Financial topics

[Matt1989]

I really wanted to post a web log article tonight, but with this cold, my
mind is total mush. (Some would say my mind is ALWAYS total mush, but
this time it's worse than usual.)

Good night, everyone.

John

I'm going to make a stab here and take a wild guess:

We're all screwed.

But today we saw the best evidence yet that the confidence, the type that had driven the market back up in the last few years whenever it looked like it was slipping, no longer has any footing. The financial institutions are much weaker now than they have been in years' past, and their negatives have overtaken any short-term euphoria (which in this case, was merely relative placidity) in importance. Me? 'm just waiting for the next big news that will cause the bottom to fall out.

[Rafaelloello]

Disclaimer: I have skimmed over some of the recent Gordo/credit card stuff but haven't read every post. Just wanted to offer my own experiences:

I don't actively seek credit cards and sources of credit, but in the past we have done very well with the offers that just magically appeared in our mailbox. When I say the past, I mean 3+ years ago when I had a need for credit and transferring balances. My wife and I still hold all our past cards, but only use 3 currently, paying off the balances every month. In a nutshell, we moved about $20K in balance transfers from 0% to 0% to 0% offer with mostly no fees and took another $24K or so in real 0% loans and it all worked out great for us. Again, this is a few years ago and although I have no use for these offers right now, I read all the ones that show up in my mailbox and the truly easy and free money that we were offered a couple years ago doesn't seem to be there any more. We probably put about $2000-$2500 on credit cards every month and pay them off every month now. Here are my experiences:

KNOW THE COSTS. I got an offer the other day for 0% for 9 months, I think. The catch is that there is an up front charge of 3% with no cap. A few years ago it used to be either no fee or a couple points but capped at $49 or $79 or something like that. It doesn't seem right that they can put huge font offers of a 0% loan/balance transfer when it's really 3% of UP FRONT interest which works out to like 5%. It's just wrong to mislead people like that.

IF YOU TRANSFER A BALANCE OR TAKE THE CASH DON'T EVER USE THAT CARD FOR PURCHASES. This is the one they thought that most people wouldn't figure out. It works like this: I took $18,000 cash at 0% on an existing card. I knew it was absolutely imperative that I make sure that card is "clean" before I take the money and keep it that way while I have the 0% loan. Here's what I would do:

1. Make sure that I have a zero balance at the time I take the loan. Two statements of zero balances/zero charges to be safe.
2. Do not make even a single purchase on that card once you've taken the cash.

The catch is that if you make even a $20 purchase on a card that you've taken the 0% money on, that $20 sits "behind" the giant 0% loan. The end result is that any purchases you add to the card accrue interest (usually at 15% to much higher, depending on your cardholder agreement) forever until you pay off the HUGE 0% loan that sits in front of it.

The way we used to game the system was to have our (deficit at the time) spending compartmentalized. You need to have:

1. A 0% on purchases card to buy the things you need (not to be confused with the things you WANT).
2. A 0% balance transfer card that you DILIGENTLY and EARLY make every payment on.
3. A few more cards that you DO ABSOLUTELY NOTHING WITH (you are waiting for these cards to give you offers)

You simply be careful and diligent and your inactive cards would eventually make great offers to you before the other offers you already took expired. My favorite take-downs were:

1. Bank of America, $18,000 cash at 0%, no fees(I think I wrote the check for $18,247.23 to "Charles Schwab" , I was afraid that something bad might happen if I wrote it to "Cash", despite reading the fine print). We still have and use this card, paying off our ~$1100 monthly balance every month, incurring no fees.

2. AT&T Universal Card, $6,500 0% Balance Transfer with no fees and a free DVD player. I still have never used this card for anything else. They've never made a dime off me.

3. My wife had about $13,000 of credit card debt that we just moved from 0% offer to 0% offer to finally 0% with reasonable fees offer for about 5 years until these offers just couldn't be found anymore. I think the balance was down to 4 or 5 thousand because we never added to it, we just made the payments. We paid it off a few months ago because we could no longer find any place good to move it to.

Again, these stories originate a few years back. I don't look for these offers any more and we pay off our balances every month now. I read every offer I receive in the mail, but I haven't seen anything like these golden opportunities in a long, long, while.

Hope this helps some of you.

Raf

One more IMPORTANT thing: If you're a good customer who pays off their balance every month, make sure you never, ever, ever, pay interest or a late fee. If you ever incur one, call your bank IMMEDIATELY and ask them to reverse it. I probably end up paying a day to a week late on my cards a few times a year and they like to whack you big PLUS you'll pay interest every month even if you continue to pay your monthly balance every succeeding month on time. I have had COUNTLESS phone calls with my credit card companies over these matters and have NEVER failed in having these fees reversed. If you don't ask ( and maybe re-ask, and maybe threaten to take your business elsewhere) the answer is always no. I only have these problems on the couple cards I have that won't let you set up automatic full payments.

[JLak]

Thus, the deflationary spiral now applies only to the dollar.

I have a question about this. The Bretton Woods agreements caused all foreign central banks now hold mostly dollars in reserve. If the dollar becomes twice as valuable, then does that mean that the central banks can issue twice as much foreign currency?

China has made statements about moving the world away from the Bretton Woods system and the US dollar reserves. I have a feeling that they can do this today as the world's export superpower just as the US was at Bretton Woods. If the world moves away from the dollar as a standard reserve, then what happens? It seems that the treasury would have to raise t-bill rates significantly to find buyers, which would raise interest rates in general and discourage investment and lending. That seems deflationary, but internationally the dollar would be in less demand, so the exchange rates would be inflationary.

John, I've also seen you suggest the relief of the US debt by other nations. Aren't treasury notes their reserve currency? If they relieved our debt, what would happen to their central banks?

Really I'm quite confused by the calculus of international macroeconomics. Would someone please shed some light on this matter?

[John]

I transcribed a couple of interviews that I thought were particularly
significant.

The first was on Bloomberg TV yesterday, of a guy who's been to
Singapore recently, and has had a view of international shipping
trade:

> Rose: I spent about a week in singapore, a lot of time in the
> port, no activity. No activity at all. They've ground to a halt.

> I can give you anecdotal information, and I can give you factual
> information.

> Q: start with anecdotal information

> Rose: Anecdotally, I spent two days driving around two of the
> biggest ports in Asia, and saw very little activity. Very little.
> Ships loading, unloading - very little activity.

> Factually, the BDI [Baltic Dry Index] is down around 90% this
> year, and it confirms what I saw with my own eyes.

> It's really very simple. You can watch the BDI, you can watch
> commodity prices, you can watch the stock market -- they all
> depend on the credit market.

> You cannot get credit to load a cargo and bring it from point A
> to point B. Credit does not exist. 60 sovereign countries cannot
> get a letter of credit to buy oil.

> Q: Are we close to hitting bottom?

> Rose: I think it's really simple. I take a leading economic
> indicator from cab drivers. I asked the cab driver in Singapore
> what the problem is. He said, "You don't lend money to people who
> don't pay it back."

> No one can buy anything, because there's no global trade right
> now, and so until we unfreeze the credit markets, and people can
> get a counterparty and help them buy oil, and deliver it from
> point A to point B, there's not going to be a lot of commerce.

> So, watch the credit market. A lot of people are focusing on
> Libor.

> I'm far less focused on Libor. You know why? The banks can
> borrow from the central bank. They don't need to borrow from one
> another.

> So banks are borrowing from the central bank, but where's the new
> credit? Banks are struggling to find the capacity to finance the
> loans they've already promised, let alone new loans.

> Q: Should investors be looking for bargains to buy shipping
> stocks?

> Rose: These companies have all been hit by a tsunami that was not
> of their making. All of a sudden, they cannot get credit to load
> ships. This is not the ship owners' fault. Our analyst downgraded
> the group over the summer, based on the price of commodities
> coming down, which was an indicator for him of ship cargoes going
> down as well. He did a great job.

> How do you figure out what the bottom is? Watch the credit
> markets. When the credit markets open, there'll be enormous
> buying opportunities. ... There's been huge wealth destruction, as
> a result of the credit markets being seized. When the credit
> markets open, then we'll have an idea of what real value is in the
> marketplace.

Incidentally, the Libor (London interbank offering rate) interest
rates, which measure the willingness of banks to lend money to each
other, have been inching down slightly since last week's huge
bailout, but this morning they started to climb again. This is what
you would expect in an accelerating deflationary spiral.

But this interview with Simon Rose indicates that the Libor rate is
irrelevant anyway. What's really important is that nobody is willing
to lend money to a corporation, the picture that Rose paints is that
worldwide shipping, especially of dry bulk goods (steel, iron ore,
etc.) has come to a standstill.

Sincerely,

John

[John]

This interview occurred this morning on CNBC. Art Cashin is a major
proponent of the "capitulation" theory, and this morning he gave
details about what he expects:

> Q: We're feeling the bottom again, Art. What's going to happen?

> Cashin: I would love for a little bit of an up move today - maybe
> go up to 8750 or 8800 -- that would be a textbook Elliott Wave
> move -- and then you'd get that big washout / selloff. I was
> hoping for it by the end of this week, guess it's going to be
> pushed into next week. A dramatic climax looks like it's very near
> at hand here.

> Q: Yikes. That could be scary. I guess if it was early
> November, that's not much different than making a low in October,
> is it Art?

> Cashin: Well, in 1929, you made the low on November 4. I prefer
> to keep them in October. ,,,

> I'm looking for a climactic bottom, down from here obviously, and
> that could carry through for several months [i.e., lead to a
> rally for several months], and then maybe in May, we'll get to
> know the full effect of the recession, and see how things look
> them. ...

> I don't want to scare anybody. You could get an overtrade, You
> retest the original lows around 7850, you could go to 7400, you
> could go to 7000, you could even overtrade that. But it will be
> quick. Get your basket out, and be ready to catch the bargains
> when they come your way.

As I've pointed out before, this is a major mainstream view, and to a
certain extent, it agrees with what I'm expecting (a generational
panic and crash). This is the kind of thing that happened in 1987,
and Cashin is expecting it to happen again.

So Cashin and I are expecting roughly the same thing, but the
differences in our views have to do with the aftermath:

• The Silent Generation led the selloff in 1987, and managed it
  very carefully, based on their memories of the Great Depression, so
  there really was no major emotional panic.
  
  The Boomers and Gen-Xers today will be quite different, since they
  have no previous experience. They'll experience total panic,
  completely unlike the Silents in 1987.
• Although a relief rally is possible, the long-term trend of the
  market will be to continue downward, for the next 3-4 years.

Sincerely,

John

[John]

Dear John,

> I have a question about this. The Bretton Woods agreements caused
> all foreign central banks now hold mostly dollars in reserve. If
> the dollar becomes twice as valuable, then does that mean that the
> central banks can issue twice as much foreign currency?

The easiest way to understand it is as follows: The dollar becomes
scarcer, and therefore more valuable. So if another central bank
wants its currently to maintain parity with the dollar, it would have
to make that currency equally valuable, by withdrawing the currency,
and making it scarcer. Of course, that will be politically
impossible.

Sincerely,

John

[John]

According to a report this morning, Nouriel Roubini has been speaking
at a hedge fund meeting in London, and he predicts that hundreds of
hedge funds are going to collapse. Roubini says that we're in a
situation of sheer panic. He predicts a big run on hedge funds,
massive dumping of assets, and that may force policy makers to shut
financial markets for a period of one or two weeks.

And so, the massive panic selling scenario appears to be in progress
right now.

This would indeed qualify as a "generational panic and crash," and
not exactly what Art Cashin had in mind.

Sincerely,

John

[The Grey Badger]

I really wanted to post a web log article tonight, but with this cold, my
mind is total mush. (Some would say my mind is ALWAYS total mush, but
this time it's worse than usual.)

Good night, everyone.

John

John - this is flu season. Have you had your shot this year? I reacted to mine by feeling cold and sluggish and moderately dysfunctional for several hours, which tells me what it's protecting against is probably pretty strong. So consider that this might be the fly and take good care of yourself.

If you have fresh minced garlic (comes in a jar at the supermarket), add it to your hot chicken soup.

Granny Pat

[drsteph]

John et al.

I am not a frequent poster either here or elsewhere but john will (may) recognize that he and I have corresponded by email a few times and I have put his name out there a few times as well (particularly on the fabius maximus website). I don't think we agree often, particularly about roubini, but it seems you might have come around to my viewpoint lately (although my own might be changing on him slightly as well - think he is angling for a cabinet level position in next administration).

While I am not a fan of mumbo-jumbo, the cyclical changes of generational dynamics lend themselves easily to elliot wave analysis. While the chief proponent of that (robert prechter) has been consistently wrong for years, I would suggest that readers google Tony Caldaro's blog. I have been following his thought process for quite a while and while he is not always right, I think right now he is probably better tuned to this market than anyone, particularly the US market. http://caldaroew.spaces.live.com/ While its possible that we simply see an absolute, utter collapse, haven't we really seen that already since last September? There is still so much cash out there and to have a true generational panic there needs to be massive, serious, utter wealth destruction of the bulk of the population (at least the lower 95%). We're not there yet - we saw the first wave of bargain hunting last january in the real estate market with those who were deluded into thinking the real estate mess was only a retracement buying in. Now, the affluent are 'bargain hunting' and waiting for the 'fire sale' prices so that they can purchase on the cheap. The only problem with that is that those high ticket items will be purchased with dear money and now that money is committed. While some might do just fine on a longer term, inevitably hubris and an inability to recognize the changing of the game will occur and there will be casualties among those who still think that leverage and loans to bail them out in the event of unemployment, etc... still exist - they will be sadly and sorely informed otherwise.

Folks would be well to study the other market declines in addition to '29. Remember, there was a slow grind lower for many of these events - the spectacular drop of '29 was more of the mid point of the beginning rather than the end. While we would all like this event to be over, its more likely that things go on for longer than we care to have happen. Tony thinks we are going to see a short term bottom, followed by a short term retracement (perhaps on the euphoria associated with an obama presidency?), followed by further grinding lower to a newer low from which we will begin the cycle of saving, investment, technologic advancement, growth, and ultimately in another 80 years, rampant credit overexpansion leading to a new collapse. And yes, wars fit into that schema too. Reccomend russell napier's excellent book "Anatomy of the Bear" for a more complex look at things (http://www.amazon.com/Anatomy-Bear-Less ... 174&sr=8-1)

As far as what to do financially, I really am about as confused as everyone else. Excessive volatility such as we are seeing makes it nearly impossible to develop long term viewpoints. To a certain extent, fiat & policy will determine the winners - 401k's might be sacrified, but savings accounts preserved. IRA's might be ok, but college savings accounts revoked. Deflationary collapse may predominate, with subsequent debt monetization causing currency devaluation/inflation at a later stage. Ultimately, I have no idea which will pan out. I have positioned myself as neutral as possible, and will buy back into equities when P/E ratios approach more reasonable long term purchasing levels (actual P/E <10). Treasuries, cash, commodities, mining stocks, US value equities, international equities and debt, currency baskets are all things to try. I recognize that I will probably lose money on a number, but I am more interested in preserving something than making a killing. That's what option trades are for.

Perhaps one of the best opportunities that exist, particularly for the affluent, is to obtain cheaply the things that they will need for the next 5-10 years. Hards might be difficult to replace if trade opportunities decrease. I don't intend to pay off my mortgage until I can do so COMPLETELY - I can see plenty of people being foreclosed upon for the last $10,000 on a $200,000 mortgage because they lost their job and couldn't pay the mortgage. That cash reserve (provided it isn't confiscated or the bank collapses) will provide many many months of mortgage payments should I lose my job.

My suspicion is that we see massive volatility continue for the next 18 months and then, as if in exhaustion, everything just stops - significant unemployment, no jobs, higher taxes, reduced trade, etc... Thereafter, perhaps we will start the cycle again (perhaps not, who knows as we might be entering a new phase of 'HIstory'). The important thing is to get through. Suspect that the opportunity is to transfer cash assets back into the market after the shakeout and from there into income producing real estate once there is nobody left to buy. But my guess is as good as anyone's on this, and my opinion will probably change and be influenced by policy and fiat that occurs in the intervening months. Ultimately, as long as we have our families and our health, the rest is less important.

Since this is a public forum, I must state that this post is for entertainment purposes only. I am not a financial advisor, and do not hold myself out to be one. You are hereby directed to contact your own financial, tax, and legal advisors for any questions that you may have about your personal situation. DYODD.

Full disclosure: long multiple equity mutual funds, foreign and domestic bond funds, closed end funds, treasury bonds, put options on the S&P index.

[Witchiepoo]

I can see plenty of people being foreclosed upon for the last $10,000 on a $200,000 mortgage because they lost their job and couldn't pay the mortgage.

A couple of other things I've thought about in the last few days, related mostly to the California housing market, which started this whole mess:

When housing prices here went up, a lot of people took out home equity loans to get cash for various purchases. My cousin did this to buy a car. So it's not just people who bought homes in the last few years that are screwed. It's also people who may have bought homes years and years ago, but made the mistake of borrowing money on what is now a greatly devalued asset. If they can't make their payments now, the only option is foreclosure, since they will never be able to sell their home for it's prior value.

Also, the way that property taxes are calculated here, many people are now stuck with tax bills based on overestimates of their property's value. I'm not sure if this law can be changed, or how, but I wouldn't be surprised if someone tries to do it. When I moved recently and called the city to get my garbage bill changed, they asked specifically if it was a foreclosure, because a lot of people are simply moving out without squaring things away with utility companies. Wouldn't at all be surprised if the same things happen with property taxes.

Ultimately, as long as we have our families and our health, the rest is less important.

Something that we often forget in our materialistic society.