Debt Consolidation Loans

Anyone could have unforeseen and catastrophic events strike their personal and financial lives:  divorce, medical bills, unemployment.  Maybe you were living a certain lifestyle but you were responsible and had sufficient income to service your car loan, house payment, student loans and other obligations.  However you lost your job and were unemployed for longer than expected and burned through your savings too quickly.  You have a new job paying less than before.  What to do?  

You could get a debt consolidation loan which essentially means that a bank or S&L pays off many of your high-interest loans:  car loan, credit cards and maybe a home-equity line of credit.  Then you make one payment per month rather than many, and hopefully the interest rate is less than the 22% charged by those credit cards.   By getting all of your late accounts paid off, a debt consolidation loan has the added benefit of helping your credit score (assuming that you are not then late paying off the consolidated debt payments). 

A New Budget

This is going to be a difficult time.  You and your spouse need to take some time to talk about just what expenses are absolutely necessary and what things are relative luxuries.  Maybe you can get by on one car.   Cars are very expensive when you include tax, depreciation, loan payment, insurance and maintenance.  If one of you can take the bus you’ll save a small fortune and might not have to cut back on other things like cancelling the cable TV.   A budget is all about tradeoffs. 

Shop Around

So you’ve decided that maybe a debt consolidation loan is the way to go.   Before you sign anything take the time to gather information.  Reading this article is a good first step.  Also talk to kith and kin who might have been in a position similar to yours.   Don’t rush into the first debt-consolidation loan that you find.  There are many different terms (length of repayment and interest rate) to consider. 

Credit counseling – Keep these things in mind.

Beware of credit counseling companies.  Many of them are paid for by the very companies who issue credit cards (Citi, BofA, Wells-Fargo).  You might think that they are on your side in the negotiation between yourself and the credit card companies, but they will work to get the very best deal for the companies without regard for your interests. 

Bankruptcy – Last or First Resort

If you’re already in deep financial trouble, have been late on many loans and your income can’t service your debt, maybe it is time to consider bankruptcy.   But you’ll need to weigh the pros and cons.   Obviously BK will hurt your credit rating so it shouldn’t be entered into lightly, but it might not be a lot worse than all of the late bills that you’ve already put on your credit report.  And if you suffer under your present financial millstone of insufficient income and too much debt you’ll continue to be late and hurt your credit score for years to come.  You might be better off to bite the bullet, declare bankruptcy and take this one-time hit to your credit score.  At least this final act stops the continual hits to your credit score caused by many late payments and gives you the chance to start anew.  Use this opportunity to avoid falling into this painful hole again. 

Translating Some Common Financial and Economic Platitudes

1.  Americans focus too much on the next quarter and not the long term.

We on the board of directors find the shareholders to be really annoying.  Can’t we just do what we feel like doing and enjoy our corner offices without you whiners always wanting return on investment?   We’ll give you ROI someday and that should be good enough. 

2.  We (the Fed) are concerned about inflation and will remain vigilant.

We won’t really do anything to tighten the money supply but we hope that you’ll believe us and not dump our bonds when you see inflation creeping upward. 

3.   This has been a challenging quarter.

OK, we sucked big time.  We can’t blame our own screw ups so let’s try to focus attention on the things that were beyond our control.

4.  But we are optimistic for next quarter.

We don’t really have a plan but we’re praying that we get lucky and make more money. 

5.  Pass this tax for the children.

No matter how meager the benefits to the recipients nor how high the cost to others, we can always count on you sheep to go along with this.  Anyone who disagrees with us hates children.

6.  The people have spoken.

We’re elated to have won this election even though we had to outspend our opponents three to one.  No one will fall for “God is on our side” but we can use this platitude as the next best thing. 

7.  Everyone must make sacrifices in these difficult times.

Taxpayers need to shut up and pay more.  They’re just being greedy.  We can’t expect bureaucrats to cut back and have smaller staffs or less luxurious offices.  By “everyone” sacrificing we mean the little people.  

8.  Everyone must be patient.   We can't expect (corruption in China, Pakistan, the US budget deficit) to change overnight.

OK, it's obvious that this is a horribly corrupt system.  We can't offer any justification whatsoever. Just let us keep it going a little while longer, only a few more years.  Please?

Bond Trading - Could another flash crash reset US debt?

On May 6^th, 2010 US the DJIA and other stock indices dropped about 9% in a matter of minutes and then recovered equally quickly.  Someone who had standing buy orders, or was quick on the trigger, could have made a lot of money very quickly.    It’s well-known that computer trading programs are instructed to follow the herd.  If everyone else is selling, they too sell, lest they be left holding stocks or commodities worth vastly less at the end of the day.   Here are the elements of a short-story based on the flash crash and how it could be engineered to happen again.

Computer Trading

The US government could quietly steal a copy of the code that another deep pocket uses.  This other deep pocket is the Chinese government trading desk which owns around one trillion dollars of T-bonds.   The Chinese don’t really expect the US or anyone else to steal computer code so it’s not protected as closely as say nuclear secrets, missile capabilities or even diplomatic cables.  A small team (think the Watergate Plumbers) could break into the trading offices, copy the hard drives,  and create a diversion by sloppily forcing open some file cabinets to steal papers on some other secrets such as what individuals are being investigated for taxes. 

Code Breaking

The encrypted hard drives are brought back to the US and turned over the super-computers of the NSA who spends weeks with their Crays crack the codes.   It might help speed up the decryption if the US had performed a bit of social engineering by picking up some old passwords and similar information from a mole or paid spy inside the Chinese trading offices. 

Market Simulation

The decrypted hard drives are sent to top-secret labs to have the trading programs inserted into large simulation.  They would be poked and prodded to find out how they would respond to various market movements.   The US would develop a trading routine and set of inputs (i.e. dumping T-bonds on the market to cause a spike downward) that optimally took advantage of the Chinese program, inducing it to sell huge volumes and then not buy back too quickly when the US jumped in and rebought the bonds just sold minutes earlier. 

E-Day 

The US Fed unleashes their program on the markets, first driving down prices and inducing the Chinese to follow suit, then buying back in quickly at a much cheaper price.  Of course this will be tricky to pull off and might take several waves up and down in order to sell and buy back hundreds of billions of dollars of Treasuries.  

Aftermath

Even without knowing the Chinese computer trading programs the US could likely induce a flash-crash in T-bonds and skin the Chinese by jumping in and buying back the bonds at vastly cheaper prices.  Stealing the trading programs merely allows the process to be optimized so that the US could win the largest possible prize.  It would be hard for the Chinese to complain without looking foolish.  “We have had these big movements before.  Didn’t you learn anything from 5/6/10?  You shouldn’t have programmed your trading operations to dump Treasuries at such cheap prices.  Lol  No we don’t know who was on the other side of all those trades.”    This is merely plausible deniability. 

Of course the Chinese would know that only the US Fed would have a few hundred billion dollars to throw around and pull off this ruse, but they wouldn’t have a leg to stand on in order to get an investigation into this obvious market manipulation.  The US could even accuse the Chinese of causing the crash, muddying the waters.   Furthermore the Chinese wouldn’t want to admit to having been outsmarted, so the issue would quietly die.  The Chinese government would be a bit smarter, a bit more careful and considerably poorer after the greatest Sting in history.   

Time Value - Relationship to Technology

Time Value

Most serious investors are already familiar with the time value of money.  A thousand dollars next year is worth less than a thousand dollars this year.  The discount factor of the future money is the interest rate you could get on a very safe investment (historically taken to be US treasury bonds).   I want to broaden this idea to include the time value of technology and how this affects your investments.

Window of Opportunity

Imagine if you had a great new idea on how to make floppy disks better/cheaper/faster.  Would you be able to turn this idea into money?  If you had the idea in 1960 it would be worth close to nothing because people didn’t have personal computers and the big mainframes at the time didn’t use floppies.  No one could foresee the explosive rise of personal computer that would occur in the 1980’s.  Similarly your great new floppy disk patent would be worth very little in 2011 because the world has moved on to optical or RAM technologies.   Your floppy disk patent was really only of significant value between about 1985-1995, the peak years of use for floppies.  Technology has a window of opportunity; neither earlier nor later will work.

Aging Technology

Different stocks have different sensitivities to the time-value of their technologies.  Generally commodity stocks such as oil have only a weak correlation to technological change.  Yes, new methods of extracting oil will affect them.  Similarly new fuel-saving hybrid cars, for example, can make some small changes to the bottom line of oil companies, but not much.  Similarly platinum (actually a by-product of copper and nickel mining) production does not change a lot year to year, however as an investor you still need to be aware of how platinum is used.  If cars or coal-burning power plants need to conform to more restrictive environmental laws then the value of platinum could go up, but if technology makes palladium a more effective substitute then the value of platinum can drop. 

Biotech Stocks - A case study

Other stocks can be extremely sensitive to technology changes and have only a narrow time slot when they can make money.  A prime example is the behavior of drug and biotech stocks.   As an investor seeking to value such a company you need to look at their “pipeline”.  That is to say what drugs are they working on and how valuable are these?  What patents does a certain drug company have and how soon will they expire?  What do competing companies have in their pipeline that could endanger the profits of the drug or biotech company that I own? 

Future Shock

In general technology is changing more quickly with each passing year.  This is one of the central ideas of the 70’s classic “Future Shock”, and it has been proven repeatedly with each decade since the book was published.   This has the effect that technology-sensitive companies have a continually shrinking window over which they can recoup investment and make a profit.  The companies who can recognize the time-value of technology will be the ones to win in the marketplace, and the investors who pay attention to this concept will be the ones to profit from these companies. 

How Will the Uprising in Egypt Affect My Investments?

Egypt Investment

The wheel is still in spin so all we can at this point is speculate on the many possible outcomes of what is currently happening in Egypt.  At least if you ponder about things a while in advance you have a better shot at making money or protecting money than the people who just wring hands and sigh. 

Spin Master

There are many sides to this struggle and they all want to spin it their own way.  The US would like to portray it as democracy being asserted in a highly-controlled country tired of being held down by a strongman (Mubarak).  Iran would portray it as Muslims rising up against a regime that dared to make peace with the devil (Israel).  China spins the struggle as part of the Arab world throwing off the last colonial shackles of being dominated by the West.  There are other smaller players with their own spin on the action:  Israel, Syria and the Palestinians.    

New Pakistan

There is a very real possibility that Egypt could become the new Pakistan:  nominally secular and mouthing words about cooperating with the West and opposing terrorism, but with some elements in the government or military secretly helping support terrorism.  The protestors have some sane elements espousing democratic ideas, but the Islamic Brotherhood is a big player in the protests and they make no secret of their desire to install an Islamic state (like Iran) and negate the peace treaty with Israel.  If this happens or even if they only get a big role in the new government then it could destabilize all of North Africa and embroil the west in the struggle for years to come.  China is not entirely opposed to this outcome and Iran welcomes the possibility.   A new and prolonged struggle in the middle-East could benefit US defense companies such as BA, RTN, LMT and NOC. 

Suez Canal

The Suez Canal is a huge concern among all serious observers in the West, with about 10% of all world trade passing through the straits.  When it was closed in 1956 and 1967 it precipitated huge wars.  Israel could not and certainly would not tolerate its closure this time.  We can hope that the new government of Egypt understands this and treads lightly, but many times we’ve seen Islamic radicals do crazier things.  If the Canal is closed, even for a short while, then many commodities like oil and industrial metals could jump significantly.  You will need to weigh just how long the closure will last.  Under such circumstances domestic producers, e.g. BPT, could see big gains. 

Europe's Lifeline

Europe is particularly dependent on traffic through Suez since a much higher percentage of their oil and commodities make the passage.  If the canal is shut off it could quickly cause a spike in European inflation and a slowdown in their economies as they are starved for raw materials.  If the ECB responded as expected, the ECB would expand the money supply and put even more upward price pressure on commodities.    It would seem likely that the euro would depreciate against the dollar and yen, leading to some trading possibilities there.  

Contagion

One last thing to consider is the risk of contagion.  Iran would love to cast this as an Islamic uprising and export revolution to Libya and surrounding countries.  This would likely increase Iran’s prestige in the region and push them even more to develop their nuclear and missile capabilities.  Oil prices would rise while the economies of the West sank.  The central banks for the US and Europe, already fighting unemployment and slow economies, would create vast amounts of new money and likely cause bad inflation.  Consider these things in your short-term trades and longer-term investments. 

The Madness of Crowds - 5 Signs of a Bubble Mindset.

The Madness of Crowds

Even in our lifetimes we’ve seen several financial bubbles such as stocks in the late 90’s or housing in the mid 2000’s.  So what is the psychology that propels the bubbles forward and how can we recognize when the end is nigh?  Here are some reliable indicators: 

New Rules - The old rules don’t apply.

When internet companies with no earnings and a handful of workers were selling for a billion dollars in the late 1990’s, some critics noted that the vast majority of these had no earnings and in fact were generating big losses.  The supporters shot back that the old rules of valuation (P/E ratios, ownership of stuff, patents) no longer applied and that we should use price/revenue or some absurdly high growth rate in order to estimate the value of an enterprise.  Some of these small companies did make it big but we can probably count them on one hand:  Yahoo, Ebay, Amazon, Google.  Most of the other tiny companies  declared bankruptcy or were gobbled up at low prices by one of the giants, leaving their investors with a few percent of their former values. 

Greed

When housing prices were going up rapidly in the early 2000’s and loans were as easy to get as a glass of water, people were buying multiple houses with nothing down in the hopes of flipping them in a month or 2 months with a 10% gain.  Some otherwise stable people saw the early practitioners of this approach make 10k or 20k a month, so they too jumped in.  When you see people jumping into a market just because they saw someone else make a lot of money in it, that’s a reliable sign that the end is near. 

Trend Following -  Everyone agrees that…

Think about it:  if everyone agrees that stock X is a great investment, then they’re probably already owners.  If you look around and there aren’t any more people on the sidelines or naysayers who could be converted to buyers, then buying will soon dry up and the correction will be hard and fast.   This secret has long been known to those who call themselves “contrarians”. 

Hockey Stick Graph

When you look at a price chart and it’s taking on the shape of a hockey stick, rising faster and faster to the point of being nearly vertical, beware.  Sure you’ll find pundits who will predict that it will go to a zillion dollars by this time next year, but do you really think that’s likely?   As soon as the curve starts to level out those who made money will feel that there are only small gains left to be had, and start to dump their shares. 

Runnning Out of Oil - (land, stocks, gold)

This argument usually goes something like “There’s so much money entering the stock market these days and very few IPO’s or companies issuing new shares.  There’s plenty of money chasing too few shares so they have to go up!”  This is usually the argument that you’ll hear on TV very soon before the crash.

Big Business - 5 tricks used by Big Business and Big Government

This describes 5 fallacies that Big-Government (BG) and Big-Business (BB) use in order to get people to spend money on one wasteful scheme or another.    These days BG and BB are so intertwined that their schemes are usually one and the same:  witness the love-fest between Obama and the GE CEO or the trillion dollar bailout of Golman Sachs, JP Morgan and General Motors. 

Accounting Fraud - Count only the benefits.  

One example of this is when the government squanders a huge amount of money on some wasteful jobs program.  They take a few hundred billion dollars from taxpayers and make a big show about how many jobs are “created”, but they don’t count the jobs that are destroyed because private people didn’t have the money to buy big-screen TV’s or cars or vacations.  

The whole ethanol boondoggle is another example where it sounds great to create fuel from renewable things like corn.  Of course no one wants to talk about the fact that it takes 1.2 gallons of fuel to make enough corn to create 1 gallon of this politically-popular renewable fuel.  

Expert Opinion - Hire only experts who agree with you.

For every expert there is an equal and opposite expert.  So the supporters of one scheme or another can always find experts who will (for a fee) produce reams of paper “proving” that this scheme will be wonderful and solve all problems. 

Experts can even be created and opposition stifled by applying copious amounts of money.  University professors are constantly competing to see who can bring in the most research money.  It didn’t take them long to realize that professors who made studies “proving” global warming got plenty of funding from Uncle Sam, while those disputing warming grew poorer.  Does anyone remember the global cooling hysteria of the early 70’s?  Look it up.

Government Data - Lying with statistics. 

This type of fallacy is really too big to cover here.  In fact it’s the subject of many books such as “How to Lie With Statistics” by  Darrell Huff .   One example is how government changes the definitions of unemployment, inflation or the money supply to suit their own purposes.  

Predicting the future - huge future gains/losses.  

If you have a small chance of a huge gain then you would happily pay some price for that chance.  Or if you had a small chance of a catastrophic loss you would make an effort to avoid it.  So all that is necessary is to promise bigger and bigger future gains (losses) if a certain action is taken (or not taken). 

So with global warming every year we have bigger and bigger claims about the horrible destruction that will be wrought.  If it’s far enough in the future then the perpetrators of this fallacy are safe from ridicule.  Religions used to promise converts extreme bliss or 100 virgins in the afterlife, if only they would cross our palms with silver today.  Heh heh. 

False Advertising - Bait and switch.

Under this category we have things like child pornography laws that they told us would catch really horrendous and depraved people, but then the laws end up being applied to 17 year old highschool girls who use their cell phones to send pictures of their boobs to boyfriends.  Or the AMT was sold as a way to keep those evil rich people from getting away without paying taxes, except now it’s applied to families with 2 incomes who are very far from rich and struggling to make a house payment.