Ship Owners are cancelling their orders
We talk a fair bit on the shipping industry lately. Why i tune in alot to this was probably due to my investment in Courage Marine as well as the shipping industry is how goods are shipped from one place to another and a good barometer on international trade.
However this bit of news are more likely related to potential impact faced by locally listed ship builders like YangZijiang and Coso.
Shipowners are forfeiting tens of millions of dollars to cancel contracts to buy vessels rendered uneconomic by one of the industry’s sharpest downturns.
Last week, New York-listed Genco Shipping announced it was forfeiting $53m in deposits it had placed to buy six new vessels due to cost a total $530m.Hellenic Carriers, listed on London’s junior Aim market, said it was forfeiting a $6.97m deposit and making a further $1m payment to abandon a $69.7m contract sealed in July to buy a dry-bulk carrier.
At the same time, Oslo-listed Golden Ocean told Lloyd’s List, the shipping daily, it was reviewing its ship orders, although none had yet been cancelled.
The cancellations follow a collapse in the short-term, spot market rates for dry-bulk ships carrying iron ore, coal, bauxite, wheat and other commodities. The fall – of 71.9 per cent in October alone – has sent ship values tumbling. Consequently, it is often more worthwhile for shipowners to forfeit their deposits and pay compensation than to go through with deals on which they would never earn a reasonable return.
Quentin Soanes, managing director of Braemar Seascope, a London shipbroker, said that, for the worst-hit sizes of dry-bulk carriers, 40-50 per cent of existing orders could be cancelled. Braemar’s current estimate of the world order book of dry bulk ships stands at 3,920 vessels.
he said: “It’s going to be very, very messy, I think,”.
By cancelling orders, the shipowners rfelease badly needed cash they would otherwise have to put towards future payments on ship purchase…
Shipyards, meanwhile, are struggling to secure the guarantees that will refund shipowners if they fail to complete their orders. Without such guarantees, orders become void.
Stamatis Molaris, chief executive of Excel Maritime Carriers, told investors he no longer expected to receive four large dry-bulk carriers ordered for $311m from Korea Shipyard in Mokpo, South Korea.
The father of portfolio theory on the crisis
In the early 1950s, when young Harry Markowitz was looking for an area of economics to pursue, a chance encounter with a stockbroker in Chicago led him to apply a new logic about risk to what had been an investment industry based on touting individual stocks. He revolutionized the investing world by showing how to create diversified portfolios that reduce risk and maximize return.
Our current credit crisis arose from an imbalance of risk and return in portfolios of mortgage-backed and other debt securities, so it seems timely to ask the father of modern finance what went wrong and what to do about it.
Now 81 and still teaching and advising funds, Mr. Markowitz has good news and bad news. The bad news is that bailouts to restore liquidity aren’t addressing the real problem. The good news is that once we have the information to measure the losses of bad risk-taking, markets will recover.
Mr. Markowitz doesn’t excuse the financial engineers who bundled complex mortgage-based and other securities. They violated the first principle of his portfolio theory. “Diversifying sufficiently among uncorrelated risks can reduce portfolio risk toward zero,” he says in an interview. “But financial engineers should know that’s not true of a portfolio of correlated risks.”
In traditional Markowitz-inspired investing, such as mutual funds and index funds, there is a discipline around variables such as asset classes and models of covariance. In contrast, collateralized mortgage obligations and related securities had no such discipline. These risks sank together. “Selling people what sellers and buyers don’t understand,” he says with understatement, “is not a good thing.”
In a now-famous paper on portfolio selection in the Journal of Finance in 1952, Mr. Markowitz wrote that risks that are not correlated with one another work best, while investments that move together — owning both Ford and GM — are riskier. This idea, which seems obvious now, was so novel then that when Milton Friedman reviewed Mr. Markowitz’s University of Chicago Ph.D. dissertation, he half-joked it couldn’t lead to a degree in economics because the topic was not economics. Mr. Markowitz got the degree and in 1990 shared the Nobel Prize in economics for portfolio theory.
As with all new information tools at our disposal, applying portfolio theory to investing entails its share of trial and error. Mr. Markowitz admits some people might object to asking him how to repair the credit crisis. “You, Harry Markowitz, brought math into the investment process,” he imagines some people thinking. “It is fancy math that brought on this crisis. What makes you think now that you can solve it?”
He draws a line between his portfolio theory and its later misapplication. “Not all financial engineering is always bad,” he says, “but the layers of financially engineered products of recent years, combined with high levels of leverage, have proved to be too much of a good thing.” In contrast, classic investment portfolios such as mutual funds and index funds continue to reduce risk.
In an essay recently posted on the Web site of Index Funds Advisors titled “What to Do About the Financial Transparency Crisis,” Mr. Markowitz calls for urgency in addressing the underlying problem of mismatched securities. So long as there is continued “obscurity of billions of dollars of financial instruments,” we run the risk of Japan-style stagnation. Banks there, with the support of the Ministry of Finance, refused to mark bad debts to market for a decade.
“Just as with all securities, the fundamental exercise of the analysis and understanding of the trade-off between risk and return has no shortcuts,” Mr. Markowitz says. “Arbitrarily assigning expected returns absent an understanding of the risks of the securities is precisely how the economy arrived at this point.”
Mr. Markowitz reckons it could take a year before we have the transparency we need. Assessing the value of mortgage-backed securities requires scrutinizing mortgages down to the level of individual ZIP Codes. “The valuation process will take as long as it takes, but it is the primary step toward effectively utilizing the very controversial bailout and avoiding the structural problem of a stagnant economy.”
How to avoid more such crises? Politicians need to learn a lesson. “If the choice is requiring mortgages for people who don’t qualify or keeping the banking system sound, we should learn to opt for sound banking every time,” he says. Also, since “financial engineers seem to get their necks chopped off periodically,” they shouldn’t get bailed out when it happens.
The father of modern finance knows how badly correlated portfolios create risk instead of controlling risk. Mr. Markowitz deserves a hearing from policy makers for his insistence that they focus on restoring information and transparency to the credit markets, making losses clear and resetting prices accordingly. To put the issue in probability terms, the odds are between very remote and nonexistent that the economy can recover until these basic steps are taken.
Bankruptcy Watch: Circuit City Files for bankruptcy
Circuit City filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code. I caught this very nice timeline of what news came out during its 98% plunge in share price.
I found a comment in one of the blogs discussing Circuit City interesting. What went wrong with their business?
I am sure people would like to blame their staffing change. Perhaps that how revisionist history may play out.
I see the staffing change as an attempt (albeit an ultimately unsuccessful one) to forestall this very happenstance.
Brick and Mortar stores simply cannot compete with the “no sales tax” and “free shipping” internet age. Brick and Mortar can only cater to those who
(1) need an immediate gratification
(2) do not have the means to purchase over the internet.
#1 is a very delicate balance as to price sensitivity, and can’t sustain a huge chain.
#2 tends to be of a certain income range and DEFINITELY cannot sustain a huge chain.
The internet got them … but blame the re-staffing if you want.
So what do you think is the reason for Circuit City’s failure?
Deflation Watch:Parent Pulls Kids from Day Care!
ROCKFORD, Ill. (AP) — The nation’s economic troubles play out one family at a time at the New Horizons Learning Center in this struggling city two hours northwest of Chicago.
Some parents have been laid off and must pull their children out of the day care center until they can find a job. Others’ employment hours have been cut, so they reduce their kids’ attendance to a few days a week.
Financial strains prompt one mother to pay with a postdated check. Another chooses to work in the middle of the night — after putting her kids to bed — because of the extra dollar per hour that shift brings. And the stress shows on the faces of the children who can’t understand why their friends, without explanation, stop coming.
“They act out more, cry a lot more,” said Diane Kesterton, director of New Horizons, where a 38-child enrollment has been halved to 19 in just three months. “They don’t know what’s happening, they’re confused.”
Parents nationwide are telling day care providers they must scale back or abandon their services. Instead, they keep kids at home with grandparents or upend their work-life balance because gas and food prices have become prohibitive and average child care costs outpace rent and mortgage payments — even for those drawing salaries.
“I was paying more in day care than I was making in work,” Meredith Hartigan, a Rockford single mother of two, said in explaining her decision to pull her 4-year-old daughter out of day care in August and switch to working nights and weekends.
Hartigan said her $38,000 office-job salary couldn’t cover her bills and $6,900 in annual day care costs.
To make matters worse, Hartigan’s ex-husband’s salary as a roofer is set to plummet as it does every winter — and she’s increasingly concerned his business won’t pick up next spring as it has in years past.
Child care providers have similar fears as centers that have had waiting lists for as long as anyone can remember now find themselves scrambling for children. Many are for the first time offering part-time services or changing hours to accommodate the growing number of parents working off shifts, or struggling to make ends meet.
“It is not about people making choices to drive a second car,” said Diane Stout, executive director of Circles of Learning, also in Rockford. “For many low income people it is making a choice for food.”
Diana Ochoa, a 27-year-old who lives with her sons, 4 and 6, at her parents’ house in Rockford, said — even after a sharp decline in gasoline prices — she can only afford to fill her tank enough to bring her youngest boy, Kenneth, to New Horizons three days a week.
And when she can’t afford child care, Ochoa stays awake through the day to care for her youngest son at least until her parents come home from work.
It’s not just low-wage earners feeling the pinch. Day care costs average between $3,380 to $10,787 a year for just one preschooler, according to the National Association of Child Care Resource & Referral Agencies.
Even before this year’s economic perils, the cost had climbed 5.2 percent between 2006 and 2007, said Linda Smith, the association’s executive director. And in every state in the country, the monthly child care bill for two children is higher than median rent payments and as high or higher than a mortgage.
While 2005 U.S. Census Bureau data, the most recent available, indicated 2.65 million preschoolers attended day care, Smith’s association says current national enrollment — or unenrollment — figures are not available.
But there are distressing signals.
In June, well before Wall Street’s tumultuous fall, research firm IBISWorld Inc. predicted day care revenues would climb by just 1 percent in 2008 — just more than a third as much as in each of the previous two years.
In San Gabriel, Calif., Total Child Center owner Doreen Sonnadara said although no children dropped out, her enrollment fell from 51 at the beginning of last school year to 15 at the start of this one because younger children have all but stopped taking their older siblings’ spots.
In the Rockford area, where manufacturing jobs have disappeared by the thousands in recent years and the unemployment rate jumped to 8.8 percent in September, day care providers are worried next year could be even bleaker.
“Even in the last couple weeks it feels like (economic troubles) are moving up in the next income level,” said Toni Brown, who owns Stepping Stones Child’s Center in nearby Roscoe. “First, the people living day-to-day who were immediately hit. Now it’s hitting people who thought they were safe for a while.”
General Motors Corp. this month announced plans to shut down its plant just across the state line in Janesville, Wis., putting 1,200 people out of work — and Brown is bracing for the repercussions.
“We have one family, the mom is a GM employee, and they have two children with us,” she said.
“We just had two (children) in the last week, we were told they are now staying home with grandma until ‘things get better,’” she added. “It’s not getting better.”
When not having child care isn’t an option, some fear financially strapped parents will put their kids in facilities or homes that are little more than waiting rooms.
“We are driving people into an unregulated system,” said Peggy Liuzzi, executive director of Child Care Solutions, a resource and referral agency in Syracuse, N.Y.
Smith agreed, saying she expects even people who now qualify for aid from the state to not even bother applying.
“If you know there are 207,000 people on the waiting list in California, you probably aren’t even going to get on the waiting list,” she said. “Why fill out all the paperwork?”
And that means more children could be put in possibly dangerous situations as parents turn to cheaper, unlicensed care.
An example, said Liuzzi, was the woman in New York who, unable to find anyone to care for her 4-year-old daughter while she went to work in a shoe store, simply left the girl outside in a car with a sandwich and water, checking on her every hour.
The woman’s decision, which came to light when someone spotted the child and called authorities, underscores the desperate situations facing a growing number of parents.
“People need to work,” Liuzzi said. “They can’t let their jobs go and they will make choices they will regret.”
Courage Marine 3rd Quarter Announcement
As expected the result was abit chui. The subsequent quarters will really reveal the mantle of this management. Unpredictable rates will definately create big challenges for the management. However, on the positive note, it also presents a good opportunity for the management to replenish its aging fleet.
- Revenue fell 25% while expense stayed relatively the same.(Freight rates plunging no?)
- Profit for the quarter fell 57% from USD 20 mil to USD 8.6 mil
- Balance sheet stayed relatively the same
- Operating Cashflow fell by 50%
Group turnover fell 25% in 3Q08 to US$18.2 million from US$24.2 million in 3Q07, reflecting the general decrease in dry bulk freight rates. The Baltic Dry Index (”BDI”) dropped significantly in recently months and averaged about 6,400 in 3Q08, 17% lower than 3Q07’s average of 7,700. The BDI was trading around the 3,000 level as at 30 September 2008.
Commentary
The global financial crisis has had a significant impact on the shipping industry. Freight rates have been extremely volatile in the past few months, with the BDI reducing to around the 800 level currently from an all-time high of above the 11,000 level in May 2008.
The Company expects freight rates to continue to be subject to downward pressures in the coming quarter and for FY2009 and in view of this, the Company and the Group’s financial performance may be adversely affected.
Additionally the recent economic volatility has affected the market’s ability to place reasonably accurate valuations on vessels.
The Company is currently assessing the carrying book values of the Group’s vessels, to determine if an impairment charge will be necessary and will make the appropriate announcement in due course.
Subsequent to end September 2008, the Group acquired a second-hand vessel MV Zorina (approximately 48,000 dwt, and previously known as MV Marigold) for US$16 million. In addition, the Group’s subsidiary has signed a Memorandum of Agreement to acquire another second-hand vessel weighing 67,000 dwt for approximately US$4 million. This vessel will be delivered in mid-November 2008. In line with the Company’s intention to replace older vessels with younger vessels where possible, the Group disposed one of the oldest vessels in our fleet, MV Ally II, in early November. The Group’s total fleet size will therefore rise to 9 vessels and the total tonnage of approximately 460,000 dwt is 21% higher than the 380,000 dwt as at 31December 2007.
Furthermore, in late October, the Group obtained a new bank loan for an amount of US$10 million for the acquisition of MV Zorina.
The Group will maintain its cost-efficient structure and focus on keeping its fleet well-deployed and running efficiently. The year 2009 is expected to be a challenging one for the shipping industry due to the deterioration in the global economic situation.
However, the Group believes that its prudent expansion of tonnage, good customer relationships, focus on keeping a tight rein on expenses and strong balance sheet will enable it to seize opportunities and overcome challenges in the coming year.
Sarin Technologies 3rd Quarter 2008
The company reported a bad quarter results, no doubt affected by the slow down in US.
- Net profit fell 49%
- Cash Hold decreased from USD19 mil to USD11mil.
- Operating cashflow was just USD 31k!
- Cash hold decreased mainly from a capital expenditure of USD 7 mil
- A larger R&D and increase in sales and marketing efforts added to costs
- Planned ahead will be to cut these 2 items by 20%
Due to the unpredictability of earnings and cashflow, I am inclined to take this company off my dividend stock tracker. Do let me know if you feel otherwise.
A good analysis of the Apple Ipod Business by Financial Alchemist
I have been a fan of Turley Muller at Financial Alchemist. He does really detail analysis and comparisons between companies.
This week, I came accross his posting on Apple’s Ipod Business. Its facinating to see the sales figures and ASPs put out and the pricing strategy Apple relied on to garner greater of the consumer surplus. This analysis can prove to be a good economics case study in itself with figures supporting demand elasticities and how volume reacts to price changes.
Personally i do not own an Ipod. I use a Meizu M6 as my main mp3 player. I never considered getting one, even though i can afford one easily.
However, I would say i am really intrigue in getting a iTouch 2G. In Singapore, It should retailed at around SGD 350. I think that is a very reasonable price to pay for a 8 GB WIFI enable mp3 player. What is working for it, is really the application that you can download from Apple iTunes App Store.
You would be able to download numerous offline applications, games as well as cloud computing wares such as Dropbox, Evernote, Things and Remember the milk. I used my project manager’s iPhone and just loved the integration.
Do read up on this analysis. its rather long but interesting.
Slowing iPod sales growth has been one of the chief concerns among AAPL investors because the iPod has historically been a major contributor to Apple’s overall revenue growth. The concern stems from the belief that the PMP market is becoming saturated. With 175 million iPod units sold, finding new customers is becoming more difficult. However, the iPod is becoming less of a revenue contributor, hence Apple is dependent on the iPod for its sales growth. Andy Zaky, a highly accurate AAPL analyst addressed the iPod’s shrinking importance with regards to Apple’s corporate revenues. In addition, If Apple reported iPhone sales as part of the iPod segment, this wouldn’t be much of a concern, because the iPhone would have reaccelerated sales growth in the iPod segment. I recently discussed that scenario. Yet, Apple reports the iPhone separately. Therefore, this analysis focuses on the traditional iPod product line and its growth outlook.
Historically, Apple has used price reductions to fuel unit volume. The demand elasticity allowed the increase in unit sales to outweigh the decrease in ASP, resulting in higher dollar revenue. In a more saturated environment, demand becomes less elastic Unit growth has been slowing: 6% (FY08) vs. 35% (FY07), but iPod dollar revenue grew 10% in FY08 compared to 8% in FY07. Apple was able to increase iPod ASP to $167 (FY08) from $161 (FY07) with the introduction of the Touch. Even as the PMP market has neared saturation, Apple has reformulated its iPod product line which will motivate upgrades to iPod models carrying higher ASPs. Therefore, Apple’s current iPod product line strategy focuses on appealing to non-PMP users, as well as motivating current users to upgrade to higher ASP models. Apple has also positioned the iPod product line so that it’s practical for a user to own multiple iPod models to serve different purposes.
iPods were the primary growth engine for FY05 and FY06, responsible for roughly 58% of Apple’s total revenue growth for both years. In FY07, iPod segment generated only 14% of overall sales growth. As a percentage of total revenue, iPod accounted for 33% (FY05), 40% (FY06), 35% (FY07) and 28% (FY08).
The iPod is becoming less significant for revenue growth due to the success of the Mac and iPhone segments. Apple’s revenue grew 35% in FY08 and 24% in FY07, yet the iPod was the slowest growing segment both years. In the last quarter (4Q08), iPod sales were only 21% of total revenue, and less than 15% not using iPhone subscription accounting. Thus, concerns about flagging iPod sales detrimentally impacting Apple’s overall business are stretched since the iPod is becoming less of a contributor. On a non-GAAP basis, the largest revenue contributing segments are the iPhone and Mac, which are the also the fastest growers.
Historically, Apple has introduced new iPod models at high prices then gradually lowered prices. Unit volume accelerates at lower price points, but the decrease in ASP results in less dollar sales growth. The reverse is true when Apple introduces models at high ASPs, which offsets the effect of lower unit volume on dollar revenue. In a saturated market, demand elasticity evaporates as unit volume is not responsive to lower prices. The focus shifts to motivating current users to upgrade to new-featured models at higher price points. A common belief is that Apple has sold so many iPods, that there isn’t anyone left that doesn’t already own one. In a sense, that’s almost literally true. Those that would enjoy such a device, likely have already bought one. Figuratively speaking, the low hanging fruit has been picked. Therefore, Apple needs to keep introducing new models with advanced features that will entice user upgrades and appeal to new consumers lying beyond the PMP market. Apple has accomplished this with the Touch.
iPod’s first two years on sale, ASPs averaged around $350. Then in Q404 (Sept) Apple cut iPod prices $100 and demand increased considerably. In Q205, Apple priced the “Mini” iPod model @ $199 along with launching the shuffle. This resulted in ASP dropping to $191 in Q2 from $264 in Q1. Unit sales exploded even exceeding the previous period which was a holiday quarter. ASP trended down over the next couple quarters until Q106 when the video iPod was released. ASP rose to $207. ASPs gradually fell over the subsequent 8 quarters, sustaining unit volume growth.
In FY07, unit sales growth was 31%, but revenue growth was only 8%. In 1Q08, Apple introduced the Touch model which carried a significantly higher ASP. This resulted in FY08 iPod revenue growth of 10% on top of 6.2% unit growth. That’s right, iPod revenue growth was higher in FY08 compared to FY07. Thus, even though unit volume has slowed materially, dollar revenue growth has actually increased. I think that point is often missed from investors and the media primarily focusing on unit sales.
iPod unit sales only grew 5% (y/y) for 1Q08, but dollar sales increased by 17% due to a higher average selling price (ASP). After 8 consecutive quarters of declining ASP, the Touch reversed that trend as ASP rose to $181/unit in 1Q08. You would have to go back 6 quarters to find a higher ASP. We have seen a decline in ASP since Q1 mainly due to the price cut for iPod Shuffles, which management stated has had a very positive effect on volume.
In the September quarter (Q4), ASP fell to $150, primarily due to the back-to-school promotion. I surmise that ASP might have been $20-$25 higher otherwise. Going forward, I expect the recent trend of declining ASPs to reverse. ASPs will rise due to the sales mix skewing towards the Touch model. The July opening of iTunes App store, along with the September’s introduction of the 2nd generation Touch model at reduced prices, will substantially boost demand.
The purple shaded area of the sales table highlights the periods where ASPs dropped stimulating unit sales growth. It’s also apparent that revenue growth slowed due to the lower ASPs. The green area shows the periods where ASPs increased significantly; unit sales stalled, but revenue growth accelerated due to the higher ASPs.
[Continue Reading here at Financial Alchemist >>]
Down and Out in Beverly Hills: Rolexes, Picassos Hit Pawnshops
Nov. 7 (Bloomberg) — The worse the economy gets, the better it is for Jordan Tabach-Bank.
“Business is booming,” said Tabach-Bank, the chief executive officer of Beverly Loan Co. in Beverly Hills, California.
Beverly Loan is a pawnshop. Not just any pawnshop, but the kind that caters to people who hock Cartiers, Harley- Davidsons and Oscar statuettes when they need cash. They really need it now, Tabach-Bank said from a third-floor office, protected by bulletproof glass, off his showroom in the Bank of America building near Rodeo Drive.
“I’ve never seen so many bankers, lawyers, doctors and actors” with valuable things to pawn, he said. He pointed to an 18-carat white gold bracelet with 69 diamonds ($2,900) and an 18-carat yellow gold Rolex Yachtmaster II (“a steal” at $18,500).
With credit drying up at regular lenders, “in many cases now, we’re not just the bank of last resort,” Tabach-Bank said. “We’re the bank of only resort.”
High-end pawnshops aren’t like most of the 10,000 dealers affiliated with the National Pawnbrokers Association, a Keller, Texas-based trade group. The average U.S. pawn transaction is $75, according to the association’s Web site.
$2.7 Million Necklace
At Tabach-Bank’s shop, “confidential collateral loans,” as they’re called, have been made on art works by Pablo Picasso, Andy Warhol and Jean-Michel Basquiat. Amounts loaned range from several thousand dollars to “six- and seven-figure deals,” he said, with clients using the money to cover the mortgage, make alimony payments or finance cosmetic surgery.
[Continue reading here at Bloomberg >>]
Stock Bull Being Born
Adam Hamilton from Zeal writes here what he believes should be a start of a new cyclical bull market. Funny that he mentions not alot of bulls out there when i still hear people getting in the markets now haha…
With the election of a new President, it was an important week for the financial markets. Whether you were part of the 53% of Americans who voted for Obama or the 47% who voted against him, you’ve got to be thankful this bitter campaign has ended. A peaceful regime change is a great blessing that should not be overlooked.
The very next morning it was back to business as usual for the financial markets. Countless traders collated and analyzed all the information available to them to continue trying to best-position their capital for the future they believe is most probable. And prevailing sentiment was definitely morose. No matter who won on Tuesday, today’s serious market and economic problems were going to linger.
The pessimism and gloom is certainly justified. With the S&P 500’s (SPX) 35.1% year-to-date loss, 2008 is heading for the record books as one of the worst stock-market years ever. This bear has been brutal. In its first year which ended October 9th, the SPX was down 41.9%! This was the largest first-year loss in any bear since the one after the 1929 crash plunged 43.8% during its first year. Things look and feel pretty bleak.
With endless bearish arguments out there, many very logical and plausible, it is easy to surrender to the pessimism and capitulate. But if you are a contrarian, somewhere deep in your brain nagging doubts are gnawing away. If virtually everyone is bearish and pessimistic, and almost everyone is discounting Armageddon, shouldn’t I fight the crowd and be bullish? When better to buy low than when practically no one is brave enough to buy?
While it is very hard to be bullish today, my inner contrarian keeps warning me that today’s excessive pessimism and bearishness isn’t sustainable. Every time I unmute CNBC in my office, 95% of the interviews are bearish and negative. Each time I read financial news, a similar unbalanced negative worldview emerges. The bearish trade is certainly extremely crowded today, highly in vogue.
All these newly-minted weathervane bears are amusing to watch. The right time to be bearish was back in the early 2000s, when everyone insisted on staying bullish. Back in 2001 and 2002 I was making the case for a 17-year secular stock bear based on market history. This meant the stock markets were due to grind sideways for the better part of two decades in a giant trading range. It was a heretical thesis at the time.
While the perma-bulls scoffed back then, they are not today. If you are not familiar with the long cycles in the stock markets, my “Long Valuation Waves 3” essay will quickly get you up to speed. Understanding where we are in these long cycles is the single most important piece of knowledge any long-term investor can possess. While most naïve investors are crushed in these secular bears, prudent investors can thrive.
I continued this thread of research over the last 7 years, updating it periodically. By January 2008 it was starting to look like we were entering a cyclical bear (lasting a few years) within this 17-year secular bear. While the SPX was still sojourning in the high 1300s I warned…
“So is a new bear looming? It depends on what kind of bear we’re talking about here. There are short-term cyclical bears that last a couple years or so, which tend to cut major stock indexes in half. And there are far worse long-term secular bears, which tend to run for 17 years or so. We may be entering the former but we never left the latter.”
This bear-within-a-bear concept is critical today, especially for contrarians. Cyclical bears within secular bears tend to run for a couple years and cut headline stock indexes in half. While our current cyclical bear has only run for half as long, in terms of depth it has already neared the projected 50% decline. At worst on a closing basis between October 2007 and October 2008, the SPX plunged 45.8%!
Add to this observation the fact that secular bears tend to have giant trading ranges. If a given secular bull (like 1982 to 2000) peaks at an indexed level of 100, after that it should gradually meander back and forth between roughly 100 and 50 for 17 years. The 100-to-50 declines are the 50% cyclical bears within the secular bear. And the 50-to-100 increases are the 100% cyclical bulls within the secular bear.
Well, believe it or not, despite the rampant pessimism today our current secular bear’s trading range suggests we could be nearing the beginning of one of these 100% cyclical bulls. And even if our current cyclical bear persists for another year first, its remaining downside should be modest. Since its first year witnessed such an extreme decline, it is likely too low in its secular trading range to fall much farther.
[Continue Reading Article Here >>]
WSJ: How to make a Spending Plan
It would seem that this topic is getting more and more relevant by the day. Here is a good introduction from Wallstreet Journal on how to structure your spending plan.
“Budget” might well be the dirtiest word in the financial language.
People hate budgets because budgets seem confining. Like diets, budgets are forever begun with grand intentions, only to be quickly ditched when spending restraints seem too much like a yoke preventing you from disbursing your money as you like.
But in today’s environment, where unemployment is on the rise and where consumers are hung over after a multi-year credit binge, a budget is the very tonic many households need. It doesn’t have to be painful if you understand one salient fact: You control your budget; it doesn’t control you.
Every month, you dictate how you spend your limited financial resources. Your budget has no control over that. You can choose to eat out every day, or you can choose to replace your wardrobe, or you can choose to pay off additional principal on your debt balances, or you can choose to afford a getaway over a long weekend. Whatever you want to do with your money, you can do it.
But here’s the catch: You can’t do everything.
And therein lies the problem. Too many people want their paycheck to cover everything they want, the instant they want it, and if the money’s not in the budget, they turn to American Express and MasterCard. Bad, bad idea. That credit-reliant mindset got this country into the mess it’s now in.
So, as you seek once again to hew to a budget, let’s come at this problem from a different point of view. First, we’re not going to call your budget a “budget,” and, second, we’re going to focus on the one component you have real control over, your discretionary spending.
What’s in a Name
Money is as much a way of thinking as it is a means of interacting in the consumer economy. As such, we’ll attack the budget from a mental angle. From now on, start calling your budget a “spending plan,” because that’s exactly how it operates. It is your personal plan for spending your dollars in any given month.
Think about your life for a moment. Do you make the exact same purchases every single month? Of course not. What you buy differs from one month to the next. Yet many people use the “average cost per month” approach to budgeting, so that in any given month they can spend an average of $150 on clothes, and an average of $100 on a vacation, and an average of $300 on eating out, and so on.
But life doesn’t work that way. You don’t take a vacation every month, and the vacations you do take aren’t costing you $100 when you take them. More important, you’re not saving that $100 each month to cover the vacations when they do arise. You’re spending the money on other items and then, when the vacation pops up, you’re shoving the full cost—well more than $100—onto a credit card because the budget isn’t prepared to handle the outsized outlay.
That’s a seriously flawed way to plan your spending.
Instead, budget each month for exactly what you want to buy. You might not need new clothes this month, so how useful is a budget built on the premise that you’ll spend $150 on shirts or skirts? Instead, you might rather spend that money on a dinner and a play for you and your partner. That’s the expense you should be planning for, and that’s the beauty of a spending plan: it doesn’t tell you how to spend your money. You get to determine what you think is the best use of your cash each month.
And how do you plan for that?
By planning your discretionary income. That’s the key to successful budgeting.
Managing Discretionary Dollars
Every month you have certain costs that do not change. The mortgage/rent, a car note, insurance payments, electricity and groceries (give or take a few dollars). Those costs are fixed, unless you pay off your car, reduce your electrical consumption, change your insurance policy or move to a cheaper or more pricey apartment (or you refinance your mortgage).
Add up all the fixed costs in your life and subtract that sum from your monthly take-home pay. The result is your discretionary income—all the money you have for the month to pay for the wants you harbor. Exceed that amount and you are living beyond your means. And if your fixed costs exceed your income, you have some serious issues to tackle that go well beyond this article.
The goal of successful budgeting is learning to live within the bounds of your discretionary income.
Once you know exactly how much money you can spend, then you can go about the process of determining how you want to spend it.
As each month approaches – say, on the 20th of the previous month – make a list of your spending desires. Some of these will be “needs,” some will be “wants.” A new suit for an interview that could increase your salary clearly fits the needs category and should be high on your list of costs that you cannot cut. The new video-game system is a want and should clearly fall to the bottom of the list, the items you consider only after your needs have been fulfilled.
Fund the needs first. If you run out of discretionary income before all your needs are met, then you must prioritize. Which needs can you push into next month? Can you borrow a suit from a friend for that interview so that you can allocate that money to another need?
If your needs are paid, and you still have cash to afford some wants, you must still prioritize. Is that video-game system more important than the vacation you hope to take with the family in six months? Would it make more sense financially to allocate some or all the cost of the game system to the vacation? Maybe you put half the money toward the vacation and half toward the game system and wait a month before buying.
This is what budgeting is really about: prioritizing your discretionary spending. You choose how you spend your money, and you do so, but only to the point that you have the money to afford your choices.
One of the great benefits of the monthly spending plan is that you can change it on the fly without throwing your finances into a tizzy. Friends phone and want you to share the cost of beach house over a long weekend. Look at your spending plan for the month, determine what discretionary costs you haven’t yet incurred and where you can cut or scale them back, and you’ll have the necessary funds for your beachside getaway – without tossing the expense onto your credit card.
Ultimately, a spending plan comes down to this fact: If you want to spend every last nickel on double-tall half-caff mocha latte grandes with sprinkles every working day, that’s your call, so long as you explicitly recognize you’re allocating all your money to that expense every month, and you don’t also go out and buy all the other stuff you want, too. That’s where households fall into the abyss—they overshoot their discretionary income each month, sloughing ever more costs onto their debt balance. When the fall comes, it’s painful, as the U.S. has learned the hard way in the credit- and mortgage-crisis of 2008.
Stay within the limits of your discretionary income and you will never struggle with debt. And, you’ll never bust your budget, er, spending plan.
Getting accustomed to the process might take a couple of months as you figure out how to prioritize spending. But once you’re comfortable with that, planning your spending for the coming month will require just a few minutes of your time.
Saving and Irregular Expenses
The first item on your discretionary spending list every month should be an amount allocated to your savings account. A savings account is your first line of defense in a financial emergency, so fund the reserve every month to build an increasingly larger cushion with each passing month.
In theory, you should save at least 10% of every paycheck, more if you can afford it. But rules of thumb aren’t static. If 10% is too much, start with whatever amount you can afford on a monthly basis, and work to increase that amount every six months.
Also, if you earn a pay raise or bonus at work, put half of the net into your savings and apply the other half to your discretionary income. This way, both your financial security and your lifestyle share the benefit. (Caveat: If you have debt that you’re trying to extinguish, apply to your debt the half that would otherwise go otherwise to discretionary spending. Eradicating debt is far more important than enjoying an extra movie and meals out each month. And all of any bonus should pay down debt, since a bonus is found money that’s not part of your monthly spending plan).
Financial life is filled with a variety of irregular expenses. These are costs such as insurance premiums, tuition payments, property tax bills and others that arise during the year, generally quarterly, semi-annually or annually. Though these are clearly routine payments, too many people treat them as emergency expenses because they don’t have enough money in their checking account and their income for the month can’t cover the cost. So they bill these expenses to their credit card or deplete savings.
This is simply bad planning, not bad luck.
If you know a certain expense will arise in, say, three months, then plan for it months in advance. Build the cost into your spending plan, either on the fixed or discretionary side of the ledger, whichever is appropriate. But don’t leave the cash in your checking account; you’ll be too tempted to spend it, or will forget what that money is for and allocate it to something else.
Instead, put the money in a separate savings account (not your normal savings account), and fund it every month with the dollars necessary to cover the various costs that you know will pop up from time to time. When the expenses arise, you’ll have the dollars ready to go and the outlay won’t impact your spending plan that month. This strategy works well for any long-range expense you foresee for the year, from insurance premiums to vacations to Christmas spending. Just plan it all in advance and save along the way.
And that’s it. That’s successful budgeting. It’s not hard. It doesn’t have to be onerous on your lifestyle. All you have to do is recognize that you control your money, and you determine where you spend that money each month.
