Daily Archives: March 13, 2008

Beware of calls of Media Bias A.K.A. Talking Ourselves into a Recession.

The financial illiterate laymen I speak with all think this is a great time to buy despite the losses suffered in their 401ks. Financial Advisors and Money magazine have been beating in the dual mantra’s of dollar cost averaging and “equities always outperform the other asset classes long term”.
It seems that the obvious of history is just that, history.
The scary thing is that the average investor isn’t selling anything…yet.
As for the standard fare of the media being behind the price curve. Keep this in mind: December 18, 2000 Newsweek had the following on their cover: “Recession Ahead?”
While the facts are:
December 18, 2000
Dow closed at 10,645 (bottomed at 7,286 on Oct 9, 2002, 31.5% further drop)
S&P closed at 1,305 (bottomed at 801 on Sep 30, 2002, 38.6% further drop)
Assuming the media’s timing is just as bad today:
Dow at 12,000 today will bottom at 8,220
S&P at 1,300 today will bottom at 798
The obvious is that most people don’t understand subprime, auction rate preferreds, OTC derivatives or any other financial gobblegook. And they haven’t done anything about it either. Wait until they do before you begin buying anything.
On a side note: the S&P is exactly where it started at the begining of our first “CEO” presidency.
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Private versus Public

I consider myself fairly well versed in the intricacies of finance, but every once in a while I realize how naive even I am.

Via Bloomber.com: House’s Frank Says Municipal Ratings Add Unfair Costs

To paraphrase, ratings agencies have been judging Municipal Debt and Corporate Debt according to different criteria. A single A rated municipality has less of a risk of defaulting on a loan than some AAA rated corporate entities. The result of this double standard being increased cost for cities and states and increased profits for high-net worth investors and debt insurance agencies.

Municipal bonds are only appropriate investments for high net worth individuals because of their tax exempt status. The rating of Debt determines how much the interest rate will be; think of it as a city’s credit score. A municipality with the same ability to pay, or rating as a AAA rated Corporation may only receive a single-A rating and be forced to pay a higher interest then is justified by their ability to pay.  In order to get high net worth investors interested these municipalities will pay large fees for bond insurance to achieve the necessary AAA rating or pay higher interest rates.

Hundreds of municipalities have been paying for this bond insurance to achieve the necessary AAA rating.   This insurance is now approaching worthlessness as the companies who sold this insurance have also insured vast sums of mortgage securities.  As the increasing default rate of mortgage’s saps the funds of the incorrectly named Monoline  insurers (AMBAC, MBIA et all), not only is Municipal Bond insurance possibly worthless, but also unnecessary.

Imagine purchasing Auto insurance only to find out that, not only is the insurance company bankrupt, but your car is really a bicycle.

 

Words Fly

What’s the matter with Kansas?

Woman sits on boyfriend’s toilet for 2 years

Ness City Kansas – Girlfriend was physically stuck to the seat — her skin had grown around it

Toilet Seat