Archive for the 'economics' Category

Nov42008

Tuesday Top 5: 5 Options in Our Wild and Crazy Times

These are indeed some wild and crazy times we are living in - especially if you are in the real estate or financial fields. Utter chaos and turmoil rule the day.  Part of me wishes John Wayne would ride in on horseback, just for effect.

As I keep my ear to the ground, this is what I am hearing:

Should I buy stocks or go into cash?

Should we buy a house or keep renting?

Will I have my job next week/month/quarter?

Will I ever be able to retire?

Add to these a heavy dose of uncertainty and you have a perfect recipe for mass amounts of people looking for their next move.

In the spirit of fun and learning, I thought that I would offer up a few nuggets of what I think five clear cut options you have as an entrepreneur/investor are right now.

1. Run for the hills

You could hole up in a cave, mount some machine gun nests and wait for the rioting and looting to ensue.  Usually, if you want to make money this is not the best idea.

2. Yearn for the past

Most of the other people that aren’t running for this hills or participating in the ostrich look-alike contest are fondly reminiscing about the days of yore.  Things were good for a long time for people in many different industries.  Mortgage brokers used to be able to almost literally print money.  Blank checks were handed out to financial planners and stock brokers (in the forms of commissions and fees).   Auto companies used to be able to piston SUV’s and pickup trucks off of assembly lines and watch their wallets expand.

While this was all well and good, it is now part of the past.  Evolution and change are the rule of the day in business.  Well, they always were, it was just a matter of it being practiced.

3. Learn a lesson or two

There  are plenty of things we can learn from what has happened in the credit, stock and real estate markets in recent months and the events that are currently taking place.

“Those that cannot remember the past are condemned to repeat it.”  - George Santayana

For the entrepreneurs and investors still standing, this quote should burn into our mind that we should never get so far ahead of ourselves as to think that we are invincible.  I knew more than a few companies and individuals who thought the music was never going to stop (just like in 2000, when dot-coms became dot-bombs).

Life is a constant shakeup of learning and doing.

4. Tackle New Opportunities

Since the apocalypse is not yet upon us (despite Sports Illustrated magazine’s lobbying), there are no doubt new opportunities to make money in industries that are currently decimated.  Think: housing, auto’s, mortgage.  What shape this will take I don’t yet know.  Could new, niche focused portfolio lenders pop up to fill gaping holes in the mortgage market?  Will the upstart auto companies popping up like weeds in Silicon Valley usurp the global auto powers that be?  (I mean..come on, can GM hold out that much longer?  Glad I dumped my shares a few years ago).

When the tide finally retreats back to the sea, we will all look around and realize that not everyone has been swimming naked.

5. Vote

Since election day is upon us, it would be very patriotic of me to neglect to mention that the polls are open and you (well, those citizens of the U.S. who enjoy the privilege of voting) might be well served to pull the lever for the future you want to see.  I encourage you to get down and dirty and learn what I call the ‘micro-politics’ of your municipal and state governments.  Find out who your local judges, prosecutors, city council members and other elected officials are.  These people will impact your life more than the newly income president and vice president will.

Think about: keeping criminals off your neighborhood streets, approving new businesses into your city or town, changing the tax code to make it more/less favorable to businesses or homeowners.

—————-

Alright, now for a shameless self-plug.

My business partner, Dylan Tanaka and I will be resuming our real estate video blog at MiRealEstate.tv.

Keep your eyes open tomorrow for brand new episodes.

Published
by
Adam Davis
on November 4, 2008
in Finance and economics
. 0 Comments
Oct132008

Fear and Greed, good to see you are a live and well

“We always try to be greedy when others are fearful and fearful when others are greedy.”

-Warren Buffett

buffett

It’s not a big stretch to see that a lot of the world is afraid right now.  For example, take a look at some recent news headline snapshots:

“Searching for ways to tackle the unfolding economic crisis…

“Market Crash Shakes World”

If you had taken a nap like Rip Van Winkle  a year ago and woke up today, here is what you would find:

  • Lehman Brothers and Bear Stearns out of business
  • AIG, Fannie Mae and Freddie Mac owned by Uncle Sam
  • The Dow Jones Industrial average down 40%

Perhaps you would just like to go back to sleep for another year and wake up to hopefully find things in less of a state of absolute pandemonium.

Alas, if you did that, you would probably miss out on one of the largest wealth building opportunities in your lifetime.

Dovetailing the opening quote by Mr. Buffett (a reasonably successful investor!), the time to ‘get in’ is when pessimism and uncertainty are running high - just as they are right now.  When hoards of investors and consumers are scared and cynical, they aren’t looking at the true intrinsic value of investment opportunities are not making logical decisions.  Emotion (read: fear) is driving their actions and pushes the real value of investments below their true worth.

yinyang

Take the asset class that I like the most right now: real estate.   I don’t think that you’ll find a more out of favor sector of the entire U.S. economy.  The credit crisis and foreclosure tidal wave have all but extinguished even the most resilient of investors hopes for a comeback in the near future.  However, select investments do make sense in both the short and long term.  For example, take look at the following deal breakdown for a single family home deal in Roseville, Michigan (one of the cities in Metro Detroit where my real estate firm purchases bank owned homes):

Purchase price: $20,000

Repair Cost:  $10,000

Total Cost Basis: $30,000

Annual Net Cash Flow (allowing for repairs, vacancy, capital improvements and all operating expenses): $3,600

Now, even if you strip out the idea that the house is worth more than $30,000 from a comparative market value standpoint and you strip out the idea that the house will ever appreciate in value (both of these are extremes, but bear with me), you are looking at purchasing an asset at a price of about 8.3 times annual cash flow.  In stock parlance - this would be like buying a company at 8.3 times earnings, or a P/E ratio of 8.3.

Considering the fact that the S&P 500 (a broad market indicator) is trading at roughly 18 times earnings (P/E ratio of 18), you can see that real estate is not necessarily the bastard asset class across the board that much of the media would like you to believe.  In fact, if you throw any semblance of long term price appreciation in the mix, combined with any benefit of income from real estate being more tax efficient (not always a given)- you have a strong performing asset.

–>  you will not that I left the idea of leverage out of the equation in this analysis for a more ‘apples-to-apples’ comparison

Right now, I think there are some great buys on the stock market side of things as well.  Cyclical stocks are going to be out of favor right now (think: steel makers and home builders).  Among others, I think this is a great time to grab stocks like Nucor Steel (NUE) and KB Homes (KBH).  I have owned Nucor for over 4 years now and could launch into a few reasons to buy, outside of the fact that their shares have been pummeled by the fear mongering of late.  KBH is trading for less than its net tangible asset value - meaning  you could (theoretically) purchase the entire company and liquidate it and at least make your investment back.  This is a relatively rare occurance in the modern stock market.

Since this is not a stock picking blog or real estate blog, I will not opine further.  I only use these examples to illustrate that one can profit from all of the madness going on right now by just looking at the horizon and not at everyone else’s head under the ground.

As is plainly evidenced, fear and greed will always play a dominant role in investment decisions.  The question is: which side will you be on?

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For those in the Metro Detroit area interested in learning more about real estate investing, the industry or what is going on in general in the marketplace right now, the upcoming Real Estate Investors Association of Macomb (REIA of Macomb) is going to be great.  Than Merrill of the A&E show Flip This House is going to be on hand to razzle and dazzle with his tremendous knowledge and investing techniques.  Meet people from around the area who are of like mind and occupation.  Go to the website to learn more.

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I also encourage anyone who wants to learn more about successful investing (of any kind) to read the compilation of letters that Warren Buffett writes to Berkshire Hathaway shareholders each year.  Go here to download some good reading.

Published
by
Adam Davis
on October 13, 2008
in Entrepreneurship, Investing and economics
. 0 Comments
Sep232008

Someday things will change…right?

For anyone paying attention to what has transpired in the financial markets in the last week, you know that we could discuss for eternity the short and long term implications of everything from government intervention to the value of the greenback.

I have no such interest.

There comes a point in time where you must admit the lack of control you have over many factors that intimately affect your life.  The latest events on Wall Street over the past week are an example of this.  This does not mean that we cannot adjust and improvise, and capitalize accordingly, it simply means that our boats, however large, will be tossed and pushed to an fro whether we like it or not.

One thing we can take away from this latest financial debacle is the old axiom: “the more things change the more they stay the same.”  Consider this:

  • in the 1990’s as the “new economy” was booming, it was “different this time” was the prevailing wisdom as the stock markets soared to dizzying heights, and people rushed in with investment dollars
  • in 1998, a hedge fund managed by Nobel Prize winners and math genius’ imploded and almost took the financial system down with it - they claimed they were different because they could mathematically eliminate risk from their portfolio
  • in 1929, flush with money from the roaring 20’s, investors were betting big with borrowed funds on the stock market - in spite of past market panics and margin calls, it was different for them
  • in 1971, President Nixon implemented wage and price controls, designed to tame 6% inflation and there were a great many who thought “temporary” wage and price controls could cure inflation - it will be different this time, they thought.  By 1974 the U.S. inflation rate had reached double digits

Apparently it was going to be different this last time as well, with subprime mortgages, credit default swaps and collateralized debt obligations.

Different indeed.

To take away something different from this most recent market meldown would be like saying that we have ignored history repeating itself over and over again.

Be ready for the next one.

Published
by
Adam Davis
on September 23, 2008
in Finance and economics
. 0 Comments
Aug72008

Nuclear Fallout - Mortgage Mess Continues to Pummel Average Joe

cloud1

Here’s a scenario for you:

A stranger comes up to you and asks to borrow some money. You have the ability to make the $5,000 loan being requested. The stranger can’t provide you with much information. They are vague about what their job is, how much money they make and how they will be able to repay the loan. They don’t have any assets to speak of. But they “promise” that they are going to repay the loan.

Does it sound like a good idea to make this loan?

If you said “yes,” then congratulations, you have what it takes to be a modern day finance company.

Now, you get to CLAIM YOUR PRIZE: Billions of dollars of losses!!!!

It used to be the job of banks and finance companies to ferret out the bad borrowers - you know, doing their best to solve the old adverse selection/moral hazard problem. From the huge mess we have in our financial markets right now, it seems as though all the computer algorithms that they had drawn up to make lending decisions did way worse than a monkey could have done in releasing funds to borrowers who were never going to make a payment.

_____________________________________

Finance giant and investment bank Morgan Stanley has just announced that they will “freeze” all of their clients’ home equity lines of credit (HELOCs). While the company isn’t releasing much information about this as of yet, one can speculate that the main reason for this is that the values of homes have dropped so much over the past 12 months that the equity being borrowed against is no longer there.

Hmmmm…

Knowing what we know about how many Average Joe’s and Jane’s use their homes like ATM machines, taking out equity to buy everything from new cars to vacations and plasma T.V.’s, it isn’t hard to see how further changes like this in the lending markets are going to make for a very lean Christmas this year in many homes.

punch1

This is likely troubling for consumer spending, since much of it relies on the “2 C’s:” confidence and credit. The mortgage and finance companies, who used to woo Average Joe with tantalizing offers of cheap and easy credit, are now gunning for him. It seems every dollar of red ink is stained with the blood of Average Joe’s and Jane’s across America.

If I could rub an old lamp and give orders to my genie, I would wish for ‘normal’ lending standards to return to the market - you know, like it used to be before things got absolutely nuts and ghosts started getting financing for leaving some residue on the wall.

genie1

Published
by
Adam Davis
on August 7, 2008
in Finance and economics
. 0 Comments
Jul312008

Singing the $8.7 Billion Blues

Henry Ford is rolling over in his grave right now. Ford Motor Company recently posted a quarterly loss of $8.7 billion. That’s right, billion with a “B.” It’s a staggering, mind boggling, head scratching sum.

How can a company lose $8.7 billion in a single quarter and still stay in business? For the sake of the economy here in Southeast Michigan, I hope that Ford is able to implement their turnaround plan. If not, I hate to speculate what the outcome will be.

forksign

Speaking of this, haven’t these auto companies been ‘turning around’ for the past 5 years or so? Anyway…

Being involved in residential real estate investment here in Metro Detroit, this news definitely makes me bi-polar. On the manic side, I can see more foreclosures and distressed properties coming to market, driving prices down and presenting better deals. On the depressed side, I see more unemployment, more housing inventory driving rents down and more blight taking hold.

There are indeed two sides to every coin.

For anybody doing business here in Metro Detroit (or anywhere for that matter), I present this to you as the most compelling reason to develop a global business model. Being geographically dependent on your customers and suppliers (as Southeast Michigan is so dependent upon domestic based auto manufacturing) is a non-starter. As a 21st century business, you must learn to tap into the power of a worldwide customer and supplier base.

It has been said that, in business, you are either growing or dying.

The best part of this is that we have a choice; we can succumb to the pressures of economic change or we can make our peace with them and adapt.

As always, history will be the judge and jury.

gavel

Published
by
Adam Davis
on July 31, 2008
in Real Estate and economics
. 2 Comments
Jul112008

Too Big to Fail? What the Heck is Really Going On?

godzilla

Since just about every other blogger under the sun has weighed in on the pending financial meltdown that an insolvent Fannie Mae or Freddie Mac would create in the global credit markets - I feel compelled to throw my hat in the ring as well (what better thing to do when getting buzzed on caffeine at Caribou coffee on a Friday night?).

Many of you are probably familiar with the “too big to fail” tag that has been attached to some large financial institutions in times of trouble, most recently Bear Stearns. This tag has been thrown on the Government Sponsored Entities Fannie Mae and Freddie Mac in recent days as their stock values have plummeted and their financial woes have raised eyebrows across the world. “Too big to fail” means that the government should step in and prevent an institution from failing so as to preserve the greater good of the public.

I can tell you first hand, from an entrepreneur’s standpoint, that having the credit markets get worse right now would be bad news for me and a lot of my brethren. I know that the age-old argument of government interference in private enterprise is alive and well here, but I can’t help but take a look at what the implications would be if financing real estate transactions slowed down further or the capital markets failed to function in getting companies from small to large the money they need to work and grow.

Our economy has become so overly dependent upon credit and liquidity to even operatethat things will really come to a standstill if big shocks occur. The speed with which markets react to information is stunning and it wouldn’t take long for banks and credit card companies to put the screws on small business owners - squeezing profits and impeding growth.

Much of the commentary about this situation right now is focused on big companies and Wall Street banks. The entrepreneur is left out of the discussion but not out of the equation. I think that something should be done from a cooperation standpoint between the governments and other institutions that are close to Fannie and Freddie. We can’t afford to go ‘cold turkey’ in changing our credit dependency overnight - we need to enter rehab first and work it out of our system.

I am hoping and praying for sanity during this whole mess. Though I am confident that things will work themselves out over the long term, the short term will mean pain for somebody, portfolio companies, pension funds, investors, etc.

We can only look forward and learn from what is going on right now and eliminate the ‘irrational exhuberence’ that has once again penalized investors and, most likely taxpayers, again.

“I can calculate the movements of heavenly bodies but not the madness of men.”

Sir Isaac Newton

Published
by
Adam Davis
on July 11, 2008
in Finance and economics
. 0 Comments