The Investor Rebellion

This week, the second wealthiest man in America, and the most famous investor in America, Warren Buffett, did an interview with ABC in which we was asked what were his top 3 piece of investment advice he had for average Americans.  Let’s first start off with what he did NOT say.  He did not say “Buy And Hold”, he did not say “Invest for the Long Term”, he did not say “Diversify”, he did not say “Dollar Cost Averaging”, he did not say “Be Patient - Don’t Panic”, he did not say “Stocks Are on Sale”, and he didn’t mention anything about a 401k.  But why not?  Every professionally certified ”Investment Advisor” out there says those things, why wouldn’t the most successful investor in America say at least one or two of those?  The fact that none of those pieces of “advice” made Buffett’s top 3 pieces of investment advice further shows that those mantras are not advice, they are sales slogans and advertising slogans for the financial advisory industry.

So let’s get to what Buffett did say.  #1 - “If it seems too good to be true, it probably is”.  Think Bernard Madoff’s and Allen Stanford’s victims wish they had followed that advice?  I sure wish I had followed that advice with Auction Rate Securities.  I think Buffett is saying here to always have a healthy amount of skepticism when considering an investment opportunity.  This is especially the case right now, as we are moving into a very uncertain, unknown economic period in which we are sailing through uncharted waters on many different fronts.  The period of 1983 - 2007 was one of the greatest 25-year economic booms in American history, if not the greatest, and the period of 1988-2000 was likely the greatest bull market the U.S. stock market has ever seen.  We may not see things like that for many, many years to come.  This goes for stocks, bonds, real estate, just about everything.  Be skeptical, do your homework, get second and third opinions, and remember it is always much better to miss out on gains than to lose money.

Buffett’s # 2 piece of advice - “Always look at how much the other guy’s making when he is trying to sell you something”.  WOW, is Buffett taking a shot here against the financial advisory industry?  It kind of sounds like it to me.  Maybe not, but when I hear this, the first thing I think of is Certified Financial Planners, Investment Advisors, and stock brokers.  As we have discussed here many times before, today’s Investment Advisors/Financial Planners are really just mutual fund sales representatives.  They are simply sales representatives that make money off selling mutual funds, bond funds, and money market funds.  Because of this, their investment “advice” really isn’t advice at all and is extremely biased towards the stock market, because that’s really the only investment type they can sell you that they can make money on.  This is why they are always negative on CD’s, savings accounts, physical real estate, physical commodities, and foreign currencies, because they can’t make any money selling those.  They all have more sales training than they do investment and financial training.  So, as Buffett says, always remember what your Financial Planner makes money on when he gives you investment “advice”.

Finally, # 3 - “Stay away from leverage.  Nobody ever goes broke that doesn’t owe money.”  AMEN Warren!  THANK YOU for saying this and I hope Wall Street, and the U.S. Government, is listening.  He goes farther in the video interview and says that a friend of his once told him regarding leverage “If you’re smart you don’t need it, and if you’re dumb, you’ve got no business using it”.  Again - AMEN sir!  Our economy has been built on debt and leverage, at every level, over the last 15-20 years.  Individual consumer, household, corporation, federal government.  Every level of our economy is based on and dependent upon debt.  Unfortunately, as Buffett just said, many of the people (at every level) using leverage had no business using it, which is why we’re in the mess we are today.  This is a lot of why there is such a Commercial Real Estate mess right now, as we discussed yesterday.  So, stay out of debt, save money like there’s no tomorrow, and stay away from investing with borrowed money (leverage).  That is true, credible, solid financial and investment advice from the country’s greatest investor.  Thank you Warren for sharing this advice with us and I hope America is listening!

One more thing that Buffett mentioned, in passing, is that he feels that the value of the U.S. Dollar may well decline, and “could become worth far less” over time.  This is due to the “huge deficits” that the U.S. government has run up, as Buffett said in passing talking about investing in yourself.  We all need to seriously, seriously listen to this and consider the implications for this.  If Warren Buffett truly feels we may be headed for inflation, even hyperinflation, we better listen and start preparing for that possibility.  We will keep a very close eye on this topic here at Investor Rebellion and make the safest possible investment recommendations accordingly.

http://www.cnbc.com/id/31849504

Matt Good Investment Advice, Wall Street Conflicts of Interest Bernard Madoff, Bond Defaults, Economy, Inflation, Investing

This writer, the associate editor of Smart Money magazine, says that in our current system, the answer is no.  I agree with him 100%.  How many college graduates that just graduated in May or June have found jobs (that pay money)?  Have a majority of them?  I doubt it.  Even though many of them don’t have a job, what all of them DO have is a record high amount of student loan debt.  Was it really worth the $50,000 - $200,000 that their parents spent, for them to have a very hard time finding a job PLUS have a massive amount of debt?  I agree that it’s not colleges and universities’ fault that the economy is bad and this is the worst job market in decades, but I agree with this writer that a college degree today is just not worth the enormous cost.  By the way, I myself do have a college degree (business) and did graduate from a relatively expensive 4-year university, so I include myself in this criticism, and part of this is my own frustration at how little I feel my college degree has really helped me for the money it cost.

Do you know what Bill Gates, Steve Jobs, Larry Ellison (CEO of Oracle), Michael Dell, and Paul Allen all have in common?  Yes, they all are some of the wealthiest men in America, but that’s only one of the things they have in common.  The other thing they all have in common is that NONE of them have a college degree and none of them graduated from college.  Not one of them.  So yes, it is true that college graduates, on average, earn more money than people without a college degree.  However, keep in mind that many of the wealthiest men in America, as noted above, do not have a college degree and did not graduate from college.  Also, as this writer illustrates, the additional income that a college graduate makes does not necessarily make up for the enormous cost of a college degree today, combined with the minimum 4 years of time they spent not working and not saving money and earning interest on that money.

From 1995 - 2005, the cost of a public college increased 51%, and that’s BEYOND inflation.  It increased far more if you factor out inflation, and that’s still as of 4 years ago.  It absolutely has continued to increase, possibly at an even more rapid pace, over the last 4 years.  The cost of a private college increased 36%, again beyond inflation, over that same 10-year time period from 1995-2005.  The amount of money parents and/or young adults have to spend in order to obtain a college degree has gotten absolutely out of control and off the deep end.  Furthermore, that assumes that the student obtains his or her degree in four years and finishes college in four years.  Over 40% of students that enter college have not gotten a degree yet after SIX years!!!  This even further increases the average cost of getting a degree.  And just what does that college degree get you today anyways?

Unless you are a lawyer, doctor, nurse, engineer, or teacher, college graduates are not trained in a specific trade.  The majority of college graduates, in my perception anyways, graduate with a business degree or some B.S. liberal arts degree that in my opinion means absolutely nothing.  Those graduates are not trained and skilled in a trade and/or craft, so they enter the workforce not very well-prepared to find a job and start a career.  Does college teach you how to sell?  Does college teach you how to be a programmer?  Does college teach you how to hire, manage, and fire employees?  Does college teach you how to get a small business loan, or how to raise capital from potential investors?  In my opinion, in our current system today, no it does not.  So just what does a college education teach someone? 

According to a 2005 study by the U.S. Department of Education, college graduates “have not actually mastered the reading, writing and thinking skills we expect of college graduates.”  The study found “a remarkable absence of accountability mechanisms to ensure that colleges succeed in educating students.” Literacy levels among college graduates, the commission noted, fell sharply over the 12 years ending in 2003.  Why is this?  The writer believes that colleges and universities have made it easier to graduate and get a degree, creating courses such as Campus Culture and Drinking (Duke University) and History of Comic Book Art (Indiana University) for students to take in order to complete minimum requirements to get their degree.  How ironic is it that colleges created a class on college drinking?  Today’s college students need to take a CLASS to learn about drinking????

I have been frustrated that there are no college courses whatsoever on personal finance, investing, home ownership, and/or managing your money.  Robert Kiyosaki has spoken out about this for years.  People pay tons of money for high education, but they receive no financial education whatsoever.  High School doesn’t offer anything along these lines either.  This partially explains why Americans are in so much debt, and things like taking out a home equity loan to buy a plasma TV or take an expensive vacation have been so commonplace.  I do agree with Kiyosaki when he says that we need far more financial education in America, and NOT from stock brokers or “Financial Advisors”.

Please do not take this as me saying that education is a bad thing.  Education is very necessary and is an extremely critical part of our society and our economy.  I just feel, as does this writer, that our current system of college education and college degrees is fundamentally flawed, primarily because it has become just so darn expensive.  As I said earlier, there are some trades where it is necessary and thus makes sense, such as nurses, engineers, teachers, doctors, and lawyers.  People who graduate with those degrees graduate with training in a specific trade that they can immediately build a lifelong career around.

Given the enormous cost of most 4-year colleges, I think there is a much better R.O.I. (Return On Investment) for a high school graduate to attend a vocational school that teaches them a specific trade.  Learn how to be a plumber, mechanic, welder, chef (culinary school), hair dresser, truck driver, carpenter, etc.  You can even become a nurse (LPN, not RN) without a 4-year college degree.  Those vocational schools are FAR less expensive than the 4-year universities, and again, you graduate with training and skills in a specific trade and occupation.  This makes it much easier to find a job, in my opinion anyways, than a 4-year B.A. degree from a college.  If you are a salesperson and/or want to be a salesperson, then you really should be able to find an employer who will hire you even though you don’t have a college degree, because a college degree has absolutely NOTHING to do whatsoever with whether or not someone can sell and produce revenue for a company.  I also think a small, local community college will produce much greater R.O.I. than a big, 4-year university, simply because the cost is so much less and the quality of education, in my opinion, is about the same.

The cost of a college degree has just gotten totally out of control.  I hope that one of the effects of this economic collapse is that we see college tuition come way, way down.  I also hope that we see the societal and cultural stigma of not having a college degree go away, along with even the social status of parents saying “My son goes to Duke” or “Our daughter goes to Penn”.  Do you really think it’s worth the money?  I personally do not.

http://articles.moneycentral.msn.com/CollegeAndFamily/CutCollegeCosts/is-a-college-degree-worthless.aspx

Matt Good Investment Advice Investing, Unemployment

This excellent MSN Money article from Monday discusses something I have brought up several times before.  During the Clinton Administration in the 90’s, the U.S. Government changed the way they calculated the unemployment rate.  When job loss reports come out, you always hear how the highest unemployment rate the country has seen since the Great Depression was in 1982, when unemployment hit 10.8%.  The green shoots crowd will scream that this is evidence that things aren’t that bad, that we’re nowhere near that number yet, and we’re “only” at 9.5% unemployment.  However, as I’ve pointed out before, in 1982, the unemployment rate was calculated differently than it is today. 

In 1982, the Government included both discouraged workers (workers who have given up looking for jobs out of frustration and left the work force) and involuntary part-time workers (part-time workers who would rather have full-time work but can’t find it) in the unemployment rate.  That changed during the Clinton Administration, and the official unemployment rate today does NOT include either of those groups.  If you include both of these groups of people, as they did in 1982, the unemployment rate today would be 16.5%!  Today, that number is referred to as “U-6″ or the “underemployment rate”, but in 1982, the official unemployment rate was calculated the same way as the “U-6″ is today.  So, unemployment is already significantly worse than it was in 1982, if you calculate the unemployment rate the same way they did in 1982.

This MSN Money article goes even further, and says that today’s “U-6″ still doesn’t even tell the full story of unemployment.  One additional thing the Clinton Administration did, as this article points out, was change the definition of discouraged worker to only include those that had given up looking for work because there were no jobs to be had within the last year.  So even today’s U-6 rate is not giving us a full, real, accurate picture of unemployment.  If you include these folks, then the U-6 rate is at 20.6% (ouch), according to John Williams of Shadow Government Statistics (www.shadowstats.com ). 

Yet another change that has occured since 1982 in the how the U.S. Government calculates the unemployment rate is the “Birth-Death Model”, which was added in 2000.  This has also gotten a lot of attention lately from critics of the way the official unemployment rate is calculated.  The Birth-Death Model is designed to account for the addition and subtraction of small businesses, and the resulting job creation and job subtraction that results from that.  It basically adds between 100,000 to 200,000 jobs every month (out of thin air) to account for the addition and subtraction of small businesses across the U.S. and the resultant lag in jobs survey data it creates. 

The problem is, during an economic downturn, especially one as serious as our current one, there simply is no way on earth that 100,000 - 200,000 net jobs are being added every month.  So, in a serious economic downturn, the Birth-Death Model significantly overstates and overestimates the number of jobs created.  Therefore, if you take out the jobs that the Birth-Death Model added (out of thin air) to the June jobs report, the actual, real number of job losses for the month is closer to 650,000 rather than the reported 467,000.  This also obviously falsely minimizes the official unemployment rate, as even the official unemployment rate would be higher if you have to include 100,000 - 200,000 more job losses.

Another factor we have discussed here many times is the plummeting of the average work week - the average number of hours worked in a week.  This has declined at just as rapid of a pace as jobs have over the last 6-9 months, as in June the average work week set another all-time record low of 33 hours.  What this means is that not only are Americans losing jobs in massive numbers, but even the Americans who still have jobs are having their hours cut by their employers at an unprecedented pace. 

This means that even the Americans who still have jobs are making less and less money every month, which still has a significant negative effect on the economy, as they have less and less money to spend and are even having a harder and harder time making their mortgage payment.  This is especially true since many Americans purchased a bigger house than they should have, and purchased it based on their income at that moment in time.  If their income drops, and continues to drop, even employed Americans will default on their mortgage and their home will be foreclosed on.  David Rosenberg, former Chief Economist at Merrill Lynch, says that the fall in the number of hours worked in June is equivalent to a loss of more than 800,000 jobs!

The last topic this MSN Money article discusses is another we have discused previously here - the unemployed running out of unemployment benefits. Rosenberg says that one-in-three among the unemployed (33%) have been looking for a job for more than six months and still can’t find one.  Because unemployment benefits typically only last 26 weeks (about 6 months), and because everyone (even the green shooters) predicts unemployment to continue to worsen to at least 10%, more and more Americans are going to be both without a job and without unemployment benefits.  That is not good.  Some states have extended the 26-week duration of unemployment benefits, but with the current financial state of many states, do you really see that continuing?  By the way, is California going to eventually issue I.O.U.’s for their unemployment benefits????

Unemployment is critical to the core sectors of our economy - housing, banking, and consumer spending.  Remember consumer spending is 70% of our economy.  People without jobs obviously aren’t going to spend money, and even the employed who have their hours cut aren’t going to spend as much money.  People without jobs and without unemployment benefits sure as hell aren’t going to spend any money.  All of those groups of people are also more likely to default on their mortgages, credit cards, car loans, and other consumer loans, which leads to more losses for banks and more bank failures.  Unemployment is critical to everything that is going on right now and take the U.S. government’s “official” unemployment rate with a grain of salt from now on. 

http://blogs.moneycentral.msn.com/topstocks/archive/2009/07/06/true-unemployment-rate-already-at-20.aspx

Matt Credit Crisis, Economy California, Commercial Real Estate, Credit Cards, Economy, Foreclosures, Unemployment

One of the most common sales slogans that you will hear from Financial Planners/Investment Advisors, especially right now, is “stocks are on sale”.  This sales pitch (and again - this is a sales pitch, not investment advice) is based upon the premise that since we’ve had a downturn in the market, now is the time to buy stocks because prices are low (”on sale”).  The industry was saying this a year ago when the market was at 11,500, as several Financial Planners I met with were telling me to invest in the stock market at that time and at that level, and I also clearly remember a “Smart Money” magazine last summer with the headline that now is a great time to buy stocks.  Well, unfortunately, if investors had followed their “advice” at that time (which again was a sales pitch, not advice), they have lost about 25-30% of their money over the last year.  That surely doesn’t stop the financial advice industry though, as they are continuing today to aggressively try to convince you once again that “stocks are on sale” and now is the time to buy.

David Rosenberg, the former Chief Economist for Merrill Lynch, in an essay he published on Tuesday, makes a great argument that stocks right now are actually about the same value that they were at the PEAK of the market in October of 2007.  How could that possibly be when the Dow was at 14,000 then and at 8,100 now? Well, investors need to understand that just because the price of a stock is lower, doesn’t mean that stock is necessarily “on sale”, or a better value, in terms of what you are getting for the money.  The value of a stock is measured by the multiple, or the price-to-earnings ratio (P/E ratio).  This is the price of a stock divided by the earnings of that particular company.  This is how you can tell if a stock, or the market, is “on sale”, regardless of a chart or the fact that the market has fallen a lot since a recent peak.

The forward P/E ratio of the S&P 500 is currently about 14.5.  This is very close to where it was in October of 2007, when the forwad P/E was about 15.  October of 2007 was the all-time highest level ever for the S&P (1565).  So how can it be that the P/E is about the same when the S&P is only at 879 right now as compared to 1565 back then?  Because the earnings of S&P 500 companies have plummeted over the last 9-12 months.  So even though prices have plummeted, corporate earnings have plummeted just as much, if not even more than prices have.  This is why the P/E ratio is still relatively high, even though prices are much lower, again because corporate earnings are even lower.  Therefore, as David Rosenberg says, with the current P/E ratio of the stock market today, “it is hardly the case that this market can be viewed as a bargain.”  Remember that the next time your mutual fund sales rep (sorry, “Investment Advisor”) tells you that “stocks are on sale” and “now’s the time to buy”.

Second quarter (April - June) earnings start coming out this week.  Analysts expect earnings for the S&P 500 companies fell an average 35.5 percent in the second quarter from a year earlier, after falling by that same amount in the first quarter.  While it is possible that we may get some earnings numbers that are not as bad as that, and are perceived positively because they beat expectations, the market now is having more and more of an expectation that things are supposed to be turning around and business improved in the second quarter.  Therefore, earnings surprises on the negative side will have a damaging effect on the market. 

Also, I am very glad to hear (in today’s AP story below) that the market is starting to look at revenue, and not just earnings.  Companies reported better-than-expected earnings in the first quarter primarily due to huge layoffs and other cost-cutting measures.  Earnings are profits, and profit is revenues minus costs, so you can increase earnings without increasing revenue through cutting costs.  This is actually a much, much easier way to improve earnings as it is always far easier to cut costs than it is to increase revenue (sell more product).  In my opinion, higher earnings from mass layoffs and cost cutting gives a false sense of the company’s ”positive” numbers.  I’m glad to hear that Wall Street wants to see that companies are selling more goods and services (increasing revenue), because that is actually a real sign that business is improving.  I doubt however that we are going to see many companies with increases in revenue, given that most purchasing in the U.S. is done with debt and banks have virtually stopped lending money to anyone. 

http://zerohedge.blogspot.com/2009/07/thoughts-from-rosie-and-taibbi.html

http://finance.yahoo.com/news/Investors-2Q-revenue-a-sign-apf-3079155440.html?x=0&sec=topStories&pos=2&asset=&ccode=

Matt Economy, Good Investment Advice Economy, Investing, Wall Street

The U.S. economy over the last 15-20 years has been built entirely on debt, at every level.  Debt is the core foundation of our economic system and the “growth” we experienced from 1982-2007, especially from 1994-2007.  This is true at every level of the economy, from individuals, to households, and especially the U.S. Government.  Another example is my post earlier today on how the Commercial Real Estate market has been based entirely on debt (leverage), and it’s crashing now because commercial lending is at a standstill.  This Reuters article from Thursday talks about how big of a role debt has become in another sector/level of our economy - U.S. companies and corporations.  Unfortunately, just like with every other sector, debt has now grown to far too big of a level with U.S. companies, and that will create many problems, likely for many years to come.

In the first quarter of this year, the debt of U.S. industrial companies in aggregate exceeded 100 percent of their annual income for the first time EVER recorded in history.  U.S. companies’ debt-to-income ratio has never been higher in history than it is now, as the total debt of U.S. non-financial companies was $7.2 trillion at the end of the first quarter.  This is not good.  At best, this massive debt is going to constrain economic recovery and future economic growth for many years to come.  At worst, this massive debt puts many companies dangerously exposed and at the risk of going out of business. 

Just as U.S. households’ income and wages have not nearly kept up with their debt, the growth of U.S. corporate profits have not nearly kept up pace with the growth of their debt.  Again, our economic growth was based on debt, at every level.  When times were good, this wasn’t a big deal, as companies’ revenues and profits were still growing and the debt-to-income ratio was manageable.  However, when the economy fell off a cliff in the fourth quarter of 2008, profits and revenues plunged, which skyrocketed their debt-to-income ratio as their debt remained the same but income plummeted. 

Because of this, we are entering a prolonged period of debt deleveaging - paying off debt - both with U.S. households and with U.S. companies.  This debt deleveraging process is going to take time, probably lots of time, and could very well constrain economic growth for the next 10 years.  This is exactly what happened in Japan in the 1990’s, as they went through a very similar banking, real estate, and financial crisis which ultimately led to a “lost decade” of an awful economy with no growth for 10 years.  After taking on way too much debt and then paying the price for it, companies will be much more fearful about shouldering too much debt in a forbidding economic landscape.  That in and of itself will restrain economic growth, because many firms will hesitate to invest in expansion.  The same thing is true with U.S. households and consumers, as we have seen the personal savings rate skyrocket over the last few months, as U.S. consumers are trying to pay off their debt and save money after paying the price of taking on way too much debt during the boom.

As this article says, there are three things companies can do in order to solve their debt problem.  The first is to slowly pay off the debt, which is what we just described.  This option of debt deleveraging will take lots of time and constrain economic growth and recovery.  The second option is to refinance the debt at a lower interest rate.  I think this is HIGHLY unlikely given the current lending environment, which is extremely tight as banks are very reluctant to lend money at all.  The third option is default.  I do think this option will happen with more frequency than people would like to admit or believe, and I do think we will see corporate bond default rates approaching, or possibly even exceeding historically high levels.  I would be extremely cautious in buying corporate bonds right now, definitely do your own thorough homework on the company, and prepare yourself going in that they could default on your bond.

Our economy has been based upon debt for the last 15-20 years.  We are slowly starting to change this culture of borrowing money, but it will take time, and there will be pain during this process of change.  I do believe in the long run we will be better off moving to an economy that is based on production, capital (savings), and labor, rather than debt.  I feel that is a much more sustainable long-term economic model than an economy based on debt, but again, it will take time and it’s going to be painful.  There really isn’t any way around that.

http://www.reuters.com/article/ousiv/idUSTRE56879P20090709

Matt Credit Crisis, Economy Commercial Real Estate, Credit Cards, Economy, Investing

This past week we saw 4 new investment fraud cases brought to light, in just one week!  On Tuesday, the SEC announced they were charging Dallas-based Provident Royalties LLC with securities fraud, for allegedly scamming thousands of oil and natural gas investors in a $485 million Ponzi scheme.   This involved close to 8,000 U.S. investors, from September ‘06 - January ‘09.  Provident promised investors annual returns of over 18%, and falsely told them that 86 percent of their funds would be placed in oil and gas investments.  Provident Royalties LLC, broker- dealer Provident Asset Management LLC, and the 21 entities that offered and sold securities were also named in the lawsuit.  

On Wednesday, in New York, 25 people along with a mortgage company were indicted in a $100 million mortgage fraud case by the Manhattan District Attorney.  12 of the 25 have already pleaded guilty, and the defendants included lawyers, appraisers, bankers, and mortgage brokers.  Later that same day on Wednesday, the SEC announced that six employees of Wall Street firm Sky Capital, including the President & CEO of the company, ran a $140 million “trans-Atlantic boiler room” to defraud investors in the United States and also in Britain.  After getting investors’ money initially, which I’m inferring included Sky Capital stock, Sky Capital then told investors they could not sell their Sky Capital shares, which artificially inflated Sky Capital’s stock price.  Investor money was used primarily to enrich the brokers, and pay off other investor victims who had lost money in prior investment scams they had ran.

Then, to finish up the week, on Friday the SEC announced that an Illinois hedge fund - Lancelot Investment Management LLC - fed more than $2 billion of clients’ money into a Ponzi Scheme ran by another businessman named Thomas Petters.  Lancelot received millions of dollars in fees, at the expense of investors, for feeding their clients’ money into the Ponzi Scheme.  Petters, who was named a defendant in the SEC’s suit, was arrested in October for his Ponzi Scheme, which brought Polaroid Corp into bankruptcy.  Though Lancelot knew that Petters had prior criminal convictions, and knew that that Petters owed more than $130 million to investors, Lancelot hid this information from their clients.  Also, as Petters began running short of cash to support the fraud in 2007, Bell engaged in bogus transactions to keep the failures concealed.  During the first six months of 2008, Bell and Lancelot raised an additional $243 million, it said.

How many more Ponzi Schemes are out there?  How many more other investment fraud cases are out there?  Were Bernard Madoff and R Allen Stanford simply the tip of the iceberg?  Just how rampant is investor fraud?  Remember that back in early June, the U.S. Commodity Futures Trading Commission said there is a wave of “Ponzimonium” that is sweeping the globe.  Just how true is that?  Time will tell, but always do your own homework on any investment you make and get second and third opinions.  Remember it’s always much better to miss out on opporunities, than it is to lose money.

http://www.cnbc.com/id/31798634

http://www.cnbc.com/id/31798940

http://www.bloomberg.com/apps/news?pid=20601087&sid=ahUOBqCvvJx0

http://www.reuters.com/article/newsOne/idUSTRE56653H20090707

Matt Bad Investment Advice, Economy Bernard Madoff, Investing, SEC

That is a quote from Congresswoman Carolyn Maloney, at a hearing that she chaired on Thursday of Congress’ Joint Economic Committee.  Talk about hitting the nail on the head.  Commercial Real Estate appears to be getting worse by the day, and it is a looming disaster on our near-term horizon that will lead to many more bank failures and massive losses for the banking and financial sector.  Commercial loan delinquencies have doubled in the past year, and nearly every major market in the U.S. has seen commercial property prices drop 35-45%, with New York City seeing a 50% price drop! 

In the Dallas/Fort Worth market, commercial property foreclosure filings have doubled on office buildings so far in 2009, and the number of shopping center foreclosure filings there has more than doubled in 2009.  A major Dallas-area developer, Opus West Corp., filed for bankruptcy this week, and the President of Dallas Foreclosure Listing Service said in a Dallas Morning News article this week ‘This is just the beginning“.  Friday’s Dallas Morning News Business Section had 2 front-page articles on the worsening Dallas Commercial Real Estate Market, one being about the increase in foreclosures and the other being about how there is more office space vacancy in Downtown Dallas right now than there has been in a long time - about 2.5 million square feet of empty office space.  This is only going to lead to property prices coming way down, just like they are in most other major markets around the country.

Commercial lending is basically non-existent right now, as loans for over $30 million pretty much do not exist.  This is a huge problem, as commercial real estate is all about leverage - using huge amounts of borrowed money to finance the purchase of properties.  Like everything else in our economy, it’s all based on debt and lending.  Most commercial property loans are structured as balloon notes.  This means that borrowers pay only interest on the loan for the first five or 10 years until the loans mature, and then the entire amount must be paid back.  This is great when property values are rising, its easy to find tenants (companies and retailers), and rents are rising.  Unfortunately, that is not the case right now, and that has caused the commercial real estate investing and finance game to come to a screeching halt.

Due to rising unemployment, mass layoffs, and significant downsizing in the retail sector, commercial property landlords/owners are losing tenants and have had to drop rents just to keep the tenants they still have.  This has caused serious cash flow problems for those owners/landlords, which has caused them to be unable to make their mortgage payments, which has led to massive increases in defaults and the value of properties to decline significantly.  This, in turn, makes it very difficult for owners to refinance their loans, which they must refinance because all commercial property loans are balloons like I explained earlier.  A Federal Reserve survey from April, which was 3 months ago, showed almost two-thirds of domestic banks had reported tightening lending standards and terms on commercial real estate loans over the previous three months.  And that was as of 3 months ago!

An AP story today on the commercial real estate problem talks about how U.S. banks right now are doing the exact same thing that Japan’s banks did in the 1990’s, which led to the “lost decade” of Japan’s awful economy for an entire decade.  U.S. banks right now are granting extensions to borrowers for these commercial loans, in the hope that the market and economy will rebound and commercial property values are going to go back to the levels they were at two years ago, at the peak of the market in mid-2007.  Isn’t this just a telltale sign of our culture and society today?  No one in our society today wants to accept reality, face the problem head-on, and bite the bullet.  Everyone just wants to do anything possible to ignore/deny reality, and keep things the way they are for just one more day, or one more month, even if the long-term consequences of that are disastrous.  Individuals are like this with credit cards and home equity loans, and the U.S. government and Federal Reserve is like this with bailouts and stimulus and all of these other economic intervention programs.

By doing this, banks are only just just delaying the inevitable by not dealing with troubled loans now.  It also lets the banks post results that are misleading, because the loans have more risk to them than banks are disclosing given how the loan extension looks on paper.  So, yet again, just like we had with mark-to-market accounting rules, this allows banks to pretend things are better than they really are.  I just hate that.  Doing this did NOT work at all in Japan, as it further constrained new lending, the market never turned around, and Japan had an awful economy for a decade.  Making lending even tighter than it already is right now is exactly what we DON’T need, but that is what we will get with banks doing this.  And if the loans that are being extended turn up rotten a year or two from now, that will constrain lending even more.

The commercial real estate crash is going to lead to many, many more bank failures, as commercial loans are a significant part of the portfolio of many small and midsized banks.  An average of 20 percent of local and regional banks’ loan exposure is in commercial real estate vs 4 percent for the nation’s biggest banks.  Remember we’ve already had 53 bank failures so far this year, and we are about to see many more through the remainder of 2009 and well into 2010, primarily because of this commercial real estate crash.  Also, as I’ve said many times before, as credit card lending becomes tighter and tighter, that will devastate the retail and restaurant industries, which will also put massive downward pressure on the already crashing commercial real estate market.

http://www.cnbc.com/id/31831512

http://finance.yahoo.com/news/ALL-BUSINESS-More-toxic-loans-apf-2961296570.html?x=0&sec=topStories&pos=4&asset=&ccode=

Matt Credit Crisis, Economy CNBC, Commercial Real Estate, Credit Cards, Economy, Federal Reserve, Foreclosures, Unemployment, Vacancies

There certainly aren’t any green shoots in this story, which is a sad, yet not surprising story on the quickly rising number of homeless Americans.  Homeless shelters are overcrowded in several areas across the country, this Reuters article specifically references the entire state of Massachusets, Indianapolis, and Phoenix.  I’m sure other areas are like this, especially in Michigan, Ohio, and Illinois.  To quote the Director of the Boston Health Care for the Homeless, “This truly is the highest we have ever seen it.”  Wow.  The increase in the homeless is primary due to rising unemployment and rising foreclosures, as the common path to being homeless is losing your job, then losing your home to foreclosure.

In the state of Massachusets, homeless shelters are at capacity and have no more room, and that has forced the state of Massachusets to put families up in motels in unprecedented numbers.  In Phoenix, the waiting list of the UMOM New Day Centers Homeless Shelters has doubled in the past year.  That is not surprising at all given the enormous amount of foreclosures Phoenix has seen over the last 1-2 years.  In Indianapolis, overcrowded homeless shelters are turning families away, forcing growing numbers to seek vouchers for hotels provided by nonprofit groups such as The United Way.  Indianapolis School Officials have said they have seen an increase in the number of student parents who use a hotel as their primary address.

Unfortunately, this trend may well continue to increase, as I see unemployment continuing to rise well into 2010, along with foreclosures continuing to increase for a while as well.  As I’ve said before, with the size of the work force increasing significantly all of the time, with record numbers of college graduates entering the workforce, along with the retired coming out of retirement to re-enter the workforce, along with workers that were supposed to be retiring and leaving the workforce postponing retirement indefinitely, I just don’t see where all of the jobs are going to be for all of these people.  I hope I’m wrong, but where are all of these people going to work?  We’re only going to have a bigger and bigger workforce looking for jobs over the coming years, as Generation Y (the baby boomers’ kids that are in college and high school right now) is triple the size of Generation X, the generation before it, so we are only going to have more and more people entering the workforce over the next 5 years or so.      

http://www.reuters.com/article/newsOne/idUSTRE5694XV20090710?sp=true

Matt Credit Crisis, Economy Economy, Foreclosures, Unemployment

CIT Group (different bank than Citigroup) is a huge bank that is a lender to nearly a million small to midsize companies across the country.  For example, they are the primary source of credit for Dunkin’ Donuts and all Dunkin’ Donuts franchisees.  That’s just one small example.  To quote their website, CIT is “the # 1 independent leasing company in the U.S., serving more than 500,000 commercial end customers ranging from small businesses to Fortune 500 companies”  They are heavily involved in the airline and railroad industry, along with virtually every other major industry in the U.S.  Unfortunately, as of 3 months ago, they also just happen to have $68 billion in liabilities.

The Wall Street Journal is reporting today that CIT Group has hired bankruptcy specialist Skadden, Arps, Slate, Meagher & Flom LLP as an adviser, and said that the hiring comes as CIT prepares for a possible bankruptcy filing.  Know who else recently hired this law firm?  Circuit City.  And we know what happened to them.  CIT’s stock fell 18% yesterday to $1.53, its lowest level in seven years, and their stock has fallen 59% year-to-date.  They have reported more than $3 billion in losses over about the past two years, and their bond rating has just plummeted to below junk level status, as all three major rating agencies have downgraded CIT’s bond rating multiple times in just the last few months.  This caused the FDIC yesterday to say that they are unwilling to guarantee CIT Group’s bond sales, because that would put American taxpayer money at risk.  Ya’ think?  THANK YOU Sheila Bair for FINALLY saying no to someone.  Maybe we can’t actually bailout everyone?  CIT Group has already received $2.3 billion in taxpayer bailout money, and it sure looks now like that was money well spent.

If CIT Group were to fail, that would be the biggest bank failure since Washington Mutual, as they have $3 billion in deposits, $76 billion in assets, and $68 billion in liabilities.  Much more than the hit to the ever-dwindling FDIC insurance fund though, is the devasting impact this would have to the 1 million small to midsize businesses that CIT Group lends money to.  Those one million companies would lose access to their long-time credit line, and, to quote the Wall Street Journal, “thousands of manufacturers could run into problems”.  Larry Doyle over at Sense On Cents says if CIT fails “there would be a significant ripple effect across our economy.”

Will CIT Group fail?  What would be the consequences of that?  What effect will it have on the economy?  What effect will it have to the financial system?  What effect will it have on the stock market?  How many job losses would result from it?  This is yet another looming disaster on the horizon, so just add one more to the current list of California, other states such as Illinois & New York, Commercial Real Estate, Freddie Mac, Credit Cards, and probably more that I’m missing right now.  Fasten your seatbelt for the possible failure of CIT Group.  As with most everything else during this economic collapse, we are sailing through uncharted waters, and no one knows exactly where we are headed.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aHOrbEKeCVzk

http://zerohedge.blogspot.com/2009/07/cit-prepares-to-file-bankruptcy.html

http://www.senseoncents.com/2009/07/no-get-out-of-jail-free-card-for-cit/

Matt Bailout, Credit Crisis, Economy Bond Defaults, California, Citigroup, Commercial Real Estate, Credit Cards, Economy, FDIC, Federal Reserve, Freddie Mac, Sheila Bair

Only 1 bank failed this week, after 7 failed last week and 5 failed the week before that.  A small bank in Wyoming - The Bank of Wyoming - failed yesterday.  It “only” cost the FDIC $27 million out of their rapidly dwindling deposit insurance fund, although that is a relatively small number compared to previous bank failures.  This brings us to 53 total bank failures so far this year.  Brace yourself for many, many more bank failures over the course of this year and well into 2010, the primary cause of which will be commercial real estate loan defaults.  Also, we may soon see a huge bank fail, which I will post on next.  I continue to believe that the only reason both Citigroup and Bank of American have not failed is due to massive, ongoing financial support and bailouts from the Federal Reserve and the U.S. Government.

http://finance.yahoo.com/news/Regulators-shut-small-Wyoming-apf-555577631.html?x=0

Matt Credit Crisis, Economy Bank of America, Citigroup, Commercial Real Estate, Economy, FDIC, Federal Reserve