InvestorCentric

Senate Puts President Bush In His Place But Was It Warranted?

2008-05-13T14:31:00.000-07:00

Over President Bush’s pleas to the contrary, the Senate almost unanimously (97 to 1) approved a measure that will halt the further purchase of strategic oil reserves. Since it was passed by such a large majority, the measure cannot be vetoed by the President, so it looks as if President Bush has lost this battle for good. "Why on earth should we be putting oil underground at a time of record high prices?" Sen. Byron Dorgan (D-N.D.), the measure's chief sponsor, argued in a LA Times article. Democrats have been calling for this action for quite some time, but more recently Republicans have taken their side on the argument as well. Considering how much oil has been going up, though, this hoarding of oil might prove to be one of President Bush’s best investment decisions yet.

Under President Bush’s guidance the government has been adding about 70,000 barrels of oil a day, in comparison to the approximately 21 million barrels of oil the U.S. consumes each day, according to the LA Times. Since the amount being hoarded is minimal compared to total usage, the impact of suspending further stockpiling won’t be that great, but some economists figure it could save consumers as much as 3 to 5 cents per gallon on gas, according to the LA Times.

It is not hard to see that the motivations of many of these politicians is to get re-elected, but Bush doesn’t have that problem, so logic would say his only incentive is to do what is best for the country going forward. The main reason he gives for the stockpiling is energy security, which certainly has validity, yet I think it is proving to be an even better investment.

Here are some numbers to consider: Our national oil stockpile sits at approximately 702.7 million barrels, with an average price paid of $28.42 a barrel, according to the U.S. Department of Energy website. Since oil is more than $125 a barrel, that means that thanks to the policies upheld and pushed by Bush, we have created almost $68 billion of “oil equity,” so to speak. Considering many of the other dumb decisions Bush has made over the years, this might actually be one of his better ones, so let’s cut him a little slack. If the U.S. were now to release oil reserves to ease oil prices until we hit the stockpile point we would have been at had we listened to the previous Democratic oil outcries, we would be able to reduce gas prices by much more than the 3 to 5 cents we may see because of the current measure just passed by the Senate. So maybe there really is some method to Bush’s madness.

The Detroit Auto Industry Might Be In For Yet Another Hit

2008-05-13T10:37:00.000-07:00

At this point probably everyone is aware that Detroit’s auto industry has been struggling, and as the auto industry goes, so goes Detroit’s economy. During the past few years, consumers have left the American car manufacturers for their smaller and more fuel efficient foreign counterparts. Recently the American car manufacturers have begun to embrace the consumer’s desire for fuel efficiency, but they are still behind the competition, and now it appears that the entire auto industry might be in for a new shock.

As the price of oil continues to skyrocket, many consumers aren’t satisfied, or will eventually become unsatisfied, with the current level of fuel efficiency and are simply deciding to pass on the new car altogether in favor of public transportation. Many people have already been priced out of buying a new car with the added cost of fuel, but if $200 oil becomes a reality, as Goldman predicts, then you can bet the number of people being forced to public transportation will increase. This obviously is bad news for the Detroit auto industry.

I would love to see more people take public transportation. It is much more environmentally friendly and cost effective, yet there is a major problem: Many major cities in the U.S. have poor public transportation systems, and at their current levels, they are just not realistic for many professionals. I would love to take public transportation into work each day, but if I took the bus to work, it would take me about an hour and 15 minutes instead of the 10 to 15 minutes it takes me now. When you factor in the trip there and back I would have lost 2 hours of my day--not something that I’m willing to give up. It seems rather silly to me that a 7-mile journey would require three bus transfers and take more than an hour. Because of these many inefficiencies, and the increasing demand for public transportation, I see some changes in the future--and, of course, an investment opportunity.

First off, as more patrons are forced to public transportation, you can be sure that the government will be hearing their outcries about the inefficiency. As a result, I foresee an increase in public transportation investments, and possibly even upgrades. I love the light rail system they have going in Portland, and although I probably shouldn’t even mention the word "monorail" in Seattle (we’ve had quite the costly experience in the past with this one), I’m starting to think it’s not such a bad idea--assuming we actually do it right this time.

Lastly, I see access to public transportation becoming an important part of a person’s home buying decision. As you can probably tell, when I chose my home I wanted something close to work so I didn’t have to commute far, but I didn’t take into account whether it would work for public transportation. Those properties that are close to main transit centers which allow homeowners to easily go wherever they need to go might see an increase in demand. If I was planning to use public transportation from the start I certainly would have factored it into my housing decision. So while the Detroit auto industry may be in for another hit, public transportation companies and properties that are public transportation friendly should do well.

Greedy Conniving Landlords Or Smart Investors?

2008-05-12T09:00:00.000-07:00

New York City is home to many rent-regulated apartment buildings. In fact, rent-regulated apartments account for 57 percent of the total in the Bronx, 42 percent of the apartments in Brooklyn, 59 percent in Manhattan, 43 percent in Queens and 15 percent of those on Staten Island, according to The New York Times. Typically these buildings aren’t great investments because the land value is high and the cash flow is proportionately low, but now several private equity funds have discovered a loophole of sorts that is turning these previously poor cash flowing apartments into great investments. It isn’t without some ethical issues, though.

Usually in these rent-regulated apartments, tenants will stay for long periods of time because the rents are much lower in these units than elsewhere in the city and the yearly allowable rent increases are small compared to the actual market increases. The opportunity these private equity funds and investors are exploiting is that when a tenant moves out, the landlord is allowed to increase that particular unit’s rent to market. Considering these rent-regulated units are being rented in some cases at 65 percent or more below market, according to The New York Times, it is easy to see how this endeavor can become quite profitable. The more tenants you can get out of the building, the more money you are going to make. The problem is that these tenants typically don’t want to move, and even if they do, there are often few options of places they can afford to go. This is where the questionable ethical practices come in.

Tenants in buildings that have been bought by the private equity funds are now complaining of harassment and other questionable tactics on the part of the landlords in order to get them to move out of the building. Some of their tactics, such as offering tenants three months' rent as compensation for moving out seems decent, but others, such as harassing phone calls or repeated baseless court proceedings, are over the line, in my opinion.

It seems that many of these firms are having success at getting tenants to move out, but I think many of these landlords are falling into the greedy and conniving area. The idea is a good one, but crossing the ethical line just isn’t worth it, no matter how much they are going to make on these investments. It appears that these questionable activities might come back to haunt them anyway. Some of the tenants who have been “harassed” are filling a lawsuit against one of the private equity firms, and another firm has already settled a lawsuit brought upon them for rent-gouging, according to The New York Times. It has certainly been my experience that it is better to do things right the first time, because if you try to cut corners you’ll pay for it in the end. I think that if these funds are patient and really try to work with these tenants to come to an amenable solution, these investments can work out great for everyone involved. But by trying to expedite things, and make some extra cash at the expense of their tenants, these funds are showing their greed and are likely pay the price.

Consumer Debt Increases By More Than Double Estimates

2008-05-09T09:07:00.000-07:00

Consumer debt (excluding home loans) increased by $15.3 billion in March over the previous month, according to a report released by the Federal Reserve. Analysts had only been predicting around a $6 billion increase, so the news came as quite a surprise. The fact that Americans are borrowing and continuing to spend is good news for the economy in the immediate future, but for the long term, the implications aren’t as good. Let’s look at some of the causes of the debt hike and then the potential implications.

It doesn’t take a rocket scientist to figure out why Americans are getting further in debt, but here are a couple quotes:

Americans have had to go into debt to maintain their existing lifestyles, Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling, said in a CNNMoney article.

The Commerce Department said that personal spending rose higher than expected in March because of the rising costs of necessities such as food and fuel, even as personal income growth across the country slowed, CNNMoney reported last week.

So Americans want to maintain their lifestyles, but things are getting more expensive, so further in debt they go.

In the near term, people using debt is a good thing for the economy. Consumer spending accounts for around 70 percent of the gross domestic product in the U.S., according to the Associated Press, so any increase or decrease in consumer spending can have a drastic effect on the economy. At the same time, we must understand that debt spending can’t go on forever. There will become a point when people are tapped out and they just cannot borrow anymore. When that happens it will cause a huge pullback in spending and the economy will be hit hard.

I know the idea of there being a limit to the amount of money people can borrow is a hard concept to grasp for Americans, considering we are the nation of debtors, but it is true. Whether we want to believe it or not, in order for there to be a lasting spending increase, wages are going to have to go up. Considering that wage increases haven’t even been keeping up with inflation over recent years, we have a ways to go on that front.

The Economy Is Worse Than We Know: Check Out These Numbers!

2008-05-08T16:46:00.000-07:00

Sorry to be the one to add more doom and gloom to an already rocky financial landscape, but the economy might be even worse than we think. According to Kevin Phillips from Harper’s Magazine, the government has been artificially fudging economic statistics for years by changing the way things are calculated. The main three government statistical calculations that Phillips points out are the unemployment rate, Consumer Price Index (CPI) and GDP. If we were to calculate these numbers in the manner in which we used to, before all the changes, things wouldn’t appear nearly as rosy as they do right now.

Here are the current numbers:

Unemployment Rate: 5 percent

CPI: 4 percent

GDP Growth: 0.6 percent (Q1 2008)

Now here are the estimates given by Phillips:

Unemployment Rate: Between 9 and 12 percent

CPI: Between 7 and 10 percent

GDP Growth: Minimal growth since 2001

Phillips also makes an interesting point about why the government needs to fudge the numbers. In his article, Phillips says that according to calculations from John Williams at Shadowstats.com, if the government had failed to make the changes to the CPI index, and stayed true to the old calculations, Social Security checks would be 70 percent greater than they are today.

As most people know, Social Security payments are tied to the CPI index, and as inflation goes up, so do the checks in order to compensate. Considering that the nation is already more than $9 trillion in debt, and that the government spends every dime of incoming Social Security payments, adding billions more in Social Security liabilities would not be helpful to the economy. In addition, if inflation was reported at the higher number, we would surely see much higher interest rates across the board--again, not a big booster to the economy. Phillips gets into much more detail, but for brevity's sake, I’m not going to get into that here. If you want to read the full article you can visit Harper’s (requires subscription) or you can read a free partial version at Mindfully.

I can see why the government felt they had to make the changes they did, and some of them even seem to be warranted, such as one pointed out in a recent New York Times article. “To take just one example, years would often pass before the index included new products — like cellphones — and therefore it missed the enormous price declines that occurred shortly after those products entered the mainstream.” In addition, it is much easier to change around some numbers that most people don’t understand anyway, and in doing so lower your liabilities, than to flat out tell them their Social Security benefits are going to be cut, or taxes are going to be raised.

Other changes, though, seem questionable at best. One change that was made, as pointed out by Phillips, is that the new calculations make adjustments to people’s assumed buying habits if certain products get too expensive. For example, if flank steak gets too expensive, people are assumed to shift to hamburger. At the same time though, nobody is assumed to move up to filet mignon when things are going well. So this is a change that can only make the CPI go further down, which seems a little biased.

No matter how we slice it, or how much we think we’ve been cheated, the government can’t afford to increase our social security payments by 70 percent, or to increase any other payments to us for that matter--even if they wanted to. They probably aren’t even going to be able to pay the full Social Security benefits as they are now for many more years, so we might as well give up that argument. Below is a chart that shows intragovernmental holdings, which essentially is money that the government is "borrowing" from other government agencies, the main one being Social Security.

The best thing we can do is understand that the government-reported numbers may not be as good as they say, and make the necessary adjustments to our own calculations. Instead of using 3 percent as the inflation number in your retirement calculations, maybe it makes sense to use 5 or even 7 percent. Sure, it would be nice if the government could actually be trusted and told us the truth now and again, but hey we can’t set our hopes too high, right?

City Of Vallejo, California Declares Bankruptcy: Will More Cities Follow?

2008-05-08T11:11:00.000-07:00

Rarely do cities of a decent size declare bankruptcy, but that is exactly what the city of Vallejo, California, home to more than 100,000 people is doing. Hurt by falling property tax revenues, a stagnant economy and the failure to renegotiate key deals with unions, the city of Vallejo was left with little choice. The questions now are: How will this bankruptcy affect residents and business owners in the city? And is this city’s bankruptcy just a glimpse of what is to come?

A bankruptcy is harsh reality; it is in essence the proclamation that you can no longer afford to pay your debts, and you need help. It is especially bad when a city makes this declaration because it affects a lot of people. Taxpaying residents and business owners expect their cities to provide certain things in exchange for their tax payments. These things include security, infrastructure and so on, which are absolutely vital to a city and its residents' well being. When a city goes bankrupt, residents and business owners usually see dramatic cuts in the services they receive. In addition, the city’s patrons can also expect rising taxes as the city tries to climb out of the hole. Neither of these things are good for the people living and working in the city, and they also tend to be a detractor when it comes to getting new people and businesses to move to the city.

The problems in Vallejo are not isolated--it is likely that many other cities across the country are also experiencing them. During the housing boom Vallejo was able to pay for all the services on the back of increased property taxes, but as housing prices started falling hard and fast, they saw their coffers run dry. This is a common occurrence in boom and bust cycles. During the boom time, many cities see tremendous growth and they are often pressured to increase spending and undergo various projects in order to keep up. When the boom is over, they are left with all the expenses of the boom, but much less revenue with which to pay for them.

The people and businesses that moved to Vallejo during the boom did so with the expectation that things would continue on as they were then. Now, with police and fire forces at the bare minimum and infrastructure maintenance in question, residents are not getting what they planned on. Normally when cities are short on cash, they can raise needed funds via a municipal bond offering to investors. Considering the dire straits Vallejo is in, and its pending bankruptcy, that option is basically nonexistent. In order to get added services Vallejo has to raise taxes, and that is typically not a good way to stimulate a local economy. Already people are hesitating to move to Vallejo because of its financial condition, and it is likely that it will also force some residents and businesses out. If this happens it could lead to a negative spiral affect that could completely destroy the city. Look at some of the cities in Ohio for an example of what happens if residents and businesses leave in masse.

The city of Vallejo is not alone in its financial trouble, and as the housing crisis continues to leave its mark and the economy continues to struggle, it may not be the last city to declare bankruptcy. Considering the impact that something like this can have on the well being of a city, it might be wise for investors to add a new layer of due diligence to their property purchases: studying the city’s financials.

*The picture above is of the California Maritime Academy in Vallejo, CA and is courtesy of iamu-edu.org

Benefits Of Economic Recession

2008-05-07T09:39:00.001-07:00

With all the doom and gloom talk about the current (or looming, depending on your view) economic recession and housing bubble, I thought it would be nice to talk about some of the benefits that should be realized by these otherwise negative events for a change. An economic recession is not a joyous time for most people, as jobs and wages are cut and belts are tightened, but there are some positives.

The housing bubble, for one, should be looked at as an overall good thing for many people who were priced out of the market. In many parts of the U.S., homes were just flat out getting too expensive; now that they have dropped by double digit percentages in most areas, they are becoming more affordable. Obviously this isn’t necessarily a good thing for current homeowners, but it is certainly a correction that needed to be made.

Another benefit of the economic recession is that it should serve as a wake-up call to investors and consumers alike. Things were going so well that many investors got big heads and took on a too much risk. Consumers on the other hand didn’t bother to save and instead decided to spend every penny they had and then some. The pain people are experiencing now as a result of those actions should be remembered next time a boom and bust comes around. This might be wishful thinking, as it seems people didn’t learn this lesson after the dot-com bust, but hopefully this time will be different.

In addition, I hope that this economic turbulence will force the government to re-evaluate their spending habits and overall budget. The U.S. government is wasting more money than we can even imagine on things which are producing either no, or little, benefit for our country. If the U.S. government were a business, they would have gone out of business a long time ago. They need to figure out which programs are producing significant ROI to the country and cut the programs that aren’t holding their weight.

Lastly, one of the key benefits for investors from an economic recession is that they are often able to buy assets cheaply. Smart investors will look to capitalize on everyone else’s panic and desperation and buy up their assets at a hefty discount. Often times it is possible to actually make more money in a recession than during the boom. Less competition and desperate sellers mean lots of opportunity for investors. The trick is that investors need to make sure they aren’t buying assets which are going to decline in value.

While economic recessions are gloomy times, there are some benefits that can be derived from them. Hopefully you prepared yourself for this economic recession and are prepared to profit from it instead of falling victim to it. If not, then learn from your mistakes and make sure next time you are ready. Regardless of what some people say, there will likely be more recessions in your lifetime. Make sure you are prepared.

The Housing Crisis Is Over! Or Is It?

2008-05-07T09:31:00.001-07:00

I read an interesting opinion piece in The Wall Street Journal yesterday by Cyril Moulle-Berteaux, a hedge fund manager, which said the housing crisis was over, and that it bottomed out in April. I couldn’t help but respond to such claims, as I’m not sure how he can be so confident in his stance. You can read the whole article for yourself; I’m not going to get into all the particulars here, but I wanted to add a couple points.

The stats that Mr. Moulle-Berteaux used in his article sound great, but how much can we rely on such data? The answer is we can’t. Just as he says the data being used by the housing naysayers is inaccurate, so too must we be skeptical of his. Statistics can be found to back up just about any point you want to make, and beyond that you can analyze data sets in many different ways and skew them as need be.

The main point that he makes is that housing is now affordable to the masses again, so we should expect people to start buying. Typically, when the cost of renting nears the cost of owning, people will choose to buy. That argument makes sense to me. However, many people couldn’t buy now even if they wanted to. Lenders have tightened their standards to the point that, unless you are looking at getting a conforming loan, you are pretty much out of luck. That means that people need to be able to put up 20 percent in order to buy a home, and I’m not sure as many people have that kind of money as he thinks. During the housing boom we experienced the highest proportion of homeownership in U.S. history, and this was in large part because of the increased number people who were able to qualify for home loans. Now that these people can no longer qualify for home loans, the percentage of homeowners has to drop. As more and more people go into foreclosure and lose their homes, the percentage of homeowners is going to drop. Considering how the number of foreclosures is continuing to increase, I think it might be a bit premature to call a bottom.

In addition, we have to consider the mob mentality. Even if prices have dropped to an equilibrium, in boom and bust cycles, both the boom and bust typically go further on their perspective ends than they statistically should. The reason for this is that people follow a mob mentality; we are natural followers and we don’t want to be the first ones to the party, so to speak. Therefore, even if April marked the statistical bottom, the market is probably still in for some additional correction before people are ready to jump back in. When they do, though, it will likely be a nice little surge of activity.

Many of Mr. Moulle-Berteaux’s points are valid, and who knows--maybe he will turn out to be right. But from my experience, trying to time the market is just a practice in futility. There are so many factors that go into determining these things that chances are you are going to be wrong when you try to time a market. In my mind, the factors that investors need to keep an eye on are property yield or cash flow. Cash flow is an age-old indicator of property value, and it rarely lets us down. Steep losses are realized when people panic and leave the market all at once. If a property owner is seeing cash flow, they have no need to panic. So my advice to you is to not bother trying to time the market. Be smart, and if you are going to buy, buy on cash flow rather than trying to use your--or anyone else's--crystal ball.

The Water Crisis: Saving For A Sunny Day

2008-05-06T14:14:00.000-07:00

Summer is approaching, and with it comes anticipation of all its pleasure: picnics, barbecues, baseball, summer vacation and life-destroying drought. From San Diego to Atlanta, from below the Texas border to the Rockies, people of the Sun Belt are bracing for another summer of watering the lawn with their bathwater...at night...wearing a ski mask to avoid hefty fines. Just what are people doing to prepare and conserve in these hard-hit places? Let’s start with my old hometown, Atlanta...

To celebrate Sunny Perdue’s “Take a Shorter Shower” month, Stone Mountain Park premiered its Snow Mountain attraction last November. The 1.2 million gallon slush ball was conceived to give sunny Atlanta a most deserved winter wonderland, but apparently a bunch of prissy naysayers who like taking showers more than seeing children happy shut the attraction down after opening day. Reprehensible isn’t it? What had they to complain about? Besides this:

“Snow blowers were pulling water from the DeKalb County water system, instead of the park's lake because park officials wanted the snow to be pure white.”

People in Georgia wanting something to be pure white?! NEVER!

Ahem...

In a state where there are no natural lakes (the main reservoir, Lake Lanier, is a flooded town that routinely stuns and drowns swimmers with debris floating from the bottom), and where most of the watersheds have been paved over for parking lots and tract housing (Georgia’s lack of natural barriers made it prime for unchecked growth for the last decade), one would think that the legislature would have a better contingency plan than “Screw over Alabama and Florida” but that’s what it boils down to. Water wars between the three states have been flaring for over 15 years, and last year saw a particularly nasty clash between Georgia and Florida when the Northern Aggressor—in a rare, bipartisan decision—voted to divert millions of gallons of water that had been promised to Florida to protect endangered mussels and sturgeon in the northern lakes. Meanwhile, the hundreds of golf courses across Georgia kept their sprinklers on. As long as they can pay for it, who are we to stop them?

This smacks of an “almighty dollar” scenario that may play out on the other side of the country in Vegas, whose reservoir at Lake Mead is tapped by aqueducts to many surrounding cities. That reservoir is already at half capacity and declining rapidly. According to a report published by researchers at Scripps Institution of Oceanography, UC San Diego, Lake Mead may be bone-dry by 2021.

I have heard people suggest that Vegas is protected by the vast wealth contained there, which will allow the city to simply buy water when it becomes necessary... I’m sure those generous casino and hotel moguls will be just thrilled to share with everyone. Might I add that this would necessarily be at the cost of towns that would see their water supply go to a higher bidder? Is this really an ideal scenario to anyone? And can one be sure that Vegas’ coffers won’t dry up as well? Casinos are not recession-proof, and if Cirque du Soleil has to start performing their hit water show “O” in a vat of urine, Vegas may lose its appeal and the house may finally lose a round. Benjamin Franklin said in his Poor Richard’s Almanac: “When the well runs dry, we shall know the true worth of water.” One can only hope that whoever has it will accept feather boas and sequined thongs as payment.

The Lake Mead crisis is complicated by a 1944 water-sharing treaty with Mexico, which guarantees that a certain minimum of potable water from the Colorado River reach the Mexican border. A desalination plant was built just north of the border to make good on this promise, but by the time the river reaches the Colorado River Delta—half a century ago, a two million acre expanse of wetlands and lagoons—it is a mere trickle, and the surrounding area is a salt flat.

Elsewhere, tensions over the Rio Grande water supply continue to rage in South Texas and Mexico. A decade-long water-debt to the U.S. by Mexico was resolved in 2005, but only after an estimated $660 million of losses because of failed crops in the Texas Valley. Texas is seeking redress through NAFTA in Canadian courts for these losses, and the soured relations between the two states show no signs of improvement.

During the worst years of the drought, the government did what it could to aid Southern farmers by funding updates and improvements to irrigation systems, but reservoirs throughout the Sun Belt are still pitifully limited, and rampant growth in cities such as Vegas and Atlanta and Phoenix (which seems to have the soundest approach to the water crisis of the three) threaten to turn these towns into dust bins in a matter of years. As much as some people would like to believe it, this is not a problem that money alone can solve. Only real planning and foresight will be enough to protect these cities from complete desiccation.

If you choose to invest in any city threatened by drought, then do not fail to research the city’s contingency plans and make your own. Increasing interest in sustainable housing is making additions such as home reservoirs more accessible. For those living in drought-affected areas, such considerations may become absolutely vital, and so for those investing in these areas, having a house whose residents can actually take a shower may make the difference between a hot-ticket and sand trap. Now...I’m off to the golf courses!

Fannie Mae Records $2.2 Billion Quarterly Loss; Fear Mounts

2008-05-06T10:47:00.000-07:00

Mortgage giant Fannie Mae today reported first a first quarter loss of nearly $2.2 billion, or $2.57 a share, much higher than the expected loss of $0.81 analysts were expecting, according to The New York Times.

Those who are regular readers of this blog know that one of my biggest fears is that one of these mortgage giants will fail. The impact of a Fannie Mae or Freddie Mac failure would be felt hard and fast, and would likely send the already precarious economy into a colossal tail spin. Not only would the housing market tank, but so would the entire U.S. economy. I am not excited about those prospects and the new-found power given to these companies by the government is not increasing my confidence level at all.

I understand why the government loosened the guidelines for the companies, yet at the same time it scares me. While the possibility remains that these changes will help the credit markets, and in turn the housing market and economy, they also increase the chances of these companies failing and the potential impact of a failure. According to The New York Times, Fannie Mae and Freddie Mac now control more than 80 percent of the mortgage market--more than double their market share of just a couple years ago. If these companies fail, the mortgage market is for all intents and purposes dead--a scary possibility. Of course, the government won’t let these companies fail, but how much would a bail out cost taxpayers? Some estimates put the number over a $1 trillion, a number that would have serious consequences to a nation already over $9 trillion in debt.

I have my fingers crossed that we won’t have to witness the failure of either of these mortgage industry giants, but as the losses continue to mount, I get more and more fearful. America has a lot riding on these two companies, so let's hope that they are able to keep it together.

What Happens In Vegas Devalues In Vegas

2008-05-05T16:46:00.000-07:00

The Las Vegas real estate market has been notoriously hard-hit by the foreclosure crisis: 51 percent of unsold homes in Vegas are now vacant. This has presented investors with a large selection of single-family properties for investment. In a market such as Las Vegas with an abundance of vacant homes, investors should view such purchases as long-term investments and know that it may take several years before a home turns a profit. But what about some of the ultra-lux homes? According to a recent article in the Los Angeles Times, luxury homes in Vegas may be second only to a Fried-Scorpion-on-a-Stick Stand in terms of bad investments:

“About 1,000 houses are listed for sale in Las Vegas for $1 million or higher, more than 600 of them built since 2004. But unless they've been constructed in the last year or two, the properties are considered out-of-date, making them all that more difficult to sell, real estate agents say.”

In a town where Hank Overalls becomes Mr. Henry Tuxedo and Lucy Dressbarn becomes Lady Prada von Guccistein overnight, in a place where the word of the moment is always “New!” whereas “Classic” and “Established” are maledictions, it is only natural that the homes be as extravagant and aesthetically bankrupt as their occupants. The trouble is—in case you don’t know—Las Vegas is situated in a flat, hostile desert, and there isn’t much in the way of a view or an established neighborhood. With acres of land available for development and only an impotent Bureau of Land Management to moderate it all, one developer after another (and sometimes the same one, over and over) has created the next “hot” neighborhood, and residents have followed:

“One developer, Christopher Homes, recently opened a neighborhood of homes in the hills west of the Strip selling for $1.7 million to $3 million. Several houses have sold to residents of adjoining neighborhoods who lived in their houses for less than five years, including homes built by the same developer, said Erika Geiser, the company's vice president.”

“‘They feel their residence is obsolete,’ she said. ‘They're looking for something more innovative, more cutting-edge.’”

Cutting-edge, indeed. Like so many glass pianos of yesteryear whose tops are now marred by the fine cuts of straight razors and the occasional syringe, the old homes are indeed pathetic vestiges of a bygone era, and I don’t blame the homeowners from moving on. Here is a table displaying some of the bare necessities that people expect to find in their new homes:

Classic	NEW!
5,000 to 7,000 square feet	8,000 to 10,000 square feet
Walk-in showers	7 foot by 7 foot showers
Granite tile bathtub	Granite slab bathtub
12” by 12” polished travertine tiles in entrance	20” by 20” polished travertine tiles in entrance
Stainless steel counters, glass tiles in kitchen	Stainless steel counters, glass tiles in laundry room
Plastic chandelier	Chandelier made of human sternums*

*May or may not be an exaggeration. Would it be all that surprising if it were true?

All of this is to say, it takes knowing the future of what people will want in a home—and where people will want that home—to win at investing in ultra-lux homes in Vegas, and in the end you’re probably better off the blackjack tables. Take the sad story of Mr. William Derentz, for example:

“William Derentz, who heads the company that runs the annual Harvest Festival in Laguna Hills, bought a 5,400-square-foot home in Las Vegas for $2 million in 2004. He never moved in, since he planned to resell it in a year or two at a hoped-for profit of $1 million.”

Alas, the market tanked and defeated Derentz moved into the house in February, but while there, he will remodel the backyard, adding “his-and-her” cabanas to make it a more competitive seller. He may want to make those “his-and-her” reservoirs instead, given that the Las Vegas real estate market may never recover if it runs out of water first.

More on the increasingly dire water crisis in the Southern U.S. and Mexico in tomorrow’s post: “Water, Water Everywhere, But Not A Drop To Fill My 49 Square-Foot Shower,” or perhaps “The Day After Tomorrow Part II: The Day After Cinco De Mayo.”

Barack Obama: Guilty By Association?

2008-05-05T09:35:00.000-07:00

By now everyone knows the Rev. Jeremiah Wright and what he has done to the Obama campaign, but what about another of Barack Obama’s friends, Deval Patrick, the governor of Massachusetts? I just read an interesting opinion piece in the Wall Street Journal by Jon Keller in which Keller essentially called out all of Patrick’s faults and proceeded to say that Obama would end up just like Patrick. The article brings up many similarities between Obama and Patrick: They are both African American, they both attended Harvard Law and they both frequently focus on “change” in their rhetoric. Earlier this year in a campaign speech, Obama even borrowed some words from one of Patrick’s speeches and was accused of plagiarism. The two are close friends, and may be similar in some ways, but is the assumption that Obama will follow the same path as his friend really fair?

I am not personally an Obama supporter, and I am not planning to vote for him come election time, but this is not because of the actions of his friends and acquaintances. To judge him solely on that would be short-sighted, and I feel for the guy for enduring so much judgment, even if this sort of scrutiny does come with the territory. While I do think Obama might be promising more than he can deliver, the main reason I don’t support him is that I don’t agree with many of his major policies. One of Keller’s major criticisms of Obama in the article revolves around these promises of change. Deval Patrick has failed on several occasions to see his promised changes through, and Keller thinks Obama is likely to do the same. I, too, question whether Obama will be able to carry his changes to completion, as I am always skeptical of politicians that make grand promises, but one thing makes me think that he perhaps isn’t just paying lip-service.

A gas tax holiday has recently been proposed, which McCain and Clinton are supporting and Obama is opposing. I firmly agree with Obama on this, and I respect that he is holding his ground. Most Americans don’t understand economics all that well, and many will jump on the gas tax holiday bandwagon. It would have been easy for Obama to support the tax holiday along with Clinton and McCain and gain the goodwill of millions of Americans who are faced with the reality of $4 a gallon gas, but it wouldn’t have been the best move for the country. Obama may be more perseverant than people think, and these allegations that he will be another Deval Patrick may prove to be a bit premature.

Most Expensive House In The World Almost $2 Billion

2008-05-02T13:21:00.000-07:00

It appears there will soon be a new “most expensive house in the world.” The fifth richest man in the word and head of Mumbai-based petrochemical giant Reliance Industries, Mukesh Ambani is building a new home which will cost nearly $2 billion. How do you know when you have too much money? How about when you are having a $2 billion house built for you. Considering Ambani is worth some $43 billion according to Forbes, this $2 billion home is in no way a stretch for him, but maybe it is just a tad extravagant.

According to an article in Forbes, the Ambanis will leave their extensively remodeled 22-story tower home in downtown Mumbai for their new 27-story 400,000 square foot skyscraper (visit Forbes for more details), also located in Mumbai and equipped with nearly every extravagance imaginable. A building of this size wouldn’t ordinarily cost $2 billion, but because of the material being used and the fact that the designs of each floor are very different, the costs are much higher. I’m not typically one to go bashing wealthy people for their extravagant spending habits, but this was a little disturbing to me. They already have one of the most expensive houses in the world and are simply one-upping themselves, flaunting their wealth in the face of poverty and deprivation being experienced in their country. Here is an excerpt from the World Food Programme’s website:

Nearly 50 percent of the world's hungry live in India, a low-income, food-deficit country. Around 35 percent of India's population - 350 million - are considered food-insecure, consuming less than 80 percent of minimum energy requirements.

Nutritional and health indicators are extremely low. Nearly nine out of ten pregnant women aged between 15 and 49 years suffer from malnutrition and anemia. Anemia in pregnant women causes 20 percent of infant mortality. More than half of the children under five are moderately or severely malnourished, or suffer from stunting.

How can you possibly justify a $2 billion expense when half of the starving people in this world come from your country? For most wealthy Americans, it is hard to understand and relate to such dire problems half a world away. Once you witness with your own eyes a person dying of starvation, you get a new perspective on life, or at least anyone with a heart would. Unfortunately—or fortunately depending on your perspective—many Americans never see such things first hand and such problems seem as unreal as they are remote. But Mr. Ambani, I must imagine, has witnessed these problems first hand, as it would be hard to avoid them while living in a country facing such a crisis.

Ambani is pouring money back into the economy with the construction of his residence, along with the 600 or so staff he is expected to keep in order to maintain his home. Those people are probably thankful to Mr. Ambani, but I can think of a thousand ways in which just a fraction of this $2 billion could be used to better help his countrymen.

I’m not a frequent reader of Indian media, but I imagine that this fellow is not looked upon too highly by the poor in India. If I were Ambani, I don’t think I could sleep at night in my overly extravagant palace while elsewhere in my city thousands of people are dying of starvation and malnutrition. Personally, all I would be able to think about is that I could have saved every one of them, but instead I chose to have that custom solid gold toilet. Sounds like a nightmare to me...but hey...as long as he can live with himself.

*Photos used were from Forbes.com

Hispanic Culture: Embrace It And Prosper

2008-05-02T13:11:00.001-07:00

America is embracing Hispanic culture, and investors should too. The Hispanic population is the fastest growing segment of the U.S. population, and according to the most recent Census Bureau release Hispanics now comprise 15 percent of the total population or some 45 million people. Furthermore, it is projected that by 2050 Hispanics will make up 25 percent of the total U.S. population. There are numerous ways in which investors can embrace and profit from the emergence of Hispanic culture in America. I will mention a couple.

Real estate investors in particular can capitalize on this trend is by making their rental properties more Hispanic-friendly. Advertise and use signage with both English and Spanish. If you are having a property manager service your property, why not find one that is bi-lingual? A bi-lingual property manager would be able to capitalize on both English and Spanish speaking tenants, offering you more coverage. Depending on your location—California and Texas in particular—you might think about pulling out all the stops to make your rental Hispanic-friendly.

There are many businesses one could start that take advantage of this growth. One of the more interesting ones to my mind was included in our Business Ideas article, namely the creation of bi-lingual call centers in Latin America that service the U.S. population. There is a plethora of bi-lingual natives in Central America in particular that offer cheap labor. How long do you think it will be before U.S. companies stop outsourcing call center business to places like India, where labor is rapidly becoming more expensive? In addition to rising costs in places like India, there is also the difference in time zones, which isn’t a problem in Latin America. Labor might be a tad more expensive, but it is well worth it when you can have employees who speak the top two languages in the U.S. and who reside in the same time zone as you.

No matter what business or type of investment you’re in, there is probably a way which you can better cater to the Hispanic population. Investors who embrace this culture stand to do well in coming years, while those who ignore it could have serious regrets.

U.S. Had Worst Housing Market In The World Last Year

2008-05-01T08:04:00.000-07:00

The U.S. won the dubious honor of having the worst housing market in the world in 2007, recording an 8.9 percent drop in housing prices nationwide. The second worst housing market after the U.S. was Ireland, which saw a 7.32 percent drop. We all knew things were bad in the U.S. housing market, but the worst in the world? That is quite a distinction.

When looking at these numbers we must remember a couple things, though.

First, not all the countries in the world provide national housing market data, so many countries are not even included in the data set.

Second, the U.S. is a large country and housing markets across cities and states are different from one another, so the number is simply a national average. Florida and California in particular had an extremely strong negative effect on these calculations, while states such as Texas have actually held up fairly well through the housing crash. Thus comparing the U.S. housing market to one such as Hong Kong, for example, is a stretch at best.

Nevertheless, we can still consider ourselves to be the champions of housing market futility, and while there is no trophy involved, we can revel in the fact that we are #1.

*Chart from Global Property Guide

All housing market data used in this article was provided by Global Property Guide.

What Will Become Our Alternative To Oil?

2008-04-30T14:20:00.000-07:00

With the price of oil hovering around $120 a barrel, there is talk coming from seemingly every direction proclaiming that we need to find an alternative to oil, but talk and reality are two different things. So on what can we hang our hopes?

There are several alternative energy sources out there, but most of them have little to no chance of becoming our long term solution. The one the White House has been backing is ethanol, but recent studies and food prices have shown the vast weaknesses with it. So we know for sure that ethanol (at least the food-based version) is out, but what else do we have?

There is a lot of talk about hydrogen, clean coal, natural gas, nuclear and even non-traditional oil sources, but alas all of them have major weaknesses. There appears to be no perfect solution to our oil dependence. Among these alternatives, to my mind the best solution involves a heavy dose of nuclear energy, but the cost and time frames involved can be prohibitive.

The idea of nuclear power itself is great, but what about all the radioactive waste produced by the plants and the major security risks involved? These are a couple of the big questions brought up by nuclear power opposition, and until recently there really wasn’t a good answer. Not too long ago I came across a company that is working towards implementing thorium in place of uranium in nuclear reactors. This is an interesting development because the byproduct of a thorium based reactor cannot be used to build a nuclear bomb (always a good thing), and the half life is a fraction of its uranium counterpart. This technology is fairly new, but if it works it could potentially solve a couple of the major concerns brought up by those opposed to nuclear power.

The thing to keep in mind here is that there is no perfect solution. We are going to be dependent on oil for some time yet, but the longer we take to address our oil problem, the worse off we are going to be. President Bush recently said “I think we better understand that there's not a lot of excess capacity in this world right now," According to Reuters. The demand for oil is increasing at a much faster pace than the supply, so according to economic theory the price of oil probably won’t be coming down anytime soon. If we don’t look for the best solution, one will be forced upon us eventually.

This problem is real in my mind, and as an investor I’m of course trying to figure out what the solution will be and how to profit from it. The best solution I see long term is with nuclear energy; what do you see? I’m curious to hear what others are thinking, so if you think you know what the solution to our oil problem will be, fill us in.

Federal Reserve Meeting Today: BYOB, Pizza Will Be Served

2008-04-29T13:51:00.000-07:00

The Fed is meeting again today and tomorrow. To mark this diminishingly historic occasion, I have composed the following ditty. Ahem...

There once was a man named Bernanke:

For the banks, an immaculate flunky.

When their assets all failed

with our money he bailed

them all out like a good little monkey

Thank you. Thank you.

As the Fed disappears behind the curtain yet again, ‘O we of little faith’ are bracing for yet another quarter percent drop in interest rates. Soon it will be official: You will likely see more appreciation on kitsch from the Franklin Mint than anything that comes out of the U.S. Mint. My friends all laughed when I plunked down 100 smackers for my Mystical Dreamcatcher Pocketwatch, but who’s laughing now?!

For those of you who didn’t have foresight enough to invest in chilling likenesses of dead royalty and zirconium encrusted daggers, allow me to predict what the Fed is planning to do. Just let me look into my Dragon of Lore Crystal Ball (a steal at 5 payments of only $39.99!)...

Abra-cadabra!

~~Ah yes...I scry a rather stoned-looking Bernanke telling the table that he knows exactly what needs to be done. Well! That’s good news!~~

~~Oh. He wasn’t talking about the economy. He was suggesting that they order pizza.

But still...based on his track record, that’s one of his more reasonable suggestions.~~

~~Now someone else at the table is telling him that no one there can afford to have a pizza delivered

because food and gas prices have soared again.~~

~~Bernanke insists that “Referendum Deepdish” be passed as they can just print more money

in the office next door. The motion is passed.~~

~~Someone raises a new motion: Will the Reserve lower interest rates again despite the fact that it has done nothing to mitigate the housing crisis or prevent a recession? They ask the chairman directly.~~

~~Bernanke teeters in his seat for a moment, opens his mouth...and then passes out on the floor.

The attendees concur with the chairman’s motion to drop the interest rate again. Motion is passed.~~

~~The pizza arrives. The delivery fellow receives a lousy tip.~~

As we can see, it’s all business as usual at the Federal Reserve. But before I go off to polish my collection of Elvis Head Silver Dollars, I leave the Fed with three bits of advice:

These are tough, confusing times, and I do in fact sympathize with anyone tasked with sorting this out, but your methods have proven to be the financial equivalent of bloodletting for the ailing economy. Try something new for once, PLEEEEEEEASE!
We know the banks own you (literally), but at least pretend that you have the interest of the American people in mind. You know, we love a good circus act. And if you piss us off, then...
Don’t stiff the pizza boy: He knows where you live.

Barack Obama Could Win The Election Thanks To Ron Paul?

2008-04-29T10:38:00.000-07:00

The fact that the Ron Paul Revolution is still kicking, despite the fact that the Republican nominee has already been decided, could potentially help Barack Obama and hurt John McCain’s chances at the presidency. I read an interesting blog post from Tommy Christopher at the Political Machine that brought up a key point. According to Christopher, one of the strongest ties of the Ron Paul revolutionaries is that they strongly oppose the war in Iraq. Since McCain plans to keep the Iraq war going indefinitely, this will likely lead to many Ron Paul supporters crossing party lines to vote for the Democratic candidate, which will likely be Obama.

McCain’s party hasn’t worried too much about the Ron Paul fallout, probably assuming that it would taper off once he clearly won the nomination, but that doesn’t appear to be happening. In the recent Pennsylvania primary, Ron Paul won 16% of the vote, which in itself is not a huge number, but if a majority of these Ron Paul supporters turn to Obama come election time, they could easily swing the race.

Ron Paul seems intent on continuing to use his platform as a presidential candidate to spread his revolutionary ideas for as long as he can. The more people who hear Paul’s message, about the Iraq war in particular, the more people who could demand the end to this war, which would likely only come if Obama is elected president.

By staying in the race Ron Paul is in effect helping Obama. I don’t think that Ron Paul supporters are truly excited about the prospects of McCain or Obama, or they would be supporting one of these candidates by now. Which way they go in the end though could possibly decide the presidential race, and it is hard to ignore that the biggest issue in many of the Ron Paul Revolutionaries minds is the Iraq war. I can’t imagine many things more upsetting to Republican leaders than the idea of the Ron Paul Revolution helping Obama win the presidency, but it just might happen.

Where Do Fed Bailouts Come From?

2008-04-29T08:41:00.000-07:00

There are a lot of conspiracy theories out there about who really owns the Federal Reserve and how they profit from the actions of the Fed. If you’re looking for a good explanation of the real ownership structure, I recommend reading the following article from an economics professor at The Citadel: http://www.libertyunbound.com/archive/2004_10/woolsey-fed.html.

In reality the Fed is owned by its member banks, though the benefits of ownership are commonly misunderstood. The main benefit provided by the Fed is not the direct profit potential. Rather, the benefit to the member banks is protection. The Fed not only offers liquidity in the event of a bank run, it also offers an entity with the power to increase the money supply. That’s a handy benefit for bailing out a bank that has dipped its depositors’ cash into too many risky and highly leveraged investments.

The majority of directors on the boards of the Federal Reserve banks are appointed by the banks themselves. Is it any wonder that the Fed is so motivated to step in and offer bailout packages to keep these banks afloat? It’s not difficult to see the actual origin of these bailouts.

Whether bailouts should or shouldn’t occur seems to be a moot point to me. We have given the Fed the power of currency production. Do we expect them to use it to benefit the average American? If so, we ought to reconsider how the Fed is structured. Although the Fed certainly has to play the political game in pandering to Americans, at the end of the day they don’t work for us.