Posts Tagged ‘Financial’

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Stop Me If You Have Already Heard This One

September 22, 2008

Eleven days ago I bought a note backed by a loan given to someone with less than stellar credit.  It pays a lot of interest.  Sounds a lot like a structured investment vehicle backed by a subprime loan, does it not?  Well, I promise I will not go down in financial flames, and here is why:

1. Most importantly, I am only using money I can afford to lose.  I consider this no different than gambling, just with fewer dice and cards involved.

2. I am not borrowing huge sums of money in order to buy even more of these notes.

3. I did research.  I checked out the credit status of the person receiving the loan.  I know their debt-to-income ratio.  I know their general credit score.  I know how much revolving debt they have and what percentage of their total credit they have actually drawn on.  In other words, I know this is a risky investment, not something I think is a sure bet that pays a lot of interest.  This is a higher-risk venture with a high-return potential.

Okay, so what kind of return am I looking at?  Well, the $50 I loaned will be repaid over three years at an interest rate of 18.65%.   Since the payments are amortized (which basically means I get the interest on the remaining money loaned and some of the money I actually loaned back every month,) I will get about $1.80 a month for the next three years, assuming this person makes every payment on time.  That means I’ll end up with about $65 at the end of three years, or just under 10% APR.

It pays better than a three-year CD, but that is because there is a real risk the person may not pay the loan back on time or at all.  Right now, the quality of borrower I loaned the money to has a higher than 91% current rate.  So, more than 91% of the loans made to people like the borrower I loaned to are being paid on time.  I am willing to get a much larger return in return for risking that this person will not be one of those 9%.

I am planning to continue loaning people money as I save up batches of $50, so I will keep you updated on how things go.  If you are curious what service I am using to do all of this, it is Prosper.com.  If you are interested in becoming a lender too, let me know, and I can send you an invite.  If you make a loan because of the invite, we both get $25, so it is better for you than just signing up.  (It is better for me, too.  I have no shame.)  If you are interested in borrowing money, I can send you an invite too, but I get $50 if you borrow, and you do not get anything, other than a loan.  (Again with the lack of shame.)

p.s.  When I said I am only using money I can afford to lose, I meant it.  This is all being funded from the “fun money” I get to keep from my paycheck.  I am not even using all of my fun money, since I put some aside every paycheck into a savings account to pay for things like birthday and Christmas presents for my wife.  I would not risk money for my retirement on something like this.

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The Sickness

September 18, 2008

I may be a little sick.  All the financial turmoil going on is really, really exciting for me.  I wish I had a job on Wall Street right now.  The rapid change of things would keep me up and going for days.  So, yeah, I probably am a little sick.

Again, I must sing the praises of Steven Pearlstein.  His article today on cleaning up after the “category 4 financial storm” is both insightful and scary.  He comes out and says something I have been mentioning to my wife, and thought I had mentioned on my blog, but I cannot find it in the archives, so I must have forgotten.  What was it he said?  To paraphrase, that the entire economy has to de-leverage itself.

Right now all the players in the economy from conusmers to business to the federal government are living on borrowed money.  Well, everyone’s willingness (and ablility) to continue lending is drying up, quickly.  We all need to start living within our means again.  And by “living within our means,” I mean living on the money you have left after making all those debt payments.  It will be a long, slow process, and with the reduction in spending, a recession is practically inevitable.

The alternative is a finanical market flailing around trying to figure out who is strong and who is weak.  Of course, the flailing will just continue to weaken strong companies and outright kill the weak ones.

I have a feeling we will see a large batch of mergers and buy-outs as the market consolidates the weaker companies under the stronger ones and companies band together to survive.  This will be bad for consumers for awhile as the number of suppliers of services, like banking, declines, they gain power, allowing them to push consumers around more.  However, hopefully this will be like a wildfire and burn off all the dead wood, allowing fresh growth to come in and repopulate the market.

Hopefully I will be able to look back on all of this and tell my children I lived through (and prospered in) interesting times.

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Everyone Wants Me To Help Them Lobby

July 9, 2008

Recently I have gotten two emails asking me to contact my Congressmen.

The first is from the SETI@home project.  SETI@home uses the spare processing power of your computer to analyze data gathered from the Arecibo Radio Telescope to find anything that might be a signal from intelligent life in outer space.  I have donated the spare power of various computers I have owned over the years to the project.  I help in fits and starts.  I will run the program for a few months, take a year off, and then run it again some more.  It may not be the best way to find extraterrestrial life, but it is better than anything else I can come up with.

So, why are they contacting me? Because apparently Congress is looking to drastically cut the funding to the telescope.  There are two bills before the two chambers to continue financially supporting the the telescope.  SETI@home sent me the link to a letter I can print out and send to my Congressmen.

The second email I received was from an airline.  Apparently they feel that the price of oil is being driven up by speculators in the oil market.  So, they want me to go to this website and contact my Congressperson asking them to regulate the commodity markets more.  I am going to paste the website below so I can address a few points in it:

Tell Congress to Act Now to Lower Energy Costs

The oil price bubble is unfairly taxing American families and restricting our nation’s economic potential. While everyone is aware that supply and demand constraints contribute to price increases, there’s another force at work that, like gravity, is invisible yet powerful. This force is rampant speculation.

Okay, let us dissect this thing paragraph by paragraph.  First up, they call the oil bubble a tax.  Taxes are bad, so therefore the oil bubble must be bad because they called it a tax, right?  As for it hindering our economic potential, the price of oil is directly aiding the oil companies.  Exxon could never have posted their highest profit ever if it were not for the oil bubble.  It is also helping out hedge and pension funds.  So, the oil bubble is not universally bad.  Oh, and by calling it an invisible and powerful force, they are trying to evoke some kind of low-level dread.

Every time you buy products such as food or gas, you are impacted by unregulated, secretive and often foreign commodities futures markets. Speculators in these markets are increasingly buying and selling commodities such as oil even though they have no intention of using the product. As unregulated speculators pocket billions of dollars at your expense, the price of commodities has increased out of proportion to marketplace demands.

Hmm, the Republicans have been telling us that deregulation leads to things like lower prices and better service.  Is this necessarily a bad thing?  As for secretive, yeah, that is probably a bad thing in a market of any kind.  Transparency is important to be able to determine the health of a market.  Now, for my favorite adjective here, foreign.  Who cares if the markets are foreign or not?  Are all commodities supposed to only be sold in a US market?  Would that not make those markets foreign to everyone else in the world?  They are just trying to play on a fear of the unknown.

It is not a bad thing if someone buys and sells something they have no intention of using.  Store owners do it all the time, and stock traders do it all the time.  Just because someone makes a profit, even a large one, from buying and selling things they are not going to use does not mean they are doing anything wrong.

Please take a moment and tell Congress to act now. By adopting common-sense solutions, Congress dramatically reduce the price of oil and gas, providing immediate relief for businesses and hard working Americans.

Calling something common-sense does not make it common-sense, especially when you are calling for the immediate and dramatic reduction of the price of something in a market.  Most people call that a “crash.”  Besides, the change in price of oil is not felt by buisnesses and “hard working Americans” (Yo, Joe!) until months afterwards.  It has to filter down through the supply chain to finally affect the consumer.

With that all said, I do think greater regulation is probably needed.  However, the last thing we need is another bubble bursting.  We need to deflate it slowly.  So, we need to hit the problem from three different sides:

  1. Reduce demand.  If you are not putting anything in the back of your SUV, minivan, or pick-up truck that could not fit in the trunk of a car at least twice a month, get a smaller car.  It would actually be cheaper to rent a pick-up truck when you needed it than to make the payments on a higher-priced vehicle and pay for the lower gas milage.  Moving from an SUV to a compact car saves a lot more in gas than moving from a compact car to a hybrid, so that is why I am focusing on the big vehicle owners.
  2. Raise interest rates.  It strengthens the dollar, reducing the price of oil.  It also makes money more expensive to borrow increasing the price of the leveraged buying hedge funds like to do.  Finally, it pushes people towards smaller cars since it costs more to buy a car.
  3. Finally, increase regulation, but do it slowly.  Give people time to gracefully exit the market.

One great benefit of the high oil prices is that alternative fuels are finally getting a fair shot.  It is only when prices get this high that alternative fuel research and adoption becomes economical.  Hopefully we will get enough progress made on them by the time oil comes back down that they will still be viable, economically speaking.

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I’m Back

June 27, 2008

Okay, I’m going to try to keep this up to date again.  I think I have a lot to post on this one.  🙂

First, Greece was awesome.  I have to go back.  However, I will share with you the travel tips I learned:

1.  Before going to Greece, bone up on your Greek.

2.  Even more importantly before going to Greece, get on a StairMaster.

3.  Don’t fly Air France.  Every flight of theirs we took left late, and they managed to lose one of our bags for a few days.

4.  There is less internet access in Greece than you would expect.

5.  There are more historical sites there than you can see in three weeks.

As for more current news, school starts August 25th.  I’m excited to be going back, because now I get to take all the finance courses I want to take, instead of all the other courses I had to take.  I have a very strong affinity for things I want and a very strong repulsion for things I have to do.

Oh, and the economy still sucks.  Again, Steven Pearlstein has a great column on the economy.  I think it’s funny how I’ve been reading how people don’t understand why consumer confidence is as low as it was in the 70s when the economy is better.  What people aren’t grasping is the difference between the micro and macro view.  In the macro world of economics, the broad measures aren’t as bad.  The GDP is still growing, for instance.  However, in the micro world, people are getting laid off, they aren’t paying their bills, and everything is getting more expensive.  So, we have a disconnect between the two sides of economics.  I have a feeling the micro is going to pull down the macro, though.  If peoples’ personal finances are not doing well on a growing scale, then the economy as a whole is going to have trouble recovering.

So, there you have it, my prediction of doom and gloom.  Things will get better once the economy isn’t so levereged.  When people and companies are borrowing so much money, it’s hard to gauge how something like the Fed increasing interest rates to combat inflation will change things.  Let’s hope for the best.

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Gas Tax Holiday?

May 8, 2008

Sounds like a bad idea to me.  I’m not a big fan of pandering, and this really smacks of Clinton and McCain attempting to buy our votes with money the government doesn’t have.

People say they want the government to be run like a business, but since businesses exist soley to make money (except for non-profits, and even then…) I think that is not the goal we want of our government.  A government should be run like a household.  It should make money in order to provide for the needs of those living under its roof.

Where am I going with this?  Well, say you’re the head of a household.  Your financial situation isn’t looking so good, and it looks like your wife and kids may be losing their jobs.  So, what do you do?  Bringing in less money does not sound like a good idea to me.  Convincing your family’s jobs to give them more money sounds like a better idea to me.

To stop the analogy, real wages have not increased in quite awhile, and I think the economy is starting to feel the effects.  People say that raising the minimum wage hurts businesses by forcing them to spend more of their money on their employees.  However, most of the companies that pay minimum wage are companies that people spend a lot of money at:  retail stores, grocery stores, dry cleaners, etc.  So, giving people more money to spend actually will give those companies a boost.

So, again, I think that companies need to bail out the economy, not the government.

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My Economic Stimulus Package

March 14, 2008

So, this year the federal government is giving people up to $600 a piece to spend.  That’s crap.

You want to see some real stimulus?  Let’s look at ExxonMobil.

They posted a record profit of $40 BILLION.  That’s more money than any corporation has ever made in one year in the U.S.  What do I think they’re going to do with it?  I’m betting a stock buyback.  It’s one of the stupider moves they could make.  Their stock prices are already flying high, so they’ll be buying those shares of stock at a premium.  One of the first rules of using the stock market is to buy low and sell high.  Buying their own stock now would be buying high.

Second, all a buyback does is raise the equity of shareholders on paper.  They actually have to sell the stock in order to reap the benefits of the buyback, which would in turn lower the price of ExxonMobil stock.  So, you’re not actually giving value to your shareholders.

If ExxonMobil really wants to give back to its shareholders, it should issue a dividend.  Give the cash straight to the shareholders immediately.  Reward them directly for having faith in the company.

However, if ExxonMobil really wants to reward the people that made their record profit possible, they should give some money back to its employees.  After all, if their employees hadn’t done their jobs as well as they did, they wouldn’t have made as much money.   Here’s my recommendation:  Give each employee a $100,000 bonus.  $100,000 is a lot of money, right?  How could they possibly afford to do that?  With ExxonMobil’s 100,000 employees, that $100,000 bonus works out to $10 billion dollars, one quarter of the company’s profit.

It’s a decent chunk of their profit, but there are lots of benefits.  First, any company that gives all of its employees that size of bonus will have wonderful morale and very little turnover.  It would also generate a feeling of investment.  After all, I know I would be more likely to try to generate profits if I knew I’d be getting some of those profits.  Second, the government will suddenly have almost 100,000 people jumping up a number of tax brackets.   So the government will actually get MORE revenue.  Finally, 100,000 people suddenly getting $60k after tax withholdings will be throwing huge amounts of cash into the economy.  They could use it to pay off loans and credit cards, adding liquidity to the credit market.  They could buy large ticket items like TVs, cars, etc.  The least likely thing they’ll be willing to do is invest all of it, effectively negating the stimulating power of the bonus.

Now,  it would take more than just ExxonMobil doing this, but if every company gave 25% of their profits back to their employees, a lot more money would be flowing through the economy.  It also means the government wouldn’t have to get involved and would maybe even benefit financially.