Patrick’s Rants

Warrent Buffett has come out in full support of Goldman Sachs, defending their hedge fund sales. He argues that everyone was essentially a “big boy” and that no children were harmed in the creation of the fund that was designed to fail. I will concede that traders were on deals like piranha on a side of beef, that greed made traders, Wall Street, and Main Street blind. There is blame nearly everywhere you look when it comes to housing prices and the collapse of Wall Street firms. It comes down to pure and simple greed.

Now, to the deal that Goldman is facing SEC charges over. Goldman created and sold “synthetic collateralized debt obligations“. Synthetic means fake, made up. So they (the investment community, not Goldman) made up an investment based on nothing. Well not nothing really, but the only value a synthetic CDO has is what someone else is willing to pay based upon a different but sort of related investment. Think of it this way, you are driving down a road with no stop lights, traffic signals, road bumps, etc. You are unlimited in how fast you can drive. You decide that your speed and even the direction you drive should be based on the car next to you. There is no reason other than you want to. The synthetic CDO is designed so that if the car next to you slows down, you slow down, if it speeds up you speed up. If it runs into an elk, your bumper needs to be replaced. Sound crazy? It kind of is. It’s not buying insurance on your car, it’s buying insurance on the other car. In the insurance industry you have to have an interest in the insured item – you cannot buy homeowner’s insurance on your neighbor’s house, you cannot buy car insurance on his car, you cannot buy life insurance on his wife. But with Synthetic CDOs that’s exactly what has happened. Insurance on something you don’t own and, therefore, can’t lose.

The deal that Goldman was selling was designed to fail. Yes, it was homeowner’s insurance on the house with exposed wiring, a pan of hot oil on the stove, the clothes iron plugged in, and the drying Christmas tree decorated with open flame candles. And the inhabitants are out of town for a week. The bet is that this house will burn down. Buffet’s argument is that the insurance company should have known that this house was going to burn down – nay smoke was already coming out of the windows – and it’s their own fault for insuring it. They’re big boys, they knew what they were insuring. I say not so fast. In the real world (not the synthetic one) this would be insurance fraud, the claim would be denied and someone would be in jail.

Buffett is a pretty smart guy, I don’t dislike him. I agree with some of his arguments about more fair taxes. I applaud his frugal behavior, his modest income when other CEOs are raping their companies and shareholders blind. But I don’t stand on the same side of the street on this particular issue. I suppose we will just have to agree to disagree on synthetic CDOs. Only time will tell which side is right, and whether the regulatory leash will be shortened.

Dear Wall Street, we’re sorry.

As the last hours of 2009 fade into memory, the pundits are talking about the stock market recovery from the Great Recession. And to hear them tell it 2009 was remarkable in the 64% bounce from the market bottom in early March. As I look over what I’ve done in my own retirement account I see that I managed to do better than the markets as a whole. And that’s the way it should be; managed accounts should do better than unmanaged accounts or the index. If you didn’t do at least better than the market overall (or your portfolio didn’t double in value like mine if you want to get really daring) it might be time to take over management of your account. I’m considering a newsletter of sorts for investors who might be interested in what I’m looking at or investing in. Actually it’s far more like trading but it’s not day trading – I’ve only had one trade that took place in one day. I know. Everybody and his brother has a newsletter or a financial blog. I’m not really trying to compete with that. I suppose that I can just get feedback here to see how many of my regular readers think I might have something valuable to add. Anyone can write they had a great idea and made a bunch of money. Just look at Madoff or Enron. And to write that I bought several stocks and sold them for an average of 10% return per trade – some of them more than once – is easy. I could very well fake a great hindsight history so that’s no proof either. An email newsletter, another blog perhaps, text message updates?

Let me know and see you in 2010.

I guess I’m not the only person who thinks that CEOs are overpaid and that compensation needs to be fixed. Will Ashworth writes Executive Bonuses Must Go over on Investopedia.com and his arguments are compelling. Pay CEOs a decent rate of pay, say $4 million/yr and let them buy shares of the company with their own damn money if they want stock.

Over on Yahoo, Robert Kiyosaki writes,
The Biggest Scam Ever an article about 401(k)s. This in response to the Time article Why It’s Time to Retire The 401(k). He cites statistics on balances and averages.

I completely disagree with both arguments. Here’s the simple truth: the 401(k), Keogh, 403(b) and the multitude of IRAs are probably not going anywhere. When most people set up these plans at work, they meet for a few minutes with their HR person who doesn’t know anything about investing and just wants to get all the check marks done for the new hire. Retirement accounts are not a Ronco product – you cannot, cannot just “set it and forget it”. If that’s the way you plan your retirement fugetaboutit. You won’t retire, you’ll be like Robert Shivley in the Time article working on the golf course or greeting people at Walmart. The biggest problem with defined contribution plans like a 401(k) is there is no one to hold your hand, walk you through it and keep you on track. Sure there’s the HR weasel but their job is just to get you to fill out the paperwork. They don’t care if you should be more heavily allocated to stocks or bonds and by law they really can’t give you investment advice. And the investment firm that handles your 401(k) usually is not all that interested in sitting down with you to determine the right balance for your personal account. They usually get paid for the dollars contributed after that it’s a tiny commission amount on the total invested dollars.

It’s not the 401(k) or the IRA that need to be tossed, it’s the idea that you can Popeil your retirement. Wherever your money goes, if you have the opportunity and can allocate your own funds, sit down with a planner of some type. If your 401(k) is sitting at a local firm have a one hour review with your broker. If not and it’s one of those “follow the line” firms call them up. The people answering the phone at those firms want to keep your money and are paid salary to talk to you. There’s nothing in it for them(except keeping the account), it’s all about you. If it’s a local broker remember any decent broker will sit down with you and if they won’t fire them and move your money – assuming you can.

If you can’t move your money and your broker doesn’t have time for you – after complaining to your HR department about the lack of service – sit down with a fee based planner (as opposed to commission based planners). You can take all of your options to a fee based planner who charges you by the hour and has no vested interest in which investments you actually hold. The only vested interest an hourly planner has is to give you decent advice that makes you want to come by next year to pay them for another hour of their time – oh and the referrals of your co-workers who can’t get advice any other way helps.

While the statistics cited by Time are pretty scary not knowing what the statistics are based upon is even scarier. An average is just that, an average. More new accounts with lower balances, more older (presumable larger balance) accounts that have been rolled from 401(k)s out to IRAs, more people regularly withdrawing from their accounts all contribute to the average, just as much as a stock market downturn. Without the underlying numbers averages are just statistics. As has oft been quoted, “there are three types of lies: lies, damn lies and statistics”.

I don’t think the 401(k) needs to go away. I think people need to start planning more for their 20+ years in retirement than next summer’s vacation. They need to start looking at what they are invested in. Ron Popeil isn’t your retirement plan. He might be able to get a chicken done just right, but you have to set it and then reset when it comes to retirement planning. And just because Warren Buffett knows that a stock is a great value and will be worthwhile 40 years down the road doesn’t mean you can buy and hold forever. Even Warren sells once in a while. You still have to periodically look at your retirement plan. You have to take a vested interest in how much you have to retire on, no one else cares about your retirement – really.

The other night my wife received a text message from Verizon that told her that one of our phones had gone over its allotted minutes for the month. If I recall it was the day before Thanksgiving. Of course it was my daughter’s phone (the phone we allow her to use, not that she purchased it). My first reaction was to snatch the phone away from her, which I did. Of course I over reacted and the correct thing to do is to lock the phone down during the peak hours – which one can do with Verizon. So the phone is locked down until the first day of the next billing cycle December 7.

A few weeks ago, S asked if I would help her with her Economics class coming up next semester and I told her I would. And now she has learned the first lesson, scarcity of resources.

I wrote about using the low stock prices at the beginning of this year to lower your taxes a little and to lower how much you have “at risk” in Intel (INTC). If you had followed the 100 share strategy I mentioned in March here’s what would have happened.
First, let me arbitrarily pick June 1, 2007 as your original purchase date. INTC closed at $22.36. For simplicity I’m going to use the close price of the day. I’m also going to ignore the August 3, 2007 dividend (simply because I haven’t checked the ex-dividend date. I will count the intervening dividends)

• Purchase 100 shares of INTC June 1, 2007 = $2,236.00 (plus commissions, discount brokers will run around $10, others will run as high as $50-$75)
• November 5, 2007 dividends of $0.113 = $11.30 added to your account (using the discount broker you just made back your commissions)
• February 5, 2008 dividend $0.128 = $12.80
• May 5, 2008 $0.14 = $14.00
• August 5, 2008 $0.14 = $14.00
• November 5, 2008 $0.14 = $14.00
• February 4, 2009 $0.14 = $14.00
• May 5, 2009 $0.14 = $14.00 (only counting 100 shares worth of dividends, the ex-date timing could have doubled that)

If you had read the article on March 4, and decided that I wasn’t crazy, you could have bought your new 100 shares for $12.31 = $1,231.00. Holding the shares for around 35 days, you would have sold your “first in” shares on June 5, at $15.92 at the close $1,592.00. This gives you a $644.00 loss based upon the original purchase price on June 1, 2007. In a couple of transactions you have lowered your basis – or purchase price – in INTC, thrown off some beneficial tax losses and kept the same number of shares in your account. The long term capital loss over $3,000.00 can be applied to gains if you had them or carried forward for when you do have them.

Plus there’s almost $700.00 of dividends up there, so if you are using that cash for your new purchase your new shares only cost around $600.00.

The economy is in a very precarious position. Many states are having trouble passing their budgets, putting many state employees and state funded private businesses one IOU paycheck from the edge. The mom who works in New York who has to keep going to work while the paychecks are no good or non-existent can’t pay for gas, food or rent. The gas station won’t take an IOU. The grocery store won’t take a “Wimpy payment” and hopefully the landlord is understanding – but they have bills to pay too. If enough tenants don’t pay on time the building could plummet into foreclosure forcing entire buildings of families out onto the street.

I believe the next big wave of foreclosures, adverse credit actions, and unemployment will come out of these state budget problems. I could be wrong, but I believe this newest ripple will have an effect for the next 16 months as people try to claw back to almost making it.

Almost true… We are raising your rate

What is it with CEOs that makes them think they should get more and more pay? Millions of dollars each and every year even as they drive their companies into the ground doesn’t sound very sustainable does it? AIG finance division employees received “retention bonuses” while the hand is out to the government to infuse the company with cash. Give me a break! You fire people who lose your company money setting it on the brink of financial collapse so big it would take down the entire world, you don’t pay them more to stay.

Forbes lists the average CEO pay at $12.8 million. $12.8 million. That’s a whole lot of zeros. And the problem is that the more they get paid, the greedier they get and then you end up with Enron, Worldcom, AIG and Bear Stearns. The usual argument for more pay is along the lines of, “if we don’t pay more then we won’t attract the best CEOs”, especially when those companies need a turnaround. But that argument is crap. Steaming, stinky crap. Look at Iacocca. He took a $1.00 per year salary until Chrysler was turned around. Further look at Warren Buffett. His salary is listed as $100,000. Add $75,000 from director’s fees that he receives from companies he has invested in and the indirect (but still taxable) benefits of $315,709 for personal and home security services. Now, the $100,000 is less than Joe the Plumber claimed he would be making if he bought the plumbing business. And Warren is listed as the world’s second richest man. So, if you want to attract intelligent people to run the biggest companies in the world maybe the pay package should be smaller instead of bigger? I mean, if you aren’t successful enough to have other income and assets why should you be given free rein to steer the company to benefit you by maximizing your stock options?