During Saturday’s summit, the G20 pledged the following:

• Aggressively battle the global recession by agreeing to not pass new restrictions on global trade …

• Improve regulatory supervision of banks …

• Implement stricter accounting standards …

• Employ oversight of the derivatives markets, and …

• Synchronize tax cuts, lower interest rates, and spending initiatives.

In a statement issued after the meeting, the G20 said,

Against this background of deteriorating economic conditions worldwide, we agreed that a broader policy response is needed, based on closer macroeconomic cooperation, to restore growth, avoid negative spillovers and support emerging market economies and developing countries.

I am always skeptical when it comes to mixing money and politics - which is just about 100% of the time.  I love the idea of a united front and global response, but it has never worked in past.

Because of this, I remain cautious and continue to move my money to US Treasuries.  My 401k and other IRA’s are with Fidelity.  I love that company, but things can be limited.  I have moved my 401k to an income producing bond fund and everything else to the short-term US Treasury fund, FFXSX.

I may miss some of the upside when it comes back,  but I am still so very cautious of a HUGE downturn next year.  I was waiting for someone to say DOW 6000 and it happened last night on the best show on financial television, Fast Money.  Guy Adami stated that the DOW could have a “6 handle” if we break through the 7800 technical support established in mid-October.  A 6 handle is not DOW 6000 but that is where it could go if we break through that technical support.

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Saturday’s G20 Summit Yields Something…I Think

But people were doing it because houses were being auctioned off.  People were camping out all night just to have the opportunity to buy one of them.  The world was coming to an end and if you didn’t have your house before Las Vegas ran out land, you would have to pay $3 million for a 1000 square foot house in this town.

The truth of the matter was that we were in a bubble like everyone else around the country.  The post-mortem on the real estate bubble will tell us exactly why it happened.  There are plenty of reasons, but at the core of any bubble, is fear.  Fear of not getting yours.  Fear of missing out what everyone else is making mint on.

The bubble here was a quite a bit more exacerbated since Las Vegas is a town of gambling.  However, a bubble it still was and it eventually popped.

The New Financial Bubble

Now, I believe we are in a new bubble.  The bubble can best be described as the “bubble of fear.“  This fear bubble is quite intriguing.  It will not be like other bubbles.  In other bubbles, prices go way up, then something happens, people lose confidence and EVERYONE heads for the exits at the same time.  Prices drop and people lose everything if those people decided to lever up and use debt for their purchases.

In this new bubble, not everyone will be rushing back into investing when their fear all of the sudden disappears.  Fear doesn’t work that way.  Fear eventually goes away, but human nature is to conquer the fear slowly, then thank their lucky stars it was not as bad as they thought.  It does not mean they suddenly embrace what they were fearing.

There is no doubt a bubble of fear, though.  Just turn on the news or read the paper to find we are heading (or already in) another Great Depression.  Gun sales are way up and people are stock-piling food.  People are on the brink of driving themselves insane over this fear.

I heard a guy on CNBC the other day say that the stock market could realistically go to zero.  Debt holders would be OK, but equity holders are in a position where all future cash flows are completely uncertain - hence, companies are generally worthless.  Now that is a bold statement.

The real problem here is that he just may be right.  Everyone’s value in their investments just may be worthless.  There could also be Martians living on Mars.  I don’t discount either one, until I know for certain, but what I do know is that I do not live my life by these.  I don’t know and neither does that guy on CNBC…….so just relax.

Do your homework.  Make assessments.  If you think things are about to unravel, then sell your positions and go into something more stable for the moment.  Don’t worry about the losses.  They are real and it hurts, but don’t let fear run your life.  Things will get better and you will want to re-enter when they do.

I try to remember what is important in my life.  I want to expect the best and prepare for the worst, but I think that latter is what everyone is doing at the moment.  This is not healthy for the system and when everyone moves in the same direction (like they are right now), you end up pumping it up way more than what it really is (a true definition of a bubble.)

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The New Financial Bubble: Fear

Neel Kashkari

(Tarnished Asset Repurchase Program) when it was passed by Congress about a month ago.  He worked directly for Hank Paulson, the current Treasury Secretary, when Hank led the venerable Goldman Sachs investment bank a few years back.

Neel was on capitol hill today testifying to Congress on the recent reversal from Treasury on the TARP plan.  Just look at the news stories and read some of the comments from Congressmen.  They are vicious, but I think warranted (more on that in a moment).  One of the Congressman called him a “chump”.  Another said, “that statement you just made, you will be thinking about the rest of your career.”

They are lambasting the guy and literally taking him behind the shed for a whoopin.  It is incredible.  I watch some of the clips on CNBC and I am shocked at what is happening to this guy.  That being said, the Treasury department, Paulson and President Bush deserve MUCH more than this.

Kashkari is simply taking the heat and the brunt of the frustration of 8 years of insane policy and putting our system on the brink.  He is also taking a huge hit for Paulson pulling a bait-and-switch on Congress and the American people.  Poor guy.

Kashkari has no choice but to take the heat

I feel very little sympathy or empathy for the guy, though.  I, like many Americans, are terribly frustrated at anyone and everyone that took down millions (and in the case of Paulson billions - $1.2 billion to be exact) during the time of high tide - 2003-2007.

The amount of pay in salary and bonus’s taken during the the time of living large on Wall Street was obscene.  More importantly, they rewarded themselves for taking HUGE risks (leveraging 40-1 in risky assets) way before they knew whether or not those risks were good ones or not.  The bonus’s were based on leveraging to the hilt when times were good, ignoring the possibility of times turning bad with that huge risk level.

As we all know, when you lever up, you are putting only your equity at risk.  If prices go up slightly, your small equity investment may double in size in a very short period of time.  For example, buy a house for $100k and take a mortgage for 97.5% of it.  You come up with $2.5k and your lender comes up with $97.5k - the exact math used by the investment banks during this time.

The house goes up in value by a VERY small 5% - taking the value of the house to $105k.  However, the return on investment/equity is 200% - $5k profit increase on $2.5k equity investment.  Give yourself a huge kiss, break your arm patting yourself on the back, and don’t forget to bonus yourself like an Middle Eastern Sheik at bachelor party as you are now are freaking rockstar.  This is exactly what happened on Wall Street during the day.  It was party all the time when times were good.

Forget about the fact that if the asset loses 5%, the entire equity investment is gone and then some.  If it loses just a small, realistic 10%, the asset is so far underwater it is silly.  And you have what we have today - across the board.  The investor will simply walk away from the asset - way beyond NOT freaking good.

This is why Kashkari has to take the heat.  He is the guy.  He is the man - and he is getting paid big bucks to take the job - just like he did when he was part of the problem at Goldman Sachs.  He, like anyone else who made millions way before the risk came to fruition, has to take the heat.  I feel bad about some of the personal attacks on the guy, but that comes with the job.

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Attacks On Kashkari Are Tough, But Fine With Me

I’ve given this a lot of thought lately and here in the Las Vegas real estate market, we are seeing signs of this concept gaining momentum.  In North Las Vegas, our ground zero for housing depreciation, City Council recently approved a foreclosure solution that will most likely start a new trend to help the housing crisis.

Essentially, the concept is to tear down houses to decrease the supply and to improve the offerings of existing, feasible resales on the market.  In the NLV instance, they want to tear down a foreclosed multi-family property.  It is a blight on the community and having those extra units is only adding to an oversupply that will take years to sort out.

Why not tear it down?  I can’t think of any reason not to do it.  The property is not really viable and if times were good, us land developers would have torn it down for a new, more vibrant property anyhow.  Tear it down during these hard times and reduce supply - it’s brilliant.

Tear down as a strategy

This obviously begs the question, “should this be done elsewhere as a strategy?”  I say YES!!!  We could buy tarnished assets under the TARP plan, invest in banks, or even insure those tarnished assets - but none of these will immediately impact the core reason we are in this mess to begin with.  As a country, we overbuilt and binged on easy money to build even more.

If we could get housing supply under control and reduce the number of living units, the imbalance will be pulled back into equilibrium.  If this happens, there is an incredible chance housing prices will stop falling.  If that happens, we can count on the underlying mortgage backed securities and other securitization assets to stop falling in values as well.  This will stop the run on the banks balance sheets and presto!!!  We have this situaion at least somewhat under control.

I know this concpet is an ugly one.  Imagine using taxpayers dollars to tear down high end condo’s on Florida’s coast; to plow under 2500 square foot single family homes in Las Vegas; or to demolish attached condominiums in Denver.  This is not a good sight and people would surely say, “what a waste.”   But this concept does work.  It should be looked at a real opition instead of the sillyness that is happening right now with our taxpayer dollars during this financial crisis.

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Help Housing Crisis By Tearing Down Supply

The symbolic nature of this news, though, can not be overlooked.  Here at the Financial Analysis Guy, we try to put things like this into perspective to how it affects other pieces of the machine.  Kyle Canyon was once a beacon of hope for the once suspected land constrained Las Vegas real estate market.

With 30,000+ new homes being sold and closed every year between 2004-2006, there was definitely a thought we NEEDED to have Kyle come online ASAP.  The other master planned communities were running out of finished lots at those paces and this was simply going to be needed to keep the Vegas machine running.

Kyle Canyon MPC was on the horizon, though.  Ground was never broken and all the builders were putting these units into their business plan several years out.

Las Vegas Depression

The rest of the country may have seen a slowdown.  Prices may have dropped double digits in some areas.  Here in Vegas we have seen a median (that’s right, a median) price drop of 30% from last year.  Overall, the median resale price of a home is down nearly 40% from its high in 2006 ($300k down to $190k.)

That doesn’t tell the whole story, however.  In some places of the valley, namely North Las Vegas, prices have come down 70% across the board.  Houses that routinely sold for $300k in 2005-2006 are now selling at auction for $75k (I have several examples of this.)

Layoffs are everywhere.  Companies, when asked how they are doing, claim they are “hanging in there.”  When our company was working through their issues - just prior to going out of business - the company line was “we are hanging in there.”  You have to say this or you have no chance of keeping customers, suppliers and employees.

Signs of rebound are false positives

We have recently seen signs of a Vegas real estate market rebound, but these are false positives in my opinion.  The recent rebound in resales are mostly investors thinking they are snapping up cheap houses - relative to the astronomical prices we saw a few years back.

Prices continue to drop and when prices do stabilize (or even uptick slightly) these investors will put their houses back on the market - delaying the eventual rebound.

The foreclosure of Kyle Canyon puts the Las Vegas real estate market front and center in the national news, verifying what we already knew - we are in a massive recession here locally and most will agree we are in a Depression-like state.

I think everyone is hoping for things to change, but it will take time.

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Las Vegas Depression In Full Swing With Kyle Canyon News

We have been in line for a Chinese adoption for over 3 years now and have all but given up hope on that one.  We were caught right in the middle of many different factors coming together at once to cause this to slow down considerably, but that is an entirely different post.  So, my wife and I decided to adopt locally while waiting for the Chinese government to get their collective heads out of their asses and let more of their lost girls get adopted.

So, we went through the full gamet of process to adopt locally - background, financials, fingerprints, home-study, classes, etc.  There is a ton of stuff you have to do, but since we were ready for China, we pretty much had it all done and ready for the local one.  We got in line at the end of December and got our call on March 29, 2008 - the day he was borne. 

What is significant about this is that we were not expecting it.  It was not like we had a mother that picked us or we knew the delivery date or anything.  Nope, there was a baby and it was presented to us.  Talk about stress.  Even more intriguing was the fact that the baby did not meet our criteria for race.  We are both white and this new baby was a mix Hispanic/African-American. 

The wildcard, though, was that the baby was PERFECTLY healthy.  The new baby boy was 6 pounds, 10 ounces and was in perfect health - no drugs, alcohol or smoking.  This was indeed rare.  Babies are rare enough - but a completely healthy one as well.  We jumped at it and it has been GREAT!!! 

Jackson is starting to smile and things are going wonderful.  We are not getting enough sleep, of course, and the wife and I are “negotiating” over shifts.  Awwwww, the fun has begun, but I wouldn’t trade it for the world!!!!

As a financial analyst, though, the best analogy I have heard for this came from my current boss, Rex.  He said the first 6 months, it is all negative cash flow.  Then the investment really starts producing for you when they start to smile and interact with you.  Then you know where your time and money went…incredible…

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Welcome Jackson Daniel - long time coming!!!

Trent discussed the importance of one’s reputation and used a famous, well-used quote from one my idols, Warren Buffett.  I love Buffett and all that comes along with him.  He is the true silent assassin though.  He folksy mannerisms and “aw-shucks” ways should not lead anyone to believe he is not a killer when it comes to business.  But one thing he does do that is completely above board.  He will never lie, cheat, or steal to get what he wants out of life.

He believes in hard work, doing your own homework, and NO SHORT CUTS!  This last one is the most important in my opinion. 

The quote Trent used was as follows:

“It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”

There is another quote from the Oracle of Omaha that I like and that is “there can’t be two you’s.”  Why is this one so important to me?  I like it the best because he simply states that the person you are in public MUST be the same person you are in private as well - and vice-a-verse. 

Trent’s post was amazing because it really focused in on the hurdles of keeping and maintaining the most important asset you have in your life - your reputation.  The quote I like, the two you’s quote, runs along those same lines, but the reputation implications is just part of it. 

Think about the implications of making sure you act the same way in public you do in your private life.   Oftentimes in our lives, we save all the niceness and kind words and politeness for those who mean the least to us.  And when we get home from our hectic lives, it is our children and spouses that suffer the negativeness of the real world pushing us around.  If we just treated our loved ones the same way we would treat our co-workers or perfect strangers (for the fear of not being liked or making a good first impression) our lives would be enriched beyond our wildest dreams.

We can not live a phony life in public and not be that same person in private.  We also can’t be cruel and uncaring in private and not have that carry over into our public persona.  It just does not work that way.  The truth about who you really are catches up to us no matter in public or private. 

So the lesson here is to take a long hard look at who you think you really are.  If you don’t like what you see, it is time to make some changes in your life.  If you are happy with who you are in public (or private) but the other one suffers because you are trying to be something you are not - it is time for some changes as well.  In any event, you will be a better person for it.

There can’t be two you’s quote is genius.  I respect Warren Buffett the man as much as I do the personality and the business savvy.  I respect Trent’s writing over at his blog just as much and wish him all the best.

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Warren Buffett - There Can’t Be Two You’s

His shtick may get tiring at times and I will go weeks or months not watching the guy, but when I come back to him…very entertaining stuff.   I love the comparison to a televangelist.  He does have a cult-like following where people hang on his every word for investment advice. 

I do think his show highlights a problem with our society in general, though.  We are always looking for the quick fix; the timesaver; the get ahead idea; the way to beat our competition to the punch. This mentality, coupled with the seamingless massive liquidity that exists in publicly traded stocks, forces wild swings and knee-jerk reactions to any new news.

Since almost all of us are now using online trading accounts for our investments, taking investment action is literally 30 seconds away. This is bad for trading, let alone investing. It is the “gotta have it now” convenience of acting on this stuff that really is the root of the issue.

Argument: Positive
Doing your homework on stocks as investments is music to my ears. I am all about doing the analysis and when it comes to finances, you better do it at least twice.  If this message gets to investors (or even speculators for that matter) then his message is indeed positive.  When people start to learn why things happen in the markets the way they happen, then people will eventually become smarter and better investors.  It is just that simple.

Another place where he helps tremendously is keeping it interesting.  This stuff is not all that exciting.  Matter of fact, it can be like watching My Left Foot for the 67th time.  It can be outright boring.  At times, you will not see a return on your investment for years.  This is not good for our get it now society.   Holding the interest of people when they are learning is very difficult.

Finally, his approach to understanding sector influence on individual stocks is fantastic.  Knowing when things cycle in and out of favor depending on what is happening in the general economy is vital to long term success in investing.   Much of the financial analysis that I do is related to the sector and general market conditions.  After all, watch the general stock market tomorrow.  See which way it is going and see how that corresponds to the stocks you are watching.  The correlation coefficient on staggering in some industries.

Argument: Negative
The Cramer effect is a tough one to quantify. However, it is real just like any other influential person in our society.   He is the cause, like so many like him, for the massive increase in the VIX (Volatility Index) over time.  Remember, he is part of a 24-hour news and business station.  That is a lot of hours to fill up with commentary.  People use this as the new way to educate themselves and it is VERY easy for people to overreact to these folks looking for ratings.

When I ask some of the pros who lived through the S&L crisis of the late 80’s and early 90’s if this downturn is worse than then, they all say the same thing:  MUCH WORSE!!!  They say the amount of fear and uncertainty in the market (led by the news shows and media in general that is now and in your face 24/7) is immensely more influential.  It is leading the problem to a much worse scenario just based on the amount of fear it is producing.  It is a reality we have to bare with 24 hour media and attention grabbing techniques for eyeballs.

Finally, his constant “BUY, BUY, BUY” or “SELL, SELL, SELL” leads the weary to do one thing all the time - act on our investments constantly.  The brilliant Warren Buffett abhors this type of investing.  The need to constantly be acting on our investments is our way of making sure we “stay ahead of the curve” - which is insane.  It is also a way for us to “stay relevant” - also insane!  Do the homework and be patient.  You always have to make sure your thesis makes sense, but buy and hold works.  Holding forever does not work on everything, but holding for the long-term almost always does on good investments.

Wrapping it up…
I love watching him for entertainment value - anything beyond that is simply buyer beware. He keeps it interesting and his books are not bad so long as you understand the context. This is going to sound weird, but he offers me almost no value for trading purposes.  He is usually reporting on stuff that already happened or is behind the curve.  For investment value, he offers me very little as well, but does help with some of the education. He has some good ideas and his work on sector analysis is priceless in my book.  Everyone, please, do your own homework and learn, learn, learn.  As you start doing your own financial analysis, you will see order where there is nothing but chaos.  The fog will eventually get lifted and you will benefit from your own education.

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Jim Cramer’s Influence: Negative or Positive, but always entertaining

One thing that wasn’t on her list but was on mine, was replace every dinosaur light bulb we have in the house with those new fandangled bulbs that look like a bowl of spaghetti. Since I am all about saving money and doing my own financial analysis to justify my actions, I had to look at this based on my return on my investment (or Internal Rate of Return).  It took the idea of saving money bigtime for me to actually do the right thing - what kind of person am I???

I thought this process would have taken me about 20 minutes, but after spending roughly 2 full hours on this little project, I was felling pretty good about myself.  I replaced nearly 40 light bulbs and did a variety of equivalent 60 watts, 75 watts and 100 watts.

What is cool about this is the learning process.  What I learned was the following:

• the old 60 watt version uses only 14 watts in the new version
• the old 75 watt version uses only 18 watts in the new version
• the old 100 watt version uses only 23 watts in the new version

These new light bulbs use 1/5 of the electricity as the old version.  HUGE savings when it comes to paying my those really nice folks at the utility company.  The package says I can save, under normal uses, the following:

• the 14 watt version saves $46/year
• the 18 watt version saves $56/year
• the 23 watt version saves $77/year

Since I replaced nearly 40 light bulbs today, I know the savings could very well be huge.  If the average savings per yer is $50 per bulb (on average since most of them were the small kind) and I replaced 40 of them (I need my calculator), but I think that is roughly $2,000 per year in energy savings.  I am not that optimistic and I know that it simply can’t be true, but lets say I was off by 50% and it only saves me a cool grand each year.

Time to crack out one of my best friends (Microsoft Excel) and do a little investment return.  The total investment in light bulbs was $33.  My time is free since I was working around the house and my wife gets a special discount - for barter of course…  ;)  The internal rate of return on this investment is silly to discuss.  It is off the charts, so let’s not even discuss it. 

What is truly neat to look at is how these 10 C-notes are going to multiply over time, invested VERY mildly at 8% return.   To see what this means to me in 30 years time - saving the $1000 every year; invested at 8% annual return - simply use the following formula in excel   “=FV(.08,-1000,30)”. 

(BTW, I am writing this with The Matrix on in the background…killer flick)

This silly little bulb replacement exercise just netted me an additional $113,283.21 for our retirement.  If my adjustment down to $1000 per year is wrong and I actually save the $2000 per year, my take at the end of all of this (just replace the 1000 with 2000 in Excel) is an unbelievable $226,556.  I am besides myself right now.  Somebody needs to come on over my pad and punch me in the face a bunch of times for not doing this sooner.  If not in the face, then at least a couple swift kicks in the beans.  What the heck was I thinking? 

Oh yeah, one more thing, I of course put all my dinosaur bulbs on craigslist to try to offset my $33 initial investment.  For some reason, spending the initial scratch still gets to me.  Those light bulbs seem perfectly fine, but in the in long run, those things were eating me out of house and home.  Taking food off my table sort of speak.  And the Financial Analysis Guy can never have that!

One more thing, the Financial Analysis Gal has this amazingly beautiful floor lamp in the corner of our living room.  It is artwork - I will give it that.  She loves it and we can’t craigslist it quite yet, but the time is coming.  Why?  That halogen lamp uses 300 watts (that’s 21 FREAKING times more energy than my little spaghetti style friend).   That lamp is now officially put on notice!!!

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ROI of Replacing Light Bulbs

If this is true, companies like Walmart and Costco are going to succeed in this new world paradigm.  Sales will grow tremendously over time and this less expensive alternative will win out in the masses.  I, of course, am extremely interested in this concept as any good financial analyst might be.  What does it mean to my investments?  How can I capitalize on this sea-change, if it really is one.

Jeff took on several aspects of consumerism in this three part series.  As I watched this, I realized it is not just doing my analysis for investment purposes that is so important.  The other part of this equation is the Financial Analysis Guy as consumer. 

In our quest to climb over each other in this wonderful rat race we are all in, we are constantly reminded that there is always something a little better that we could have had with a little more money, or a little more time, or a little more effort. 

Why are we so obsessed with having the very best?  I think one reason is the long-time American pastime of “keeping up with the Jones’”.  This simply the notion that there is a need of people to compare how they are doing in life with their neighbors; their family; their friends; colleagues; etc.

I am always trying to convince my wife and others around me of the concept of Good Enough.  Yes, I get accused of “settling” and being a slacker because I am not necessarily striving for perfection.  What does that say about you, Chuck?  Seriously, what kind of person are you to settle?  Don’t you want more?

Of course I do.  But at what cost to get more?  During my undergrad and, even my graduate work, I realized that B’s were good enough.  It was not that I would not take an A if I could get it, but the amount of work required, extra work, to get that A was overwhelming.  Therefore, I was the guy not always swinging for the fences.  I was happy swinging and making contact with the ball and getting singles, doubles, and triples.  I knew that my quality of life and my quality of education was not tied to my grade, but more the learning experience.

The other side of this argument is growing as a person.  How can you grow as a person - personally, professionally, spiritually, physically - if you are settling for good enough?  This is a good question, but a huge leap in my opinion.  Like everything else I do, I don’t think that this concept can be applied to everything in our lives - nor do I want it.  Is my love for wife good enough?  Never.  How about my health?  Nope…not that either.  But it does apply to just about every material thing I possess.  It does apply to my work and my ability to cope with other people in everyday life.  And it certainly applies to my time.

In future posts, I will address several aspects of our lives - material, spiritual, etc, in this series “Good Enough”.  I believe this is a topic worth exploring and I want others to comment.   I just might be all wet here, but I want to explore it.

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Good Enough