The Stock Markets: My Theory

WARNING: Let me preface this blog post by saying that although I am a CPA, I am not a professional investor nor adviser. You should take all of this post with a huge grain of salt :-)

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I have always wondered why the three major stock market indices (DOW, S&P and NASDAQ) always move in concert with each other, generally moving up and down in unison. How is this possible when each has a unique group of stocks? Aren’t there masses of stock pickers buying/selling individual stocks? It just doesn’t make sense…or does it?

Now, if you read the market news, it will say the markets went down because of blah blah blah and the next day the markets rebound because investors ignored blah blah blah. Why would, say, good news for the housing market make the tech-heavy NASDAQ rise? Read more

I’m all in…get ready for the big correction!

Well, I’ve been sitting on the investing sidelines for several years and have finally decided its time. Time to move some cash into equities. Now, despite the fact that the government has merely allowed the proverbial can to be kicked farther down the road, one cannot argue that stocks have continued to rise with no end in sight. Are they due for another correction? Sure, but my investment timeline is long enough that I should be able to absorb it. I’m hoping I can get enough gains in before that happens. Read more

Ironically, if the economy recovers, the US is in deep doo doo…

When the Federal Reserve pulls back from its $85-billion-a-month bond-buying program due to the improving economy, interest rates will rise from their artificially low levels. It’s not an option folks. The Fed has to pull-back or risk run-away inflation. And quite frankly, rates are going to eventually rise anyways no matter what the Fed does IMHO.

So why is this bad? Well, according to Wikipedia, the combined total public debt currently stands at $16.805 trillion and grows everyday. If rates rise to just 5%, that’s $840 billion at year!

Know what the US is expecting to take in in tax revenues this year? Just $2.712 trillion. Using my 5% interest calc, 31% of all tax receipts would go to interest! What if rates go up even further???

If you remember the financial crisis of 5 years ago, don’t forget it because despite all of the back-patting going on in Washington, in reality, they only kicked the can down the road. Have you heard much talk about paying down the debt? Nope. Have you ever tried to borrow your way out of debt troubles? It doesn’t work. Eventually you have to pay the piper. We as a nation are about to.

So what does this really mean to you and me? Well, either higher taxes or the US government will have to declare bankruptcy. The latter seems unlikely, and higher taxes will have a negative impact on the economy. It’s a vicious circle.

Excellent related article Can the U.S. Go Bankrupt?

Eventually, we will have to pay the piper

It’s hard to understand the quick rebound in the financial markets, but it should be obvious to even the layman that you cannot truly borrow your way out of a financial bind, which is what the US government has done. We’ve only delayed the pain that *must* be felt and probably made it worse.

“The Fed and other policymakers seem unaware of the monster bubble they are creating. The longer they remain blind, the harder the markets will fall.” Full article

–Nouriel Roubini

It is *not* a good time to buy a home

Yup. That’s right. It is not a good time to buy a home, at least in California. “But housing prices seem to have bottomed!”, you say, and “interest rates are at historic lows!” Well, allow me to explain.

Because, homes are so expensive in California, people tend to buy as much house as they can afford; the yardstick for “affordability” being the payment. The price of the home they can “afford” is, thus, driven by two main factors: the payment they can afford and the interest rate. (I’m ignoring the down payment since that will vary wildly from person to person.) All things being equal, the payment people can afford is a constant at any point in time. This is particularly true if financial institutions learn their lesson and stop the loose credit practices that got us into this mess in the first place (i.e., ARMs, interest only, no-doc, etc.). My feeling is that, at least in the short-term, a borrower’s true ability to pay will be evaluated much more stringently.

Currently, mortgage rates are artificially low because the government is trying to encourage banks to lend to help the economy. Rates without government intervention would be much higher. Think about it: credit/loans are much harder to come by these days. In other words, the supply of money is low. So what normally happens when the supply of something shrinks? Well, the cost goes up and for loans the price is interest rates.

The government cannot keep rates low forever and there are many reasons why. The primary reason is inflation. Eventually inflation will start to rear its ugly head. The Fed will be forced to increase rates because keeping them low will only fuel inflation. My guess is that this will not happen for a year or maybe a few years, but it *is* going to happen. As the economy recovers, it is inevitable. Also, the government may have to start paying higher interest rates on the trillions of dollars of debt it is now trying to sell. If the rates on T-bills/bonds goes up, guess what? Overall rates go up.

When rates go up, the amount of the loan people can afford goes down. Naturally, this will put downward pressure on home prices. Now, although it is theoretically possible that rates will rise gradually and not cause issues, I don’t believe that is likely. Rates are likely to jump quickly because of being artificially held down like a rubber band being released before it breaks. The effect will be devastating to the real estate market.

Still arent’ convinced interest rates will affect real estate that much? Consider this: the payment on a $500,000 loan at 4.5% is about $2,500. If rates climbed to just 8%–still low by historical standards–the loan would have to be about $350,000 to maintain the same payment! That’s a 30% decline! At 12%, the amount dives to $250,000, at 50% decline! And don’t even think that’s impossible. A few decades ago, rates above 20% were common.

For me, I am ignoring the fact that interest rates are at historic lows. It’s artificial. I would rather pay 8% and owe only $350,000 than pay 4.5% and own $500,000. If rates came down, I could refinance. The person with the $500,000 loan is stuck.

Previously, I had thought that rising interest rates was going to be the catalyst for the bursting of the real estate bubble. I was wrong there. The actual cause was the rapid realization that mortgage-backed instruments weren’t really secured by the underlying assets. Still, as I’ve set forth above, the impact of rising interest rates still looms.

Special thanks to the Irvine Housing blog, whose recent post, got my blogging juices going and reminded me of my thoughts.

Will extending unemployment benefits make labor stats look worse?

I think it’s pretty common knowledge that unemployment statistics are understating unemployment because they fail to count those still out of work, but have exhausted their benefits. I wonder, then, that if they extend unemployment benefits, will unemployment statistics spike as those still unemployed folks are re-added back into the system and, thus, counted again. Since it would appear that H.R. 3548 will extend benefits another 13 weeks and is expected (hoped?) to pass, I guess we will see if my theory holds water.

Doug’s #1 Rule of Business: Take the customer’s money as fast as possible.

Businesses spend billions on advertising and promotions to do one thing: Get consumers in their stores to buy their products. Marketing departments are critical in any business.

So why then, do businesses often do such a poor job “closing the deal”? Why do they have several checkout lines, but only man a few during peak hours??? Their soon to be ex-customers stand in line. Irritated. Vowing not to come back. Planning to take their business to a competitor.

And yet, the insanity continues. The ads and promos have done their job with great success. A customer has visited the store and made a selection. There they stand. Practically holding their hands out with money…”please take my hard earned cash”, they plead. But no deal. You need to wait in this line, just like everyone else.

How many times do you go into a large store and of the 20+ people that are visibly working there, they’ve got one or maybe two uninspired dorks plodding people through the checkout process. It’s a crime! So called fast-food are big time breakers of my #1 rule.

You would think that upper management or the owners would visit the operating locations once in a while and see what is going on. I would also think the store managers would be appalled and make changes. Maybe they have and just get no support.

There are a few that get it right: CostCo, Frys Electronics, (most) McDonalds, and Pavilions. Sure, you might stand in line at those places, but they show effort to get you checked out as quickly as possible. That’s the difference. Conveying concern and showing effort.

I have had this “rule” for many years, but what makes me bring it up is my experience at the local Ralphs grocery store in Culver City. My daughter and I stepped in to buy a few items and when we got to the checkout, it was oh 70 feet long. It was maybe 6pm on a Sunday night. One checkout open! They eventually managed to get two more open. Now do you think the manager walked around guiding customers to the newly opened lines? Hell no. They just pissed customers off as people just grabbed the shortest lines, etc. etc. I hate that store, but yet I continue to think things might have changed or I’ll catch it at a better time. I should know better. Pavilions may cost more, but I guess ya gotta pay for good customer service.

The concept to seasonal sales is now officially dead

I haven’t read this anywhere, so perhaps I’m among the first to say it, but the effectiveness of the traditional seasonal sales is officially over or dying quickly. What I’m talking about are time-of-year sales like Black Friday, President’s Day Sale, Back-to-School, even Christmas Sales. They are no longer significantly meaningful to consumers. We now expect things to always be “on sale” (i.e., discounted)…somewhere. You see something you want, and you just know that you can get it cheaper by searching the Internet. C’mon, were the Black Friday sales limited to just the Friday after Thanksgiving??? No way. I continue to see “Black Friday” sales even now in the middle of summer. Hell, I’ve seen “Black Monday” sales!

Now, I’m not saying that they won’t continue to happen, because retailers love to name their sales events to give them meaning. I’m just saying that they are becoming ineffective as a marketing technique. It probably has a lot to do with the equalizing of the marketing playing field due to the Internet. I like it.

It’s similar to what has happened with TV shows. It used to be that ALL shows started in exactly the same week in the Fall. That is still somewhat true, but TV shows now start all the time. January. Summer. Whenever. Someone finally figured out–I think Fox started it–that launching a show when other networks were showing reruns or whatever was a good time since you didn’t have to compete with other new show announcements. Retailers have figured out the same thing. (