Category Archives: Recession

Reduce your California Withholding NOW!!!

Posted on July 1, 2009 | 10 Comments

Sure tax season is 10 months away but you still can protect yourself now if you live in the state of California.

As you know, California is starting to issue IOUs to those that have lower priority on debt held against the state.  The lowest on that totem pole are any taxpayers who are owed a refund.  It is very possible  that this IOU system will continue for some time, even as late as next calendar year when you are filing your 2009 taxes.  Remember. April 15th 2010 is the next calendar year but it is within the current IOU-laden fiscal year for California.

What does this mean for you?  If you are expecting any sort of tax return there is a chance that you will, instead, receive an IOU.  As a result you should seriously consider (legally) reducing the amount of tax withheld to a point where you at least wind up break-even (or even owing a little bit) when you file your taxes for 2009.  If the state owes you anything do not expect to receive it in a timely fashion.  Better it be in your pocket than there’s.

Also remember you have paid half of your income taxes for the year so you’ll need to account for that as well.

This is probably extremely critical if fear you may be unemployed in the near future.  You may find yourself in a situation where you would wind up with a tax refund but not see the much needed cash in time.

Please note that your situation may vary depending on your specific circumstances so you should ALWAYS contact a professional for the right strategy.  I just contacted an accountant and wanted others to at least have the chance to do so as well.

Forewarned is forearmed.

Oh and be forewarned about the next major drop in real estate on the San Francisco Peninsula.  Here is an article that shows why prices are due for another 30% drop.

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Posted in Recession, Sense & Sensibility

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The (Scary) Math Behind the GM Taxpayer Bailout

Posted on June 1, 2009 | 11 Comments

Why are the taxpayers only going to get a few pennies on the dollar for its GM investment?  Its very simple math that goes something like this

The government effectively will get 60% of General Motors in exchange for $50 Billion in aid.

This, using standard investor math, means that GM has an implied value of:

50 Billion/.60 = $83.3 Billion

Currently (or as of last Sunday) GM had 610 million shares outstanding.

That means that for the taxpayer to break-even GM shares (in the pre-bankruptcy world) would need to be worth $136.55 PER SHARE (83.3 Billion/610 Million)

The lifetime HIGH for GM is $93.62 back in April 2000 when the going was good. So good luck with that.

Oh and to complicate matters the government will see its holdings diluted if the bondholders take the extra 10% that they were promised as part of setting up the bankruptcy filing.  If GM is doing well one would assume they would exercise these options and taxpayer shareholders would get diluted.

In that case the taxpayer stake goes to 54% which means an assumed market cap of $89.3 Billion or a per share price of $146.39

So even if GM were to return to its lifetime high of $93.62 the taxpayer would only get back $34 Billion 0r 68% of its investment if GM got as BIG as it ever was.

This of course is impossible based on the Government’s own admission that they are structuring GM to compete in an economy where car sales are 33% less than they are now. 

Sure these numbers are approximations and some of the debt might be repaid like a normal loan (and I hope most of it is) but you can tell that there is no way that the taxpayers will see even HALF of their money returned even if all the right things happened (in a short-period of time as President Obama doesn’t want to hold on for long).

Well look on the bright side.  We got rust-protection and under-coating free with the deal and we know how important those are.

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Posted in American Auto Bailout, Recession, Sense & Sensibility

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Rearranging Deck Chairs on the Peninsula

Posted on May 22, 2009 | Leave a comment

With a good run on the stock market and even some good news about housing sales I think its time for an example before anyone gets too cozy that the worst is behind us.

To play it safe you need to think about where we are in the economic cycle the same way as an important scene in the movie Titanic.  This is the scene where the ship, which has been slowly sinking for about an hour, suddenly levels off when the submerged part of the boat (partially) breaks away.  Everyone is relieved that they are floating level when all of a sudden they get pulled down in a rush to the bottom.  The sinking part of the housing market just (partially) broke away and everyone is giving that sign of relief.  Strike up the band!
 
 
Here is why we are in for that second more hellish ride straight to the bottom.  In the short term the credit markets will get a swift kick when we finally have a large bank failure come to light. Give it 3-6 months and my FDIC insured money is on Bank of America (eventhough they passed their “stress” test). There goes the financing revival. Second of all housing will get another kick in the pants in two years when interest rates have to start going up again (to combat eventual inflation).  We have seen the recent good news being the result of lower interest rates so what happens when those interest rates go up? 
 

Also as any real estate agent will tell you “location, location, location”.  Well while prices have begun to level in the outskirts like Vallejo they haven’t really begun their fall in Silicon Valley and the Peninsula.  Right now people here think “whew that wasn’t so bad” (only a 10% drop in value) but in reality what these market movements (dramatically falling median home prices) presage is a large fall coming to the Peninsula this year.  Yes everyone is buying homes in the cheaper areas of the “bay area” which is what is driving down the median.  That means less buyers on the Peninsula (in which you can’t find any homes close to the current depressed median).  Its only a matter of time before it finally hits here.

My prediction (or is that a “sinking feeling”) is that this summer will feel “soft” on the peninsula and that will prick the confidence bubble leading to the same panic here that happened last year in the suburbs.  This is when 30-40% price drops (peak-to-trough) become a reality in Palo Alto by summer 2010.  Additionally the bank efforts to artificially restricted supply of foreclosures will finally give way as all banks decide they need to get out before its too late.
 
Impossible you say?  Remember it was once said that the housing market could not possible crash the same way the NASDAQ did during our last bubble.  Really??  Have a look at this graph which offsets the NASDAQ peak to correspond with the peak in Bay Area housing prices.

housing-vs-nasdaq1

Oh and lets not forget that the housing market is permeated by many myths that are proving to be quite untrue (and therefore won’t be there to save this market).  For a detailed analysis of these myths please point your browser here.

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Posted in Housing Bailout, How to Lie with Economics, Market Cycles, Recession

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Houses Can’t Possibly Behave Like a Stock…

Posted on March 19, 2009 | 2 Comments

Around March 2006 I started to theorize that housing prices in the San Francisco Bay Area might be this decade’s bubble.  It followed that we could see a collapse in housing prices to the same dramatic proportion as we saw in the NASDAQ.  When discussing this concept with friends, relatives and even a tax accountant I was presented repeatedly with these arguments of why that was impossible:

  1. The Bay Area is still a highly desireable place to live so housing prices could never decline and if they did never that dramatically.
  2. Houses take longer to sell and can’t be traded like a stock so prices can’t fall as fast.
  3. Also since you can always live in your house (and you can’t live in your stock) there is no reason for a fire-sale so prices can’t fall as far.

At that same time I saw a chart of house prices in which the curve was shifting to the point where it was almost going straight up.  That reminded me of what the NASDAQ looked like in March of 2000 and we all know what happened in April of 2000.  So could this happen again?   Were all bubbles fundamentally the same (eventhough the assets were dramatically different)?

Well clearly we are in the midst of a price adjustment but evenso it can’t be as bad as the NASDAQ, or can it?

So the other night I decided to do a little data-diving and found two key pieces of information:

  • Month-end NASDAQ prices from 1981 to the present.
  • Month-end median housing prices for the Bay Area back to 1987.

I then overlaid the data on top of one another after shifting the NASDAQ data up by 6 years.  Why 6 years?  Simply put the NASDAQ bubble popped in 2000.  The housing bubble, it is currently agreed, popped in 2006.   By shifting the NASDAQ data by 6 years we could see how well the curves aligned.

So what you see graphed below are month-ending NASDAQ prices starting in 1981 and month-end median house prices for the Bay Area starting in 1987.  See anything interesting?

housing-vs-nasdaq

So there you have it.  All three arguments as to why the housing prices wouldn’t collapse like the NASDAQ were COMPLETELY WRONG and now we see that no matter what the asset the dynamics of the bubble are the same.  Yes it is true that the run-up in housing prices is not as fast BUT the fall was just about as fast and there is a good chance that it will go as far.

So next time someone says “this time its different” make sure to laugh discretely and sell quickly. 

Now the next question is when do you buy?  Certainly not now. 

I wouldn’t advise using the chart above as a way to peg a specific date and I would go back to fundamentals.   The key fundamentals you need to check are:

  • Is owning now cheaper than renting?
  • Are prices equal to or less than 3 times the median of incomes in the area?

If you answer “no” to either of these questions then  DO NOT BUY.

Now what if the fundamentals do check out but the market is still falling?  This is where the trend information in the chart can come in handy.  To find a bottom wait until prices move upward for about 3 consecutive months (make sure they are prices for your city and NOT the county or region).  If they do and the fundamentals still check out then its time to buy.  While its true you will miss the absolute bottom its much better to buy on the upswing than to “catch a falling knife”.  Until it turns you have no idea how much more its going to fall so its worth paying a small premium for some certainty.  As you can see from the chart waiting a little bit won’t result in you missing a big upswing.  It took the NASDAQ about 6 years to reach HALF of what it was worth at the peak.  Missing three months of house price gains isn’t going to break the bank.


Oh and according to this article house prices are in for another fall and there is an interesting analogy to the sinking of the Titanic you might find interesting (with video)

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Posted in Housing Bailout, Market Cycles, Recession

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A Recession Even Letters Can’t Describe

Posted on February 16, 2009 | 5 Comments

In all the financial press there has been much discussion about the shape of the recovery, always in the form of letters.  Would it be a “V-shaped” recession – sharp drop followed rapidly by a sharp recovery?  Or possibly “U-shaped” – sharp drop followed by a period of bottom-trawling followed by rapid recovery? Or even a “W” – two sharp drops with recoveries after each?  Some have even proposed an “O” as in “O sh#t its never going to recover!”

I have found that letters cannot describe this recession.  My belief is it will be a sharp drop (been there, currently doing that) followed by a long and slow climb out for stocks and house prices.  Well nothing in the English alphabet can possibly account for this.  So what could?

Stumped, I sat staring at my Smart Phone looking for answers and then it hit me.  Looking above and to the right of the screen, not where I typcally find answers to my internet queries, I saw my cell phone carrier’s name and logo and VOILA!!! 

Welcome to the official shape, logo and motto of The Great Recesssion.

recezion5

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Posted in Housing Bailout, Market Cycles, Parody, Recession

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Contacting Economic Influencers in the Obama Administration

Posted on January 11, 2009 | Leave a comment

I now have dug up email addresses for Obama’s top two economic advisers Timothy Geithner and Lawrence Summers.  See this page to see how you can email them and make sure that irresponsible homeowners are not bailed out.

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Posted in Recession

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