Sushi Money

A strange world these days with oil and energy prices through the roof, seesawing up and down.  Lots of reasons and speculation, but quite simply demand outstripping supply.   I watched the Enron debacle explained on PBS last night, and it was interesting and… well, downright scary.  How a corporate culture became more about the “cult” aspect was amazing.  But I had a few thoughts, especially as I watched how Enron plotted and manipulated energy and money, especially throughout the western U.S. and California.  One of the fallen leaders was quoted at one point talking about how “Enron was going to change the world…”  You know what?  They did… and not positively.  I think in many respects Enron showed the rest of the world how one company… and a few people, can manipulate energy prices to the tune of billions of dollars.  Heck, if Enron could do it why not OPEC?  Why not some of these two-bit countries who are now nationalizing energy resources that foreign companies, notably many American companies, have put tons of investment and research into?  I think Enron showed the world that manipulation… speculation…. arbitrage… exploiting loopholes… all can be used to take advantage of the need for a given resource.  I’m not a conspiracy theorist by any means, but I think as demand increases for resources, there are countless many who will take advantage of that demand by doing whatever will make them the most money, ethically or not.  The free markets at the extreme perhaps.  So for now we live with high fuel prices.  My only hedge is to invest in the energy sector myself… find a good company with excellent fundamentals.  Maybe the gains in that investment over time will help take the sting out of prices at the pump.  At least I’m helping pay for the success of the companies I invest in!  Of course the other hedge is to drive my 45 mpg Metro as opposed to the F-150.  I never figured out why GM shut down the Metro line… they basically gave the business to the Japanese auto makers.  Bad timing on their part as fuel prices were low at the time- but they probably didn’t make much on the car anyway.  I think we paid a whopping $7200 for it in 1999.  Of course it’s not the most luxurious ride… (an understatement).  But that little car just keeps on chugging and barely sips fuel.  It has its place, and the fundamentals for what it does are excellent.  I like to think of stocks the same way.

Does the market just keep going up?  The big 13k is close but does it really mean anything?  I don’t follow the technical indicators much, and for me it’s just a number.  Motley Fool expressed it pretty well in a recent article titled “Dow 5,000?” I don’t usually read the MF articles- too many hoops to jump through and it seems like most of their stuff is a sales pitch.  But many of the articles are informative, and I agree with Mr. Zimmerman about being prepared:

“…savvy investors should strive to fix their portfolios while the sun is shining, in part by ensuring that their basket of investments is spread intelligently across the market’s valuation spectrum.”

But what does it mean to spread your investments “intelligently across the market’s valuation spectrum?”  I think it means many different things to many different people.  One investor’s goals and tolerance for risk may be far different from another investors.  Before a pitch for some mutual funds, Mr. Zimmerman describes that value stocks should hold up better in a down market than growth stocks.  No real surprise there- growth stocks command a risk premium that value stocks may not since they have already fallen in value.  Growth stocks may have greater volatility with potentially greater variance of performance over time- higher returns in good times and lower returns in tough times.  One way to look at it is using a statistical measure called beta.  In essence beta is used to measure risk based on volatility, with the market having a statistical beta of 1.0.  Stocks with beta higher than that are potentially riskier, but also may yield a higher return.  Stocks with a beta lower than the market are less volatile and less risky but also have a lower expected return.  So value stocks should have a lower beta than growth stocks right? Not necessarily… if a high-flier stock has fallen greatly and some may consider it a value stock, it actually may have a higher beta and be classified as more risky after it decreased in price! Why? Because beta measures volatility. Beta can be a useful measure, but it’s only one way to look at risk.  Beta doesn’t work very well when price movements are considered.  There is a key issue here, and Investopedia has a great discussion of it in an article titled “Beta: Know the Risk“ from 2004 by Ben McClure.   For me, the big take-away is how I approach investing for the long term while considering the fundamentals.  From the article and a reference to Ben Graham:

“Try to spot well-run companies with a “margin of safety”–that is, an ability to withstand unpleasant surprises. Some elements of safety come from the balance sheet, like having a low ratio of debt to total capital. Some come from consistency of growth, in earnings or dividends. An important one comes from not overpaying. Stocks trading at low multiples of their earnings are safer than stocks at high multiples.”

I don’t know where we go from here… but I try not to care too much.  Saying I don’t care would be a specious statement… of course I care how the market and my investments do!  But at the same time- I agree with preparing for the down side because it will come… it’s just a matter of time.  When I’m better prepared, I’m less inclined to fret over market movements.  How we prepare for those times is the question, and my answer is to focus on fundamentals, invest for the long term, and keep on learning along the way. 

Some strange news out this week that illustrates, for me, how legislation is often very misguided.  Rep Charles Schumer (D- N.Y.) is apparently pushing legislation that will help “bail out” the “victims” of the subprime mortgage mess.  Laura Rowley on Yahoo wrote an excellent article, Footing the Bill for the Subprime Fiasco, describing this initiative.  Now I’m all for prosecuting illegal activity by predatory lenders and helping consumers find out how to rectify loans and deals that were brokered illegally.  But Ms. Rowley makes an excellent case regarding the fact that most of these mortgage loans were taken out by people who simply made poor decisions.  And she reiterates that the vast majority of borrowers, some 85%, are paying the mortgage on time.  I think Rep Schumer is making political hay out of this opportunity… having taxpayers foot the bill for a legislative remedy is just plain wrong.  Imagine if they tried to do this with the stock market!

On another note of legislative foolishness, the State of Florida is finding out the hard way that capping property insurance rates is doing more harm than good.  The intention is well-founded, as many Florida homeowners are being priced out of the insurance markets.  But at some point, insurers simply cannot do business in a state where the risks outweigh the costs of doing business.  Motely Fool wrote an interesting piece titled Stupid Florida! in which they describe the problem.  They illustrate the issue with an example of a major insurer, USAA, basically pulling out of the property insurance market in Florida.  In a letter by the USAA CEO, he cites some interesting data:

1. Over the past 10 years, USAA has paid approximately $220 million more in Florida homeowner insurance losses and expenses than it has collected in Florida homeowner premiums.

2. Florida residents account for 49 percent of USAA’s exposure to natural disaster risk, yet make up only 9 percent of USAA policyholders and pay 12 percent of USAA’s property insurance premiums.

3. With more than $2 trillion in coastal property exposed to the risk of catastrophic hurricanes – and a history of frequent, strong storms across the state – Florida has the most challenging property insurance market in the country.

Therefore, the State of Florida has left us no choice but to take the following actions in order to limit potential future losses, and to protect the association and its members.

I feel the issue personally because I am a USAA member, and they carry most of my personal insurance business.  I read this very letter myself the other day. This is an excellent company and I’m proud to see the company take necessary steps to protect their viability as a company.  I feel bad for the Florida members and retirees who may need the coverage, but the Florida legislators have created the situation.  Legislation can do wonderful things… and it can also do great harm.  I think back to how the boat and yachting industry was nearly destroyed by the institution of the “luxury tax”…   What our legislators do locally and nationally really does matter.  I shudder to think of the changes that may take place with tax laws over the next few years with the Democrats leading the charge!

The market has been on the move forward this week, a little at a time.  We’re due for a pullback- wouldn’t surprise me if it was pretty volatile.  I find it very interesting that the U.S. dollar is at a multi-year low against the Euro with many unkowns in the economy right now, and yet the market still moves forward.  I’m certainly not complaining, but I’m not sure that the “rising tide” is “lifting all boats” this time.  Morningstar recently put out an article describing the market as close to fairly valued, with the DOW undervalued by almost 7%.  Essentially the view indicates investor expectations for “modest returns this year.”  I was surprised by that analysis because the market just seems overvalued to me after a pretty good run since late summer of ‘06.  How do they do it?  From the Morningstar article, “We can compute an aggregate fair value for the market by calculating a market-cap-weighted average of our fair value estimates for the stocks in an index. To determine if the market is over- or undervalued, we then compare the indexes’ aggregate fair values to their current market prices.”    So it’s Morningstar’s analysis that provides the basis.  I’ve always enjoyed their research, I don’t always agree with their views.   It’s going to take a lot more upside earnings numbers and strength in the economy before I see upside.  But how about that eBay?!  Pretty decent earnings… I just love a company that earns money through leveraging the passions of other people.  Speaking of the passions of other people.. I’ve been waiting for a good entry point for Altria and this week may provide one.  They just posted a first-quarter decline of 21% of net profits… although international growth is strong and their forecasts are positive.  Should be an interesting week.

Okay I’ll admit it… I’m getting more defensive.  I’ve always been an optimist and invest on the Bull side, yet perhaps the kind who likes to “make sure” and check on things to ensure their progress is on track.  Lately however I’ve been uneasy.  Why exactly?  A lot of things. I’m no economist so I won’t roll out a bunch of statistics that, although I enjoy reading, I simply don’t enjoy justifying.  But I look at the same news and data that most amateur investors do, and even though I’ve been doing it a long time all I’m sure of is that nothing is for sure.  So with the subprime mortgage woes, the seesaw economy, the new highs for the indexes, the mideast turmoil, and a couple years of heavy political wrangling before an election plays out… I think I finally decided to get more defensive.  I say more because I’ve already been 60/40 stocks to bonds.  But now I’ve rebalanced my portfolio to about 35/65 stocks to bonds.   I still own eBay because I’ve made some nice gains over time and consider it a long-term investment.  I also own GE both because I’ve had it a long time, and it provides a steady dividend return with a company that is probably the broadest reflection of the economy in one stock I can find. It hasn’t shined in quite a few years, but that may be changing soon. Finally I own some ConocoPhillips because I believe they are well positioned over the long-term in the oil sector and can weather a storm should it arise.  Aside from those stocks I own both Balanced and Growth mutual funds in my Roth IRA with more emphasis on the Balanced funds.  My research on the expected yield of my portfolio ranges from 5% to 7.5%.   The Balanced funds may do much better.  But should we tip into a recession, and should the market reverse itself, I’ll be decently positioned to ride it out.  I personally believe we’re going to see about a 5%-7% return over the next couple of years or longer.  I also believe the housing market is going to take 3-5 years to work through the supply and demand curve, with home appreciation stagnating during that time.  When will I become more bullish?  When the mideast issues become clearer in a couple years… when the election is over… when interest rates don’t go up over the next two years… after the market corrects more than 10% at least twice in the next 3 years… when it stops raining…. how the heck do I know!?  But that’s where I am.  I’ve got to honor my gut instincts.  If I’m wrong and miss out on the next leg up?  So be it.  Something else I’m becoming as the years go by?  More patient.

Have you ever really looked around at all the stuff you own? I have… it’s not a pretty sight.  How on earth do we accumulate such stuff over time?   I shake my head as I wonder in amazement when cleaning up the basement, or trying to organize a desk.  And yet I still see the “need” for various things and go and buy them.  I “need” this tool… I “need” these vitamins… My child “needs” this toy…  We “need” this food… and gradually it really becomes… I want.   So when I look honestly at my needs versus wants?  Most of them are wants.   Sometimes I feel guilty for so many wants, but I enjoy the stuff I have just the same. 

Perhaps in a few years down the road I will think about downsizing.  But not yet.  Besides the vast majority of the Baby Boomers are far ahead of me in that process.   Which brings me to the pondering questions I have about the economy.   If it is normal during the course of our lives to begin “downsizing” and not accumulating as much “stuff” then does that mean that as a nation, economically, we will not be buying as much stuff, and thereby we will spend less money?   If so, does that mean the savings rate will increase? Or will we spend our money on other things?  Perhaps a little of both, but something tells me the winds of spending are going to change quite drastically in the years ahead. 

In this article from the AP via Yahoo, a Woman Tries to Sell it All on Ebay.  Her focus is on simplifying her life… breaking free of the “stuff” that makes up her life to gain a clean start for herself.   I can identify with that desire!  I also think that will be a new “movement” or focus for many Americans… to simplify their lives, to live more simply, to not accumulate as much.  And I believe that too will equate to less spending in many traditional areas.  This week I’ve been minimizing my health care expenses by not seeing a doctor.  I’ve just had the flu and I’m finally walking around with clarity in my eyes for a change.  I haven’t really had the flu like this since I was a child, but I ended up in bed for 2-3 days with a 102 degree fever and a head that wanted to explode.  Many folks turn first to the doctor when they don’t feel well.  I’m a stubborn sort who likes to handle things myself if possible. 

Maybe those same traits lead many of us along the pathways of handling our own personal finances as much as possible too.  But my best remedy when I’m sick is Nyquil.  I don’t know why, but it really makes a difference for me and helps break the fever.  That and sipping Coca-Cola during the day.  Now it’s time to begin cleaning up around here.  Got to figure out what to do with all this “stuff” first!

Okay, back home again and time to get serious!  Finished taxes for the year and looks like paying estimated taxes worked well for last year.  Actually I’ll get some of it back… after selling two homes in the last three years, the second home was just above break even, and under the threshold for paying taxes on any gains.  Keeping good records for home improvements and doing most of the landscaping myself really helped.  I use Turbo Tax and it has been helpful to look back as well as forward to see where our tax situation will be.  Now it’s time to work on debt reduction.  I have several credit cards and have taken advantage of 0% balance transfers, as well as 0% financing.  But one has to be very disciplined to ensure the payments are made on time, as well as paying off the credit cards before the 0% time period expires.  In some ways it’s a challenge to “manage debt” in that manner… but it allows me to keep funds in a good money market account earning close to 5% interest.  I don’t believe debt is always a “bad thing” because it can be used as a tool for a given time period.  For most of us, car and house payments are a fact of life.  But taking on more debt than one’s income can sustain is where you can get in trouble.   My goal over the next 6 months is to reduce all debt to a minimum.   After moving twice in less than five years, there is a lot of financial juggling that takes place.  Moving expenses and setting up a new home or lifestyle is a major transition.  Now we are in a place where we intend to live for a very long time…  and that allows a positive focus on our personal and financial lives over time.    Psychologically, does anyone enjoy carrying debt?  I think it bothers some people less than others.  It’s still a “burden” in terms of owing money and ensuring responsibility for the debt is managed.  Again, a short-term tool to help with life transitions and goals.   I think I’ll compute some debt to income ratios, and look at net worth… then begin tracking that on a monthly basis.  But along the way?  Keep saving and investing!