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Strengthen Your Personal Balance Sheet
In the last 12 to 18 months our country has gone
through some difficult times. Many people had a false sense of wealth caused by over inflated home values.
The lesson to be learned, and we are learning it, is that a home is not an investment, it is a place to live.
A home, while it is an asset, is an expensive one. Interest, Insurance, utilities, maintenance,
and taxes are cash suckers and all come with owning a home. Wealth is not built by owning a home,
it is built in the following ways. Saving
what your earn. Earning more so you
can save more. Receiving interest and
dividends from others, not paying interest to others. Do yourself a favor and
create a personal balance sheet. For those of you that are not aware of what a balance sheet is,
it’s simple. List your assets and subtract your liabilities, the result is your net worth.
The key here is that you need to be honest with yourself. This is something that I started doing
years ago and it has helped me set goals for myself. I update my balance sheet every 6 months on December
31st and June 30th of each year. I then set goals for the next 6 months on where I want my assets
and liabilities to be. Below is a sample of what I am talking about. Dec 31st (Actual) June 30th (Goal) ASSETS Cash in Banks $5,000 $5,000 IRA’s $75,000 $80,000 401(k) $25,000 $30,000 Stocks $10,000 $12,000 Total Liquid Assets $115,000 $127,000 Home $200,000 $200,000 Auto $15,000 $13,000 Personal Property $25,000 $25,000 Total Fixed Assets $240,000 $238,000 Total Assets $355,000 $365,000 LIABILITIES Mortgage $160,000 $158,000 Car Loan $10,000 $8,000 Credit Card $3,000 $1,500 Total Liabilities $173,000 $167,500 Net Worth $182,000 $197,500 Everyone should have an idea about where they are at financially at all times.
It is my belief that most people have no clue as to how much they are worth, or not worth. If you
don’t know where you are at, it is impossible to get to where you want to be. I see this in
the bank all the time. Business owners bring in annual financial statements and all they want to talk about
is their income statement. That is fine and dandy but what really matters to the banker is the balance
sheet. If you really take the time to make sure your balance sheet is strong, you will be able to weather
difficult times. If you have a weak balance sheet, you will have a difficult time even if you have a small
interruption with your income. A strong balance sheet also allows you to take advantage of economic downturns
(buy when things are cheap). The question now is. What is considered a strong
balance sheet? There is one ratio that I think is tantamount and that is the “debt to worth ratio”.
Take your total liabilities and divide it by your net worth. In the sample above the Dec. 31 actual
total liabilities was $173K divided by the Net Worth of $182K = A debt to worth ratio of .95 is calculated. Personally,
I believe a debt to worth ratio of 1 or less is a very good ratio. Some might argue 1.25 or 1.5, but I
think if you owe less than you are worth you are in a strong financial position. Do this for the health of your financial future. Create a
balance sheet and work diligently to strengthen it. Set attainable but challenging goals for yourself and
you will be rewarded in the long run! PJ Morganfowler 5-2-08
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Social Security
I can’t imagine that there is a working person in their right mind that thinks social security
is a good deal. If there is, boy, are you snowed. Do you really know how bad a deal it is? Consider the
following. You contribute 6.2% of your gross wages to Social Security. In addition, your employer also contributes
6.2% of your wages to social security for a total on 12.4%. Now, lets say you start out working when you are 22 years
old with a annual salary of $40,000/year and you get a 3.5% increase every year (small in comparison to the real world). When you are 65 years old your salary
will have grown to $169,950. You will have earned gross wages of $3,873,945 over your life time. You and your employer will have paid in $480,369 to Social Security on your behalf. That is an average of $11,178/year. If you were able to invest that same money
in a private retirement account that earned an average rate of return (conservative) of 7%, you would have a nest egg (ASSET)
worth $2,769,645 at the age of 65. Take that $2,769,654 and annuitize it over 30 years (to last until you are 95) at the same 7% and you would get monthly
income of $18,427/MONTH for 30 years!!! Know anyone that anticipates receiving that from SSI??? I sure as H E
double hockey sticks don’t! Oh yeah, here is the Kicker When you die, guess what. You have no asset you pass along to your children/grandchildren. What a great deal! I don’t know
about you, but I would be willing to forgo any future benefits of SSI if I and my employer didn’t have to pay in another
dime to those clowns in Washington! It’s a complete joke and the American people for the most part don’t
know how badly they are getting screwed! PJ
Morganfowler 4-17-08
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How Is Our Federal Tax Money Spent?
The following is how the federal tax money from 2006 was spent, broken out by cents
on the basis of one dollar. Social Security, 20 cents, total of $550 billion. Defense
Spending, 19 cents, total of $510 billion. Interest on the National Debt, 15 cents, total of $406 billion.
Medicare, 12 cents, total of $338 billion. Medicaid and State Children’s Health Insurance
Program, 7 cents, total of $198 billion. Supplemental and Emergency Funds, 2 cents, total of $58.4 billion.
Education, 2 cents, total of $56.5 billion. Housing Assistance, 1 cent, total of $34.3 billion.
Veteran’s Affairs, 1 cent, total of $33 billion. Homeland Security, 1 cent, total of $32 billion.
Transportation, .5 cents, total of $15 billion. Environmental Protection, .3 cents, total of $7.6
billion. Other (including technology and space,
energy, labor, and agriculture. Among the projects and agencies that are funded: NASA, the National Labor Relations Board,
and research into alternative energy sources like ethanol and solar power), 19 cents. (Stats sourced from
Newsweek)
There are two main categories in the federal
budget: federal funds and federal trust funds. Federal funds are considered "discretionary" dollars—meaning
Congress and the President have a say in how they're spent. Federal trust funds are "nondiscretionary,"
meaning the money has been spoken for. Each category takes up about half the total budget. Federal trust
funds include spending mainly on Social Security payments, the Medicare program, and part of the Medicaid program, or $1.5
trillion. The remaining $1.2 trillion—used on everything from the military to education to the arts—is left for
political priorities.
It is interesting how social
security is our number one expenditure yet the fund is still forecasted to run dry. It really makes me
wonder as our population grows, and assumingly most people work, if the fund really is going to run dry. Defense
spending is obviously way up because of the war, and won’t slow down anytime soon. The third highest
amount is what really sticks out to me. We spend $406 billion on paying the interest of our National Debt.
That is mind boggling, and I don’t think it is even possible to wrap your brain around. Imagine
if we could somehow get rid of half of our national debt? It would make a huge difference on all other
areas of spending. Perhaps then we could spend more than 2% of the total pot on education?
The possibilities are endless.
Raising taxes
is not the answer as the democrats keep trying to tell us. It is the opposite, we need to cut taxes, and
watch the economy flourish. I’ve never understood why someone would think raising taxes is the answer?
It goes completely against the grain of a healthy free market economy. As I have stated before,
I am no economist, but a healthy economy means more money for everybody, including the government, which logically seems the
quickest way to lower our national debt. Am I missing something?
Keith Kloob 4-16-08
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 Import Less,
Export More, SAVE MORE! I do not know that much about economics, but from what I have noticed in the past couple of years,
this is what needs to happen for our economy and general health as a nation to turn around. The gross domestic product (GDP) is one the primary indicators used to gauge the health of a country's economy. It represents the total dollar value of all goods and services
produced over a specific time period - you can think of it as the size of the economy. Usually, GDP is expressed as a comparison
to the previous quarter or year. For example, if the year-to-year GDP is up 3%, this is thought to mean that the economy
has grown by 3% over the last year.
Measuring GDP is complicated (which is why we leave it to the economists),
but at its most basic, the calculation can be done in one of two ways: either by adding up what everyone earned in a
year (income approach), or by adding up what everyone spent (expenditure method). Logically, both measures should arrive
at roughly the same total.
The income approach, which is sometimes referred to as GDP(I), is calculated by
adding up total compensation to employees, gross profits for incorporated and non incorporated firms, and taxes less
any subsidies. The expenditure method is the more common approach and is calculated by adding total consumption, investment,
government spending and net exports.
As one can imagine, economic production and growth, what GDP represents, has
a large impact on nearly everyone within that economy. For example, when the economy is healthy, you will typically see low
unemployment and wage increases as businesses demand labor to meet the growing economy. A significant change
in GDP, whether up or down, usually has a significant effect on the stock market. It's not hard to understand why: a bad economy usually means
lower profits for companies, which in turn means lower stock prices. Investors really worry about negative GDP growth, which
is one of the factors economists use to determine whether an economy is in a recession. (The last four paragraphs are verbatim sourced from http://www.investopedia.com/ask/answers/199.asp).
Now that we have a quick understanding of GDP, I dug up the percent changes for
the last fifty years for the United States. The last mini-recession we went through was in 2001 when our percent change
was only 0.8. The following years since have went like this: 2002 (1.6), 2003 (2.5), 2004 (3.6), 2005 (3.1), 2006
(2.9), and 2007 (2.2). We slowly crept up after 2001 to 3.6, but now have been steadily declining since that time, and
the outlook for 2008 is looking like a number somewhat similar to the 0.8 of 2001. The recession in 2001 when our GDP
change was at 0.8 was a drastic jump down from 3.7 in 2001, and it seems this was due to the War on Terror and our military
expenditures sharply spiking up through the roof. What is troubling to me about our recent drop is that it has been
a steady, yet consistent drop, with know hope of rebound in sight. The housing market is collapsing, consumer confidence
is plummeting, and everyone is talking about doomsday right around the corner. This seems like a recipe for disaster,
and we can only blame it on ourselves for letting things get so out of control. The exact reason for the recent drop
of our economy is a list of many variables that all play in a part in some manner. The alarming thing is that know seems
to really know what is the root cause, or at least put it into words that everyone can understand. The GDP is in trouble,
and we need to fix it.
Import less and export more. The U.S. used to export way more goods and services than they imported.
However, in the last few years this number has been shifting in the other direction. The Department of Commerce, shows
that total January exports of $148.2 billion and imports of $206.4 billion resulted in a goods and services deficit of $58.2
billion, up from $57.9 billion in December. So our deficit in this area is also growing at an alarmingly troubling rate
which I’m sure is indicative of our declining GDP. How do we fix this? I don’t have the answers because
I am not an economist, although I’m growing to wish I had majored in Economics more and more everyday. To me the
answer seems simple, import less and export more until the export number is way bigger than the import number. We have
to get the right people in office and leadership positions in this country to make this start happening.
What can we do
as average citizens to help fix this problem? I think the answer is way too simple to be true, but in the long run I
think it is the only thing that will really get us back on track. The answer: SAVE MORE, AND STOP SPENDING MONEY
YOU DON’T HAVE!!!! This cannot be said enough! Everybody has been living high on the hog in the past few
years with their credit cards (me included to an extent), and this needs to stop. When everybody is creating huge demand
with money they don’t have, it in turn is going to make the supply on our own soil get depleted, and require importation
of more goods to fulfill that demand. That in turn has finally snowballed, and put us in the mess we are now in.
Please people, stop doing this, it is killing our country! Stop worrying about global warming and spending money on
making our environment more clean (which by the way is slowly leeching us dry), and start worrying about what matters,
and that is saving money, and not spending what you don’t have. Once we get our economy back into good shape,
all of the other stuff including Green Initiatives will all fall into place. A healthy economy is the base for all things
good, and without it nothing can really be accomplished.
How
come saving more and stop spending what you don’t have has not been addressed by any of our horseshit presidential candidates
in this latest race? I think the answer is simple, people don’t want to hear the truth. If a prez candidate
started telling everyone that they have to stop spending money they don’t have, and saving money to help build back
up the strength of our economy, it would be the death knell for them. The truth is that we are electing a president
on issues that don’t matter, and it is really sad. We need to address and fix the only issues that really matter
right now, and that is getting people to start living more responsibly with their finances. That is the bottom line.
Keith Kloob 4-4-08
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DAILY RANT
Wednesday, March 19, 2008 
This is not exactly a rant, but a Q&A from readers with our own egotistical, yet challenged PJ Morganfowler regarding
financial matters.
PJ:  Right now Oil is high party due to our weak dollar. People dump money into commodities (Oil, Coffee, Wheat, Soybeans) to hedge
against inflation (early 1980's). Near term wheat hit $24/bushel a few weeks back! A year ago it was trading below $5.
A typical yield on wheat is 50 bushel/acre. That means if a farmer still had some 2007 wheat in his bins and sold it at the
peak he would have grossed about $1,200/acre on wheat. Take that figure by say 2,000 acres of wheat and you get revenue of
$2,400,000. I woul be just as concerned about what you are going to pay at the grocery store as what youare paying at the
pump. PerryT: Thank you PJMF...you proved me wrong and your insight is appreciated.
Tell me, is there any chance for relief in sight? Will prices ever come down? PJ: What goes up...must come down. A few things that can cause oil to fall in the near term.
1. Stonger Dollar
2. Full
blown recession (lack of consumer and corporate spending) which would ease the demand for oil.
3. government intervention
(specultors can buy a barrel of oil with only 4% of the price down in cash) If they were required to put 50% down like a stock
trader, the potential for big ROI would plummit making oil a much less attractive investment for paper traders. You would
see fewer if any paper traders and all that would be left is the gas companies bidding against one another. This is my biggest
hang-up with oil. imagine what home prices would be like today if you had to put 50% down!!! Well, the same goes with oil.
My guess is that a lot of the bozos that are financing the other 96% of that barrel are going to get burned when they have
a margin call and this problem will correct itself in the next few years. PJ:
This was taken from cnn money.
"Indeed, investors seem to have stopped looking to the oil market's underlying
supply and demand fundamentals for price direction, Cordier said. Oil supplies have risen in eight of the past nine weeks,
and numerous forecasters have cut demand growth estimates for this year, yet crude prices continue to surge. Gasoline supplies
are at 15 year highs, and gasoline demand has fallen every week since late January, yet gas prices keep rising to new records."
Supply and demand doesn't even matter with oil right now. Cutthroat: I remember a few years back when gas was .88 cents a gallon at Caseys in Fergus Falls by the State Hospital. It wasn't
that long ago..... PJ: 9 years ago to be exact. 1999, those were good times. The stock market was rolling and energy prices were at he bottom of
the barrel. It spurred unprecedented growth in our country and around the world. Now, all that growth needs fuel to keep operating.
think of the typical home in 1999. 2500 sq feet with 2 maybe 3 tvs. fast fwd to todays new home. 3500 sq feet is small, more
space to heat, heated garage - 3 stall, tv in every room, 2-3 lap tops, exterior flood lights that could blind a person, 2
suburbans driving from the burbs to downtown 5 times/week, coffee grinder, cappucino machine, the list goes on and on. Does
anyone even walk a golf course anymore? Nope. We need to consume gas or electricty to play golf now. It's coming to a
halt my friend, it's coming to a halt. Since PJ does not contribute actual pieces anymore, this was the best we could do if you want some insight on all
things financial. Keith Kloob 3-19-08
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DAILY RANT Monday,
March 3, 2008 
Credit Crunch
Here’s another perspective. I/we have manageable credit debt. We live
within our means. We pay all bills on time and frequently pay more than minimum on credit debt.
We pay taxes, pay necessary fees, licenses, etc and even volunteer to prepare and dish out meals to homeless people
(mostly for good karma not because I’m a good person). So how are we rewarded? How about a 5% drop in your home value in the last year?
How about a property tax increase? How about an increase in insurance premiums? No,
don’t answer yet. We’ll also throw in flood insurance for an extra charge. Go
ahead, reliable debt payer. You get it whether you like it or not. You’ve earned
it. Earned it, eh? How
about got f*cked again by asshole money grabbers who refuse to be responsible adults? I’m so sick
of hearing all these sob stories of people loosing their homes because of their ARMs have adjusted. Or
the idiots that bought a home before they sold their existing home. Guess what, asshole? Stop
blaming the lenders; it’s in their nature to prey on the weak and stupid. Hey, that’s you!
That’s how they make their living. I know you can read and write because you need those skills
to close on a mortgage, your failure to read and understand is, as usual, hurting all of us who follow directions, read and
comprehend, and live within our means. You f*ckers got us into this mess and now as usual we have to pick up the slack at our expense to clean everything
up while you wallow in your misery and live off of your parents or government assistance and wait for the next poison apple
to wolf down. As for you lenders, go f*ck
yourselves. You’re not innocent either. My distain for you equals my loathing
of dumb-as-shit loser adult children borrowers. I understand that you’ve wrote the book on screwing
people out of their money. I’m not angry at you because your natural state is “asshole”.
I’m not angry at crocodiles because they eat innocent wildebeests; it’s in their nature to be heartless
assholes, such as yourselves. I’m more mad at you at your inability to take responsibility for your
f*ckups. Inability is the wrong word. Unwillingness is more like it. You’re
not stupid. You know how the game works. You get caught, cash out, and close up shop
before anything hits the fan. When it does, you say, “I’m sorry.” And
get away scot free. And the cycle repeats… Come to think of it, I pretty much hate everyone right now. See, it’s bill day and on this
day I get really pissed. I know this all sounds like the typical ignorant shit that people like me continue
to spout out, but I know there are a lot of people like me out there and we’re not happy. So a big F*CK YOU to mortgage lenders, stupid asshole people, Wall Street assholes,
bankers (except PJ), and Ryan Seacrest. I hate that guy. Josh Alomar 3-3-08
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America, the plastic nation.  Sorry it
has been a while since my last article. I have been busy with the foreclosure boom that is running rampant
across our country. Let me tell you, lawyers that represent banks and finance companies are raking it in
these days. This article as you may have guessed is going to touch on the growing problem our nation has with credit
card debt. Depending on the source, you will hear that the average American household has just over
$8,000 borrowed against credit cards. Take that number and divide by the median household income of around
$50,000 and you will find that the average household has 16% of their annual income owed to a credit card. Some
might think that this is not a big deal, but believe you me, it’s a huge deal and it’s going to be an even bigger
deal in the next few years. Credit cards, believe it or not do have a useful purpose in our economy.
It’s a way for the consumer to avoid writing a check out for every little expense and a way for merchants to
get their cash right away for a sale and avoid taking an NSF check into their till. However, when people
start carrying the balance over month after month the spiraling effect that is present today takes place. Lets
say that a consumer purchase $100 worth of groceries and fails to pay off the balance by the end of the statement cycle and
that the interest rate on the card is 18%. Credit cards calculate interest based on the average outstanding
principal balance during the cycle unlike a loan which uses simple interest on the actual balance. If you
had an average balance of $1,000 during the cycle and paid all of it off but the $100 you will get charged 18% on the $1,000
which equals roughly $15 a month when you really only carried over $100. $15/month on $100 is $180/year
or 180% interest. So, if you go a whole year without paying off that $100 grocery tab you will have effectively
spent $280 on $100 worth of groceries. I know this is dummied up a bit but most people seem to need it
that way in today’s world. 
Here
is what I foresee happening in the near future, if it’s not already. Banks such as Citigroup are
already writing down billions in their credit card portfolios because of serious delinquency. And just
like they are doing in the mortgage market, the banks are going to start being more and more selective on who they give plastic
too. Soon you will have to have near perfect credit to be able to qualify for the plastic.
So what? you might ask. Well, approximately 80% of our country’s economy is fueled by consumer
spending and in the last 5 years, the average American has spent 1% more than they have earned……. using credit
cards. Once the financing goes away, so does spending, and once the spending goes away, our economy goes
in the tank. Oh yeah, one more thing. In the past 5 years the overspending idiots
have been able to bail themselves out of credit card debt with the use of home equity loans. Guess what?!?!
With the housing market going in the tank (the worst is not here yet by the way) you don’t have any more equity
in your home, in fact your home is worth less than it was 1 year ago so if you took out a home equity loan a year ago and
maxed out the equity in your home, you are now upside down (you owe more on it than it’s worth). Good
luck with that one! It’s my humble suggestion to all to start living within your means.
Oh wait, most people don’t seem to know what their means are. Most people bury their head
in the sand and hope for a miracle. Wake up people! Stop using your plastic to finance
everyday living expenses. Only use it for things that you know you can pay off at the end of the month
and start a fricking savings account for unexpected expenses that come up so when you do have them you can pay for it in cash
vs. plastic. Yes, it may be painful to change your lifestyle and curb your spending but do it and you will
thank yourself in the future.
By PJ Morganfowler 1-22-08
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The Ethanol Industry – Hey guys we are burning our food. 
You
will find people sitting on both sides of the fence when it comes to the Ethanol debate. On one side, you
will find the farmers across America’s corn-belt cheering the mandate by Congress for an increase in the use of ethanol
blends in each gallon of gasoline. On the other hand, you will find realists, like me, who know for damn
certain that ethanol is not the answer.
Ethanol will, and has caused more problems than it is solving. The price per bushel of corn has gone
from around $1.75 in just 18 months, to $4.62 for march 2008 delivery. Now, if you know anything about
farming, you would know that a yield of 200 bushels/acre is very attainable in states like Iowa and Nebraska.
The price difference in the last 18 months is about $2.83/bushel, which gains the farmer an extra $584 for every acre
of corn he harvests, assuming an average yield of 200 bushel/acre. If that farmer plants 1,000 acres of
corn, that’s an extra $584,000 of revenue. This is precisely where the problem lies.
We as Americans, on average have the disposable income to cover some of the cost increases it will take to feed our
families. However, country’s that we export to do not have the same luxury. Some
of the people that we export to, spend over 50% of their income on food alone. They can’t afford to see the price of
their food go up by 20%-30%, they will starve!
I think that the Ethanol boom is going to be a bust and here is why. The
Ethanol plants can’t be profitable with today’s corn and ethanol prices, especially the ones that are now coming
on line and have 10’s of millions in debt to pay back. Many of the ethanol plants that are being
built, or are now coming on line were using $1.80 corn and $2.00 ethanol in their projections. They are
now paying 2.5 times that for corn, and the price of ethanol has changed little. The price of ethanol is
strongly influenced by the price of gasoline, and the price of gas is partly determined by the price of crude oil (see previous
article on oil). Oil is trading at all time highs, and the bubble will eventually pop like all bubbles
do. When this happens it will send the price of gas down, and the price of ethanol will drop as well.
When the price of ethanol drops, it will no longer be profitable for the ethanol plants to keep producing at the current
corn prices, which will cause an over supply of corn, and then the price of corn will also drop like the panties on my high
school prom date. When this happens, ag land prices will also plummet and the over-leveraged farmers will
be in the hurt bag just like in the early 1980’s. This will cause the banks that financed the land
at today’s stupidly expensive prices to take losses, and the whole cycle will start over again.
I know I keep preaching a reoccurring theme over and over again, but
the simple fact of the matter is that the same business principals hold true in all cases. People are rushing
in at the peak of the corn and land prices, and it’s going to blow up on them sometime in the near future.
The same goes with the stock market of the late 90’s, the recent housing bubble, oil and ethanol are going to
be next on the chopping block and people are going to get hurt.
If we were really serious about finding an alternative to oil to fuel our
cars, we should be looking more into hydrogen. Iceland’s buses run on the stuff, why can’t
our cars??? The reason we are burning our food for fuel is that the farmers are good at lobbying.
Just look at the subsidies they get already. Go to www.ewg.org and look at the subsidy database. You can see who has
received what in federal subsidy. If we really wanted to protect our environment, we would not rely on
farming for a source of fuel. Farming is one of the most environmentally, non-friendly industries in our
country. We are encouraging our farmers to till every last acre of wildlife, and drain every last wetland
they can, to cash in on the high corn prices so we can feel good about filling our flex fuel suburban with E-85.
Hydrogen is clean, and the only thing that comes out of your exhaust pipe is good ole H2O. But what
do I know, I am just a hick banker from the MidwestJ
Next Up: Retirement – Start saving now, or plan
on working until your dead.
By PJ Morganfowler 1-3-08
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Oil - Why it’s really $95/barrel There are many reasons to believe why oil is trading at all time highs
nearing $100/barrel these days. The most common theme you will hear is the ‘ole supply is not meeting
demand. The liberal media will tell you that the USA is consuming more and more oil, and that there is
not enough being pumped out of the ground to feed our SUV’s. You will also hear that China is rapidly
expanding and using more oil to fuel the construction of their growing economy. Yes, it is true that the
world is consuming more and more oil. However, consumption is not the only culprit causing the ridiculous
oil prices. Oil is a commodity and is traded just
like corn, pork bellies, wheat, soybeans, and canola. Commodities are traded similar to stocks on the NYSE
with one major exception. When a buyer wants to buy a stock or commodity they can leverage (borrow
money) to purchase more than they have in cash. When buying a stock, the buyer can leverage 50% of the
purchase price of the stock, e.g. buy 1000 shares of BOA at $40 giving a total cost of $40,000, they can buy that much stock
using just $20,000 of their own funds and borrowing the other $20,000. The loan is secured by all of the
shares of stock. Now, let’s see what that does to the investor’s return on investment.
Had the investor paid cash for the 1000 shares ($40,000) and he sold the shares for $42, he would have made a profit
of $2,000 on his investment of $40,000. $2,000 return / $40,000 investment = 5% return on his money, not
bad. If the investor leveraged his purchase at 50%, the return would be as follows $2,000 return / $20,000
investment = 10% return. WOW! He made the same money using less of his own.
Now, there will be interest paid on the $20,000, but it would be minimal if he is a day trader and for practical purposes
we will not consider this expense in our article. There
is a big difference between leveraging stocks and commodities. To make the math easy we’ll say crude
is trading at $100/barrel. If an investor wants to buy a barrel of oil and leverage he is only required
to come up with 4% of the money vs. 50% when buying stocks, e.g. I am going to buy 1000 barrels of oil with a total cost of
$100,000 and I only have to invest $4,000. If oil goes up by $1 the next day (which it does) and I sell,
I make $1,000 on my $4,000 investment which equates to a 25% return, in one freaking day!!!! If I had to
pay $100,000 cash for the whole investment, my return would have been a measly 1% vs. 25%. Can you believe
this load of crud? My point with this is very simple,
if trading oil had the same rules as trading stocks, the price of oil would be much lower because the potential for a huge
return on investment is gone. If the big investment firms were required to put 50% down in cash vs.
4% down, the price of oil would plummet like the significance of Mark McGwire’s 62 homeruns in 1998. If
congress would pull their heads out of their pants and start looking to pass legislation to limit the loan to value that investment
banks are able to lend to oil traders, oil will fall. Even the hint that congress is considering passing
such legislation would send oil prices lower. Think of it like the housing market. If
you were required to put 25% down in order to buy a home, how much home could you afford? A Freaking lot
less than you can if you only need to pay the closing costs on your mortgage (see previous article regarding the mortgage
meltdown). Not many people can afford to put $100,000 down on the $400,000 McMansion down the road
from the outlet mall, and still have money left over to buy a flippin’ HUMMER to tote little Jonny and his buddies to
soccer practice in, especially if you have to put 25% down on a $75,000 vehicle. My
predictions are this, oil will soon start to fall and the crazy investment banks that borrow 96% of the cost of a barrel of
oil are gonna start to take losses, they will then begin to not borrow as much on a barrel of black gold and the price of
oil will drop even further. Yes, I know it sounds somewhat like wishful thinking but I have said it before
and I will say it again. Ever seen a bubble that didn’t pop??? Next time: The Ethanol Industry – Hey guys, we are burning our
food!
By PJ Morganfowler 12-31-07
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The Mortgage Meltdown: Who
is to blame?
If your home is in foreclosure
and you are easily offended, stop reading now. This article is not something you will hear on CNN, and
you will definitely not hear this from Congress who claims to be “fixing” the mortgage crises.
I believe there are two main groups responsible for the current mess in the mortgage and housing industry, and
I can’t believe I even have to write this to explain it.
Group #1 –
The Lenders – When I say lenders, I am not talking about the small community banks that simply originate and sell mortgage
loans. I am talking about the large lending institutions that buy what are called Mortgage Backed Securities,
and put them in their investment portfolio. Mortgage Backed Securities are what fund the mortgage loans
that get originated by banks and mortgage brokers. The fact that the purchasers would purchase, and thus
create some of the idiotic mortgage products that were introduced over the last 7 years, makes me want to puke!
No money down, minimum payments that don’t equate to the monthly accrued interest, lending money at a variable
rate to people that can barely afford to pay a mortgage at 4%. What did they think was going to happen
when the rate reset in three years to 8%???? And these are just the people with good credit history.
They also created products for people with “sub-prime” credit history. The term “sub-prime”
sounds like it means: less than perfect. It really means: these people pay their bills slower than the
second coming of Christ. It also means they have little or no money of their own to put down, so they have
no personal investment in the property. To all the lenders who carry sub-prime mortgage paper on their
balance sheet, YOU DESERVE EVERYTHING YOU GET!!! The big banks across the nation have recognized billions
in losses in the 3rd and 4 quarter of 2007. Sorry folks, you got greedy and got burned, deal
with it.
Group #2 – The borrowers –
this is my favorite group to pick on because they like to try and put the blame on someone else for their problems.
When on earth are people going to start taking responsibility for their own actions? When you signed
that Adjustable Rate Mortgage 3-5 years ago, and interest rates were at ALL TIME LOWS, what in the world did you think was
going to happen when the rate was scheduled to reset?????!?!?! You are all freaking morons and now you
are crying about the fact that your interest rate went from 4.25% to 8% on your $400,000 mortgage that you could barley afford
to pay at 4.25% interest. You’re whining because you are going to lose your home. Guess
what!! You didn’t put any of your own money into the place anyway, so it was never yours.
The bank is the one that is gonna take it in the shorts. You're just upset because of what your
friends are gonna say about you living beyond your means. Guess what, most of your friends are in the same
boat! I mean, how ridiculous is it that someone could or would by a $500,000 HOUSE AND PUT $0 MONEY DOWN?!!!
Just the thought of that makes me shiver. To all the people that have to keep up with the Jones’
but can’t do it anymore, and are going through foreclosure, you, like the bank that funded your loan, are getting what
you deserve. From now on, start being more fiscally responsible for crying out loud!!! There
is a product that every bank and credit union across America has, and it’s called a savings account. Get
one and start using it. Build up the balance to equal 3-6 months living expenses, and only use the money for emergencies.
Also, get rid of the plastic. The average family in America has over $8,000 in credit card balances.
What the hell is wrong with people! $8,000 at 20% interest. If you can’t
pay for it, don’t buy it. Plain and simple!!!
In closing, the housing and mortgage industry are in shambles, and it’s my opinion
that it will only get worse over the next 12-24 months. There is currently an 11 month supply of homes
on the market in the US. More and more foreclosures are going to be seen over the next year, which will
flood the already saturated market with more inventory. That coupled with the fact that the pendulum is
now swinging the other way, and lenders are going to over tighten their underwriting standards takes more potential buyers
out of the market. I don’t know how many of you took Economics 101 but BIG SUPPLY + SMALL DEMAND
means prices have to fall. Have you ever seen a Bubble that hasn’t popped? Me
either.
By P.J. Morganfowler
12-28-07
Next
month : OIL, why it’s really $95/barrel.
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