall into that category.

The problem is that both retirees and their financial advisors made a mistake which is very common in all human beings. Human beings have a tendency to extrapolate whatever the current trends are indefinitely into the future. Think California housing bubble.

People expected the good times to continue and for the bull market in stocks to go on and on. Obviously, it did not. Any person approaching their retirement years with a nest egg today should keep in mind the lesson from the last bear market - that any investor liquidating principal in a down market can't rely on the "long-term" to bail them out.

Reproduced from Wall Street Mess - http://www.blogcatalog.com/blog/wall-street-mess

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Thursday, June 11, 2009

Dollar Collapse

Now is the time to exit the dollar and buy foreign currency investments, the Euro has issues but is considerably stronger than the dollar. The Yuan will decouple, India, Russia and Brazil all offer investment potential but I still think ultra secure solar power plants in Euro's offer the safest investment outside of treasuries with the benefit of a huge foreign currency trade to the upside.

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True Colors of an Administration

I was wondering how long it would take for the new fresh, clean, sweet smelling feel of the Obama administration to wear and acquire the soiled, cloying smell of self interest similar to the Bush Era.....

Today the Obama administration revoked the salary cap on employees of bail out firms. It was done in a quiet hush hush manner of you don't announce your insolvency and destroy my recovery plan and I will drive inflation through the roof and raise interest rates to destroy any chance of recovery. Thus enabling us to hit the true bottom of the market in October and break all previous lows including the Great Depression. Then you will have no choice but to admit insolvency and hide it under another government bailout of another 2-3 Trillion dollars. I will have done my work and leave the US economy in tatters, the US dollar worthless and no longer the reserve currency (note everyone is know after IMF paper not US treasuries - the only person who sees value in these is Bernanke) ready for a foreign takeover by nations with currencies of value.

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1 in every 64 houses in Nevada receiving Foreclosure notice on this month

May foreclosure activity was the third-highest month on record, and marked the third straight month where the total number of properties with foreclosure filings exceeded 300,000 — a first in the history of our report,” said James J. Saccacio, chief executive officer of RealtyTrac. “While defaults and scheduled foreclosure auctions were both down from the previous month, bank repossessions, or REOs, were up 2 percent thanks largely to substantial increases in several states, including Michigan, Arizona, Washington, Nevada, Oregon and New York. We expect REO activity to spike in the coming months as foreclosure delays and moratoria implemented by various state laws come to an end.

National Average - 1:398
Nevada - 1:64
California - 1:144 - 92,249 properties
Florida - 1:148
Arizona - 1:158

Michigan, Georgia, Colorado, Idaho and Ohio round off the top ten accounting for 77% of all combined foreclosure activity nationwide.
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Wednesday, June 10, 2009

Sell, Sell, Sell

Sell on any rally within the next few months, I strongly believe the market will crash again in September or October and test resistance. I expect us to dip below the 52% decline and break the 53% resistance barrier of the great depression. The market rallyed artificially on bank profits, the government cash injections allowed them to shjow this but the reality is that the bank stress tests based on older non current data showed the majority to still be unable to withstand certain market factors. In my opoinoion many are insolvent and I wouldnt have a penny over the FDIC limit in any of them.

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What constitutes good value in a real estate purchase.

Its funny how many times in the last few months that I have heard brokers tell me a property is a steal or I would be crazy to miss out on this opportunity.

I was recently looking at a house that was originally listed at $805,000 in 2007. ( A seller can ask what they want the do not have to justify this figure to anyone and it is not justified by anyone)
The property only received a few offers which were all around $450,000. (This in my opinion establishes true market value as a property is worth what someone is willing to pay for it not what the seller is asking for it)
The house was unsurprisingly foreclosed upon by the bank who owned the property at around $395,000. (cost of borrowing)
I was told with confidence by the broker that I could have the house at $350,000 and another broker corroborated this telling me it was a "steal" at $350,000

So here is my question..... how did the brokers establish the initial value of $805,000 and how do they know it is a steal at $350,000.

I think the initial value was a market gut feel, which is what happened so often in the leadup to the crash and was a massive contributory factor. This is what I think the house can be sold for based upon the common hysteria in the market and if I ask it and there are no comparable sales it creates a market value of its own.

Why did the developer not sell it at a profit at $450,000 - was he lead by the brokers and the promise of higher returns or was he greedy??? It is hard to tell but so often I have sold properties below the value I think they are worth and seen them resold by others for more within a year or so.... however if i crystalized a profit on the transaction then I came out ahead in my opinion as I was able to move forward to the next deal with more cash in my pocket than Ihad originally. I never attempt to sell at the very top of the market as it can easily move down during the transaction and may well not close.... at which point a profit making situation becomes a loss and a possible black mark on your credit.

Funnily enough there is a property in the same development nearby which stands the developer at $750,000 which is beautifully built and has fabulous Viking appliances etc. Whilst this is great for winning awards etc when a developer gets personally involved in the property there are all manner of upgrades that go in that are not supported by the development, type of buyer looking at the property or the market.

Why am I suggesting a $250,000 value for the property when I am being told it is a steal???? I have owned and managed rental properties since I was 16 years old. If I know i can only rent a property for $1800 a month then I make the following calculations.

$1,800 x 11 = $19,800 (I leave out 1 month for renting fees, vacancy and refurbishment as experience has taught me this is most likely with any non commmerical property)
$2500 = Taxes, HOA's and other associated costs

$17,300 is my total income for the property - I am thinking a 7% yield would be fair - ideally Iwould like 10-12% but seeingas I can lock my loan at around 6% today that makes sense as you will see later.

Therefore my multiple is 14.25714 to give me a 7% yield


I would then subtract my closing costs of $2,471 and I have my exact offer price.

Now what has been happening is people have been ignoring these calculations and subsidizing the mortgage in lue of a return from Capital Appreciation - This is a dangerous gamble though as you have brokers fees, early repayment on mortgage etc associated with selling a property and would have to see at least approximately 8% appreciation just to cover carrying costs.

When one takes the emotion out of property and looks at it in the same fashion as a commerical property or business decision we receive a firm indication that the market is far from bottoming out in certain areas. I personally would advocate that appraisers and realtors are required to go through this type of process and produce similar maths to establish a selling price.

California is correcting well as I was saw a trailer on PCH in Pacific Pallisades that would have been $280-350,000 at the height of the market is around $95,000 - 1/3 of its original suggested listing price.

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Wednesday, May 27, 2009

How to Hold Realtors Accountable If They Lie

I had a shocking experience yesterday when I encountered a young real estate investor who had been told a complete pack of lies by a real estate broker. The facts were so twisted and manipulated to make the sale that it gives a bad reputation to the good honest decent brokers out there. Realtors have always been a law onto themselves but it is essential that in the new economy that they are regulated and what they say is accountable. 

This realtor stated:

a) a foreclosure had been listed at over $800,000 prior to being foreclosed upon and had had offers in that price range (highest offer on record was $450,000), 
b) that a Wyndham was building timeshare units in the development (well known public/ common knowledge they had pulled out), 
c) that the golf course associated with the property would not be paid for by HOA dues, 
d) that there wasn't plans to build a property immediately adjacent to the home that would obscure most of the views,  
e) while he could only get $1500 in rent now next year he would be able to get the $2500 to pay his mortgage easily.

That brokers can lie and not be punishable or in any way held accountable is a travesty, there are few if any professions with so little integrity and accountability. The pressure created by another imminent cash offer, the momentum building that you have to offer over asking or you will never get into this market and it will be priced out of your range.

We should have some kind of law that mitigates the buyer beware clause making Realtors accountable. There should also be some sort of criteria as to listing prices on properties that so often create false precedents in the buyers mind. Finally when appraisers are sent out, they should not be able to use comparables from pre august 07 and the crash to justify values today, they should have to make their valuations current and accurate based on market conditions.

I personally always use a multiple of rental income, as you would with a commercial property, as that takes away alot of the emotion involved in house purchasing. If you work on a 10-20 times multiple of a properties rental income (5-10% yield) you are in a pretty safe zone as to a properties true value. I have seen odd properties such as Via Rodeo in Beverly Hills that are trophy properties sell for 2% but these are exceptions and not the norm.

Again the government should take this opportunity when they are regulating banks and lending brokers to implement a system to protect the consumer from unscrupulous real estate brokers.  

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Wednesday, May 13, 2009

A phenomenal article on why housing hasnt bottomed out yet.

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Saturday, April 11, 2009

Incredible understanding and explantation of societies evolution into the web

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What happens when the leveraged buyout firms deleverage

The definitive users of leverage over the last 3-5 years have been the private equity funds; Blackstone, Fortress, APAX partners, KKR and the Carlyle Group to name a few. They have raised billions for leveraged buyouts, far beyond the scale of anything ever seen before. They acquired a company they felt has too much fat, trimmed it down to size - increasing profitability. This then allows them to resell, IPO or otherwise exit within a 3-5 year period with fabulous profits.

I expect many of these Private Equity Funds including Fortress, KKR and Blackstone to start to unravel within the coming months, as their short term loans (used to purchase the companies) come due. Fortress Investment Group (FIG.N) had a very public issue with Intrawest last Fall when they had to refinance a $1.7Bn loan and struggled immensely. When your facilities terms get worse you have to pay more money for the same service which is a direct hit to bottom line.  They will also be impacted as they will not be able to service the increased costs of  the debt as a result of their reduced revenues caused by the global depression, furthermore they will not be able to raise the capital needed refinance, cover shortfalls or to fuel any further growth. Thus they will be unable to hide red spots hidden within their balance sheets and we will see the beginning of a Bankruptcy season that will last throughout 2009 and well into 2010. The Private Equity funds are very well run and managed though so you can guarantee the assets are so well ring fenced that they are unaffected (bar some loss of principle) when each layer of the onion is peeled back. They will rise again to prominence in them middle of the next decade as the few assets they maintain become valuable and they are able to sell them off for a good profit. I think RailAmerica, Inc and FECI should be a great performers long term as they are cash flow businesses with incredibly high barriers to entry.

On a Micro Level looking at one of Fortresses assets that is underperforming; Intrawest. I cannot foresee them lasting the summer on heavily reduced 2009 numbers. They have frozen and rolled back salaries, lost their insurer in Liberty Mutual, seen decreased skier visits and revenue and worst of all were established using a finite model as most of their revenue and profits come form the development and sale of real estate and not the running and management of ski resorts.

Short (FIG.N).....

Intrawest's failure should spill over onto the other ski resort operators in the market and make for short term shorting opportunities and long term buying opportunities.

Thus as a small short term idea I plan to play with is:

Short Vail Resorts (MTN)

Even though their numbers are pretty reasonable, (probably a good buy at $10 at the end of 2011 season) seeing as the depression did not hit Denver till later in the season after everyone bought their season tickets (24% of revenue in 2005 to 34% in 2009). They will probably suffer immeasurably more next season.

Intrawest will probably file for the Canadian version of a CH 11 reorganization and break off the Colorado Resort in to one division, East Coast Resorts into another, maintaining Whistler Blackcomb, Tremblant and their Canadian Resorts until after the 2010 Olympics when they will hope that renewed skiing interest and revenues will save them. 

Intrawest has already divested themselves of most of their stake in Mammoth and that leaves Sandestin and Lake Las Vegas to be sold of to private investors. I would presume that the Colorado resorts would be sold off as Copper Mountain is a true "dog" and is in the Vail Resorts Epic pass stronghold of Summit County and cannot compete. They are really a great purchase for Vail resorts but the monopolies and mergers commission will probably not allow the sale.

 Steamboat will probably be sold to a private individual and will make a great destination resort and Winter Park which is 50% owned by Denver will probably be picked up by one of a few small groups of private investors; possibly including "George Gillette Jr" former owner of Vail who has been poking around in recent months. 

Intrawest as started was a short term business model which is probably why the founders sold out in 2005. It was based on ever increasing real estate sales to fuel growth but due to the finite opportunities for ski resorts this market was truly limited, which is why they did so well in it in the first place. Private Equity funds sometimes lack alot of the necessary understanding of the core and underlying business which causes them to err dramatically. The thing that makes a great ski resort is great grooming and phenomenal customer service, these do not run hand in hand with a spreadsheet in Manhattan.

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Monday, April 6, 2009

What caused the crash, who should go to prison and how to fix this mess

This article could have so many titles:


Whose to Blame?


Why are the wrong people being blames?


The one reform the market desperately requires?


Where was the free market watchdog? No not the SEC......


Why are the rating agencies not owning responsibility for their mess?


Should AIG and Madoffs investors be allowed to sue the Rating Agencies?


Who owns the Rating Agencies and is keeping them out of the press???


The Rating Agencies have held themselves out as our guiding lights in investment they have built a huge business in the niche of advising us what is safe and what isn't and then hung us out to dry. They do the hard work and the heavy lifting providing us with the due diligence we require to make educated and astute investment decisions. As an savy investor you wouldn't dream of loading your pension fund with NR (unrated) or "D" grade bonds months before retirement. It is their commitment to you that your "AAA" investment will be the "best grade, reliable and stable" yet how are they held accountable when these investments prove to be anything but.

In any self regulating system there are checks and balances, many of which relate to the manner in which the market carries out due diligence and how it assesses risk. The more risk one takes the higher the return, which mitigates losses when there is some kind of implosion. The investor normally is philosophical and says, hey I took a risk and had I wont the return would have been worth it. It is the very true for anyone investing in speculative oil exploration drilling the returns will be huge and you will only invest a small portion of your portfolio. A less speculative investor will wait until oil has been hit and invest in the secondary wells drilled to tap the known reserve, you would naturally be willing to invest more in this than in the exploration. The risk averse investor will invest in the pipeline from the known field to the known refinery, this is where the majority of investors have the majority of their money, including; pension funds, insurance companies, charitable foundations, banks. The financial implosion we are currently witnessing is the result of the self regulating bodies that held themselves up as our due diligence experts telling us that we were buying a pipeline to an existing oil field from a refinery. This was the coveted "AAA" rating or even slightly lesser rating such as "A" and "AA." They failed us and if anyone should be imprisoned, punished or found fault with it is the heads of these companies who held themselves up as independent and then earned their very revenues from the companies and assets they were supposed to independently rate. This is why the market has no trust now, what was seemingly secure and therefore had such a large proportion of wealth in it is now clearly seen to be unsecure, investor confidence is shaken to the core.


This confidence must be restored and there is truly only one way to achieve this. The checks and balances need to be trustworthy and more than any other thing the current Government needs to do is make the organizations' that decide who we should believe in be honest again. Would I be mistaken in thinking that these agencies are avoiding the limelight due to their owners (McGraw Hill owns Standard and Poor's)  and the vast profits (often 50% or more) this company makes for them. They are the most culpable entities in the current society. Whilst Madoff is vilified and the SEC is chastised, the rating agencies (Stand & Poor's, Fitch, Moody's) should have been the natural whistleblowers, they have skated by with barely even a mention.


I couldn't believe it when one of my potential investors asked me recently what my bonds "credit rating" was. The worthless piece of paper it would have been written on would have cost me nearly $500,000 to obtain and would have been almost entirely dependent on the information I provided carefully formatted by one of the ex-credit rating agency employees who charge $100,000 or more to guarantee you obtain certain ratings. The system is corrupted, "power corrupts and absolute power corrupts absolutely." These companies have absolute power over which investments flourish and which never make it, yet what is their process, ability and knowledge in handing out these ratings. Need I point out that Enron, Lehman, WorldCom, Texaco, Conseco, Global Crossing, United Airlines, GM, GMAC, Countrywide,  KMART, Fruit of the Loom, Continental Airlines, Citibank all held high ratings and the consumers found out before the rating agencies that these were wrong.


I propose that the very first thing the government does before any more bailout money is handed to banks etc is that this system is ripped apart, either nationalize these companies or imprison anyone who gets ratings wrong due to personal gain. Make these entities culpable, why should AIG loose so much money and its investors too when they entrusted their risk quite logically to the rating agencies. People should still to what they are good at and be able to have the confidence to trust other companies in their fields of expertise. I was able to work out that Countrywide's Chairman/ CEO Angelo Mozzilo was selling his stock as fast as he humanly possibly could, it was public information, why couldn't they have raised a red flag 6-9 months earlier when I did..... its basic due diligence...... When Harry Marcopoulos  raised the red flags why didn't they investigate it, it is not the SEC we turn too, to tell us if something is a good risk or a bad, it isn't the SEC that "RATES" something as "LOW RISK".


It is wonderful that these organizations create huge barriers to entry making only mega deals viable and pushing fund manager towards the limits of efficiency where returns will be compromised due to the sheer scale of the investment fund requiring investment. Warren Buffett has underperformed in recent years due to the sheer scale of his fund and that fact that opportunities are not as bountiful, he cant even look at smaller deals as the economies of scale no longer make sense. Whilst he will now make a killing because of his heavily cash weighted position he is proof that   


My call is out to the people is we should punish those who should be punished even if the media wont focus on it as they own them. The people who told us to trust in garbage are not people we can trust this sector of the system is utterly corrupt and needs a complete overhaul or else we will be right back here again before you can say next generation.


Long-term credit ratings

Fitch Rating' long-term credit ratings are set up along a scale from 'AAA' to 'D', first introduced in 1924 and later adopted and licensed by S&P. Moody's also uses a similar scale, but names the categories differently. Like S&P, Fitch also uses intermediate modifiers for each category between AA and CCC (i.e., AA+, AA, AA-, A+, A, A-, BBB+, BBB, BBB- etc.).

Investment grade

§                     AAA  : the best quality companies, reliable and stable

§                     AA  : quality companies, a bit higher risk than AAA

§                     A  : economic situation can affect finance

§                     BBB  : medium class companies, which are satisfactory at the moment

Non-investment grade (also known as junk bonds)

§                     BB  : more prone to changes in the economy

§                     B  : financial situation varies noticeably

§                     CCC  : currently vulnerable and dependent on favorable economic conditions to meet its commitments

§                     CC  : highly vulnerable, very speculative bonds

§                     C  : highly vulnerable, perhaps in bankruptcy or in arrears but still continuing to pay out on obligations

§                     D  : has defaulted on obligations and Fitch believes that it will generally default on most or all obligations

§                     NR  : not publicly rated

Short-term credit ratings

Fitch's short-term ratings indicate the potential level of default within a 12-month period.

§                     F1+  : best quality grade, indicating exceptionally strong capacity of obligor to meet its financial commitment

§                     F1  : best quality grade, indicating strong capacity of obligor to meet its financial commitment

§                     F2  : good quality grade with satisfactory capacity of obligor to meet its financial commitment

§                     F3  : fair quality grade with adequate capacity of obligor to meet its financial commitment but near term adverse conditions could impact the obligor's commitments

§                     B  : of speculative nature and obligor has minimal capacity to meet its commitment and vulnerability to short term adverse changes in financial and economic conditions

§                     C  : possibility of default is high and the financial commitment of the obligor are dependent upon sustained, favorable business and economic conditions

§                     D  : the obligor is in default as it has failed on its financial commitments.


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When Will Obama Go To War

 "History does not repeat itself but it does Rhyme"

Mark Twain

 Barack Hussein Obama and his administration along with the "Great Depression" historian and Federal Reserve Chairman Ben Bernanke are repeating almost every move executed by Franklin Delano Roosevelt during the 1930's "New Deal."  This can be seen right down to the wording of their speeches and the "fireside chats" replaced by the "town meetings" to boost the "feel good" factor.

 "The only thing we have to fear is fear itself"

FDR Inauguration speech.


"On this day, we gather because we have chosen hope over fear"

Barack Hussein Obama Inauguration speech 2009


However as we enter the "greatest" depression ever in US history (see my article of September 11th 2007 http://jonsyrose.blogspot.com/2007/09/liquidity-crisis-little-reflection.html) and face what could be the end of the American Era of Global Dominance; history teaches us that the $3.5 Trillion will not be enough just as the $2.5Bn wasn't enough in 1932. The incredibly job building programs of public infrastructure that Barack Hussein Obama proposes, mimicking  the 1935 public works will not be enough and the 1.5m that became homeless during the 1930's will likely and sadly repeat itself. Foreclosures are headed towards an all time high and bank lending is tightening whilst fear runs rampant throughout main street America where job security is non existent. Henry Paulson replicated the FDR bank holiday and cash injection on October 14th 2008 with some $250Bn invested in the banks in an attempt to prevent the homelessness if not the rush on banks. This didn't occur as he raised the FDIC limits to $250,000 much as FDR brought the FDIC into being to prevent or mitigate the rush in the late 1920's and early 1930's. Timothy Geitner has proposed the Public-Private Investment Program to further try to avoid the mass foreclosures  but America's consumers are overleveraged as are our businesses. Spending grew out of control and the checks and balances of the economy are attempting to right the sinking ship.

Foreclosures are Inevitable

People do not earn enough to meet a three and a half time ratio for earnings unless house prices return to realistic levels. The only way to achieve this is for them to be foreclosed upon and resold. This was seen with the penny auctions in the 30's. Rents must return to being fairly close to the mortgage payment, this is, in my opinion, the essential fair value of a property and the yardstick I have always invested by. Seeing as earning cannot support higher rents then this is another reason for the overheated property market to reset. Hold off your buying for at least another 12-18 months while the government and banks realize that this is inevitable and must be done. Banks must realize and actualize their losses or the government must assume and actualize these losses through the Public-Private Investment Program.  

Suicide and the Reality of Returns

Lets hope that suicides do not once again reach their height of 18 per 100,000 as during the 1930's although the high profile suicide of Rene-Thierry Magon de la Villehuchet who lost in the region of $1.3Bn with Bernard Madoff does not bode well. Bernard Madoff exposed the weaknesses and cracks in the system which cozy's up to insiders as his scheme grew to such levels that it collapsed under its own weight and demands for injections of new cash; much like Charles Ponzi's Scheme did in 1920. Harry Marcopoulos was ignored as were many others who explained that some things were too good to be true and the basic rules of math's and economics do not and cannot be changed. Greed, Euphoria and the desire to "keep up with the Jones's" kept people investing speculatively and chasing the dream of rags to riches/ overnight successes and quick millions. Even now diner tables are still filled with people talking of the one deal they invested in where they got high returns etc and ignore and gloss over all the others they lost on. The average investor doesn't achieve more than 5-6% per annum if the truth be known although to hear them talk you would think you are missing out all the time and they are raking in 15-20%. 

Why Obama May Choose War

World War II resulted in the US government expending $500Bn and it still took till 1943 to restore employment (with a significant decrease in the male population) and till the late 40's-early 50's for the stock market to return to its pre 1929 high. This in modern money would be government war expenditure of in excess of $10 Trillion and probably closer to $20-30 Trillion in real terms. History teaches us this is the kind of figure necessary in simpler time with a less complex and interwoven global economy. 

"These are the indicators of crisis, subject to data and statistics. Less measurable, but no less profound, is a sapping of confidence across our land; a nagging fear that America's decline is inevitable, that the next generation must lower its sights." Barack Hussein Obama Inauguration speech 2009

In Conclusion

Don't lower your sights, just remember that no one gets rich over night, there are years and normally decades of hard work that lead up to "overnight" success. Slow and steady growth of investments from savings put away on a weekly or monthly basis is what built the middle class and will rebuild it again. Solid cash flowing businesses that produce essential products and utilities will always be in demand and will provide constant dividends that if reinvested will far outperform equity value growth over decades. Think long term, the Chinese and Japanese are and they are the societies most likely to take the lead in growth and power over the next Era which I like to think of as the "Asian Era." This doesn't mean that one should discount Europe which will always be a solid performer or America, just don't expect to see the kind of dominance and world leadership that has been witnessed over the last 100 plus years.

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Wednesday, March 25, 2009

America in Crisis

The current financial crisis we are in is escalating out of control, I question whether the current administration has anyone who understands what is happening, why it is happening and is operating without some vested interest; never mind whether they have the correct answers as to how to solve it. The creation of a new entity "The Public-Private Investment Corporation" to purchase toxic debt funded by some $1 Trillion of taxpayer money is going to buy up mortgages, car loans, credit cards loans and other toxic debt off balance sheets for banks and other lenders....... If these assets are sold to large investor groups, hedge funds and other such entities at 5cents on the dollar then it is an open admission that the tax payer will never see any return on its investment and those in power will have scratched the backs of many who put us in this position in the first place. This is the definitive version of the AIG bonuses being paid and we will unwittingly agree to this, not that we have any say, because of the language and structures used to deceive us.

We are talking about a quarter of the total bail out funds which will never even be attempted to be recouped, it would be impossible for it ever to be returned and it will be small component of the $10 Trillion of additional debt that will be created by the Obama plan. The question is will the repayment of this money be handled as cavalierly. At least in Europe the governments have taken shares and stakes in the banks they bailed out so they will get share growth and dividends, the lack of commercialism and understanding in the US government is a strong indicator of how we got ourselves in this mess in the first place. If our representatives can sign the patriot act without reading it and give away our civil liberties why would we expect them to have read how the money will be used and where it will come from.

We the people need a voice, we need to speak out and someone needs to derail the coming travesties and injustices that are about to occur.

The Institutions

The financial institutions essentially walk away scot free and start business anew with and unblemished and untarnished record as a result of the bailout. Now I wish I had been running an unethical business where short term bonuses were put ahead of the interests of the company and its shareholders. I could have leveraged up and paid off my leveraged loans with new loans from another institution without ever having developed an additional cent of cash flow. The price of the underlying asset having undergone a paper increase so someone could write the new loan, pocket the commission and sold it on to an unsuspecting third party who was blinded by the supposedly independent rating of the supposedly impartial credit rating agency who was charging $50,000-$5,000,000 for the pleasure. Lets be honest this is in truth what has been happening for the last 10 years or so.

Government Regulation has missed the point entirely - why haven't they taken over the Rating Agencies

The government claims it will tighten regulations to ensure that such situations will never occur again but there are fundamental changes that need to occur for this to happen that will not happen without a broader scale collapse of the existing system and with the maintenance of status quo. The entire ratings system requires not just revamping and overhauling but a new and different uncorrupted system, "power corrupts and absolute power corrupts absolutely." With so much blame being directly attributable to the rating agencies who were evaluating investments and attaching to them double and triple A credit ratings. Kudos to their PR and PM firms who are keeping them out of the press and are enabling them to fly under the radar at a time when they should be chastised and probably shut down entirely.......

Corporate Ownership/ Responsibility

Current executives are being paid enormous amounts and quite clearly do not have any great degree of competence, a few such as HSBC and Porsche stand out. These executives are being paid in proportion with people who built and created businesses and who really created or earned their rewards, which often took a lifetime of effort and much financial hardship along the way. As a salaried employee you have minimized your risk and therefore should not be paid proportionately to someone who has ownership and therefore carries all the risk. If you are paid after all others and are paid out of profit and profit alone then fair enough. Obviously there will be some leeway to tax planning in this situation. 

The corporation has to return to private ownership, or some semblance of this, when the Rockefellers, Carnegie, Gates and Buffett owned a business they pocketed the profits at the end of the year and they funded the losses, these were actual figures to them that affected how they were paid and how their managers were paid. In the modern world the accountability of ownership doesn't exist, everyone is milking the huge amorphous entities so big and diverse that no one really knows what is going on, they are managers taking the salaries and benefits of owners and that is very wrong. They have always had the security of a salary and never staked all or nothing on the success of the entity, with this reduction of risk should come the reduction of remuneration. With international taxation and offshore tax havens these entities are so complex that it takes a degree of genius to understand it. That kind of genius is found in someone who establishes and builds a company (Rockefellers, Carnegie, Gates and Buffett ) not in some employee who has risen through the ranks. If he had the capability to run the organization properly he would have done it himself.... look at the ultra successful hedge fund managers, the Bill Gates and Warren Buffets', they are not out running someone else's company. 

The Bankers and Banking Professionals

A whole generation of Bankers have grown up with what was always explained to me as the new model which made no mathematical or economic sense. Keeping said individuals in the job is a recipe for disaster as they cannot rectify the problem as they don't understand how the underlying system works, the principles it was established upon and they do not have ownership of the problem.

The toxic debt is not what people think it is, it is actually real assets owned by real people it isn't some ethereal accounting principle.

What is the government going to do with the toxic debt it is buying from the banks that created the loans in the first place, it is being treated as some ethereal unsubstantiated piece of paper which is what got us into this problem in the first place. There is a loan behind each number, that loan is made by someone who has been financially imprudent or had the misfortune to be laid off in the economic downturn stemming from the worlds rapid deleveraging. Will said Joe Blogs be allowed to keep the property he purchased, many of the banks have ceased foreclosure activity, or will he be foreclosed upon and evicted. If he is allowed to keep his beautiful home that he couldn't afford then the average man on the street who wasn't imprudent is being financially punished for his caution and education. This would represent one of the greatest tragedies in capitalistic history. Thus impugned for intelligence what should you do, buy a house you cannot afford as everyone else is doing it and getting away with it? No one in their right mind will buy these except at such cut down rates 5-15 cents on the dollar that they are bargain enough to justify the handling and carrying costs of defaults. No one has the liquidity to do this without gearing up again which is how the whole problem occurred in the first place.

The Media

Many in the media are making statements that are reassuring and attempting to waylay a lot of the fears of the public and the investment community. These statements are false, unsubstantiated and in my opinion down right misleading and deception. There is no way we can turn any corner or see improvements in the economy this year or next. Much of the campaign rhetoric from the presidential campaigns is just downright impossible. The nationalization of the healthcare system is too expensive for us to pursue. Effective increases in the quality of schooling is manageable but not with the current crisis and no matter which way we look at it social security is running out of money and state pensions are going to be impossible to maintain without some delusionary system with ever escalating debt that is never intended to be repaid. The knock on effect of this is no one outside the US wants to buy treasuries and the value of the Dollar collapses raising cost of living of all out China/ Asian products. Without immense increases in domestic production this will lead to Hyper inflation, which is something we should have had long ago except for Greenspan and Bernanke's artificially low rates which created this bubble.

Long Term Consequences

We live in a universe governed by cause and effect, the second that an imbalance is created in this system it moves to right itself. With artificial measures put in pace to prevent this check and balance system from operating we are causing a far greater, wide reaching and longer lasting reverse. This could well without being melodramatic mark the implosion of US global dominance as the pendulum swings back to reestablish balance. We stand in a pivotal moment as a country and as an economy where arrogance and ignorance are all that are required to mark the end of a short but bright epoch of American dominance.

Remembering that it takes about 12-18 months to foreclose on a property we haven't even seen the beginning of the impending crash, we are no where near a midpoint. The banks have held off on a lot of foreclosures and many people are only now and over the coming two years loosing their jobs and income that will bring them to the edge of bankruptcy and force them to face impending foreclosure. This could be the largest class shift we witness in the last 1000 years as so many people who formally owned their own homes are forced to rent and those who can afford to own rental properties grow their wealth dramatically (ending up with a European/ German/ French ownership structure)

Hedge Fund Managers - Not Villains just making profit in a society where profit is placed above all else

Why are we berating hedge fund managers who made billions of dollars shorting the current crisis, I believe we should complement their intelligence as they would have been vilified by investors had the market gone the other way. America was made great by saluting the greatness of those who succeed, jealous and creating laws to crush ingenuity are the antithesis of what made America great.


If the government was to decide to increase regulation on Hedge Funds we really would be in trouble as they wouldnt know what they were seeing, how to deal with it or what regulations to put in place. There isnt a single person that could figure it out as if they could they would be running their own funds. They would be unable to understand or calculate the future impact of their legislation it woul just be some knee jerk, popularist response as with almost everything the current administration has done.


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Thursday, March 19, 2009

I am so Confused and i am not alone Ben Bernanke and the Government must be too

Okay so today the Federal Reserve announced it was going to start buying government treasury bonds to boost the economy and prop up the market.

This $1.25 trillion i presume is not part of the $3.8 Trillion already pledged by congress et al to battle beleaguered banks and troubled home owners. But here is the thing....

The Federal Reserve doesn't have money and prints money as it needs it, the treasury department sells bonds to fund its activities and if this isnt sold to a foreign government it becomes a part of the national debt as it is purchased by the Federal Reserve with money it doesn't have.

Can one conclude that foreign governments have lost all faith in the US government to repay its debt and that the currency will devalue and is not a good investment. If so this is a doomsday scenario for the US economy and spell infinitely higher interest rates and inflation long term as well as saddling future generations with a debt they cannot pay and a country with minimal self reliance with an ever weakening currency that will buy far far less if the Yuan of China decouples.

Then the Fed will buy toxic loans essentially following the banks into what caused the credit crunch in the first place, thus allowing banks to offload more bad debt off the balance sheets and into the government coffers..... Could the Dollar soon be valued in a similar way to the Italian Lira in the 80's and 90's.......

Sell Dollars and buy Yuan and Euro

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Tuesday, March 10, 2009

Key Business Growth Areas

There are several areas of the US and Global economy that should experience significant growth in the next several years making them great investments with strong potential returns. Looking to these areas will pinpoint key technologies and individual companies that should outperform the market and will make great entrepreneurial opportunities. These areas are Energy, Healthcare, Bonds/ Guilts/ Treasuries, Computing, affordable rentals and Green Enterprise. Here is a breakdown of each area of growth in more detail:


One of the most significant growth area will be utilities and energy companies, particularly in emerging economies such as China and India who do not have strong infrastructure in place. This will lead to a boom in power generation as consumer and industrial demand increase at a constant an unabated pace. Even though these economies will experience recession and downturn due to the current global climate they needed this chance to catch up with their growth before they reach a cataclysmic infrastructure collapse. The fact that so much output is necessity and basic products essential to sustaining the first world way of life will undoubtedly save them from significant depression and enable them to clear a recession by 2011.

America and Europe will continue to increase their demands at a slower rate as economic downturn has a greater impact and where greening of energy sources and particularly energy utilizes (bulbs etc) become more economical. However as recycling (eg Smelting etc very energy intensive) and computing power increases this will pick up alot of the slack.


Whether the markets crashed or not alot of people are due to retire and or have retired and need to take annuities to finance their retirement. This will be a huge growth area and people will be looking to make reduced resources (401k and home equity) go further. Cashflowing investments will fall into this category and that will make an interesting contrast to fiscal instability of the asset classes normally used to finance such annuities.


A greying population means a huge growth in Heart, Cancer and Brain related diseases. Barriers to entry to all markets are huge so expect to see the existing companies continue to grow and provide safe returns.

3)Bonds/ Guilts/ Treasuries

Flight to safety will continue for the foreseeable future, this asset class has been damaged by the reduction in credibility of the rating agencies (who are utterly incompetent0. Expect a strong recovery over the next 3-5 years

4) Computing

We have not seen the end to computing revolution, whilst it is hard for mature companies such as microsoft and google to continue double digit growth there is no doubt that we have only seen a fraction of the impact that computing will have on our lives. Look for robotics, alternative control methods (optical input) and personal assistant companies to rise to the fore. This bodes well for all fibre optic telecoms as data transfer will become more and more critical and infrastructure means high barriers to entry. Watch also for the emergence of city wide wi-fi systems.

5) Affordable Rentals

Whether the american consumer belives it or not and no matter how much the government denies reality to themselves the market has to bottom out and unless the governemtn pays off a significant percentage of the mortgages of the millions of people facing foreclosure, they cannot afford their houses, never could and the inflation the governments solution is creating will result in them being even less able to afford the property in a few years. Therefore affordable rental units people can afford that will allow them to put themselves back on their feet after bankruptcy and foreclosure woes will be a boom market. These are not hi end condos or any other such development as was being flung up during the last 10 years. It is more the rent controlled properties such as those of Manhattan.

6)Green Enterprise

The world is going green not through choice but through necessity. Higher gas prices, electricity costs etc mean that consumers and businesses have to green up to reduce costs. Expect to see diesel making a strong entry into the US market, increased sales of energy saving lightbulbs and devices and energy saving devices.

Also with the ever increasing water shortage expect to see water recycling and re filtration come to the fore as it becomes a necessity. Waste water utilization the middle east, Australia and the west coast of USA will be one of the boom industries of the next 15-20 years.

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