Don’t Like Where Your Bet Is Going? Cancel It
I read this article in Financial Times: Nanshan deals with Goldman Sachs halted.
China’s securities regulator has ordered a state-owned power group to cancel oil derivatives contracts it signed with a Goldman Sachs subsidiary which would have exposed the Chinese company to losses if oil prices continued to fall.
Bond Proposals on Ballot
I have quite a few bond proposals on my November 4th ballot. I voted (by mail) for one measure for public transportation, another for public schools and against the others. What’s interesting to me is that the proposals all say there is no tax increase because the bond repayments will be paid out of the general fund. I don’t know. It’s like we can get the purported benefits for free.
Do you have bond proposals on your ballot? How will you vote on them?
FREE! Financial Markets Class by Robert Shiller
Do you wish you attended a top university and studied under the greatest professors? I do. That’s why I’m a big fan of the Great Courses series by The Teaching Company. I get to learn what I haven’t in college.
This gets better. Under its Open Yale Courses initiative, Yale University made available online, FREE!, ECON 252 Financial Markets taught by Professor Robert Shiller. Outside of academic circles, Professor Shiller is probably most famous for his book Irrational Exuberance. From the course description:
Why the United States Is More Prone to Housing Problems
An article in Financial Times led me to a good research paper by Luci Ellis, an economist at Bank for International Settlements (BIS). BIS is the “bank for central banks” based in Basel, Switzerland.
The paper confirmed what I suspected when I wrote Mortgage Loans Around the World. Basically the home loan borrowers in the U.S. had it too good. When the system is too good to the borrowers, it’s not so good to the lenders. The lenders are made more vulnerable to credit losses.
The paper compared the United States with other developed countries which also have an advanced financial system for housing and home loans. It revealed several structural factors which made the United States stand out in the world. These factors made it more likely that the U.S. lenders will run into trouble. From the abstract:
Tax Loss Harvesting and Missing the Best Days
When news about the $700 billion bailout plan first came out last month, the U.S. stock market staged a big rally on September 18 and 19. The S&P 500 index rose 8.5% in two days. Respected author Larry Swedroe posted this on the Bogleheads forum on Sunday, September 21:
“It is often discussed about TLH [1] whether to wait 31 days and reinvest or immediately.
Preferred Stocks, Credit Crunch, and Illegal Immigrants
I’d like to share some comments on a few pieces I read in the news and blogs.
Preferred Stocks = Subordinated Debt (Credit Slips) – Professor Adam Levitin of Georgetown University looked under the surface of our government’s bank recapitalization deals using preferred stocks, following similar moves by the British government and Warren Buffett’s purchases into Goldman Sachs and GE. Although they all involve preferred stocks, not all preferred stocks are created equal. It turned out that the U.S. government’s deals are a lot worse (to the taxpayers) than the UK government’s deals or Warren Buffett’s deals. We are getting from our banks 5% dividend for 5 years, and 9% dividend after 5 years, which we may never see. The UK government is getting 12% dividend from their banks from day 1. They also prohibit the banks from paying dividend on common stocks until the government’s preferred stocks are paid off. Warren Buffet’s deals were 10% dividend, 10% redemption premium and a boat-load of in-the-money warrants from Goldman Sachs and GE. We should’ve given the money to the British government or Warren Buffett and let them structure our deals with the banks.
Tightening of Credit Strikes Nerve Among Consumers (San Francisco Chronicle) – Via MnD on Bogleheads Forum. This is a story by Associated Press. It was run in many newspapers with slight variations. It tells us how people on “Main Street” are affected by the credit crunch. They can’t get as much credit to buy stuff which they don’t have money for. Credit card companies are not approving as many people as before. They are not giving as high a credit line as they did before. People are mad at credit card companies for choking off their lives. The credit card companies just can’t win. When they were mailing out many credit applications, people are mad at them saying they are like drug dealers handing out drugs. Now they are handing out less and people are mad at them again.
TIPS During Deflation
[Updated on Oct. 28, 2008. All yields are real yields, after inflation/deflation adjustments.]
While the stock market was in turmoil, the real yields on Treasury Inflation Protected Securities (TIPS) rose to an attractive level. The real yield on 10-year TIPS broke the magic 3% number, a level that hasn’t been reached for many years. Many TIPS buyers including myself thought the high real yields in the first few years after TIPS first came out in late 1990s were a fluke. The real yields were high because TIPS were new and illiquid. I thought we’d never see 3% again. It’s amazing how fast things change. Back in the spring, the 10-year TIPS real yield was under 1% while the 5-year TIPS real yield was negative (please note all yield numbers for TIPS are expressed as real yield, which is on top of inflation).
It’s always hard to explain why the market moved the way it did because previously when the stock market ran into trouble, the bond prices went up (real yields down ). The concern for deflation was raised as one possible explanation for the rising TIPS real yields. A poster on the Bogleheads forum asked whether the real Yield to Maturity (YTM) number quoted when an investor buys a TIPS on the secondary market will still hold if there is deflation instead of inflation.
Overbalancing Continues
The stock market crashed last week. I continued with overbalancing although I slowed down the pace from my original plan because it’s hard to keep up with the speed the market was dropping. Both the U.S. and international broad market indexes crossed the 40%-off mark. My target stocks/bonds ratio is 70/30, up from 65/35 when the stock market entered the bear territory in July, and from 60/40 a year ago. 70/30 is still not too aggressive for my age. I’m planning to retire in about 20 years. The big 3 mutual fund companies all have at least 70% in stocks in their target date fund for people who plan to retire between 2025 and 2030.
| Stocks | Bonds | |
| Vanguard Target Retirement 2025 Fund | 78% | 22% |
| Fidelity Freedom 2025 Fund | 70% | 30% |
| T. Rowe Price Retirement 2025 Fund | 79% | 21% |
| Vanguard Target Retirement 2030 Fund | 85% | 15% |
| Fidelity Freedom 2030 Fund | 80% | 20% |
| T. Rowe Price Retirement 2030 Fund | 84% | 16% |
| Average | 79% | 21% |
How does it feel when I buy into something and then see the purchase amount completely disappear the very next day? Not good. Warren Buffett said I’m supposed to prefer sinking prices, but it still takes a lot of nerve to see what the sinking prices do to my portfolio.
Refinanced to Foreclosure
I heard this on the radio on my way home last week. A lady called a talk show program about her foreclosure story. I’m paraphrasing here:
The bank foreclosed my home recently. It was my family home of 35 years. I raised my kids in it. I love it. The bank was WaMu. I begged them to let me keep it but they wouldn’t work with me. I had a loan of $745,000. They sold the house for a little over $300,000.
2008 Tax Year AMT Brackets
Bundled with the bailout bill, congress passed an extension of increased Alternative Minimum Tax (AMT) exemption amount. The exemption goes up from $66,250 in 2007 tax year to $69,950 in 2008 for married filing jointly and from $44,350 in 2007 tax year to $46,200 in 2008 for single or head of household.
With this increase, the 2008 tax year AMT brackets become:
| Married Filing Jointly | Single or Head of Household | AMT Income | QD & LTCG* |
| $69,950 | $46,200 | 0% | 0%/15% |
| $150,000 | $112,500 | 26% | 15% |
| $225,960 | $199,460 | 32.5% | 21.5% |
| $429,800 | $297,300 | 35% | 22% |
| more | more | 28% | 15% |
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