Double Journey

Because I follow the market so much and because I’m fascinated (from an economics perspective) with the rising price of gas, I find the calls for Saudi Arabia and other oil-producing nations to produce more oil to be pretty silly.  Yes, I get the fact that American consumers are feeling the pain at the pump.  This is causing all sorts of other problems and will probably lead to the double whammy of inflation and recession, stagflation.  Believe me, I don’t want to see that.

But I find the whole situation amusing for a few reasons.   First off, I really think it might be in the best interest of the United States to just let oil stay this hi.  There are already signs that America is pulling back on their gas guzzling ways.  By most accounts, SUV sales are down anywhere between 20%-40% as Americans switch to smaller cars.  Air travel is also down as more and more people are opting to stay at home.  I think in the long term, America will be better off weaning itself from our oil loving ways.  If oil stays this hi, alternatives will be found.  Nothing motivates people like money.  When oil is cheap, nobody has any incentive to find another alternative.  With oil this expensive, the alternatives start looking a lot more attractive.

But here is the kicker.  The oil producing countries get this! I really don’t think they want the world’s addiction to oil to end any time soon.  But it is hilarious to me to see the United States ask, cajole, and demand these countries to produce more oil.  These countries have every incentive in the world to pump more oil.  Oil, even hard to reach oil, probably only cost about $50 a barrel to produce.  Yet it sells on the market for almost triple that.  Now think about it.  What would you do if you could produce a product and sell it for triple what it cost you to produce?  You would make as much of it as possible as fast as you could!  There really is no reason for the US to keep asking to increase production.  However much the oil industry is a “cartel” believe me, they cheat when they can.  Although they artificially keep supply low on purpose, all the OPEC countries have a huge incentive to cheat on the quota.  They have done it in the past when oil wasn’t this hi.  The incentive to cheat is even greater now so what makes anyone think they won’t?

So let OPEC do whatever they want to do.  I honestly think the United States, it its smart, can win either way.   Then again, that may be asking too much.

From the obvious files, Treasury Secretary Paulson declared that  we have to do something to fix social security.  Not sure where he has been the last decade or so when it became pretty obvious that we had a mounting problem.

Clearly we can’t sustain the current path.  Either taxes need to be raised (they are already pretty high) or benefits need to be reduced.    Now, we all know how I feel about taxes, so I’m clearly not in favor of that.  I also see how it would be unfair to reduce benefits to those already retired or near retirement.  To me, the answer seems pretty simple.  Start promising less to people like myself and raise the retirement age.  If people near retirement need to work a little bit longer, so be it.  Social Security was never meant to fund people 1/3 of their life.

You know what the scary thing is?  I’m not sure if people fully realize the full extent of the problem.  Read the article.  It talks about how Social Security will start running a deficit in 2017 and go bankrupt in 2041.  What is not talked about is the fact that what happens in 2017 when the government has to start drawing from the “trust fund”.  The fund is nothing but government issued bonds.   This causes a double whammy.  When they come due, what do you think happens?  The government needs to somehow turn these bonds into actual money.  How do they do that?

The old trick of issuing bonds won’t work, can’t pay bonds with bonds.  So the government now has three horrible choices.

1. Cut spending somewhere else
2. Raise taxes yet again
3. Print money causing massive inflation

Considering how hard it is for the government to do either of the first two now when the pain would be relatively minor I have a bad feeling that the government will do #3.  So not only will I not get any benefit from Social Security, not only will I have to pay for everybody else’s benefit, but all the money that I have saved for myself will become worth a lot less.  Sounds like a great future.

I’m taking public transportation. There, I said it. Only two weeks ago, I talked about how oil sped past the $100 mark. Shortly thereafter, I complained about my commute and how I was going to start taking the train to work. Well oil hit $110 a barrel today. Up until recently, you haven’t seen the spiking price of oil translate into higher prices at the pump, but I think that is about to end. The odd thing is is that there is no reason why oil should be this high.

I liken it to the speculation that was rampant in the housing market. Nothing was supporting the run-up in housing prices other than the fact that lots of other people wanted to buy houses despite the actual lack of demand for housing. The same thing is going on here. There isn’t a high demand for oil. People, like myself, are starting to take a hard look at alternatives. The supply of oil is actually rising, not falling, so it is clear that there is actually an oversupply of oil at these prices.

At some point, like housing, oil prices will retreat, fundamentals always catch up. That’s not to say I don’t think it will hit $120 before too long. That’s the thing about speculation, it can go far longer than you ever expect. I thought housing was crazy in 2004 but it went on for several more years.

Most people can’t change their routine very easily. Either there isn’t convenient transportation to work or there really is no alternative to driving. So the money comes from somewhere, and it has to come from either savings or from spending diverted from somewhere else. With the economy already in a recession, that is going to make the situation that much worse.

How has the rising price of gas affected you?

I KNEW we had a housing bubble. On another blog, I called the top of the market in October of 2005. I was dead on in California. I was tempted to short the stocks of a few homebuilders and mortgage insurers but never did. I figured that Wall Street had to know that these businesses were in trouble and had already priced it into the stocks.

I KNEW that the Wii would take off. In fact, I told my friend Scott to buy Nintendo stock. I didn’t myself because I was too lazy to call my broker and place an order since Nintendo only trades on the Japanese exchanges. I knew how hard it was to get a Wii. People were snatching them up faster than they could be shelved, and I knew Nintendo had something special. I figured Wall Street knew too so, and I was lazy, so I did nothing. Stock doubled in a year.

I KNEW that Guitar Hero 3 was the must have item of the year. I was actually going to buy it a few weeks ago, and then Vivendi announced that it would purchase them. The stock jumped over 20% that day and hasn’t looked back.

There is the theory that the market always perfectly prices in all news to a stock. That’s a bunch of bull. Wall Street will often over react or under react to news. It’s up to you to figure out the real story and play things correctly. If you know deep down inside that the so-called-experts have it wrong, chances are, you are correct. There is a fantastic book by Peter Lynch called One Up On Wall Street where he talks about advantages that individual investors have on the street. One of the many advantages you have is that you see things at the ground level. Much easier for you to spot the trend starting than the analyst on Wall Street.

Happy New Year everybody!  I hope we have a great year going forward!

Tomorrow is Christmas. Not to sound so cynical, but it really is one of those things that has turned into a consumer driven holiday. Given that, it gives great insight to where we are as a nation economically and where we might be headed for the next year.

This year looked to be a bad year for retailers. Many people were blaming the subprime mess and credit crisis for the problems. Others believed that the consumer was worried about a recession. But it looks like there may have been a slight last-minute rush to the stores.  However, I wouldn’t rush to crown this a great success.  Other reports I read are that Credit Card debt is rising, so much of this consumption may indeed be borrowed from the future.

This holiday season will be crucial to myself because it will dictate a lot about where I think the economy is actually going this year, and thus my investment strategy.  You see, people vote with their wallets.  It is an important psychological thing for people to buy things during this time of year as to not disappoint their loved ones.  If people aren’t spending, they are worried about the future.  If they are worried about the future, they must see things on the horizon that really worry them.

I’ve been a natural bear for a while, so I need to temper whatever news comes out about the consumer with my own internal bias.   I would be shocked if this holiday season turns out to be a success as I think the wealth effect will be working in reverse.  People are starting to realize that their home is not an ATM.  I think it is happening slower than it should, but it is happening.  If people feel poorer, they will spend less, and the economy numbers will be affected.

The Just One story is easy for me today. The Bush administration announced a plan which would essentially freeze interest rates in hopes of stemming the tide in an otherwise rising wave of home foreclosures.

It would essentially classify homeowners into a few different buckets. To make a very complicated story short, homeowners who have mortgages that have rates which will reset in the next two years and can not afford the reset, will get a reprieve from the rising interest rate they would have otherwise had to pay. Those who can afford it won’t get it (how this is determined is beyond me) and those who could have never afford even the lower rate won’t get it.

Another sticking point is to figure out a way to get investors who bought these securities to just bend over and take this. Imagine if someone promised to give you $10 a month for a year and then $30 a month every month after that. Then, when it comes time to start the $30 month payment they say, “Just kidding!”. Well that is what this plan is doing.

What about all those homeowners who complain they didn’t know what they were getting themselves into? Well I don’t feel a lot of pity for them. This was the biggest purchase they will ever have, and they didn’t try and understand what they were buying? People like me, who were careful with my money and didn’t buy when everyone else was going crazy now have to pay for this (yes we all pay for it). Doesn’t seem really fair to me. Further, the economist in me knows this plan will cause Moral Hazard going forward. Basically future homeowners will know that the government will bail them out, causing more people to take on riskier loans. Moreover, investors will suspect the same thing, and demand higher interest rates, thus making mortgages for all more expensive.

So how do you play this in the market? Still wouldn’t touch financials or stocks related to housing here. In fact, I would wait for them to bounce, and they will bounce, and then short into strength. Names like Toll Brothers were up 13% today, I think you let them go a little higher, and then short them. This mess isn’t anywhere close to over.

What do you think? Do you think this is a good plan that the government should support? If not, what would you let happen?

More Info:

Details of Plan

Pimco Manager criticizes plan.

Six Quick Thoughts

OK, so one of the keys to having a great corporate pedigree is to have attended and Ivy League School (And by Ivy League I do mean any of the top-tier national schools). For most people, it is too late to change this. There is always the option of going to get a graduate degree at a top-tier university, but for most people in the working world, that just isn’t going to happen. This is for all the young people who are wondering just how I did it and what advice I may have. Remember my post about compound interest? The point of that post was to emphasize how doing a little bit now, can pay big rewards in the future. This is my view on how important it is to do well at an early age to get into the right school.

I want to be very clear about this point before I move forward. You do not need an Ivy League degree to get a good job or to be successful. Getting an Ivy League degree does not guarantee success. What it does do is present a signal to potential employers is that somehow, someway, you made it through a very selective process. This is an important consideration in many managers hiring process. My alma-mater accepts around 10% of all applicants. And this is 10% of an already very selective group. It reminds me of that Seinfeld episode where George is able to meet beautiful women because he has a picture of a model who is supposedly his dead fiancee. The women accept him because he has already been selected by another beautiful woman.

Every time I go into a job interview, at some point someone says to me, “Obviously you are smart, you went to Princeton…” This is an important point. By default I am assumed smart. I got accepted to Princeton more than a dozen years ago, and yet it still works is paying dividends for me. It won’t get me the job by itself, but it at least allows me to get my foot in the door. It’s up to me to shove my way through.

So what do I know about getting into an Ivy League School? Well I got into several, I still do interviews for Princeton, and I actually had a college friend on the admissions board for a while. So what’s the secret? Here it is, there isn’t any. I can assure you that there is no magic formula for getting into the best schools. Each and every application is read, and read by multiple people. What catches the eye of one, may not catch the eye of another. That being said, here are the basics in order of what I believe is important.

Get good grades in the hardest classes. I want to emphasize hardest, because A’s in classes that aren’t challenging just don’t carry as much weight. You don’t have to get straight A’s (I didn’t. Got a handful of B’s) and you don’t have to be #1 in your class (I was #8) but it doesn’t hurt. Your record has to demonstrate that you consistently challenged yourself and that you excelled in those challenges. Ivy League schools are looking for people who know how to tackle problems, get things solved, and aren’t afraid of what might come their way.

Do stuff outside of class. Obvious but important. However, don’t join every club for the sake of joining a club. Top schools prefer it much more if you can show you were committed and exceeded in a few areas than you spending an hour a week in twenty different clubs. This of course flies in the face of what I did, as I wasn’t particularly talented in any one thing. Everyone at Princeton, besides being smart, tended to have one really good talent whether it be playing an instrument or being good at sports. Be well-rounded. I can’t emphasize this enough.

Standardized test are important, but they aren’t that important. This is coming from a guy who got 1560 on his SAT’s and all 5’s on the AP exams that my school saw. If you do well, great. It will just confirm the other facts. If you do poorly, you aren’t sunk yet, the rest of your application is much more important. I knew people who got 1600 and didn’t get in. I knew some people who were in the 1100’s and got in. There were probably people even lower than that. So do your best, and as long as you are OK, then don’t worry about it.

Be interesting. Don’t do what everyone else does. This will come out in your application. These people read dozens of applications a day. Believe me, they all start to sound the same. If you have some unique talent or some special life experience, make sure it comes out in your application. However don’t write about how winning the big game made your realize blah blah blah. They’ve heard it all before. At the same time, don’t be too cute either. Chances are, among the thousands of applications over a dozen years, someone has tried the same tactic. Just be honest, and yourself.

Some things that aren’t that important include your recommendations and your interview. Everyone gets a good recommendation. At worse, it can only be a small negative. The same goes for interviews. Don’t stress over them. Most high-schoolers have never been in an interview, and they are very nervous going in. Believe me, it isn’t weighted all that much. I didn’t even interview with Princeton.

That’s all it takes, and a little bit of luck. Did I miss anything? If you have questions or want to know more about my experiences, feel free to leave a comment, and I’ll try to respond.