Double Journey

Wilbur Ross, a famous investor best known for buying companies in distressed industries, proclaimed that he is looking to buy a bank.  He declared,
“We will end up with a bank, there is no doubt about that.”   He goes on to state that he actually wanted to buy a bank sometime last year but the government’s TARP plan put a hold on that.

Read that line again.  Because the government intervened, a private investor decided not to invest.  I actually blogged about this a few weeks ago when I talked about the unintended consequences the government was creating with its bailout plan.   And now here is proof that this is exactly what is going on.  Because the government is now in the business of investing in private institutions, private investors are holding back their own plans to do the same thing.  Can you blame them?  Government interaction does a number of things.

• Makes equities more expensive because government is propping the company up
• Subordinates your own investment since the government is mandating first rights to any liquidation
• Makes it near impossible to really value companies because you are not sure what the government might do next

To make matters worse, the government is putting YOUR tax dollars at risk here when others were more than happy to take on the risk instead. I do not really care if someone like Wilbur Ross loses his shirt when a bank collapses. I care very much when my the government loses my tax dollars. Even if these “investments” pay off for the tax payer, I think the government was silly to take on the risk because it could just as easily go the other way.

Of course it is just going to get worse.  The government is going to start investing in more programs far more reaching than just the banking sector.  Will it crowd out private investors?  Of course it will.  The only real question is, by how much?
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Or in my case, give her options.  This is a standard bit of advice I give people when it comes to their boss. Whenever my boss asks me for advice, I always make sure to give her my recommendation along with a few more options for her to consider.  Just this past week, I gave her a list of ideas about how I would go about changing the tech org.  I did not think all of them were great ideas (one of them even suggested she should let me go) but I wanted to let her know that I completely thought through the problem.  I provided the pros and cons of each of the options, and then let her make the final decision.  In this case and others, if I have done my job correctly, she will just go with my recommendation.  As a manager myself, this is what I generally do.  I will almost always go with the recommendation of those that work for me.  If I did not trust them to make good decisions, I would have some other issues to deal with.

While seemingly obvious, not everybody really understands why this is so important.  People generally move up the professional ladder because they are good at making decisions.  Your boss is probably no exception.  What you are doing when you come to your boss with options is giving them a chance to flex what I am sure they consider to be one of her strengths.  Your boss probably does not have all the answers and will appreciate it if you lay down all the available options to her so she can make an informed decision. If you only give her one option, it puts her in a bad position and does not give her a chance to feel totally behind the directive.

Further, taking the time to actually think through all the options and presenting them to your boss shows that you have fully considered all the options.  So long as you come up with a good recommendation and thoughtful options, it should hopefully instill some confidence in your boss that you are capable of making your own decisions.  In time, your boss will come to learn, by seeing the thought you put in your recommendation, that you are capable of making your own decisions.  She will trust you more. She will come to your more often for advice because she will know you will completely think through the problem.
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I’ve spent the last year blogging about whatever happens to come across my mind that day.  I admit, it hasn’t been the most ordered way to go about things and I think I could use a nice kick in the pants when it comes to blogging.  To that end, I’m really going to try and focus this blog in the coming year and make sure I blog about the things that interest me (and my readers) on a more regular schedule.  To that end this is what I will attempt blog about:

Mondays: Mondays mean it is back to work, so expect me to talk about career advice and other things

Tuesdays: Probably one of my favorite topics, our government and the effect on our lives.

Wednesdays:  Economics.  It pervades so much of our lives, so I’ll discuss some sort of economic concept and how it effects us day to day.

Thursdays: What’s going on in the stock market and what I plan on doing about it

Fridays: Won’t write every Friday, but when I do, it will be about something completely random that has little if anything to do with any of the other topics

Saturdays: Taking a day off

Sunday: Something personal.

I will not strictly stick to the schedule, I may change my mind if something else catches my attention that day, but I will   Let me know what you think
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Before people get worried, no, I  do not have to figure out this scenario.  I usually browse the top headlines available to the right just to see what’s going on in the world.  Often times something catches my eyes and I like to comment on it.  Today, there was an article about people who have had to learn to live after they have lost their six-figure jobs.  I am certain that all over the country, people are starting to learn to live with this reality.  A six figure job is a sort of status symbol.  It is for many, the pinnacle of achievement.  For most Americans, the belief is that your life will become much better and much easier if you can grab this brass ring.  People feel they have “made it” if they can do this, and they start living a much better lifestyle.

However, this is probably just a mirage for most people.  I can tell you from experience that your life does not just become magically better because you start making more money.  Many many people in the coming years are going to find themselves in this predicament because the jobs that are disappearing are not coming back.  There was definitely a bubble out there, and it will take years for us to recover.  Having been unemployed for months, many of these people have had to accept jobs that pay significantly less, often times as much as 70% less.  That requires a drastic change in lifestyle, or does it …

The article got me thinking what I would have to do if I all of a sudden lost my job and had to take a much lower paying job.  In these tough times, it is not out of the realm of possibility.  So how would my life change if I had to accept say a 50% pay cut?

Well not much.  This is because I control two sides of my financial equation.  I control both the income side and more importantly, I control the cost side.   If you count the income of my fiance now, I have about quadrupled my income in the last 8 years of my life.  Have I quadrupled the cost side?  Not even close.  I might have increased my total cost by about double, but that’s about it.  And that’s a double from the meager livings of a recent college grad.  I could in fact live the exact same lifestyle I do today, cutting no cost, and probably live that way almost indefinitely.  I could take my own income to zero (leaving the fiance’s there), and live off my savings for at least five years.  That’s without scaling back.

However, I could just as easily scale back.  The biggest cost is easily the apartment.  I am now on a month to month lease, so if I reduced that cost by about 40%, which I could easily do, and got rid of one of the cars, which would be no problem since we only use one now anyway and I do not have a job to drive to in this scenario, I think we could actually live quite comfortably for quite a long time.  After I got over the initial shock and fear of losing my job, I am sure I could even turn the whole thing into a positive as it would give me time to pursue other things I’m really interested in.

So why have I done this?  Who in their right mind would prepare so well for a disaster scenario that is (hopefully) unlikely to happen?  Well, it comes down to the fact that I am by my very nature conservative and not willing to put my own fate in the hands of others, namely my employer or the economy.  It is just upbringing really as I saw first hand my family go from upper middle-class to barely scraping by.  You should never believe that disaster is not just one accident or one pink slip away.

Wow, that was kind of a downer to bring in the new year huh?  OK, got to write something much more upbeat next.  Probably will not be posting until next week, but I hope everyone had a great New Year!
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Decided to put my predictions down for 2009.  Here is what I think will happen in the next year

• GM equity will go to Zero.  The equity is worth nothing because the debt is worth nothing.  Sooner or later this is going to have to be reflected in the stock price.
• The recession will be significant and it will hurt.  Unemployment will reach 10%.
• Housing will continue to tumble.  There will be double digit declines in California.
• The market will go higher at first, dip again, and remain flat or slightly down for the year.  The rally everyone is waiting for just is not going to happen.
• We will not see significant inflation yet (but we will in 2010)
• The United States will, believe it or not, do better then the world markets
• Commodity prices will fall at the beginning of the year.  Oil will drop to below $30.  It will not crater however and there will be a rebound in commodities
• The United States will actually have a positive savings rate!  Sounds unlikely but I do not think there is any other choice at this point.
• One of the major retailers, one that is not currently in trouble, is going to declare bankruptcy.  Macy’s, Nordstrom, Saks, Sears, etc.

Let’s see how many of these come true in the coming year.  How about you?  What do you think the next year holds for us?
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I’ve had this blog a little bit over a year.  In that year, I will admit I haven’t done a heck of a lot to try and grow this site.  I would like to make the excuse that my new job has been much more demanding then I would have realized.  I could argue that I have done really well in my financial goals by putting my focus there rather than to focus on this site.  But in the end, it would just be excuses.  It would all be true and valid but I for one do not like it when people make excuses, so I will not be making them here today.

However, despite this lack of focus in building this site, I am somewhat impressed I have blogged as much as I have.  I have a little over 200 post for the year.  That’s no small feat and means I’m averaging about a post every week day.  I hope to do even better next year.  More on that to come.  I decided I would look back at what I wanted to accomplish with this website and see how far off I veered.

1. Double my $20,000 - I gave up on this one just a few month into the year.  I just didn’t have the time to do it and in reality, I’m sure I would have failed at it given how poorly the market performed.  I would have done better then the market, I probably would have even made money in the money I was trading, but I would not have gotten anywhere close to doubling the money, that is for sure.
2. Develop another source of Income - I did not get to this one either.  Sad really.  It was something I really really wanted to do.  I make a nominal amount through this site, but just barely enough to cover my yearly cost so nothing much to speak of here.
3. Watch my basket more carefully - This one I have actually done thanks in no small part to this website and the discipline it has made me have.  Still, I lost track of a stock or two and held on to a few I probably should not have.  But everyone had losers this year and I’m chalking this one up to the bad market.
4. Spend more money - This one was the crazy one.  Easy for some, hard for me.  I did loosen up the purse strings ever so slightly.  I bought myself a 50″ Plasma TV , a new Digital SLR camera, and a host of things for the apartment (including upgrading the apartment itself).  I even bought an engagement ring.    Admittedly the last one should not count as I would have done it regardless of my decision to spend more money or not but the first few are definitely a departure from me and my frugal ways.  All said, it was a lot of money for me.  Does it prevent my fiance from calling me frugal?  Nope.  She is probably right.  I still skimp and save probably more than I should given our income level.  But in the end, it always comes down to the fact that I rather save now and retire early later.  Then again, with the way our economy is going and the reaction of our government, they may make that impossible.

So all in all, not a very successful year from the blog perspective. It was a very successful year for so many other reasons.  I got the job under control now, where before I was miserable at times.  I got back to California and could not be happier with that move.  And of course, I got engaged!  I honestly could not ask for much more of a successful year.  Well, that is until we turn the calendar to 2009 …
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I went to work on Friday, December 26th.  I knew there would not be very many people there.  Of the nine people who report to me, only three went into work on Friday.  Other departments had similar turn out.

I rarely, if ever, take these days off.  While most people take the day off in order to take advantage of the long holiday, I see it as one of the best days to actually go into work. There are several reasons I enjoy going in on these types of days

• Traffic is extremely light.  Makes a big difference when you live in Los Angeles
• There is nobody around to bother me, so I can actually get work done
• I don’t have any meetings to go to.  Once again, I can get work done
• Work these days is definitely easier.  Long lunches are the norm
• Workers are almost always dismissed early on these days

For the most part, the last two do not really effect me since I can always take long lunches and I can always leave when I want to, but it is nonetheless nice to have days where expectations are low.  For me, it is extremely important that I get some time this year to actually focus and do work.  I have a bunch of reviews to do this year, many of which I am not prepared for because I was not the manager for most of these people for most of the year.  I am the type of person who likes to have really good and accurate reviews for his employees but this year will prove challenging and I need all the time I can get to write these reviews.

Hope everyone is having a Happy Holidays.  Only a few more days till 2009!  How are you spending the last few days?
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I walked into a Banana Republic tonight.  I was not really intending to do any shopping but the fiancée wanted to do some shopping so I went in.  With two days left till the big day, I was not looking forward to the big crowds.  So as I went into Old Town Pasadena, I was pleasantly surprised that it was not as crowded as I feared.  It was crowded, but definitely subdued from what you would expect just two days before Christmas.

I got parking relatively easily.  And when we walked into various sores, it really was not crowded at all.  The very first thing I saw when I walked into Banana Republic were heavily discounted items.  There was a light silk cashmere sweater (similar to the one pictured) at the front of the store marked down about half of its normal price, from $70 to $35.  To make it an even better deal, there was an additional 20% off any sale item.  I ended up getting that item for about $30.  I had no intention of buying anything but since I needed some new, warmer clothes anyway I decided to take advantage.  I bought two other items, all of which were heavily, heavily discounted.  This can not be a good sign when there are deals this good.

The thing is, the store was relatively empty.  It seriously looked like any other night.  Now granted, it was getting slightly late at around 9:00 p.m., but still plenty of time was left for people to shop.  Even sadder was the fact that I basically walked up to the register to pay, something that almost never happens this time of year.  I have had many similar observations at Best Buy, even on Black Friday.

So it is no surprise that many forecasters are saying this will be the worse shopping season in decades.  It was just reported that for the first time ever, online sales actually decreased from the previous year.   There is no doubt to me that this is going to be a very tough Q1 for many retailers as they report dismal numbers.  The trick is, are they as bad as everyone expected?  It is hard to say because so many people have predicted a dire year, myself included.  But I have to think the market is going to sell off even more in Q1.  While the predictions have been dire, the market over the last month has behaved relatively well, shrugging off most of the bad news.  Can it continue to do that?  I just cannot believe it can.

Now if only my Home Theater receiver would go on sale even more than it already is …
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Fortune published their predictions for the worst housing markets in 2009.  Not surprising to me eight of the ten cities are based in California.  Number one on the list of course is my hometown of Los Angeles.

What may be surprising to some is the extent that the forecast is so negative.  The article is predicting that the market will correct to the downside about 25% in 2009 and 5% in 2010.  I’m assuming these are year over year numbers so if you take their calculation it means the median price in Los Angeles will be about $282,000 in 2009 and 265,000 in 2010.  How do these numbers compared to what I think is reasonable?

Even given this horrific prediction, I still think the numbers are a little high.  What is my reasoning?  Well the average home price in Los Angeles was about $162,000 in 2000, the beginning of the real estate boom.  The high was reached at about $573,000 representing a 350% increase.  Even at $265,000 it represents a 164% increase in about 10 years.  Is that really justified?  Not really.  If you believe, like I do, that housing should track inflation, then it would mean that there was an average of 5.5% inflation over those ten years.  Considering we had very little inflation over the last several years, and we are likely to have deflation for at least 2009, I think the 5% number is still pretty high.

In addition, housing needs to track income.  The traditional measure of housing is that housing prices should be 3x gross income.  That means the expectation is that the average income in Los Angeles will be  $88,000.  There is NO chance of that happening in the next two years (average now is just a little over $40,ooo), so the number is still a little high.  Now of course, I expect housing to retreat slowly, not in one big bang, so the prediction may be valid only if we continue to see price declines moving forward.  But they are predicting a significant slowing of the price decline in 2010, and I just do not see how that is possible considering I actually think we will OVERSHOOT to the downside like we overshot on the upside.  It happens in every market.

So in short, I think we will see even worse numbers then predicted.  The employment outlook in Los Angeles looks bleak and is getting worse.  You combine that with the overbought nature of this market, and you have the recipe for some pretty significant decreases over the next two years.
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On Friday, the Bush administration opened up the TARP funds to bailout the Auto Industry.  Yet another example of the government not fully understanding the law of unintended consequences.

I love analyzing unintended consequences.  It challenges our assumptions about the things we only think we know.  Those who follow this blog know I have alway opposed the TARP.  So my disdain for the Auto Bailout is just an extension of my hatred for any sort of government intervention into private enterprise.  Remember, it is OUR tax money that is going to save the ass of these PRIVATE companies.  I really really hate the idea of private gains and socialized losses.  When these companies were doing well, did the taxpayers see any benefit?  Now that they are losing money, why are expected to share in teh losses?  How can any capitalistic system work when parties do not have to pay for the consequences of the risks that they take?

At any rate, I am fairly certain that the government actions at this point are doing more harm then good.

The goal of the TARP, at least initially, was to unfreeze the credit markets.  If capital stops moving around, then the entire economy freezes.  People cannot get loans to buy cars.  Businesses cannot receive credit to buy merchandise.  They have to lay people off since they have no goods to sell.  Banks refuse to loan money to people and businesses that have bleak prospects, which is everyone.  This would put the economy in a death spiral which the government was not willing to risk.  Now, while I disagree that this would have been the outcome, at the very least I can understand why they did it.   It is truly impossible to know what would have happened.

But for me, it is easy to take a good guess about what has and what will happen because of this.   I just have to look at the incentives that the government is creating.

First, I just look at what has happened.  It is clear that the markets are frozen in part because of what the government is doing.  I as an investor have no idea what the government is going to do next.  This makes it very hard for me to be able to figure out what I should be doing.  I would love to get long or short certain stocks but I simply cannot.  For example, I think commercial real estate needs to go down from here but I cannot easily get in because the government might try to bail them out next.  While on the surface it may seem like a good thing that people are fearful to go short, you have to remember that a healthy market has both winners and losers.  Losers are taken out quickly and shot.  This means there is more capital to deploy to healthier companies.

But this cannot happen so long as the government props up failing businesses.  Money will continue to flow to places it should not because the government might do something unexpected.  Look at what almost happened to oil.  Barack wanted to implement a “Windfall Profit” tax.   Now oil is down to about 30% of where it was before.  If there would have been a windfall profits tax it would have constrained supply causing the price of gas to go higher.  When left alone, you can see what happened.  Oil corrected ridiculously fast and now I am buying gas at around $1.60 a gallon.  This is how markets are supposed to function, we eventually reach equilibrium.

But this cannot happen so long as the government continues to interfere.  So what is next?  I have no doubt the market will continue to freeze.  Why should private investors step in when they are being crowded out by the government?  Why would any business want to take money from private parties when they can get money from the government for free?  More and more companies are going to start coming with their hands out asking for a bailout.   We will see at least a few more industries claiming they are crucial to the economy and that letting them fail will mean millions of jobs.

The market will stick around this range for a while.  It will not rally or drop too much from here.  People are at a standstill because there really is no way to tell which way to go.  Some people may welcome the relief from the volatility.  But I see a bigger problem; we could easily end up like Japan and just stay stagnant for years.  It is like ripping off a band aid.  We should have just tore it off and hit bottom as quickly as possible so that the recovery could happen just as quickly.  But that is not what is going to happen.  We will no doubt get a few rallies that may seem like there are brighter skies ahead.  But we will not know what the government will do next, and since I do not know the rules of the game, I am most likely to not play.
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