Carnival of Wealth, Danyang–Kunshan Grand Bridge Edition

September 30, 2013

When the CYC principals were kids, and read the Guinness Book of World Records for fun (alright, only one of them did, the other was playing with dolls), the longest bridge on Earth was this:

Verrazano-Narrows

The Verrazano-Narrows, linking Brooklyn to Staten Island and reaching 4,260′ at its longest span. A few (just a few) years later, the Verrazano-Narrows is no longer in the top 100. Presenting the Danyang-Kunshan Grand Bridge, or a tiny portion of it:

Danyang-Kunshan

 

It’s not so much a bridge as it is a slap in the face to the underlying Yangtze River Delta, asking why it dares to deposit its sediment over such a vast area when there are cargo and passengers to move. The Danyang-Kunshan is 102 miles long, or 127 times longer than the Verrazano-Narrows. Imagine a bridge that goes from Staten Island to Delaware, rather than Brooklyn, and you’ll have an idea. It’s so long that your Nissan Leaf couldn’t make the trip, and not just because the Danyang-Kunshan is a railroad bridge.

Not only are 16 of the 23 longest bridges in the world Chinese, every last one of them was built in the last decade. We wish we could remember whom to attribute this quote to: “The reason China will own the next century? All our politicians are lawyers. All their politicians are engineers.” But the latter are also censors and spies, too, and thus differ greatly from the former. Now let’s do some carnivalin’:

Around the same time we were memorizing superlatives and dressing Barbie, we first heard adults talk of that magical word, “retirement”. Even then it made little sense: from firsthand observation, it seemed to mean to work until you’re grey and hunched over, then either putz around in the garden or watch soap operas. Jason of Hull Financial Planning (buy his Winning With Money course, available in our sidebar) argues that all this time society was confusing the specific case for the general one. You don’t want to eventually retire, whether you think you do or not. You want to be financially independent. You don’t have to be 65, or anywhere close, to achieve the latter.

Or as Harry Campbell at The 4-Hour Workday puts it, “Paycheck to Paycheck is No Way to Live.” If you don’t have multiple sources of income – passive sources, predicated on something beyond your proficiency at your job – you’re asking to be permanently committed to the treadmill. Until you retire, of course.

We didn’t go looking for a theme this week, other than long bridges, but it seems we’ve landed upon one. Newcomer Justin at Root of Good retired became financially independent at 33, impressive enough even without having 3 little kids (which would prompt us not only to stay at our jobs, but to ask for as much overtime as possible and come in on weekends, too.) He gives a general explanation of how it’s a lot easier to walk away when you have a licensed professional designation.

Our central bank, the Federal Reserve, has a greater impact on your financial decisions than you might think. Until the Fed stops manipulating interest rates, and meets the fate it deserves, Barbara Friedberg is here to explain how you need to be aware of the Fed’s manipulations and use them to your advantage.

Steven Chang at Net Passive Income is either another CoW debutante or we just don’t recognize his name from previous submissions. Steven has a passive income stream, albeit a modest one at this point, and you’ll never believe what one of his sources is. If you’ve ever visited Goolge.com, or EPSN.com (one of our frequents), or Faecbook.com, well, Steven might own it.

Bryan Chau at Success Pen Pal gives us his worthiest post in a while, explaining the coarser points of value investing. He includes a glossary of important ratios; price-to-book-value, price-to-cash-flow etc. Handy to have them all in one place.

Amanda at My Dollar Plan asks: What do you get the old person in your life who has everything? How about a reverse mortgage? If you’re not familiar, it’s exactly what it sounds like. Once you own a house free and clear, you can borrow money with said equity as collateral. You don’t have to pay the money back until you’re dead, which makes this your heirs’ problem. Amanda also explains that there’s the following requirement:

To be eligible for a Reverse Mortgage, you must be at least 62 years of age or older

Just to be clear, that means if you’re anywhere from 62 to infinity (“at least 62 years of age”), you can qualify. And if you’re beyond infinity (“or older”), you can also qualify.

The CoW is like the Hydra. For every “head” we alienate, another 2 seem to grow back in its place. This week, Dorethia Conner at The Money Chat joins the parade. Or maybe Jay Robert. The byline is “By Dorethia Conner/Guest Post by Jay Robert,” so who the hell knows. Here’s a tip, Dorethia and/or Jay. The 2nd-person pronoun can be your friend:

Here are six of the biggest lender-related misconceptions that consumers should overcome so they can get the best loan for the most affordable price.

Who are you writing for? Oh yeah, the reader. Try it again:

Here are 6 lender-related misconceptions to overcome, so you can get the best loan for the lowest price.

If we ever refer to y’all dispassionately as “consumers”, please kick us in the groin. The 6 misconceptions are legitimate, however, and if you get your mortgage at the place that holds your savings account just because it holds your savings account, you’re all sorts of misguided.

Mike St. Pierre at Annuity Rates HQ continues his relentless advocacy of annuities. He’s submitted to the CoW probably 40 weeks in a row. We wonder if he’s ever sold an annuity to someone who said, “Yeah, found out about you on Control Your Cash. Those blog post roundups really work!”

Robb Engen at Boomer & Echo makes an all-too-infrequent return to this site. Robb relates a story about a relatively young guy who has 2 deferred-benefit plans on the horizon, and thus admits that he barely saves a dime. Robb don’t play that way, realizing that the future by definition isn’t secure for anyone. Or as Robb puts it,

I saved too much for retirement! – said no one, ever.

Finally, Dividend Growth Investor reminds us that no stock is unassailable. Apple and Google seem like permanent and permanently profitable fixtures of the economy today…just as General Motors and Philip Morris were 20 years ago. Div (our pet name for him) discloses that he’s long on McDonald’s and Walmart, reasoning that bargain prepared food and inexpensive consumer goods will still be of interest to consumers in the near-to-medium future.

Thanks again for coming. New Anti-Tip of the Day tomorrow, new post Wednesday, new post Friday, new CoW Monday, etc.

Filed Under: Uncategorized

Another 3 Bite the Dust

September 27, 2013

 

That is one eye-catching logo

That is one eye-catching logo

 

The Dow. Or, in metonymic fashion, simply “the market”. The single quantity most identified with the strength or potency of the economy, particularly its investing arm. We’ve discussed before what exactly the Dow Jones Industrial Average is and how to calculate it, but that was 4 years ago and it’s time for a freshening.

In one sentence, if you’re too lazy or burned out to read the linked article above: Add the stock prices of 30 particular large companies, multiply the sum by a constant, and there’s your Dow index. Mindlessly simple, and either in spite or because of that it’s managed to burrow itself into the collective consciousness. The companies have changed throughout the years, U.S. Leather having less impact on the economy today than it did in 1899, but here are the 27 oldest constituents of the Dow:

3MAmerican ExpressAT&T
BoeingCaterpillarChevron
CiscoCoca-ColaDuPont
ExxonMobilGeneral ElectricWalmart
Home DepotIntelIBM
Johnson & JohnsonJPMorgan ChaseMcDonald’s
MerckMicrosoftDisney
PfizerProcter & GambleTravelers
UnitedHealth GroupUnited TechnologiesVerizon

 

Earlier this month, the 3 remaining slots were occupied by Bank of America, Alcoa, and Hewlett-Packard. Last year the Dow traded out one of its components for another, and this is the first time in 9 years that it’s traded out 3 simultaneously. We’ll get to the newcomers in a minute.

Bank of America, as you may remember from our haranguing of a couple years back, received a direct $45 billion in taxpayer cash, and $5 billion more via equally culpable straw purchaser intermediary American International Group to avoid what 2 presidential administrations feared would be the collapse of the economy. We weren’t close to having that happen, and the bailout did thousands of times more harm than good, but Bank of America has a more effective public relations department than we do. 6 weeks after the cash infusion, B of A stock hit a nadir of $3.14. Within a year the stock price had sextupled, leading B of A management to issue pronouncements; of perfunctory thanks to the helpless taxpayers, and of the promise of happy days ahead to investors and borrowers. Long story short, by the end of the next year the stock had again lost 2/3 of its value. A consistent non-performer drags the value of the index down, so Dow Jones & Company said “enough” and went looking for suitable replacements.

Same deal, to a lesser extent, for Alcoa and Hewlett-Packard. The former is profitable but dwindlingly so, and revenue is down year-to-year for the first time in a long time. Alcoa is an acronym for Aluminum Corporation of America, and aluminum prices have been dropping steadily for the last 2 years. Alcoa isn’t diversified enough to make up for the commodity price drop, and so it did do the Dow adieu.

Did do the Dow adieu. Did do the Dow adieu. In other news, the 6th sick sheik’s 6th sheep’s sick.

Finally, the titan-cum-laughingstock Hewlett-Packard. For those of you either too young to know or too well-balanced in your daily lives to care about this stuff, Bill Hewlett and David Packard were the original Jobs & Woz. H & P started their company in a garage in Palo Alto, the Steves in a garage in Los Altos, 8 miles away.

But a lot has changed since 1939. By the 2010s, Hewlett-Packard was making mistakes almost for the fun of it. The company spent $1.2 billion to buy Palm, and basically wrote the purchase off a year later. They hired an overmatched CEO who didn’t even last a year. He authorized the purchase of Autonomy, and if you think the Palm purchase was stupid at least Palm didn’t publicly overstate its value by $9 billion. Yeah, that was another writeoff. Hewlett-Packard stock free-fell last fall, bounced back this year (doubled, in fact), but that wasn’t enough to keep it in the Dow.

The replacement stocks fit the index as well as any, given the Dow’s implied goals of reflecting the diversity and breadth of the economy. The committee traded out a tech company, a mining company and a bank and replaced them with…a shoe company and 2 more banks.

Notice something about the list of 27? Relatively few of them are full-on consumer companies, selling something you can buy in a store. Thus Nike joined the mix. Not coincidentally, Nike stock is at an all-time zenith. Revenue is growing – arithmetically rather than geometrically, but Nike has been around for a few decades. Add healthy profit margins and a price/earnings ratio with room for growth, and Nike was an easy choice.

Goldman Sachs, profiteers of the 2008 mortgage crisis and beneficiaries of the infamous Troubled Asset Relief Program, replaced Bank of America. An exchange of scoundrels? Perhaps, but the former’s financial statements are far more attractive than the latter’s. Goldman Sachs’s earnings per share is at a record high. Also, it’s the most juiced company in America. Its CEO seems to spend more nights at the White House than Michelle Obama does, and the list of recent Treasury Department upper-level hires reads like the 2002 Goldman Sachs internal phone directory.

That leaves Visa which, curiously, began to trade publicly only in the spring of 2008. (Prior to that Visa was more an agglomeration of companies, more of a “membership association” than a standard stock issuer.) At its initial public offering the stock traded at $44. It’s now within a gallon of gas of $200, and the company enjoys a market capitalization of $125 billion. (Fun Fact: Visa cards debuted in 1958, under the name BankAmericard. A service of…Bank of America. B of A licensed the card to other banks, and by 1970 had effectively ceded control to the entity that would become Visa.)

How does this affect you, the ordinary investor (assuming you’re an ordinary investor)? Minimally, unless your investments’ value derives from the value of the Dow. Or, of course, if you’re long into any of these 6 companies. If your mutual funds are tied to an index, chances are pretty good that it’s the 17-times-broader S&P 500, whose makeup remains unchanged.

Filed Under: Finance, Uncategorized Tagged With: , , , , , ,

The 5 Best Places To Live in America

August 28, 2013
St. George, Utah, the 6th-best place to live in America.

St. George, Utah, the 6th-best place to live in America.

 

San Diego? No. Prices are too high and California is a test kitchen of awful laws.

Sharon, Massachusetts (Money magazine’s top place to live)? Similarly restrictive laws, with the added benefit of cold weather. Also, you’d be surrounded by Massholes.

San Francisco? “What’s this foul-smelling squishy thing I just stepped in? Why, it’s a homeless person. Yeah, another one. We’ve been walking on an unbroken carpet of them all the way from Fisherman’s Wharf. I hope the hypodermic needle that last one stabbed me with is at least infected with a treatable strain of hepatitis.”

Louisville, Colorado (also on Money’s list)? No offense, but we’ve never heard of you.

 

Money and common knowledge are idiots. Here’s our list, the definitive one. We’ll do them in ascending order, add to the drama. Presenting the 5 Best Places To Live in America:

 

5. An apartment you’re renting.

It’s not like we haven’t said this before, repetition being endemic to personal finance blogging, but every dollar you spend here is a waste. Think about the way this transaction works:

You: Hi! Here’s 1/4, maybe 1/3 of my gross income.
Landlord: Thanks. Here’s a floor. Oh, and I still get to keep it. I also get to keep your money.

You’re an adult, right? Then buy a house. Or at least a townhome or a condo. One more time: this is about building wealth. While wealth doesn’t drop out of the sky, at least for most people, it also doesn’t grow of its own accord. You need to start with the raw material, i.e. some amount of money, before you can do anything with, i.e. invest it. Renting, and thus forking over a big chunk of that investable money, handicaps you from the start. You have to live somewhere anyway, so why wouldn’t you build equity while doing so? Renting is a great way to enrich someone else.

Yeah, let’s hear it. “The housing market crashed and people got foreclosed upon. Why should I let those greedy mortgage companies have another opportunity to profit off my hide?”

The only people who got hurt by the housing “crisis”, which is now over, were those who were in over their heads in the first place. They bought too much house, they crossed their fingers in hopes of appreciation, and plenty of them lied about their income on their applications. (Just the same, those overmatched borrowers should probably blame the lending agents for believing their lies in the first place. Nothing is ever anyone’s own fault.) Being in over your head with anything, whether house payments, student loans or credit card debt is beyond the scope of this site anyway. Go join the other hand-wringers at the more querulous blogs if finding commiseration is more important to you than being rich is.

After a 4-year double nadir, prices and mortgage rates are finally rising but still historically low. You can use that as an excuse for not buying if you want, or you can see it as the tremendous opportunity it is.

No, you can’t afford a house when you begin the transition from student to wage-earner. Renting is an unfortunate necessity for most of us at some point in our lives. That point should be as early as possible. Save like your life depends on it – or your livelihood, which it does – until you’ve got enough for a down payment. Once you do, and if you’re motivated enough it shouldn’t take more than a few months, a standard monthly mortgage payment won’t be much more than what you’d otherwise pay in rent. And even if it is, you’re building wealth. Even in a bad-case scenario in which your home doesn’t appreciate as much as you’d like. Your house isn’t going to lose 100% of its value unless you live in Detroit. Your rent payment will lose 100% of its value every single time.

That is, unless you choose

4. An apartment you’ve signed a lease option for.

A lease option. It’s like an ordinary lease, except that at the end of the term you have the option (not the obligation) to buy the property. Lease option renters love this because they think that they’re building toward something, unlike the poor folks under item No. 5. Lease option holders are indeed in a better position than those who have no hope of buying their residences, but…

Care to guess how many lease option holders actually exercise the option? Here’s a quote from Maggie Hawk, who sells real estate in east-central Florida:

In 18 years selling real estate, I’ve never seen it happen.

Renters, by and large, embody certain characteristics. If you smoke, buy lottery tickets, own a pit bull, have a neck tattoo, have ever paid for a UFC pay-per-view, and/or have a couple of DUIs and should’ve walked on one of them but your lawyer screwed you over, it’s far more likely that you rent than own. If you hold a lease option you might think that by the end of the term you’ll have enough wherewithal to buy the place and take advantage of an unsuspecting landlord, but the real world shows a glaring paucity of such renters. Should you be disciplined enough to be one of the few renters who can capitalize on a lease option, you’ll do fine. And will eventually leapfrog over No. 3:

3. An apartment you’re sharing.

Life is going to have financially unhappy episodes. The idea is to compress them into as short a time as possible. If you’re dumb enough to have incurred credit card debt, paying it off in 9 months is always going to be better than just making one more splurge and then ending up taking 18 months to pay it off. Debt bloggers and the staff at MSN Money either don’t know or won’t acknowledge this, but that’s their problem.

Having roommates blows unless you’re one of those odd extroverted people who actually enjoy others’ company more than their own privacy, but again, it’s about minimizing the duration of the pain. Paying half or a third of the rent instead of all the rent means you’ll be on the road to No. 2 all the more quickly:

2. Your own home.

Congratulations. This is where it leads to. Read again from the top if you’re unclear. Equity buildup. Mortgage interest deductions. No matter how much you choose to insist that the glass is half-empty, and that renters are blessed because they don’t have to spend money on everything from landscaping to basic home repair, it’s hard to find a valid counterargument to the point that rent always gives a return of 0.

1. Your own 2nd home.

No one said you had to stop at one. Find a renter – God knows there are enough of them – and you can solve your residential cash flow deficiency easily. Repeat as necessary, and passive income goes from a nebulous concept into something tangible that can make a real difference in your life. It beats the hell out of obsessing over replacing your light bulbs with CFLs and keeping your tires properly inflated, too.

Once you’ve bought a first house, buying a second is surprisingly doable. And relatively easy to achieve if, as we’ve been saying since we learned how to talk, you buy assets and sell liabilities. It’s all in here.

Filed Under: Education, Real Estate, Uncategorized
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