Impending Disaster for GM and GMAC

As 2005 drew to a close I predicted it was the height of the Real Estate bubble, in May 2007 I predicted Countrywide Financials (CFC) impending sub prime implosion. In July I started to forecast the Real Estate/ Subprime/ Conduit effect and now I make my prediction for 2008 – the companies to watch, are

GM & GMAC

These companies stock will in my estimation drop a minimum of 60% during 08 – I am expecting to see a $10-$13 GM share price during 2008. I am further expecting to see their Bonds drop down to a B- or junk bond rating. GMAC will probably enter single digits and also have their bonds downgraded to B- or junk status

Where am I getting my forecast from???

Okay – GM and GMAC are ultimately the true kings of subprime debt, with cars that no one wants they have become an money lending business, however unlike any sensible money lending business loaning money to people who cant afford to pay (loan sharks – see article on credit card companies, the modern day loan sharks) they are offering money at rates that would make a Japanese bank wince! Further more when they sell a car, they take a depreciating asset, throw in a hint of negative equity from a prior car, an artificially inflated resale value and voila you have a 50-60 unsecured loan, not at 19-39% APR like a credit card, but at 4.2%, scarcely outpacing inflation. Now add a past history of employ pensions (read gray bomb article) and you have a company with all the liquidity of Countrywide Financial!!! (Read impending doom article)

Work on the premise that should I make this story better – who will be affected by this implosion, non less than the beloved Cerberus group of Chrysler fame and their illegitimate father Citigroup…… starting to sound like a familiar chronicle…….

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The Power Of Web 2.0 - And the Myth of Google and FaceBook

The more time i spend delving into all that is web 2.0 and the more closer we get to the Launch of the the Brain Make Over Beta Site, the more perplexed i become by certain factors.

Firstly, we live in an age where Google (goog) is quoted at some $681 at time of writing which gives the company a valuation of approximately $213Bn. This is for a company that if my memory serves me correctly has about $11Bn of revenue and $4Bn profit.
Do I use google every day, resoundingly YES,
Do i think that Google has a fantastic search algorithm, again YES,
Do i believe that the company is worth 20 times its revenue and more than 50 times its profit, one second, did i just say 50 times their profit...something must be wrong with my calculator, maybe i have time warped back to 1999 and we are pre millennium and euphoric with Greenspans low interest rates!!!

Do you guys that own google stock realise that even if Google gets the 700mhz cycle and enters the cell phone market and even if they build solar plants and land a man on Mars, the potential earnings growth for the next decade has already been accounted for .... so here is my question...... Larry Page, Sergey Brin and Eric Schmidt are all bright and talented boys....so why do they own stock. If i was them, which obviously i am not, I would sell my stock and by someone like Microsoft who has a market cap of about 30% more 307Bn but has over $12Bn in profits on $50Bn+ of revenues. Lets throw in that this company fits the dynamics of both a Growth and an Income stock.

The second question is that of FaceBook, again valued at somewhere in the $10-15Bn range with revenue of less than $300m. This is another disruptive technology (I believe it is disrupting email as a more fluid and fulfilling interaction if i am to understand the hype correctly.) Like Skype this is all great but where is the revenue stream, the market is captive (which means they will surely leave given enough time) and it really serves little or no useful purpose!!! Did i just say that out loud, blasphemy. But in reality, there is a novelty in finding people i had long forgotten about and would have had no way of getting in touch with. However did i really want too, will i be able to strike up a stirring friendship and get something meaningful outr of the relationship.

So they counteracted this with a genius like devilishly cunning move (similar to the Fed increasing the Discount window to save the banks in August) of creating applications and opening up their platform. But Google copied the rapidly with a far larger network and there is still that huge issue of stick ability! Does anyone really stay on the site that long. You want to check what you friends are doing now, ok cool, i am gone see ya!!!!

So where does this all leave us, Web 2.0 the new internet will in my opinion soon cede itself to Web 3.0 which for me is interactive application based internet usage. whilst currently available i am talking about the web as a medium for absolute harmonization and integration of all facets of life........ Big, Bold and Brash maybe ..... or some would already say we are there ....... I will continue further when i explain the concept of Brain Make Over within the next month, so hold that thought.


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Credit Cards and American Consumer Debt

Household debt has now exceeded the national debt of the USA - what does this mean, this means that the people who live in America, you and me, owe more money to companies (particularly banks) than the entire government does to other countries!!!!

This figure is incredible but how has debt spiralled so far out of control. The average American family owes more than $16,000 on credit cards, many only making minimum payments. With some credit cards charging exorbitant "loan shark" style interest of 39%, late payment fees, partial payment fees etc etc credit card companies are able to double their money annually! This is quite possibly the most rewarding part of thew whole financial system for banks. The majority of hedge funds do not produce mid to high double digit returns - for mainline banks this is a n incredible pipeline that they will continue to milk until America wakes up.

Minimum payments (around 4% on average) will require 15 or more years to pay off if no further charges are made to the card. This is with a more normal 19.98% apr.

With the Universal Default Clause your credit card company can change your interest at any time for almost any reason, your debt is too high with another company, you were late on your mortgage payment etc etc. This is one of the scariest and most open ended, open to abuse clauses in the American legal system as it exposes more than 1 billion card holders, yep 300
million Americans with an average of 3 cards each, to the whim of the card company. Should you choose to retaliate in any fashion they deem unfit to this injustice, there goes your FICO score.

Meanwhile whilst on the topic of FICO scores, this number has become more critical than ever before as now it holds the key to how high your charges on your mortgage will be. Fannie May et al will be charging higher fees and possibly require higher down payments from "sub prime" borrowers. This means anyone with a 680 or less is going to be dinged - i believe on a sliding scale.

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Is your VOIP call being recorded

It has been generally well known and accepted for years now that our governments listen in on our phone calls, triggered by certain keywords. It used to be the the British tapped the American public and vice versa, until the patriot act pretty much allowed the US government a free hand.

It is now emerging that it would be possible to tap VOIP calls and you can bet your bottom dollar that if the government isn't already doing this they will be soon!

As mentioned in the article this will also be a potential boon for those criminally minded as well.

So remember, when talking on "ANY" type of phone - be careful what you say, someone may be listening!

To hear what they have been doing as a proof of concept on this have a look and listen at the following website http://siptap.voipcode.org/


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We have survived the Cold War and Nuclear threat, but will we survive the Gray Bomb, the most dangerous threat to the USA

The world stands at the edge of a cataclysmic financial abyss, and no i am not talking about the current housing and liquidity crisis, i am talking of something a little further away and somewhat grayer (excuse the pun). Although the drop to 12800 is 1200 off the high, nearly 10% as i predicted back in August (month off due too Bernankes pointless meddling)

The financial and social timebomb is the graying population of the industrialized world. I have coined the phrase the "Gray Bomb" to categorize this impending threat.

We live longer, live better, consume more and expend more. If you sit down and read the social security/ welfare document sent each year to every tax paying American, you will also see that the US welfare system is budgeting to run out of money within the next 20-30 years!

Yes

You heard me

Thats correct, they "admit" quite openly that their coffers will have run dry and they will not be able to provide for anyone properly after that time, without a drastic increase in taxes (probably to a scandanavian style 60+%) Why is this, because the Baby Boomer's will mature, the first of them passed 59 1/2 in 2005 and thus over the next 10-15 years there will be more people claiming social security pensions than people working and paying into the system, creating an insurmountable deficit.

What do i propose or advocate as a solution, don't just throw stones i hear you cry, give us a solution! I hope to provide suggestions that will spark open debate and could ultimately lead to some kind of resolution.

So lets try this, Romania "i believe" recently told its populace they would not be paying for their retirement, people had to plan for it themselves! I think that the social security system is somewhat archaic and grotesquely mismanaged and rather that continue it, make everyone more that 25 years out responsible for their own retirements!!! These people must take financial responsibility and accountability now and start saving.

Several things that need to happen to help society survive;

The government find ways to become more financially efficient and stop or even reverse inflation.

reduce dependency on oil as it is a finite supply and prices will continue to rise even on the exaggeration on the speed of reduction of this decreasing supply. Like Diamonds, it isnt as scarce as prices would indicate, but neither is its supply going to last out our lifetimes!

My solution will have several consequences, many of which i think are inevitable either way, that will be interesting;

The first being that as a collective generation, those that come after the baby boomers will probably be poorer than their parents!

The second that property values will fall significantly as more housing stock is returned to the open market with less inhabitants!

Immigration will increase from countries such as China and India that will become overly populous and lower more affordable prices will draw people in. These countries will ultimately come to resemble Japan and Tokyo in terms of density and expense.

Our generation will have significantly fewer children than our parents as we will simply not be able to afford them.

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World Shift

The world stands at the edge of a cataclysmic financial abyss, and no i am not talking about the current housing and liquidity crisis, i am talking of something a little further away and somewhat grayer (excuse the pun).

The financial timebomb that is the graying population of the industrialized world.

We live longer, live better, consume more and expend more. If you sit down and read the social security/ welfare document sent each year to every tax paying american, you will also see that the US welfare system is budgeting to run out of money within the next 20-30 years!

yes

thats correct, they admit their funds will have run dry and they will not be able to provide for anyone after that time without a drastic increase in taxes (probably to a scandanavian style 60%) Why is this, because the baby boomers will mature, the first of them passed 59 1/2 in 2005 and thus over the next 10-15 years there will be more people claiming social security pensions than people working and paying into the system, creating an insurmountable deficit.

What do i propose or advocate as a solution, don't just throw stones, give solutions, provide answers that spark debate and could ultimately lead to some kind of resolution. So lets try this, Romania "i believe" recently told its populace they would not be paying for their retirement, people had to plan for it themselves! I think that the social security system is somewhat archaic and grotesquely mismanaged and rather that continue it, make everyone more that 25 years out responsible for their own retirements!!! These people must take financial responsibility and accountability now and start saving.

Several things that need to happen to help society survive;

The government find ways to become more financially efficient and stop or even reverse inflation.

reduce dependency on oil as it is a finite supply and prices will continue to rise even on the exaggeration on the speed of reduction of this decreasing supply. Like Diamonds, it isnt as scarce as prices would indicate, but neither is its supply going to last out our lifetimes!

My solution will have several consequences, many of which i think are inevitable either way, that will be interesting;

The first being that as a collective generation, those that come after the baby boomers will probably be poorer than their parents!

The second that property values will fall significantly as more housing stock is returned to the open market with less inhabitants!

Immigration will increase from countries such as China and India that will become overly populous and lower more affordable prices will draw people in. These countries will ultimately come to resemble Japan and Tokyo in terms of density and expense.

Our generation will have significantly fewer children than our parents as we will simply not be able to afford them.

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The Ultimate Gift

Every once in a while there comes a movie that embraces or harness the power of human goodness, lifts us to want for or strive for more and to do better. "Pay it Forwards" " Forrest Gump" "Meet Joe Black" "God Grew Tired Of Us" are good examples of this inspiring genre. I was blessed to watch such a movie recently, "The Ultimate Gift" which incorporated and embodied so many values that I personally aspire to hold true.

If you haven't seen the movie then don't read on!


The 12 gifts are:

The Gift of Family
The Gift of Love
The Gift of Dreams
The Gift of Laughter
The Gift of Giving
The Gift of Friends
The Gift of Learning
The Gift of Work
The Gift of Money
The Gift of Problems
The Gift of Gratitude
The Gift of A Day

Take a little time and watch this movie, allow it to inspire you, don't be afraid!

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Saving Plan

I was asked last week about how to save money in the current economic situation and where to invest.

My answers surprised them, as I am a staunch property supporter......... Don't buy anything yet - the bottom isn't even close, I returned to my old adage that when we see rents covering the mortgage payments and all associated costs and the property is entirely self cash flowing, buy, but until then look for some solid mutual fund performance (American/ Global Growth and Income funds, Franklin Templeton etc) but try holding them somewhere different. Inside a Variable Life Insurance Policy. Why...... Tax free growth, long term disability riders, easy borrowing and the immediate net worth it provides you will all come in handy when the housing market is full of bargains!

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Diamonds Are A Girls Best Friend - Or Are They

I regularly end up having conversations with people who oooh and ahhh over diamonds, possibly the best marketed commodity on the planet. People have connotations of rarity and value when they look at diamonds and one cannot but applaud DeBeers (the cartel that makes Microsoft's anti competitive litigation with Netscape look like small children throwing rocks in the middle of a war zone) for having achieved this highly deceptive position within the precious stone marketplace.

Rubys are the rarest of the precious stones with Emerald and Sapphires close behind, Diamonds are actually one of the more common stones (resulting in DeBeers billion dollar vaults of stones) they have just been marketed well over the past century, to the point where one wouldn't give a different stone for an engagement!

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Comment e-mailed to me

Regarding your marveling at DeBeers marketing, I have to marvel even more at the psychology inside the brain of the recipients of those diamonds (women). To them, especially the 20-30 somethings, the truest expression of the love of their fiance is to buy them something worth the down payment on a house that serves no useful purpose except that one can cut your way out of a phone booth with it if trapped inside....too bad their are no phone booths anymore thanks to cell phones ! Would the money for a diamond not be better spent on the beginnings of a retirement portfolio ?

Food for thought.....diamonds are the ultimate form of nature sequestering carbon...cant burn em to release their carbon content.

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Credit Card Credit Crisis

It is only a few month since I was discussing the impact of credit card and consumer debt on the economy and that everyone saying American Express etc would not be impacted by the sub prime meltdown was crazy. If you aren't paying your mortgage and are establishing bad credit , why would you pay your credit card bill. If you are going to go bankrupt as a method to protect any money you do have, why not throw the cards in it.

It is unfortunate too reflect that Greenspan's reduction of interest rates was so extreme to recover the markets in 2001-2003 that another bubble came about. No one believed interest rate would rise ever again and they would never have to pay more interest on their principal. This short term-ism is rife throughout society and is probably one of the most significant parts of this crisis. America demands instant gratification.

Bankers looking for short term gains, their year end bonuses more critical to their lives than the long term business profitability. This is why renumeration is so important and has to be reviewed more carefully. The requirements placed on CEO's for short term stock market gains are compounded by the fact that businesses take time to change and may not necessarily benefit from the constant demands of shareholders for faster and faster growth.

This always brings me back to the anomally that is Google. With its valuation climbing past $200bn with only $4.23bn of profit on about $10bn in revenue. The price has taken into account all possible growth for the next 5-10 years. Brin and Schmit should be selling stock like crazy and investing in someone like Microsoft with a similar company valuation but over $50bn in revenue.

Which brings us full circle, analysts are all telling you:

1) Bank stocks look cheap, buy them now!!!

I say don't bother, they still haven't priced in the full extent of the crash yet as no one realizes how bad it will be.

2) Credit card company stock has been adversely affected by the housing crisis and is unfairly impacted.

I think not, they are the next to topple in the house of cards. This also has a very bad knock on impact to GM and Ford who really are a credit company now more than a car manufacturer. Expect Ford to weather the storm better on strong European sales, bt neither will be doing well in the medium term.

3) Flight to gold for safety

I think not, $800 plus is unsustainable long term and whilst you might see $900-1000 in short term hysteria, long term expect somewhere around $500.

4) Oil at over $100 a barrel.

I think this is price gouging, whilst supply is not indefinite, $65-70 per barrel is a real figure. The answer is to force manufacturer's to sell fuel efficient diesels in the US and the work on hydrogen powered cars and a distribution network that will allow them to become popular and utilitarian!

Overall expect a global depression of epic 1929 proportions, position yourself to weather a storm. Also ho0pe that Bernanke doesn't continue with his insanity and hope that the cutting has stopped, even a 1% interest rate cannot shore up the economies current messes at some point we have to turn into the storm and ride through it, perpetually running in front of the wave means it grows larger and larger making it scarier and scarier to turn into it and get through to the balmy waters on the other side.


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The Power Of Music

One of the biggest changes that occurred during that last century was the progression of music and its impact upon society.

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Diesel Vrs Hybrid Vrs Petrol Cars - The great deception

I love to hear people talking about hybrids and buying them at many thousands of extra dollars! But do these people really understand what they are doing.

a) MPG from EPA. To calculate the fuel economy of a vehicle in the US to the best of my knowledge the EPA uses a rolling road and essentially eradicated the factors of wind resistance/ aerodynamics,
vehicle weight, tire width etc. This give highly inaccurate figures. This system is reputedly being changed during 2008 to give fuel economy figures that come in line with European and Japanese testing methods. I am certain that you will see a dramatic fall in the quoted average fuel economy of all cars, but hybrid in particular! The battery weighs a lot!!!!

b) Cost of ownership. Do you know what it costs to replace the battery on a hybrid car (if you keep you car 7-8 years then lease it don’t buy it) if you are buying a used car then it is a ticking time bomb as you could end up paying as much or more than the value of the car to replace the battery.

c) Disposing of the battery. Batteries are a combination of acids, lead and other toxic material, review a short article on what it takes to dispose of batteries and how dangerous they are and you will get the idea here.

d) Diesel. Diesel engines are not what they used to be, blutech and other technologies produce engines that have significantly lower emissions than older petrol cars and also get far better fuel economy. With fewer moving parts they are a lot cheaper to maintain and have longer service intervals (this is one of the biggest revenue centers for car manufacturers so they don’t want this)

e) California. California is seem as the progressive state, yet in this arena it is archaic, by pushing hybrids harder and harder (with access to hov (high occupancy vehicle) lane and free parking downtown they have created a boon for Toyota in particular with its prius and other hybrid manufacturers.)

f) Celebrity endorsement. Celebrities have been seen turning up to all kind of event in Prius' to show their concern for the environment! However check the license plate and you will invariably see a LCS tag which means they hired it and don’t own it!!!!

g) Alternative. Greenland has gone hydrogen, Brazil is using biodiesel. UK uses gas. Whilst these are the technology of the future American car manufacturer and oil companies have a strangle hold on the economy and political decision makers. Don't expect to see these technologies until oil starts to dry up, (they love gouging you at the pump.) or significant pressure is applied. Gas stations would have to carry these alternate fuels and have supply system and infrastructure in place which will involve considerable expense and therefore loss of profit to all important shareholders!

h) Electric cars. Have you seen how an electric power station generates power (baring solar etc) they spew coal or nuclear waste out to generate the electricity, I rather use the diesel thanks!!!!

So what am I saying with all this, don’t buy a Hybrid, the Europeans have it right, get yourself a state of the art diesel for the next car and save the environment and you pocket with significantly reduced expense!


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Everybody wants to be an instant millionaire these days! Here's a fairly easy way to achieve it in far less time than you would imagine!

Everybody wants to be an instant millionaire these days! Here's a fairly easy way to achieve it in far less time than you would imagine!

Guess what, you don’t have to be a football player, a "pop idol" or win the lottery to become a millionaire, you can just do it the old fashion way (saving).

The answer to this myth of how to get rich quick is that you can't, everything in life requires hard work, dedication and nothing comes easily. I am fortunate enough to know many millionaires and several billionaires and every one of their overnight successes was preceded by at least 5 years of hard work and graft (and in many cases 10-20)! However you can increase your net worth and therefore directly affect your ability to create greater returns form existing investments as well as to accrue wealth faster.

How do you do this, it is very simple, if you want to become a millionaire, write a $1 million whole life insurance policy. This will require some effort on your part, nothing in life worth having is easy. If you get a borrowing/ cash value rider then you can borrow, often upto 90% of the policy cash value. The principal appreciates tax free. Once you have used up your tax free allowance into IRA and pension funds this is the next place you should look to put some money so it can at least grow tax free.

What doors will such a policy open for you and why will it increase the probability of you becoming rich!

If you go to any major banking/ investment institution they will have a varied range of financial products. Many of these offerings though are limited to high net worth individuals and accredited investors. Derivatives, Notes, Structured Products, Hedge Funds and other vehicles for generating double digit annual returns (sometimes with capital protection) are considered speculative or are only available to experienced investors with "suitable experience" to make such investment. A $1,000,000 whole life policy will provide you with access to many of these deals.

Why is the gulf between rich and poor widening?

For exactly the reasons mentioned above, the wealthier you are, not only do you have greater investable assets but you have access to better asset classes. Banks such as Merrill Lynch, UBS, Deutsche Bank regular issue complex derivative products that have double digit returns with capital protection through the utilization of options, hedging etc. A money market CD offer 5% per annum whilst a "sophisticated investor will have access to a principal protect barrier note with 210-230% the upside and 100% principal protection based upon the Deutsche Bank Currency Returns Index (Bloomberg Ticker: DBCRUSI Index). Sound complex, well it is, the brightest minds in the world are constantly trying to figure out new ways to make rich people richer and with a million dollar net worth you will have access to such products. As a result a $10,000 account can earn as much as a $43,000 Cd over a 5 years. Now do the maths and use the whole $43,000 and you will see what i am getting at! (its over 100k) The other huge factor this accumulation of wealth is compounding, were interest in accreted!

Why are the baby boomers so wealth and why will the next generation be poorer?
What happened to home equity and property value as Americas saving method for retirement?

This is a fascinating question and the answers are inextricably linked. During the 50-70's people were encouraged to adopt the American dream and buy their own home. At the time people were paying capital and interest so with every payment they reduced the principal owed on the house and built their equity value. The property appreciated as it almost does over any 25 year period and the home owner was left with what had essentially been a tax deductible savings account containing a considerable and valuable asset.


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50 Basis Points

With the fed cutting 50 basis points today we have to wonder what the long term effects will be.

1. The dollar has taken a quick response and devalued further.
2. Gold is rising in value letting everyone know that the dollar is getting worth less daily. It seems only yesterday that gold sat at $350 instead of the mid to high 700's.
3. Countrywide may survive too by slight of hand and balance sheet

Does this mean the real estate problems are resolved? Not at all, now they will get dragged out for longer with no true bottom of the market in sight, everyone will still be shy of CMO's, ABS's etc so lending will be lax, but interest rates will be lower for those that can refinance. All the subprime borrowers will still not be able to obtain their refinance. Therefore we should still enter a recession, just a few months later!

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The Dog Park, A Microcosm of Humanity.

We have two Samoyeds, Lovely fuzzy fluffy, warm caring and cuddle creatures and as part of our daily routine both we regularly attend those unique hangouts called dog parks. For those of you who don’t have dogs, these are sometime small, sometimes vast fenced areas where dogs are allowed to run free “off leash” playing, sniffing other dogs butts, fighting and generally being dogs. Why would I write about this and why would anyone care, well I will try to make it more poignant!

A dog park can be seen as so representative of human life and society. In those brief minutes you will see all the actions of our daily life condensed and simplified as to what they really are. You have the bravado, braggadocio male with a Pitt Bull (normally without a collar), the timid and fearful woman with the Chihuahua with diamond encrusted collar, the old couple with their faithful, tired, overweight old Labrador and many other characters which I will introduce over the course of this rambling!!!

The Pitt Bull/ Staffordshire Bull Terrier/ Pie Eyed Bull Terrier


The Samoyed

The Siberian Husky

The Rottweiler

The Labrador

The Shih Tzu

The Chihuahua

The American Bulldog

The Afghan Hound

The British Bulldog

The Yorkshire Terrier

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Happiness - Materialism Vs. Spirituality

Happiness - Materialism Vs. Spirituality

There is no question that I am very materialistic, I am the first person to admit that I love nice things and spend fortunes purchasing them, be it a Brioni suits, Rolex Watches, Jewelry, Fast Cars, Nice Houses, Big Screen TV’s with separate speakers and amplifiers etc etc (By the way, a Level 3 Monster Power Cleaner is the best TV investment you will ever make, you cant believe the difference it will make to the picture quality) I am the first person in line to spend the money and boy did that paragraph just sound like it, don't let that put you off though.

The conflict that has always raged in me between the lavish and the utilitarian in me has entered a new phase. Living in the center of the materialistic and “Look at me and what I have and please be jealous and suck up too me” universe, (Did I mention the Beckhams just moved to town) the nirvana of “selfishness,” “Beverly Hills” has been an eye opening experience. Whilst, as I previously mentioned, I “like” my material possessions as much as, if not more than anyone else (especially since loosing so much “paper wealth” in 2000-2001 (Tech stock crash) I became orientated towards bricks and mortar, tangible, physical assets one can see and hold and touch!!! Something to show for all the work) The denizens of Beverly Hills seem to “need” material possessions, buying them seems to give them a sense of self and worth, justifying and validating their existence. There is an entitlement which is quite unique, haughtiness to the women who have never personally achieved anything of any significance or benefit to the world other than marrying someone rich and spending their money! You have to love the nouveaux riche.

And the scariest part of the whole is place is that very few actually seem to have any “real” money, the house is on a 10 year interest only loan (in essence they rent) the car (for car, read Bentley or Porsche) is leased for $2000 a month or more, the credit cards are always maxed out and they have to keep working as they cant afford to retire!!! Many of the husbands work from 6am till 10pm and often spend Saturday in the office (I think they are hiding from their wives personally) just to pay the bills and try and keep ahead of the tide of debt and expenses of their lavish lifestyles. Not to mention the plastic surgery money to try and look young and be something your not! But no one seems happy, they want talk to another human being in the elevator, they don’t smile, they complain bitterly about anything and everything any time they can get anyone to listen! So many people says “money buys happiness” come and shadow one of these people for a week and see that it doesn’t.

So why is it I ask myself that all my happiest and most fulfilling moments come from those breathtaking moments on top of a mountain with my wife and dogs, walking on a beach with a beautiful sunset. How come these spiritual moments awaken my senses and fulfill me in a fashion that no material possessions can. Meanwhile when I walk on the beach with these same “Beverly Hills Wives” in the same time and circumstance, are they complaining about the sand damaging their Manolo Blahnik and their pedicure getting ruined and wondering if the can catch “something” (read disease) from walking on the beach.

So why do I still live here, I am in the process of leaving and heading back to the east coast where old money, class and sophistication rule the day. I will probably make land fall in Denver on route for some skiing and relaxation enroute and to try and reset my balance and sense of self. Leave my repulsion for materialism at 13,000 feet and then head back to Greenwich, CT, Manhattan, NY or even Boston, Ma.

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Feeding the Beast

It doesn’t seem so long ago that the evils of CFC's (Chlorofluorocarbons) were being vilified in the press. Today we have a different type of negative connotation to CFC's (Countrywide Financial Corporation). Blamed for much of financial liquidity crisis and turmoil during August 2007 (they were just being greedily like everyone else, but they got a little too greedy) they are once again hungry and need to feed. Such financial behemoths have incredible burn rates (the basic unavoidable running costs of doing business, before any revenue is generated).

Did I mention the housing recession and that only this week several home builders were offering over $100,000 in incentives to get people to clear out some of their massive and costly inventory and provide them with some cash flow and liquidity. Did I also mention the commercial paper that needs to be rolled and isn't finding a home this week, or the off balance sheet debts that are starting to cry for help and also the vastly reduced number of buyers of CMO's (Collateralized Mortgage Obligations) ABS's (Asset Backed Securities), who don't want to share I the risk of loan pools where FICO scores no longer give any indication of who will or won't default due to relaxed underwriting standards, who Countrywide and other originators and banks need to securitize (pass debt onto to) write loans.

It is only 3-4 weeks since Bank of America became a "national hero" and bought $2Bn (shoring up the market and calming everyone's fears) of preferred stock to try and add to the war chest of the largest mortgage originator in the USA. That was on top of $11.5Bn short term credit lines drawn down upon the week earlier. Now Goldman Sachs is trying to put together another round of funding, possibly including J.P Morgan, Merrill Lynch etc.

Are intelligent people throwing good money after bad, surely not shrewd investment banks, it must mean Countrywide will be fine I hear people say. Maybe it is just my cynicism but I believe that whilst Countrywide may well survive in one guise or another, the vultures are lining up for the pickings, as well as protecting their already large investments. How are they doing this I hear you ask, simple, they are buying convertible preferred stock!

What does that mean in reality; it means that if Countrywide defaults or ceases trading they are the first in line to be paid, subjugating all the common shareholders. With assets being sold at cents on the dollar, their $2Bn may well clean up the majority of the real and semi-liquid assets of Countrywide whilst clearing debt, rental agreements, bad credit etc etc.

Okay I am sure I just heard you gasp!

Gasp you should, Countrywide just about managed to pay its staff and dividends due at the end of this month, but without significant loan generation, they will be light on revenue so how will they pay next month! That is why I say these savvy investment bankers are not throwing good money out of bad, they are protecting what will be theirs at the expense of the everyday common shareholders and a board of a company fighting for its very survival is boarding the life raft to leave the sinking ship. Why do I say this, well to build a business you need to be able to borrow and bankers are usually the people doing the lending. So if you scratch their back, they wouldn’t want to you too waste all your skills and talent and energy, so they will invest in you when you coming looking for funds for you new venture in 4-6 months when the smoke has blown away and the bare and empty carcass of CFC is finally laid before the common stock holders!

Did I mention the savvy bankers hedge, should countrywide prove canny enough to survive by a hairs breadth, they can convert their preferred stock into common stock at $18 something a share and have a nice return on their investment!!!

Dare I utter the whisper of the name of another much vaunted company – ENRON!

P.S The car industry will be the next to suffer as dealers give away cars with huge incentives and ultra low financing (even Honda the most frugal of all companies) to clear inventories ready for 2008 models!!!

P.P.S By the way if you haven't realized all this spells the way for a recession of "Great Depression" portions


Copyright Jonathan Rose 2007 - Creative Commons License





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Liquidity Crisis - A Little Reflection Gives Compelling Answers - Impending Stock Market Crash - Real Estate Bubble has Burst

The media shouts of a liquidity crisis and the financial markets are in turmoil, the terrible words recession and depression are being uttered by many and people are drawing upon similarities between 2007 and the former stock market collapses of 1987, 1929 and the recessions of the early 1930's, 1970’s, 1990's, 2000's . The question is how much do you really know and what do you need a know to make a considered opinion and protect yourself?

Historical Crashes & Depression/ Recession

Black Monday, October 19th 1987, came at the end of two record years where leveraged buyouts, mergers and acquisitions financed by junk bonds (In leveraged buyouts, a company would raise massive amounts of capital by selling junk bonds to the public. Junk bonds are simply bonds that have a high risk of loss, so they pay a high interest rate. The money raised by selling junk bonds, would go towards the purchase of the desired company.) drove the market to an artificial and unstable high. The Dow lost 22.6% of its value or $500 billion dollars, equivalent to more than 2000 points today.

The savior was Alan Greenspan who started to slash interest rates, inject money and renew consumer confidence. Thus the market was completely recovered within 12 months and on its way to new highs.

The great depression 1929 - You have to love October, the 29 crash was on the 28th and 29th when the market went from 400 to 145 and some $5bn was lost.



Charting the two great crashes shows an alarmingly similar picture with very similar profiles including the increased artificial liquidity, utilization of Margin in one Futures in the other to provide accentuated leverage and the need to a sharp correction to re correlate the market to true value.


Whatever scale one chooses to use the similarities are hard to deny



A recession occurs when GDP (Gross Domestic Product) falls for 2 or 3 consecutive quarters, illustrating that the economy is not growing as it should. Redundancy and job cuts as well as burgeoning debt are commonly associated with such times. Recessions often follow market corrections.




It is interesting to compare and contrast the recession of the 1930’s with that of the early 2000’s – had we not had the real estate bubble growing out of Fed Easing, who knows what the outcome would have been!

Current Market Value vs Prior times

This is one of the most important factors to understand when looking at current market volatility. Due to the incredible and unprecedented rise in market value (nearly 16000 in its high of 2007) there is an equal and equivalent rise and fall in daily trading range, thus a 200 point rise is equal too a 20 point rise when the market was at 1600. That is what makes the chart below so scary!!!


What’s happening now?

Countrywide Countrywide Financial (CFC) is being blamed by many as some corporate evil at the center of this crisis, but they are merely a scapegoat and one of the larger more visible symbols that people can vilify. Whilst their Chairman would seem to be profiteering and cashing out share options as fast as they can be written (over $100m in the last 12 month) it is not their "fault" that they are laying off thousands of employees to avoid bankruptcy CMO’s, QIV, SIV's, Conduits, Securitization and Private Equity.

The essence of success in business and trading is to buy or make something and sell it for more. To do this successfully initial capital is required. The best source of capital (liquidity) is to borrow someone else’s money and pay them less to borrow it than you can make by using it. Then your internal rate of return, the amount of money you make on the money you invested personally is magnified exponentially. The same is true of Margin within stock investing.

CMO’s (Collateralized Mortgage Obligation) MBS's (Mortgage Backed Security) are the method in which banks lend money to someone to buy a property, then to free up the money they invested so they can invest it again and make more money, they sell it on bundle as a CMO or MBS.

QIV (Qualified Investment Vehicle), SIV's (Structured Investment Vehicles), special purpose entity (SPE) while you may not have heard of these yet, you will be, this is as method for a bank/ company to transfer debt off its balance sheet. When reporting to shareholders, or borrowing money a bank or company wants to have the maximum number of assets and the least amount of liability. By moving liability into these off balance sheet entities their listed/ published balance sheet looks better (This is how 10’s if not 100’s of Billions in debt have been hidden from the public eye)

When defaults start to occur in this arena as they already are, credibility will be reduced and investors will panic and people will sell their investments to avoid loosing them! As in 1929, 1987, 2000 if there are not enough buyers prices will drop to bargain basement levels where astute investors will swoop in and sweep up cheap stocks.

The Federal Reserve

This is one of the most critical influences on the economy right now, which is why everyone watch Ben S. Bernanke comments so closely.

Alan Greenspan believed that consumer and investor confidence were to be boosted or at least supported at all times and many decisions seemed to focus on this. However Greenspan made some drastic mistakes, in 2001 – 2003 he cut interest rates so low that he created the real estate bubble.

What Was The Real Estate Bubble

Savy investors were able to sit back and watch the real estate bubble happen, capitalizing on less experienced individuals who worked out how much they could afford to borrow at “current” interest rates with no eye to the future and what they would do if they were to rise factoring in capital appreciation into their calculations. (the old saying of past performance is no indication of future performance!!!!!!)

Furthermore the teaser rates offered on loans to allow people to buy ever increasingly expensive real estate were inevitably due to reset and brokers were able to glibly assure people that they could just refinance closer to the time and not too worry about it!!!

Well unfortunately teaser rates and sub 5% mortgages are gone for now and people have to pay “very real” interest on their mortgages. The truth is that at some point we have to endure a correction and reach a bottom, to cut rates heavily to save the consumer will merely put off the same event till some time in the future and whilst it is sad to say, that is not truly in anyones best interests!!!

The Government


Whilst this is a somewhat more contentious subject it is not one that can easily be avoided. More money has been printed during the 8 years of George W Bush’s presidency than under all other presidents combined. Trade deficits are at their worst levels ever, the dollar is exceptionally weak and many central banks are moving more assets into Euro’s as a result. This does not bode well for the economy.

Furthermore in times of recession, a war is “sometimes” entered into by the US government driving substantial military spending and diverting attention overseas. This isn’t really an option as the USA is already essentially at war still in Iraq. It is rumored that the war gas been so expensive to date that the military will have to scrap or put on hold the F35-JSF (Joint Strike Fighter) project for lack of budget. That could potentially although not significantly impact America’s global military dominance.

How to Capitalize on this Information????

So September is the only month in the year that statistically shows losses! Meanwhile October is the month of Crashes!!!

Real Estate

1) The real estate bubble is bursting, expect to see significant price decreases and increased foreclosure over the next several years (unlike the stock market an adjustment cannot happen overnight).

+ Prices will decline throughout 2008 and into 2009 leaving great buying opportunities for those with Cash in late 08 early 09. Don’t buy for capital appreciation as it won’t happen till the beginning if not middle of the next decade at the earliest! (2010-2012)

2) Expect to see the commercial market decline 10-15% over then next year to two years as leverage is reduced and people will be unable to finance acquisitions

3) Expect to see more mortgage originators file for bankruptcy (possibly even Countrywide to clear off some debts) The Chairman has sold $10-100’s millions in options over the last 12 months (you would expect him to buy stock with the proceeds due to the bargain basement prices – preferred stock (issued at $25) reach mid $9 range during August

4) Expect to see at least 1 major home builder file for Bankruptcy

Financials

1) Don’t be surprised to see a bank failure or something close spark the next stock market crash, QIV may well be the cause of financial illiquidity of a medium sized banking institution

2) Whilst people are stating that Credit Card Companies are being unfairly hit as they do not hold any sub prime mortgage assets, do not be surprised to see credit default rates rising from 3% upto around 6%. When you have lost your home and your credit is not looking good, why not write off those pesky credit cards of $10,20 or even 30k+ at the same time.

3) Writing covered calls and selling puts on any open long positions seems like a great hedging strategy

4) Staples and super solid stocks – as those chosen by the like of Warren Buffet make for great long term holds as do any stocks that take an unfair beating

5) Most of all sit on the sidelines and play out September and October ready to capitalize in December.

"Plan for the Worst Case Scenario and Be Happy when the Best Case Occurs" - Jonathan Rose


You asking what all this means, for a prediction. Whilst one cannot foretell exactly and the markets have been known to do the unexpected, i am predicting a 500+ (probably 1-2,000 point drop) towards the end of October...caused by a liquidity short fall by a major bank, Countrywide becoming insolvent (or admitting it is) a major house builder filing for bankruptcy or someone finding out that the banks are carrying in excess of $250Bn of off balance sheet debt that they need to do something about and can't!!!


Don't say I didn't warn you!!!!







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Housing - How Low Can It Go - The Real Estate Bubble is Bursting

It is interesting to look at how people have been valuing property over the past 5-7 years, logic has seemingly left the building and until it is fully restored, the bottom will not be in sight.

One of the primary factors that is missing from the market has been to establish the rental income that the property can produce. With this figure in mind plus all costs, can the property cashflow and service a capital and interest debt as well as taxes, insurance and expenses!!!!

This is the real and true value of the property, what it is worth. If you find property that meets these criteria then it is worth buying as it will cashflow if not from day one, then very soon thereafter.

The other factor which is critical to successful investing, is the lack of emotion. A pure and empirically derived decision is essential to success in real estate as with any other investment. One of the major factors that plays into the volatility is peoples knee jerk reactions to the media which is trying to sell advertising (lets be honest) and needs as many "hooked readers as possible!

Don't buy a house because you love it, or it feels right, buy it because it is a good investment. Location, Location, Location is critical to this. Are there good or great public schools in the area, is it near good shops, are there areas that will decline and become less desirable situated nearby, does it have a good water supply (this will become an increasing issue over time)





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Between Birth and Age Five

Between birth and age five, your child has up to thirty IQ points at stake.

Scientists now know that the human brain is undergoing a constant and dramatic transformation in the first years of life. During this peak time of development, every activity and experience leaves an indelible mark on your baby’s brain, for better or worse.

The right kind of stimulation and nutrition will create connections in the brain that promote intelligence and raise IQ.

The wrong kinds of activities and foods can stifle intellectual development, destroy brain cells, and leave your child more vulnerable to learning or behavior problems down the road.

So, what can you do during the first five years to ensure that your child is primed to excel?The good news is that raising a smarter child is easier than you think. It doesn’t require making an investment in expensive equipment or high priced tutors. It’s as simple as playing the right games, serving the right foods, and maintaining a brain-enhancing environment in your home by eliminating common household toxins. learn easy and highly effective strategies that can vastly improve your child’s brain power and reduce his or her chances of developing ADD and ADHD. For example, you can:

• Stimulate Memory: Changing a component on the over-the-crib mobile every week makes the baby compare what was there before to what’s there now, reinforcing memory pathways in the brain that are critical for learning.


• Spread out those shots: Schedule more frequent trips to the pediatrician for vaccinations, so that fewer shots are administered at once. Flooding the immune system with a cocktail of different vaccines can damage the nervous system.


• Get rid of toxins: Protecting a child from neurotoxins found in foods, toys and even baby bottles can help preserve precious IQ points.

In addition, he reveals the numerous toys and household products that contain harmful, brain-damaging toxins and shows how to identify and combat common childhood problems like ADD and food allergies that may affect your child’s development.Your job over the first five years is to help your child build the best brain possible., you can mine the countless opportunities you have each day to make your child smarter, happier and better prepared to excel.





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