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The Innocent Investor

by @ 10:57 pm
Filed under: financial

A while back I was reading about Bernie Madoff's adventures (fascinating story) and the smooth way he operated his giant Ponzi machine. The interesting part of the story was about how some of the damages will be recovered from other investors who were ostensibly lucky enough to withdraw their investments before the house of cards came crashing down.

I suppose if I had lost substantial assets with Madoff, I would want as much money recovered as possible, even if that meant forcing the early investors to forfeit their gains. While it may be true that those investors profited from ill-gotten gains, this presents one with an ethical and moral dilemma.

Suppose you were just an innocent investor in a seemingly legitimate plan and you had decided to take your profits and walk away. Why would you be responsible for future losses if the investment suddenly collapses? You had committed no crime here. You had followed the rules and had bought and sold the investments in good faith. You had taken the same risk as the others, but had the fortune of better timing.

This scenario plays out in the market all the time. Take the recent drop in the stock market. Many investors lost substantial amounts when their shares suddenly plummeted in value and they were forced to sell at ridiculously low prices. Then others stepped in and picked up those shares on the cheap and by now some of them have tripled or quadrupled their initial investments in a very short run. If they decide to sell their shares today and walk away with handsome profits, would they need to worry that the early sellers may come back and try to take away their profits? And if so, how much would they need to forfeit?

The early sellers may argue that abnormal conditions had caused the shares to plunge to artificially low levels and the current owners had profited from the panic and despair that had gripped the market. You may argue that in this case no fraud had taken place, but those "toxic assets" that led to the violent volatility weren't exactly proper either.

I have no problem with going after the swindlers and their cohorts, but for those who took the same risks as others and profited fair and square, there shouldn't be any negative consequences. Why go after the early investors instead of the regulators who were asleep while the fraud was being perpetrated? If every legitimate gain in the market is at the risk of being taken away, what incentive is there for people to invest in anything?


Oracle Buys Sun

by @ 9:38 pm
Filed under: financial,internet

Oracle Buys SunWhen today I heard the news of Oracle buying Sun Microsystems, my first thought was that I wished I had picked up some JAVA shares after the IBM deal had fallen through. It was just a matter of time before a suitor would snap it up.

My second thought was about its impact on the tech sector and the end users. For one, this puts Oracle in the hardware business with new competitors like IBM, HP, and Dell. It's possible though that Oracle would sell off or just kill that part of the business.

The more interesting situation is the future of Java, MySQL, and OpenOffice. My predictions are: Java will continue in its current form, free for users with a fee-based maintenance arm. MySQL will be absorbed into the big Oracle DB mother ship and will continue to be free of charge under a moniker like Oracle-Light or something similar. Again, there will be a fee-based maintenance plan for that. As for OpenOffice, Oracle will have its challenges with Microsoft and Google. It's probably steady-as-she-goes with regards to OpenOffice, at least for some time.

Oracle seems to have the right combination of fortune and skills to successfully absorb acquired companies into its collective. If the past is any indication, the Sun Micro acquisition will be yet another smooth sailing (pun intended). Of course the downside of this will the layoffs that follow such an event.

It’s a bit sad to bid farewell to Sun as an independent firm. This company has had such a huge impact on the tech sector in terms of innovation and the proliferation of the Internet. But considering the alternative (possible bankruptcy or a state of irrelevance), Oracle may be just the right company to keep Sun's legacy of innovation alive and even push it further.


Credit Ratings Knocks

by @ 10:01 pm
Filed under: financial

Years ago when I was a rookie employee at GE, fresh out of college, I was introduced to GE Interest Plus, offering a checking account with a competitive interest rate. I began saving my money there without realizing that this really wasn't a regular bank account. It wasn't their fault, the fact that they weren't a standard bank and therefore not FDIC-insured was clearly stated, it just took some time for me to realize that. By putting money in that account, I was really investing in GE's short-term debt and accepting a slight risk of loss.

There risk was not being FDIC-insured, but GE had top credit ratings from Moody's and S&P and that gave some assurance that the invested money wouldn't just vanish. GE Interest Plus's Web site proudly displayed their perfect credit rating.

Fast-forward a few years and it turns out that the credit-rating agencies really weren't adding much value. Many companies or investments that were deemed safe by these agencies either went bankrupt or had severe losses. The agencies may have sustained credibility damage but they still persist. What else is there?

Last Friday GE and Berkshire Hathaway had their credit ratings downgraded by a notch. They are still considered safe but not first-rate. GE Interest Plus updated their credit ratings statement to reflect the change and below is snapshots of their before and after ratings statements. Could be a while before GE's credit rating is back on top again.

GE Interest Plus


Circuit City Goodbye

by @ 10:27 pm
Filed under: business,financial

Circuit CityLast week, walking by a Circuit City store at lunch time, I noticed a few people out on the street holding liquidation signs. Tempted, I went inside the store and took a look around the near-empty and dark store with few remaining items collected in the front of store. There were slim pickings and but I left with a new Batman, The Dark Knight DVD and Saliva's Every Six Seconds CD for about $6.

I suppose getting these items at such a bargain price should have given me a good feeling but the truth is that the experience was a depressing one. Circuit City wasn't exactly the kind of store I would shop at but I remember the times when the stores were vibrant and thriving. There were lots of merchandise on the shelves with shoppers zigzagging the isles and talking to the many associates.

Today Circuit City shuttered its doors for the last time, joining the other bygone stores like CompUSA and Nobody Beats The Wiz. I couldn't help but feel a bit of guilt over the demise of this business, the throngs of people who have lost their jobs as a result, and the neighborhoods blighted by yet another failed store.

In a way the failure of Circuit City is emblematic of the ailing economy as a whole. Whatever satisfaction I might have felt for getting a bargain, quickly turned into an empty and hopeless feeling that the fabric of our economy is fast unraveling under the weight of the economic crisis. I realize that we can't wish the bad times away, but I don't want any more liquidation sales and bankruptcy-driven bargains. I want to walk into a store and see it buzzing with shoppers. Christmas and independence-day sales are just fine with me.


GE Below Cisco

by @ 11:15 pm
Filed under: financial

GE Below CiscoAdd this to the list of things you thought would never happen. GE's market capitalization of around $80B today is almost the same as those of Apple or Oracle. It’s less than those of Cisco or Google or IBM.

General Electric, the conglomerate blue-chip company that once was known as the most admired with the highest market cap in the world is now worth less than the specialized tech companies, much maligned after the tech bubble implosion of 2000.

Lest you think that such reversal of fortunes pleases me, consider that as an ex-GE employee with many shares of this company in my 401k, my retirement savings have dwindled to dismal levels. GE was a company that set the criteria by which all others were measured against.

Who would have guessed that the rules of long-term investing would turn upside-down in such a short time. One wonders if the time has come to discard everything we have learned for generations and draw up new rules.

There are those who believe that the fear-motivated market freefall is terribly overdone. That soon the market will come to its rational senses and will correct itself in a hurry. I also believe that at these levels we must be somewhere near the bottom searching for a footing to climb back out. But as I witness the daily spillage of red ink, the voice inside my head keeps repeating: something has gone horribly wrong with capitalism.


Housing Market

by @ 3:33 pm
Filed under: financial

The stock market is going through tough times. Look at your battered 401k statement, if you dare, and you'll know how bad things are. Yesterday the DJIA barely hovered above the 7,000 mark. That's a 12-year low and some are still calling for more, a lot more, pain ahead. Short positions are now firmly in command.

The housing market is having its own reversal of fortunes to grapple with. Some markets in California, Nevada, and Florida are just dumping properties as fast as they can find reluctant buyers. Others, such as the northeast, are less severly stricken for now, but trending downward nevertheless. There are a few obvious reasons behind this condition:

  • Banks are afraid. They are unable or unwilling to loan money to anyone but the cream of the crop of creditworthiness. That leaves many out of luck in securing a mortgage.
  • People are afraid. Many with investment properties just want to cut their losses and sell, therefore flooding the market.
  • High unemployment rates have caused many people to fall behind or stop making their mortgage payments causing many properties to be at or near foreclosure.
  • Buyers are waiting for better bargains. As far as the home prices have fallen, many believe there's still plenty more froth to be erased.
  • Money is scarce. People's investments have been decimated in the downturn, leaving little money or confidence to buy properties.

So what we have is a double-whammy of inflated supplies and shrinking demand and that's the basic pricing determinant for anything bought or sold.

Inherently, the housing market's response to economic conditions is slow. Unlike stocks, futures, or precious metals, it takes time to close the paperwork-heavy deals. But is it possible that the lagging housing market will also experience its own 12-year lows in the near future? If the stock and credit markets continue their deterioration, there's little else the housing market can do but to follow suit. And the bargain hunters keep waiting. Illogical and irrational as things may be, no segment of the market is completely insulated from the rest.


Berkshire Hathaway, Cheap Again?

by @ 11:14 pm
Filed under: financial

Back on Nov. 20, 2008 when the stock market was touching multi-year low points, Berkshire Hathaway (headed by the famed Warren Buffett) was touching its own low of $75,000/share. A number of notable sites/publications jumped to the defense of the stock, marveling at the opportunity of owning a share of this company at a bargain price.

This one from US News and its follow-up article couldn't hold back the excitement, even claiming that the BRK.A stock (based on some arbitrary metric) should really be valued at $136,000. Were they right or wrong?

Well, both. The share price did indeed shoot back up to about $108,000 within 3 weeks. That would have been a good spot to sell. From there it started to fizzle a bit every week and today it once again tested the Nov 2008 lows, some 3 months later.

At this point it's anyone's guess where it's headed. The fact is that BRK is invested in some of the same companies that are facing severe financial issues these days. If those companies are ailing, what justification is there for BRK to be healthy? BRK is not insulated from the global economic events that has gripped all industries. Nor is it attractively positioned to profit handsomely from economic hardships. As I have mentioned before, BRK also faces one other big risk and that is the age of its CEO, Warren Buffett. Admittedly that risk is most likely priced in, but one must still wonder, where would this company be without its star leader?

So considering everything, is BRK once again at a bargain price or is it over-priced? Only time will tell.


The APY Game

by @ 11:10 pm
Filed under: financial

It has been only a few days since I posted about the 4% savings account at Dollar Savings Direct. I characterized the rate as "unheard-of". Apparently the folks over at the bank agreed and over the weekend they lopped off 0.5% from the APY bringing the interest rate down to 3.5%.

You really can't blame them for lowering the rate. 4% was just way too high in the current low interest rate market. But that's how the game is played. You set a high rate on the account and advertise the devil out of it to attract enough money. Then you lower the rate to a reasonable level to keep existing customers from jumping ship while new money continues to arrive, albeit at a slower rate. And you keep adjusting the rate to keep the money flow steady.

Well, 3.5% APY is still a decent rate, but who knows where it'll stand next week, or the week after.


High Interest Savings Account

by @ 12:09 am
Filed under: financial

While the historic low interest rates are good news to consumers who need to borrow money (that is if they qualify in the tight credit market), they are bad news for those needing to hoard cash. You are lucky to find a CD, money market, or a savings account paying 2% interest these days.


But there are a few banks around that still offer decent rates on savings accounts. One such bank I recently ran into is DollarSavingsDirect, a division of Emigrant Bank. It has been offering an unheard of 4% APY on savings accounts. In comparison, its sister unit, EmigrantDirect currently offers 2.5% savings accounts with no minimums. DollarSavingsDirect requires a minimum $1,000 deposit, there is apparently no maximum amount, and the accounts are FDIC insured.

Based on what I have found so far, this is not a teaser rate and people have actually been earning that interest rate on their deposits for a few months. Of course the rate is always subject to change and it probably will fall if interest rates remain this low or go even lower.

That's the basic problem of chasing higher rates. By the time or shortly after your money lands in the account, the rate could slide below your previous bank and you are faced with the decision of moving your cash again. And since your money doesn't earn any interest while in transition (which could sometimes take a week) your effective rate could end up being lower than what you had expected.

With electronic deposits (Automated Clearing House or ACH) the best day to request a transfer is on a Monday of a holiday-free week. That way you run a lower risk of having your money held up over the weekend or a holiday and losing extra days of interest earnings, while awaiting the completion of the transfer.

Note: I receive no compensation from the banks mentioned in this post.


Lessons from Apple's Jobs

by @ 12:31 am
Filed under: financial

AppleThe off again, on again, off again news about Steve Jobs has been sending the Apple stock on a roller-coaster ride for the past few months. Investors are nervous and that is clearly reflected in the volatility of the company shares. With tonight's news on Jobs' leave of absence, Apple has taken a dive in after-hours trading, down over 7%. No doubt more volatility will follow when it opens tomorrow.

This brings into question the degree by which the value of a company should be tied to one person. When Jobs retook the helm at Apple in 1997 he achieved the incredible feat of turning a moribund company into a behemoth. Few expected that kind of success, but the price has been that Apple's fortunes were forever tied to one person. Apple without Steve is like Seinfeld without Jerry, or the Honeymooners without Jackie, or Van Halen without Diamond Dave. Ok, the last one was a bad example, but you get the picture.

The point is that companies are supposed to thrive for a long time, but people's lifespan are just too short - we're all mortals. For a company to survive its founder or star leader, it must have a solid succession plan and skilled people who can navigate the ship long after the lone captain has left the deck. GE did it without Edison, AT&T did it without Bell, and Exxon did it without Rockefeller.

As for the bad examples, look at GE today. It has floundered since Jack Welch signed off, even with all the grooming for its current leader. Martha Stewart Living Omnimedia never recovered after Martha Stewart got into legal trouble and served jail time.

But Microsoft and Oracle have done a decent job of decoupling themselves from their leaders. These companies will probably be fine even after Gates and Ellison are gone. Yahoo has learned that lesson with Yang abdicating yesterday in favor of a new leader. Google has also done it right by not keeping its founders in the limelight all the time and allowing an outsider to lead the company.

I suppose the ultimate example of a company inexorably tied to its leader is Berkshire Hathaway. Warren Buffett is no doubt a genius who has transformed an unknown textile company into a $150 billion giant. But he is also 78 years old and investors must wonder about how much longer he can perform his magic. There is little question that at the first sign of his deterioration, the stock will sustain a heavy blow. Of course I hope that's a long way off. The market is a soulless beast, but I admire him for his thrift and his charitable trait.


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