Sushi Money

If it’s not apparent to many people by now, the frugal living style is becoming the “in thing” these days.  No surprise considering the challenges Americans face with a tigtening economy and job market.   While consumers have cut back on spending more than any time in the last 28 years, the Fed has lowered interest rates to levels not seen since the days of Eisenhower.  It’s no wonder we’re spending like we lived in the days of Eisenhower over fifty years ago.

Of course the government is doing all it can to stimulate the economy, but consumers have awakened to the reality that money only goes so far.  And taking on more debt to support lifestyle needs is just not a good idea for long term financial security. 

But what is surprising is that being “frugal” is becoming fashionable throughout all levels of the socio-economic spectrum. Even the more affluent families are now looking for ways to cut back, and busy executives are wearing bargain shirts.  It just makes sense.  Why does “dressing for success” have to mean $1200 suits and $80 shirts? 

I believe we’ve entered a new period of practicality and frugal living.  Even if it’s simply a response to challenging financial times, people are becoming aware that spending money they don’t have just digs a deeper hole of indebtedness.  Living a simpler lifestyle is healthier, more stress-free and saves a lot of money over time.

So will families and children growing up these days have a new perspective on frugality and financial awareness?  Is this a new paradigm that has changed how society may interact with money?  Possibly, but you’ve got to wonder if some people are simply like that all the time anyway, or if it’s just due to the financial crisis.  A good comparison is the Nature versus Nurture debate, examined by the Wall Street Journal in The Making of a Miser.

“…people who lived through the Great Depression were often thrifty their entire lives. Since the 1930s, each successive generation has gotten to be more free-spending.”

“The current financial crisis could change that. “Right now, there are probably a lot of children who are going to be tightwads,” says Mr. Rick.”

“But our childhood isn’t the only factor. George Loewenstein, a professor of economics and psychology at Carnegie Mellon University, says people have innate tendencies. “It’s almost like people are born tightwads or cheapskates,” says Dr. Loewenstein…”

I’m not sure about being born to be thrifty.  Personally I think it has more to do with our experience, and the nurture aspect of childhood development is very important.  Yet being a tightwad is far different from simply being frugal.  And being a cheapskate, or someone who stresses out about every penny may not be all it’s cracked up to be:

“…According to Messrs. Rick and Loewenstein, being a tightwad isn’t the happiest state of being. Many cheapskates experience something akin to physical pain when they spend, and are constantly anxious about money.”

“Spendthrifts aren’t necessarily any happier. Their free-spending often causes stress in their lives and marriages. Indeed, Messrs. Rick and Loewenstein say the happiest people are frugal, which they define as people who are able to spend without suffering but take pleasure in saving.”

But what about the little things we love to buy, or gadgets like cell phones?  Are we thinking twice about those purchases as well?

One of the more expensive items I purchased this year is something most of us don’t need, but we really like.  A GPS navigation gadget, or personal navigation device (PND).   I’ve been waiting to buy one of these for a few years, and finally justified it by taking a two-week trip this summer (with sky-high gas prices to boot!).   Taking the trip was not a frugal decision by a long shot.  But it was a chance to spend time with my son, and something we will long remember.

To help with the trip I found a Garmin Nuvi 770 at a great price on Amazon, and had to have it.  And how did it perform?  Flawlessly.  In fact, the trip would not have been the same without it, and I’ll never be without it again.  This thing took us places I couldn’t have imagined, and kept us safe and sound and always aware of our location.  We did a round-robin trip in the midwest, through Michigan and the Upper Peninsula, and back down through Wisconsin, circling Lake Michigan.   Not only did the Garmin take help us find dozens of “points of interest” (POI’s) that we might otherwise not have seen, but it also found gas, shopping and dining facilities in a heartbeat. 

Crossing the Mackinac Bridge into Michigan’s Upper Peninsula

You can even see Mackinac Island in the picture’s background to the right over the water, and also on the Garmin’s screen.   This thing was just awesome to use, and really simple.  Personally I view it as a safety or security issue now- we know where we are, and how to get where we want to go.  It’s peace of mind and a whole lot more.  I even added a custom POI database that listed campgrounds, parks and other recreation facilities.  The coolest part is while driving down the highway in late afternoon, I could look up campgrounds nearby and the Garmin finds several I never heard of or even knew existed.  So we end up camping at some terrific places, without a reservation, simply by using the Garmin to find them as we travel along.

So can a Garmin be considered a frugal purchase?  Probably not, but one could make a case for saving gas by not getting lost!  It probably comes out even though, because the Garmin shows you so many new things you never knew existed, that you like driving there too. 

But a couple of months later, do I still use the Garmin very much?  Not everyday, but whenever we visit the city, go to garage sales, need directions to some new place, etc., it’s very handy to have.   I suppose of you’re a sales rep or a realtor, you can’t live without it.   But in terms of frugality it’s not an easy argument to make.  This thing is a cool gadget that makes life and travel better…but most of us don’t need one. 

I would like to think I’m usually in the frugal category, or at least working a lot harder at joining the ranks of the future frugal. I think we have entered a new age of frugality, and many people will more carefully consider how and where they spend money and the lifestyle choices it brings. 

Personally I enjoy spending money, yet I relish saving money on things and finding a good buy.  In reality however, I also don’t hesitate when I think I need something, and I usually pay for quality when given a choice.  But I often wonder if frugality and the enjoyment of shopping can go together?  I think the answer is yes, but it depends on the lifestyle we choose, and how much that debt is part of our lives.  It’s much easier to whip out that credit card and charge something rather than pay cash.  When we use our own hard-earned cash, I think we’re a little more careful about what we buy.

All I know is I choose not to stress out about financial choices (or debt!), and the more I provide for a secure financial future, the better my life is.   And that’s what it’s all about.

In these last days before the election I find myself amazed at the emotions and tactics of the political candidates and their followers, on both sides of the aisle and at both the national and local level.  This surely is one of the most fascinating, if not important elections we have faced in decades. Today I’m stepping out of the financial discussion to share a few thoughts on the election.  This may frustrate or disappoint some of you, and it may please others.  Whether you agree or disagree, that’s fine.  I respect your views and the choice that’s right for you.  I’ll even try to put up a guest post with opposing views if someone sends it in.  But for today, here’s mine:

Who am I voting for?  McCain.  Why?  Primarily because I believe he has a better vision for the future of the nation, as well as a philosophy that strengthens rather than weakens the foundations of society over time. 

I’m voting for McCain not only in terms of my views on national security or economics, but more importantly in considering the basic elements of what one believes about freedom and democracy.   At the heart of these beliefs, for me, is an understanding that the individual in society is the strength of that same society. Whatever we do to help grow, foster, improve and assist that individual in realizing their potential and expanding their ability to contribute to society is essential both for them and the nation as a whole.  

One of the growing socio-economic buzzwords is the term human capital.  Human capital refers basically to the inherent skills and knowledge that an individual may possess in order to contribute to society and produce economic value both personally and for that society.   One of the hallmarks of America has been to establish a foundation of freedom that allows this tremendous drive by individuals to grow and succeed, personally and professionally, and to seek ”…life, liberty and the pursuit of happiness.”    I prefer to think of it the same way as Benjamin Franklin:

“All the constitution guarantees is the pursuit of happiness. You have to catch up with it by yourself.”              

The expansion of human capital through the economic fabric of our free American democracy has arguably fostered the greatest revolution of invention and creative genius in history.  Yet it isn’t perfect.  What society is?  Even with the current economic challenges we face, the grand experiment of American democracy has been an incredible success story that continues to foster industrial, technological and environmental change throughout the world.  More importantly it places people first, acknowledging both the value of human rights and the value of human life.  Something that far too often is forgotten about most of the world in which we live.

We owe that strength and genius not to the nation of America itself, but rather to its people.  And the only way we are going to continue fostering the strength of the American nation over time is to continue empowering people as individuals, and not as recipients of government programs and largesse that increasingly demands adherence and holds their future hostage. 

I read a message on one of the news sites today that was interesting.  I think it’s a creative story and not a real event, but it makes an interesting point:

“Today on my way to lunch I passed a homeless guy with a sign that read “Vote Obama, I need the money.” I laughed. Once in the restaurant my server had on a “Obama 08″ tie, again I laughed as he had given away his political preference- just imagine the coincidence. When the bill came I decided not to tip the server and explained to him that I was exploring the Obama redistribution of wealth concept. He stood there in disbelief while I told him that I was going to redistribute his tip to someone who I deemed more in need–the homeless guy outside….”

Maybe the waiter would actually smile, and say “Good idea!” if this were to happen.  Probably not however, because few of us like having our money taken from us and being told we must give it to others.  Choosing to do so is one thing.  Not having that choice is another.

I believe Obama’s vision of change and “economic justice” to be lacking in understanding for the basics of freedom and democracy, and that it devalues rather than empowers the individual in society over time.

And quite frankly I would rather politicians work to legislate for structural  economic foundations, with evolving regulatory approaches, that support free enterprise rather than redirecting the hard work and success of some to those that may do little to earn it.  I believe the dreams, creative vision and efforts of hard-working Americans actually lift up the nation over time, and that if we make taxes too burdensome, and focus on re-distributing the products of their success to those who do not earn it can only serve to undermine the fabric of the nation.

I do believe we must give and share with those who may not ever be able to achieve or survive on their own, or without help in so many areas.  But giving of your own volition is one thing.  Having your money taken and being told that you must do so is another.  Rather than government deciding who are the deserving among society to receive the wealth of others, we must foster a nation that lifts up the poorest and those who are struggling. 

We can teach, train, volunteer, and give of ourselves in so many ways, and government can help establish programs and structures to facilitate those goals.  But economic justice is far more than being “neighborly” by taxing the rich, and handing out money to the poor.  It’s a balance to be sure, but Obama’s views- and those of Pelosi, Reid, Frank, Dodd, etc., are balanced much too far to the left.

Essentially I think America needs McCain more right now than we need Obama. 

Yet from the polls, media blitz and just about every other indicator, it looks like Obama has some incredible force that may sweep him into the Presidency this election.  If so then perhaps I’m voting with the minority.  Maybe the nation needs a pyschological shift of energy or some zen-like aura of charismatic change that Obama seems to bring for so many people.   But I just don’t see it.  I would rather focus on McCain’s experience and practical approach to moving the nation forward, rather than some lofty, unscripted vision of change. 

In the car this morning I actually heard two religious hymns being sung with Obama’s name in them, holding him up even as “holy.”  I have to admit that was a little shocking to me, and I’m not even an ardent religious observer.  I have to wonder if in times of national challenge or crisis that people might be flocking to someone new, someone they want to believe in and that can “save” America?  Have many of our fellow Americans replaced their religious views with a secular perspective that is looking somewhere for hope, and are they now looking toward Obama to provide that level of dramatic change?  Maybe so.  Whoever wins the Presidency, I do think the country will be fine.  But it’s going to be a very interesting ride depending upon the direction we take.

What a difference a few months can make.  I paid $2.19 per gallon to fill up a tank of gasoline today.  Is that amazing or what?

Remember all those days of $3.79 or $4.20 per gallon gas where it was just crazy silly to be paying those prices?  Looks like global demand has dropped so much that oil is falling towards $50 dollars a barrel.  We may see gasoline under $2 bucks a gallon in some states before year-end.

Meanwhile OPEC is scrambling to cut production and keep prices high around the world.  Iran and Venezuela are screaming “Higher! Higher!” while the price of oil- and their ability to prop up their regimes- keeps falling.

Realistically, I wonder how long oil prices will remain this low?

Well the market certainly is fickle.  Down a hundred points then up a hundred.  No one really knows the direction right now except that uncertainty makes people nervous. Recession, credit crisis, investment fears, the election… Don’t get me started on the election.  Some experts see lots of downside remaining in the markets, and then maybe a huge bear market rally before the end of the year.   With time and effort, it looks like our vaunted leaders will get a handle on the challenges facing us.  Let’s hope it’s the right handle…

“All human situations have their inconveniences. We feel those of the present but neither see nor feel those of the future; and hence we often make troublesome changes without amendment, and frequently for the worse.”

                                                                     Benjamin Franklin

It’s enough to make most investors toss up their hands and move on to something a little more certain.  Like focusing on work, home and family.  We may not be able to do much about the direction of our investments, but we can certainly influence the direction of our lives.  And that, today, is enough for me. 

“Finish each day and be done with it. You have done what you could. Some blunders and absurdities no doubt crept in; forget them as soon as you can. Tomorrow is a new day; begin it well and serenely and with too high a spirit to be encumbered with your old nonsense.”

                                                                       Ralph Waldo Emerson

Spent a great weekend mostly outdoors enjoying some beautiful Autumn weather.  Don’t you just love this time of year?  The leaves are changing colors, the air is crisp and cool, and it gives us a chance to catch up on things we’ve put off for too long. It’s also just plain fun to explore the countryside and get out a little more, especially with lower gas prices! We even marched in a parade this weekend, listening to the sounds of a high school band.  For all the challenges the nation faces, it’s great to see people involved in the community and enjoying the timeless traditions each year.

Gas prices in our area have fallen drastically in recent weeks.  You can sense relief at the pump when filling up.  It’s all part of the great unwinding of leverage.  The more we read about the financial mess it appears that hedge funds and other large insitutions have caused much of the drop in share prices through liquidation of investments in order to raise cash.   Some people believe this unwinding will continue with more downward pressure on stocks.  Others believe we’re close to a bottom, and even Warren Buffet is pitching to buy stocks right now.

As for oil prices, we don’t see those “experts” talking about $200 or $300 oil anymore. In fact, many people believe oil could fall below $60 a barrel for some time, and OPEC is scrambling to put production cuts to shore up prices.  

“OPEC, supplier of about 40 percent of the world’s oil, may pare output by 1 to 2 million barrels a day in stages to stabilize prices, said Chakib Khelil, the group’s president. Deutsche Bank AG lowered its 2009 crude oil price estimate by 35 percent to $60 a barrel, citing the possibility of a “major world recession.”  

Maybe they’ll succeed for a time, but how anyone can say that consumer demand was the primary reason for the runup of oil prices is beyond me.  Yes, there is huge demand for oil- too much demand as the U.S. is dependent on foreign oil and prices rose sharply. But that is only because supply was so restricted, and speculation by investors also impacted demand.  Speculation has played an enormous role in our oil markets in recent years and now we’re seeing prices stabilize with the unwinding of leverage and credit crisis impacts. 

But guess what?  Lower oil prices may not last beyond a few months or a year or two because the world’s appetite for oil continues to increase and we’re still not producing enough here in the U.S.

There is real demand for oil globally, and there are only so many places we can get our oil from. So yes, the price we pay for oil will be driven by the demand and the supply of oil we can produce or import over time.  Investors will also return to the oil markets and at some point we’ll see prices rise again.  Let’s hope that between increased production in the U.S. and reduced demand through higher mileage and alternative vehicles, that prices won’t rise quite as high as they did this year.

****************

In other news I will say that I was bothered that Barack Obama raised over $150 million dollars during the month of September alone.  That’s more than George Bush and John Kerry raised combined during the 2004 election!   Why does that bother me?  Mostly because he’s taking money from private sources, instead of public funding like John McCain.

With public funding, we know where it comes from, who gives it, and there are detailed records and accountability.  Senator Obama had earlier pledged to stick to public funding, but later changed his mind and broke that promise, taking millions from private sources instead.  Where is that money coming from?  Who are the people and institutions that are “buying their way” into the campaign coffers of one of our Presidential candidates?  

I’m no expert but I thought that campaign finance reform was supposed to reduce that type of thing?  In any event, Senator McCain is not lacking for funding either, although he’s behind Obama.  McCain received a big chunk of matching dollars to help finance his campaign:

“Helping Sen. McCain keep up was the one-time, $84.1 million in taxpayer matching money he received in September. Sen. Obama won’t get such a one-time payment because he opted out of public financing after first suggesting he would participate, a decision that has cost him some political points.”

“Public financing gives candidates taxpayer money for their campaigns, but it also requires them to hew to spending limits and essentially stop fund raising for themselves during the general election. The parties can continue raising money for the candidates; however, much of their spending must be conducted independent of the presidential campaigns. By opting out of public financing, Sen. Obama is free to spend as much as he can raise.”

“McCain spokesman Tucker Bounds said the campaign can overcome the fund-raising mismatch. “We are going to be competitive because, despite Barack Obama’s best efforts, this is an election not an auction,” he said.”

“The Obama campaign has also fielded criticism from Republicans for what they say is a lack of donor transparency. Federal rules don’t require disclosure of donors giving less than $200. Small donors account for about half of Sen. Obama’s 3.1 million contributors.”

I will say that I’m tired of being bombarded with tv advertisements for the candidates. We don’t watch much tv, but do have it on in the evenings.  The “I’m so-and-so, and I approve this message” line is getting really annoying.  I find myself hitting the mute button, regardless of which candidate’s advertisements are playing.

I do have a preference for one candidate over the other at this point, but I would rather not make this a politically focused discussion.  I will say that I think the nation is so much greater than any one candidate, President or their administration.  If I have any concerns, it is more about a possible Liberal Supermajority taking over the nation’s highest offices as President and in Congress.  I don’t think either party should have a lock on both Congress and the Presidency.  That gives the politicians nearly free reign to pass whatever legislation they think is okay. 

Yet regardless of who is elected this year, I think we’ll be fine.  Both Senator McCain and Senator Obama should be able to gather effective representation within their party to lead the country through the recovery over the next four years.  It may be a little more painful in some areas such as taxation or spending cuts, but we’ll get through it.  I think the nation’s political focus also goes in cycles.  It may be time for more change than many of us are prepared for!  But in another four years we can revisit the process once again.  Have a good week.

The U.S. Department of Labor released the September 2008 CPI-U, or Consumer’s Price Index data showing that the CPI was virtually unchanged since the prior month.  What does this mean?

There’s lots more data there than most of us want, but basically it indicates that inflation is lower based on overall energy and transportation costs.  More importantly it means that Social Security recipients will receive a 5.8% increase in January 2009.

“Monthly Social Security and Supplemental Security Income benefits for more than 55 million Americans will increase 5.8 percent in 2009, the Social Security Administration announced today.  The 5.8 percent increase is the largest since 1982.”

“Social Security and Supplemental Security Income benefits increase automatically each year based on the rise in the Bureau of Labor Statistics’ Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), from the third quarter of the prior year to the corresponding period of the current year.  This year’s increase in the CPI-W was 5.8 percent.”

“The 5.8 percent Cost-of-Living Adjustment (COLA) will begin with benefits that over 50 million Social Security beneficiaries receive in January 2009.  Increased payments to more than 7 million Supplemental Security Income beneficiaries will begin on December 31.”

That’s a healthy annual cost-of-living adjustment and many people will be happy to get it.  Unfortunately, just keeping pace with inflation doesn’t take into account all the other rising costs that people face.   Some say the 2009 5.8% cola increase will leave millions in poverty.

“… the announcement ignores the fact that the increase still badly trails inflation, will leave seniors with less buying power than they currently have, and will thrust more elderly Americans into poverty”

“Although the COLA is intended to help seniors keep up with inflation, a recent study by The Senior Citizens League (TSCL) that analyzed 15 key expenditures found that people 65 and over have lost 51 percent of their buying power since 2000. Expenses such as home heating oil and gasoline have more than doubled since the beginning of the decade, while food staples such as eggs and potatoes have increased by 137 and 97 percent, respectively.”

“In addition, the average Medicare Part D prescription drug program will increase by 24 percent next year, and home heating oil this winter is forecast to increase by 23 percent from last year.”

“A majority of the 50 million Americans who receive a Social Security check depend on it for at least 50 percent of their total income, and one in three beneficiaries relies on it for 90 percent or more of their total income.”

So what does that tell us?  It tell’s us that we don’t want Social Security to be our only source of income in retirement!  But for millions of Americans, that is the reality.  For those who are younger, we still have time to save and invest in order to establish a retirement income foundation that supports our lifestyle needs.  Social Security is then available to supplement our retirement needs.   Of course many people believe Social Security benefits may not be available at all, or may have to be reduced over time simply because of the vast number of people who will be receiving it and the government’s ability to pay for it.

However I believe Social Security will be around for a very long time, and that the government will find ways to sustain and fund the accounts (taxes…).  But the benefits may have to be reduced, and no matter how much Social Security provides, it will not be enough to provide a substantial retirement income.   The rest is up to us.  But at least for those receiving Social Security now, a 5.8% raise is a lot better than nothing.

Well then.  A day to be in the markets.  Nearly an 11% gain in one day, after losing 18% last week. 

Last week was the worst week ever for the Dow… and Today was the best day ever for the Dow. 

It almost presents some zen-like Yin and Yang investing paradox as we struggle to understand how it affects us.

So what’s it mean really?  Does this mean we’ve hit a bottom?  Is the pain over?  Does our retirement portfolio head back in the other direction?   Questions many of us want to know.  But the market is funny that way.  Not funny “ha ha” but funny as in fickle:  There really are few definitive answers.  As much as we would like to know that it’s time to start investing again, we look the other way and the market has taken off somewhere else. 

So was last week the value investors opportunity of a liftetime?  Or was today really just a bear market rally?

My humble opinion:  Last week was a bottom for the short term.  Much easier calling in retrospect, huh? We may take off on a bumpy ride toward 10,000 or 11,000 on the Dow.  But let’s be realistic- the market was extremely oversold last week, and many companys’ stocks were selling for less than they were worth.   We were due for a rally… BUT!  Does that mean the credit crisis has changed?  No.  The U.S. and other countries throughout the world face many economic challenges ahead.  The landscape has changed just enough to provide hope and encouragement over the short term.  Meanwhile we watch the housing and mortgage markets, the jobs reports and the earnings reports, and we know that we may struggle through a recession or other challenges ahead.

We obviously don’t know what tomorrow brings. But here is an excellent article that shows how Keeping Your Money in the Market is a long term strategy for success.  Stocks have not been this cheap in several decades.  

But knowing that we don’t know what’s ahead, many people have figured out that they are not willing to risk their money in the stock market anymore.  Lots of folks have flocked to CD’s for a safe and sure return.  Nothing wrong with that at all, especially with a 4%-5% yield over 5 years.   

Are you that risk averse?  If investing bothers you that much, then you need to sit down with your advisor or planner and figure out a more conservative asset allocation.  If you’re handling your investments yourself, maybe sitting down with a financial planner can help as well anyway.  A year ago I talked about risk tolerance in the context of real estate investing.  It’s worth examining a little more closely, and better late than never.

The time to decide you are not comfortable losing money in a particular market investment choice is ideally before you put money there! But most of us learn things a little harder, through experience. Knowing our risk tolerance is not hard, but making decisions appropriate to our risk tolerance often is.

Risk tolerance is a very personal thing, and there are few right answers. What is right for you may not be right for me. What is right for your spouse may not be right for you, so you will need to strike a balance or an agreement for your investing goals and allocation. Risk tolerance is also tied to the time horizon for your investment goals.

If you’re saving for a down payment on home, your risk tolerance should necessarily be very low and your assets should be in a savings or money market account. If you’re examining risk tolerance in terms of retirement in 20 years, that presents a whole new perspective. The ancient Greek saying “Know Thyself” is very appropriate. We are trying to work with a level of risk that is appropriate to our goals, time horizon and personal level of comfort.

Many studies have been done to investigate consumer risk tolerance, and basically the studies show that people are normally far more conservative than they think. In other words, we often think we are willing to handle degrees of risk, but when it comes to losing money, we are not prepared for risk at all. Here are some tools you can use to analyze your own tolerance for risk:

• MSN/Money Online Risk Tolerance Quiz: A quick online assessment of risk tolerance.

The following are printable .pdf files:

• Investment Risk Tolerance Quiz: An excellent risk tolerance quiz courtesy of North Dakota State University, by J.E. Grable and R.H. Lytton.
• Risk Tolerance Quiz: This is a useful risk tolerance questionnaire from Richard D. Margarian. Use your answer choice as the points for each question, then total them up at the end.
• Retirement Risk Tolerance: A short analysis form that looks at risk from a retirement goal perspective.

There’s also few things better than a good second opinion. If you want objective advice and a closer examination of risk and asset allocation, find a professional Certified Financial Planner in your area using the Financial Planning Association’s search tool.

And one other note:  If like many people, you’re just not looking at it anymore… well that’s called “The Ostrich Method of Investing.”  Might be okay if you’ve established some long term goals for 10-20 years from now, but it doesn’t always work out the way you might think!   Especially if you need money over the short term. 

For those who really believe the future is pretty bleak for the next 10-15 years, then maybe you do want to find a safe place to keep your money.  But I’m not going to bet against America, or the ingenuity of a whole bunch of folks that love business and capitalism. 

Besides, too many people like finding ways to make money. Greed is a heck of a motivator.  And from my perspective, the stock market is a pretty good long term proxy for the success of our free market economy. 

The past week was the worst ever for stocks in the Dow’s 112 year history with the index falling almost 21% over seven days.  Friday was the eighth down day for the market, unprecedented in scope and duration.   Almost everything has fallen, and there were few refuges for those seeking safety, apart from cash.

“…Until now, the Dow’s worst week was in 1933. Total trading volume of stocks listed on the New York Stock Exchange also hit a record, 11.16 billion shares.”

“The damage has been devastating both to households and to major investment institutions. Investors’ paper losses on U.S. stocks now total $8.4 trillion since the market peak one year ago, based on the value of the Dow Jones Wilshire 5000 index, which includes almost all U.S.-based companies.”

“The blue-chip average is down 40% from last October’s record, its biggest decline since 1974.”

 And that’s the hard part for so many people to understand.  Retirement funds in 401(k)’s and IRA’s are taking an enormous hit, and some folks are throwing up their hands and selling everything.  Think you’re safe with gold?  Not yesterday as gold prices fell Friday after weeks of gains.  

“Gold for December delivery fell $27.50, or 3.1 percent, to settle at $859 an ounce on the New York Mercantile Exchange earlier falling as low as $829. The metal has dropped for two straight sessions, at least temporarily halting a big move upward as investors shifted funds into gold and silver to take advantage of their perceived safe-haven appeal.”

“But as U.S. stocks continue to slide, large institutional investors have been forced to sell gold and other commodities to meet margin calls and other requirements, said Jon Nadler, analyst with Kitco Bullion Dealers Montreal. In a margin call, investors who borrowed money to buy stocks are forced to repay the loans.”

“If stock markets continue their current trend, then there is little doubt that margin call liquidations will continue to negatively impact gold and oil,” Nadler said.

With the wholesale liquidation of stocks and commodities in the market, it also looks like the oil bubble has finally popped.  What does that tell us?  Was there truly so much demand that less than a year ago the price of oil was $147 per barrel with many predicting $200 oil?   And is there really so little demand now that oil is less than $82 per barrel and falling?  

Some are calling it “demand destruction” citing rapidly falling demand for oil by consumers and businesses in recent months.  But the credit crisis has exacerbated the impact of corporations and traders who would borrow money to purchase oil contracts.  However you look at it, speculation and the unwinding of large financial institutional bets in the commodities sectors have played a large role as well.  Have you seen the prices for corn or soybeans?  All down sharply.  

The good news, at least for now, is that gas and food prices should not be rising significantly over the near term, and many prices may fall.  I was looking at the price of three-dozen eggs at a big-box store the other day.  Last year the price rose from $2.99 to $5.99 presumably based on fuel costs.  The price is now down to a more reasonable $3.59 for those same three-dozen eggs.

Not only has the money flow dried up in many areas, consumers are also tigtening their wallets in response to the financial crisis.  All of this has a compounding effect, at least for a while.  My concern however is what happens next?  A few months down the road after this “unwinding” and liquidation of assets by the large institutions, will we face renewed pressure on the prices of goods and services? That’s the view of Jim Rogers and others, citing a pending “inflation holocaust.”  For the short term however, it would seem the threat of slower economic growth is of greater concern than the threat of inflation.

The more important question for many people right now is “What to do?”   That’s a question that every investor, or their financial advisor, must try to answer and to understand the longer term implications for their clients’ goals.  Many of us believe the government is making progress and that with time and increased capital, the markets will stabilize.  How soon that takes place is anyone’s guess.  

There are advisors recommending “sell” and others saying “stay put.”  A bold few are actually buying in the market, picking and choosing among beaten down stocks at bargain prices.   Personally I took the opportunity to sell some losing positions, and reallocate that money among some of those bargain stocks.   In my IRA I sold a portion of a conservative mutual fund to reallocate that money in a growth fund that had fallen sharply.  Am I early?  Maybe so.  We may yet see weeks more of losses, but it’s a bet I’m willing to take with money I won’t need for a decade or more.

I don’t believe the nation is headed towards depression-era times, but we obviously have many challenges ahead.  Some think it could get a lot worse, and it’s worth looking at What History Tells Us About the Market.   Reading that article is a sober wake-up call to how bad it was, and how bad it could be.  For now most of us are just watching, dazed and wondering when it will all turn around.

“The entire nation, it seems, is in the grip of what psychologists call “the disposition effect,” or an inability to confront financial losses. The natural way to palliate the pain of losing money is by refusing to recognize exactly how badly your portfolio has been damaged. A few weeks ago, investors were gasping; now, en masse, they seem to have gone numb.”

But amidst the financial carnage, we also hear what may be the siren song that the other side of crisis is opportunity.

“This collective stupor may very likely be the last stage before many investors finally let go — the phase of market psychology that veteran traders call “capitulation.” Stupor prevents rash action, keeping many long-term investors from bailing out near the bottom. When, however, it breaks and many investors finally do let go, the market will finally be ready to rise again. No one can spot capitulation before it sets in. But it may not be far off now. Investors who have, as Graham put it, either the enterprise or the money to invest now, somewhere near the bottom, are likely to prevail over those who wait for the bottom and miss it.”

History tells us that people tend to buy at the highs, and sell at the lows.  We may not be quite at the lows yet, but selling now is basically the same thing.  If we’ve learned anything in this market it’s that the word “risk” doesn’t mean what we thought it did.   We’ve now discovered how sensitive we are to seeing portfolio losses when the downside really hits.  Risk tolerance has changed for many of us, and a whole host of moderate and aggressive investors are now joining ranks with their conservative peers. 

If you’re dollar cost averaging with retirement funds, or 401(k) contributions, I would certainly continue to do that. The market may trend lower in the months ahead, and dollar cost averaging works in your favor. But my standing philosophy remains:  Cut spending, Pay down debt, and Increase savings.  Focusing on those three things is a prerequisite to financial stability.   If you’ve got those three things under control, then continuing to invest, or increasing investments is worth considering.

How long will it take until we see traction and more stability in the financial markets?  I think it will be weeks rather than months.  However long it takes, I am unapologetically optimistic about the nation’s future and the future of our free-market economy.   Hang in there, and have a good weekend.

***Update***  Prudential warned today stating third quarter earnings will be down on investments, and the company cancelled future planned stock buybacks.  The stock took a beating today, closing down over $10 per share.  But the company remains strong according to the CEO.   In today’s market climate however, investors are running for the exits in a “shoot first, ask questions later” approach to the financial sector.  

“While our results have been negatively affected by current financial market conditions, we are comfortable with our risk profile and believe that we are in a strong position to manage through the current environment,” said Chairman and Chief Executive John Strangfeld.”

*****

It’s a beautiful day outside… sunny and cool, blue skies and calm winds.  But the weather in the markets is still pretty stormy, and a lot of folks are stressed out. So many of us are immersed in our computers or day jobs, with noise and commotion all around us.  Or we sit at home, staring at the same screens, wondering “when” the markets or financial crisis will subside. 

This morning I took a break and went for a walk.  It was not only refreshing, but helped put things in perspective.  I don’t know where the markets or financial issues are headed, but I know there’s a lot of good folks working pretty hard to get it straightened out.  In the meantime I’ll just focus on taking care of business with work and home. 

An amazing stock story this morning was Prudential Financial (PRU).  I watched the stock open around $41 per share after getting hammered the past week.  Here’s a stock that was $60 per share just a few weeks ago.  And before my eyes today I watched it plummet over $16 dollars a share down below $26.   Incredible.  I’m thinking “either something really bad is going on with this company, or the shorts are having a field day.”  

Interesting that the shorting prohibitions against financial institutions were lifted by the SEC effective at midnight last night, October 8th.  Coincidence?  Sure, why not, but Prudential Financial was on the SEC’s short ban list until last night.

 I’m not going to examine the arguments for “market efficiencies” with shorting, but somehow it just doesn’t seem appropriate that in the name of free market capitalism we can allow huge pools of money to step in and destroy a stock over a period of days, or even intraday.   That’s the kind of market action that destroys any sense of the word “investment” for many people, and it makes you wonder how that degree of volatility happens.    

Of course I don’t really know the extent to which Prudential suffered a shorting attack on its shares today, but as I write this even before noon on Thursday, October 9th, Prudential’s share price is already back up to $39.  I’m sure the volatility will continue both ways. 

Admittedly, folks are afraid that the financial contagion might affect the insurers just like banks and other financial companies.  So that volatility is borne of panic and wholesale capitulation in certain areas.  But most of the insurance company stocks are very conservative companies with long term liabilities and strong balance sheets.  Maybe they do have some problems, but not to the extent to which the panic (and short selling) has gripped the markets and their share prices.

All I know is that if the insurers are truly at great risk of failure or default then we’re really in trouble.  These guys manage everything from life insurance to pension funds and annuities.  Their bread and butter is to manage risk very conservatively in case of the exact economic and other financial crisis that we’re seeing today.  Well perhaps the crisis of the past few weeks is indeed unprecedented, but could they have prepared for this?  Yes, to a great extent.  And no, with regard to collateral investments that may have gone south, and cross-party liabilities with companies such as Lehman Brothers.  They may even have to raise extra capital through stock offerings, or even borrow from the government. But my argument is that if the insurers can’t work through this mess, then who can?   Perhaps mom and pop with cash in the mattress… for a little while.

Having said all that I am reminded of a little family history.  My folks grew up through the Great Depression, and lived by and large quite frugally throughout their lives.  The lessons from that hard time were not lost on them.  One of my parents has a life insurance policy that was purchased by their parents.  The policy was called a “nickel policy” back then because each week the insurance representative would come by the house to collect .05 cents to pay for the insurance. 

I am told that on several occassions they didn’t even have a nickel to pay for the insurance, and my grandmother would hide in the house peeking out the window until the insurance rep went away.  One time my Mom, age 4 or 5, answered the door, with her Mom whispering in the background, “I’m not here!” and when asked by the insuance rep, “Honey, are your parents home?” she replied smiling, “Yes, Mommy’s behind the door!”   True story.  

That insurance policy was lost over the years after my grandmother passed away.  Mom didn’t really know about it.  But a few years ago she learned of its existence through a relative, where it was held in trust with a state government.  Lo and behold it was the same policy purchased by her Mom and paid on for many years at a very low price.  She was pleased to find that it was paid up, and worth over $5000 today, having grown in value from pennies to a respectable sum over the course of 70+ years.  What company was it from?  Prudential.  And when she spoke with the company, they assured her the policy was worth every penny.

It may be rough going for a while, but I suspect that if Prudential made it thorugh the Great Depression, the Second World War and many other turbulent times, that they’ll make it through these times as well.  Have a great day.

I’m not sure most of us have enjoyed the past few weeks, but what interesting times we live in. It’s not enough that this is an election year, with little more than three weeks to go until Americans head to the polls and vote.  Who would have thought that the deepest financial crisis in generations would come just before the 2008 election?  Understandably some folks are scared about the future.  Sometimes we need to step back and remember what our lives are really about. But we’re not even close to anything our grandparents may have seen and We’re Not Headed for a Depression.

“…the magnitude of this financial disturbance should be placed in perspective. Although it is the most severe financial crisis since the Great Depression of the 1930s, it is a far smaller crisis, especially in terms of the effects on output and employment. The United States had about 25% unemployment during most of the decade from 1931 until 1941, and sharp falls in GDP. Other countries experienced economic difficulties of a similar magnitude. So far, American GDP has not yet fallen, and unemployment has reached only a little over 6%. Both figures are likely to get quite a bit worse, but they will nowhere approach those of the 1930s.”

Did you watch the 2nd Presidential debate last night? I thought it was interesting, and that they both spoke well.  McCain actually did pretty well for a change and I appreciated his focus on national security.  And what about his idea for the government to purchase defaulting mortgages? It’s not a bad idea if your premise is that housing must recover first before the economy can gain traction again. The government would step in and stop the bleeding for the ARM loans out there, helping stem the tide of foreclosures, etc. That would help consumers refinance into fixed rate loans they could handle, probably at very low rates historically. With amazing coordination, the Fed (and other global banks) reduced rates today, and that will eventually have an impact.

I’m still looking for bargains out there, and putting a little extra cash to work.  Will the market lows continue through the holidays?  I seriously doubt it.  But if it does, I’ve got some IRA money to invest in January that will have a great entry point.

On a lighter note (which we need more of), NBC has been taking heat for removing a hilarious Saturday Night Live video from it’s site, and then putting it back up after editing it.  Take a look at this really funny seven minute sketch below.  I didn’t see the first version, but watching Bush, Pelosi and Barney Frank is so funny!  And the “victims” of the subprime mess? Right on the money.  The bit with Soros at the end is priceless too.  It’s great to see SNL provide a little humor balance between the Democrats and Republicans.  Maybe the truth is a little too close…