Saturday, October 2, 2010

Official Notice...............

Spending time with my sweetie.  Talk with you on Monday.

Interesting, but out of my element................

Gold is high.  These folks think it is going higher-here

I don't know much about gold, other than a Howard Ruff
newsletter convinced me to buy $1,000 worth of gold coins
back in the mid-1980's.  Call me impressionable.  Think I paid
$350 per ounce.  Not so many coins.  If I am doing my sums
correctly, with gold at $1,300 per ounce today, over my 25 year
holding period, I am showing an annualized return of a bit over
5%.  Not my worst investment.

Anyway, back to the story.  Key excerpts, and actually some
decent advise on investing in general:

"The question now is not whether gold will go higher or not.
The primary trend is higher and will likely continue in the
years ahead. The real question is threefold: Are you invested?
How much are you invested? Will you hold on?"

"Jesse Livermore once said: 'It was never my thinking that
made the big money for me. It always was my sitting. Got
that? My sitting tight! Men who can both be right and sit tight
are uncommon.'"

"....consider this wisdom from Dr. Marc Faber: 'An investor
could have done very well over the last 30 years with just a
handful of investment decisions. In 1970, a long-term investor
should have bought gold, silver, and oil (commodities); in 1980,
he should have sold his gold and oil and bought Japanese
stocks; then, in 1989, he should have switched out of Japanese
stocks into the S&P 500 or, ideally, into the Nasdaq,
which he should have sold at the beginning of 2000.'"

"It's really not all that difficult to make big money in the capital
markets. The big money is made in finding major trends in their
infancy and riding them out for many years. The major trends
aren't difficult to find. The difficult part is having an open mind
to find the trends and then having the conviction to stay with
the trend for many years."

"If you're in the bull market now, you've made it in before the
crowd. If you aren’t yet in, you still have time if you want to be."

"The primary trend is higher but there will be increasing
volatility and major interruptions along the way."

I wonder what they mean by "major interruptions"?

If they taught this in Civics or Econ, I must have cut class that day.........


Megan McArdle suggests it would be interesting to know where
the money actually goes.  Chart below.  Post is here.  The expense
column does not, at least on my calculator, add up to $5,400,
which left me feeling unfulfilled, so I read her readers' comments-
often an education in itself.  One of her readers posted a more
complete breakdown, as shown below the chart.

Comment from one of Meghan's readers.  Didn't check the math
but at a glance it looks about right.

For every $5000 you pay in taxes, the government borrows
$3356.80 and spends:

$8,356.80 ----- Total outlays
$1,622.49 ----- Social security
$1,570.43 ----- Total, National defense
$1,052.63 ----- Total, Income security and Welfare
$1,021.75 ----- Medicare
$794.25 ----- Total, Health (Medicaid, mostly)
$444.02 ----- Total, Net interest
$404.29 ----- Other advancement of commerce (stimulus)
$288.30 ----- Total, Commerce and housing credit (less
$246.87 ----- Federal employee retirement and disability
$226.71 ----- Total, Veterans benefits and services
$200.24 ----- Total, Transportation
$148.96 -----Total, Educ., training, employ.
$122.46 ----- Total, Administration of justice
$89.16 ----- Total, International affairs
$84.51 ----- Total, Natural resources and environment
$69.96 ----- Total, General science, space and technology
$52.83 ----- Total, Agriculture (farm subsidies)
$52.33 ----- Total, General government
$39.70 ----- Disaster relief and insurance
$11.28 ----- Total, Energy

Most of this is direct from the source, but I broke out a
few items (if one appears as a line item above, I subtracted
it from its category total - no double counting)

Total, Income security and Welfare breaks down as follows:

$1,052.63 ----- Total, Income security and Welfare
$18.34 ----- 451 Community development
$7.65 ----- 452 Area and regional development
$40.49 ----- 506 Social services
$19.52 ----- 601 General retirement and disability insurance
                    (excluding social security)
$291.11 ----- 603 Unemployment compensation
$120.95 ----- 604 Housing assistance
$187.87 ----- 605 Food and nutrition assistance
$366.70 ----- 609 Other income security

Note: Edited for greater clarity, no numbers have changed

Fascinating stuff.  Worth knowing.  Worth (forgive me Kurt) a
deeper dive to get to the granularity of the true scenario.

Aren't we a strange breed..................?

Math made simple.............

Questions about the "Great Recession"...???

A chart is worth 1,000 words.  Here is another interesting chart
from Calculated Risk showing Fannie Mae's serious single-family
mortgage delinquency rates.  The long climb began in July, 2007.
The good news is the trend line is down, as of March 2010.

Friday, October 1, 2010

Friday evening with Earl Scruggs and friends..........

Economics explained for the layman...........

Thanks Greg

A return to Guideline #14: Cash flow sometimes equals deferred maintenance.

Maintenance matters.  The Commercial Investment Real Estate
magazine asks the question, "Is deferred
maintenance the next obstacle to market recovery?"   here

Interesting quote, applying to non-recourse mortgaged
property, here:

"However, when property values decline to the point where
negative equity exists, the owner’s perspective and incentives
change dramatically...............With no long-term incentive to
maintain the condition of the property, the borrower instead
is motivated to maximize its annual cash flow at the expense
 of property repairs and maintenance."

Interesting implications here:

"Deferred maintenance also will be an issue for participants in
the purchase or refinance of existing properties over the next
several years. Lenders and equity investors will undoubtedly
require more historical evidence that properties have been
maintained during the recent market downturn. Historical
operating and capital expenditures will be reviewed carefully,
physical inspections will be conducted more thoroughly, and
needs assessments will be scrutinized in detail.

As such, brokers should prepare for a longer sale cycle due
to the increased level of due diligence. Brokers also should
prepare for lengthy negotiations in the sale of distressed
properties. Prospective equity investors in properties that have
significant or unknown deferred maintenance typically require
a substantial discount to values derived using traditional
stabilized income capitalization."

Not a game for the faint of heart..............

Lots of money gets made, and lost, in times of turmoil and
uncertainty.   Take real estate for example....please.

Interesting article from Reuters about the subject- here
Opening paragraph here:

"Buying or selling a home might be the biggest single financial
transaction of your life. Of course you want to get it right. But
how -- exactly -- do you do that at a time when even
professionals don't fully understand what's going on in the
housing market?"

A few excerpts here:

"Don't rush. Probably the one housing market observation
that  everyone agrees on is this: It's not going to take off in a
hurry. Analysts expect it to be several years before home
prices generally return to the levels they reached in the bubble
years of 2005-2007. And they don't expect mortgage rates to
sky-rocket, either. You have time to make a careful decision.

I might be wrong about this, but I almost stopped reading
after the above paragraph.  "Analysts expect it to be several
years before home prices generally return to the levels they
reached in the bubble years of 2005-2007."   Surely you jest.
If it only takes several years, then 2005-2007 must not have
been a "bubble".   I suspect the author doesn't believe that
a return to January of 2007  is several years away either,
because found in the following paragraph is this: "You may
lack neighbors for years to come."

"Look for a retirement or vacation home now. If you've been
thinking you'd like a second home now or a future home in
the traditional retirement Sunbelt, go shopping. Those
markets are depressed by overbuilding, a lack of buyer
interest and a boatload of foreclosures. You'll be able to get
a good deal. But beware: You may lack neighbors for years
to come. That doesn't just mean you'll be lonely; it means you
could be paying out-sized condo and clubhouse fees to

Thanks to KCM for pointing the way.

The Universe conspires................ take our breath away.  Here

Thursday, September 30, 2010

Good thing I like doing this................

", not what you say, drives human behavior."

Headline of a recent essay in the National Real Estate Investor

    Banks Don't Make Bad Loans, People Do

Full essay here.  Fun excerpt here:

"..if regulators don't change compensation plans for every
employee who wields authority to approve loans, little will
change in the way of loan performance."

I wonder how many regulators it will take to monitor every
employee?  Wouldn't that ultimately be the job of management
and then the Board of Directors?  How about just monitoring

"A material part of the solution to the stability of our
financial system can be found at the human level.  Bank
employees, not the bank, granted the loans that
eventually became the mortgage-backed securities that
went bad.  That wasn't because the bank employees were
bad or incompetent, but because the compensation systems
for top management and employees rewarded loan volume
and relegated loan performance to irrelevance."

I wonder if this idea is getting any traction...................

Sometimes the really smart guys confuse me.......

A few excerpts from Sule Aygoren Carranza's blog on
Globe Street with some cheap-seat editorializing thrown
in for fun:

"The multifamily industry is heading for its next bull run,
but hesitancy on the part of the business world is a major
obstacle. Still, investors should begin to prepare themselves
for the next cycle."

Maybe it's just semantics, but I long for a time when a "bull run"
isn't something we are all looking for.  How about some modest
and steady yet sustainable growth?

After going through a stabilization period this year and into
2011, apartments will enter into a period of rapid recovery,
as new deliveries remain low and the vacancy rate declines
from the 7.8% overall level it hit at midyear. Yet “while the
crisis was on a national level,” said Nadji, “the recovery
will be on a local level.”

All real estate is local, unless you're buying into a REIT.  The
reason we have a national crisis is that developers and
production builders overbuilt in almost every local market of
any size.  When talks of "bull runs" surface, all I envision is
developers crushing markets-again.

"He says the market is divided into two camps: those who
believe in the inherent long-term investment value of
apartments, and those who believe in the short-term
transactional value. He noted that he ranks of the former
are rising while the other group is decreasing."

As said in this blog before, "short-term transactional" plays are
not investing, they are speculation.  I suspect one of the
eventual outcomes from the real estate market circa 2007-2011
will be a diminished amount of real estate speculation and a
return to long-term investing, where buying right and
disciplined management matter the most.

Call me a dreamer.

Wednesday, September 29, 2010

"Make your own road tapes....."

Kurt got me started on Harrison.  He also gave me a CD with
his top 500 songs.  So, I was reading Just Before Dark and
came across the following paragraph: 

    "If you're driving solo, another enemy can be the radio or
tape deck.  This is an eccentric observation, but anyone under
fifty in American has likely dissipated a goodly share of his
life listening to music.  Music frequently draws you out of
where you belong.  It is hard work to be attentive, but it's the
only game in town.  D. H. Lawrence said that "the only true
aristocracy is consciousness," which doesn't mean you can't
listen to music; just don't do it all the time.  Make your own
road tapes: start with cuts of Del Shannon, Merle Haggard,
Stravinsky, Aretha Franklin, Bob Seger, Mozart, Buffett,
Monteverdi, Woody Guthrie, Jim Reeves, B.B. King, George
Jones, Esther Lammandier, Ray Charles, Bob Wills, and
Nicholas Thorne.  That sort of thing."

As a public service, here is Harrison's "road tape".  All that is
missing is Nicholas Thorne.  George Jones is, just in case you
check, out of order.  Enjoy!

Most difficult job in the world....circa 2007-2010......

.....has to be appraising real estate.  How do you know what
anything is worth?  Are foreclosures valid comparables?  Are
short sales valid comparables?  How large is the unsold
inventory? Are values falling?  What is the next six months going
to bring?  Then talk about pressure to perform.  Appraisers have
taken their share of the blame for overvaluing during the bubble,
now they're getting yelled at for undervaluing during the
recession.  It is a job I would not be interested in.

Richard Green offers the most sensible suggestion, here

   " ...for deals involving a minimum of 20 percent down, it is
    hard to see how appraisers have a better sense of value
    than the potential buyer who is actually putting a lot of
    money at risk."

Differring appraisal standards dependent on the amount of
actual cash the buyer has in the deal.  Sounds like a
workable concept to me.

The madness of short term thinking.................

Bill McBride at Calculated Risk offers Exhibit A in the case
against month-to-month comparisons- one definition of short-
term thinking:

    The headlines on Case-Shiller seemed contradictory
    this morning. Here are a few examples:

    From the Financial Times: US home prices slip in July

    From the WSJ: Home Prices Rose in July

    From CNBC: US Home Prices Slipped In July And May
    Stabilize Near Lows

    From MarketWatch: Home price growth slows in July

    From HousingWire: S&P/Case-Shiller 20-city composite
    index rose 0.6% for July

    The reason for the confusion is S&P Case-Shiller reports
    both seasonally adjusted (SA), and not seasonally adjusted
    (NSA) data. Because of concerns about the impact of
    foreclosures and government programs on prices, S&P
    switched to reporting NSA numbers in their press release,
    but many analysts are still using the SA numbers (I reported
    the SA numbers - see this post for the SA graphs from
    earlier this morning).

    The important points are:

   1) this is a three month average of May, June, and July.
   Seasonally this is the strongest time of the year for house

   2) sales collapsed in July, so the next report (for June,
   July and August) will probably show falling prices.

"...gave himself up to the reading of books of knights' errantcy...."

Miguel de Cervantes Saavedra was born this day in 1547.  We
are all the richer for it.

fun bonus track..........

Only the Paranoid Survive...............

A few excerpts for Andrew Groves book of that title:

A person's time is an extremely valuable yet manifestly finite
Admitting you need to learn something new is always
difficult. It is even harder if you are a senior manager who is
accustomed to the automatic deference which people accord
you owing to your position.  But if you don't fight it, that very
deference may become a wall that isolates you from learning
new things.  It all takes self discipline.
The quality guru W. Edwards Deming advocated stamping 
out fear in corporations.  I have trouble with the simple
mindedness of this dictum.  The most important role of
managers is to create an environment in which people are
passionately dedicated to winning in the marketplace.  Fear
plays an major role in maintaining such passion.  Fear of
competition, fear of bankruptcy, fear of being wrong and
fear of losing can all be powerful motivators.
...fear can be the opposite of complacency.  Complacency
often afflicts precisely those who have been the most
successful.  It is often found in companies that have honed
the sort of skills that are perfect for their environment.  But 
when their environment changes, these companies may be the
slowest to respond properly.  A good dose of fear of losing
may help sharpen their survival instincts.
I call this phenomenon the inertia of success.  It is extremely
dangerous and it can reinforce denial.

When the environment changes in such a way as to render the
old skill s and strengths less relevant, we almost instinctively
cling to our past.  We refuse to acknowledge changes around
us, almost like a child who doesn't like what he's seeing so he
closes his eyes and counts to 100 and figures that what
bothered him will go away.  We too close our eyes and are
willing to work harder, to dedicate ourselves to our traditional
tasks or skills, in the hope that they and hard work will get us
there by the count of 100.  The phrase you're likely to hear at
such times is "Just give us a bit more time."
....most companies don't die because they are wrong:  most
die because they don't commit themselves.  They fritter away
their momentum and their valuable resources while
attempting to make a decision.  The greatest danger is in
standing still.
...I think the most effective way to transform a company is
through a series of incremental changes that are consistent
with a clearly articulated end result.

Tuesday, September 28, 2010

"Chance favors the connected mind".........

Here is your chance to hear Steven Johnson, author of the book
Where Good Ideas Come From: The Natural History of Innovation

Johnson's main thrust is that most important ideas have long
incubation periods and are more than likely not solo projects.   
Collaboration, connection, and the open platform all lead
to ideas having sex, which leads to innovation.

   "The English coffee house was
   crucial to the development 
   and spread of one of the great
   intellectual flowerings of the
   last 500 years, what we now
   call the Enlightenment."

The short version with the "whiteboard".

The long version..................from TED


Confusion reigns...........Waiting on the creative................

"Investors continue to avoid market risk by pursuing high-
quality properties with strong occupancy and long-term

"Consequently, bidding for core properties in these “major”
markets is highly competitive and the assets enjoy a
significant premium in price."

One would think that paying a "significant premium" for an
investment would be taking on "market risk" not avoiding it.

The two quotes above can be found in a recent post on
Steve Felix's blog, here.

Felix concluded his thoughts on the subject::

   "... if you're looking to make a 'safe' investment and if we
all agree that the money in real estate is made on the buy,
then if you pay a lot for an asset, assuming that just because
it meets certain criteria today that you'll make money when
you sell it in, I don't know, three, five or seven years then I
guess, duh, that you're simply paying up for reliable cash
flow. And, that my friends, is the simple story of our
industry today. Cash flow is king but cash flow can be found in
other ways; it's up to those who are creative to unearth the
potential. And that is where future kings of the real estate
industry are found."

Couldn't agree more.

Don't "get discouraged by temporary setbacks"

More wisdom from Calvin and Hobbes:

It's a brave new world out there...................

"At times like this, looking back may be tempting, but it's
terribly counterproductive.  Don't bemoan the way things
were.  They will never be that way again.  Pour your energy,
every bit of it, into adapting to your new world, into learning
the skills you need to prosper in it and into shaping it around
you.  Whereas the old land presented limited opportunity or
none at all, the new land enables you to have a future whose
rewards are worth the risks."

Andrew S. Grove, Only the Paranoid Survive

Monday, September 27, 2010

Re-shifting the paradigm............Or, how we think about things matters........a lot

Once upon a time, a house was a home.  A place to raise children.
A place to make your own.  A place of belonging within a
neighborhood, within a community.  A place where a significantly
high percentage of us baby-boomers grew up.  If over time
the house appreciated, the mortgage got paid off, and a big
pot of equity was available for the retirement years, that was
a really nice side benefit.

Then the big shift.  A house became primarily an investment
vehicle.  The thought of actually paying the mortgage off
became passe.  The thought of buying a "starter home", keeping
the relationship of housing costs to income below 30%, went
out the window.  The idea of saving, of deferring  gratification,
disappeared.  The era of buying "as much as you can as soon
as you can" arrived, and housing was at the center of it.
There are a myriad number of reasons why this shift in
attitude towards housing occurred.  On the surface, those
reasons seem to make sense. However, recent history would
suggest that thinking of a house as primarily an investment
vehicle leads to unsustainable behavior.

There is much debate today about the benefits of renting
versus home owning.  Besides the fact that we should
all be grateful that we have  the option to choose what
works best for us, I will be pleased when the debate
ceases to be news and returns to being just a collection of
individual decisions.

I suspect that our current  economic conditions will be with
us until such time that the psychology of  a house being
primarily a financial vehicle, that along the way absorbs 40% +
of a family's income, morphs back to the psychology of a
house being primarily a home, within the constraints of a
reasonable budget.

Our friends from Keeping Current Matters posted a
letter last week that says all this better than I can- here.

Widespread Panic.......never too old to rock...

A few laughs for Monday

A Poem for Monday.............

A Secret Life

Why you need to have one
is not much more mysterious than
why you don't say what you think
at the birth of an ugly baby.
Or, you've just made love
and feel you'd rather have been
in a dark booth where your partner
was nodding, whispering yes, yes,
you're brilliant.  The secret life
begins early, is kept alive
by all that's unpopular
in you, all that you know
a Baptist, say, or some other
accountant would object to.
It becomes what you'd most protect
if the government said you can protect
one thing, all else is ours.
When you write late at night
it's like a small fire
in a clearing, it's what
radiates and what can hurt
if you get too close to it.
It's why your silence is a kind of truth.
Even when you speak to your best friend,
the one who'll never betray you,
you always leave out one thing;
a secret life is that important.

-Stephen Dunn

Sunday, September 26, 2010


Sunday's Verse...........

                          The Tao is empty
                          but inexhaustible,
                        the ancestor of it all.

       Within it, the sharp edges become smooth;
                     the twisted knots loosen;
                 the sun is softened by a cloud;
                     the dust settles into place.

                  It is hidden but always present.
               I do not know who gave birth to it.
It seems to be the common ancestor to all, the father of all things.

-Tao Te Ching,  4th Verse