LD’s Dollars and Sense “Central Station”

LD-The other day you said that the govt hopes mortgage rates will come down to 4.5% because of their intervention. What do you think are the chances that they will go down even further than that? And, have lenders changed their ways regarding lenient lending practices? If not, when do you think the govt might intervene? I ask because we will need to refinance, but we make about 1/3 in income than we did when we bought this place.

Looking forward to lurking. Good Luck

The term Liquidity Trap is comming into vogue by the economists. The Liquidity Trap is often alluded to as the reason for the lost decade for Japan. The Liquidity trap is understood to exist when the Federal Funds Rate is zero and they cannot stimulate with Monetary Policy.

I think Krugeman postulates that you have to induce inflation to get out of the Liquidity trap. That basically says money is made with disappearing ink, so spend it fast.

More serious question: is Wall Street talking about the Liquidity Trap or is that still an economic curiosity. Is the proposed Stimulus (fiscal) policy going to do the job for us?? What would Freidman say about this?

10 inches of snow here in Michigan, how about upstate NY.

Annie, 30yr fixed rate mortgages are now in the vicinity of 5.25 to 5.375. I do think that these rates will likely come down because the Fed still has yet to fully allocate the capital that they indicated they would in buying mortgage assets along with consumer finance assets.

It will take some doing for them to get rates to 4.5% but they have certainly shown their hand in stating what their plans are.

I think that rates woudl only get below that level if our economy has totally fallen off the cliff and that there is very little demand for mortgages….meaning, the economy is in REALLY bad shape.

Lenders have DRAMATICALLY changed their lending practices. In fact, in many places you need totally pristine credit in order to get approved for a loan.

Any lender in this market is going to be very strict in analysing your income and debt levels in assessing your ability to service a mortgage.

Hope this helps.

It does help, and thank you.

I have a question.

About four years ago when the housing market was still okay, my son bought a little house for $140,000 with an interest rate of 6.5%, no money down.

Today comparable houses are selling for $104,000.

He is able to make his $1200/mo. mortgage payment but should he keep paying on a house that is worth approximately $40,000 less than the purchase price.

Should he quit paying for the house and let it go to foreclosure? That seems pretty seedy to me but I know the bank will not allow him to refinance at 4.5% with no equity in this house.

Is he just stuck paying for this
mistake?

LD this is awesome! Thank you! And keep it up!!

There are NO bad questions. Please do not hesitate to ask anything.

Who broke the transoceanic internet cable from Asia to America? Was that you LD who did it or were any of your friends?

Bad boys.

I always appreciate a good sense of humor. We did not break that but I will say that growing up we broke plenty of other things.

Irish,

I hope that yoru son undersatnds what the implications are if he defaults on his mortgage. Those implications are that his credit score will be ruined and his ability to egt another loan down the road will be extremely difficult if not impossible. If he is able to egt a loan it will be reflected in a much higher rate.

If he is able to make his mortgage payments within the context of managing his finances he should definitely continue to make them. If he needs to tighten his belt a little it is still worth it.

If it is merely a function of his not wanting to finance a home that has declined in value, then he needs to appreciate the costs of that choice.

I hope he does not view it a a mistake. I hope he looks at his home not as an “investment” but as a means of “building equity”, “forced savings” and “having a home”. Those concepts all have real value.

I hope this helps.

My pleasure!! Thanks.

Fiscal…I answered your question twice but for some reason it does not show here. After the first reponse I assumed I did something wrong.

Not sure what the issue is. Did somehow you receive my response without it being published here?

how come you never see women on wall street?

thanks LD

I would not say that you never see women on Wall St. but I would say that they are underrepresented. Why is that? In my opinion, this is the line of reasoning:

On the trading end of the business, the competitiveness and aggressiveness is very much an athletic type of atmosphere. That in and of itself is not a reason for women being underrepresented but regrettably that atmosphere takes on the negative aspects of a “locker room” as opposed to the positive nature of “the field”. Thus the “boys will be boys” mentality makes it particularly challenging for women. Those women who voice concerns often get tagged as being “unable to take it”, while those who are “aggressive and competitve” often get tagged with the “b” word. It’s a very challenging balancing act. Not every trading desk is representative of this approch but many are. Ultimately the desk manager needs to set the proper tone.

On the banking and asset management sides of the business, women are more favorably represented but there is still plenty of the “old boy” network.

All the Wall St. firms will talk the game of values but when push comes to shove very few actually live those values.

All this said, if any women out there have an interest in pursung a career on Wall St., I would strongly encourage them to do it, but in doing that I would be focused on who (meaning who is your manager) you work for as much if not even more than what you are doing.

Develop a relationship with a good mentor who can help you navigate the waters.

Good question.

LD, how do you know when it’s time to sell a dead stock? I own some really dead paper, some of it was highly speculative but most is S&P 500, but all are down. Thankfully I don’t need the money but don’t like loosing money on general principle. Dividends are OK on most…don’t need any cap losses for 2 more years, so how do I know when to sell or should I just hold & hope? Pathetic question, I know. lol to keep from cryin’

Do you see much of a future in pursuing a career on Wall Street for anyone, man or woman, at this point (especially for a fresh young pup such as myself)?

LD, I just forced myself to look at the entire portfolio. My best performers are down around 16%, my worst are down by 60%, on average I’m down 40%. Is there some rule of thumb? I’m embarrassed to even write this but WTH.

Fiscal…I am really disappointed as I literally just spent 20 minutes writing an extensive answer to your queston and yet AGAIN it did not show up.

Perhaps somebody in the inner workings of my computer does nto like my response.

In short, i think the stimulus plan will have some benefits to create velocity in our money supply but not as much as Obama would like.

MPC….Great question!!                     Wall St. is clearly a changed industry as a result of this fiasco. That said, there will still be opportunities. A few salient points include:The investment banking model is dead (please go back and read my piece from November  12th, “The Wall St. Model iS Broken….and Won’t Soon Be Fixed”) and all the firms are now becoming commercial banks. That change means that these institutions will not be able to utilize as much leverage, which inhibits growth, which inhiobits compensation overall.

All that said, unless capitalism is dead as we know it, which I do not think will happen, ther eis a need for Wall St. and the services it provides. What are those services:

1. advice
2. asset management
3. liquidity

If I were looking to move onto Wall St. now I think I would look to join a smaller boutique investment banking shop that is not overly burdened by excessive headcount, infrastructure, and a bloated cost structure.

Clients globally will ALWAYS need good advice. This aadvice is always generated by smart people. These smart peopel will always be in demand. Thus for an entry level person I would look to become affiliated with a shop as described above and then connected to a group that allows you to grow. Your first job and first shop are never your last job and shop.

Learn, learn, learn…get a great mentor…and then work, work, work, so that you outperform all expectations. that goes for any business, not just Wall St.

Hope this helps.

…then keep coming back to NQ…and bring your friends!!  

Just….Lots of points to address here.

1. First off it is good for you to review your holdings on a regular basis. I do not encourage getting overly caught up on daily swings in the market but I do encourage knowing where you stand financially so that “you can control your finances rather than vice versa.” Why? I think it is very important that you understand the nature of your portfolio.
–how much and what kind of equity exposure…both in terms of individual stocks and mutual funds…make sure you incorporate your IRA into this process

–how much and what kind of bond exposure…

–how much and what kind of real estate exposure…

–how much and what kind of cash exposure…

–what are yor liabilities…short term, long term…

–what is your monthly budget…

This is the top down approach that is VITALLY necessary long before you get into the fine tuning of your stocks…

(I hope you don’t think that I am way off target in addressing your question, but I think it is imperative to initially focus on the forest before you focus on the trees).

From here, evaluate the respective weightings of each sector and determine if those weightings are in sync with your risk profile, your age, your needs. Maybe you find out you have too much risk, or maybe you think you are not taking enough risk.

In assessing risk, understand the types of risk that you are taking (market risk, company risk, credit risk, interest rate risk, counterparty risk especially for institutions where you hold your cash and securities).

From here, NOW you can start to fine tune your holdings. For these stocks what do you think of the industry sector? Develop an understanding of why certain stocks have gone down 60% vs 16%. Are the stocks down 60% because they are subject to heavy borrowing and may have problems getting financing in the future? Are those that are down 16% outperforming because they perform better in a recessionary environment?

It would be reckless of me to say dump something or double down on somethiing else. I think you may end up finding out that by fully reviewing your portfolio and balance sheet, that these smaller positions actually become somewaht less important.

Great question. I hope that my answer is helpful. I have to believe that many thousands of our loyal followers have the same question in this economy!!

Hope this helps!!

I may be able to do a refi of my mortgage [ now at 5.875% fixed]and home equity loan [now at 5%, but variable] at 4.5 to 4.75% but with 2.25 or 1.25 points respectively. This is a biweekly fixed rate mortgage that will save thousands in interest over the years and be paid off in about 23.3 years, rather than 30. Which rate should I choose? The lower rate with the higher closing costs ot the higher rate with the lower closing costs??? Thank you so much! What a great forum for consumers! Love No Quarter.

Try posting the answer at the end of the blog versus a response to a individual

Some how I have the feeling that the Liquidity Trap as discussed in the econometric circles is important for understanding as it applies to the street.

Hi L D. I am glad you are doing this. I will read along. I noticed at the top, you were careful to say who you are not. It seems that at one point, L. Johnson had some good things to say about who you are. Could you put that at the top of your posts, too? A nice introduction up by the title of the blog, would be great. Thanks again for doing this. I get the feeling that everyone is preocupied with Christmas right now, and the number of commenters will grow after the holidays (and the ouch, bills come due). I really appreciated your comment about the kid that lost value on the home was buying. Is 1200 a month typical for a 140,000 mortagage? More important, I would love to see you write a whole post on what happens when you let a mortage default. The dad said it was seedy, but crippling to the kid would be more accurate, it seems. Good luck, L. D.

The better the post…the better the chances of losing it.

I can’t seem to remember to copy them prior to posting just in case they are lost though.

Thanks, LD. I keep reading and learning from you.

Horses…Thanks for the plug. Great idea about posting the bio. Will look to work that into the delivery.

I do not know how that individual could have a mortgage for 140k that has a monthly payment of $1200 as that would equate to annual payments of $14,400. The mortgage may very well be a sub-prime mortgage that has adjusted higher. That is a 10% rate. Ouch!!

Good idea about writing on the implications of defaulting on a loan.

I do hope that the following grows as I know that the challenges in the economy are great and growing.

Thanks again.

Getfit…and that is the point!! Spread the word.

Susan,

A few points.

1. I am always in favor of minimizing the overall long term costs but the question becomes if that is doable under your current situation.

If you can handle the upfront points along with the biweekly payments then it is more than likely that your all in costs will be lower by paying the points to get the lower total payment.

2. Does the biweekly payment along with the higher points cause excessive strain on your current budget?

If you can handle the higher upfront payments then you will save money over the long run and that is a good thing.

Everybody’s situation is different.

I would encourage you to sit down and make a detailed budget highlighting all the monthly costs as you know them including these respective mortgage costs and then determine what works best for you.

Good luck!!

Thanks for the plug.

Fiscal,

Great question.

Not that everybody on Wall St. thinks about the “Liquidity Trap” in the midst of each and every transaction but from 40,000 feet virtually everything that occurs on Wall St. is about creating velocity in the economy and thus counteracting the trap.

This “quantitative easing” approach by the Fed is directed toward bringing down rates on mortgage, consumer, commercial and corporate assets in an attempt to promote borrowing and in turn generate velocity.

Given that nobody involved in the economy or markets have ever actually experienced an economy this challenging it is purely conjecture as to how this plays out. The government is running the risks of excessive velocity leading to massive inflation vs anemic velocity leading to the deepest recession since the Depression.

In regards to the stimulus, I think it will have mixed results in terms of creating velocity. The package being leaked is in the vicinity of $750-850bln and seems to include the following:

1. 100bln in tax cuts…I am guessing that these cuts will be directed primarily at lower and middle income groups. I agree with Robert Reich that these cuts will be used to pay down debt and pay off bills. That approach is prudent in an environment of rising unemployment and shrinking credit. That said, don’t expect much velocity from this component.

Spending:
–state aid focused on assuming Medicaid payments
…don’t expect velocity here…
–infrastructure focused on roads, bridges, et al
–school construction
–energy efficient projects
–broadband
–health info technology

These components will certainly benefit the economy but I am not certain that they create the biggest bang for the buck.

Additionally, do not forget that the 700bln TARP was actually passed as app a $850bln package with the final 150bln in the form of pork that was used to buy votes to pass the legislation. Included in that pork are a bunch of projects that include money for
1. a company that makes arrows. 2. water parks. 3. murals on city buildings…et al….

Those types of projects do not inpsire confidence that government has the fiscal discipline to allocate OUR capital judiciously.

Thanks again for writing!!

Irish…quick question. Thinking about the monthly mortgage payment, that would seem to equate to a current rate of app. 10%.

Not my biz, but that rate seems high. If possible, it is certainly worth looking into refinancing that mortgage.

Obviously lots of variables including income, credit, employment etal…but worth addressing.

Hope this helps.

on average I’m down 40%

this is true for myself as well. LD Thanks for the insights and thought provoking articles you pen.

As getfit said I keep reading and learning from you.

Best wishes this holiday to you and yours.

Irish…

One other thought came into my mind. I have heard that some people are starting to rent rooms out in their home. Not knowing if this is possible or plausible for your son but I figured that I would pass it along.

Teak…I am happy that I can help. Thanks for the plug and all the best to you and yours as well. Spread the word so we can try to help others also.

LD, Your response to my question really has me thinking…huuuuum…or am I just worrying? I could pose several counter questions but would rather focus on one tonight: “Are the stocks down by 60% because they are subject to heavy borrowing & may have problems getting financing in the future?” Crammer talks about the need to do research in this area as well but I don’t know how. Please tell how to do it. Are there specific sites? or signs?

LD,

Thanks for this service and for the opportunity to ask any question – I currently am the primary support for my family of four, the husband is unemployed but starting up his own small business (so far all major expenses have been paid in cash or short term home line of credit). We live in a area with a relatively stable housing market, we put half down on our home with a 20 year 6.25% mortgage. We have no other debt, the credit cards which are used for almost everything, are paid off monthly (we use them in order to earn air miles or get cash back.) The kids have earned scholarships for college, work part-time, and borrow the minimum amount necessary to cover the other college costs. We kick in for books, transportation, computers and cell phones. My question is – aside from a CD to be used to cover 6 months of living expenses, all we have in savings is my 401K, which lost 25% in value in 2 months. I moved it all out of stocks into bonds to stop the bleeding. I had a 60/40 split until recently. I have 13 years before I can even consider retiring, do I move a little or a lot back now or wait?

Just….

I hope that you know my response was not intended to cause yo or anybody else to worry. I do like the fact that it is causing you to think.

I do not think that you need to do extensive research for you to understand why and how a company stock is performing in the fashion that it is.

A site that I use personally is wsj.com but that requires a subscription. I am sure that you can use sites like msn.com to get a wealth of info. If not that site, many generic sites provide basic stock coverage. Look for a “money” link and find a box where you can input the name of the company and/or the stock ticker. The most basic question you want to answer is what “industry” group does this company occupy. What is happening in that industry. Does it underperform during a recession?Outperform during arecession like Wal-Mart? Does it generate excess cash-flow or does it require heavy borrowing? By looking at company details you should be able to learn a lot.

Let me know what you learn and write back.

Remember, also, that this is a process. You are not going to learn everything the first time out. In fact, you will learn some things but they will likely cause even more questions. That is good.

Start first and foremost, with the industry group and cash flow vs debt service. Let me know.

Great column LD. You have definitely helped my poor stressed brain to understand the economy a bit better. I hope you’ll continue to be around & wish you Happy Holidays also!

MBC….Wow!! Again, I am not a professional financial planner so please understand I am offerring “general” advice. It would be irresponsible of me to start offerring specific advice without knowing people personally.

That said, I will offer the following:

1. you seem to be making almost all the right moves…I commend you.

2. keeping your debt service to a minimum and not financing your debt is a GREAT move…that is also a great example for your kids. Well done.

3. In regard to savings and your 401K. I strongly encourage you to continue to fund the 401K if you can. Continue the disciplined approach that you have been displaying to this point. Saving is just as important if not moreso than investing!!

Not knowing what kind or type of bonds that you owned, many sectors of the bond market have also moved down considerably in this selloff. I think the fact that you moved it out of stocks when stocks were down 25% has likely saved you 10% +/-.

I would further add these comments.

What types of bonds do you own? The safest and most liquid that being a government bond fund is currently IMO exceedingly rich and over the long haul likely to underperform.

I am rambling here a little so let me get more specific as I formulate my response.

1. Diversify…being all in bonds for the long haul is not a winning strategy. Along wiht diversification of asset classes you also want diversification within asset classes (for example you would not allocate all your stocks to aggressive stocks or international or value stocks)

2. You do want some bond exposure as you had. In fact, I think there are sectors of the bond market currently that look very attractive, specifically the municipal market. Understand the type of municipal bond or fund before purchasing. If possible, buy pre-funded bonds or revenue bonds as these are safer than general obligation.

3. In regard to stocks, I would propose a “dollar cost averaging” technique vs the all or none approach. The way that that approach works is as follows:
if you have a $1000 to allocate to the equity market which brings you to a 50/50 split of bonds vs equity, then move 10% per month. Given the fixed dollar amount you will actually buy more stock exposure as the market moves down and less as the market trades up. Do you understand that point?

Within your stock purchases, though, I recommend a balanced approach. You can accomplish that by finding a mix of funds that you like or I may recommend merely buying an index fund that mirrors the market as a whole.

I hope this helps.

Thank you LD. I was afraid I wouldn’t get a straight answer from the loan officer at the bank. I will go with the lowest interest rate. In this terrible economy, this forum is sure to be very valuable to consumers. Thanks again!

Happy to help!!

LD, Thank you for answering my questions. Re: a “companies’ debt & ability to borrow” are you talking about their S&P credit rating? If so how high does it have to be in this environment? Triple A? What if they don’t have one? Seems like all it takes is for 1 rating agency to even downgrade them to “neutral” & things start unraveling. Those “income statements” may be beyond my ability to understand, Is that what your referring to? I admit I probably give too much weight to “insider buying”. Please know I am laughing a bit at myself typing this, aware of how unsophisticated & goofy I sound, but am not going to allow pride to stand in the way of an opportunity to learn.

LD, cash flow=TTM. I’m a moron, can’t find “debt services”, does it have a symbol?

Just….Don’t ever hesitate to ask anything. The site I use wsj.com has all of the company statements on the left side of the page once you have inputted the ticker symbol. If you have access to a site that can reference company news and financials, use it as I am sure it will provide sufficient data.

I am not referring to their credit rating, although that is also very important to know. I am just referring to their net income which reflect revenue minus expenses). Is that income growing or declining?

I would not necessarily rely on insider buying as that does not mean that you should be buying.

First and foremost, look at the industry group and decide if you want to be buying in that industry based on your thoughts about the economy. Then look at the income statement. I would encourage you to do some of this homework and come back to “central Station” and let me know how you’ve done.

Focus on income…

More questions LD –

In #3 = Your answer “In regard to stocks, I would propose a “dollar cost averaging” technique vs the all or none approach. The way that that approach works is as follows:
if you have a $1000 to allocate to the equity market which brings you to a 50/50 split of bonds vs equity, then move 10% per month. Given the fixed dollar amount you will actually buy more stock exposure as the market moves down and less as the market trades up. Do you understand that point?”

Not sure. Let’s say I have $1000 per month put towards my 401K (includes employer contribution) and currently all of it is allocated to Intermediate-Term Bond Fund (no clue specifically where that is going). In order to follow through with the above approach, I would —fill in the blanks—–.

MBC….

Under the scenario that you outline,you would effectively be utilizing the dollar cost averaging technique via your “monthly” allocations. This approach in which you put in a fixed amount (let’s say the $1000) on a regular basis buys more shares (market exposure) as the market is lower and buys fewer shares as the market is higher. For example if you are buying the Vanguard Balanced Index Fund (which is actually 60% stocks and 40% bonds, your $1000 investment buys more shares when the price of the fund is lower and less shares when it is higher. If you decide that you want separate funds (say a Vanguard Total Stock Market and a Vanguard Total Bond Index)and a 50% exposure to stocks and a 50% exposure to bonds, then again put $500 into the stock fund every month and the same amout into the bond fund every month. After you have fully allocated your funds you will have effectively “averaged” your cost basis via your fixed dollar investments.

I hope this helps.

One last point, I do very much like the idea of index funds which mirror the entire market sector that you want exposure to and as a result minimize the expense of portfolio management. For example those index funds at Vanguard have a fee of only .19%. You do want to be very mindful of the fees as the power of “compounding” is strong and you want as much of your money working for you and not necessarily paying the high fees for what may be mediocre performance.

Thanks LD, I am going to spend some time over the holidays researching my options and make some adjustments. Please keep writing posts, I have questions I don’t even know I have yet

p.s. I have always been hesitant to consult a financial planner as 1.) I wasn’t so sure they didn’t have their commission as their first priority and 2.) my tolerance for financial pain is low.

MBC,

I do have plans to continue this effort. In fact, I think that there are a tremendous number of people in our country who have feelings very similar to yours.

The fact that you are going to do more research on your own is what I would hope to happen by my writing here.

Vanguard is a good site as they have a wide array of index funds which have those low fees I mentioned and plenty of resources for you to utilize.

I am glad that I could help.

Happy Holidays!

Happy holidays to you too, but hopefully you won’t take too much time off from posting

[...] In the spirit of traveling to be with loved ones for the holidays, I thought it may be appropriate to launch our second trip from LD’s Dollars and Sense “Central Station.” [...]