Portfolio - "Update"

I've added a position in Genuine Parts Corp. (GPC) to my stock prtfoilio. It is a solid auto parts company with little debt and a good dividend, along with a history of raising the dividend annually. I've also added some 2028 US Treasury (TIPS) bonds as added protection against future inflation. Stocks represent about 15% of my investment portfolio.

Listed in order of largest to smallest holdings:

KMB (Kimberly Clark)
PEP (Pepsico)
PG (Procter & Gamble)
MMM (3M Corp)
ADP (Automatic Data Processing)
SYY (Sysco)
KFT (Kraft)
KO (Coca Cola)
BMY (Bristol Myers Squibb)
GPC (Genuine Parts)

My major asset remain CDs. I don't own a home, though I do think that is OK, as long as one doesn't go into much debt to do so. I have no debt at all, and never want any, though I do think some is OK for a home, especially in the areas which were first to collapse during this Housing decline. I also own US Treasuries, about 7% of my assets. Right now I own inflation protected ones (TIPS). The three I hold are...

2015's
2013's
2028's

I like them because they protect both against deflation and moderately against inflation. I also own some gold (coins), but it is only about 3% of my assets and use a safe deposit box to store it. Gold does not qualify as an investment, but I do think it is warranted as a small insurance policy on US currency.

My Review of "Too Good to be True"

Although the book doesn't really offer anything new about financial scams that isn't already covered in 1852's "Extraordinary Popular Delusions and the Madness of Crowds," since this one was the biggest ever and happened so recently, it is worth understanding it closer and this is a pretty good book for that. Some points worth remembering from the book are:

1. Bernie Madoff and his brother Peter had become famous in the 70's-80's for starting electronic trading by taking over the Cincinnati stock exchange, converting it to electronic trading and competing with the NYSE and ASE. Built reputation for quick turnarounds on trades. Plus, regulators knew Bernie because he sat on committees to advise the SEC. Popularized payments for order flow, so he made extra bucks for diverting trades from other exchanges. Was sought after at elite clubs and by money managers because he promised and delivered 10-12%, as long as customers didn't ask too many questions.

2. Madoff graduated Hofstra College in 1960 with a BA in political science, but wanted people to think he also had a law degree, which he didn't, but his brother, Peter, did.

3. Customers were his best sales force because he would frequently pay commissions for referrals. Alpern and Heller accounting firm, later run by Avellino and Bienes, passed along a lot of referrals. Alpern was his father-in-law. Family would play a big part with Madoff - lots of nepotism. First really big customer was Carl Shapiro, wealthy from the garment industry. Cohn and Delaire partnered with Madoff to form Cohmad and fed lots of funds to Madoff. Jaffe ran Boston's Cohmad office and fed lots of funds. Fairfield Greenwich Group in mid 90's was a big feeder after the SEC shut down Avellino and Bienes. Madoff worked closely with Chase Bank from 1992 and with Bear Stearns after JPMorgan took over Bear Stearns.

4. Secretly built his advisory business separate from his legitimate trading operation. DiPascali was the actual operations boss. Later called it a hedge fund because of the popularity of them. Repeal of Glass-Steagall in 1999 led to banks getting involved with hedge funds. Plus, securitization of debt led to more and more money available for investment for all hedge funds and Madoff. Never registered as an investment advisor so always illegal. The business grew because he promised what he delivered, and commissions, paid employees well. Everyone was happy, therefore attracted lots of investors and portfolio managers. Even if some questioned whether it was all legit, everybody was happy and no one wanted to dig deeper - sort of a shared greed. Also, Madoff just charged commissions, not heavy fees like hedge funds did, so, again everyone was happy. And, predictably consistent good returns caused no customers to be nervous. Love of hedge funds so great, Vikrim Pandit had run one and Citicorp bought it and paid Pandit a lot and made him CEO, but hedge fund ran into problems and Citi shut it down. Hedge funds had shown they weren't successful in bear markets - preservation of capital absent with them.

5. In 2005, decimalization was introduced for stock trades which put a squeeze of Madoff's legal trading business - less profits to funnel into his advisory business to cover periodic losses.

6. Plus, Madoff built in an aura of exclusivity, having a reputation that he didn't need customers. Hence attracted Swiss and European clients, even nobility. Bank Medici a big feeder through Sonja Kohn, which no longer exists and she is in hiding.

7. Collapse of stock market in 2008 signaled the end for Madoff's Ponzi scheme because his customers were squeezed for cash and wanted massive redemptions from him.

8. Harry Markopolos, working at Rampart in 1999 raised questions because Rampart used the split-strike strategy the same as Madoff claimed to use, but Markopolos said no way Madoff could have achieved such consistent returns unless crooked. The SEC was understaffed, plus tied to the industry it regulates. Plus, mostly staffed with lawyers who weren't even trained to understand Bloomberg terminals. Plus, Chairman Cox was terrible, part of Newt Gingrich's Contract with America to limit lawsuits against financial institutions accused of fraud. Gary Aguirre fired by SEC for going after a hedge fund. Plus, Madoff's daughter, Shana, married an SEC guy.

9. Madoff cared not only about profits but status at elite clubs, etc.

So, to sum it up, greed by everyone based on a trust in a guy known as Uncle Bernie who promised good returns and delivered consistently and rewarded everyone connected with him and his operations. "Too Good to be True" is a perfect title for this Ponzi scheme.

4 out of 5 stars.

Portfolio - "Update"

Other than adding to positions in SYY and ADP because of favorable price points, and renewing maturing CDs, I have kept my portfolio intact. That approach is consistent with my overall approach of essentially having a permanent portfolio subject to managing it. Stocks represent about 14% of my investment portfolio.

Listed in order of largest to smallest holdings:

KMB (Kimberly Clark)
PEP (Pepsico)
MMM (3M Corp)
PG (Procter & Gamble)
SYY (Sysco)
ADP (Automatic Data Processing)
KFT (Kraft)
BMY (Bristol Myers Squibb)
KO (Coca Cola)

My major asset remain CDs. I don't own a home, though I do think that is OK, as long as one doesn't go into much debt to do so. I have no debt at all, and never want any, though I do think some is OK for a home, especially in the areas which were first to collapse during this Housing decline. I also own US Treasuries, about 7% of my assets. Right now I own inflation protected ones (TIPS). The two I hold are...
2015's
2013's
I like them because they protect both against deflation and moderately against inflation. I also own some gold (coins), but it is only about 3% of my assets and use a safe deposit box to store it. Gold does not qualify as an investment, but I do think it is warranted as a small insurance policy on US currency.

My review of "Nudge"

"Nudge", a behavioral economics book, is very good at giving a reader perhaps a peak into President Obama's mind as he attempts to tackle some pretty big issues like healthcare, the environment, education and the financial urgencies of Medicare and Social Security. In his first few months in office, he does seem to be trying to win the support of political moderates just as this book presents such a case with its concept of "libertarian paternalism". The concept presents a case for giving people many choices while at the same time trying to have them lean toward directions which would likely be in their best interests. Some points from the book which caught my attention are:

1. Small details can have major impacts on people's behavior.

2. A "nudge" is an aspect of choice architecture which alters human behavior in a predictable way without forbidding any options or changing their economic incentives.

3. Never underestimate the power of inertia. The power can be harnessed by default options, for example. 'Econs' are people who respond to economic incentives. 'Humans' are people who respond to incentives AND nudges. Therefore, incentives and nudges help everyone.

4. It is false to assume almost everyone all the time makes choices in their best interest.

5. There are two kinds of thinking: intuitive/automatic (the oldest, like with voters and teenage drivers) and reflective/rational.

6. The book goes into rules of thumb like 'anchoring', 'availabilty' and 'representativeness' which affect how people make decisions.

7. Optimism/overconfidence and loss aversion affect decisions.

8. Temptation/dynamic-inconsistency can be handled.

9. 'Following the herd' must be managed.

10. 'The spotlight effect' - people unnecessarily tend to think others are watching them. So, investment clubs with conformists tend to do poorly, for instance.

11. The golden rule of 'nudges' is when they are most likely to help and least likely to cause harm.

12. Expect errors - humans are prone to making errors.

13. If Social Security is changed to allow investment choices, well thought-out defaults would be good. Medicare Part D is too cumbersome the way it is now, with about 2/3 making the wrong choices.

14. Asymmetric paternalism - help the least sophisicated while imposing the least on the most sophisticated.

The book also goes into over thirty nudges on various issues. Overall, the book is timely in giving a reader a clue into how some major issues facing the government might be handled, in order to have the best chance of progressing and working. 4 out of 5 stars.

Comment on The Economy - "The Window", update

It now looks like the "Window" which had opened where it was OK for the US to issue more Treasury debt (see previous comments), is beginning to close, pursuant to the recent S&P cutting UK's debt rating outlook to negative. This has created a worry in the markets for a weakness on US currency and US Treasury debt. This is a signal that although the markets are still OK for US currency and debt as Moody's just reaffirmed its AAA rating for US debt, they could turn on a dime if market psychology turns from currently 'nervous' to 'panic'.

So, although it is still technically OK for the US to issue more debt or print dollars, since unemployment still appears to be worsening, especially with California voters rejecting 5 of the 6 budget propositions, and asset values (stock market, housing, etc) still depressed, it has to be careful since the dollar and debt markets have become decidedly nervous.

Probably the reason that the recent nervousness hasn't turned immediately into panic mode is because the recent stimulus measures by the Fed and Administration/Congress have actually been successful in stabilizing the banking system, stock market and also other depreciating markets like housing and commodities. Though, it is important to watch oil, as it has nearly doubled to the low 60s and gold is near its high.

Portfolio - How to become a "Private Investor".

Calling oneself a private investor is when one earns one's money entirely by managing their portfolio of investments.

There are many ways to become one, like by winning a lottery then quitting one's job then investing the money, or likewise through inheritance or another way by essentially starting with enough money. However, I'll cover the approach which is possible for basically the average person. These are steps which can work. Obviously, it could be possible to skip some of the earlier steps, depending on an individual's circumstances and how one might have altered their life's goals over the years.

1. Start with a goal of wanting to be a private investor. Perhaps, like from childhood, wanting to reach an early stage in one's life where they no longer want to either be an employee or be self-employed which requires running day-to-day actual operations in a business. Another way to look at it, is by owning assets where other people do the "work", per se. This is not much different from owning a business, just one step removed. In fact, Warren Buffett essentially has done that, by buying entire companies, then using the cash flow from those companies to buy other investments -like shares of stock in major companies plus holding other securities. In this case, though, I would envision a child expecting to work at a normal job, but using the cash flow to build up savings and investments in order to no longer need the job. Plus, it is an advantage to have one's job(s), and education leading up to it, serve to prepare a person for such a vocation, I'd say being well-versed on lots of things.

2. Learn that it isn't how much you earn, but how much you spend and save from what you earn, that is important. I have noticed that there basically are two kinds of people, those who never save no matter how much they earn and those who save no matter how little they earn. Sure, there may be a middle road, but rarely. It is a mindset. Obviously, it is the latter mindset which is necessary to become a private investor from humble beginnings, and the sooner one can embrace that mindset the better. What goes along with that is to learn that it really is possible to enjoy life to its fullest, really very simply - public parks, home cooking, using coupons, etc, etc. In fact, it can become a pleasant challenge, in learning how to navigate such a lifestyle.

3. Start early in saving and investing, and reading about investing. Even if you just have just one FDIC-insured CD and one stock, you begin to build up a knowledge of investing. Knowledge and experience are the keys. Let's say one begins as a teenager, by the time the person is in their 30's or 40's, one has maybe 20-25 years of experience and accumulated knowledge. So, targeting perhaps the mid-40's to be in a position to become a full-fledged private investor is certainly reasonable.

4. Then, just follow my post, Portfolio -"Investing Approach". It really isn't very difficult, just requires a mindset and a desire to learn.

Also, it should be remembered that if one has embraced the mindset of being able to enjoy life to its fullest while living inexpensively, one's portfolio need not be extraordinarily large. I do have a blog, "Joseph Oppenheim Philosophy" which does look at some thoughts which might be of help to potential private investors.

Portfolio - "Investing Approach"

My general approach to investing is:

1. Stocks - I want to think of myself as a businessman, that is, only owning stocks of companies I would like to own completely if I could. As such, I would only want to own a business which offers products or services which will always be in demand in good times or bad. Plus, the products or services are top quality ones and the company is recognized as a great one in its industry. Plus, the company must have a sterling balance sheet, preferably with little or no debt. And, like any business I might own, it must regularly return a good income to me by way of a good dividend which ideally the company regularly raises annually. Hence, one is protected, to a degree, against both deflation and inflation. Obviously, the stock would also offer a reasonable chance of capital appreciation, by way of having a business which offers reasonable growth prospects.

Also, key to stock holdings, are that they must be managed, often adding or subtracting to/from positions as situations merit. Plus, although the goal is to hold a stock forever, as one would a business, a serious adverse situation which faces a company could warrant closing out the position in the stock.

As for speculation, the only way I think it is OK is to buy more of a stock I already own or want to own long-term, thinking it might move up for a short term gain, however since it is a stock I already want to own, worst case is that in case it doesn't go up right away, I just have added to my position at what I think is a cheap price. So, essentially it is a win-win kind of bet, especially as I always recommend keeping some cash in reserve - never being in a situation where I am overloaded with stocks. It should always be remembered that deep and prolonged bear markets are always possible, so stocks by their nature do carry risk. However, one other benefit of considering such trades, is that it keeps the investor more current on stock and market situations, thereby keeping one more informed. Staying informed is key.

Plus, I only want to own companies which I think are in moral businesses. Not tobacco, etc. By doing so, I get some additional feelings of satisfaction. Since there are thousands of stocks from which to pick, I don't see that as a disadvantage.

2. Bonds - I only want US Treasury bonds, notes or bills, the safest of safe. Among them, I might prefer, regular ones which pay fixed interest rate or inflation-protected ones (TIPs), as the situation presents itself. Also, GNMA collaterized debt obligations are OK as they, too, have the full faith and credit of the US government behind them. Like with stocks, positions must be managed.

3. CDs - I only want FDIC (Banks) or NCUA (Credit Unions) insured CDs. Also, I prefer ones of long term duration, mostly five year terms. I do consider these CDs as investments since there is a long-term component to them. However, I also like that they serve the dual purpose as being used as savings, since I only want CDs which have low or reasonable early withdrawal penalties. Again, some protection against both deflation and inflation, plus are liquid investments.

4. Gold or Silver - Not an investment, but reasonable to have a small amount as an insurance policy on our currency. Gold, preferably coins. Silver, preferably pre-1965 90% silver coins.

5. Homes - although I don't own any, it is fine to own one's home, as long as one treats it as a consumer item with only a limited investment component, plus I don't recommend having a large mortgage on it. If a person doesn't have the means to buy a home for cash or maybe 50% cash, he/she should rent, in my opinion. Owning a home has a lot of other costs associated with it, like maintenance, add-ons, etc which many people forget to include when considering buying their home. But, if one just wants to own a home because of choice of lifestyle, therefore recognize it is mostly a consumer purchase. As for buying investment homes, I recommend as a rental property only, using little, if any debt, and which produces net profits which would equal or beat CD rates. Plus, remember, that rental properties mean either being a landlord or paying for a property manager. Being a landlord is a labor-intensive business, so I really only look at it as favorable if a really good opportunity presents itself. As for having a property manager, either way, one of the real risks with rental properties is having tenants which severely damage the property. Therefore, investment homes may sound great, but they come with lots of hidden costs, extra time, and worry - and they are not liquid, sometimes they require a long time to sell.

Comment on the Economy - "Teabaggers"

What "Teabaggers", those people who wanted to create a spectacle on Income Tax Day, April 15th, because they were outraged at taxpayer money going to the banking system and banks turning the money into profits, don't understand that with such profits, banks pay income taxes back to the American people by way of their elected government.

"Teabaggers" don't understand that with such profits, banks are able to create jobs for the American people, who in turn spend, invest, etc which result in even more jobs which result in more taxes back to the American people by way of their elected government.

Etc, etc...

Plus, such "Teabaggers" will never understand the importance of the concept of fractional reserve banking, in that it is the most effective way to stimulate an economy, because of the multiplier effect. That is, for every dollar which is inserted into the banking system, it results in about ten dollars or so inserted into the economy.

Plus, what such "Teabaggers" also don't understand is that any recent failings of such system can be addressed with improved regulation. Greed and panic are always at odds with capitalism, and regulation will always be in need of adjustment.

Plus, even with the recent failing, it still created the greatest economic boom in the history of the planet - record low unemployment and reduction of poverty from about 12% to 9% in the 90's in the US while also fostering a lifting of about 300,000,000 Chinese out of poverty, fostering a massive global boom even helped by the dot.com/communications bubble collapse which allowed India to buy up a communications/broadband infrastructure and make them a big player in the world economy - creating even more jobs, etc.

It's called investment!

Comment on the Economy - "Competitive Devaluation"

What is happening is a competitive currency devaluation, industrial countries trying to get an advantage over other industrial countries, by having weaker currencies so as to make their exports sell better and create/keep jobs. These countries are in effect trying desperately to export their own deflation to other countries. The greatest risk globally is an all-out massive deflationary economic collapse.

Luckily, at least for now, for the US, is that the world needs us to lead the global economy out of this mess, since we are the largest and most massive creator of demand for other countries exports. The rest of the world needs us, even developing/emerging countries which have commodity-based economies. Sure, a big risk is eventual high inflation for the US. However, fighting deflation is of utmost importance now - if we can't stop that - worse things will happen.

On the bright side - we have had modest success so far, and there is a real chance that we can head off the bad inflation as long as we do start generating jobs while at the same time restructuring our economy regarding energy, health care, science. and education, and set a plan for reducing deficit/debt. But, for now, trillions of US money/debt has been destroyed -asset prices - sure asset values aren't included in M1. M2, etc - but it is still money, albeit potential money, but nevertheless it takes away any near term risk of severe inflation. It is deflation which is the biggest risk.

There is nothing wrong with a fiat currency as long as a country has valid assets, albeit indirect ones, backing it - like a healthy and educated workforce, great universities, a solid physical infrastructure, and other assets which make it a desirable country to live, visit, invest, etc.

It's a big challenge, but so far indicators show some good signs. And, anyone who understands behavioral economics, understands that public support is critical in calming financial markets and generating investment. And, right now, it is clear there is general public support, the people, in the US and around the world. The only real exceptions are the extremists, both on the Left and the Right, but so far moderates are in charge and they represent the real solid majority.

By the way, the stock market is officially in a new bull market - having risen over 20% from its lows. Sure, there is no guarantee how long it will last - it could end next week, and surely is due for a correction, but it is an important leading indicator. Financial markets key off of such things.

Portfolio - "Update"

I've altered my stock positions slightly, by adding a small position in SYY (Sysco). It is the top distributor to the food service industry, has a top-notch balance sheet with little debt, and a good dividend which it raises annually. Good dividend-paying stocks have greater value at this time since interest rates have been so low that CD and US Treasury rates are generally less than those for top-notch dividend-paying stocks. Listed in order of largest to smallest holdings.

• KMB (Kimberly Clark)
• PEP (Pepsico)
• PG (Procter & Gamble)
• MMM (3M Corp)
• KO (Coca Cola)
• KFT (Kraft)
• BMY (Bristol Myers Squibb)
• ADP (Automatic Data Processing)
• SYY (Sysco)

My major asset remain CDs. I don't own a home, though I do think that is OK, as long as one doesn't go into much debt to do so. I have no debt at all, and never want any, though I do think some is OK for a home, especially in the areas which were first to collapse during this Housing decline. I also own US Treasuries, about 7% of my assets. Right now I own inflation protected ones (TIPS). The two I hold are...

• 2015's
• 2013's

I like them because they protect both against deflation and moderately against inflation. I also own some gold (coins), but it is only about 3% of my assets and use a safe deposit box to store it. Gold does not qualify as an investment, but I do think it is warranted as a small insurance policy on US currency.

Comment on the Economy - "The Fortune Tellers"

Financial bubbles are very similar to other manias like those involving witches, the Crusades, etc, well-documented in the 1852 classic, 'Extraordinary Popular Delusions and the Madness of Crowds' . We, humans, are prone to all kinds of manias, plus, I think America has been especially prone to manias like with celebrities, the dot.com bubble, Harry Potter Books, Ipods, holiday shopping sales where crowds run over other shoppers, excessive debt, etc, etc. I found it particularly interesting that the book went into a mania involving fortune tellers.

So, Sharon Begley's recent article in Newsweek made me think that guys like Nouriel Roubini, Peter Schiff, etc - were nothing more than a current form of 'fortune tellers' and how a mania-predisposed society, like ours, especially during times of extreme uncertainty, just comes up with another mania - looking to people who are certain about what lies ahead - a current incarnation of fortune tellers - just because they might have made one great prediction is certainly no indication that they might make another - but it is their 'certainty' about the future which is the really dangerous thing about them and which mania-predisposed people are most likely to exhalt.

Bertrand Russell once wrote something like 'the problem with the world is that fools are certain and the intelligent are full of doubt'.

So, I think it wise to be extra wary of financial pundits who are so certain about what will happen with this financial mess. It would be safer to place a heavier weight on analysts who have more nuanced expectations, maybe even ones who suggest percentages about various things which might happen - like 15% chance of Depression, 50% chance of severe recession, and ranges like unemployment peaking between 15%-20% lasting 2-3 years, for example. Plus, a good analyst would be likely to also mention the positive things happening, especially since some positive things are indeed happening now, which would caution against relying too much on pundits with only worst-case scenarios.

Comment on the Economy - "The Fed's Bold Move"

Yesterday, the Fed made a pretty big move. It announced an additional $1.15 trillion of stimulus, saying it would buy up to $300 billion of longer-dated Treasury securities, and $850 billion more of mortgage agency debt and mortgage-backed securities than previously planned.

The way I sum it up is:

1. The Fed was basically doing an "end-around" to the obstructionists in Congress who caused the government's stimulus package to be watered down so as to not have enough spending to reduce unemployment fast enough, specifically in the area which was the worst hit - housing. The Fed wants to speed up bank lending - both by buying mortgage-backed assets and hoping to lower interest rates.

The Fed wants to take a deflationary depression off the table.

2. However, in the process, the Fed significantly risks inflation, a weakening dollar, rising commodity costs and long-term interest rates rising significantly.

3. Let's take a worst case scenario resulting from this move, with #2 spiking significantly. In that case, the Fed could back off from the program and return to having the government issuing debt rather than the Fed monetizing debt, and raising interest rates slightly to choke off any building inflation. This would mark the Fed's move a failure and while some damage would have been caused, but likely the damage could still be mitigated.

4. Now, for the potential good. As long as #2's risks were just moderate for a reasonable length of time, that could really help things. a) Some inflation is actually good b) a moderately weakened dollar is also good - both to spur exports and help other economies around the world b) rising commodity costs will certainly help many of the emerging and developing nations' economies where many are resource-based. This mess is global and we need other nations to also recover, in order to help us.

5. Since this is such a bold move, we need to wait awhile before being too quick to judge the move, at least a week - maybe up to a month, to see how the financial markets react. So, I'll wait awhile.

6. A few comments - a) The Fed is basically creating disincentives to saving - with a lot of incentives for people to spend and borrow. b) As for stocks, it has been said "not to fight the Fed", and the Fed is basically saying buy stocks. So, buying some stocks is reasonable, especially ones which pay dividends higher than CD or Treasury rates, while also keeping some money in reserve in case the market goes lower. Also, having some gold and inflation-protected Treasuries (TIPs) is reasonable.

7. Again, a bold move, and really too soon to judge it.

Comment on the Economy - "The Follow-Through"

First, the "Window" opened up (commodity prices collapsing and mass asset destruction which essentially removed tons of potential money which meant inflation was not an immediate threat and there was a worldwide demand for US Treasury debt) - evident 1/19.

Second, "Some Interesting Things" happened (bottoms forming in the first economic areas to turn down - US housing - most importantly in San Diego where the boom/bust first started, the US stock market, and commodities) - evident 3/4.

Third, now we have the "Follow-Through", with the stock market further confirming some sort of bottom actually happening in concert with some solid economic indicators. Some of the indicators are 1) Citicorp actually showing some reason for hope in the financial sector even if Citicorp isn't safe yet as they still will have large writeoffs in about a month. But, it does show that Fed actions and TARP have had some positive effects - a favorable yield curve plus LIBOR rates now reasonable - so well-run banks will surely be doing pretty well. Plus, recent buyouts of Wyeth by Pfizer, Schering-Plough by Merck and a pending completion of the Roche takeover of Genentech - indicate several things -money is available, investment banking has awakened, plus as our healthcare system begins to change, healthcare companies are beginning their adjustment by eliminating costly duplications, building synergies, etc.

Sure, this mess will still get worse as unemployment is still rising, commercial RE has much further to fall, same with credit card debt, likely some Eastern European nation will collapse and some Latin American country - maybe Mexico, plus some major geopolitcal event(s) will likely happen. But, the important thing is there are some positive indicators where this mess first hit. Sure, likely this is just a bounce in the stock market and further lows could be hit, but some stabilizing is happening for some fundamental reasons.

Comment on the Economy - "Some Interesting Things"

Though this mess has further to go on the down side, some very interesting positive things are happening.

In any economic downturn it is wise to look at the areas which were first to collapse, and watch for indicators of bottoming there. Plus, with all of the government stimulus, flooding markets with capital, there is bound to eventually be some general upturn, its duration all dependent on how long this "window" remains open where there is a global need for US government debt and how solid such a recovery turns out to be - actually putting people back to work, spending and returning tax revenues to the government, etc - a combination of short term and long term measures reinforcing each other - and inflation doesn't get too bad - some is OK, even healthy.

Since the US was the first nation to begin this collapse, since housing was the first section of the US economy to collapse, and since San Diego was perhaps the first US housing market to top out and begin the collapse, it is wise to look at these areas closely, bottom up.

So, I notice San Diego median housing seems to be bouncing around, up a little one week, down a little another, looking for a bottom.Plus, when I look at other US housing markets (I watch HousingTracker.net) and I see many cities up during the last month or so. Probably foreclosures are tempting a lot of buyers, so some kind of bottom is opening. Plus, anecdotally, I see around the LA area, many Chinese investors are coming in to buy homes because they are so reasonable for them. Plus, I see in San Francisco, median home prices are up about 7% in the last month. I see San Francisco being a beneficiary of the administration's goals in restructuring the economy, rewarding science, new technology, education (many good to excellent colleges and universities which will benefit, there, etc).

Plus, commodities have been bottoming. Stocks are at a critical point, but it is too soon to say they aren't looking for a bottom rather than making a further sharp spike down - which is still possible.

I don't want to say the coast is clear, plus some major unforseen event(s) could happen, geopolitically or whatever. Heck, we just had a close call from some asteroid plowing almost head on to the planet.

Plus, the world is looking to the US for leadership and this new administration does have a solid popularity during its first two months, along with a vision, all taken together seems to be supported by most Americans and most world leaders and populations. Sentiment is important at turning points in financial markets. Simply, that is the way they work, on human emotion - at critical points.

Update - Stocks, etc

I've altered my stock positions slightly, by removing AEE (Ameren). AEE, like most utilities paying good dividends, are loaded with debt, so I think their dividends are too risky and will be under pressure to be cut. I've also added a small position in ADP (Automatic Data Processing). ADP, a solid company, has little debt and raises its dividend annually. Listed in order of largest to smallest holdings.

• KMB (Kimberly Clark)
  
• PEP (Pepsico)
  
• PG (Procter & Gamble)
  
• MMM (3M Corp)
  
• KO (Coca Cola)
  
• KFT (Kraft)
  
• BMY (Bristol Myers Squibb)
• ADP (Automatic Data Processing)

My major asset are CDs. I don't own a home, though I do think that is OK, as long as one doesn't go into much debt to do so. I have no debt at all, and never want any, though I do think some is OK for a home.

I also own US Treasuries, about 7% of my assets. Right now I own inflation protected ones (TIPS). The two I hold are...

• 2015's
  
• 2013's

I like them because they protect both against deflation and moderately against inflation (yielding about 3% annually for the 2015's, more if inflation picks up).

I also own some gold (coins), but it is only about 3% of my assets and use a safe deposit box to store it. Gold does not qualify as an investment, but I do think it is warranted as a small insurance policy on US currency.

Comment on the Economy - "2004"

If you want one year, more critical than most, where deregulation went amuck, it was 2004, when Henry Paulson, then CEO of Goldman was the main pusher, with the SEC approving, regulations were eased allowing non-bank financial institutions to use leverage above 15:1 to as much as 30:1 or so. So, then these megabanks moved much of their lending to the investment divisions of their banks to issue less capitalized loans.

There are more details which made these banks undercapitalized even more, like being allowed to use their cash (or even borrow) to buy back stock, reducing their capitalization, etc. Mark to market is another factor, though that part I think is necessary, but in this perfect storm it may need to be adjusted.

And, letting Paulson dole out TARP funds, when he was a key guy behind this whole mess, was just asking for trouble.

Nationalization may be the only option, because TARP money has been used to get preferred stock of the banks in exchange. All that effected was to essentially increase the banks' debt load. We probably should have been getting equity in exchange for the TARP funds, not preferred stock. So, nationalization, temporarily, at least gives taxpayers equity which sometime will be worth more, when the banks are turned private, likely smaller and with a better regulatory environment.

Comment on The Economy - "The Window", update

1) When did the window open, the window being a time when assets (hence a form of money supply) depreciated to the point where the government actually should increase the money supply and/or debt to stimulate the economy, without risking serious currency weakness or serious inflation?

2) How long will the window be open?

Housing began to depreciate the beginning of 2006, unemployment began increasing in the beginning of 2007, the Dow started its decline in the middle/toward the end of 2007, and finally oil/commodities in the middle of 2008.

So, I calculate the approximate time when the window opened being the middle of 2008.

I would look for the first sign of the window closing being when unemployment starts decreasing. At that point housing prices probably would have stopped going down and begun increasing.

Obviously, there could be some unexpected event or series of events, particularly of a geo-political nature, which closes the window, but there is a window and it has been open for about half a year.

The bottom line is the window opened around the middle of 2008 and shows no immediate risk of closing, at least for a few more months, but likely longer.

Also, I would add that if it is a choice between the government increasing the money supply (by buying Treasury bonds, notes, etc - monetizing our debt or just printing money) versus issuing more Treasuries, there is such a global demand for Treasuries which has driven yields down so much that the US should be issuing debt rather than buying back debt. So, with this "window", right now, the global markets want US debt to flow through it.

Comment on the Economy - "The Window"

As this economic downturn continues, I think it is worth a comment about the recent, unexpected by most, dramatic drop in oil prices to as low as about $32/barrel, with other commodities also dropping significantly.

Plus, with the dramatic drop in RE prices and stock prices, much money, and debt, has been removed from circulation or debt burden or possible circulation or debt burden, in the near term. So, as the government is essentially printing money by the trllions of dollars in trying to stabilize the financial system, stimulate the economy, etc, we have been granted a "window" to allow the "printing of money and issuing debt" as long as it is wisely used - like for investment in our infrastructure, energy, education, healthcare, etc - things which will eventually return more than they cost plus create jobs as unemployment has been increasing significantly.

The stock market has already had about $7T vanish, and RE probably more if commercial RE is included. So, for now, the expansion of money and debt to the amount of even a few trillion dollars, I just don't see as inflationary or of imminent danger to our currency. Yes, we must also come up with a plan to begin paying down our budget deficits and the large national debt, but for now, we have a "window". Sure, some want to argue that asset values, like stock prices, home prices, etc aren't money because they aren't included in pure monetary statistics like M1, M2, etc, but that simply is not true.

My review of "The Great Depression Ahead"

Harry Dent's "The Great Depression Ahead" offers a lot of well-thought-out scenarios, using studies of cycles. Using them, he was pretty good in his 1993 book in calling for the 1990's economic boom and seeing the beginning of this decline. He might have missed the amplitude of the boom, but his approach does seem to have some value as a guide.

Things in the book, I think worth remembering are:

1. Leaps in science finally apply to economics, with micro-cycles being more probabilistic than macro-cycles which are more deterministic - cause and effect.

2. His S-Curve principle for new products overtaking old ones is helpful. Demographic and technology trends are perhaps the most helpful.

3. Oil/commodity booms tend to follow 30 year cycles. Though, he might not have caught the recent oil/commodity drop, it doesn't invalidate all his thinking.

4. Georege Soros is mentioned as calling 'an end of an era' in foreseeing the bursting of the credit bubble.

5. Demographics and low interest rates led to the housing bubble.

6. Geo-political cycles restrict a stock boom by about 50%.

7. He thinks 2011 will be the worst, with unemployment 12-15%, with the 'depression' lasting until about 2013.

8. Kind of funny, but he tracks potato chip spending, and he documents it peaking when a family head reached about age 42.

9. He sees 2008-2012 as survival-of-the-fittest among businesses, with the strong ones getting stronger.

10. He tracks 5000, 2500, 500, 250, 20, 10, 4, and one year cycles also. Perhaps, this is the book's weak point, since so many intersecting cycles may add too much confusion. But, he does focus on a few main ones, so I guess it could help a reader as things play out.

11. Stocks do better from May 1 - Oct 31. Although others have noticed this, he provides a helpful chart.

12. Estate taxes from dying baby boomers could be an unexpected windfall for stressed state budgets, since never before have we had such a large prosperous generation.

13. Globally, the innovation cycle will continue, if managed well.

14. Errors of LTCM are the same which are affecting the 'quants' in today's hedge fund meltdown. They are a) assuming the future will be like the past, b) assuming large gains/losses are too rare, and c) assuming investment returns are independent variables.

15. Dent mentions the book, 'Black Swan', when thinking just because you don't observe something doesn't mean it can't happen.

16. Stock/financial markets are not casinos. Casinos are closed systems with predictable odds. Markets are worse, because they contain induction errors, where price movements, themselves, affect future ones. Data points are not independent, so can't use standard bell curve distributions. Again, he mentions Soros, his 'reflexivity' concept - prices affecting prices. Volatility increases during phase transitions. Volatility is not a constant. However, the S-Curve can help somewhat.

17. Besides knowns and known unknowns, there are unknown unknowns, like the Russian bond default which caused the LTCM meltdown.

18. Republicans do better during growth and innovation phases, benefiting mostly the wealthy. Democrats handle shakeout and maturity phases better. helping everyday people. Need both.

19. Infrastructure investment is best when labor is freed up, like during economic downturns. The US spends about 2.4% of GDP on infrastructure, Europe - 5%, China - 9%, so we can handle added infrastructure spending during our downturn.

20. World trade during the 30's collapsed 67%. Something to keep in mind. Unlikely it will get that bad this time.

21. Iraq - the good thing is that maybe we learned not to try to be the world's policeman, an expensive thing.

22. The US regenerates its population at a better rate than other mature societies like Japan, Europe and Russia. Not great, but relatively better than a lot.

23. The green revolution could help the economy.

So, this is a good book, which should help a person evaluate what happens from here, in this economic meltdown.

My review of "The Shock Doctrine"

A must-read!, review originally written on April 12, 2008

"The Shock Doctrine", by Naomi Klein, is a must-read for anyone who wants to get a clearer picture about what the US has done in Iraq relating to the 2003 invasion, from an economic perspective. The book begins decades before, from the lens of Milton Friedman and his advocates' approach to laissez faire, free-trade corporatist economics and government's role in making it happen.

She does seem to come from a viewpoint as seeing free trade, etc mostly just punishing the less fortunate. It should be noted that Milton Friedman did advocate a negative income tax to replace welfare. So, it is not that he and some of his advocates are either totally misguided or heartless. However, there are indeed excesses by many in powerful positions who really are either misguided or heartless or both.

From tsunamis to Hurricane Katrina to changes in government in Chile, the Soviet Union, Argentina, etc and the 'shock and awe' in Iraq, there are people with power who either wait for or effect some cataclysm to panic everyday people to accept what is really not in their best interest and looks to reward the well-connected.

I'll just mention a few things from the book which come to mind and I feel noteworthy:

1. The author uses the term, 'useful crisis', like with the Canadian debt crisis in the 90's, to create a sense of panic to justify potential cuts to social programs. This term is appropriate in generalizing what has happened around the world in different situations.

2. Donald Rumsfeld was a board member of ASEA Brown Boveri, the Swiss firm that sold nuclear technology to North Korea. Interesting!

3. Rumsfeld was Chairman of the Board of Gilead Sciences, maker of Tamiflu, the preferred treatment for bird flu, setting up Gilead to make tons of money as the government which he became a part of, then stockpiled the drug while Americans were warned of a possible mass outbreak of the disease. When Rumsfeld left the government, the value of the Gilead stock he still owned had gone up 807%. Interesting!

4. The 2006 Defense Authorization Act grants the president the power to employ the armed forces, overriding the wishes of state governments during a 'public emergency' which could include hurricane, mass protest or public health situation. Previously, the president could only invoke martial law in case of insurrection.

5. US orchestrated foreign coups seeking to protect corporate favorites, can sometimes try to sell the coup because the country is being alien to Americans simply because it is alien to an American company and thereby trying to undermine the US.

6. Paul Bremer, given the responsibility to remake Iraq, enacted a 15% flat tax and allowed foreign companies to own 100% of the profits in Iraq, not re-invest in Iraq and not be taxed. Plus, 40 year leases for foreign investors so any future Iraqi governments would be stuck with the deals.

7. The author reminds the reader of what the political scientist, Michael Wolf, had to say that conservatives never govern well because they believe that government, itself, is bad. Surely not always true, but it is certainly a thought to keep in mind when evaluating a conservative candidate for office.

8. The White House ignored most of the Iraq Study Group's recommendations except to now allow companies like Shell and BP to get long oil leases and keep most of the profits, effectively keeping millions of Iraqis in perpetual poverty.

This book is well documented with references and definitely a must-read.

My review of "Gangster Capitalism"

A very timely book! Review originally written on November 16, 2008

What makes "Gangster Capitalism" so worthwhile is that it helps in understanding what has led us to the 2007-8 financial meltdown. As the book shows, like during the 1920's, deregulation led the way for powerful companies to allow the very wealthy to get wealthier at the expense of average people by using poor working conditions, low wages, etc, plus at the same time supporting supposedly moral movements (against gambling, alcohol, drugs, etc) which mainly served the purpose of making these trades more profitable to crooks and therefore created rampant gangsterism there. The result was such a society wracked with gangsterism at all levels, but because most people felt they were prospering, few complained. But, then it all collapsed with the 1929 crash and resulting Depression, which led the way for FDR and the New Deal programs which increased regulation of corporations, repeal of Prohibition, etc. Though the Depression lingered until WWII, the New Deal was successful in restructuring our laws and public infrastructure to create a better footing for the prosperity which would follow. The book effectively traces how much of this regulation was reduced piece by piece, beginning in earnest with Nixon, using Cold War fears to tilt the nation toward more corporate power and away from reform, support of right-wing dictators around the world, re-energizing a 'moral crusade' especially by beginning the War on Drugs, thereby making the illegal drug trade super profitable, etc. The nation had shifted Right and even Democratic presidents like Carter who was instrumental in deregulating industry and Clinton who signed into law the repeal of Glass--Steagle weren't able to stop the shift. Then, the 'Gangster Capitalism" went on steroids with G. W. Bush. By 2003, corporate taxes only amounted to 7% of revenues, while payroll taxes amounted to 40%.

Of note, the book makes clear it is opportunity which leads to much crime, so the approach of massive deregulation of corporations, plus focusing on arrests and imprisonment for victimless crimes ends up with the wrong results, more entrenched crime, even allowing corporations to capitalize on a prison industry. The book is also good at highlighting how corporations and outright gangsters were able to corrupt legal drugs (price-fixing), tobacco, asbestos, body parts, autos (Pintos), etc. Some other things in the book, of note: Hamid Karzai included drug traffickers in his Afghan administration. And, our support of Suharto (Indonesia), Mobuto (the Congo), and Marcos (the Philippines) allowed 'looting' of these countries. A corrupt financial infrastructure included the BCCI bank and offshore banking to evade taxes also developed. Plus, laundering money from illegal arms sales, drugs, and so many other illegal activities passed through our financial system.

The book is definitely tilted toward a liberal way of looking at things, therefore it doesn't go into the good things about capitalism, but there are disturbing patterns which are important to understand, and this book does that very well.

My review of "Extraordinary Popular Delusions and the Madness of Crowds"

A classic, well worth reading! Review originally written on November 22, 2008.....

For a long time, I have wanted to read this 1852 classic, "Extraordinary Popular Delusions and the Madness of Crowds", by Charles MacKay, but why I decided to do so recently, was because I was hoping to get some insights into understanding our recent Housing bubble and 2007-8 financial meltdown. I am glad I read it, because I did indeed come away with some 'extraordinary' insights.

Sure, this book goes into some historic financial bubbles, like Tulipmania, the South Sea Bubble, and the Mississippi land scheme. But, when it got into other manias involving witches, the Crusades, alchemy, popularity of certain phrases/expressions, fortune tellers, slow poisoners, duels, admiration of thieves, haunted houses, etc., it awakened me that our financial meltdown wasn't simply a repeat of other financial bubbles. We had the Internet bubble only a few years prior to what was happening with Housing, so most of us should have not been so blinded as Housing got out of hand. But, it is clear that we were also suffering from an overload of all kinds of manias, which I think, because of the depth of this book, appeared to condition so many in our society to find an even greater safety in 'crowds'. In particular, words like liberal and socialist were not just argued against, but actually successfully demonized, along with targeted uses of words like 'traitor' for anyone not supporting a US war, even trying to affix the term, 'terrorist' to Barrack Obama. Witness the success of Ann Coulter books, Fox News, etc. It is like if you just wanted to be a renter, there must have been something wrong with you, even anti-American, not wanting to participate in 'the ownership society', another term feeding into a financial mania. Plus, was anyone warning that this 'ownership society' was based almost entirely on debt, hardly real ownership? Heck, we were told after 9-11, the patriotic thing to do was shop, never mind sacrificing for the war. Also, our almost maniacal adoration of celebrities, outrageous salaries for athletes and CEOs, long lines for new introductions of new Apple products, Harry Potter books, etc, etc.

We were a society primed with all kinds of 'extraordinary popular delusions', especially susceptible to a meltdown of generational proportions. Will we change? It does look like many are looking for some deeper societal transformation. But, as this book seems to show, transformation will be difficult, and we probably need to worry about transforming to just another mania, just as bad. We have a big task ahead.

Too bad Mr. Mackay isn't around to write about our current manias. Though the book is about 700 pages long, unless you are particularly interested in every detail of each mania, you can skim over lots of the details and complete the book in just a few days and still come away with a thorough understanding.

Update - Stocks, etc.

Since it has been about 1 1/2 years since I updated my blog, here's my update....

The main reason I created this blog several years ago was basically to track my investment approaches, particularly with stocks, allowing me to reflect on them as times change. So, here we are, a lot has happened, financially, during the last year or so. Well, my approach remains the same. I always want some stock investments, looking at them as I would in owning businesses, albeit just a fractional ownership in them, companies I want to own long term, having products which will likely always be in demand, are in good financial shape and which return good dividends. Plus, I will consider adding or subtracting from my positions as situations present themselves.

Like I said, my stock position remains basically the same, as follows, in order of biggest position to least. For perspective sake, stocks make up about 12% of my asset holdings, and that is about where I always intend to be.

• KMB (Kimberly Clark) - My top holding.
• PEP (Pepsico)
• AEE (Ameren Corp) - I always want a utility and I will swap one for the other over time, the latest swap was PNW (Pinnacle West) for AEE. I did this swap for tax purposes.
• PG (Procter & Gamble)
• MMM (3M Corp)
• KO (Coca Cola)
• KFT (Kraft) - it has more debt than I like so I will probably keep only a smaller position in it. I do like its product mix and top brand names and track record of a good dividend. But, I'll watch it closely.
• BMY (Bristol Myers Squibb) - Although I am wary about drug companies because of litigation risk, I'll go with a small position in it because it pays a good dividend, is in good financial shape, healthcare is something people will always need, might be a buyout candidate, and adds a little more diversification to my portfolio.

My major asset are CDs. I don't own a home, though I do think that is OK, as long as one doesn't go into much debt to do so. I have no debt at all, and never want any, though I do think some is OK for a home.

I also own US Treasuries, about 7% of my assets. Right now I own inflation protected ones (TIPS). The two I hold are...

• 2015's
• 2013's

I like them because they protect both against deflation and moderately against inflation (yielding about 3% annually for the 2015's, more if inflation picks up).

I also own some gold (coins), but it is only about 3% of my assets and use a safe deposit box to store it. Gold does not qualify as an investment, but I do think it is warranted as a small insurance policy on US currency.

I intend to further update my blog with some investment links which I like, and other stuff.