Homemade Ethanol: The Future Or Waste Of Money?

Efuel Corporation could not have picked a better time to unveil their state-of-the art home ethanol distillery. Despite its $10,000 ask price, the EFuel100 MicroFueler is a remarkable product that might provide Americans with a glimmer of hope. The device can produce up to 35 gallons of ethanol from a combination of sugar, yeast and water that can be pumped directly into your vehicle.

The process is as easy as “third grade science,” according to CEO and founder Tom Quinn. The feedstock, which consists of sugar and yeast, is loaded into the machine, which then mixes it with water and uses a membrane system to turn the ingredients into ethanol in about a week. The device uses a standard household 110 to 220 volt AC power supply and consumes about 150 watts.

But is the EFuel100 practical? It takes 14 pounds of feedstock to produce a gallon of ethanol. If you were to use EFuel’s Carbon Credit Coupon Program, you could buy discounted EFuel certified sugar feedback for 15 to 30 cents per pound which would cost $2.10 to $4.20 per gallon by my calculation, not including electricity costs.

Most cars are capable of running on ethanol as long as they are equipped with a converter kit. This isn’t necessary for some of the new flex cars, but traditional cars will likely need to have the converter kit installed, which costs around $700.

There is also a $1,000 federal tax credit available, which will help offset some of the initial $10,000 investment. While I think it is more economical than a $100,000 Tesla electric roadster, most people are still probably better off with a good hybrid.

While promising as an alternative fuel source, there are several issues with the Efuel100. Food and electricity prices have been skyrocketing right along with oil, so the cost of fuel for the Efuel100 keeps going up. It may not scale since it requires loads of sugar to operate, and most people don’t have room in their homes for hundreds of pounds of sugar. Worst of all, a study by Stanford University professor Mark Jacobson found ethanol is no better for air quality because it releases formaldehyde and acetaldehyde into the atmosphere, which can be harmful to humans. Then of course there is the initial $10,000 investment. Because the savings on over gas is pretty minimal it would take a long time for someone to recoup that initial investment.

Despite the drawbacks, I like the idea of fighting the profiteering oil companies by creating my own fuel. If you have an extra $10,000 lying around, and loads of extra storage space, why not be an early adopter and help fuel demand for alternative fuel sources? If this product does well, it will lead to companies creating even better fuel devices, which in the end should help everyone.

This was a guest post by Charles Sipe. If you want to read more from him visit his blog.

Forget Talk Of A U.S. Recession, What About Canada?

In the first quarter this year, Canada’s economy shrank by 0.3 percent, according to Bloomberg. So while all the talk is about a U.S. recession, surprisingly, Canada may just beat us to the punch.

This news came as a shock to me because of how strong Canada’s economy has been, including their oil industry. The biggest problem area apparently was the auto industry. If the auto- and auto-related industries were removed from the, calculations then Canada’s economy would have actually still grown, according to Bloomberg. The biggest importer of Canadian automobiles, of course, is the U.S. and we just aren’t buying too many cars right now. Not only is Canada suffering from the drop in consumer confidence in the U.S., which is the number one importer of Canadian goods, but more importantly, Canada is suffering from their strong currency.

Ever since the Canadian dollar surged against the U.S. dollar, the trade balance between the countries has changed. Canadians are buying more U.S. goods and the U.S. is buying fewer Canadian goods because the U.S. goods are comparatively cheaper thanks to the weak U.S. dollar. Now the Bank of Canada is likely to cut interest rates in response. This should lead to the Canadian dollar dropping against the dollar, as it already has begun to do.

Vietnam Open For Business

For many Americans, Vietnam still conjures up images of a failed war, but those days are long gone from the minds of many Vietnamese. Today Vietnam has one of the fastest-growing economies in the world. Vietnam’s GDP grew by 8.5 percent in 2007, according to the CIA World Factbook. Vietnam’s cities are thriving and the country is becoming popular as a tourist destination. There are certainly still problems in this emerging country, one of the biggest being the tight government regulations. But the government took a big step in the right direction last week with the passing of a new law that would allow for foreign ownership of certain properties in the country.

This new law is a step in the right direction, but it still is pretty restrictive. Only foreigners who meet certain residence and professional requirements are eligible to purchase property, and the only properties they are able to buy at this point are apartments in approved buildings, according to the International Herald Tribune. In addition, the properties will only be allowed to be purchased for personal use, so investment is not an option for these units at this point.

I know that this new law is, in reality, a minor happening, but I think the bigger news is that the government was finally willing to move in the right direction. Considering the housing bubbles that have been created across the world, and the fact that Vietnam is still a relatively poor country, I wouldn’t expect a complete opening of the property market any time in the near future--if ever. But if they keep taking little steps like this it will certainly make it easier for foreigners to live, work and conduct business in Vietnam.

Vietnam is a beautiful country, and Americans who still picture it as a war-torn country need to make themselves aware of Vietnam’s new image. Vietnam is open for business--somewhat anyway--and there are many opportunities to be had.

Solving The Housing Crisis: A Modest Proposal

Disclaimer: This post is a departure from our usual material, in which we discuss “facts” and “figures” and all that nonsense. Today we’re sticking with black-hearted pessimism, which generally makes whatever one says more accurate than “facts” and “figures” ever could.

The Case-Shiller indices showed a decrease in home prices greater than 2 percent for the fifth consecutive month—14 percent since this time last year. On the upside—in terms of percentages—if it keeps this pace one can view the drop in prices as logarithmic: never quite reaching zero, but still abysmally bad. On the downside...well, that is the downside.

But on the down-downside—to coin a phrase, on the abyssal-side—tax and insurance costs are rising, offsetting further any deceleration in our decline. To anyone who purchased a home in the last six months: Pray for rain. You may soon need do without indoor plumbing.

But all is not lost. In this land of opportunity and innovation and class rule there is always a modest proposal to be found to address our woes, and I have stumbled upon one: Teepees!

Yes, teepees. I would say ‘yurts’, which are more stable, but this is America, former home of the teepee, and I’m pretty sure that we’re at war with the Mongols (or soon will be, given our record). But where, you must be asking, shall we find sufficient hides to create enough teepees for all the displaced homeowners who cannot even afford rent as those prices, too, have risen? We have wiped out most of the larger animals on this continent, and plastic tarps (being petroleum products) will soon be out of most people’s price range. Whence shall the raw materials come?

It is common knowledge that we are the most obese nation on the planet, though this will not be the case for much longer as we all begin to starve. As inflation and unemployment rise and wages stagnate, we shall all soon be The Biggest Losers. But as you also know, the excess skin from our deflated bodies will remain on our newly chic and slender frames. Tanned by days and nights exposed to the elements, this excess skin will make ideal hides for the creation of teepees.

Am I suggesting that we slay and eat the fat? No, no, a thousand times no! We’re at least six months away from that sort of desperation. But do consider how our multi-billion dollar cosmetic surgery industry—which is also on the slide thanks to a 16-year low in consumer confidence—might benefit from a boom of tummy tucks, and consider how Green and eco-friendly it would be to recycle our own skin to create a roof over our heads. To coin another phrase: “Home is where the abdominoplasty is.”

So on the abyssal-side, we can expect home prices to fall, inflation to rise, waistlines to shrink and national debt to grow (but for the banks, who at least are being paid back in depreciated dollars). My advice: Keep your economic stimulus wampum close to your chest and sharpen your scalpels. My crystal ball says the Case-Shiller index next month will show more of the same—with an added return to new-home prices decline (up this month!). See you at the pow-wow.

Barack Obama And Hillary Clinton Lead The Way In Hedge Fund Donations

In what might be considered a surprise to some, three quarters of hedge fund donations to presidential candidates have gone to Democrats, with Barack Obama and Hillary Clinton leading the way, according to Institutional Investor. Typically, wealthy people tend to favor the Republican party thanks to the party's pro-business ideals and favorable tax policies. It appears that in this election, though, the wealthy hedge fund industry is looking for change more than tax savings.

The leading candidate for hedge fund donations is Hillary Clinton, who has accumulated $802,000 thus far, according to Institutional Investor. Obama sits at around $720,000. In stark contrast, presumptive Republican nominee John McCain has received only $267,000. With McCain promising to keep Bush’s tax cuts alive, potentially saving the wealthy lots of money, and both Democrats promising to at minimum let the tax cuts expire, this came as quite a shock to me. It is apparent that the wealthy are looking for something else this year beyond dollars and cents.

It is always interesting to me to watch where the “smart money” is investing; typically they are much savvier than your average Joe. I don’t always agree with their investment decisions, and they certainly are not always right, but I do find that they are often pretty good at identifying opportunities. Who knows, maybe there is something to be said for their preference in presidential candidates as well; I’ve never thought to look into it before.

At this point I’m not leaning toward any of the candidates. Usually I go Republican, but at the same time, I worry that McCain will just be another Bush and in the end nothing will get done. On the other hand, I’m not a big fan of the Democratic candidates with their big spending proposals, desire for increased government involvement and promises of more taxes. Right now I’m still undecided, hoping that one of the candidates impresses me before voting day.

We Know About The Housing Bubble, But What About The Other Bubbles?

Talk of the housing bubble can be heard at dinner parties across the nation and read about in just about every newspaper and magazine, but if you think the housing bubble was the only bubble around, you are sadly mistaken.

“The same factors that were behind the housing bubble were also at work, to varying degrees, in the auto bubble, the commercial real estate bubble, the travel bubble, the college tuition bubble, the retail bubble, the Web 2.0 bubble and most recently the commodities bubble. Unlike housing, which began losing steam two years ago, these other sectors have just begun the painful process of repricing and finding a new balance between supply and demand,” Steven Pearlstein said in a Washington Post article.

It seems everything that is bought and sold nowadays can be turned into a bubble. Remember Beanie Babies several years back? Now kids are revisiting the same thing, only this time with the internet version of Beanie Babies: Webkinz. I recently went to buy one of these Webkinz online for a little girl's birthday present and was taken back by prices being asked for some of the “limited edition” or discontinued little animals. One retailer was asking more than $100 for a little stuffed unicorn. I thought to myself, "Who in their right mind would pay that kind of money for a little stuffed unicorn?" only to find one of the little girls at the birthday party bragging about having one. Go figure.

The point of is, markets will at times act irrationally. We have a tendency to get caught up in the hype and pay too much when the hype is positive, which creates a bubble. Then, when the bubble finally bursts, we tend to oversell the item; it's simple investor psychology. When you add investor psychology to fundamental changes, these bubbles can become severely overinflated before they finally pop and we end up with bubble gum all over our faces.

Pearlstein does a great job in his article of explaining that there is no easy fix for the problem we now find ourselves in. The only way things are going to get better is for the market to take its course. There is a reason things are getting repriced (bubbles popping): They were priced too high to begin with. Or, in certain cases, not priced high enough.

The hardest thing with all of this is that in the end, Americans are going to have to realize that we have been living on borrowed money.

“The decline is the result of years of large and growing U.S. trade deficits that should have caused the exchange rate to adjust years ago but didn't because so many of our trading partners in Asia and the Middle East were intent on linking their currencies to the dollar. In the process of maintaining those dollar pegs and reinvesting those surpluses in Treasury bonds and Fannie Mae and Freddie Mac securities, they created a surfeit of cheap credit that spawned all those bubbles,” Pearlstein wrote.

The ride was sure good, but it can’t and won’t last forever. We need to realize that things are going to have to change, and in many cases it is going to be for the worse. We have to have the wherewithal to see that the tracks end up in the distance, and either we get off now or we risk falling to our doom (Ok, maybe that's a bit dramatic, but hopefully you get the point: The sooner we take action, the better). I will leave you now with the ending paragraph of Pearlstein’s article, which I think is fitting:

“Is all this the end of the world? For the richest country on the planet, certainly not. But it does represent the end of a decade or more during which Americans were permitted and even encouraged by the rest of the world -- and by their own leaders -- to live way beyond their means. As a result, the United States has gone from being the largest creditor nation to the world's largest debtor. For the first time since the early 1980s, Americans will have to endure several years of uncomfortably slow growth and uncomfortably high inflation as the U.S. economy regains its balance and creates a foundation for more solid and sustainable growth.”

Homeowners Associations: Better Check Their Books Before You Buy

The fallout from the housing crisis has led to yet another worry for potential homebuyers: homeowners associations. Depending on the housing or condo development, homeowners associations can range from fairly minimal importance to extremely important. The more things the homeowners association is required to take care of, the more important they are. Typically condo homeowner associations take on more responsibilities because they are responsible for all the common areas, but many new home developments have been piling on added duties for their homeowners associations. Now, thanks to fallout from the housing crisis, many homeowners associations are in shambles and homeowners are feeling the pain.

In one development in Arizona, more than 40 percent of homeowners are not paying their homeowners association fees, and in others across the country, it is even worse according to USA Today. Typically, a homeowners association’s retaliation for non-payment is that they are able to place a lien on the delinquent homeowner’s home, but because property values of dropped so much and there is no equity in most of the homes, it isn’t doing any good. With the collection of unpaid dues appearing unlikely, the burden to maintain the homeowners association falls on the remaining homeowners who have paid their dues. If they fail to cover the excess, they will be faced with decreased services. Some of the problematic associations have even tried to put together volunteer days where homeowners can help provide some services themselves, such as landscaping, and save money.

Investors and homeowners alike should take note of this problem. The last thing (OK, one of the last things) an investor wants is to buy a house and then find out that the homeowners association is out of money so they can’t afford to keep up the grounds anymore, or they are going to have to cut insurance coverage. At that point, either the investor is going to have to pony up some more money or else watch the neighborhood go to waste along with the value of their investment, which might just happen anyway. Neighborhoods which are having trouble collecting on homeowners association dues are probably a safe bet to suffer from foreclosure and homeowner neglect: If people can’t afford to pay their homeowners association dues, they probably can’t afford the mortgage either or they could be investors who are simply walking away from a bad investment. Either way this is a bad sign for incoming homeowners.

That being said, investors and homeowners who are looking to buy a home in a development or condo with a homeowners association would be wise to take the extra step to examine the homeowners association’s books and responsibilities. If they see that an increasing number of homeowners are late or not paying, that could be a sign to move on, especially if the homeowners association has a lot of responsibilities. Even if you think you are getting a great deal on the property if the neighborhood’s upkeep goes, so goes the appeal and value of the neighborhood. In today’s market investors can be picky, so take the extra couple minutes to look at the books. It may just save you a big headache and hit to your pocketbook.

Is The American Dream Out Of Reach?

So American Airlines has started charging $15 for checked luggage. Wednesday, it was the lead story on the “Nightly News.” Thursday, an ABC headline read, “Checked Bag Fees: Money for Nothing.”

What’s the big story? Is it the same as taxes, where once they start charging, there’s no turning back? Or is it just that sensational statements draw readers?

Who knows, but frankly, I’m getting a little tired of the media bashing the airline industry. If it’s not incessant coverage about scheduling delays or lost luggage, it’s about security. Today it’s about charging for luggage. As I write this, the price of oil is topping $130 a barrel and is projected to exceed $200 by the end of the summer. That’s the story, and it’s way bigger than the airline industry trying to stay afloat--or should that be aloft?--by adding $15 to the price of a flight. But I think it goes beyond that.

I think people love to complain and the media gets paid by giving people what they want to hear.

Does this sound familiar? For the last 20 years, most people have agreed that airline food sucked. They’d say things like, “all three of the coach entrée choices were inedible.” Then, all of a sudden, the elimination of free food service is seen as huge disappointment. “Oh no, I won’t be getting ‘Something Over Rice’ on my two-hour flight home?”

It’s similar to people in Seattle, where I live, who, when we finally get a sunny, 80-degree day after nine months of rain, whine, “ Put on the air-conditioner, it’s too hot.” But I think it goes beyond the weather weenie mentality.

Here’s my theory about why the $15 per bag issue is so hot: The story is not about the cost of flying going up, it’s about the reality that the average Joe is getting squeezed out of the American dream. Ever since the inception of commercial airlines, flying has been a hallmark of living large. Images of pretty flight attendants, macho pilots and wealthy travelers became icons of the glamorous American lifestyle that created the “jet-setter” as an American model. Today, the air travel experience has lost its sizzle. You go through security, do what you’re told, wait for a couple of hours to board, stay seated with the buckle fastened, don’t use the toilet facilities in the front of the plane--for security reasons--and de-board without a welcome.

The whole flying experience today is threatening the average American’s chance to feel like a jet-setter, and they don’t like it. Except for when you were boarding and had to shuffle your way through the first class gauntlet, flying always allowed Americans to feel like someone special. Today, the flying experience is more like taking a bus. Airlines have always charged us for the mysticism of flying. Americans just miss the allusion in the old slogan, “It’s The Ooooonly way to fly.” Today it’s more like, “Pay up, sit down, and get out--it’s the only way to fly.”

Then again, you can always drive.

This was a guest post by James Krieger. If you want to read more from James check out his blog www.nicaraguarealestateinvestment.org.

Gas Prices Causing 23 Percent Of Americans To Change Memorial Day Plans

23 percent of Americans cut back, or abandoned altogether, their weekend travel plans because of gas prices, a survey by consulting firm Deloitte & Touche found, according to Bloomberg. High gas prices coupled with worries about the economy will likely have a big impact on this year’s travel season and beyond. Investors should consider the implications of such changes.

People are always going to need vacations and time off, so one way or another they are going to get it. The question is, where are they going to go? Obviously with gas prices so high traveling long distances, either by car or plane, becomes more expensive. Thus we can conclude that people are going to be taking their vacations closer to home than they normally would. Instead of driving 400 miles to a lake resort in a neighboring state, maybe families will settle for the one 50 miles away, whether or not it is as nice. Resorts, camp grounds and other recreational and vacation-type places close to urban centers will in all likelihood see increased business. These naturally will become the places people from the city turn to instead of further out locations. Owners of vacation and recreational properties that are far out but get most of their business from in-city travelers could be in for some rough times.

While the above scenarios focus mainly on weekend-type vacation, there will also be impact on international travel. Vacationing in Europe was already becoming prohibitively expensive thanks to the falling dollar, but now with airlines raising ticket prices to cover the cost of fuel, the dream of a European vacation is now out of reach for most people. Instead of traveling to Europe those vacationers looking for a more exotic local might turn to Mexico or a Central American country. The flights to Mexico and Central America are still affordable, and the cost of goods and services in Latin America are cheap.

High gas prices are changing more than just the thickness of our wallets, they are changing our lifestyles. It used to be that gas was an afterthought; now it is on the forefront of everyone’s mind. Instead of the big SUV, more people are opting for the fuel efficient sedan; instead of buying a home in a far out suburb, people are opting for the close in condo or smaller home; instead of traveling long distances for our vacations, we are now staying closer to home. High gas prices are changing the way we live, and since they are unlikely to go away any time soon investors should take note of these trends and act accordingly.

Foreclosure Bailout: Why It Won’t Work

The foreclosure bailout plans that seem to be on the tongues of everyone in Washington these days are doomed to failure. I read an interesting piece by Holman W. Jenkins, Jr. in the Wall Street Journal that I thought I’d share. He points out the number one reason why these foreclosure bailout plans won’t work is that many people don’t even want the houses anymore.

He points out that the bulk of the foreclosure problems across the country are concentrated in a few areas such as Las Vegas, Sacramento, Phoenix and southern Florida. He contends that the people who bought homes in the outlying areas of these locations were making bets on demographic trends and commute patterns that proved to be incorrect. Many of these homes are in areas that no one wants to live right now, especially considering the high price of gas. A family that may have been willing to commute 50 or 60 miles in 2004 to get to work so that they could own their own home now isn’t so willing to take on a commute like that.

In the article Jenkins, Jr. also touches on the normal issues, such as people buying more home than they could afford in the first place, and falling home prices. The arguments here are that a foreclosure bailout is going to be hard-pressed to help someone stay in a home that they couldn’t ever afford--not then and not now. With falling home prices it brings to question again why the people would want to stay in the house if they are upside-down? If their home has depreciated by 20 percent, and they put down nothing when they bought the home, where is the incentive? These people would be better served by walking away from the home renting for 7 years, saving their money, then buying another home, but this time within their means.

Then Jenkins, Jr. talks about how even if homeowners wanted to participate in the foreclosure bailout plan, it is still a losing proposition for American taxpayers. “…the government plan, which would pay 85 cents on the dollar for mortgages now selling for 50 cents or less. True, the House bill gamely seeks to exclude speculators and homeowners who lied about their incomes. But an ill-equipped FHA would be a sitting duck for lenders who tacitly permit nonpayers to remain in homes just long enough to pass the bag to government” Jenkins, Jr. Wrote.

In conclusion Jenkins, Jr. says that that the housing problems going on right now aren’t the end of the world; we will survive. Most importantly he ends his article by saying, “One sure way to guarantee bubbles without end is to institutionalize that one-way bet. That's what a bailout would end up doing for those ultimately responsible for directing a large chunk of the nation's savings into unwanted, uneconomic housing.”

Personally, I couldn’t agree more. If we always come to the rescue of people who do dumb things, they will never learn. I think it is time to make the people who made poor decisions pay for their mistakes, learn from them and become better for it. In business and in life, this is how you improve: You try something and if it doesn’t work, you do it differently next time. The only lesson we are teaching people now is that if you screw up, no biggie--the government will bail you out, so feel free to take some extra risks. But if people suffer no consequences from their poor choices, they will never learn.

ANWAR Alaska: Is Drilling For Oil In This Wildlife Refuge The Answer?

For those who are not aware, the Arctic National Wildlife Refuge (ANWAR) in Alaska is said to hold the largest undiscovered oil reserve in North America, and maybe even the world. We have known about the oil in ANWAR for a long time, but thanks to campaigning from environmentalists, the land has been untouched. It is estimated that the potential for recoverable oil in ANWAR would range in the multiple billions of barrels, along with trillions of cubic feet of natural gas, according to Forbes.

The political battle over oil in ANWAR has been fought for many years, but the closest to drilling we have gotten was back in 1995 when only a President Clinton veto stopped a bill from Congress that would have opened up ANWAR. Now a couple of senators from Alaska, Lisa Murkowski and Ted Stevens, are trying to resurrect the idea of drilling for oil in ANWAR. So, should we open up ANWAR Alaska for oil drilling?

This debate is tough for me. I certainly understand the economics of the matter and how beneficial this development could be for the U.S. economy. Not only would we be able to save billions of dollars off oil imports, but we would also see increased tax revenue and thousands of new jobs. Overall, it is without question that developing ANWAR would be great for the economy. At the same time, though, I can’t help but think of the environment.

Supporters of development in ANWAR claim that wildlife and oil development can coexist in harmony, and with the advances in technology, the chances of any mishaps are minimal. Yet when I watch videos like the one below I can’t help but have doubts:

If we could truly have both--development without interference to wildlife--I would be on board without hesitation, but I’m just not sure we are there yet, hence the internal debate I still have. The other thing to keep in mind is that it would likely be 15 years or so before any oil from ANWAR would hit the market. What if we were able to find a good alternative to oil within the next 15 years? The flip side of that argument, of course, is what if we don’t? If we think we are in dire straits now, just wait 15 years and see how bad things look if we don’t find some more oil soon. Just look back at the last time the ANWAR development bill was shot down, in 1995. Had that bill been passed we would soon be seeing the fruits of ANWAR’s black treasure; instead we are still in the same place we were back then development-wise, only with $130 per barrel oil instead of $16.86 per barrel oil, as it was back in 1995, according to the OPEC website.

I’m still undecided on the issue, and I guess to come to a conclusion, I will need to get more facts on the subject. If anyone has additional thoughts or information on the topic, I would love your input.

Homeowners With High Grass Could Be Sent To Prison

Canton, Ohio, in an effort to crack down on the number of unkempt yards, is preparing to put violating homeowners behind bars. As the number of foreclosures has risen, so too have the number of homes with what the city deems excessively high grass. The city considers anything higher than eight inches to be too high, according to the Canton Repository.

The first high grass offense carries a $150 fine, but a second violation can warrant a $250 fine and up to 30 days in jail. The city complains that they are spending too much valuable time and money on this problem and thinks that this measure will get the message across. They are even prepared to go after banks and other corporate homeowners if they violate the city code, according to the Canton Repository.

I don’t really see the city sending anyone to jail over this; rather, I see it simply as a threatening maneuver on their part to frighten homeowners into action. I know if I was a homeowner in Canton I would make sure my lawn was always immaculate.

It is my belief that out-of-area investors should be, without question, outsourcing lawn care properties--and even in area investors might want to consider it. Tenants just aren’t going to have the same appreciation for the property, and in particular the lawn maintenance, as you will as the homeowner. Sure, you can probably find tenants that will mow the lawn on a regular basis, but finding ones who will water the grass and other flowers, along with pruning and hedging and all the other landscaping needs that are required, is going to be pretty difficult.

I’ve tried in the past to write into the contract all the landscaping items which were to be required of the tenants, but it didn’t work out quite as I hoped. I even had one couple that really tried to keep the yard up, but they just didn’t know what they were doing and soon the lawn was completely overtaken with moss. I won’t even tell you about the horror stories of some of my first tenants (before the contract changes) and what they did to the landscaping. Let’s just say that from experience I can say that out-of-area investors need to outsource lawn care. If you are worried about the added cost, you can either add it on top of the rent and advertise it as full lawn service included, or keep the price as is and require them to pay an additional lawn service fee. Even if you have to cover some of the cost, though, it is more than worth it in my book.

Should We Sue OPEC Over Oil Prices?

I never before thought to ask the question, but apparently it is possible for us to sue OPEC over the current state of oil prices. In fact, the House just passed a bill today that would allow Justice Department to sue OPEC members for limiting oil supplies and working to set crude prices, according to Reuters. Of course, the White House has all but guaranteed a veto of this bill, so whether or not it actually comes to pass is another story, but it is an interesting thought to ponder.

First off, I’m not sure just how successful this measure would be anyway. Even if we could legally sue these countries, according to our laws at least, what would make them actually honor these claims? I have a feeling that international courts might not feel so bad for the poor U.S. considering we still enjoy some of the lowest oil costs in the world. Just go to Europe or New Zealand and tell them your sob story about $4 a gallon gas, most likely they are going to laugh you out of the room and tell you they could only dream of gas being that cheap. If the international community were able to also take part in the suit, that might make things a little more amenable, but in reality how fair would that be?

These OPEC countries are simply trying to maximize revenues on their limited natural resource, what is so wrong with that? Countries in the Middle East, for example, have little driving their economies other than oil, so what happens to these countries when their oil supply is gone? Should the U.S., or any country for that matter, be able to tell another country that they want and need what they have, but wait a sec, you are only allowed to charge me X, and if you try to charge any more than that or withhold supplies, I’m going to sue you? Something just doesn’t sound right in that scenario. Sure, the main argument is that these countries are working together to fix prices, but then again, where does the U.S. get the majority of its oil? The answer is from non-OPEC countries, with Canada leading the way.

Is there some level of price fixing going on? Probably, but in reality, can we blame them for it? I don’t think so; they are doing what’s best for their economies and their countries. If they continue to raise prices, our defense has to be to stop buying from them. That is the only way we can and should be able to affect pricing. It is our own fault we have become so reliant on oil to fuel our country and economy, and now that these countries want to get paid, it is not our place, nor our right, to tell them otherwise. The oil belongs to them, not to us; they should be able to do with it what they will.

Fed Rate Cut History And Future

Can the Fed rate cut history show us the future for Fed rate cuts? I always knew that for the most part we have been able to fairly closely determine whether or not the Fed was going to cut the funds rate--and if so even by how much--but this morning I learned something new that I wanted to share. Before, I always looked at Fed fund futures to weigh the chances of a rate cut or increase, and while these future contracts tend to give us a pretty solid estimate, they have historically overestimated the Fed rate cuts, according to Ed Nosal, economic advisor at the Federal Reserve Bank of Cleveland. So how else can you accurately determine whether a rate cut is coming or not?

Elliot Wave International is one of the largest forecasting firms in the world, and they think they can predict to a T when a Fed funds interest rate change is coming and how much it will be for. They don’t look at the Fed fund futures, though; they look at the 3-month T-Bill yield. They put together a chart that you can see below, which shows just how accurate this method is:



"And forecasting fed rate cuts isn’t all it's cracked up to be, or at least it doesn’t appear to warrant the countless hours of discussion devoted to it on financial television. As we’ve discussed numerous times in our newsletters, the Fed follows the market, not leads it. This quasi-government entity simply validates what the freely traded Treasury market has already done. The above picture should be familiar to long-time subscribers and illustrates our point about the juxtaposition between the Fed and the freely traded T-bill market. With the current gap between the U.S. 90-day T-bill rate and Fed Funds at a wide 112 basis points, the Fed’s rate cutting is not over," Steve Hochberg, Elliot Wave International's chief analyst, wrote Jan. 22 in Elliot Wave’s Short Term Update.

So if you are trying to figure out what the Fed is going to do about interest rates at their next meeting, now you have a new crystal ball to look at. As for what is going to happen at the next Fed meeting, almost everyone believes the Fed will stand pat on the fed funds interest rates, including Donald Kohn, vice chairman of the Fed.

FHA Secure Loan: Government Foreclosure Help Not Turning Out As Expected

Several months ago the Bush administration came up with a great plan to fix the foreclosure problems plaguing the U.S.: The FHA Secure Loan. This loan was to be made available to homeowners who were having, or had, their variable interest rates adjusted and needed to refinance in order to keep making payments. So just how many people has the FHA Secure program helped avoid foreclosure since its inception? Try 3,000, according to an article from CNNMoney.

Though only 3,000 people have been saved from foreclosure, the FHA Secure program has become widely popular, with over 200,000 loans issued to date according to CNNMoney. While the program was meant to help people avoid foreclosure it has turned out to be a great program for people looking to refinance. The average homeowner refinancing with an FHA Secure loan is saving approximately $400 a month, according to the article.

Many of the people using the FHA Secure program could continue to make their payments without a problem, and additionally many of them even had other options for refinancing out of their existing mortgages. For a program that was meant to help prevent foreclosure, I’m just not sure how effective it is. It is certainly helping people save money, but when the time comes that the government has to start coming good on these guarantees, taxpayers are going to have to foot the bill. Lending out at high LTVs to high risk homeowners is not appealing to banks for a reason, so if we think we are going to avoid having to pay up when all is said and done, we are sadly mistaken.

In my mind if the government is trying to help those who are on the ropes (which I didn’t agree with in the first place), then they can do that, but they shouldn't also offer up resources to those who have other options. This program should be reserved for those who have nowhere else to turn, not those who are just looking to save 0.25 points over what the bank’s other loan program will offer them. Taxpayers shouldn’t have to front the bill when there are others willing and able to do so.

Good News: Single-Family Housing Starts Lowest Since 1991

Starts of single-family homes have declined for 12 straight months, most recently falling 1.7 percent to a seasonally adjusted annual rate of 692,000, the lowest since January 1991 according to MarketWatch. Normally it is bad news to hear that housing starts are falling so rapidly, but as a real estate investor, I think it is great news. Yet, while single family housing starts decreased, there was a surprise increase in multi-family starts.

One of the biggest problems with the housing market, besides that it had gotten too expensive, was the massive oversupply of housing. Builders haven’t been able to move their homes and that, coupled with the huge number of foreclosures on the market, has led to an overall supply glut of vacant homes. The higher the supply of homes, especially vacant ones, the lower prices will fall. Therefore by cutting back on the number of new homes entering the market, supply should tighten, helping to restore balance to the housing market.

The other piece of this report was that multi-family starts increased a whopping 36 percent. While experts were expecting something of an increase, this number surprised most. Considering how many people are being forced back into renting, the fact that much of the apartment supply was converted to condos and how rents are increasing, I guess it shouldn’t be that much of a shocker. Developers love to overdo things, so when they spot a trend, they go after it without hesitation. Naturally what will probably happen is they will build way too many new multi-family units, thus overloading the market with supply, leading to a drop in rents as well as the value of multi-families. You would have thought that people would learn their lesson and be a little more cautious this time around.

What this information tells me is that we are heading in the right direction on the single-family front; cutting supply is the way to go and a positive sign. On the multi-family front, though, I’m starting to get a little worried about the future. Apartment owners have been doing well for themselves lately, but if developers start throwing up a bunch of new apartments, that is going to have a devastating effect on the existing inventory. The homeownership rate should continue to drop at least for the foreseeable future, so the supply of renters is increasing. The question is which one will increase faster--the number of renters or the number or rental units? The good news for multi-family investors is that it will take some time to get these new units on line, so the gravy train will continue for a while longer.

By the time the new multi-family inventory is ready, the single-family market will probably be stabilized and start to regain some momentum. At this point (or ideally a little before) investors may want to consider hopping trains.

Odds Of Recession At 45 Percent, Down From 90 Percent Last Month

Identifying a recession is a tricky thing, and that was never more apparent than in the flip-flopping of many economists’ opinions on the state of the economy and its odds for a recession. It wasn’t too long ago that 71 percent of economists believed we were already in a recession, and even more thought a recession inevitable. Wachovia, which last month put the odds of recession at 90 percent, just downgraded those odds to 45 percent, according to The Wall Street Journal. Is the economy really turning around, and can we begin to be a little optimistic about the future?

Recent data released by the government has been a little better than expected, but I think we are missing some things. Perhaps we are clinging to any last ray of hope we can find, but the bottom line is we should look at the facts for what they are, not coat them in sugar. One example is that yesterday everyone was elated that the CPI came in at only a 0.2 percent increase, compared to the expected 0.3 percent. This surely is good news--I don’t want to discount that--yet at the same time we can’t take this to mean that our inflation fears are over and that everything is peachy. First off, I have my concerns that the numbers being reported by the government aren’t all that accurate to begin with. In addition, while inflation might be taking a little break, so to speak, I don’t think it is gone.

Another piece of irrational exuberance in my book was how the market treated the recent earnings reports from Freddie Mac and Fannie Mae. Fannie Mae reported a loss of more than $2 billion, much more than was anticipated, yet their stock skyrocketed that same day. Something just doesn’t seem right about that. Then this week, Freddie Mac actually beat estimates and reported a loss of only around $150 million. That seems great compared to the $2 billion loss over at Fannie, but in order to cut their losses to only $150 million, Freddie Mac had to alter their accounting methods. I’m no accounting expert, but any time I hear of companies altering their accounting practices, and voila, their books suddenly look better, I get suspicious (if anyone has more knowledge about this, I’d love to hear your take). As we saw in the foreclosure numbers reported this week, the housing problems are far from gone. More and more people are losing their homes, and to me that doesn’t spell good news for Fannie and Freddie, or the housing market in general.

We also saw reports this week that more companies are laying workers off--typically not a positive sign at all--yet for the most part the markets shrugged off this news in favor of celebrating the fact that inflation was only at 0.2 percent last month. While it certainly is good news to see the economy rebounding somewhat, and for the economic news to come back better than we expect, I urge investors not to get their hopes up too much at this point. It is possible that the interest rate cuts and the economic stimulus package will come together to bring our economy out of the rut it’s been in, but I certainly wouldn’t put those chances as high as 55 percent. I still think a recession is coming, and whether it is officially here now, or whether we are able to delay it, it will surely come. Our economy has too many serious problems to fix with a few Band-Aids.

If Bernanke discovered the magic recession avoidance elixir, that is just fabulous, and we all should be ecstatic.

At the same time it has always been my belief that you plan for the worst, so that’s what I’m doing. Jump on the U.S. economy is great wagon if you will, but be careful, because I’m pretty sure the axel is loose.

Top Recession Proof Cities: Thoughts On The Recent Forbes Article

Forbes recently published an article titled "America’s Recession Proof Cities." I read the article and thought that for the most part, the cities they chose were good ones, although there were a couple I have my doubts about.

For those who are too lazy or busy to read the article, I’ll summarize it here for you. The top 10 cities in order are: Oklahoma City, Oklahoma; San Antonio, Texas, Austin, Texas; Houston, Texas; Charlotte, North Carolina; Dallas, Texas; San Jose, California; Raleigh, North Carolina; Salt Lake City, Utah; and Seattle, Washington. Forbes ranked the cities based on factors such as how housing values have held up during the past year, unemployment and the overall job and economic outlook of the cities.

The point of this article was to highlight those cities which have real estate markets that are less likely to fall prey to the housing trouble being experienced elsewhere in the U.S. If you look at the list I’m sure you will see a pattern, minus Seattle and San Jose, and that is that housing values are relatively affordable. It is no surprise to me, and shouldn’t be to you either, that the more stable markets are those that have real estate prices that are within reach for the average home buyer. The more people in an area that can afford to buy a home, the more chance there is that people may actually buy one. Most sane people don’t try to buy a house that is 9 or 10 times their income. In most of the featured markets, the home price range falls between 2 and 4 times the income level, which is much more reasonable and realistic ratio.

In addition, these markets haven’t experienced much of the widespread speculation seen in places such as Las Vegas or the Southern Florida and California markets. Investors who bought into these markets did so because they understood cash flow principals, and since they are seeing cash flow from their investments, there is little need to sell off their properties in desperation sales.

Lastly, I want to touch on the outcasts of the group, Seattle and San Jose. These markets aren’t exactly affordable, but so far have avoided the worst of the housing crisis. Living in the Seattle market, I can say that while things aren’t nearly as bad as elsewhere in the country, they aren’t all roses here either. The housing market is slow and basically prices haven’t fallen much--if at all--because sellers aren’t choosing to drop them, so houses are just sitting on the market. The main reason this happened in Seattle is that it didn’t have the widespread speculation, or subprime loans like much of the rest of the country, so sellers here had this luxury. That being said, recently prices have begun to drop and probably will continue to do so for a while longer until an equilibrium is reached. San Jose seems to be in a similar boat, but they seem to have further to fall than Seattle. Their housing prices are even more out of balance, and even though their job market is good, I certainly wouldn’t say they are “recession proof,” or that they are going to avoid a downturn altogether. The median housing prices in San Jose are 7.1 times the median salary, compared to 6.5 times in Seattle, according to data from CNNMoney.

The Emergence Of Brazil As An Economic Powerhouse

Thanks to the commodities boom, Brazil has emerged on the world scene as a new economic powerhouse. This has not gone unnoticed by foreign investors who have been pouring billions of dollars into Brazil in an effort to capture some of the vast potential for profit. While it has only been a few years since Brazil was on the verge on economic disaster, it appears they have been able to turn things around in the country--and this time change may be for good.

I read a great article from The Wall street Journal this morning about Brazil that is definitely worth your time to read. The article talks about Brazil’s past problems, how they are overcoming them, some current investments happening in the country and even a little about the future prospects for Brazil.

In my opinion Brazil is here to stay. They are one of the few energy-independent countries in the world, they have the largest supply of fresh water in the world (Some think that water resources will soon be in higher demand than oil), they are packed full of just about every other natural resource you can think of, their currency has strengthened and stabilized and their government--while not perfect--has shown remarkable growth. As the government continues to grow and strengthen, and as they continue to combat the corruption and bureaucracy that is still holding them down, the sky is truly the limit for this country.

If you are interested in finding out more about physically investing in Brazil make sure to read NuWire’s article on Brazil Property Investment.

Senate Puts President Bush In His Place But Was It Warranted?

Over President Bush’s pleas to the contrary, the Senate almost unanimously (97 to 1) approved a measure that will halt the further purchase of strategic oil reserves. Since it was passed by such a large majority, the measure cannot be vetoed by the President, so it looks as if President Bush has lost this battle for good. "Why on earth should we be putting oil underground at a time of record high prices?" Sen. Byron Dorgan (D-N.D.), the measure's chief sponsor, argued in a LA Times article. Democrats have been calling for this action for quite some time, but more recently Republicans have taken their side on the argument as well. Considering how much oil has been going up, though, this hoarding of oil might prove to be one of President Bush’s best investment decisions yet.

Under President Bush’s guidance the government has been adding about 70,000 barrels of oil a day, in comparison to the approximately 21 million barrels of oil the U.S. consumes each day, according to the LA Times. Since the amount being hoarded is minimal compared to total usage, the impact of suspending further stockpiling won’t be that great, but some economists figure it could save consumers as much as 3 to 5 cents per gallon on gas, according to the LA Times.

It is not hard to see that the motivations of many of these politicians is to get re-elected, but Bush doesn’t have that problem, so logic would say his only incentive is to do what is best for the country going forward. The main reason he gives for the stockpiling is energy security, which certainly has validity, yet I think it is proving to be an even better investment.

Here are some numbers to consider: Our national oil stockpile sits at approximately 702.7 million barrels, with an average price paid of $28.42 a barrel, according to the U.S. Department of Energy website. Since oil is more than $125 a barrel, that means that thanks to the policies upheld and pushed by Bush, we have created almost $68 billion of “oil equity,” so to speak. Considering many of the other dumb decisions Bush has made over the years, this might actually be one of his better ones, so let’s cut him a little slack. If the U.S. were now to release oil reserves to ease oil prices until we hit the stockpile point we would have been at had we listened to the previous Democratic oil outcries, we would be able to reduce gas prices by much more than the 3 to 5 cents we may see because of the current measure just passed by the Senate. So maybe there really is some method to Bush’s madness.

The Detroit Auto Industry Might Be In For Yet Another Hit

At this point probably everyone is aware that Detroit’s auto industry has been struggling, and as the auto industry goes, so goes Detroit’s economy. During the past few years, consumers have left the American car manufacturers for their smaller and more fuel efficient foreign counterparts. Recently the American car manufacturers have begun to embrace the consumer’s desire for fuel efficiency, but they are still behind the competition, and now it appears that the entire auto industry might be in for a new shock.

As the price of oil continues to skyrocket, many consumers aren’t satisfied, or will eventually become unsatisfied, with the current level of fuel efficiency and are simply deciding to pass on the new car altogether in favor of public transportation. Many people have already been priced out of buying a new car with the added cost of fuel, but if $200 oil becomes a reality, as Goldman predicts, then you can bet the number of people being forced to public transportation will increase. This obviously is bad news for the Detroit auto industry.

I would love to see more people take public transportation. It is much more environmentally friendly and cost effective, yet there is a major problem: Many major cities in the U.S. have poor public transportation systems, and at their current levels, they are just not realistic for many professionals. I would love to take public transportation into work each day, but if I took the bus to work, it would take me about an hour and 15 minutes instead of the 10 to 15 minutes it takes me now. When you factor in the trip there and back I would have lost 2 hours of my day--not something that I’m willing to give up. It seems rather silly to me that a 7-mile journey would require three bus transfers and take more than an hour. Because of these many inefficiencies, and the increasing demand for public transportation, I see some changes in the future--and, of course, an investment opportunity.

First off, as more patrons are forced to public transportation, you can be sure that the government will be hearing their outcries about the inefficiency. As a result, I foresee an increase in public transportation investments, and possibly even upgrades. I love the light rail system they have going in Portland, and although I probably shouldn’t even mention the word "monorail" in Seattle (we’ve had quite the costly experience in the past with this one), I’m starting to think it’s not such a bad idea--assuming we actually do it right this time.

Lastly, I see access to public transportation becoming an important part of a person’s home buying decision. As you can probably tell, when I chose my home I wanted something close to work so I didn’t have to commute far, but I didn’t take into account whether it would work for public transportation. Those properties that are close to main transit centers which allow homeowners to easily go wherever they need to go might see an increase in demand. If I was planning to use public transportation from the start I certainly would have factored it into my housing decision. So while the Detroit auto industry may be in for another hit, public transportation companies and properties that are public transportation friendly should do well.

Greedy Conniving Landlords Or Smart Investors?

New York City is home to many rent-regulated apartment buildings. In fact, rent-regulated apartments account for 57 percent of the total in the Bronx, 42 percent of the apartments in Brooklyn, 59 percent in Manhattan, 43 percent in Queens and 15 percent of those on Staten Island, according to The New York Times. Typically these buildings aren’t great investments because the land value is high and the cash flow is proportionately low, but now several private equity funds have discovered a loophole of sorts that is turning these previously poor cash flowing apartments into great investments. It isn’t without some ethical issues, though.

Usually in these rent-regulated apartments, tenants will stay for long periods of time because the rents are much lower in these units than elsewhere in the city and the yearly allowable rent increases are small compared to the actual market increases. The opportunity these private equity funds and investors are exploiting is that when a tenant moves out, the landlord is allowed to increase that particular unit’s rent to market. Considering these rent-regulated units are being rented in some cases at 65 percent or more below market, according to The New York Times, it is easy to see how this endeavor can become quite profitable. The more tenants you can get out of the building, the more money you are going to make. The problem is that these tenants typically don’t want to move, and even if they do, there are often few options of places they can afford to go. This is where the questionable ethical practices come in.

Tenants in buildings that have been bought by the private equity funds are now complaining of harassment and other questionable tactics on the part of the landlords in order to get them to move out of the building. Some of their tactics, such as offering tenants three months' rent as compensation for moving out seems decent, but others, such as harassing phone calls or repeated baseless court proceedings, are over the line, in my opinion.

It seems that many of these firms are having success at getting tenants to move out, but I think many of these landlords are falling into the greedy and conniving area. The idea is a good one, but crossing the ethical line just isn’t worth it, no matter how much they are going to make on these investments. It appears that these questionable activities might come back to haunt them anyway. Some of the tenants who have been “harassed” are filling a lawsuit against one of the private equity firms, and another firm has already settled a lawsuit brought upon them for rent-gouging, according to The New York Times. It has certainly been my experience that it is better to do things right the first time, because if you try to cut corners you’ll pay for it in the end. I think that if these funds are patient and really try to work with these tenants to come to an amenable solution, these investments can work out great for everyone involved. But by trying to expedite things, and make some extra cash at the expense of their tenants, these funds are showing their greed and are likely pay the price.

Consumer Debt Increases By More Than Double Estimates

Consumer debt (excluding home loans) increased by $15.3 billion in March over the previous month, according to a report released by the Federal Reserve. Analysts had only been predicting around a $6 billion increase, so the news came as quite a surprise. The fact that Americans are borrowing and continuing to spend is good news for the economy in the immediate future, but for the long term, the implications aren’t as good. Let’s look at some of the causes of the debt hike and then the potential implications.

It doesn’t take a rocket scientist to figure out why Americans are getting further in debt, but here are a couple quotes:

Americans have had to go into debt to maintain their existing lifestyles, Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling, said in a CNNMoney article.

The Commerce Department said that personal spending rose higher than expected in March because of the rising costs of necessities such as food and fuel, even as personal income growth across the country slowed, CNNMoney reported last week.

So Americans want to maintain their lifestyles, but things are getting more expensive, so further in debt they go.

In the near term, people using debt is a good thing for the economy. Consumer spending accounts for around 70 percent of the gross domestic product in the U.S., according to the Associated Press, so any increase or decrease in consumer spending can have a drastic effect on the economy. At the same time, we must understand that debt spending can’t go on forever. There will become a point when people are tapped out and they just cannot borrow anymore. When that happens it will cause a huge pullback in spending and the economy will be hit hard.

I know the idea of there being a limit to the amount of money people can borrow is a hard concept to grasp for Americans, considering we are the nation of debtors, but it is true. Whether we want to believe it or not, in order for there to be a lasting spending increase, wages are going to have to go up. Considering that wage increases haven’t even been keeping up with inflation over recent years, we have a ways to go on that front.

The Economy Is Worse Than We Know: Check Out These Numbers!

Sorry to be the one to add more doom and gloom to an already rocky financial landscape, but the economy might be even worse than we think. According to Kevin Phillips from Harper’s Magazine, the government has been artificially fudging economic statistics for years by changing the way things are calculated. The main three government statistical calculations that Phillips points out are the unemployment rate, Consumer Price Index (CPI) and GDP. If we were to calculate these numbers in the manner in which we used to, before all the changes, things wouldn’t appear nearly as rosy as they do right now.

Here are the current numbers:

Unemployment Rate: 5 percent

CPI: 4 percent

GDP Growth: 0.6 percent (Q1 2008)

Now here are the estimates given by Phillips:

Unemployment Rate: Between 9 and 12 percent

CPI: Between 7 and 10 percent

GDP Growth: Minimal growth since 2001

Phillips also makes an interesting point about why the government needs to fudge the numbers. In his article, Phillips says that according to calculations from John Williams at Shadowstats.com, if the government had failed to make the changes to the CPI index, and stayed true to the old calculations, Social Security checks would be 70 percent greater than they are today.

As most people know, Social Security payments are tied to the CPI index, and as inflation goes up, so do the checks in order to compensate. Considering that the nation is already more than $9 trillion in debt, and that the government spends every dime of incoming Social Security payments, adding billions more in Social Security liabilities would not be helpful to the economy. In addition, if inflation was reported at the higher number, we would surely see much higher interest rates across the board--again, not a big booster to the economy. Phillips gets into much more detail, but for brevity's sake, I’m not going to get into that here. If you want to read the full article you can visit Harper’s (requires subscription) or you can read a free partial version at Mindfully.

I can see why the government felt they had to make the changes they did, and some of them even seem to be warranted, such as one pointed out in a recent New York Times article. “To take just one example, years would often pass before the index included new products — like cellphones — and therefore it missed the enormous price declines that occurred shortly after those products entered the mainstream.” In addition, it is much easier to change around some numbers that most people don’t understand anyway, and in doing so lower your liabilities, than to flat out tell them their Social Security benefits are going to be cut, or taxes are going to be raised.

Other changes, though, seem questionable at best. One change that was made, as pointed out by Phillips, is that the new calculations make adjustments to people’s assumed buying habits if certain products get too expensive. For example, if flank steak gets too expensive, people are assumed to shift to hamburger. At the same time though, nobody is assumed to move up to filet mignon when things are going well. So this is a change that can only make the CPI go further down, which seems a little biased.

No matter how we slice it, or how much we think we’ve been cheated, the government can’t afford to increase our social security payments by 70 percent, or to increase any other payments to us for that matter--even if they wanted to. They probably aren’t even going to be able to pay the full Social Security benefits as they are now for many more years, so we might as well give up that argument. Below is a chart that shows intragovernmental holdings, which essentially is money that the government is "borrowing" from other government agencies, the main one being Social Security.

The best thing we can do is understand that the government-reported numbers may not be as good as they say, and make the necessary adjustments to our own calculations. Instead of using 3 percent as the inflation number in your retirement calculations, maybe it makes sense to use 5 or even 7 percent. Sure, it would be nice if the government could actually be trusted and told us the truth now and again, but hey we can’t set our hopes too high, right?

City Of Vallejo, California Declares Bankruptcy: Will More Cities Follow?

Rarely do cities of a decent size declare bankruptcy, but that is exactly what the city of Vallejo, California, home to more than 100,000 people is doing. Hurt by falling property tax revenues, a stagnant economy and the failure to renegotiate key deals with unions, the city of Vallejo was left with little choice. The questions now are: How will this bankruptcy affect residents and business owners in the city? And is this city’s bankruptcy just a glimpse of what is to come?

A bankruptcy is harsh reality; it is in essence the proclamation that you can no longer afford to pay your debts, and you need help. It is especially bad when a city makes this declaration because it affects a lot of people. Taxpaying residents and business owners expect their cities to provide certain things in exchange for their tax payments. These things include security, infrastructure and so on, which are absolutely vital to a city and its residents' well being. When a city goes bankrupt, residents and business owners usually see dramatic cuts in the services they receive. In addition, the city’s patrons can also expect rising taxes as the city tries to climb out of the hole. Neither of these things are good for the people living and working in the city, and they also tend to be a detractor when it comes to getting new people and businesses to move to the city.

The problems in Vallejo are not isolated--it is likely that many other cities across the country are also experiencing them. During the housing boom Vallejo was able to pay for all the services on the back of increased property taxes, but as housing prices started falling hard and fast, they saw their coffers run dry. This is a common occurrence in boom and bust cycles. During the boom time, many cities see tremendous growth and they are often pressured to increase spending and undergo various projects in order to keep up. When the boom is over, they are left with all the expenses of the boom, but much less revenue with which to pay for them.

The people and businesses that moved to Vallejo during the boom did so with the expectation that things would continue on as they were then. Now, with police and fire forces at the bare minimum and infrastructure maintenance in question, residents are not getting what they planned on. Normally when cities are short on cash, they can raise needed funds via a municipal bond offering to investors. Considering the dire straits Vallejo is in, and its pending bankruptcy, that option is basically nonexistent. In order to get added services Vallejo has to raise taxes, and that is typically not a good way to stimulate a local economy. Already people are hesitating to move to Vallejo because of its financial condition, and it is likely that it will also force some residents and businesses out. If this happens it could lead to a negative spiral affect that could completely destroy the city. Look at some of the cities in Ohio for an example of what happens if residents and businesses leave in masse.

The city of Vallejo is not alone in its financial trouble, and as the housing crisis continues to leave its mark and the economy continues to struggle, it may not be the last city to declare bankruptcy. Considering the impact that something like this can have on the well being of a city, it might be wise for investors to add a new layer of due diligence to their property purchases: studying the city’s financials.

*The picture above is of the California Maritime Academy in Vallejo, CA and is courtesy of iamu-edu.org

Benefits Of Economic Recession

With all the doom and gloom talk about the current (or looming, depending on your view) economic recession and housing bubble, I thought it would be nice to talk about some of the benefits that should be realized by these otherwise negative events for a change. An economic recession is not a joyous time for most people, as jobs and wages are cut and belts are tightened, but there are some positives.

The housing bubble, for one, should be looked at as an overall good thing for many people who were priced out of the market. In many parts of the U.S., homes were just flat out getting too expensive; now that they have dropped by double digit percentages in most areas, they are becoming more affordable. Obviously this isn’t necessarily a good thing for current homeowners, but it is certainly a correction that needed to be made.

Another benefit of the economic recession is that it should serve as a wake-up call to investors and consumers alike. Things were going so well that many investors got big heads and took on a too much risk. Consumers on the other hand didn’t bother to save and instead decided to spend every penny they had and then some. The pain people are experiencing now as a result of those actions should be remembered next time a boom and bust comes around. This might be wishful thinking, as it seems people didn’t learn this lesson after the dot-com bust, but hopefully this time will be different.

In addition, I hope that this economic turbulence will force the government to re-evaluate their spending habits and overall budget. The U.S. government is wasting more money than we can even imagine on things which are producing either no, or little, benefit for our country. If the U.S. government were a business, they would have gone out of business a long time ago. They need to figure out which programs are producing significant ROI to the country and cut the programs that aren’t holding their weight.

Lastly, one of the key benefits for investors from an economic recession is that they are often able to buy assets cheaply. Smart investors will look to capitalize on everyone else’s panic and desperation and buy up their assets at a hefty discount. Often times it is possible to actually make more money in a recession than during the boom. Less competition and desperate sellers mean lots of opportunity for investors. The trick is that investors need to make sure they aren’t buying assets which are going to decline in value.

While economic recessions are gloomy times, there are some benefits that can be derived from them. Hopefully you prepared yourself for this economic recession and are prepared to profit from it instead of falling victim to it. If not, then learn from your mistakes and make sure next time you are ready. Regardless of what some people say, there will likely be more recessions in your lifetime. Make sure you are prepared.

The Housing Crisis Is Over! Or Is It?

I read an interesting opinion piece in The Wall Street Journal yesterday by Cyril Moulle-Berteaux, a hedge fund manager, which said the housing crisis was over, and that it bottomed out in April. I couldn’t help but respond to such claims, as I’m not sure how he can be so confident in his stance. You can read the whole article for yourself; I’m not going to get into all the particulars here, but I wanted to add a couple points.

The stats that Mr. Moulle-Berteaux used in his article sound great, but how much can we rely on such data? The answer is we can’t. Just as he says the data being used by the housing naysayers is inaccurate, so too must we be skeptical of his. Statistics can be found to back up just about any point you want to make, and beyond that you can analyze data sets in many different ways and skew them as need be.

The main point that he makes is that housing is now affordable to the masses again, so we should expect people to start buying. Typically, when the cost of renting nears the cost of owning, people will choose to buy. That argument makes sense to me. However, many people couldn’t buy now even if they wanted to. Lenders have tightened their standards to the point that, unless you are looking at getting a conforming loan, you are pretty much out of luck. That means that people need to be able to put up 20 percent in order to buy a home, and I’m not sure as many people have that kind of money as he thinks. During the housing boom we experienced the highest proportion of homeownership in U.S. history, and this was in large part because of the increased number people who were able to qualify for home loans. Now that these people can no longer qualify for home loans, the percentage of homeowners has to drop. As more and more people go into foreclosure and lose their homes, the percentage of homeowners is going to drop. Considering how the number of foreclosures is continuing to increase, I think it might be a bit premature to call a bottom.

In addition, we have to consider the mob mentality. Even if prices have dropped to an equilibrium, in boom and bust cycles, both the boom and bust typically go further on their perspective ends than they statistically should. The reason for this is that people follow a mob mentality; we are natural followers and we don’t want to be the first ones to the party, so to speak. Therefore, even if April marked the statistical bottom, the market is probably still in for some additional correction before people are ready to jump back in. When they do, though, it will likely be a nice little surge of activity.

Many of Mr. Moulle-Berteaux’s points are valid, and who knows--maybe he will turn out to be right. But from my experience, trying to time the market is just a practice in futility. There are so many factors that go into determining these things that chances are you are going to be wrong when you try to time a market. In my mind, the factors that investors need to keep an eye on are property yield or cash flow. Cash flow is an age-old indicator of property value, and it rarely lets us down. Steep losses are realized when people panic and leave the market all at once. If a property owner is seeing cash flow, they have no need to panic. So my advice to you is to not bother trying to time the market. Be smart, and if you are going to buy, buy on cash flow rather than trying to use your--or anyone else's--crystal ball.

The Water Crisis: Saving For A Sunny Day

Summer is approaching, and with it comes anticipation of all its pleasure: picnics, barbecues, baseball, summer vacation and life-destroying drought. From San Diego to Atlanta, from below the Texas border to the Rockies, people of the Sun Belt are bracing for another summer of watering the lawn with their bathwater...at night...wearing a ski mask to avoid hefty fines. Just what are people doing to prepare and conserve in these hard-hit places? Let’s start with my old hometown, Atlanta...

To celebrate Sunny Perdue’s “Take a Shorter Shower” month, Stone Mountain Park premiered its Snow Mountain attraction last November. The 1.2 million gallon slush ball was conceived to give sunny Atlanta a most deserved winter wonderland, but apparently a bunch of prissy naysayers who like taking showers more than seeing children happy shut the attraction down after opening day. Reprehensible isn’t it? What had they to complain about? Besides this:

“Snow blowers were pulling water from the DeKalb County water system, instead of the park's lake because park officials wanted the snow to be pure white.”

People in Georgia wanting something to be pure white?! NEVER!

Ahem...

In a state where there are no natural lakes (the main reservoir, Lake Lanier, is a flooded town that routinely stuns and drowns swimmers with debris floating from the bottom), and where most of the watersheds have been paved over for parking lots and tract housing (Georgia’s lack of natural barriers made it prime for unchecked growth for the last decade), one would think that the legislature would have a better contingency plan than “Screw over Alabama and Florida” but that’s what it boils down to. Water wars between the three states have been flaring for over 15 years, and last year saw a particularly nasty clash between Georgia and Florida when the Northern Aggressor—in a rare, bipartisan decision—voted to divert millions of gallons of water that had been promised to Florida to protect endangered mussels and sturgeon in the northern lakes. Meanwhile, the hundreds of golf courses across Georgia kept their sprinklers on. As long as they can pay for it, who are we to stop them?

This smacks of an “almighty dollar” scenario that may play out on the other side of the country in Vegas, whose reservoir at Lake Mead is tapped by aqueducts to many surrounding cities. That reservoir is already at half capacity and declining rapidly. According to a report published by researchers at Scripps Institution of Oceanography, UC San Diego, Lake Mead may be bone-dry by 2021.

I have heard people suggest that Vegas is protected by the vast wealth contained there, which will allow the city to simply buy water when it becomes necessary... I’m sure those generous casino and hotel moguls will be just thrilled to share with everyone. Might I add that this would necessarily be at the cost of towns that would see their water supply go to a higher bidder? Is this really an ideal scenario to anyone? And can one be sure that Vegas’ coffers won’t dry up as well? Casinos are not recession-proof, and if Cirque du Soleil has to start performing their hit water show “O” in a vat of urine, Vegas may lose its appeal and the house may finally lose a round. Benjamin Franklin said in his Poor Richard’s Almanac: “When the well runs dry, we shall know the true worth of water.” One can only hope that whoever has it will accept feather boas and sequined thongs as payment.

The Lake Mead crisis is complicated by a 1944 water-sharing treaty with Mexico, which guarantees that a certain minimum of potable water from the Colorado River reach the Mexican border. A desalination plant was built just north of the border to make good on this promise, but by the time the river reaches the Colorado River Delta—half a century ago, a two million acre expanse of wetlands and lagoons—it is a mere trickle, and the surrounding area is a salt flat.

Elsewhere, tensions over the Rio Grande water supply continue to rage in South Texas and Mexico. A decade-long water-debt to the U.S. by Mexico was resolved in 2005, but only after an estimated $660 million of losses because of failed crops in the Texas Valley. Texas is seeking redress through NAFTA in Canadian courts for these losses, and the soured relations between the two states show no signs of improvement.

During the worst years of the drought, the government did what it could to aid Southern farmers by funding updates and improvements to irrigation systems, but reservoirs throughout the Sun Belt are still pitifully limited, and rampant growth in cities such as Vegas and Atlanta and Phoenix (which seems to have the soundest approach to the water crisis of the three) threaten to turn these towns into dust bins in a matter of years. As much as some people would like to believe it, this is not a problem that money alone can solve. Only real planning and foresight will be enough to protect these cities from complete desiccation.

If you choose to invest in any city threatened by drought, then do not fail to research the city’s contingency plans and make your own. Increasing interest in sustainable housing is making additions such as home reservoirs more accessible. For those living in drought-affected areas, such considerations may become absolutely vital, and so for those investing in these areas, having a house whose residents can actually take a shower may make the difference between a hot-ticket and sand trap. Now...I’m off to the golf courses!

Fannie Mae Records $2.2 Billion Quarterly Loss; Fear Mounts

Mortgage giant Fannie Mae today reported first a first quarter loss of nearly $2.2 billion, or $2.57 a share, much higher than the expected loss of $0.81 analysts were expecting, according to The New York Times.

Those who are regular readers of this blog know that one of my biggest fears is that one of these mortgage giants will fail. The impact of a Fannie Mae or Freddie Mac failure would be felt hard and fast, and would likely send the already precarious economy into a colossal tail spin. Not only would the housing market tank, but so would the entire U.S. economy. I am not excited about those prospects and the new-found power given to these companies by the government is not increasing my confidence level at all.

I understand why the government loosened the guidelines for the companies, yet at the same time it scares me. While the possibility remains that these changes will help the credit markets, and in turn the housing market and economy, they also increase the chances of these companies failing and the potential impact of a failure. According to The New York Times, Fannie Mae and Freddie Mac now control more than 80 percent of the mortgage market--more than double their market share of just a couple years ago. If these companies fail, the mortgage market is for all intents and purposes dead--a scary possibility. Of course, the government won’t let these companies fail, but how much would a bail out cost taxpayers? Some estimates put the number over a $1 trillion, a number that would have serious consequences to a nation already over $9 trillion in debt.

I have my fingers crossed that we won’t have to witness the failure of either of these mortgage industry giants, but as the losses continue to mount, I get more and more fearful. America has a lot riding on these two companies, so let's hope that they are able to keep it together.

What Happens In Vegas Devalues In Vegas

The Las Vegas real estate market has been notoriously hard-hit by the foreclosure crisis: 51 percent of unsold homes in Vegas are now vacant. This has presented investors with a large selection of single-family properties for investment. In a market such as Las Vegas with an abundance of vacant homes, investors should view such purchases as long-term investments and know that it may take several years before a home turns a profit. But what about some of the ultra-lux homes? According to a recent article in the Los Angeles Times, luxury homes in Vegas may be second only to a Fried-Scorpion-on-a-Stick Stand in terms of bad investments:

“About 1,000 houses are listed for sale in Las Vegas for $1 million or higher, more than 600 of them built since 2004. But unless they've been constructed in the last year or two, the properties are considered out-of-date, making them all that more difficult to sell, real estate agents say.”

In a town where Hank Overalls becomes Mr. Henry Tuxedo and Lucy Dressbarn becomes Lady Prada von Guccistein overnight, in a place where the word of the moment is always “New!” whereas “Classic” and “Established” are maledictions, it is only natural that the homes be as extravagant and aesthetically bankrupt as their occupants. The trouble is—in case you don’t know—Las Vegas is situated in a flat, hostile desert, and there isn’t much in the way of a view or an established neighborhood. With acres of land available for development and only an impotent Bureau of Land Management to moderate it all, one developer after another (and sometimes the same one, over and over) has created the next “hot” neighborhood, and residents have followed:

“One developer, Christopher Homes, recently opened a neighborhood of homes in the hills west of the Strip selling for $1.7 million to $3 million. Several houses have sold to residents of adjoining neighborhoods who lived in their houses for less than five years, including homes built by the same developer, said Erika Geiser, the company's vice president.”

“‘They feel their residence is obsolete,’ she said. ‘They're looking for something more innovative, more cutting-edge.’”

Cutting-edge, indeed. Like so many glass pianos of yesteryear whose tops are now marred by the fine cuts of straight razors and the occasional syringe, the old homes are indeed pathetic vestiges of a bygone era, and I don’t blame the homeowners from moving on. Here is a table displaying some of the bare necessities that people expect to find in their new homes:

Classic	NEW!
5,000 to 7,000 square feet	8,000 to 10,000 square feet
Walk-in showers	7 foot by 7 foot showers
Granite tile bathtub	Granite slab bathtub
12” by 12” polished travertine tiles in entrance	20” by 20” polished travertine tiles in entrance
Stainless steel counters, glass tiles in kitchen	Stainless steel counters, glass tiles in laundry room
Plastic chandelier	Chandelier made of human sternums*

*May or may not be an exaggeration. Would it be all that surprising if it were true?

All of this is to say, it takes knowing the future of what people will want in a home—and where people will want that home—to win at investing in ultra-lux homes in Vegas, and in the end you’re probably better off the blackjack tables. Take the sad story of Mr. William Derentz, for example:

“William Derentz, who heads the company that runs the annual Harvest Festival in Laguna Hills, bought a 5,400-square-foot home in Las Vegas for $2 million in 2004. He never moved in, since he planned to resell it in a year or two at a hoped-for profit of $1 million.”

Alas, the market tanked and defeated Derentz moved into the house in February, but while there, he will remodel the backyard, adding “his-and-her” cabanas to make it a more competitive seller. He may want to make those “his-and-her” reservoirs instead, given that the Las Vegas real estate market may never recover if it runs out of water first.

More on the increasingly dire water crisis in the Southern U.S. and Mexico in tomorrow’s post: “Water, Water Everywhere, But Not A Drop To Fill My 49 Square-Foot Shower,” or perhaps “The Day After Tomorrow Part II: The Day After Cinco De Mayo.”