Subprime mortgages sinking stock market?

More turmoil in the stock market. Just when it seemed it was safe to buy stocks for price increases again, after the late February drop caused by the drop of Chinese stocks on the Shanghai index, market pros are now upset over the situation of the American mortgage industry.

There's been so much money connected to mortgages that lenders have totally relaxed their standards -- borrowers were not even required to prove their income. I can't hardly imagine that - I remember the hoops I had to jump through when I bought my two houses. But interest rates have been so low this century that people have been able to buy far more house than they would have been able to before. Even if they're not able to keep up the payments.

So one of the biggest "sub-prime" lenders, New Century Financial, is on the verge of bankruptcy. Foreign markets in Asia and Europe have just tanked, because they're afraid Americans will no longer be able to buy up 95% of all consumers goods sold in the world.

Like all things, these excesses will worth themselves out, but it will be painful. Possibly very painful, according to some predictions. Of course, I've never advocated buying any mortgage or mortgage related securities. It is possible that some financial institutions that normally have been paying good dividends, such as Citigroup, will be burned by this. Citigroup apparently owned a lot of subprime mortgage risk.

REITs, which mainly collect rent, should not be as big a problem, except as the businesses they rent to are affected by any general economic slowdown.




stock market risks
stock market risks

What's real role of Federal Reserve Board?

One big factor that affects the bond market is of course interest rates. No matter how high the credit ratings of a bond issuer, even if it's the United States government, its bonds' market value will go up if interest rates fall and down and if they rise. So depending upon the whim of the Chairman of the Federal Reserve is not one of the advantages of fixed income investing.


What did the economy do before the Federal Reserve was created to manipulate interest rates to affect the economy. Gosh, they went up and down based on the market demand for borrowing money. During booms periods, there must have a large demand for money, which automatically drove interest rates up. When interest rates got too high, then the demand had to drop . . . slowing down the ability of businesses to expand and be created, thus slowing down the boom.

Once the boom slowed down, demand for money slowed down, and so banks would have had to lower interest rates to make loans, and thus help stimulate the economy to get it out of the bust period.

In short, the interplay of supply and demand for money would have worked automatically to help curb the excesses of the business and economic cycles. Variations in demand for money should have done what we now depend on the Federal Reserve to do for us -- slow the economy down during a major boom and stimulate it during a major bust.

What do we need the Federal Reserve for anyway? Why not just let banks set interest rates based on market demand for money?


advantages of fixed income investing
advantages of fixed income investing

A question about investing basics

Here is one of those investing basics that I've always wondered about:

Company stock prices that do better than the market average (beta) during a bull market go down more than the market average during a bear market.

Seems to me that if the market were truly efficient, that wouldn't happen. Here's my logic -- if a company is better managed than average (which makes it price go up more than the average during the bull market), then it should also be better managed during the bear market as well, meaning the stock price should go less than the average.

I gather that part of the answer lies in the differences in how macroeconomic factors affect different businesses -- for instance, some businesses flourish during periods of low interest rates but are taken down more than average during period of high interest rates.

But some of the answer is simply psychology -- during bull markets, investors drive prices of "sexy" stocks higher. These are usually connected to high tech. During bear markets and hard times these companies don't do as well.

Some of this is related to the phase of growth that a company is in. During its intial growth phases its stock price does better than average because traders assume its growth rate will continue for years to be higher than stodgy old "mature" companies that are well established (and which make up most of the market, determinining the market average). But during bad times these companies do worse because they're not established. They don't have reserves to draw on.

So that's another reason to invest in stodgy old "mature" companies that pay dividends. Their stock prices don't go up as much during bull markets, but their prices don't down as far during bear markets.


investing basics
investing basics

Income investing goals don't include penny stock tips

Since income investing goals don't include buying penny stocks and riding them while they rise in price (you hope) and then selling for a big profit, this information is no good to me. But some of you still probably listen to stock "tips," so may you'll like these. Heck, maybe they're good tips and you'll make money from them.

I get a lot of financial newsletter solicitations in my mail, and most of them try to entice me by profiling a penny stock that the newsletter publisher claims is the most promising they've ever seen, but just a taste of what you'll get if you subscribe to their newsletter.

Has the EPA really mandated that motor oil be changed to eliminate the sulfur and phosphorus that's added to oil? Will Platinum Research Organization (PLRO) really revolutionize the motor oil industry with their formula that improves motor oil performance without causing the emission of sulfur and phosphorus? I don't know, but it does look good.

And I really hope Acro Security Technologies (ACRO) is everything this mailer/promotion claims. They've allegedly found a quick and easy way to test for peroxide-based explosives. That's the kind used on the London and Madrid subway bombings, and the kind used in last summer's plot to blow up airplanes flying from London to the U.S., and the cause of the onerous restrictions on bringing powders, liquids and gels onto airplanes.

While the mailer for PLRO irks me by asserting that human-caused global warming is true (maybe, but not proven yet), the mailer for ACRO makes me glad it recognizes the true threat to the world posed by jihadist terrorists. I hope that ACRO's product catches all of them trying to blow up the world.

If these companies do succeed and grow, and maybe they'll start paying dividends to their shareholders. That's when I'll be interested. I don't like gambles. And I don't like selling stock to get the benefit of a gamble I took.



income investing goals
income investing goals

Growth real estate investing info

This article on real estate investing info is interesting in that a company has picked out 10 areas of big cities that are now considered "up and coming," which -- as the article points out -- is a nice way of saying that the reason the houses are relatively cheap is because of the danger.

The neighborhood listed for St Louis is Tiffany, which I'm somewhat familiar with due to having walked around it many times in the late 1980s when I was a cable TV salesperson. Also, I still work for a government agency and much of that neighborhood is part of our area. Though I don't go there in person now, I see and know many people who stay there.

As the article says, it's multicultural. It doesn't mention that it does not contain any Laotians, because they all moved out years ago -- at the same time, immediately following the shooting death of a Laotian man by an African-American neighbor.

Even when I was selling cable TV, I did notice that there were affluent-looking young whites living in some of the more developed buildings right next to Grand.

Of course, areas do change. When I first started selling cable TV, I felt comfortable walking up and down streets such as Lafayette and McRee. It was years later when I was there and a young African-American said, "What's a white person doing here?"

There's been money pouring into other low-income, high-crime areas of St Louis, such as Dutchtown. I remember driving on Delmar between Grand and Kingshighway and being startled by seeing some brand new, nice red brick houses -- often next door to condemned, dilapidated old buildings.

Seems to me there's a parallel between moving into such high-risk neighborhoods in search of real estate values that you hope will grow a lot as time goes by and the bad people in the neighborhood move away (you hope) and investing in growth stocks. You're taking a gamble. Myself, having lived in South St Louis both before and after it became a "Hood," I would be scared to death to move to such places, even though I can see the attraction for young people looking for affordable places to live and hoping to reduce transportation costs.

The whole gamble depends on enough other people making the same move behind you -- from the suburbs back to the city. Again, I can see the value for young people, but once they have children, they should want to get them out of the St Louis city school system.

So when you buy a growth stock with a good story, get a lot of good investing info. Remember that your future return depends on a lot of other people buying that stock behind you. You may be paying a lot of money for a condo that's next door to a crack house.



investing info
investing info

investment guru Harry Browne

I got an email today from The Soverign Society reminding me of the investment writer and libertarian Harry Browne. He wrote a number of investment books advocating people get Swiss bank accounts, stock up on gold and silver coins, and so on. The 70s were a terrific decade for advice of that nature, since our economy was stalled and seemed to be failing, and many predicted total economic collapse. I can't give out that kind of investment advice, especially since if we have total collapse it will be most likely due to a terrorist attack. Paul Volcker as Chairman of the Federal Reserve and Ronald Reagan's tax cuts got us through. But Harry Browne also wrote a book on the libertarian philosophy called HOW I FOUND FREEDOM IN AN UNFREE WORLD. I think that anyone, a fixed income investor or not, can get a lot out of that book, so I highly recommend it. It never got the attention it deserved.

Stick to income growth investments

I get a lot of investment newsletters and ads disguised as newsletters
in my email. Today there was a general trend in them about "green"
investing. Al Gore may not have convinced all climatologists that
humanity is causing global warming (I'm not a climatologist, but I
know that the amount of radiation the sun emits has varied by up to
30% over the eons, which is why Earth has been both much colder and
much warmer than it is now, millions of years before people discovered
fire, so I know that any climate model that disregards the role of the
sun's radiation -- as the recent UN study did -- is scientifically
flawed and no doubt politically motivated.)

However, there's no doubt that -- whether the planet is warming up or
not or whether people caused it or not -- we do need to find more
efficient ways to generate energy and slow down and ultimately clean
up pollution. Hey, I rode my bicycle to school on the very first
Earth Day! And I was an anti-nuke activist in 1980.

So it's fine with me to learn that AOL head Steve Case and Lee Iocca
have teamed up to invest in a Flexcar. And that major company are
financing research into alternative sources of energy such as wind and
solar power. Not being an engineer up on these things, I don't know
how to judge whether the optimists or pessimists are correct in
evaluating their potential.

And one newsletter talked a lot about nanotechnology is helping, though
without going into detail. I'm certainly no expert on nanotechnology
but I always figured that would be most useful for cleaning up
pollution. Release a cloud of anti-PCB micro-machines and in a few weeks or months all PCBs could be removed from the environment.

So there's no doubt that "green" is a growth industry, and it could
well be that nanotechnology is going to fuel the next stock market
boom. But I have to maintain that ordinary investors should stick
with income growth stocks that pay dividends.

If you have the deep pockets of Steve Case or Lee Iococca and you want to help the planet, fine -- I applaud you. Let's face it -- if the FlexCar fails, Steve Case and Lee Iococca may well lose millions of dollars but they'll still have many more millions. It won't affect their lifestyles. I think it's wonderful they are risking any amount of their money. But for us ordinary investors, stick with investments that pay you money.



income growth
income growth