Don’t let the talking heads on TV convince you that capitalism is about corrupt businessmen that think they are entitled to loot companies. That is about the powerful accepting money from their golfing buddies to share the loot among themselves. Capitalism is about places like Trickle Up, micro-finance, appropriate technology and entrepreneurs making better lives for themselves and their families. Donate to Trickle Up (I do).
Related: High School Student Provide Clean Water Solution – Creating a World Without Poverty – Microfinancing Entrepreneurs – Ignorance of Capitalism
I make a point of showing the discount rate changes by the Fed don’t translate to mortgage rate changes. I do so because many people think the discount rate does directly effect mortgage rates. But the Fed announced today, actions that actually do impact mortgage rates.
Federal Reserve to Buy $1.2T in Bonds, Mortgage-Backed Securities
If you are looking at refinancing your mortgage now (or soon) might be a good time, rates were already very low and will be declining. And if you own long term bonds you just got a nice increase in your value (bond prices move up when interest rates move down).
Related: Lowest 30 Year Fixed Mortgage Rates in 37 Years – Low Mortgage Rates Not Available to Everyone – Why do we Have a Federal Reserve Board?
In normal markets commercial paper is very safe. The very short term business borrowing is made possible by money market funds and provides businesses with short term financing at low rates and provides investors some return for short term cash holdings. But the recent credit crisis does not a normal market make. Companies that depended on the commercial paper market now are thinking about the risks of such dependence.
Coca-Cola Flees Commercial Paper for Safety in Bonds
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By lessening their reliance on commercial paper, borrowers are paying higher interest rates to avoid the risk of not being able to roll over the debt every few weeks. With the gap between short- and long-term debt rates the widest in at least two decades, the cost of swapping $1 billion of 30-day paper with long-term debt can cost more than $75 million in additional annual interest
Related: Where to Keep Your Emergency Funds?
World-Beating China Rally Doomed by PetroChina’s Hong Kong Gap
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Restrictions on foreign and local investment that prevent arbitrage with H shares helped make mainland equities more expensive.
It is pretty odd that there is such a large premium that local Chinese investors must pay to own stocks in the same companies available to foreign investors. There has been a discount on the Hong Kong shares (H-shares), of maybe 20-30%, for years. But it seems that either the H-shares are cheap or the Chinese shares are too expensive (or maybe a little of both). I am positive on the outlook for China both in the short and long term. Though investments there do have substantial risks (as they do anywhere). I would imagine this premium for Chinese (A-shares) should also largely disappear over the next decade as the market is allowed to become one (and at least allow arbitrage between to the two markets to reduce the premium).
Related: Capitalism in China – Easiest Countries for Doing Business 2008 – China and USA Exports and Imports Drop Sharply
I originally setup the 10 stocks for 10 years portfolio in April of 2005. The stock market has declined quite a bit since that time. Four of the 12 stocks currently have positive returns and 8 have losses (the market is down 8% annually). I still feel very happy with the makeup of this portfolio overall. The current stocks, in order of return:
| Stock | Current Return | % of sleep well portfolio now | % of the portfolio if I were buying today | |
|---|---|---|---|---|
| Amazon – AMZN | 91% | 10% | 8% | |
| Google – GOOG | 49% | 15% | 12% | |
| Templeton Dragon Fund – TDF | 40% | 10% | 10% | |
| PetroChina – PTR | 11% | 10% | 10% | |
| Cisco – CSCO | -17% | 6% | 8% | |
| Toyota – TM | -21% | 9% | 11% | |
| Templeton Emerging Market Fund – EMF | -25% | 4% | 5% | |
| Danaher – DHR | -28% | 6% | 9% | |
| Intel – INTC | -35% | 5% | 7% | |
| Tesco – TSCDY | -38% | 0% | 10% | |
| Pfizer – PFE | -45% | 6% | 6% | |
| Dell | -73% | 4% | 4% |
At this point I am most positive on Google, Toyota and Templeton Dragon Fund. I am still wary of Dell; it has fallen 73%. I have not sold any Dell, still the percentage of the actual portfolio invested in Dell has dropped to 4%, I have also reduced the amount I would invest now to 4% (and I am leaning to selling it). I am satisfied with Pfizer, at this price and yield. (and also like having some exposure to health care).
In order to track performance I setup a marketocracy portfolio but had to make some minor adjustments. The current marketocracy calculated annualized rate or return (which excludes Tesco) is -4.2% (the S&P 500 annualized return for the period is -8.3%) – marketocracy subtracts the equivalent of 2% of assets annually to simulate management fees – as though the portfolio were a mutual fund – so without that the return is about -2.2%). The portfolio is beating the S&P 500 by 4.1% annually (which is actually quite good, though still that means just losing less than the S&P 500. Also it is a bit confused due to to Tesco not being included. View the current marketocracy Sleep Well portfolio page.
Related: 12 Stocks for 10 Years Update – June 2008 – 12 Stocks for 10 Years Update (Feb 2008) – posts on stocks – investing books
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More than half of the nation’s foreclosures last year took place in 35 counties
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A few of the 35 counties leading the foreclosure boom are in already-distressed areas around Detroit and Cleveland. But most are clustered in places such as Southern California, Las Vegas, Phoenix, South Florida and Washington, where home values shot up dramatically in the first half of the decade, then began to crumble.
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The worst-hit counties are home to about 20% of U.S. households, but accounted for just over 50% of the nation’s foreclosure actions last year, driving most of the national increase. And even among those places, a few stand out: Eight counties in Arizona, California, Florida and Nevada were the source of about a quarter of the nation’s foreclosures last year.
In more than 650 other counties – about a fifth of the nation – the number of foreclosure actions actually dropped since 2006.
Related: Freezing Mortgage Rates – Nearly 10% of Mortgages Delinquent or in Foreclosure – Jumbo Loan Defaults Rise at Fast Pace – Ignorance of Many Mortgage Holders
This week the Financial Times starts a series on the Future of Capitalism with A survival plan for global capitalism
The fiscal cost of this episode is unclear. In some countries, it may be state-busting. Some nations will need to cope with extraordinary fiscal tightenings in the coming years. The domestic impact of government spending – and its geopolitical ramifications – could yet be colossal. Again, much depends on how soon the downturn ends.
There is one certainty. While recessions are inevitable, deep depressions or slumps – or whatever you call them – are neither necessary nor welcome. They destroy wealth, sap happiness and crush old certainties. What is more, increasing poverty is a grave threat to world stability and democracy. Revolutions often start as bread riots, and economically-stagnant countries make belligerent neighbours. Growth must be restarted.
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governments must take responsibility for dealing with their financial systems. The toxicity which started in mortgage-backed securities is spreading through the world’s banks as ever more assets go bad in the recession. Politicians must make sure that their banking systems are adequately capitalised and deal with the illiquid securities at the heart of this crisis.
The Financial Times has done a good job of presenting the credit crisis, the current state of affairs and what can be done.
Related: Leverage, Complex Deals and Mania – Too Big to Fail = Too Big to Exist – Monopolies and Oligopolies do not a Free Market Make – posts on capitalism – Ignorance of Capitalism – Greenspan Says He Was Wrong On Regulation
Oil at $50 Looms as OPEC Plans Cut, Keeps to Quota
OPEC states have more of an incentive than ever to restrict output because the combination of declining prices and the global recession will reduce earnings 59 percent this year to $402 billion, according to the U.S. Energy Department. Crude demand will drop for a second year, the first back-to-back decline since 1983, the International Energy Agency said.
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Dubai crude, a benchmark for OPEC oil exports to Asia, now costs more for immediate delivery than in the months ahead. The so-called backwardation is a sign of tightening crude supplies. In the last two weeks, BP Plc, the world’s third-largest oil company, sold and unloaded more than 2 million barrels stored on the supertanker Eagle Vienna it had moored off Scotland’s Orkney Islands.
“The market is going to have strong upside, 10 or even 15 percent, even if OPEC doesn’t cut,” said Johannes Benigni, chief executive officer of Vienna-based consultant JBC Energy. “The contango is slowly, but surely, disappearing and that shows the earlier cuts are working.”
Still, the deepening global economic slump may erode oil demand faster than OPEC can cut as chemical plants shut, cargo ships sit idle and motorists stay at home
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The IEA in Paris forecasts a 1 million barrel-a-day drop in consumption this year because of the recession. In the second quarter, demand will contract by 600,000 barrels a day to 84.2 million a day, as refiners perform seasonal maintenance work, the agency said.
Contago is the name for when investors buy oil and sell futures contracts for the oil at a latter date. They then rent a container ship to store the oil until delivery. In the past few months the future price of oil has been nearly $20 a barrel over the current price, meaning investors could make a tidy profit even after paying to rent the ship. As current excess supply is reduced the profit in contago is likely to disappear.
Related: Curious Cat Investment Dictionary – I Wouldn’t Sell Oil at $40 – Forecasting Oil Prices – posts on energy and economics
The economy has structural problems. The solution at this time is not to convince people that everything is fine and just go spend money you don’t have. Personal debt is much to high. The practices that allowed huge anti-competitive and economy endangering institutions to threaten the economy have not been addressed. Hundreds of billions of dollars have been given to those who caused the credit crisis. Making the federal debt problem even worse.
Some suggest we need to regain consumer confidence. Unfortunately that fixes nothing. That “strategy” is just to convince people problems don’t exist and buying what you can’t afford is fine. Just convince people to go spend more money, run up their credit card debt, borrow against their house, as long as everyone believes it can continue. That can work for awhile but it then fails due to structural issues. And the solution becomes more and more difficult the longer such a strategy is used. The same way a ponzi scheme eventually implodes.
If you could convince those in a ponzi scheme (and new investors) that they should just be optimistic it can continue. But eventually people ask for their money to buy something and none exists and the scheme fails.
With an economy, after structural problems are addressed then you need to convince people to be less fearful and to be more optimistic. Because often by that time people have become so fearful that they are not taking even reasonable steps. They don’t buy even though they have the money in the bank and have a real need for the purchase. When this happens, convincing people that the economy is stable is important. However, cheerleading and convincing people to just continue to run up their debts to spend more is not wise when the economy is already far to in debt is not wise (though it is politically expedient).
The USA needs to stop living beyond its means. That is the most important factor to long term economic strength. But the focus doesn’t seem to be on doing this, instead it seems to be on printing money to paper over the problems. There are many great strengths of the economy and those have allowed huge federal deficits, huge personal debt, monopolistic practices, destabilizing financial risks taking… Even with that things have been quite good. But those areas need to be addressed over the long term.
Related: Let the Good Times Roll (using Credit) – Families Shouldn’t Finance Everyday Purchases on Credit – Living on Less
Ex-Leaders at Countrywide Start Firm to Buy Bad Loans
Its biggest deal has been with the Federal Deposit Insurance Corporation, which it paid $43.2 million for $560 million worth of mostly delinquent residential loans left over after the failure last year of the First National Bank of Nevada. Many of these loans resemble the kind that Countrywide once offered, with interest rates that can suddenly balloon. PennyMac’s payment was the equivalent of 38 cents on the dollar, according to the full terms of the agreement.
Under the initial terms of the F.D.I.C. deal, PennyMac is entitled to keep 20 cents on every dollar it can collect, with the government receiving the rest. Eventually that will rise to 40 cents.
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Phone operators for PennyMac — working in shifts — spend 15 hours a day trying to reach borrowers whose loans the company now controls. In dozens of cases, after it has control of loans, it moves to initiate foreclosure proceedings, or to urge the owners to sell the house if they do not respond to calls, are not willing to start paying or cannot afford the house. In many other cases, operators offer drastic cuts in the interest rate or other deals, which PennyMac can afford, given that it paid so little for the loans.
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But a PennyMac representative instead offered to cut the interest rate on their $590,000 loan to 3 percent, from 7.25 percent, cutting their monthly payments nearly in half, Ms. Laverde said.
This is one way the economy cleans up messes. A foolish organization lends money (or buys mortgages, loans…) to lots of people that couldn’t pay back and they then sell those loans at a big discounts. The new owners of the loans now have this mortgage that the homeowner can’t afford. But the cost of the mortgage to them wasn’t anywhere near the amount the homeowner owes. So the new buyer can make a great deal of money just by getting the homeowner to start paying again (even if it is at a much lower rate). They can also make money by foreclosing and then selling the property but truthfully if they can get the homeowner to pay that is likely a much better quick profit for them (and they can then sell the performing loan to someone else – I would imagine). Who knows if PennyMac will make a ton of money this way, but I fully expect many organizations to do so.
Related: Nearly 10% of Mortgages Delinquent or in Foreclosure – Learning About Mortgages – How Much Further Will Housing Prices Fall? – Jumbo v. Regular Fixed Mortgage Rates: by Credit Score