Archives For January 2012

Note: This post has been sitting in my drafts for over a week. I’m a little behind on my reading but I’ll try to follow-up with any interesting findings from Part 2 of the roundtable.

I don’t read the annual Barron’s Roundtable for stock tips. Rather, I read it to get a sense of the bigger picture. Here are a few quotes from Part I of this year’s Roundtable.

Bill Gross: When money yields nothing, banks won’t lend it. If a bank can keep money on deposit with the Fed at 25 basis points [a quarter of a percentage point] or lend it at 27 basis points, the yield on a two-year Treasury, why take the two-year risk? The combination of low return and high risk basically freezes the system. The global system is trying to delever and central banks are trying stop that process and pump trillions of dollars in. In a bimodal world, we could have reflation in 2013-14, or deflation in 2012. The probability of both is high.

Then there is this exchange comparing today’s situation to the late-seventies early eighties:

Schafer: Most of us have been in the business long enough to remember when the Aug. 13, 1979, cover of BusinessWeek declared the death of equities. The next year the market was up 13%. In the next five years it was up more than 50%. In the next 10 years it rose more than 250%. There is a lot of pessimism around, and a lot of opportunity.

Witmer: It is astounding that people will trample each other to get a cheap TV, but when shares of great companies get cheap, they sell them. It makes no sense.

Zulauf: People don’t care if the TV gets cheaper later, but they care when their stocks get cheaper.

Black: The U.S. doesn’t have the same financial flexibility today that it had in 1979 and 1980. Government debt is 100% of GDP, compared with 32.6% then. The huge debt overhang is a ticking time bomb.

Gross: The biggest difference is that long-term Treasuries were yielding 14.5% in 1981, and now they yield 3%. The federal funds rate was approaching 20% then, and it is basically zero now. To do well, stocks and other asset classes have to fight a tremendous head wind of overvaluation in the price of money.

That’s all that stood out from Part 1.

My oldest son is 16 and is about to inherit our old car as soon as we get his mom something else to drive. Since he will have transportation, we have decided to let him get an after school job to help pay for his insurance, save for another vehicle, as well as get some experience. I know several people from my grocery store days back when I was in college. So, here is my question…

Is it a bad (or good) idea for me to help him get a job by making a couple of phone calls?

I’m leaning towards helping him. Why? Because he’s a good kid and I know he’ll do a good job when given a chance. Also, from a store manager’s point of view, it might be nice to hire the kid of someone you know well because you know that the parent is going to hold their kid to a higher standard.

I’d like to know your thoughts.

Begin rant.

Just saw this on MSN:

Deal could cut principal on 1 million loans

Apparantly, there’s ANOTHER deal being hammered out to help homeowers (misspelled on purpose). Here’s how this deal might work out:

• $17 billion would go toward principal reductions. If 1 million homeowners were to be helped, that would equal an average reduction of $20,000 each. About 11 million U.S. homeowners are underwater on their mortgages.

• $5 billion would go toward homeowners affected by the deceptive practices and to state and federal housing programs. The settlement envisions a payment of $1,800 each to 750,000 affected homeowners. About 8 million Americans have faced foreclosure in the past four years.

• $3 billion would help homeowners refinance their mortgage loans at a rate of 5.25%. That’s more than 1 percentage point above current market rates, but most underwater homeowners are not eligible for refinancing. Some, however, have received rates as low as 2% as part of mortgage modification deals.

The media is doing a tremendous job at painting these homeowners as victims.

Question: Where’s my mortgage principal writedown?

Basically, this “deal” screws all the people who were RESPONSIBLE and bought homes they could afford.

Yes, some banks foreclosed improperly. It’s not known if the homeowners being foreclosed upon deserved it or not. I guess if a bank tries to foreclose without the proper paperwork, the deliquent borrower can just stay there forever. Not sure how that works.

It’s a big mess.

End rant.

I read a couple of follow-up stories/opinion pieces on Mitt Romney’s tax bill.

The first one, Romney and the Burden of Double Taxation, echoes the point I made last week about dividends being taxed at the corporate level before they paid to investors.

The tax rate on investors is unfair, but for the opposite reason. Our tax code layers taxation of dividends and capital gains on top of a top corporate tax rate of 35%—which even President Obama acknowledges is one of the highest in the world.

He goes on…

This is ironically the embodiment of the “corporate personhood” legal doctrine otherwise so decried by the left. The law taxes corporations as if they were separate beings from the shareholders who own them and then levies a separate tax on shareholder payouts and gains. This double taxation brings the effective tax rate on investment income to as much as 44.75%.

Now, this point is ONLY relevant if the corporation is actually paying federal income tax.

The other article (also in today’s paper) gives a little more depth to Romney’s taxes:

Mr. Romney reported $21.7 million in income. He paid $3 million in federal taxes, slightly more than the $2.98 million he made in charitable donations.

Of Mr. Romney’s 2010 income, he noted a capital gain of $12.6 million, taxable interest of $3.3 million, ordinary dividends of $4.9 million and smaller sums of gains and losses on business income, refunds and other income.

In an estimate of his 2011 taxes, the Romney campaign said Mr. Romney would pay $3.23 million in federal tax on $20.9 million in total income. He said he would have itemized deductions of $5.7 million, including $4 million in charitable donations.

Personally, I think all politicians should receive this kind of scrutiny.

This quote comes from a book titled The Hedge Fund Mirage: The Illusion of Big Money and Why It’s Too Good to Be True*, which was reviewed in today’s WSJ:

“If all the money that’s ever been invested in hedge funds had been put in Treasury bills instead, the results would have been twice as good.”

I have often suspected the same thing. I think hedge funds are really only good for the hedge fund managers. If a hedge fund manager is making outsized returns, he’s probably taking lots of risk.

*Affiliate Link

1. Interesting thoughts on “7 habits of extremely frugal people
One disagreement – I don’t think making your own bread is really “free.” There are costs involved in all of these (even if it is only time costs). Some of those costs are worth it when you are trying to save money, but some may not be.

2. What Makes Debt Socially Acceptable?

3. 6 Step Plan to Dominate Your Debt
Not a whole lot of new information here, but sometimes it’s good to have a list.

4. I Think I Figured Out Why Frugality Is So Popular
Perfectly sums up the reasons “getting out of debt” and “weight loss” are our favorite topics to read about…but never actually do.

5. 3 Steps to a Quick Turnaround
Another “get out of debt” article. I like that he doesn’t gloss over the difficulties, but outlines some good steps to get started.

6. How to Organize Your Pantry and Save Cash

7. 5 Ways to Slowly but Surely Become a Millionaire

8. 7 Surprising Facts About Roth IRAs

9. Voluntary Slavery

10. 10 Steps to a Happier Life
Favorite: #1. “Lighten up! Don’t get your panties in a wad about every little thing thathappens.”

Before kids can spend money, they have to have some in their pocket. How do your kids earn money?

The avenues that children have to earn money are very limited, and every parent has a slightly different philosophy about how their children should earn money. Here are the pros and cons of some common ways cash finds it’s way into the little pockets of our kids:

Birthdays, Christmas, Granmda sneaking money to the kids when you’re not looking. Sometimes kids just get gifts. Obviously this doesn’t teach them about earning money, but it’s a good opportunity to teach kids about generosity and gratitude. (Please teach your kids to write thank-you notes. It’s worth it.)

Lots of parents give their kids an allowance – a certain amount of money each week to spend. An allowance implies that they receive the money no matter what – they haven’t necessarily “earned” it. Often kids are required to do chores and contribute to the household, but the two things may not seem related – especially to very young children.

One positive thing about giving kids an allowance is that they know how much money they’re going to have and when they’re going to have it. I think that can teach some good planning habits in older children and teens.

According to Dave Ramsey, a better way to teach your kids to handle money is by giving them comissions for the work they do. They are earning each penny by doing work. (They can also lose money when mom or dad has to do their chores for them.) This is a good way to teach kids that money and work go hand in hand. It also helps them feel like a contributing and profitable part of the family.

The downside here is that the amount of money the kids get may vary from week to week. It can also be more difficult to manage than a weekly allowance.

We use the Chore Pad app on the iPad to track what our kids have earned. Each chore is assigned a value and rewards can be customized to fit your family and your kids. Highly recommended.

Kids can be very creative. Ours recently decided they needed money for a new video game. They gathered all the toys they no longer play with, wrote signs on construction paper and taped them to fences around the neighborhood (made the neighbors very happy, I’m sure). Then they sat in the driveway waiting for people to come buy their used toys. They were frustrated no one wanted to pay $5 for the broken remote control car, but this was an excellent teaching moment.

Sometimes kids can work for others outside of their home in order to earn money. Grandparents are a great place to practice (and are usually very generous). I love watching the creativity in our kids when we give them the chance to come up with their own ideas.

Especially in our affluent society, kids need to learn that there are things in life that you have to work for. The more successful we as parents are, the harder we will have to work at making sure our kids don’t grow up feeling arrogant and privileged.

Teaching kids how to earn money isn’t the same thing as actually training them to get out there and do it! Parents should require their children to earn their own money for some things that they want. Many parents buy their kids everything they want, but I think it’s important for children and teenagers to feel the pain of not being able to “afford” something – until they work to earn the money themselves.

My personal opinion (currently) is that the commission format works best for younger children, while you’re teaching the correlation between work and money. As they get older, I think kids need the consistency of knowing how much money they’re going to get. That’s what we’re currently doing and it seems to be working for our kids. Every family is different, though, and it’s up to the parents to decide what works best for their kids.

How do you teach your kids about earning money?