I am retired and take educated guesses on all things financial.

July 30, 2009

July 30, 2009: Do As I Write, Not As I Do.Thomas Friedman of the NY Times Perpetuates The Liberal Stereotype

Tom Friedman is a well-meaning sort. The NY columnist and best-selling author has been telling us for years about carbon footprints, energy conservation and minding our lifestyles to consider emulating those less fortunate.

Well, Mr. Friedman was exposed recently to have as his modest residence a palatial 7.5 acre estate a short distance from the Bethesda, MD, Country Club with a beautiful view overlooking the area replete with manicured (non-native species, perhaps?) landscaping that he can view from his 11,400 square foot house. If Mr. Friedman wishes, he can view his modest environs from sitting on the throne in one of the seven bathrooms within the home.

I do not begrudge Mr. Friedman winning the lottery by cashing in on a wealthy spouse. Those of us that try to save a bit on energy here and there, and do with less, are likely offended by the hypocrisy of this man and the audacity of his lifestyle vs. his expectations for us.

May we all aspire to live Tom Friedman's American Dream. That said, I could do without seven bathrooms.

July 26, 2009

July 27, 2009: Hybrid Investments: Have Your Cake (And Eat It, If....)

As investors, we as a species generally like to explore some of the more eclectic investment vehicles for fun, and sometimes for profit. FISN, the Federally Insured Savings Network has been at the forefront of offering sightly off-the-mainstream products to both retail and institutional investors for years.

Here are a few of their current ideas combining an attractive guaranteed interest rate, IF....

10 years (Years 1-10). The interest rate is fixed at 6.50% for one year and accrues daily for every day in the quarter that the 6 month US Dollar LIBOR rate is less than 6.00% and above 0%. Interest is paid quarterly based upon satisfying the above qualification. The interest accrual amount is adjusted each quarter. No interest is paid for any day the 6 month US Dollar LIBOR rate is greater than 6.00%. FDIC insured. $25g minimum. Callable quarterly after one year.

A similar product with slightly different terms is available at 5.75% interest.

5 Years. Interest rate is paid quarterly. The interest rate is fixed for the first year at 3.50%. For the last four years the rate is based upon the 3 month US Dollar LIBOR Rate plus 1%. Rate is adjusted quarterly during the last four years and capped at 5.25%. $25g minimum.

28 Months. S&P 500 Index Market-Linked Deposit. Interest paid at maturity based upon the change in the closing value of the index. Interest is paid at the rate of change, up or down, as long as the daily closing price of the index never exceeds a rate of greater change than 27% to 32% up from the initial value or greater than 15% down from the initial value. If the closing price of the index ever breaks out of the range,no interest is paid. FDIC insured. $25g minimum.

A similar vehicle is based upon the Russell 2000. If the daily closing price does not change greater than 40 to 50% or down 15% from the initial level, you get a nice check.FDIC insured. $25g minimum.

Annual interest is paid on several products based upon a basket of stocks. For instance:

6 years. Basket components are Abbott Laboratories, Amgen, General Electric, Kimberly-Clark, Metronic,Nike, Schlumberger Ltd., Target, Walgreen and Yahoo!.
Annual interest is paid based upon the average gain the 10 Large-Cap US stocks in the equally weighted basket. Each year the gain is recomputed from the initial average value to the year end average value. Interest is paid is there is an applicable increase. The gain is the average change in the basket value. Annual individual stock increases are capped at 11% to 15% per year. No interest is paid if the average is down. FDIC insured. $25g minimum.

Some other baskets include Astra Zeneca, Goldman Sachs, Infosys Technologies, Kraft Foods, PetroChina, Research In Motion, Sony, Toyota Motor, Vale S.A. and Vodophone. And, Wells Fargo, Honeywell, Nokia, CVS Caremark, Monsanto, Microsoft, Home Depot, Exxon Mobil,McDonald's and Costco.

Many others with stocks, various sector averages and maturities abound for the curious eye.

We all know that the "house" is mildly betting against you with the stips, etc. Still, I believe that some of these products look very appealing, especially for investors that are neither heading for the hills with dried food and a shotgun or expecting Dow 15000 anytime soon.

July 23, 2009

July 23, 2009: An Investment Decision: Rent or Buy?

How you decide to best allocate housing monies is not often discussed in a financial magazine or blog. Yet,housing generally consumes a large part of our income (unless you are still freeloading off mom and/or dad) and is considered by many financial planners to be the average person's largest single "investment".

What to do in today's housing market? Buy? Rent? Live in your Prius? Discounting option #3, here is a sane approach to determining whether renting or buying is appropriate.

Using a simple Price to Rent (PR) ratio over the largest fifty metropolitan areas which was arrived at by calculated by dividing the annual rental cost for a unit by the price of a single family home in the same area, I arrived at the ratio of 13.9. Thus, a ratio of OVER 13.9 signifies that renting makes more sense than buying.

For example, the average price of a home in a section of Portland, Oregon is $248,600and the median rent is $813. The PR Ratio is 25.5 and indicates that renting is much better than buying. Some other cities where renting is preferable to buying include Seattle,San Francisco, Salt Lake City, San Jose, Washington D.C.,Los Angeles and Chicago.

On the other side of the coin, the average price of a home in a section of Indianapolis is $94,000 and the median rent is $707. The PR Ratio is 11.2 and indicates that buying is preferable to renting. Some other cities where buying is preferable to renting include Memphis, Pittsburgh, Dayton (OH) and Cleveland (OH).

Obviously, there are opportunities in all markets that contradict this simple decision process, but as a rule of thumb it works well - especially for the less sophisticated home buyer. Watch interest rates, the state of the home market in your area and, importantly, the desirability of the area before renting or buying.

On a national average, the medium home price in late June was $169,000, the median rent $1013.00 and the PR rate was 13.9.

July 17, 2009

June 17, 2009: A Wonderful Day

I am writing from a suite located on the grounds of Peterson AFB in Colorado Springs, CO. Meeting and conversing on a variety of topics with everyone from Generals to newly enlisted and stalwart civilian employees of the 50th Space Wing is a humble experience. We are very fortunate to have these top-notch intellects and, yes, patriots, successfully defending our country.

I am especially proud today because our eldest son was honored with an important command position after a formal ceremony held on the grounds of Schriever AFB, about 8 miles from Peterson and the nerve center of our Space Intel program. The change of command ceremony featured speeches, a formal military presentation of the unit flag and citations by an honor guard, culminating with Tom's remarks as new commander of this unit. He will be responsible for hundreds of millions of dollars of taxpayer monies and has prepared well for being given this assignment - one of the youngest ever to have held a position of this kind. I know he will do a great job because he works well with individuals of all ranks and, he's cheap, so the taxpayer's money has a great steward.

Maj.Tom has worked in Space Weapons his entire career and has a Master's Degree along with post-graduate advanced training at Squadron Officer School (Air University at Maxwell AFB),Air Command and Staff College,Financial Management Staff Officer training at Keesler AFB and Defense Financial Management and Comptroller School at Maxwell AFB. He was named Distinguished Graduate, Financial Management Staff Officer Course American Society of Military Comptrollers Certified Defense Financial Managers.

Tom's been awarded the Meritorious Service Medal, Air Force Commendation Medal with oak leaf cluster, Air Force Achievement Medal, National Defense Service Medal and the Global War on Terrorism Service Medal.

All before his 35th birthday.

Being at this special occasion with his wife (also a USAF Major) and his two children made this an even better event --it's nice being grandfather!

July 12, 2009

July 13, 2009: South Korea Poised To Excel

As South Korea tolerates the threats from the sputtering dictatorship of North Korea, I believe that now is a good time to consider speculating that the wild gyrations of gang up north are a bluff as the government begins to wobble and weave with the ultimate result a change in leadership, father to son or other. In any event, North Korea's feudal state cannot continue and whomever or whatever gains the reigns of power will have to make economic and political accommodations with South Korea as well as her other contiguous neighbors. North Korea's two strongest allies (Cuba, Iran, Syria and Venezuela aside), China and Russia, must be getting fatigued with the pathetic missile tests and computer hacking akin to a child screaming for attention. It is no longer worth their efforts to prop up North Korea, as the geo-political game has changed to other points of focus.

As all of South Korea will stand to prosper with a diminished or collapse of North Korea, I recommend investor's consider iShares' MSCI South Korea Index ETF (EWY). Trading at approximately $35.50/share, this $1.9b ETF with an expense ration of 0.63% presents cheap and diversified entry into this country's stock.

Top holdings include Samsung Electronics (17%, far and away the largest holding), Posco, KB Financial Group, Shinhan Financial Group, Hyundai Motor, LG Electronics, KT&G Corporation, Samsung Electronics Preferred, Korea Electric Power and LG Display Company.

Top sectors within the ETF are:

Information Technology (27.48%)
Industrials (16.68%)
Financials (16.32%)
Materials (13.23%)
Consumer Discretionary (11.05%)
Consumer Staples (5.74%)
Telecommunication Services (3.68%)
Energy (2.70%)
Utilities (2.30%)
Health Care (0.66%)

North Korea is playing war games such as has not been expressed since the mid-1950s. My guess is that this is the beginning of a death spiral that may unify the Korean peninsula with the capital being Seoul - and with democracy and your investment dollars winning big at the expense of the little men of Pyongyang.

I do not own EWY at this time.

July 07, 2009

July 7, 2009: Billions for Urban Real Estate Investors

Let the monies roll in! The Housing and Economic Recovery Act of 2008 has arrived in an urban area near you. Almost $4 billion in Federal grants and an almost equal amount of matching State and Local Grants are pouring in to targeted urban areas for the purchase, renovation, demolition and new construction of homes.

My opinion is that this operation will ultimately fail. But for the investor, the ability to purchase and make use, for better or worse, of real estate with this manna from heaven is compelling as an immediate investment opportunity.

If you live near an urban area, make haste wisely to find out through a Realtor, Banker or City Planner (already, politicians are awarding property grants to political friends) about areas approved for investment.Five areas are included in this legislation that opens the gates for investors:

1. Financing Mechanisms (2301-c-3-B) for purchase and redevelopment of foreclosed upon and residential properties, including such mechanisms as soft seconds,loan loss reserves and shared equity loans for low to moderate income buyers.

2. Purchase and Rehabilitation (2301-c-3-B) to purchase and rehabilitate homes and residential properties that have been abandoned or foreclosed upon in order to sell, rent, or redevelop such homes and properties.

Relevant Definitions:

Abandoned: A home is abandoned when mortgage or tax foreclosure proceedings have been initiated for that property, no mortgage or tax payments have been made by the owner for 90 days or more, and the property has been vacant for at least 90 days.

Current Market Appraisal Value: The current market appraisal value means the value of a foreclosed-upon home or residential property that is established through an appraisal made in conformity with the appraisal requirements of the URA at 49 CFR 24.103 and completed within 60 days prior to an offer made for the property by a grantee, subrecipient, developer or individual homebuyer.

Acquisition: Section 2301(d)(1)of HERA requires any purchase of a foreclosed-upon home or residential property under NSP be at a discount from the current market-appraised value of the home or property. Such discount shall ensure that purchasers pay below-market value for the home or property. For the mortgagee foreclosed properties, grantees must seek to obtain the maximum reasonable discount from the the mortgagee, taking into consideration the likely carrying costs of the mortgagee if it were not to sell the property to the grantor or subrecipient.

Rehabilitation: Direct home ownership assistance to persons whose incomes do not exceed 120% of median income.

24 CFR 570.202 states eligible rehabilitation snd preservation activities for homes and other residential properties. Note that rehabilitation may include counseling for those seeking to take part in the activity.

3. Land Banks: 2301 (c-3-C) states that a Land Bank may not hold a property for more than ten years without obligating the property for a specific, eligible development in accordance with NSP requirements. HUD does not believe that holding property alone is sufficient to stabilize most neighborhoods.

4. Demolition:2301 (c-3-D) allows the purchase and demolishment of blighted structures.

5. Redevelopment: 2301(c-3-E) allows redevelopment of vacant or demolished properties. New houses may be constructed.

Well-schooled investors or consortium of investors will do extremely well in all phases of this program. As mentioned above, I do not think this will have a long term positive impact upon urban housing. Tenants determine what remains clan and fit for habitation and what does not. However, the investor(s) will reap a windfall buying distressed real estate and flipping it to builders or local homeowners who can get cheap financing on great terms. Sound familiar? Shades of the housing bubble all over again.

Many years ago, I was rehabilitating properties and innocently asked a long time -and very successful- urban real estate investor "When will A_______run out of properties to rehab?" He laughed and said,"There will never be a time when an urban area runs out of properties to rehab". He was right. And now is a great time to jump on the bandwagon and flip,resell or use the Section 8 program for your rental tenants using other taxpayer monies.

And here I am vactioning in Palm Beach. Time to get on home and get in on the action.