Archives For November 2007

From Citigroup Feels Heat To Modify Mortgages ($) in yesterday’s Wall Street Journal:

Ana Cecillia Marin, a 36-year-old single mother of three, owns a 20-year-old ranch house on a dusty, garbage-strewn acre in Palmdale, Calif. She says she earns $34,000 a year managing flower sales at a Los Angeles food store and selling clothes on the side. She bought her house in 2005 for $385,000. By taking out a first and second mortgage, she was able to buy it for no money down.

At first, her ex-boyfriend helped make mortgage payments, she says, but his construction jobs dried up. She hasn’t paid anything for months on the $76,426 second mortgage serviced by Citigroup, and she has also fallen behind on her $308,000 first mortgage, serviced by a unit of Bear Stearns Cos.

Ms. Marin says she got a foreclosure notice on her first mortgage. Judging from recent sales of similar homes in the area, it’s unlikely that Citi Residential will be able to recoup money owed on the second mortgage in the event of a foreclosure sale, because the first-mortgage lender gets its money first.

“I’m afraid I’m going to lose it,” Ms. Marin said recently of the house. Already, she had moved most of her belongings into a wooden crate in the yard. All that remained inside were the mattresses on which she and her children sleep.

This woman was destined for disaster!

I just did a hypothetical mortgage amortization using her purchase price of $385,000 and a 30-year fixed mortgage at 6.3%. Her principal and interest payment (not including property taxes) would have been $2,383 per month (her monthly income was $2,833). Her monthly payment would have represented over 84% of her income! Yes, the article did say that her boyfriend helped with the payments, but he wasn’t included in the mortgage. In other words, this woman should have NEVER been approved for this mortgage!

Totally unbelievable!

That’s a chart of this year’s performance of the Dow Jones Bank Index, which is a wieghted index of 88 banks. Looking at the chart, it appears that 2007 is going to be a horrible year for bank stocks.

Consider this:

Of the 86 remaining banks* in the Dow Jones Bank Sector Index, 80 have negative returns for 2007 (not including dividends). What’s worse is the average return for those 80 banks was -31.04%! The index itself is down 28.6% in 2007. OUCH!

The worst performer?

IndyMac Bancorp with a -82.68% return so far this year. Indymac began the year at $45.16 per share and is now trading at $7.82. OOPS!

The best performer?

Northern Trust with a 22.52% return in 2007. This is slightly misleading since Northern Trust isn’t a bank like all the other banks in the index. In other words, it was shielded from the subprime mess.

The moral of this story is DIVERSIFICATION! Don’t own just one sector or subsector. Instead, own the entire market. As the graphic shows below, a portfolio of the Dow Jones Total Market Index allocated equally among the ten sectors would still be up nearly 6% so far this year:

The results are even better if you add international into the mix.

Diversification is the key.

*The Dow Jones Bank Sector Index had 95 constituents at the beginning of the year. Some banks were dropped from the index and a few were added, bringing the current total to 88 constituents. I did not include the new additions in my research.

Taking a week off put me slightly behind on my roundup schedule. Anyway, here’s a short roundup of the MoneyBlogNetwork happenings over the past week:

Nickel renews his distaste Dish Network.

Jim reviews 100 Minds That Made the Market.

Speaking of reviews, Flexo reviews Russell Bailyn’s Navigating the Financial Blogosphere. – I received a copy of the book today and will be posting a review shortly.

It’s a little late but here’s FMF’s list of things to do besides hit the mall after Thanksgiving.

JD has a guest post on how to save 15% on your cable bill.

MBH has six checkbook tips.

Finally, Episode 52 of the NCN Podcast is available.

That’s it for this week. I’ll post an expanded roundup next week.

While working on another post, I came across Doral Financial, a company whose stock was trading at $2.87 on December 29, 2006. Today it’s trading at $18.70. At first glance that looks like a stellar rate of return so far this year.

You would be wrong.


Because on August 17, 2007, with the stock trading at just $.88 per share, the company did a 1-for-20 REVERSE stock split. As you can probably tell from the word “reverse,” a reverse stock split is the opposite of the kind of stock splits that most of us are used to. In most cases, companies do a stock split in order to reduce the price per share (you get more shares but the shares are worth less). A reverse stock split is done to increase the price per share (you get less shares but the shares are worth more).

Here’s an illustration:

On January 1, 2007 your investment in Doral Financial would have looked like this:

1,000 shares × $2.87 = $2,870

On August 17, 2007, right before the split, your investment would have looked like this:

1,000 shares × $.88 = $880

Right after the split, your investment would have looked like this:

50 shares × $15.00 = $750

As of this writing, 50 shares would be worth $935, which is still way below the value at the beginning of the year.

So, why did this company do a reverse stock split? Because it is embarrassing for a company to have a stock price that is below $10 per share. Imagine how this company felt with their stock trading below $1 per share! In addition to the embarrassment, institutions won’t consider investing in a company whose stock price is so low.

Finally, one thing I found kind of funny when putting this post together is this statement I found on the Doral Financial website:

LOL! They clearly aren’t meeting their lofty goals.

Do You Know How To Work?

November 26, 2007

Ben’s basic message is that “while almost everyone I know went to college, very few learned how to actually work — i.e., how to give an honest day’s labor for a paycheck.”

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I like old books. Even though some of the advice in Dale Carnegie’s How to Stop Worrying and Start Living (Affiliate Link) is dated (as you’ll see below) it amazes me how common sense never goes out of style.

Here’s Dale Carnegie’s 11 Principles for Managing Your Money:

Rule No. 1: Get the facts down on paper!

If you are spending more than you earn and you don’t know why, you need to track your spending by either writing down everything you spend or by using a software program like Quicken or Excel.

Rule No. 2: Get a tailor-made budget that really fits your needs!

One budget won’t fit everyone’s needs. What’s important to one person may not be important to another person. That’s why you need your own budget.

Rule No. 3: Learn how to spend wisely.

The author mentions several pamphlets and resources that are no longer available (the book was updated in 1951). However, there are resources like Consumer Reports that can be extremely helpful when it comes to making buying decisions.

Rule No. 4: Don’t increase your headaches with your income.

Just because you make more money doesn’t necessarily mean you need to increase your spending. In fact, one of the ways to build wealth is to not increase your lifestyle as your income increases. If your spending holds steady while your income increases, your net worth will grow dramatically.

Rule No. 5: Try to build credit, in the event you must borrow.

To this advice I would add that it is also important to keep tabs on your credit report and score. One way you can do that is through MyFICO. They offer subscription plans but I don’t think that’s necessary. For a one-time fee of $15.95, you can get your credit report and credit score from one of the three credit bureaus.

Rule No. 6: Protect yourself against illness, fire, and emergency expenses.

The right kind of insurance is very important. It’s also important to have an emergency fund. In fact, the two go hand-in-hand because an emergency fund can actually reduce your insurance costs because you can raise your insurance deductibles.

Rule No. 7: Do not have your life-insurance proceeds paid to your widow in cash.

This one sounds dated as it almost implies that a woman is too stupid to know how to handle money. Rather than worrying about how life insurance proceeds are paid, it is more important to have a plan put together in the event of a premature death.

Rule No. 8: Teach your children a responsible attitude toward money.

In my opinion, this is one of the best gifts that parents can give to their kids.

Rule No. 9: If you are a house wife, maybe you can make a little extra money off your kithen stove.

Again, this one sounds quite dated but the point makes sense: if times are tight, figure out a way to make additional income. The author detailed a story about a woman who started making baked goods for a local deli. Before long she was making 5,000 pies a year from her kitchen. Eventually, she moved into a bigger building and hired people to help her.

Rule No. 10: Don’t gamble—ever.

I can’t argue with this one.

Rule No. 11: If we can’t possibly improve our financial situation, let’s be good to ourselves and stop resenting what can’t be changed.

This last one is probably difficult for people to accept. However, I do think it is important for people to embrace the reality that not everyone can be rich. Instead of griping about the situation, we should concentrate on giving our kids the tools they need to succeed.

I was surprised to see that he makes no mention of investing for the future. Maybe we should make that Rule No. 12!

Like I said earlier, some of the points are dated but for the most part, what the author says is common sense. Fortunately, common sense never goes out of style.

I’m Baaaaack!

November 26, 2007

It’s hard to believe that it has been a week since I last posted! Time flies!

We had a great Thanksgiving. My family started arriving on Wednesday afternoon. We had 17 people staying at our house (including my family). On Thanksgiving day we had 28 people in our house. It was a bit cramped but I think everyone had a nice time.

By yesterday morning, everyone was gone and things were nearly back to normal.

It was nice to take some time off from blogging but now it is time to get back to work. I’ll get back to regular posting today.