Future Sight: June 2009

Wednesday, June 24, 2009

Goldman Analyses Its Risk Exposure

Understandig Limitations of Risk Reporting

This work is licensed under a
Creative Commons Attribution-Share Alike 3.0 United States License.

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.

This work is licensed under a
Creative Commons Attribution-Share Alike 3.0 United States License.

Sphere: Related Content

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

Sphere: Related Content

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.

This work is licensed under a
Creative Commons Attribution-Share Alike 3.0 United States License.

Sphere: Related Content

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.

This work is licensed under a
Creative Commons Attribution-Share Alike 3.0 United States License.

Sphere: Related Content

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.

This work is licensed under a
Creative Commons Attribution-Share Alike 3.0 United States License.

Sphere: Related Content

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.

This work is licensed under a
Creative Commons Attribution-Share Alike 3.0 United States License.

Sphere: Related Content

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

=$247,142.58

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.

This work is licensed under a
Creative Commons Attribution-Share Alike 3.0 United States License.

Sphere: Related Content