No Bailout For You!

It was just announced that the auto bailout package failed in the Senate.  I love the Senate.

So now what happens?  There is some rumblings that George W. Bush and the White House will consider using some of the TARP money to fund the bailout.  Just like the banks, they will just give the money to the automakers with very little strings attached.  Yeah, great idea, because that seems to be working for us.  We are only down about 30% from when we started that program so clearly it is working.

I for one hope that does not happen, and not for the reasons you may think.   Yes, I am not a fan of bailing out anyone.  I think this is a horrible use of taxpayer money.  But I am much more interested in just seeing the drama play out.  How close are we really to a full collapse of the American Auto industry?  Is it as dire as everyone is saying?  I for one think everyone is being a little bit of a Chicken Little.  I have no doubt that one of the Big three will fail.  But I do not believe it will take down the other two.  I do believe that Americans will still have an interest in buying an American car, so I think we will actually see a much stronger automaker emerge from the rubble because they will see significantly more demand coming from the customers of the failed automaker.

I expect to see GM fail.  I expect this no matter what happens, even if the White House decides to  give them enough money to run for the next year.  I think Chrysler will continue to live on the brink, but I think they will survive.  And I expect the winner in all of this to be Ford.   What do you think will happen?

Save Money on an Engagement Ring (and get higher quality at the same time!)

To add to my post about my engagement, I learned one interesting thing about engagement rings.  It pays to go to a small specialist.

Like a lot of people, I tend to feel  more comfortable shopping at big chain stores.  That is why I tend to do my shopping at places like Best Buy, Target, and Amazon.  They tend to have the widest selection and the best prices because they have huge stores and usually do not offer high level of customer service.  I actually prefer this since it not only keeps prices low, but I do not like to be bothered by sales people when I am shopping.

However, with the ring, I went a different route.  I should say, my fiancee went a different route.  Someone like me would be tempted to go to one of the big engagement ring stores like Robin's Brothers, Jared's or Tiffany's.   Especially the latter one because the name is so well known.  I would shy away from a small mom-and-pop type setup because I would not feel as safe going to a place like this given how expensive this purchase is (it is now probably the most expensive thing we own).  But my fiancee had a particular style in mind, so she decided to do some shopping.

She picked a style and decided to ask several of the local jewelers for quotes.  To her surprise she found one that quoted her a very reasonable price just for the band.  She also asked about the solitaire diamond and they gave her several options, each of which were actually cheaper than anything we could find elsewhere.  This was very surprising to me because their prices were actually better than the online retailer Blue Nile. Blue Nile is known to have very good prices on its single diamonds and when we tried to find one of the same quality as the one our jeweler offered, it came out to be more money online.

This was a very good diamond, it scored very well in the 4 C's (Cut, Clarity, Color, Carat).  In fact, we found that many of the chain type stores could not match the grade of diamond that we were getting.  While most people worry about the big C, Carat, we found that it was probably the least important factor.  Her diamond is brilliant, it really sparkles in the light because it scores so high in all the other factors.  So my strong recommendation out there to anyone looking to get a diamond ring, focus on the OTHER C's.  It is much more important than you think.

My only other concern was how I could be sure I was getting what I paid for.  That was easily taken care of by going to a third party jewelery appraiser which I had to do anyway to get the ring appraised to buy insurance on.   Of course, the appraisal went fine and my fiancee could not be happier.  So we found not only better service but better price and quality by going with the small guy.  It may make me rethink what I thought I knew.

In Bear Markets, Everyone Loses Money

Bear markets are very dangerous.  No matter what side of a trade you take, you can lose money.  Even if you yourself are a bear, chances are you will lose your shirt as well.

On Friday, the market decided to make sure I understood this point.   The worst job numbers in recent memory came out on Friday.   The numbers, while they look horrible, are actually worse then they look on the surface.  I have always had a problem with the employment rate and how it is calculated.  It counts as employed people who are underemployed.  That is, people who work part time but want to work full time or people who have a job that pays them much lower then they are qualified to make.  It also does not count people who have just given up.   In this type of economy, there are many people who fall into these categories.  People must also remember, that the financial and credit crisis are just starting to make its way into the economy.  That means, we are only in the first half of this problem with plenty more to come.

Anyway, the market was down after the numbers came out, as it should be.  I decided to get short the market.  But then a funny thing happened.  The market decided to shrug it off and rally, ending the day up by about 3%.  Now, there was no news that should have made the market rally.  In fact, there was more bad news after the job numbers came out.  But bear markets just do not care.  They move, very rapidly, in directions that do not really make any sense.  Since I was double short the market, I instantly lost about 7% of my investment

Now you could argue that the market has bottomed.  And you might be right.  I personally don't think so as I think people still have not quite digested just how big of a bubble we really had for a year.  How do I know this?  I just look around me for the data.  I have been scanning the house listings seeing how much houses are going for in my area.  Housing that are selling are at about 2004 prices.  Houses that are listed are around 2006 numbers.  Now I live in Southern California, the epicenter for the housing collapse.  Yet people are still insisting on premium values for their houses.  2004 housing prices are still about double what they were in 2000 when the bubble started.  Does anyone actually think housing prices should have doubled in four years?  Further, the average house in the area is still selling for about 8x income.  This is more than double what it should be.

If this market bottoms, I am certain it will not be a violent ride up like this.  It will hover at the bottom for a while because the United States has a long way to go to work through all the issues that we have.   I still have an appetite for risk, and will continue to try and trade this market.  I jut hope that hungry bear does not get me before I get it.

No Bonus - So What?

I sit here listening to the Automakers in front of congress lay out their plan to return to profitability.  In the proposals is a clause that states that management will not get a bonus in the next year.  My question would be why is this considered a concession?  Why would anyone think they should do anything else?  Why would anyone expect to get a bonus when there company is hemorrhaging money?  If your company does not make money, you should not get a bonus.   I understand, it is not the fault of the individual, but that does not justify paying bonuses when you are on the verge of bankruptcy.   I had years of not getting bonuses because my company was losing money.  I learned to live with it.  I have also had it where my company was profitable and the bonus was up for cutting because we did not meet the target number.

So I just find it funny that it is something that anyone think should not be done.  Does anyone think that bonuses should be paid out in this situation?

"The End" For the Rest of Us

For a truly great read on the Wall Street collapse, I strongly recommend you read The End by Michael Lewis.  He is the author of the book "Liar's Poker".  In this article, he clearly explains some of the egregious acts Wall Street perpetrated to get us where we are today.  Lewis, like many of my friends, was part of the Wall Street machine.  He ended up leaving after he could not stand the ridiculousness of it all.

In the article, he gives a great description of how we got into this mess.  He tells the story of people who recognized the now seemingly obvious conclusion that there was no way that people who were getting mortgages should get mortgages.  He goes further to explain how the CDO market worked and how the people part of it knowingly exacerbated the situation.  To make matters worse, most of these so called "experts" really no experts at all.  They were like him, fresh out of school with no idea what they were doing, yet tasked with allocating the nations capital.  And these are the people our government wants to bail out now?

Reminds me why I will never hire a consulting company to do work for me.  Straight out of college, I went to work for the world's largest consulting company.  I did not even know what consulting really was, but it was one of the things everyone coming out of an Ivy League school did.  You either worked on Wall Street or you were a consultant.  Now, I was a technology consultant.  That meant I was supposed to be some sort of expert on technology matters.  Now, lucky for them, I had a computer science background.  I actually was a pretty good programmer.  But some of my colleagues would not be able to tell you the difference between an array and a linked list.  They thought "C" was just another letter and "Java" was just something you drank.

Yet we were all shipped out to work on projects at well over $120 an hour.   That is not a typo.  Now, someone like me, I might be worth it.  I was a good programmer, understood the fundamentals, and had the logical mind to solve most computer problems.  But some of these other guys?  We are talking people who never compiled a single line of code in their life now being asked to build some of the world's larger computer systems.  How is that at all sane?

The same thing happened to my friends in Wall Street.  All of them were thrown into big money projects.  Many of them had never taken a single economics, accounting, or business class.  It totally changed the way I thought about the professional world and made me scared about some of the things that happen at these large important companies.

Credit Card Companies Pulling Back Credit

On CNBC the other day, Meredith Whitney, an analyst who predicted the subprime crisis and the turmoil we would see at Citibank, declared that the next big problem would be in consumer credit.

When I first heard her on CNBC, I did not think much of it.  I have heard the death of the American Consumer predicated many times.  And every time, the consumer finds a way to spend more money.  While this cycle has to eventually end, I just was not willing to hold my breath to see it happen.   I also did not see the banks killing the cash cow that is consumer credit.   So I dismissed the commentary and went back to work.

But then I witnessed it with the pullback with my very eyes that night.  I got a letter from one of my credit cards informing me that they were going to close the account.  This is a credit card which I have not used in over two years.  I kept the card open because it was the card I have had for the longest time and thus it is highly positive on my credit score.  However, due to the inactivity, the bank was pulling my line of credit.  Now keep in mind, I'm not a credit risk.  I have always paid my bills on time and I have never carried a balance.  My credit score is north of 750.

Part of this may indeed be that it cost them money to have me as an account holder when there is no activity on the card.  So I don't really blame them.  I have gone through equally long periods of time without charging very much to the card, so I can not imagine this was the only reason.  So given that, I doubt it is a coincidence that in this credit environment, the banks are closing lines of credit to their customers, even to their most credit worthy customers.

So if someone like me is losing credit, what must be happening to other people?  Is this just another sign that we have a ways to go before we work our way through all these problems?

How Trading Can Drive You to Maddness

I went short the market last Wednesday.  I did it by my normal method; I bought the Exchange Traded Fund SDS.  I bought this ETF when the market turned negative in the morning.  After three days of Rallying, I figured we would get at least one day of a correction.  My plan was to get in and out of the ETF as quickly as possible.

Unfortunately for me, it was also a travel day for me.  I was returning from my trip in San Diego so I was in the car for the middle part of the trading day.  In the car, I was listening to the news, and the market continued to go higher.  It ended the day several percentage points higher, meaning I was down almost 5% just that day.  Thursday, the markets were closed, so I was forced to hold on to the position.  I resolved to get out on Friday.

I woke up early on Friday to find the market trading relatively flat.  I was still certain that there was no way we would get five up days in a row in a market like this, so I waited until the market dropped a little bit, and I was going to sell.   The drop never came, the market inched higher and higher throughout most of the day.  Since it was a short trading day the market close before I could do anything meaning I had to hold on to my position throughout the weekend.  I was now down 10%, right at my stop price, and I was for certain going to get out on Monday.  I was hoping the market would not open up sharply higher, as this would increase my losses.

Well the market gave me a gift today.  The market tanked, dropping 8% in one day.  Since I was double short in my position, I made up my losses and more in one day.  While I was going to sell in the morning, it was clear the market was weak so I held on to it till the end of the day.  I sold half the position at the close and made a small profit after taking some very big losses.  I will get rid of the rest of the position as soon as it is reasonable.

The point of the post should be pretty clear.  I got REALLY lucky in this trade. I should have gotten out way before I did.  I almost had to take some big losses and the market bailed me out today by falling apart.   If you were me, you would also understand this.  Trying to play this market can really drive you nuts.  There was really no good reason the market was rallying last week.  There was no bottom reached.  Even if the bottom was reached, there was no reason stocks should have been up 15-20% in a week.  That's insane.  That is not a sign of a healthy market.  But the fact remains, just when you think you have it figured out, the market does crazy things.