Tuesday, December 30, 2008

Book Review

At times the book gets a little tedious and repetitive, however it provides a background to the subprime meltdown that just isn't available anywhere else. It fully blames Wall Street, for some reason leaving out the politicians that also allowed things to happen, but on par is an excellent read.

What you will read in this book will be insightful and will completely piss you off. The characters that walk off with hundreds of milllions of dollars while completely ruining our economy and totally screwing over the little guy are not in jail and at this point are not even targets of any prosecution. The shadow banking industry (or non-banking industry) that arose and went unregulated makes no sense to the average person - why? The average person knows that if you make loans to people with no ability to pay them back and a history of not paying back debts - you are going to have a lot of defaults. Wise is that the school teachers, plumbers and construction workers that I've conversed with everyday for the past seven years understood this and Hubris Street didn't?

My biggest regret is not fully understanding what was going on. After all, I lived in the middle of all of it - Orange County, while it was happening. Every day I marveled at what I saw. 125% loans, Option Arm loans, Stated Income Loans, loans to people who had no job and no income (for $600,000). I called the housing bubble and told people not to buy homes unless they had a ten year time frame. I figured a 20% drop is around the corner....little did I know that things were even worse than I could have ever imagined. Now, in some places (including where I live in Murrieta) prices have dropped more than 50% from their highpoint. The market was flooded with easy money that was lent to people who could never pay it back and it created a huge false demand for real estate that drove prices up to a bubble point - creating victims of the people who COULD afford the homes they bought.

This will take awhile to unwind and will lead to needed regulation. However, in all likelihood the regulation will be written poorly and hurt any recovery rather than help. In the meantime, Stanley O'Neal, Angelo Mozilla, Roland Arnall, Robert Cole, Ed Gotschall, Steven Holder, Davide Loeb, Brad Morrice and many, many others are cozy in their mansions with bank accounts in the millions (some in the hundreds of millions and even billions) when they should be in prison (with the exception of Roland Arnall who died of cancer after serving as an ambassador).

Don't get me wrong, I don't begrudge people for making money, even lots of money. What bothers me is that these people were and are crooks. They helped to create the current mess and are not being held to account. There is something wrong with that.

Scott Dauenhauer CFP, MSFP, AIF

Hussman: The Dollar Crisis Begins

Interesting commentary. I don't know if he is right, but he did a pretty good job in 2008.

Scott Dauenhauer CFP, MSFP, AIF

Wesbury: Fed Balance Sheet Expansion Is Not Hyper Inflationary

What is interesting about the title of this piece is Wesbury doesn't say "inflationary", he says "hyper-inflationary". I think him and James Grant are more or less on the same page (see Grant article previous to this post), but Grant apparently sees more inflation than Wesbury.

As you can see we have a huge range of opinion on where money is going - its a range that is from hyper-deflationary to hyper-inflationary and everywhere in the middle. I'm on the inflationary side.

Scott Dauenhauer CFP, MSFP, AIF

James Grant: WSJ: Is the Medicine Worse Than the Illness?

James Grant writes about the current mad printing of money by the Federal Reserve. This is a must read. In another post I'll link to a Wesbury piece that partially disagrees with Grant.

Scott Dauenhauer CFP, MSFP, AIF

Coping with Craziness

Feinberg sums up the frustration that many of us in the financial services industry have faced this year:

"Losing my cool. The last week of September and the first week of October were particularly bone-chilling for me. Spastic drooling had never been one of my problems. Now, I ask for the dribble cup along with the Wall Street Journal. The market's incredible volatility has made me a shell of my former, long-term-oriented self. I now think and trade like a hedge-fund guy. Recently, my cash and short positions totaled 40%. Three days later, they totaled 10%."

"Oh, my clients. They are unhappy and scared. Some sound like kids who have been stiffed on their birthday presents. They expect more from me, much more, and are now bombarding me with e-mails asking when the carnage will end. Each message feels like a kick in the gut. I know I've let them down, that I should have seen this maelstrom coming. I didn't."

"I don't know what will stop it -- and that's one of the things that drives me bonk-ers about the current market. I see a value, I buy some shares, and the sucker goes lower. Then it's rinse and repeat and repeat and repeat. Oh, the horror."

Its been a rough year for everyone.

Scott Dauenhauer CFP, MSFP, AIF

2009 Conventional Wisdom

I'm not making any predictions about 2009, but I will say that recent predictions that I've been reading regarding 2009 are giving me a small reason to be upbeat. It isn't what you think. I can find few economists or financial "guru's" who are upbeat about 2009...and that is exactly why 2009 just might turn out to be o.k. Conventional wisdom is usually wrong. Again, 2009 might turn out to be a stinker and its certainly the safe opinion to be bearish, but just remember that all of these same guru's (well 99% of them) were completely wrong about 2008 and never predicted what actually happened.

The great philosopher Yoda once said "Difficult to predict. Always in motion, the future is." He couldn't have been more right.

So there it is, 2009 may or may not turn out to be a good year, and no, you shouldn't be worried that I'm quoting from a non-existent alien philosopher.

Scott Dauenhauer CFP, MSFP, AIF

Monday, December 29, 2008

Another Idea On Solving the Foreclosure Problem

Banks and financial institutions that hold bad mortgages are not negotiating. They say they are, but they are not. Until they do, the foreclosure problem will only get worse. The main problem is that these banks and institutions are most likely insolvent and can't negotiate. Perhaps they need an incentive, one might be to offer then a double deduction on the principal that they agree to write down with borrowers. In addition, allow them to take those deductions and losses against previous profits in the past four years and as far forward as they need. Its not perfect, but the fact remains that until principal write downs happen, the foreclosure crisis will continue.

Scott Dauenhauer CFP, MSFP, AIF

Tuesday, December 23, 2008

Opinion: Seniors Victimized By Low Rates

With the Feds lowering short term rates to zero and attempting to lower long term rates by buying Treasury bonds homeowners with equity and good credit are doing handstands. Perhaps all of this maneuvering will help, perhaps not, only time will tell. What is left out of the story however are those who are effectively subsidizing this policy - Seniors who rely on reasonable interest rates for income.

While the meltdown in the stock market has been epic, at one point a tad over 50%. The meltdown of interest rates has been complete. Last year a senior could get a rate of 5 - 6% on their money with little, even no risk in most places. I even have a few clients who locked in a risk free rate of 7% for five years in a 457 plan they had access to. For seniors who were earning 5%, they would get about $5,000 per $100,000 invested. Today that rate is now nearly zero. You can shop around and get 2 or 3% in a CD, though you may even have to go out five years to do that. That would be around $2,000 per year of income for every $100,000 invested a drop of 60%.

What is worse is that the inflationary forces that have appeared to disappear and even reverse into deflation (which does actually make the $2,000 go farther......until you factor in that seniors are not experiencing deflation) are short term. The return of inflation is inevitable. This will further decimate the savings, though it will probably raise rates.

These low interest rates will push seniors to look for higher rates, not thinking about the higher risks. They will be marketed to by weasels who will attempt to lure them into their faux products promising higher returns with little or no risk - a combination that doesn't exist (can you say Madoff).

Be vigilant out there and stay on your guard.

Scott Dauenhauer CFP, MSFP, AIF

Thursday, December 18, 2008

Inflation or Deflation: A Tale of Two Economists?

It's the tug of war of the century - who will win out. Everyday I read another economist predicting deflation and everyday I read another economist predicting inflation. I side with the inflation folks long term. Either way the Fed has its hands full and only time will tell if what they are doing is right. Below are links to two articles, one predicting inflation the other deflation.



Scott Dauenhauer CFP, MSFP, AIF

Wednesday, December 17, 2008

Humor Break: Dilbert

Couldn't resist posting this. If we don't laugh we'll cry, right?

Why I Don't Buy Into Active Management

Humor Break: Bailout Application

A History of Bear Market Recoveries

Great chart. I urge you not to put a lot of stock in it (pun intended) as this recovery may not follow the previous ones.

Scott Dauenhauer CFP, MSFP, AIF

The Long View: Essays on the history of business: A Fiasco That Fed The Great Depression

I'm about to start reading John Steele Gordon's book, An Empire of Wealth, but am finishing up Amity Schlaes The Forgotten Man first. This article is a preview of his book and draws close parallels to the Lehman failure. What I find interesting is that we have an opportunity to avoid a depression and especially a great depression - but we must look to our history to ensure that the wrongs of those times are not revisited. These books give us a glimpse at what we did wrong, let's hope someone in Congress and the White House are reading such things.

Scott Dauenhauer, CFP, MSFP, AIF

Inflation is the Real Danger, Not Deflation

I rarely make market forecasts since if I'm right people will expect me to make more forecasts which is a pressure I'd rather not deal with and if I'm wrong I look like a fool (which, interestingly enough isn't a stretch). I'm going to go out on a limb and say that I'm not buying into the Deflation scenario. I'm not saying we can't or won't have some deflation, simply saying that it won't be long term. Yes, I am aware that we just had two straight months of deflation, however if you strip out energy and commodity prices we actually had steady or slightly increasing prices. Why do I think we will have inflation?

First, the Fed chairman has basically said he would do anything possible to avoid deflation, so that is one.

Second, the Fed is printing so much money to address the crisis that it has to be inflationary, I don't believe that the fed can "mop" up this money as quickly as it thinks. Neutralizing is not nearly as easy as people are playing it up to be.

Third, interest rates are zero which doesn't bode well for the dollar. There was major flight from the dollar yesterday when the announcement came. While the dollar is the reserve currency of the world - at some point people might want to earn something on their money. I know, I know, right now people are more concerned about return OF their money rather return ON their money - this will change. A falling dollar is great for exports, but it can be inflationary and very well may inflate commodities again. I'm not saying oil will hit its highs of earlier this year, but that a doubling of oil at some point isn't out of the question. Don't get too used to paying $1.50 a gallon for gas.

Fourth, the banks still are not lending and that is because they still have impaired balance sheets. The Fed is going to print money to buy their bad assets - more printed money will cause inflation.

Again, I could be wrong, but my textbooks tell me I'm not. For what it is worth I'm recommending Treasury Inflation Protected Securities. New issue's are best as they protect against the possibility of deflation, but secondary are fine as well if you have a decent time period.

Gold is probably an option as well, but I'm not going there just yet and to be frank, I just don't know what's going to happen.

The Fed is walking a tight rope and I'm not saying it isn't doing the right thing, I really don't know, but I don't believe we can print this much money and have this low of interest rates without long term inflation.

O.K., there you have it, my prediction. I've got a 33% chance of being right - there will either be no inflation, deflation or inflation, my chances aren't too bad!

Keep in mind that this is not a blog that gives investment advice (you must pay for that as a client of mine), these are just my current views, if you invest on your own based on my views and lose money - tough.

Stay tuned.

Scott Dauenhauer CFP, MSFP, AIF

Humor Break: Twas The Night Before Christmas (The Year of the Grinch)

’Twas the Night Before Christmas
(The Year of the Grinch)
By David H. Resler

’Twas the night before Christmas, my shopping was done
I’d gotten great bargains, gee, aren’t low prices fun!
But less costly gifts are but small consolation
For my four-o-one K’s brutal devastation.

This year of o-eight ranks surely one of the worst!
It all started when the housing bubble did burst.
How could such a mess happen? And, who should we blame?
The fault lies with culprits far too many to name.

But my rhyme needs a villain, and for me that’s a cinch.
It’s none else but that vandal — the nasty old Grinch,
Who’d slinked into town for some real mischief making
And our long expansion he planned to be breaking.

From that first day on, he was brewing up trouble,
Aiming his sights first on the housing price bubble.
So the Grinch posed first as a home mortgage lender
His too easy loan terms sent some on a bender.

Prudence and judgment the Grinch deemed simply passé
Neither income nor job would stand in his loans’ way.
For a Grinch-loan nothing had to be verified.
‘Cause in MBS bundles these risks would he hide.

When agencies scored these loan pools triple-A sound
Investors chased his high yields like fox-hunting hounds.
All this was part of the Grinch’s mean little scheme,
Popping the bubble, he wrecked the home owner’s dream.

With his handiwork done, the Grinch felt elated
He knew what came next as these assets deflated.
The fortunes amassed in the boom years just vanished,
And Wall Street’s wizards from their boardrooms were banished.

Then the Grinch plot did from Wall Street so quickly spread
As surging gasoline prices deepened the dread.
And though the oil price upsurge had no lasting cause,
It surely led soon to a severe spending pause.

When Lehman House failed and the markets did seize
Nothing the Fed did could halt the deep credit freeze.
Though the Treasury and Fed tried ev’ry trick,
Nothing could stop the markets from growing more sick.

There’s not any doubt we’re the grip of recession
That doomsayers warn we’ll lead soon to depression.
With bus’nesses shutting ’and big banks a-failing,
The Grinch felt pure joy and his spirits were sailing.

But that nasty old Grinch shall not our Christmas steal,
We’ll drive him from town or we’ll cut him a deal.
We’ll line up for some help from Tim, Ben and Hank..
We’ll use the might of the Federal Reserve Bank.

Since not all the problems are to Wall Street confined
Some fiscal injections too must now be designed.
The president in waiting has named his new team
And shown us the outlines of a grand fiscal scheme.

A middle class tax cut plays a very key part
In hopes it will give spending a hefty jump-start
On new infrastructure too much more must we spend
“This plan will bring” so he says, “this slump to an end.”

New regs for markets will stop all Grinch-like deceivin’
“This,” says Obama, “will be change you can believe-in.”

In the end we know too the Grinch will change his way,
So a brighter future will start this Christmas Day.

Monday, December 15, 2008

Hall of Idiots: "Top Banks"

If you bother to read the above linked to article you will find that the following banks are just plain idiots:

Royal Bank of Scotland
Insurer AXA
Societe Generale
Credit Agricole
Banco Populare
Reichmuth and Company

Ironically I haven't been able to find any direct US banks involved. I say ironically because many of the international banks that have exposure (some in the billions) have complained about the US regulatory scheme and how it failed. While I don't think I can argue with that, it seems this is simply shifting the blame from people who SHOULD have known better.

This is such an easy scam to spot that these banks will end up making every client whole as no court in their right mind will find that there was not a massive breach when it came to due diligence. This pyramid scam was so easy to spot and yet so many people and institutions were suckered into it.

There were many hedge funds, charities and even a senator who invested millions.

All of these banks and any bank that pops up later are idiots. It wasn't enough that our US Banks and regulators failed to police the massive mortgage fraud that was perpetrated on this nation, this is just icing on the cake. Will new regulations really make a difference when old one's clearly are not enforced?

I actually believe there needs to be a new set of regs, I'm just not sure its going to help, so much trust has already been lost.

Scott Dauenhauer CFP, MSFP, AIF

Friday, December 12, 2008

Don't Buy Into the Deflation Delusion

Excellent article that goes against the grain of the economist's that are making news today. Deflation, Tamny argues is a delusion. This article is a pretty easy read given the complicated concepts involved and I encourage you to read it.

I see inflation, not deflation over the next five years. Sure, we could have short term deflation, it is a real possibility, but I still think the long term threat is inflation.

Please read this article.

Scott Dauenhauer CFP, MSFP, AIF

How To Solve The Foreclosure Crisis

Barron's finally is offering some decent idea's on how to solve the foreclosure crisis that in reality has caused our banking system to be basically insolvent. While I don't agree that it can be done for only $100 billion, I do believe this is the start of a constructive conversation about the real issue plaguing our economy - the massive debt and leverage tied to mortgage securities.

What I find interesting and kind of appalling is the fact that all those mortgages held by Fannie and Freddie are not being worked out. Freddie is more willing to take a $250,000 loss and foreclose a property than actually work it out with a principal and interest reduction - this is costing the taxpayers money because they are on the hook for 100% of the loss.

On a separate note. The Oil crash has been a huge stimulus to America and the longer it stays down the bigger that stimulus will be (much bigger than the government could do this quickly), however as the crisis storm clouds begin to clear and the dollar becomes less needed as a risk haven we could see the dollar fall again and we could see a lot of inflation due to the printing of money by the Federal Reserve - this has the affect of hurting the dollar and this will in turn bring the price of oil (and gold) back up. I'm not saying it will hit $143 again, I have no idea what it will do in the short term, but there are risks and I don't think you should get to used to paying $1.60 per gallon for gas........though I certainly hope it stays that way for a long time.

Scott Dauenhauer CFP, MSFP, AIF

Top Broker Accused of $50 Billion Fraud

Note: This link is only good for 7 days.

Somehow, despite numerous warning signs and many complaints this famed stockbroker got away with a Ponzi scheme of mammoth proportions. The recent turmoil in the markets and massive redemptions finally broke this scheme and now the operator is about to face the music after being turned in by his sons (who are surely attempting to get out of criminal prosecution themselves).

How do you protect yourself from these types of scams?

First, don't ever write a check or send money directly to the company servicing you. For example, the only check I would ask a client to write to me and my company (Meridian Wealth Management) would be for fees relating to my service. I would never ask you to send your money directly to Meridian Wealth Management. If you are working with a broker or an advisor and have sent your money directly to them as opposed to sending it to your own account at a major brokerage custodian like Schwab, Fidelity, TD Ameritrade or others, you should start investigating right away. Your money could be at risk.

You should receive monthly or at least quarterly statements FROM a reputable broker/dealer like the one's mentioned above - not from the company itself. While my company provides quarterly consolidated statements they are in addition to, not a replacement of the statements from the custodian (Fidelity, Ameritrade and TIAA).

Lastly, check to make sure your advisor is registered as either an Investment Advisor or a Registered Representative. You can start at www.finra.org.

Ronald Reagan used to say "Trust, but Verify". This is good advice and I encourage you to do it, even if you're a client of mine.

You should be able to log in to your accounts online at the institution to see your accounts. If you can do all the above you should be safe from a ponzi scheme, though of course not from regular losses in the stock market.

Scott Dauenhauer CFP, MSFP, AIF

Ripe for an Attack

I'm not trying to scare anyone and no, I don't know something that no one else knows, but.....is it me or are we ripe for another terrorist attack?

American has been brought to its knees financially, Oil has fallen by $100 a barrel and we are in the midst of a change over to a new President. Nobody has terrorism on their mind other than feeling bad for those over in India.

The terrorist we know are patient and have to be thinking that an attack now could be the final death blow. Let's hope and pray that our government keeps their eye on the ball, while we can never afford a terrorist attack, now is perhaps the worst time.

Scott Dauenhauer

Thursday, December 11, 2008

'Fannie and Freddie Were Lenders' Written in 2002

Some people thought this guy was nuts in 2002, now he looks like prophet.

Scott Dauenhauer CFP, MSFP, AIF

Wednesday, December 03, 2008

Humor Break: Your House, As Seen By......

A client sent me this, gotta love it!

Your House as seen by yourself

Your House as seen by your home buyer:

Your House as seen by your lender:

Your House as seen by your appraiser:

Your House as seen by the County Tax Assesor:

Will Anybody Actually Address the Problem?

It appears that while everyone has acknowledged that our problems began with the Real Estate meltdown, no one seems to be willing to actually deal with that meltdown. Program after program has been rolled out, but none of them are actually helpful - they just nibble around the program (the purveyors hope that announcing a program will make them look good and make the markets move, even if the program is just a waste).

Housing needs to be addressed and losses need to be taken by everyone involved. This means mainly the banks and the consumers, but perhaps the government (though not the McCain route). Until the vast majority of loans are renegotiated, there will still be problems.

For some reason the banks hold a lot of "toxic assets", helping the underlying collateral will help these toxic assets become less toxic, but getting them off the balance sheets will do more to help the banks move forward from this calamity. TARP was supposed to do this, but the idea was a failure from the beginning in terms of how it was supposed to be ran. For a few weeks I've been pondering how to get these assets off the balance sheets. The idea I came up with was to create a government pool that would accept the assets from the banks in exchange for some equity and future income rights, as well as some loan loss guarantees by both the bank and the government. This would effectively do what TARP was supposed to do, but without purchasing the assets outright. The pool would be run for the long run which would mean that "mark-to-market" rules would have no affect. This morning I was reading that this is in fact the approach that the Swiss took with UBS (or something like it).

The Treasury and Fed are walking some pretty fine lines right now, but they've got to do something about this toxic asset problem that starts with housing. The longer we delay, the more costly and harmful it will get. Just last week we found out that in addition to the 1/3 trillion of bad assets Citigroup has on its books, they have another 2/3 of a trillion of their books. We need a Toxic Asset Pool and housing to be addressed.

Scott Dauenhauer CFP, MSFP, AIF