Archives For February 2009

I read in today’s Wall Street Journal, an editorial about how newpapers should be charging for online content just like they charge for print editions of their papers. The ONLY paper I pay for online content is the Wall Street Journal.

I thought this would make a good question of the day.

Would you pay for an internet newspaper subscription?

Personally, I would not. Why? Because I have found that lots of the articles I read are articles that are shared among many different newspapers either via the Associated Press or due to the fact that one company may own several different newspapers.

Besides, I hate feeling like I’m getting nickeled and dimed to death. I also feel that I’m doing my little part in helping newspapers when I link to their articles. Afterall, I am sending traffic their way.

So, what do you think?


February 19, 2009

Santelli’s Chicago Tea Party.

I like this: “The new administration’s big on computers and technology. How about this president and new administration: Why don’t you put up a website to have people vote on the internet as a referendum to see if we really want to subsidize the losers’ mortgages…”

This comment left by Alan Chen on the Wall Street Journal article about Obama’s Mortgage Bailout Plan, hits the nail on the head (except for the last sentence):

This is absolutely disgusting. $275 billion to 5 million people who took a risk recklessly and purchased homes they could not afford? They’re simply GIVING away $55,000 tax free per person. As Robert points out, that’s equivalent to what a normal person would get after working to earn almost twice that to net $55K. At least the bail outs to wall street are LOANS.

This is definitely a slippery and dangerous road we are going down. Keep at it and soon the US will look like France, where people are lazy and feel they have a god-given right to everything that everyone else considers an earned privilege.

The housing market needs to readjust, and the government seems to be doing everything it can to prevent that. It is not a right to own a home, it’s an earned privilege. There is nothing wrong with renting while you save up to buy a home. The government really needs to get rid of the interest expense deductions on mortgage payments… it gives too much incentive to buy homes irresponsibly.

Selfishly, I like the mortgage interest deduction. It didn’t inspire my wife and I to buy more house than we could afford. You still have to use your brains…regardless of the tax breaks.

This particular part of the article bugs me:

…the government plans to spend $75 billion to encourage lenders to modify loan terms for people at risk of foreclosure or already in foeclosure proceedings. Lenders and the government would jointly lower monthly payments to 31% of homeowners’ income.

We must live in a fairy land. The very idea of repricing an asset and the underlying liability to within a person’s budget is crazy. It makes me sick to my stomach. Aren’t these repricings going to lower home prices too?

I wish a politician would stand up and say, “I feel sorry for those of you who are about to lose your homes but we have to realize that you made a choice when you purchased your home. One of the blessings of living in America is that we are free to make choices. Unfortunately, we cannot keep you from making bad choices. If you are a homeowner facing foreclosure, move out, rent an apartment, and make better choices to get back on your feet.”

My wife just came off a plant turnaround. For those of you not familiar with a turnaround, it’s when a plant shuts everything down to do maintenance. Naturally, when the plant is down, they aren’t making product, which means they aren’t making money. In other words, they want it back up and running as soon as is safely possible. Bottom line: my wife worked LOTS OF HOURS. L-O-T-S!

While she was working, the house pretty much became a hellhole. It was a disaster. Why? Well for one, I’m kinda lazy. The second reason was that we didn’t have a plan for who does what. Sure, my boys have had chores that they are supposed to do but the timing of those chores was kind of vague.

We needed a plan.

So, this past weekend, I put one together, showed it to my wife, and instituted it. The boys were griping and complaining at first but the results have been wonderful so far (yes, it’s only been day 3 but I like what I’m seeing so far). The plan is still a work in progress but so far, so good.

The first part of the plan was to simply make a schedule for when things should get done. It looks like this:

Weekday Schedule

The second part is their daily chores:

Daily Household Chores

When I presented this to the boys they didn’t like it because they thought it would take up too much of their time. But, what we have found is that they actually have MORE time because they’re not wasting time. They also like it because there are no surprises. And, since they have their chores, I’m not asking them to do other stuff.

Yesterday morning I was getting my shower and I heard the vacuum cleaner going (and I didn’t have to tell anyone to do it). My son did scold me because the schedule said that it should only take 10 minutes to vacuum but it took him longer. I told him to vacuum faster…lol.

The goal of all this is to have some sort of balance in our household. Our typical routine is to mess the house up all week long and clean it on the weekends. That sucks. Who wants to spend the weekend cleaning? Not I! If this plan works, spending the weekend cleaning will be a thing of the past.

Let’s hope it works…

Long-time AFM reader, Miguel, sent me this email last night:

I was just reading something very disturbing in Paul Krugman’s Sunday NY Times column. Apparently, the Federal Reserve has just released the results of the latest Survey of Consumer Finances, a triennial report on the assets and liabilities of American households. And Krugman’s interpretation of the data is that: … there has been basically no wealth creation at all since the turn of the millennium: the net worth of the average American household, adjusted for inflation, is lower now than it was in 2001. As Krugman puts it, the surge in asset values had been an illusion — but the surge in debt had been all too real.

I’m not so sure I totally agree with Krugman’s perspective, notwithstanding the fact that he has a Nobel in economics and I well um… I suppose I don’t have any prestigious prizes to speak of in any field. I mean seriously, it is actually normal for our economy to ebb and flow in cycles, its just that after such a long boom we are going to get a real ugly bust. By the way, in case you didn’t know, Paul and the newspaper his column appears in are a wee bit on the liberal side (like ragingly so) and tend to view the Bush era with a negative bias (not too much of a stretch right now). But, I try to pay some attention to what he has to say, if only because a lot of people will be paying attention, and plus, he seems like a guy I’d enjoy having a chat over lunch with some day.

So, if what Krugman says is true, then that’s pretty scary and I wonder how much of it is observable in tangible ways that we can see in our everyday lives. For my own situation, let’s see now:

1) Personal Income – Check. My personal income is highly variable and has taken a huge hit. Looks like I’ve been busted back to 2001 levels for the moment, though still employed which is a big plus considering the number of people I know out of work.

2) Business Income – No effect yet. We have rental and business income which fortunately has not dropped off, at least not yet.

3) Investment accounts – Check. Investment accounts are down over 40% in past 12 months. Feels like we’ve been punched in the head, like we simply poured money down a black hole. It makes me physically ill to think about it.

4) Real estate value (home & investment r.e.) – Some reduction in value but not as severe as expected – I think we’re around 20% off the peak right now in my area. But r.e. values are usually lagging and very sticky. Given where the NYC economy is headed it would not surprise me to see our r.e. decline further in value.

So, I’ve been wondering… given what we know today, is there anything that I would have done differently the past eight years, given the opportunity to do it over again. I still feel like I’m a financially better off and way more prepared today than I was in 2001. In fact, I looked at my files, and it turns out (I had forgotten) that 2001 was the very 1st year that I broke into the 7-figure net worth club. Fortunately, my current NW, while recently diminished is still way ahead of the 2001 figure. Interestingly, however, although I am worth somewhat more now, I am also carrying a lot more debt, largely because of a bigger home & mortgage, and also some use of debt to buy investment r.e.

And that relates to the one thing I would take away from the present crisis, which is that I wish I had focused more on debt reduction vs. investment. There is a saying (don’t recall where I got it from) that goes something like “Debt is HARD, Assets are SOFT.” I now fully, painfully understand this one. There was a time when my liquid assets and investment accounts more than covered my debt. That was a nice feeling, knowing I had the means to pay off my mortgage. But, now I can no longer quite make that statement with the same level of confidence because my assets have shrunk (seemingly overnight). The debt is still there staring me in the face… laughing its head off… “you will never get rid of me now you fool… ha ha ha.”

I find myself kicking myself for jumping on the band wagon, especially in ’05 and ’06… get into the market now or you’ll miss lots of upside… blah blah blah. On the one hand, you have to invest for the future. But, on the other hand, I should have had different priorities and done more housekeeping when I had the resources to do it. All in all, I still feel very blessed both monetarily and otherwise. I am better off today than I was eight years ago and hopefully, well-positioned to capitalize on the downturn by snapping up under-valued assets when the opportunity comes along.

I was wondering how you (and your readers) feel about these questions:

Are you better off today than in 2001? How or why?

What would you have done differently the past several years if you could redo it?

– Miguel

For me and my family, there’s no question that we are better off now than we were in 2001. We bought our house in 1999 for $89,000, refinanced it in 2007 in order to get some cash to do a major renovation. The house is still worth a lot more than we paid for it—even when you consider the refinancing.

The 401(k) is down substantially over the last year or so but it’s still above 2001’s level—although not by much.

What would we do differently if we could? Nothing really. I think we have done okay.

What about you?

This one hits close to home as the Stanford Financial Group is located in Houston.

The SEC has registered a complaint against Stanford Financial Group (, alleging massive fraud. You can read the PDF of the complaint here. If the SEC’s complaint is to be believed, Stanford Financial Group is evil. Read the complaint for yourself.

The complaint is filled with lots of accusations. I found this one from the SEC’s press release interesting:

According to the SEC’s complaint, the defendants have misrepresented to CD purchasers that their deposits are safe, falsely claiming that the bank re-invests client funds primarily in “liquid” financial instruments (the portfolio); monitors the portfolio through a team of 20-plus analysts; and is subject to yearly audits by Antiguan regulators. Recently, as the market absorbed the news of Bernard Madoff’s massive Ponzi scheme, SIB attempted to calm its own investors by falsely claiming the bank has no “direct or indirect” exposure to the Madoff scheme.

The SEC seems to be overreacting to the Madoff tie. When I dug into the complaint, I found exposure of $400,000. From the complaint:

In a December 2008 Monthly Report, the bank told investors that their money was safe because SID “had no direct or indirect exposure to any of [Bernard] Madoffs investments.” But, contrary to this statement, at least $400,000 in Tier 2 was invested in Meridian, a New York-based hedge fund that used Tremont Partners as its asset manager. Tremont invested approximately 6-8% of the SIB assets they indirectly managed with Madoffs investment firm.

Yes, it is exposure to Madoff, but it is relatively small exposure for a company managing billions of dollars.

I did find something kind of interesting while looking around on Stanford Group’s website. For instance, here is some information on their investment strategy. It sounds eerily similar to Madoff’s “strategy.”

Stanford’s Stanford Investment Model (SIM):

The objective of the Stanford Investment Model (SIM) is to provide consistent returns regardless of market volatility, and it is based on the investment philosophy that has been used successfully for all of Stanford’s proprietary funds. We target a consistent yield or income stream as agreed upon with our clients, while monitoring risk and managing the overall volatility of the portfolio.

Our strategy for diversification to minimize the effects of market volatility is sophisticated and far-reaching. We pursue true global diversification with relentless intensity to meet our objective of targeted returns. We carefully consider asset classes, investment strategies, sectors, and regions of the world that most investors either don’t have easy access to or rarely receive information about. SIM was developed first and foremost to minimize the downside risk of a portfolio.

We recognize taking risk is essential to achieve investor goals, but there is a difference between accepting the risk the market gives you and managing that risk.

Although we may not outperform the indices during a bull cycle, our investment strategy is one of long-term consistency through bull and bear markets. The Stanford Investment Model offers investors a truly different view of wealth management.

This stuff is getting more exciting by the day. The best fiction writers would have a hard time coming up with stuff this good.

I received the following email this morning from an AFM reader:


I read your blog (and a few other financial blogs) mostly every day. I read a lot about the importance of keeping a liquid emergency fund for about 6-months worth of expenses. What I have not heard however, is what basis that 6-months is calculated on.

1) Do you include any employment insurance benefits as a reduction in the amount required?
2) Do you use your regular expenses as a guide for spending? Or can you take credit for some reduction in discretionary spending?

Just looking for some opinions / guidance as I’m fairly new out of university and think it is important to have some level of financial stability. Thanks!


First off, the “rule of thumb” is three to six months of living expenses. Where and how they came up with that number I’m not sure.

1) Do you include any employment insurance benefits as a reduction in the amount required?

As far as I can tell, the “rule of thumb” does not take into account unemployment benefits. So, unemployment benefits would reduce the amount necessary in your emergency fund. However, keep in mind that in addition to providing your day-to-day income needs, your emergency fund will also need to provide a cushion for unexpected needs that will pop up (car repairs, plumbing problems,…). So, I would look at unemployment benefits as just that: a benefit.

2) Do you use your regular expenses as a guide for spending? Or can you take credit for some reduction in discretionary spending?

During a period of unemployment, you would be advised to cut out all unnecessary expenses. Afterall, you don’t know how long you’re going to be unemployed. Plan your emergency fund need on a reasonable budget to give yourself some leeway during a period of unemployment. Some needs will be reduced while others may pop up. For example, you may need to buy a new suit (if you don’t already own one) in order to go on job interviews.

I think the main thing to keep in mind when it comes to emergency funds is to HAVE ONE! Too many people have nothing set aside and have nothing to fall back on in times of need.

One last thing: I would avoid using credit cards if at all possible. Charging up your credit cards and then not being able to pay them back would be devastating to your financial situation as well as your credit score.