Credit Cards and The Growing Consumer Debt Epidemic

Household debt has now exceeded the national debt of the USA – what does this mean, this means that the people who live in America, you and me, owe more money to companies (particularly banks) than the entire government does to other countries!!!!

This figure is incredible but how has debt spiraled so far out of control. The average American family owes more than $16,000 on credit cards, many only making minimum payments. With some credit cards charging exorbitant “loan shark” style interest of 39%, late payment fees, partial payment fees etc etc credit card companies are able to double their money annually! This is quite possibly the most rewarding part of thew whole financial system for banks. The majority of hedge funds do not produce mid to high double digit returns – for mainline banks this is a n incredible pipeline that they will continue to milk until America wakes up.

Minimum payments (around 4% on average) will require 15 or more years to pay off if no further charges are made to the card. This is with a more normal 19.98% apr.

With the Universal Default Clause your credit card company can change your interest at any time for almost any reason, your debt is too high with another company, you were late on your mortgage payment etc etc. This is one of the scariest and most open ended, open to abuse clauses in the American legal system as it exposes more than 1 billion card holders, yep 300 million Americans with an average of 3 cards each, to the whim of the card company. Should you choose to retaliate in any fashion they deem unfit to this injustice, there goes your FICO score.

Meanwhile whilst on the topic of FICO scores, this number has become more critical than ever before as now it holds the key to how high your charges on your mortgage will be. Fannie May et al will be charging higher fees and possibly require higher down payments from “sub prime” borrowers. This means anyone with a 680 or less is going to be dinged – i believe on a sliding scale.

Is your VOIP call being recorded

It has been generally well known and accepted for years now that our governments listen in on our phone calls, triggered by certain keywords. It used to be the the British tapped the American public and vice versa, until the patriot act pretty much allowed the US government a free hand.

It is now emerging that it would be possible to tap VOIP calls and you can bet your bottom dollar that if the government isn’t already doing this they will be soon!

As mentioned in the article this will also be a potential boon for those criminally minded as well.

So remember, when talking on “ANY” type of phone – be careful what you say, someone may be listening!

To hear what they have been doing as a proof of concept on this have a look and listen at the following website http://siptap.voipcode.org/

Copyright Jonathan Rose 2007 – Creative Commons License

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Feeding The Beast – Countrywide is Hungry For Money Again

It doesn’t seem so long ago that the evils of CFC’s (Chlorofluorocarbons) were being vilified in the press. Today we have a different type of negative connotation to CFC’s (Countrywide Financial Corporation). Blamed for much of financial liquidity crisis and turmoil during August 2007 (they were just being greedily like everyone else, but they got a little too greedy) they are once again hungry and need to feed. Such financial behemoths have incredible burn rates (the basic unavoidable running costs of doing business, before any revenue is generated).

Did I mention the housing recession and that only this week several home builders were offering over $100,000 in incentives to get people to clear out some of their massive and costly inventory and provide them with some cash flow and liquidity. Did I also mention the commercial paper that needs to be rolled and isn’t finding a home this week, or the off balance sheet debts that are starting to cry for help and also the vastly reduced number of buyers of CMO’s (Collateralized Mortgage Obligations) ABS’s (Asset Backed Securities), who don’t want to share I the risk of loan pools where FICO scores no longer give any indication of who will or won’t default due to relaxed underwriting standards, who Countrywide and other originators and banks need to securitize (pass debt onto to) write loans.

It is only 3-4 weeks since Bank of America became a “national hero” and bought $2Bn (shoring up the market and calming everyone’s fears) of preferred stock to try and add to the war chest of the largest mortgage originator in the USA. That was on top of $11.5Bn short term credit lines drawn down upon the week earlier. Now Goldman Sachs is trying to put together another round of funding, possibly including J.P Morgan, Merrill Lynch etc.

Are intelligent people throwing good money after bad, surely not shrewd investment banks, it must mean Countrywide will be fine I hear people say. Maybe it is just my cynicism but I believe that whilst Countrywide may well survive in one guise or another, the vultures are lining up for the pickings, as well as protecting their already large investments. How are they doing this I hear you ask, simple, they are buying convertible preferred stock!

What does that mean in reality; it means that if Countrywide defaults or ceases trading they are the first in line to be paid, subjugating all the common shareholders. With assets being sold at cents on the dollar, their $2Bn may well clean up the majority of the real and semi-liquid assets of Countrywide whilst clearing debt, rental agreements, bad credit etc etc.

 Okay I am sure I just heard you gasp!

Gasp you should, Countrywide just about managed to pay its staff and dividends due at the end of this month, but without significant loan generation, they will be light on revenue so how will they pay next month! That is why I say these savvy investment bankers are not throwing good money out of bad, they are protecting what will be theirs at the expense of the everyday common shareholders and a board of a company fighting for its very survival is boarding the life raft to leave the sinking ship. Why do I say this, well to build a business you need to be able to borrow and bankers are usually the people doing the lending. So if you scratch their back, they wouldn’t want to you too waste all your skills and talent and energy, so they will invest in you when you coming looking for funds for you new venture in 4-6 months when the smoke has blown away and the bare and empty carcass of CFC is finally laid before the common stock holders!

Did I mention the savvy bankers hedge, should countrywide prove canny enough to survive by a hairs breadth, they can convert their preferred stock into common stock at $18 something a share and have a nice return on their investment!!!

Dare I utter the whisper of the name of another much vaunted company – ENRON!

P.S The car industry will be the next to suffer as dealers give away cars with huge incentives and ultra low financing (even Honda the most frugal of all companies) to clear inventories ready for 2008 models!!!

P.P.S By the way if you haven’t realized all this spells the way for a recession of “Great Depression” portions

Brain Make Over’s Epistemology (e·pis·te·mol·o·gy (ĭ-pĭs’tə-mŏl’ə-jē)

The branch of philosophy that studies the nature of knowledge, its presuppositions and foundations, and its extent and validity.

 Neuro-Plasticity Principle

The Brain is malleable or plastic and can be molded, adapted, advanced, trained and developed for increased performance and the reduction of limiting factors.

Redundancy

The Brain has redundant neural and synaptic pathways that can be trained to circumvent and therefore effectively eliminate limiting factors

Scalability

Brain Make Over has adopted the approach that any product it develops should work to some degree for everyone – breadth of scope and application results in a economical solution

Holistic Approach

We believe in the power of assimilation/ integrate treatment styles and processes harmoniously for the common goal of improvement.

Awareness of Collective Conscious

People are increasingly aware of global consciousness and their own role within this. By working to enhance ourselves and our children we positively contribute to the future. “The Secret”, “Anthony Robbins”, “Environmentalism”, “Conservation”, “Celebrities giving back” are increasing manifestations of this.

Alternative Treatment

Utilization of non invasive, non pharmaceutical brain training and development to improve performance without impacting the epigenome and future generations. Societal recognition of its dependence upon pharmaceutical medications of which all side effects may not be known or fully understood.

Interrelation of Science, Technology and Social/ Human evolution

Brain Make Over is attempting to assist with the evolution of the human species in a small fashion my merging the benefits of technology with the human and social element.

No Child Left Behind

Government is recognizing the importance of future generations and the education that they receive and how this can and will impact our species in both the short and long term. With an affordable improvement Brain Make Over bridges the gulf in education qualities by providing enhancement to the fundamental building blocks of learning.

Human Capital

Brain Make Over recognizes the importance of human capital within the workforce and its implications for the future. Through better assessment and selection and enhanced learning and speed of processing companies can increase productivity and corporate wellness.

Empirical data collection

The only true data is that which can be empirically collected which negates outside influencing factors, such as behavior, emotion etc. Only through accurate and objective testing can one know the actual “real” result, no matter what non empirical results my imply

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Housing – How Low Can It Go

It is interesting to look at how people have been valuing property over the past 5-7 years, logic has seemingly left the building and until it is fully restored, the bottom will not be in sight.

One of the primary factors that is missing from the market has been to establish the rental income that the property can produce. With this figure in mind plus all costs, can the property cashflow and service a capital and interest debt as well as taxes, insurance and expenses!!!!

This is the real and true value of the property, what it is worth. If you find property that meets these criteria then it is worth buying as it will cashflow if not from day one, then very soon thereafter.

The other factor which is critical to successful investing, is the lack of emotion. A pure and empirically derived decision is essential to success in real estate as with any other investment. One of the major factors that plays into the volatility is peoples knee jerk reactions to the media which is trying to sell advertising (lets be honest) and needs as many “hooked readers as possible!

Don’t buy a house because you love it, or it feels right, buy it because it is a good investment. Location, Location, Location is critical to this. Are there good or great public schools in the area, is it near good shops, are there areas that will decline and become less desirable situated nearby, does it have a good water supply (this will become an increasing issue over time)

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If You Don’t Want An Honest Answer Don’t Ask Me

Everyone who knows me will tell you that I am opinionated, for right or wrong, I believe it is essential to have and at the appropriate time express an opinion.

I am intellectually curious, by this I mean I have a thirst for knowledge and am constantly seeking to improve myself through learning!!!

I believe that the Truth is the essence that so many have lost, falseness and fakeness rule the day, or maybe its just that I currently live in Los Angeles!

Life is about Hard Work, plain and simple if it is worth having, then you have to work hard to achieve it, nothing is worth having if it isn’t worth working for.

Nothing happens overnight, every instant success you see is preceded by at least a five years of hard toil, which at times will often seem fruitless. Whilst a baby is not a baby until it is born any mother will gladly remind you of the 9 months and 23 hours of labor that came before it (It doesn’t mean they wont do it again)

If you want to get rich quick, win the lottery – just don’t expect the money to stick around too long if you don’t develop the skills to manage it really quick.

If the same thing keeps happening to you time and time again, then maybe it is time for a little self reflect, look at yourself and see if maybe, just maybe you are doing something that is causing this repetitive behavior.

It doesn’t matter how much money you have, money will not make you happy. Happy people are happy, sad people are sad and miserable people, well they are just miserable. Money can at times make life easier but more often than not it complicates things, blurs the lines and leaves you knowing less about yourself and the people around you than before!!!

Poor people want to be rich, Rich people want to be happy, Single people want to be married and Maried people, well they just want to be dead!!! By the Way the Happy people, they want for nothing!!!! Happiness is a state of mind not a state of wallet.

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Liquidity Crisis – A Little Reflection Gives Compelling Answers – Ignore at your own Peril

The media shouts of a liquidity crisis and the financial markets are in turmoil, the terrible words recession and depression are being uttered by many and people are drawing upon similarities between 2007 and the former stock market collapses of 1987, 1929 and the recessions of the early 1930’s, 1970’s, 1990’s, 2000’s . The question is how much do you really know and what do you need a know to make a considered opinon and protect yourself?

Historical Crashes & Depression/ Recession Black Monday, October 19^th 1987, came at the end of two record years where leveraged buyouts, mergers and acquisitions financed by junk bonds (In leveraged buyouts, a company would raise massive amounts of capital by selling junk bonds to the public. Junk bonds are simply bonds that have a high risk of loss, so they pay a high interest rate. The money raised by selling junk bonds, would go towards the purchase of the desired company.)  drove the market to an artificial and unstable high. The Dow lost 22.6% of its value or $500 billion dollars, equivalent to more than 2000 points today.  

The savior was Alan Greenspan who started to slash interest rates, inject money and renew consumer confidence. Thus the market was completely recovered within 12 months and on its way to new highs. 

The great depression 1929 – You have to love October, the 29 crash was on the 28^th and 29^th when the market went from 400 to 145 and some $5bn was lost. 

 

Charting the two great crashes shows an alarmingly similar picture with very similar profiles including the increased artificial liquidity, utilization of Margin in one Futures in the other to provide accentuated leverage and the need to a sharp correction to re correlate the market to true vaue.

Whatever scale one chooses to use the similarities are hard to deny

 

A recession occurs when GDP (Gross Domestic Product) falls for 2 or 3 consecutive quarters, illustrating that the economy is not growing as it should. Redundancy and job cuts as well as burgeoning debt are commonly associated with such times. Recessions often follow market corrections. 

It is interesting to compare and contrast the recession of the 1930’s with that of the early 2000’s – had we not had the real estate bubble growing out of Fed Easing, who knows what the outcome would have been!    

Current Market Value vs Prior times 

This is one of the most important factors to understand when looking at current market volatility. Due to the incredible and unprecedented rise in market value (nearly 16000 in its high of 2007) there is an equal and equivalent rise and fall in daily trading range, thus a 200 point rise is equal too a 20 point rise when the market was at 1600.  That is what makes the chart below so scary!!!  

What’s happening now?
 
Countrywide Countrywide Financial (CFC) is being blamed by many as some corporate evil at the center of this crisis, but they are merely a scapegoat and one of the larger more visible symbols that people can vilify. Whilst their Chairman would seem to be profiteering and cashing out share options as fast as they can be written (over $100m in the last 12 month) it is not their “fault” that they are laying off thousands of employees to avoid bankruptcy CMO’s, QIV, SIV’s, Conduits, Securitization and Private Equity. 

The essence of success in business and trading is to buy or make something and sell it for more. To do this successfully initial capital is required. The best source of capital (liquidity) is to borrow someone else’s money and pay them less to borrow it than you can make by using it. Then your internal rate of return, the amount of money you make on the money you invested personally is magnified exponentially. The same is true of Margin within stock investing. 

CMO’s (Collateralized Mortgage Obligation) MBS’s (Mortgage Backed Security) are the method in which banks lend money to someone to buy a property, then to free up the money they invested so they can invest it again and make more money, they sell it on bundle as a CMO or MBS.  

QIV (Qualified Investment Vehicle), SIV’s (Structured Investment Vehcles), special purpose entity (SPE) while you may not have heard of these yet, you will be, this is as method for a bank/ company to transfer debt off its balance sheet. When reporting to shareholders, or borrowing money a bank or company wants to have the maximum number of assets and the least amount of liability. By moving liability into these off balance sheet entities their listed/ published balance sheet looks better (This is how 10’s if not 100’s of Billions in debt have been hidden from the public eye)

When defaults start to occur in this arena as they already are, credibility will be reduced and investors will panic and people will sell their investments to avoid loosing them! As in 1929, 1987, 2000 if there are not enough buyers prices will drop to bargain basement levels where astute investors will swoop in and sweep up cheap stocks.   The Federal Reserve This is one of the most critical influencers of the economy right now, which is why everyone watch Ben S. Bernanke comments so closely.  Alan Greenspan believed that consumer and investor confidence were to be boosted or at least supported at all times and many decisions seemed to focus on this. However Greenspan made some drastic mistakes, in 2001 – 2003 he cut interest rates so low that he created the real estate bubble. People were able to sit back and watch it happen as people worked out how much they could afford to borrow at “current” interest rates with no eye to the future and what they would do if they were to rise!!! Furthermore the teaser rates offered on loans to allow people to buy ever increasingly expensive real estate were inevitably due to reset and brokers were able to glibly assure people that they could just refinance closer to the time and not too worry about it!!! Well unfortunately teaser rates and sub 5% mortgages are gone for now and people have to pay “very real” interest on their mortgages.  The truth is that at some point we have to endure a correction and reach a bottom, to cut rates heavily to save the consumer will merely put off the same event till some time in the future and whilst it is sad to say, that is not truly in anyones best interests!!!   The Government 

Whilst this is a somewhat more contentious subject it is not one that can easily be avoided. More money has been printed during the 8 years of George W Bush’s presidency than under all other presidents combined. Trade deficits are at their worst levels ever, the dollar is exceptionally weak and many central banks are moving more assets into Euro’s as a result. This does not bode well for the economy.  

Furthermore in times of recession, a war is “sometimes” entered into by the US government driving substantial military spending and diverting attention overseas. This isn’t really an option as the USA is already essentially at war still in Iraq. It is rumored that the war gas been so expensive to date that the military will have to scrap or put on hold the F35-JSF (Joint Strike Fighter) project for lack of budget. That could potentially although not significantly impact America’s global military dominance.  

How to Capitalize on this Information???? 

So September is the only month in the year that statistically shows losses! Meanwhile October is the month of Crashes!!! 

Real Estate 

1) The real estate bubble is bursting, expect to see significant price decreases and increased foreclosure over the next several years (unlike the stock market an adjustment cannot happen overnight).  

+ Prices will decline throughout 2008 and into 2009 leaving great buying opportunities for those with Cash in late 08 early 09. Don’t buy for capital appreciation as it won’t happen till the beginning if not middle of the next decade at the earliest! (2010-2012) 

2) Expect to see the commercial market decline 10-15% over then next year to two years as leverage is reduced and people will be unable to finance acquisitions 

3) Expect to see more mortgage originators file for bankruptcy (possibly even Countrywide to clear off some debts) The Chairman has sold $10-100’s millions in options over the last 12 months (you would expect him to buy stock with the proceeds due to the bargain basement prices – preferred stock (issued at $25) reach mid $9 range during August 

4) Expect to see at least 1 major home builder file for Bankruptcy 

Financials 

1) Don’t be surprised to see a bank failure or something close spark the next stock market crash, QIV may well be the cause of financial illiquidity of a medium sized banking institution 

2) Whilst people are stating that Credit Card Companies are being unfairly hit as they do not hold any sub prime mortgage assets, do not be surprised to see credit default rates rising from 3% upto around 6%. When you have lost your home and your credit is not looking good, why not write off those pesky credit cards of $10,20 or even 30k+ at the same time. 

3) Writing covered calls and selling puts on any open long positions seems like a great hedging strategy 

4) Staples and super solid stocks – as those chosen by the like of Warren Buffet make for great long term holds as do any stocks that take an unfair beating 

5) Most of all sit on the sidelines and play out September and October ready to capitalize in December. 

“Plan for the Worst Case Senario and Be Happy when the Best Case Occurs” – Jonathan Rose

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