2009 Predictions

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?

2008, a Look Back

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 ...

Working on "Quiet" Days

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?

Christmas Discounts are Deep

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 ...

Worst Housing Markets for 2009

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.

Changing the Rules Midgame

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.

When Cuts Happen

Like many companies, my company recently announced a scaling back of certain employee benefits.  Some of them were quite significant, like the suspension of our 401K matching.  Some of them were important but not as significant; we scaled back the variety of drinks we offer for free like Red Bull and bottled water.   In these tough times it is to be expected so none of these changes actually caught me by surprise.   Funny enough, I see the financial statements of my division, and we are cash flow positive with no debt, a relatively strong position to be in as the economy worsens.

But it is always wise to be conservative going into problems rather than be caught off guard when things eventually get worse.  And I am sure they will get worse from here.  The thing is, and maybe it is just me becasue I was expecting it, most of the other employees seem to be taking this quite well.  Perhaps I have a skewed view of things now because I am in management.  I might also be bias because I do  not expect much from the company I work for other than a place to work, growth opportunities, and of course my paycheck.  However, almost every employee I talked to seem to be taking the cuts in stride.

This is in stark contrast to my experience at Microsoft where there was an uproar over losing towel service, something probably used by less than 5% of employees.  Perhaps people are just more understanding in a down economy.  It is universally understood that these cuts were made in lieu of losing headcount.  How many people would argue about keeping an energy drink over losing their job or having to see one of their fellow employee's pack up their stuff?  Perhaps the difference this time is that people at Microsoft rarely worry about losing their job as opposed to most of the rest of the world which realize layoffs are a real possibility.

So I was pleasently surprised how well the staff was taking the announcement.  In fact, many people offered more suggestions about where there should be even more cutbacks.  Most of them really appreciate how honest and upfront management has been about the situation.  Most of them enjoy being part of the process.  It is ironic to me because I have been in other places which want to hide the truth from people until it is too late thinking their employees will not be able to handle it.  This case clearly shows how people can be if you are just upfront with the situation.

So how do you think you would handle getting your perks reduced?  Is there any perk you get that you think your company should do away with?  Is there any perk you would get upset if they took away?

Fed Fires All Its Bullets ... And Misses

In a very expected move, the Fed decided to cut interest rates all the way to 0.25%.  They have essentially made it free to borrow money from the Federal Reserve.  Somehow, they have forgotten what got us here, cheap money.  Not only did they do that, but they pledged to buy all sorts of assets including Mortgage backed securities and U.S. Treasuries.  This now empties the gun of all the things the Fed has done, at least all the things that we can rationally expect.  God forbid if they come up with something more.

The saddest part of this all is that this is not going to work.  In fact, it will make the situation worse and prolong our problems.  Now, I have no doubt that we will see a small bump in the market.  In the short term, all this free money will have some positive effect on the economy.  But printing money never solved any problems and it will not solve this one.  How do I know?

The problem right now is not that there is not enough money out there.   The problem is that nobody trust the markets.  I am the Fed's target.  They want people like me to start deploying the capital I have on the sidelines.  I have no skin in the game right now.   I do not own a house and I have lots of cash on the side.  It will not help to move the economy for people upside down in their house to just stay upside down in their house.  They need new demand to come to the market.  However, there is no chance that someone like me, someone who has had as much patience as I have till now, to come into the market anytime soon.

You see, I cannot get involved with a market that just wildly swings about.   The 5% move to the upside we saw today was just ludicrous.  Sane markets do not behave like this.  One of my larger positions in in UYG, the Double Long Financials.  It was up 20% today.  You would think I would be jumping up and down with joy but I am not.  As fast as it came today, it can go just as fast the other way, and there is no way for someone like me, someone who cannot sit in front of the computer all day, to safely get into this market.

All the Fed is doing is making it more difficult to trade.  They fired all their bullets early in the game and we still have a few innings left.  Now what happens when the next wave of bad news crosses the wires.  Believe me, there is more bad news coming, I have NO doubt about that.  There are more foreclosures and more job losses coming, more than most people expect.  The fed cannot cut rates anymore nor can they really buy any other asset class that will make any difference.  The dollar rally is now shot to hell and soon, foreign countries are going to lose interest in treasuries.  Then what?  Maybe the fed can just throw the gun.

When Your Competition Wants to Save You ...

You know you have problems.  Many of the foreign automakers like Toyota have come out on the side of a U.S. automotive bailout.  Much of their reasoning seems sound.  They want to ensure that the industry is healthy overall.  They want to be sure that any suppliers which they may share stay in business.  They do not want to see the U.S. fall deeper into a recession thus stifling demand for their own cars.

But I really think they have a much more sinister agenda.  They like having the weak competition.  Think about it.  If you could play against the Washington Generals every night,why would you not?  Having manufacturers as inept as the Big Three give the likes of Toyota and Honda very weak competition.  Now imagine if one or two of the big three fail.  Say you have the Big One.  Would it not make for much tougher competition if you had to go against a lean mean American Manufacturer?

Worse yet, imagine if all the American Auto Manufacturers collapsed.  Now let us say a low cost Korean or Chinese manufacturer comes in and buys the assets of the failed Big Three.  Do you think the Japanese Auto makers want to see that?  Why should you as an American care?  Because strong competition can only benefit you.  If the Japanese actually face stiff competition instead of companies who lose billions of dollars, they will have no choice but to lower their prices, increase their quality, or both.  The winners in this would be the American Public.  The losers of course would not just be the American car industry, but it would be the Japanese as well who have benefited from the poor competition!

So why do I want to bailout the Big Three again?

Charitable Giving This Holiday

Despite what some people may think given this blog, I do donate to charity every so often.  I believe charity is a very personal choice and not at all an obligation.  I do not find fault with anyone who does not decide to give to charity because I do not pretend to understand everyone's personal situation.  Some people have the ability to give, some people do not.  But despite anyone's ability to pay or not to pay, charity should never be an obligation.

I have a perfect giving record to Princeton.  I do this because they gave so much to me when I attended and I want to see that opportunity extended to others.  This year, I also participated in my Company's plans to sponsor several local families.  I signed up to buy clothes for two children.  Funny thing is that not many people signed up to buy clothes.  Most people were signing up for things like microwaves, blenders, or backpacks.  Not sure why that is.  In fact, every person asked for clothes, and I was the only person as of Friday to sign up to buy any.  Strange.  Before I go on, I have to comment on one thing.  Lots of families asked for blenders.  Why on earth are families asking for blenders?  The only time I ever use my blender is to make margaritas or smoothies.  I highly doubt, or at least I hope, that this is not why they are asking for this, but I cannot understand what else these blenders will be used for.

This year, I was a little bit more cautious in my giving.  Despite being OK financially, I am a little bit worried about the economy and my job.  While I am not in any emminent danger, my company will do poorly in a protracted downturn and we did recently hear some news that will fundamentally change our industry going forward.  So, just to be safe, I decided to take it easy this year.  So if someone like me is pulling back a little bit, I wonder how much other people are pulling back?  If this is as widespread as I think it probably is, then what does that say for charities in the next few months?  Now more than ever, charitable giving is needed, but what happens when there is nobody left to give?

What are you doing this holiday season?  Are you giving as much as you normally do?

No Bailout For You!

It was just announced that the auto bailout package failed in the Senate.  I love the Senate.

So now what happens?  There is some rumblings that George W. Bush and the White House will consider using some of the TARP money to fund the bailout.  Just like the banks, they will just give the money to the automakers with very little strings attached.  Yeah, great idea, because that seems to be working for us.  We are only down about 30% from when we started that program so clearly it is working.

I for one hope that does not happen, and not for the reasons you may think.   Yes, I am not a fan of bailing out anyone.  I think this is a horrible use of taxpayer money.  But I am much more interested in just seeing the drama play out.  How close are we really to a full collapse of the American Auto industry?  Is it as dire as everyone is saying?  I for one think everyone is being a little bit of a Chicken Little.  I have no doubt that one of the Big three will fail.  But I do not believe it will take down the other two.  I do believe that Americans will still have an interest in buying an American car, so I think we will actually see a much stronger automaker emerge from the rubble because they will see significantly more demand coming from the customers of the failed automaker.

I expect to see GM fail.  I expect this no matter what happens, even if the White House decides to  give them enough money to run for the next year.  I think Chrysler will continue to live on the brink, but I think they will survive.  And I expect the winner in all of this to be Ford.   What do you think will happen?

Save Money on an Engagement Ring (and get higher quality at the same time!)

To add to my post about my engagement, I learned one interesting thing about engagement rings.  It pays to go to a small specialist.

Like a lot of people, I tend to feel  more comfortable shopping at big chain stores.  That is why I tend to do my shopping at places like Best Buy, Target, and Amazon.  They tend to have the widest selection and the best prices because they have huge stores and usually do not offer high level of customer service.  I actually prefer this since it not only keeps prices low, but I do not like to be bothered by sales people when I am shopping.

However, with the ring, I went a different route.  I should say, my fiancee went a different route.  Someone like me would be tempted to go to one of the big engagement ring stores like Robin's Brothers, Jared's or Tiffany's.   Especially the latter one because the name is so well known.  I would shy away from a small mom-and-pop type setup because I would not feel as safe going to a place like this given how expensive this purchase is (it is now probably the most expensive thing we own).  But my fiancee had a particular style in mind, so she decided to do some shopping.

She picked a style and decided to ask several of the local jewelers for quotes.  To her surprise she found one that quoted her a very reasonable price just for the band.  She also asked about the solitaire diamond and they gave her several options, each of which were actually cheaper than anything we could find elsewhere.  This was very surprising to me because their prices were actually better than the online retailer Blue Nile. Blue Nile is known to have very good prices on its single diamonds and when we tried to find one of the same quality as the one our jeweler offered, it came out to be more money online.

This was a very good diamond, it scored very well in the 4 C's (Cut, Clarity, Color, Carat).  In fact, we found that many of the chain type stores could not match the grade of diamond that we were getting.  While most people worry about the big C, Carat, we found that it was probably the least important factor.  Her diamond is brilliant, it really sparkles in the light because it scores so high in all the other factors.  So my strong recommendation out there to anyone looking to get a diamond ring, focus on the OTHER C's.  It is much more important than you think.

My only other concern was how I could be sure I was getting what I paid for.  That was easily taken care of by going to a third party jewelery appraiser which I had to do anyway to get the ring appraised to buy insurance on.   Of course, the appraisal went fine and my fiancee could not be happier.  So we found not only better service but better price and quality by going with the small guy.  It may make me rethink what I thought I knew.

In Bear Markets, Everyone Loses Money

Bear markets are very dangerous.  No matter what side of a trade you take, you can lose money.  Even if you yourself are a bear, chances are you will lose your shirt as well.

On Friday, the market decided to make sure I understood this point.   The worst job numbers in recent memory came out on Friday.   The numbers, while they look horrible, are actually worse then they look on the surface.  I have always had a problem with the employment rate and how it is calculated.  It counts as employed people who are underemployed.  That is, people who work part time but want to work full time or people who have a job that pays them much lower then they are qualified to make.  It also does not count people who have just given up.   In this type of economy, there are many people who fall into these categories.  People must also remember, that the financial and credit crisis are just starting to make its way into the economy.  That means, we are only in the first half of this problem with plenty more to come.

Anyway, the market was down after the numbers came out, as it should be.  I decided to get short the market.  But then a funny thing happened.  The market decided to shrug it off and rally, ending the day up by about 3%.  Now, there was no news that should have made the market rally.  In fact, there was more bad news after the job numbers came out.  But bear markets just do not care.  They move, very rapidly, in directions that do not really make any sense.  Since I was double short the market, I instantly lost about 7% of my investment

Now you could argue that the market has bottomed.  And you might be right.  I personally don't think so as I think people still have not quite digested just how big of a bubble we really had for a year.  How do I know this?  I just look around me for the data.  I have been scanning the house listings seeing how much houses are going for in my area.  Housing that are selling are at about 2004 prices.  Houses that are listed are around 2006 numbers.  Now I live in Southern California, the epicenter for the housing collapse.  Yet people are still insisting on premium values for their houses.  2004 housing prices are still about double what they were in 2000 when the bubble started.  Does anyone actually think housing prices should have doubled in four years?  Further, the average house in the area is still selling for about 8x income.  This is more than double what it should be.

If this market bottoms, I am certain it will not be a violent ride up like this.  It will hover at the bottom for a while because the United States has a long way to go to work through all the issues that we have.   I still have an appetite for risk, and will continue to try and trade this market.  I jut hope that hungry bear does not get me before I get it.

No Bonus - So What?

I sit here listening to the Automakers in front of congress lay out their plan to return to profitability.  In the proposals is a clause that states that management will not get a bonus in the next year.  My question would be why is this considered a concession?  Why would anyone think they should do anything else?  Why would anyone expect to get a bonus when there company is hemorrhaging money?  If your company does not make money, you should not get a bonus.   I understand, it is not the fault of the individual, but that does not justify paying bonuses when you are on the verge of bankruptcy.   I had years of not getting bonuses because my company was losing money.  I learned to live with it.  I have also had it where my company was profitable and the bonus was up for cutting because we did not meet the target number.

So I just find it funny that it is something that anyone think should not be done.  Does anyone think that bonuses should be paid out in this situation?

"The End" For the Rest of Us

For a truly great read on the Wall Street collapse, I strongly recommend you read The End by Michael Lewis.  He is the author of the book "Liar's Poker".  In this article, he clearly explains some of the egregious acts Wall Street perpetrated to get us where we are today.  Lewis, like many of my friends, was part of the Wall Street machine.  He ended up leaving after he could not stand the ridiculousness of it all.

In the article, he gives a great description of how we got into this mess.  He tells the story of people who recognized the now seemingly obvious conclusion that there was no way that people who were getting mortgages should get mortgages.  He goes further to explain how the CDO market worked and how the people part of it knowingly exacerbated the situation.  To make matters worse, most of these so called "experts" really no experts at all.  They were like him, fresh out of school with no idea what they were doing, yet tasked with allocating the nations capital.  And these are the people our government wants to bail out now?

Reminds me why I will never hire a consulting company to do work for me.  Straight out of college, I went to work for the world's largest consulting company.  I did not even know what consulting really was, but it was one of the things everyone coming out of an Ivy League school did.  You either worked on Wall Street or you were a consultant.  Now, I was a technology consultant.  That meant I was supposed to be some sort of expert on technology matters.  Now, lucky for them, I had a computer science background.  I actually was a pretty good programmer.  But some of my colleagues would not be able to tell you the difference between an array and a linked list.  They thought "C" was just another letter and "Java" was just something you drank.

Yet we were all shipped out to work on projects at well over $120 an hour.   That is not a typo.  Now, someone like me, I might be worth it.  I was a good programmer, understood the fundamentals, and had the logical mind to solve most computer problems.  But some of these other guys?  We are talking people who never compiled a single line of code in their life now being asked to build some of the world's larger computer systems.  How is that at all sane?

The same thing happened to my friends in Wall Street.  All of them were thrown into big money projects.  Many of them had never taken a single economics, accounting, or business class.  It totally changed the way I thought about the professional world and made me scared about some of the things that happen at these large important companies.

Credit Card Companies Pulling Back Credit

On CNBC the other day, Meredith Whitney, an analyst who predicted the subprime crisis and the turmoil we would see at Citibank, declared that the next big problem would be in consumer credit.

When I first heard her on CNBC, I did not think much of it.  I have heard the death of the American Consumer predicated many times.  And every time, the consumer finds a way to spend more money.  While this cycle has to eventually end, I just was not willing to hold my breath to see it happen.   I also did not see the banks killing the cash cow that is consumer credit.   So I dismissed the commentary and went back to work.

But then I witnessed it with the pullback with my very eyes that night.  I got a letter from one of my credit cards informing me that they were going to close the account.  This is a credit card which I have not used in over two years.  I kept the card open because it was the card I have had for the longest time and thus it is highly positive on my credit score.  However, due to the inactivity, the bank was pulling my line of credit.  Now keep in mind, I'm not a credit risk.  I have always paid my bills on time and I have never carried a balance.  My credit score is north of 750.

Part of this may indeed be that it cost them money to have me as an account holder when there is no activity on the card.  So I don't really blame them.  I have gone through equally long periods of time without charging very much to the card, so I can not imagine this was the only reason.  So given that, I doubt it is a coincidence that in this credit environment, the banks are closing lines of credit to their customers, even to their most credit worthy customers.

So if someone like me is losing credit, what must be happening to other people?  Is this just another sign that we have a ways to go before we work our way through all these problems?

How Trading Can Drive You to Maddness

I went short the market last Wednesday.  I did it by my normal method; I bought the Exchange Traded Fund SDS.  I bought this ETF when the market turned negative in the morning.  After three days of Rallying, I figured we would get at least one day of a correction.  My plan was to get in and out of the ETF as quickly as possible.

Unfortunately for me, it was also a travel day for me.  I was returning from my trip in San Diego so I was in the car for the middle part of the trading day.  In the car, I was listening to the news, and the market continued to go higher.  It ended the day several percentage points higher, meaning I was down almost 5% just that day.  Thursday, the markets were closed, so I was forced to hold on to the position.  I resolved to get out on Friday.

I woke up early on Friday to find the market trading relatively flat.  I was still certain that there was no way we would get five up days in a row in a market like this, so I waited until the market dropped a little bit, and I was going to sell.   The drop never came, the market inched higher and higher throughout most of the day.  Since it was a short trading day the market close before I could do anything meaning I had to hold on to my position throughout the weekend.  I was now down 10%, right at my stop price, and I was for certain going to get out on Monday.  I was hoping the market would not open up sharply higher, as this would increase my losses.

Well the market gave me a gift today.  The market tanked, dropping 8% in one day.  Since I was double short in my position, I made up my losses and more in one day.  While I was going to sell in the morning, it was clear the market was weak so I held on to it till the end of the day.  I sold half the position at the close and made a small profit after taking some very big losses.  I will get rid of the rest of the position as soon as it is reasonable.

The point of the post should be pretty clear.  I got REALLY lucky in this trade. I should have gotten out way before I did.  I almost had to take some big losses and the market bailed me out today by falling apart.   If you were me, you would also understand this.  Trying to play this market can really drive you nuts.  There was really no good reason the market was rallying last week.  There was no bottom reached.  Even if the bottom was reached, there was no reason stocks should have been up 15-20% in a week.  That's insane.  That is not a sign of a healthy market.  But the fact remains, just when you think you have it figured out, the market does crazy things.