Archives for March 2009

Jim Cramer v. Jon Stewart: The Feud Continues…

Posted on March 12, 2009 // 16 Comments

If you don’t watch The Daily Show regularly, you may have missed more “drama” between Jim Cramer and Jon Stewart after the TDS roasted CNBC last week.

Cramer responded by saying his words were taken out of context. Jon Stewart responds, saying Jim Cramer didn’t recommend buying Bear Stearns stock a week before it collapsed – what Cramer called an “urban myth”. No, he did it five days earlier:

Then I guess more defensiveness by NBC. It seems even they don’t realize that TDS is a parody show, not a real news show. Yes, they take soundbites and then make fun of them. That’s the entire basis of the show! It’s on Comedy Central.

You can’t win, Cramer! In reality, I’m sure both NBC and TDS are loving this, because controversy = ratings = $$$. TDS will milk this as long as they can. CNBC is already financial porn, where the whole point is to talk out both sides of their asses all day long. Buy! Sell! Do something! Trade Trade Trade!

Proof? Jim Cramer will be a guest on The Daily Show on Comedy Central tonight (Thursday 3/12), assuming he doesn’t cancel too.

Filed Under: Funny //

Poll: Would You Ever Walk Away From Your Mortgage?

Posted on March 11, 2009 // 78 Comments

In order to qualify for federal loan modification assistance, your mortgage balance can be no larger than 105% of the appraised value of your home. So what if your house’s value dropped so much that you owe more than that? (This is referred to as being “underwater”.)

One option that many people are considering is to simply stop paying your mortgage, walk away, and mail your lender the keys. This is especially true in the 27 states in the US that have “non-recourse” mortgages, where the lenders can’t even seek the difference between what you owed and what they auctioned your house for.

Some people view paying your a mortgage as a moral and/or ethical obligation. Others view it simply as a legal contract, where you agreed to borrow money with your house as collateral. The lender takes on the risk of you walking away, in exchange for a certain interest rate. You, on the other hand, must deal with the consequences of a damaged credit history.

For the purposes of this poll, “walking away” means doing so voluntarily before circumstances would force you into foreclosure. What do you think?

Would You Ever Walk Away From Your Mortgage?

View Results

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I won’t take a stand either way for now, but will post my own thoughts tomorrow. Elaborate on your choice in the comments below!

Filed Under: Real Estate //

Do I Qualify For Loan Modification? The New Homeowner Affordability and Stability Plan

Posted on March 10, 2009 // 26 Comments

I’ve been reading through the details of the new Homeowner Affordability and Stability Plan, which is letting lenders modify mortgages as of March 4th. Most of the information is collected here, where you can find a fact sheet, a two-page summary of modification guidelines, and the 17-page full list of guidelines.

Eligible borrowers can either refinance into a new, more affordable mortgage, or obtain a modification of their existing loan. Your existing mortgage must have been originated on or before January 1, 2009. I’ve tried to briefly summarize the rules below.

How do I qualify for a refinance?
The Home Affordable Refinance program will be available to 4 to 5 million homeowners who have a solid payment history on an existing mortgage owned by Fannie Mae or Freddie Mac. Normally, these borrowers would be unable to refinance because their homes have lost value, pushing their current loan-to-value ratios above 80%. Under the Home Affordable Refinance program, many of them will now be eligible to refinance their loan to take advantage of today’s lower mortgage rates or to refinance an adjustable-rate mortgage into a more stable mortgage, such as a 30-year fixed rate loan.

How do I qualify for a loan modification?
Borrowers who are struggling to stay current on their mortgage payments may be eligible (even if they are not currently behind on payments!) if their income is not sufficient to continue to make their mortgage payments and they are at risk of imminent default. This may be due to several factors, such as a loss of income, a significant increase in expenses, or an interest rate that will reset to an unaffordable level.

In general, you may qualify for a mortgage modification if (a) you occupy your house as your primary residence; (b) your monthly mortgage payment is greater than 31% of your monthly gross income; and (c) your loan is not large enough to exceed current Fannie Mae and Freddie Mac loan limits.

How will my existing loan change?
The modification sequence requires first reducing the interest rate (subject to a rate floor of 2%), then if necessary extending the term or amortization of the loan up to a maximum of 40 years, and then if necessary forbearing principal. Principal forgiveness or a Hope for Homeowners refinancing are acceptable alternatives.

I think I’m eligible! How do I start the process?
Gather up your income documentation (paystub, your most recent income tax return, all mortgage documents, and all information on all debts like car, student, or credit card loans. Then contact your lender or HUD-approved counselor and ask to be considered under the Homeowner Affordability and Stability Plan.

It would seem that a lot more people might be interested in the refinancing aspect of this plan. I don’t qualify for a loan mod, but am certainly above 80% loan-to-value. However, I doubt my rate can get much better. The main obstacle is to find out if you indeed have a Fannie or Freddie loan. I wonder if the closings costs will be subsidized – they mention that appraisals would be waived in some cases.

Filed Under: Real Estate //

MicroPlace Review: Earn a 5% Return and Help Fight Poverty Too?

Posted on March 10, 2009 // 23 Comments

“A billion people around the world work hard every day to lift themselves out of poverty. They don’t want your charity. They want your investment. Invest today, earn a return, provide them with a livelihood.” – Microplace.com homepage.

Sounds pretty good, huh? Microplace is owned by Ebay, and is an SEC-registered broker of microfinance securities to individual investors. Loans are classified by level of poverty, financial return, length of investment, and geographical location. Recently, they got my attention by offering a 2-year loan with a promised interest rate of 5% per year, and a 4-year loan at 6%.

What is microfinance?
Microfinance is the supply of loans, savings, insurance and other basic financial services to low-income households and businesses, usually in areas where people don’t have access to formal banks. Microcredit is the extension of very small loans (microloans) to these poor entrepreneurs. A big name in this arena is the Grameen Foundation.

Tell me more about this 5% return…
Here is the loan listing page, and here is a link to the long 63-page prospectus for these Global Poverty Alleviation Notes (how’s that for an investment title?). I have looked through it, but haven’t digested it all. They are offered by Micro Credit Enterprises (MCE), a 501(c)(3) nonprofit organization. MCE seems to focus on women entrepreneurs, which have made up about 90% of their borrowers. They seem to participate in a variety of countries on 4 continents, from Armenia to Bolivia to Cambodia.

These notes are not a mutual fund, and is not FDIC or SIPC insured. These are unsecured debt obligations, with partial backing of “philanthropic guarantors”. Basically, wealthy individuals and/or groups promise to repay parts of this loan if there are enough defaults. The details are a bit vague, but there seems to be a networked agreement across multiple guarantors. However, risks definitely remain.

The actual interest charged to local microfinance institutions (MFIs) are stated to be from 8-10%. The rates paid by actual individuals are not stated, but can be as high as 30%. But these are often short-term loans to people with no collateral and few alternatives. The historical repayment rate is listed to be 96%.

What about MicroPlace vs. Kiva.org?
Kiva.org also lends small amounts to low-income entrepreneurs in the developing world. However, Kiva currently does not offer interest to lenders since it is a non-profit organization and is not registered with the SEC. Also, it has more of a person-to-person lending structure where you can choose the specific person you wish to lend to. However, I have read that Kiva is trying to offer interest in the near future.

Are you going to invest?
I’ve put some money to “work” at Kiva already, and my personal repayment rate on my completed loans from Kiva has been 98% so far. Given that I am still not very familiar with these investments, I still can’t treat the 5% Microplace note as a reliable investment. However, I am still leaning towards putting a chunk of money into it, because I do think significant principal loss is unlikely, and I want to give them a chance. If it works out, I think microfinance would really take off if there was also a financial benefit to investors.

Filed Under: Giving Back, Investing //

Chart: Historical Stock Market Comebacks After Crashes

Posted on March 9, 2009 // 12 Comments

Here’s another chart to ponder, found as part of an Emergency Physicians Monthly article about investing during recessions. It shows what has happened in the past to the S&P 500 five years after a significant market decline.

Or course, you should also remember that if you experienced a 50% drop, mathematically you’ll need a 100% increase to get back to your original point. But your money invested after and during the drop will have done much better.

From the conclusion of the article:

While it’s tempting to shift your portfolio during economic crises, the noise in the data, the lag time between the beginning of a recession and its announcement, the potential false signals, and the historical market returns during recessions suggest that it’s difficult to time the market successfully. With some historical knowledge, we can sail through future stormy markets a bit easier.

Via EmergDoc at Bogleheads.

Filed Under: Investing //

Summary of California’s Upcoming New Tax Hikes

Posted on March 9, 2009 // 56 Comments

A lot of states are struggling these days, including the Golden State. Even though California already had the top marginal personal income tax rate and highest base sales tax rate in the country, they are getting even higher. According to a legislative study, the following four tax increases will make an average family of four with an annual income of $75,000 pay $963 more a year in taxes. Here’s how it breaks down:

#1 – Sales Tax
Starting April 1st, the base sales tax rate will rise from 7.25% to 8.25%. While this is only one additional penny per dollar, relatively it is a 12% increase in sales taxes. The base rate doesn’t include taxes added by individual cities and counties. For example, the total sales tax rate in San Francisco will now be 9.5%. In some cities it will break 10%.

#2 – State Income Taxes
Personal income taxes would increase across the board by 0.25 percent on taxable income for 2009. The highest bracket is now 10.55%. A single person with more than $47,055 in taxable income will be in a marginal bracket of 9.55%. Remember, this is on top of Federal income taxes.

Examples: This equates to an additional $125 for taxpayers filing jointly with $50,000 in taxable income, $250 for taxpayers filing jointly with $100,000 in taxable income, and $1,250 for taxpayers filing jointly with $500,000 in taxable income.

If California receives $10 billion or more in certain types of assistance from the federal stimulus package, the tax increase would drop by half to 0.125 percent. However, a recent study by the state Department of Finance has found it unlikely that this level will be reached ($2 billion short).

#3 – Annual Vehicle Licensing Fees
These fees will double, to 1.15% of the car’s value each year. On a new car valued at $25,000, the vehicle license fee will be $288. The increased fee is effective on registrations beginning May 19.

#4 – Dependent Tax Credit
This tax credit will be reduced by $210 (for each dependent).

Sources: LA Times, SF Chronicle, Sacramento Bee.

Filed Under: Taxes //

Hilarious: The Daily Show Makes Fun of CNBC

Posted on March 6, 2009 // 40 Comments

Who’s that annoying co-worker a few cubes down who keeps giggling at some stupid video on Friday afternoon? Just go home already, ya jerk! Yeah, that was me, watching this Daily Show clip making fun of financial pr0n channel CNBC.

The first part is about Rick Santelli’s rant about “loser” homeowner bailouts, but the good stuff starts at about 2:45 minutes in. I wonder how many hours they spent compiling these clips!

“If I only followed CNBC’s advice, I would have a million dollars today! …Provided I started with a hundred million dollars.” – Jon Stewart

Filed Under: Funny //

The Permanent Portfolio Asset Allocation: Fail-Safe Investing by Harry Browne

Posted on March 6, 2009 // 36 Comments

Another non-mainstream book that I’ve been reading is Fail-Safe Investing by the late Harry Browne. His conservative investing philosophies appear to have initially been in vogue during the 1980s, a period of high inflation. These days, with stocks earning basically nothing over a decade, it seems to be making a comeback. In the book, he recommends having two portfolios. For money that you will need for things like retirement, you should create a Permanent Portfolio. For money that you won’t need, you can keep a separate Variable Portfolio that you can speculate with.

The Permanent Portfolio
In general, Browne does not believe it is possible to predict the future, and trying to do so is futile. Therefore, he went out to design a Permanent Portfolio that maintains your purchasing power over all time horizons, both long and short, and also independent of future market conditions.

Here are the four asset classes he believes in, which correspond with four possible modes of the market:

The idea is that no matter what is happening, at least one of the four areas will be doing well, and probably well enough to create a positive total return. For example, in extreme inflation both stocks and bonds might be doing bad, but gold will likely be doing great. His proposed asset allocation is simply an even split between them:

From 1970-2003, according to his website, this mix of asset classes has earned about 9.5% annualized, with a lot less volatility than I would have guessed. This is before expenses.

Permanent Portfolio Mutual Fund (PRPFX)
There is also a managed mutual fund that follows this strategy, although not exactly. It is run by the Permanent Portfolio Family of Funds and the ticker symbol is PRPFX.

Very recently it hasn’t been doing as well. The one-year trailing return is -20.60%, while the Vanguard S&P 500 Index fund has a trailing return of -47.50%, and the Vanguard Target Retirement Income fund has a trailing return of -16.90%. But over the last 5 and 10 years, the fund has beaten out most balanced mutual funds of stocks/bonds.

Food For Thought
I’m not advocating this approach by any means, but I found it intriguing for a variety of reasons. First, it still somewhat follows modern portfolio construction techniques by diversifying across multiple asset classes that are not strongly correlated with each other. Most portfolios these days are only split between stocks and bonds. The stocks part may be split many ways (small cap, international, etc.), but with correlations increasing across the board, that hasn’t really helped add much diversification. Maybe we all need more cash and direct inflation protection.

Second, the Permanent Portfolio is still a passive investment style that does not try to predict the future, time movements in and out of the market, or pick the best mutual fund or hedge fund manager. No stock newsletter or trading systems. You just rebalance across the four broad asset classes if they get lopsided.

There are some extreme notes of caution in his writing as well. For example, the gold is recommended to be kept in physical form, and outside of the United States. The idea being that if our dollar (fiat currency) fails, the U.S. government may also be in trouble. Gold and other property might be confiscated. Browne thinks everyone should have a foreign bank account. (My biggest hurdle is buying gold, personally. I’d rather invest in a commodity like oil or even rice than a shiny soft metal.)

More Information
There is some good discussion on this topic in this Bogleheads post, and the Crawling Road blog has several posts exploring this as well.

Filed Under: Investing //

March 2009 Financial Status / Net Worth Update

Posted on March 5, 2009 // 30 Comments
Net Worth Chart 2009

Time for another super-happy-fun net worth update…

Credit Card Debt
For newer readers, don’t worry. In the past, I have been taking money from credit cards at 0% APR and immediately placing it into high-yield savings accounts or similar safe investments that earn 5% interest or more, and keeping the difference as profit. I even put together a series of step-by-step posts on how to make money off of credit cards this way. However, given the current lack of good no fee 0% APR balance transfer offers, I am just waiting to pay off my existing balances.

Retirement and Brokerage accounts
Unless you’ve been completely devoid of human contact for the last few weeks, you know the market is in the dumps. I really don’t have much market commentary to make, besides the fact that I still intend to keep investing. I’ve been trying to cut back on the CNN/CNBC-types of financial news actually and focus more on things I can change, which as a result has helped keep me a bit more optimistic.

Cash Savings and Emergency Funds
Our emergency fund has increased a bit, but this snapshot was taken before we each put $5,000 into our 2008 IRA contribution. So really it remains at about a year of our current expenses.

Home Equity
This is where most of this month’s drop comes from. I used the same internet valuation tools as before – Zillow, Cyberhomes, Coldwell Banker, and Bank of America (old version) – but while most of them continued their gradual decline, the Coldwell Banker estimate dropped by over $140,000 in one month! After taking off 5% to be conservative and 6% for expected real estate agent commissions (11% total), the overall average estimate dropped by $34k. Well look at that, I am nearly “underwater” on my house despite putting 20% down a year ago. Oops.

Filed Under: Goals, Investing, Real Estate, Retirement //

Redbox and DVDPlay Promo Coupon Codes

Posted on March 4, 2009 // 8 Comments

If you aren’t familiar with them, Redbox and DVDPlay are little DVD rental kiosks that only cost $1 per day to rent. Redbox can be found in many McDonald’s, and DVDPlay’s tend to be in Safeway grocery stores. Limited selection, but not bad for some cheap entertainment. Just hope there isn’t a huge line or a broken kiosk when you want to return.

Redbox Free Coupon Codes
Every Wednesday in March, you can visit the Redbox Blog and get a free rental code. The code for March 4th is 75EA16 (tonight!) and is only good that day until Midnight central time. If you sign up for SMS alerts you can also get another free code every Monday.

DVDPlay Discount Coupon
You can get a 75 cent rental with the coupon code WOW75. One use per credit card. Expiration unknown.

Filed Under: Deals & Offers, Frugal Living //

2008/2009 NonDeductible IRA Contribution Decisions

Posted on March 4, 2009 // 20 Comments

With the market in another funk this week, I was reminded that I had until April 15th to make my IRA contributions for 2008. It could get worse before then, or it might bounce up again, I have no predictive powers either way. I don’t like to be wishy-washy, so we went ahead and each invested $5,000 to a non-deductible IRA today.

Background
A nondeductible IRA is the same as a Traditional IRA, except that your income is too high so you can’t deduct the contribution. If you haven’t maxed out all your other options like a deductible Traditional IRA, Roth IRA, 401(k), or 403(b) plan, you should put your money towards those first. This option is mostly for those with no other better options.

Why?
So if you don’t get the tax deduction, what’s the point? The most appealing is that in 2010, unless the law is changed, you can start rolling over your non-deductible IRA into a Roth IRA with no income restrictions. I am starting to like my chances, since we are only ten months away from 2010 (I plan to convert right away) and I’m sure with the current deficit the government would like to collect all the tax revenue it can now instead of later. If it looks good, I’ll probably make my 2009 contribution in December (after making sure we don’t otherwise qualify) and convert that to a Roth too.

The second reason is that the after-tax returns might be higher if you invested in tax-inefficient products like bonds, commodities, or REITs.

Contribution Limits
The contribution limits are $5,000 for both 2008 and 2009. If you are age 50 or older, you can contribute another $1,000 that year.

What Did I Buy?
My portfolio is getting out of whack right now, so I bought what I need to bring it back into my desired asset allocation. I purchased $3,000 of an REIT fund (VGSIX), $2,000 of a US Small Value fund (VISVX), and $5,000 of an Emerging Market fund (VEIEX). We’re still making regular contributions to our 401ks, which contain our US and International “Total Market” funds.

Filed Under: Investing, Retirement //

Simple Prosperity on Enjoying The Present

Posted on March 3, 2009 // 31 Comments

Another quote I like from the book Simple Prosperity:

“The modern mind,” writes Wendell Berry, “longs for the Future as the medieval mind longed for Heaven.” Berry argues that we’ve been conned into believing that the present is something we need to escape because it’s just not good enough. We can’t be here now because we don’t yet have enough money, enough gadgets, or a large enough house. We’re not yet powerful enough or “happy” enough to live in the present. The truth is, if we’re satisfied with what we have in the present, we’re less likely to be obedient consumers, so the supply-side of the economy has invested trillions to engineer dissatisfaction into our shell-shocked psyches. Leisure, love, and laughter can be best had in the future, we begin to believe, but we can’t put our fingers on where that disturbing idea came from.

Am I satisfied with the present? No, because I still have to wake up and work every day. 🙂 But I also make it a point to do activities that I love every day as well so I’m not just looking forward all the time. I’m still working on goals, but now a big part of that is figuring out what is “enough”.

Filed Under: Goals //
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