Leverage in a Global Economy

Posted by T.W. Hanson - Apr 2nd, 2008 at 20:04

 earth

The New York Times devoted an entire section of today’s paper to living in a leveraged world.  The potential problems of this reality are small compared to global climate change, but they are much larger than the current U.S. housing crisis.

This is a must read for vicenarians interested in how money, markets and the global economy functions.

Leveraged Planet

A Market Bubble Collapses: The Slow Motion Train Wreck Version

Posted by T.W. Hanson - Mar 16th, 2008 at 20:03

train wreck

Vicenarians don’t have much practical experience with the troughs in the business cycle. There was the savings and loan crisis in the late 80s and early 90s, but many of us were learning how to read during those years. The Internet/.com bubble collapse of 2000 is our primary frame of reference for distressful economic times. This crisis is appears very different. Although characteristics like increased unemployment seem to reappear each cycle, there are rarely perfect parallels from one downturn to another. One of the macro differences is the speed. The rate at which this credit markets are contracting is much slower than the rapid implosion of the Internet companies in 2000.

Unlike in 2000, today’s irrationally overvalued assets are homes and properties.  Prices for these assets are sticky.  Most are unique and take weeks, months or years to sell.  One result of this is that the securities tied to the value of these properties have fallen at a similarly and painfully slow pace.  Write downs of assets on bank balance sheets haven’t occurred all at one but have been stretched from quarter to quarter to quarter.  This is forecast by some to continue for quarters to come.

bubbleDuring the Internet bubble, company values were wiped out overnight.  Equity values disappeared, companies shut down, people and families felt pain and the economy took a hit.  However, it was over in a relatively short period of time.

The industry this is hitting the hardest is slowing down the bleeding even more.  The financial institutions provide and source the capital for all other industries.  Each day they are operating in a weakened state, other businesses and individuals aren’t getting the financings or financing terms that a fully functioning free market would provide.

When will the market recover and economic expansion resume?  When the financial sector reaches a catharsis resulting from both the final write down and the replenishment of tangible assets on their balance sheets.  Don’t hold your breath.

RealSimple : retirement

Posted by Tad Johnson - Feb 15th, 2008 at 20:02

I stumbled upon RealSimple.com and found some nice financial articles geared towards the vicenarian. Here’s #4 (of 6):

“I don’t know how much to save for retirement!”

http://www.realsimple.com/realsimple/gallery/0,21863,1710778-4,00.html

Your Biggest Money Worries, Solved | Life Soul | 4 : RealSimple.com via kwout

Vicenarian Stock Picking

Posted by T.W. Hanson - Feb 14th, 2008 at 19:02

Darts

You have just purchased what you believe is a great product (an iPhone, a pair of Crox, a Jamba Juice smoothie, etc.).  For your own sanity’s sake, I hope the first thought that enters your mind isn’t about the owning a portion of the company that makes this product.  However, it is possible to buy shares of Apple, Crox and Jamba Juice, and you may entertain thoughts of owning these companies.  Should you buy them?  By concluding that a company has a good product, you only have half of the investing picture and may as well be throwing darts at lists of companies in the business section of your paper.

Many vicenarians and virgin investors will pick stocks using affinity toward a product as a primary means of investing analysis.  This strategy is flawed because it omits considering the value at which you are buying a part of the company.  If that value is too high, you may be buying into a great company with great products that is worth less in 10 years than it is now.  For example, Nortel Networks is a solid company with a $5 billion market cap.  Adjusted for spits, its stock traded at levels 0ver $600/share in 2000.  It closed today at $11.43/share.  Another parallel example is with automobiles.  A BMW is a good product, but no one I know would pay $6,000,0000 for a new 7 series.

Similar logic should be applied when looking at buying stakes in companies.  The company’s products must be something you believe in, and the value of your portion of the company needs to be appropriate.

Zecco + ETFs = No minimum Roth IRA

Posted by Tad Johnson - Feb 10th, 2008 at 14:02

I’ve heard a few comments from friends and readers of this site that most of the big banks require too high of account minimums for mutual funds in a Roth IRA account. Fidelity requires a minimum of $10,000; Vanguard’s is $2,500. This is a problem for the vicenarian investor with $500 to $1000.

Solution : Zecco.com + ETFs

http://www.zecco.com/default.aspx

Zecco.com - Free Stock Trading & Investment Community via kwout

Zecco.com offers free stock trades (10 per month) for accounts with $2500 or more, and very reasonable $4.95 trades for accounts with at least $1. By way of comparison, Scottrade charges $7, E*Trade $12.99 and Fidelity $19.95. Zecco offers regular and retirement accounts, including the Roth IRA.

ETFs (Exchange Traded Funds) work like a mutual fund but trade like a stock. So instead of enforcing account minimums, you can buy any number of shares at any time. You buy ETFs through a broker (such as Zecco) and you’re charged a trading fee on the buy and sell (unless you’re using Zecco and you have $2500 in your account).

There are hundreds of ETFs available in every imaginable market sector. For the vicenarian investor, I think it’s wise to use market index funds for your core retirement accounts. Vanguard (known for low cost funds) offers a total stock market index (ticker VTI) that charges a mere 0.07% expense ratio.

If you’re looking to start a Roth IRA and don’t meet the account minimums for the big banks, consider using a service like Zecco. You can always transfer your account to one of the big banks in the future, so this can be a great way to get started.

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