2009 Predictions

Decided to put my predictions down for 2009.  Here is what I think will happen in the next year

• GM equity will go to Zero.  The equity is worth nothing because the debt is worth nothing.  Sooner or later this is going to have to be reflected in the stock price.


• The recession will be significant and it will hurt.  Unemployment will reach 10%.


• Housing will continue to tumble.  There will be double digit declines in California.


• The market will go higher at first, dip again, and remain flat or slightly down for the year.  The rally everyone is waiting for just is not going to happen.


• We will not see significant inflation yet (but we will in 2010)


• The United States will, believe it or not, do better then the world markets


• Commodity prices will fall at the beginning of the year.  Oil will drop to below $30.  It will not crater however and there will be a rebound in commodities


• The United States will actually have a positive savings rate!  Sounds unlikely but I do not think there is any other choice at this point.


• One of the major retailers, one that is not currently in trouble, is going to declare bankruptcy.  Macy's, Nordstrom, Saks, Sears, etc.

Let's see how many of these come true in the coming year.  How about you?  What do you think the next year holds for us?

2008, a Look Back

I've had this blog a little bit over a year.  In that year, I will admit I haven't done a heck of a lot to try and grow this site.  I would like to make the excuse that my new job has been much more demanding then I would have realized.  I could argue that I have done really well in my financial goals by putting my focus there rather than to focus on this site.  But in the end, it would just be excuses.  It would all be true and valid but I for one do not like it when people make excuses, so I will not be making them here today.

However, despite this lack of focus in building this site, I am somewhat impressed I have blogged as much as I have.  I have a little over 200 post for the year.  That's no small feat and means I'm averaging about a post every week day.  I hope to do even better next year.  More on that to come.  I decided I would look back at what I wanted to accomplish with this website and see how far off I veered.

1. Double my $20,000 - I gave up on this one just a few month into the year.  I just didn't have the time to do it and in reality, I'm sure I would have failed at it given how poorly the market performed.  I would have done better then the market, I probably would have even made money in the money I was trading, but I would not have gotten anywhere close to doubling the money, that is for sure.


2. Develop another source of Income - I did not get to this one either.  Sad really.  It was something I really really wanted to do.  I make a nominal amount through this site, but just barely enough to cover my yearly cost so nothing much to speak of here.


3. Watch my basket more carefully - This one I have actually done thanks in no small part to this website and the discipline it has made me have.  Still, I lost track of a stock or two and held on to a few I probably should not have.  But everyone had losers this year and I'm chalking this one up to the bad market.


4. Spend more money - This one was the crazy one.  Easy for some, hard for me.  I did loosen up the purse strings ever so slightly.  I bought myself a 50" Plasma TV , a new Digital SLR camera, and a host of things for the apartment (including upgrading the apartment itself).  I even bought an engagement ring.    Admittedly the last one should not count as I would have done it regardless of my decision to spend more money or not but the first few are definitely a departure from me and my frugal ways.  All said, it was a lot of money for me.  Does it prevent my fiance from calling me frugal?  Nope.  She is probably right.  I still skimp and save probably more than I should given our income level.  But in the end, it always comes down to the fact that I rather save now and retire early later.  Then again, with the way our economy is going and the reaction of our government, they may make that impossible.

So all in all, not a very successful year from the blog perspective. It was a very successful year for so many other reasons.  I got the job under control now, where before I was miserable at times.  I got back to California and could not be happier with that move.  And of course, I got engaged!  I honestly could not ask for much more of a successful year.  Well, that is until we turn the calendar to 2009 ...

Working on "Quiet" Days

I went to work on Friday, December 26th.  I knew there would not be very many people there.  Of the nine people who report to me, only three went into work on Friday.  Other departments had similar turn out.

I rarely, if ever, take these days off.  While most people take the day off in order to take advantage of the long holiday, I see it as one of the best days to actually go into work. There are several reasons I enjoy going in on these types of days

• Traffic is extremely light.  Makes a big difference when you live in Los Angeles


• There is nobody around to bother me, so I can actually get work done


• I don't have any meetings to go to.  Once again, I can get work done


• Work these days is definitely easier.  Long lunches are the norm


• Workers are almost always dismissed early on these days

For the most part, the last two do not really effect me since I can always take long lunches and I can always leave when I want to, but it is nonetheless nice to have days where expectations are low.  For me, it is extremely important that I get some time this year to actually focus and do work.  I have a bunch of reviews to do this year, many of which I am not prepared for because I was not the manager for most of these people for most of the year.  I am the type of person who likes to have really good and accurate reviews for his employees but this year will prove challenging and I need all the time I can get to write these reviews.

Hope everyone is having a Happy Holidays.  Only a few more days till 2009!  How are you spending the last few days?

Christmas Discounts are Deep

I walked into a Banana Republic tonight.  I was not really intending to do any shopping but the fiancée wanted to do some shopping so I went in.  With two days left till the big day, I was not looking forward to the big crowds.  So as I went into Old Town Pasadena, I was pleasantly surprised that it was not as crowded as I feared.  It was crowded, but definitely subdued from what you would expect just two days before Christmas.

I got parking relatively easily.  And when we walked into various sores, it really was not crowded at all.  The very first thing I saw when I walked into Banana Republic were heavily discounted items.  There was a light silk cashmere sweater (similar to the one pictured) at the front of the store marked down about half of its normal price, from $70 to $35.  To make it an even better deal, there was an additional 20% off any sale item.  I ended up getting that item for about $30.  I had no intention of buying anything but since I needed some new, warmer clothes anyway I decided to take advantage.  I bought two other items, all of which were heavily, heavily discounted.  This can not be a good sign when there are deals this good.

The thing is, the store was relatively empty.  It seriously looked like any other night.  Now granted, it was getting slightly late at around 9:00 p.m., but still plenty of time was left for people to shop.  Even sadder was the fact that I basically walked up to the register to pay, something that almost never happens this time of year.  I have had many similar observations at Best Buy, even on Black Friday.

So it is no surprise that many forecasters are saying this will be the worse shopping season in decades.  It was just reported that for the first time ever, online sales actually decreased from the previous year.   There is no doubt to me that this is going to be a very tough Q1 for many retailers as they report dismal numbers.  The trick is, are they as bad as everyone expected?  It is hard to say because so many people have predicted a dire year, myself included.  But I have to think the market is going to sell off even more in Q1.  While the predictions have been dire, the market over the last month has behaved relatively well, shrugging off most of the bad news.  Can it continue to do that?  I just cannot believe it can.

Now if only my Home Theater receiver would go on sale even more than it already is ...

Worst Housing Markets for 2009

Fortune published their predictions for the worst housing markets in 2009.  Not surprising to me eight of the ten cities are based in California.  Number one on the list of course is my hometown of Los Angeles.

What may be surprising to some is the extent that the forecast is so negative.  The article is predicting that the market will correct to the downside about 25% in 2009 and 5% in 2010.  I'm assuming these are year over year numbers so if you take their calculation it means the median price in Los Angeles will be about $282,000 in 2009 and 265,000 in 2010.  How do these numbers compared to what I think is reasonable?

Even given this horrific prediction, I still think the numbers are a little high.  What is my reasoning?  Well the average home price in Los Angeles was about $162,000 in 2000, the beginning of the real estate boom.  The high was reached at about $573,000 representing a 350% increase.  Even at $265,000 it represents a 164% increase in about 10 years.  Is that really justified?  Not really.  If you believe, like I do, that housing should track inflation, then it would mean that there was an average of 5.5% inflation over those ten years.  Considering we had very little inflation over the last several years, and we are likely to have deflation for at least 2009, I think the 5% number is still pretty high.

In addition, housing needs to track income.  The traditional measure of housing is that housing prices should be 3x gross income.  That means the expectation is that the average income in Los Angeles will be  $88,000.  There is NO chance of that happening in the next two years (average now is just a little over $40,ooo), so the number is still a little high.  Now of course, I expect housing to retreat slowly, not in one big bang, so the prediction may be valid only if we continue to see price declines moving forward.  But they are predicting a significant slowing of the price decline in 2010, and I just do not see how that is possible considering I actually think we will OVERSHOOT to the downside like we overshot on the upside.  It happens in every market.

So in short, I think we will see even worse numbers then predicted.  The employment outlook in Los Angeles looks bleak and is getting worse.  You combine that with the overbought nature of this market, and you have the recipe for some pretty significant decreases over the next two years.

Changing the Rules Midgame

On Friday, the Bush administration opened up the TARP funds to bailout the Auto Industry.  Yet another example of the government not fully understanding the law of unintended consequences.

I love analyzing unintended consequences.  It challenges our assumptions about the things we only think we know.  Those who follow this blog know I have alway opposed the TARP.  So my disdain for the Auto Bailout is just an extension of my hatred for any sort of government intervention into private enterprise.  Remember, it is OUR tax money that is going to save the ass of these PRIVATE companies.  I really really hate the idea of private gains and socialized losses.  When these companies were doing well, did the taxpayers see any benefit?  Now that they are losing money, why are expected to share in teh losses?  How can any capitalistic system work when parties do not have to pay for the consequences of the risks that they take?

At any rate, I am fairly certain that the government actions at this point are doing more harm then good.

The goal of the TARP, at least initially, was to unfreeze the credit markets.  If capital stops moving around, then the entire economy freezes.  People cannot get loans to buy cars.  Businesses cannot receive credit to buy merchandise.  They have to lay people off since they have no goods to sell.  Banks refuse to loan money to people and businesses that have bleak prospects, which is everyone.  This would put the economy in a death spiral which the government was not willing to risk.  Now, while I disagree that this would have been the outcome, at the very least I can understand why they did it.   It is truly impossible to know what would have happened.

But for me, it is easy to take a good guess about what has and what will happen because of this.   I just have to look at the incentives that the government is creating.

First, I just look at what has happened.  It is clear that the markets are frozen in part because of what the government is doing.  I as an investor have no idea what the government is going to do next.  This makes it very hard for me to be able to figure out what I should be doing.  I would love to get long or short certain stocks but I simply cannot.  For example, I think commercial real estate needs to go down from here but I cannot easily get in because the government might try to bail them out next.  While on the surface it may seem like a good thing that people are fearful to go short, you have to remember that a healthy market has both winners and losers.  Losers are taken out quickly and shot.  This means there is more capital to deploy to healthier companies.

But this cannot happen so long as the government props up failing businesses.  Money will continue to flow to places it should not because the government might do something unexpected.  Look at what almost happened to oil.  Barack wanted to implement a "Windfall Profit" tax.   Now oil is down to about 30% of where it was before.  If there would have been a windfall profits tax it would have constrained supply causing the price of gas to go higher.  When left alone, you can see what happened.  Oil corrected ridiculously fast and now I am buying gas at around $1.60 a gallon.  This is how markets are supposed to function, we eventually reach equilibrium.

But this cannot happen so long as the government continues to interfere.  So what is next?  I have no doubt the market will continue to freeze.  Why should private investors step in when they are being crowded out by the government?  Why would any business want to take money from private parties when they can get money from the government for free?  More and more companies are going to start coming with their hands out asking for a bailout.   We will see at least a few more industries claiming they are crucial to the economy and that letting them fail will mean millions of jobs.

The market will stick around this range for a while.  It will not rally or drop too much from here.  People are at a standstill because there really is no way to tell which way to go.  Some people may welcome the relief from the volatility.  But I see a bigger problem; we could easily end up like Japan and just stay stagnant for years.  It is like ripping off a band aid.  We should have just tore it off and hit bottom as quickly as possible so that the recovery could happen just as quickly.  But that is not what is going to happen.  We will no doubt get a few rallies that may seem like there are brighter skies ahead.  But we will not know what the government will do next, and since I do not know the rules of the game, I am most likely to not play.

When Cuts Happen

Like many companies, my company recently announced a scaling back of certain employee benefits.  Some of them were quite significant, like the suspension of our 401K matching.  Some of them were important but not as significant; we scaled back the variety of drinks we offer for free like Red Bull and bottled water.   In these tough times it is to be expected so none of these changes actually caught me by surprise.   Funny enough, I see the financial statements of my division, and we are cash flow positive with no debt, a relatively strong position to be in as the economy worsens.

But it is always wise to be conservative going into problems rather than be caught off guard when things eventually get worse.  And I am sure they will get worse from here.  The thing is, and maybe it is just me becasue I was expecting it, most of the other employees seem to be taking this quite well.  Perhaps I have a skewed view of things now because I am in management.  I might also be bias because I do  not expect much from the company I work for other than a place to work, growth opportunities, and of course my paycheck.  However, almost every employee I talked to seem to be taking the cuts in stride.

This is in stark contrast to my experience at Microsoft where there was an uproar over losing towel service, something probably used by less than 5% of employees.  Perhaps people are just more understanding in a down economy.  It is universally understood that these cuts were made in lieu of losing headcount.  How many people would argue about keeping an energy drink over losing their job or having to see one of their fellow employee's pack up their stuff?  Perhaps the difference this time is that people at Microsoft rarely worry about losing their job as opposed to most of the rest of the world which realize layoffs are a real possibility.

So I was pleasently surprised how well the staff was taking the announcement.  In fact, many people offered more suggestions about where there should be even more cutbacks.  Most of them really appreciate how honest and upfront management has been about the situation.  Most of them enjoy being part of the process.  It is ironic to me because I have been in other places which want to hide the truth from people until it is too late thinking their employees will not be able to handle it.  This case clearly shows how people can be if you are just upfront with the situation.

So how do you think you would handle getting your perks reduced?  Is there any perk you get that you think your company should do away with?  Is there any perk you would get upset if they took away?