Archive for September, 2008

I’ve been writing about FDIC for a while now and I’ve written about the fact that FDIC really only insures about $44,000 and not $100,000 as most people think so why is everyone rushing to increase limits to $250,000 now?

The answer is obvious:

Let’s say you have $400,000 in cash lying around. You’re smart enough to know that banks will only insure $100,000 on any ONE account at a bank so you decide to spread your money around.

  • You open an account at Chase and put $100,000
  • You open an account at WAMU and put $100,000
  • You open an account at Wachovia and put $100,000
  • You open an account at Citigroup and put $100,000

You pat yourself on the back for your ingenious plan to insure 400k when FDIC will only insure 100k. But this week, you find out that Chase has bought WAMU and Citigroup has bought Wachovia. Oh no! Your ingenious plan has been foiled! You now only have 200k out of 400k insured! Panic! Panic! Panic! You run over to Chase and Citi and pull out 100k from each bank and start looking for a new bank to put that money in so where do you go?

Of course, now you start wondering if any bank is safe or which one will be gobbled up next and if a bank is really the best place for your money. Perhaps you take that cash and pay off your mortgage…..or perhaps you start buying gold with it…..or perhaps you decide to pay off those auto loans, HELOCs, and other debt…..or perhaps you buy real estate in a foreign country….or buy US Treasuries.

Whatever your decision, it likely results in banks having less capital and makes the existing problems even worse and that’s why there is a rush to raise the FDIC limits now. There is one HUGE problem with raising the limits though and I hope someone will be saavy enough to let everyone know what it is…….if not I’ll tell ya later 😉

This market volatility is great for my ETF Covered Call strategy as it’s been extremely profitable to buy long and simultaneously sell short.  I’ve made $3,000 these past few days and  with the market gyrations, it’s been exceptionally profitable to buy back those contracts on the cheap when the market turns the opposite direction.

I had a feeling that the bailout bill wasn’t going to pass after I read it Sunday night, it just didn’t have anything good in it to solve any real problems.   My guess is that the bill would have simply pushed the problem onto the next administration to deal with it.

I suspect the bill will pass later today or this week with some crazy shenanigans pulled and that may rally the market which would mean more profits to bank 😉

Good hunting.

As expected, bloggers, pundits and media keep telling everyone not to panic which begs the question, when is it time to panic?

Dow down nearly 800 points in day, down 3700 points from peak,  multiple major bank failures, investment banks filing for bankruptcy, insurance companies filing for bankruptcy, international banks failing, government interventions,  banks cannibalizing banks,  Federal Reserve gimmicks, FDIC fears, US Mint suspending gold sales and on and on.

So when will the time come to panic?  Is it when the Dow drops down to 7000?  Is it when your credit card stops working? Is it when your bank cuts your credit lines?  Is it when the ATM runs out of cash?   Is it when you go to the bank for cash and they tell you they don’t have any?

Perhaps the pundits plan should be to calmly accept personal bankruptcy in a dignified non-panicked manner so as not to upset the Joneses. Be sure you have a plan before the panic sets in!

Geez, I shutter to think what would have happened without that short selling ban that was supposed to keep the market from crashing.   The Dow tanked 777 points today and if the short selling ban wasn’t in place then I wonder if the Dow would have tanked 2000+ points.

Oh wait, there’s always tomorrow…….  😉

It seems many people are out buying gold lately but too many people seem to be seeking 1 oz coins instead of the more practical 1/10 oz coins.   The key issue here is if you need to resort to bartering with gold, you don’t want to have to “break” a one ounce gold coin or worse trade a one ounce coin for something not necessarily worth one ounce of gold.

Ideally, you should have a mix of both one ounce gold coins, half ounce coins and one tenth ounce coins as part of your inventory.    A while ago I discovered that in some cultures it is customary to buy some gold on your child’s birthday each  year as part of their savings.   I found this quite fascinating and decided to add it as part of my kids wealth building plan and each year, I make a trek to buy some gold for my kids.

Ideally, I try to purchase one ounce each year and in theory, my kids should have 18 oz of gold by the time they reach their 18th birthday.    At the current price of $850/oz that would translate to about $15,000 in value.

MSNBC has a nice summary of the Bailout Bill and I’ve read through all of it and I don’t see how it’s going to solve any major problems. The best this bill is going to do is prolong the pain and it won’t stop the US economy from slipping into a major recession.

I’m still surprised that there isn’t a single dime to shore up FDIC. I wrote over a year ago that FDIC needed to raise coverage limits to at least $224,000 for ALL accounts to keep up with the rate of inflation but that still hasn’t happened.

The bailout bill breaks down into a simple theory, “if banks are freed from bad home mortgages, everything will get better” but there are so many questions that remain unanswered.

What good are the credit rating agencies now?   Why would you use them to base your lending or investing on if they provided nothing but garbage information?

What good is FICO scoring in lending right now?   No doubt that all these bank mergers, shrinking HELOC lines, and defaults have trashed many peoples scores -even the innocent ones.

Is the goal here to get consumers to borrow to buy fuel inefficient cars they don’t want, homes with questionable titles or depreciating values?

If we were to assume that all banks magically have their balance sheets wiped clean and all have a fresh $700 billion to lend out, who’s going to borrow and for what purpose?    How easy is it going to be to lend money with more regulatory oversight and bureaucracy?

Assistance to home owners?   Wasn’t that included in the last bailout bill and it didn’t seem to help anyone did it?

The most troubling thing in this bill, at least for me, is the following:

Section 132. Authority to Suspend Mark-to-Market Accounting.
Restates the Securities and Exchange Commission’s authority to suspend the application of Statement Number 157 of the Financial Accounting Standards Board if the SEC determines that it is in the public interest and protects investors.

Section 133. Study on Mark-to-Market Accounting.
Requires the SEC, in consultation with the Federal Reserve and the Treasury, to conduct a study on mark-to-market accounting standards as provided in FAS 157, including its effects on balance sheets, impact on the quality of financial information, and other matters, and to report to Congress within 90 days on its findings.

These regulations were created after the Enron and Worldcomm debacle where assets were being booked that had no or questionable value and now they’re going to be suspended?   How many new Enrons will spring up after repealing these regulations?  I love that last part, “..if the SEC determines that is in the public interest and protects investors.”

Yeah, having another Enron will “protect investors.”

Everyone seems to be making assumptions that a bailout bill will pass, it will cure everything and things will return to normal a few days later.  The prudent investor needs to ask, “What if…..”

What if the bail out bill doesn’t pass?

What if the bail out bill passes but it doesn’t help?

What if the bail out bill passes, but helps in the wrong way?

What if more banks fail after the bail out bill?

What if FDIC goes under?

Note: I’ve heard the following, “in the history of FDIC, not a single depositor has ever lost a single penny” and at the same time every prospectus is required to state, “past performance is no indicator of future performance” but how ironic.

What if the Dow drops to 8,000?

What if the Dow rockets to 15,000?   What should I do?

Unfortunately, I can’t answer these questions for you because the right answers depend on your situation.   If you’re 20 and plan on retiring in 40 years then most of these issues may be mute.   If you’re 60 and plan on retiring on 5 years then you’ve got some questions you need to answer.

For those people that have Wamu credit card(s) and Chase credit card(s), the obvious question now is how long will it take Chase to consolidate credit card lines and how will that impact FICO?

If you have $10,000 credit line at WAMU and $10,000 credit line at Chase and Chase consolidates them both to $15,000 then you’ve effectively lost 25% of your credit line and possibly increase your debt ratio if you’ve been carrying balances.

With the credit crunch continuing full steam, I doubt Chase will simply consolidate the credit lines without reducing  them.  This scenario on top of already shrinking Home Equity Lines of Credit might make for a FICO score squeeze.

Of course less competition will ultimately mean higher interest rates for everyone but that’s a post for another day.

Didn’t I just write a post about gold confiscation coming soon? Well the first step is the US Mint running out of gold which appears to be the case right now. From Yahoo.

WASHINGTON (AP) — The U.S. Mint is temporarily halting sales of its popular American Buffalo 24-karat gold coins because it can’t keep up with soaring demand as investors seek the safety of gold amid economic turbulence.

Mint spokesman Michael White said Friday that the sales were being suspended because demand for the coins, which were first introduced in 2006, has exceeded supply and the Mint’s inventory of the coins has been depleted.

The Mint had to temporarily suspend sales of its American Eagle one-ounce gold coins on Aug. 15 and then later that month announced sales of the American Eagle coins would resume under an allocation program to designated dealers.

White said the Mint expected to soon start distributing available Buffalo gold coins through a similar allocation program.

Through Thursday, the day the Mint suspended sales of the American Buffalo, the Mint had sold 164,000 of the coins this year, up 54 percent from the same period a year ago.

“People are scared. Gold has become a safe haven,” said Michael Maroney, a vice president of sales at gold dealer Monex Precious Metals in Newport Beach, Calif.

Maroney said that demand for the one-ounce American Eagle coins was “through the roof.” He said Monex still had American Buffalos available Friday because the company had recently stocked up on them.

Fuel, Food, and Cash should be priorities now.

Remember hurricane Katrina?  Category 5 hurricane heading towards New Orleans and no one thought anything bad would happen: no preparation, no evacuation, no disaster recovery planning, no competence on any level.

We’ve got a category 5 financial disaster right now and people are acting like deer on headlights: frozen and unprepared.

You’re going to find yourself yelling and chanting:  help! help! help!  and wait for the government to air drop some cash to you if you do nothing right now.    The Chairman of the Federal Reserve, the head of the US Treasury and the President of the U.S. are all warning about a collapse and the band plays on……

History repeats itself over and over and no one learns a damn thing; Absolutely amazing but that explains why some people get rich slick and some people don’t.