Posted: Tue Apr 08, 2008 8:01 am Post subject: Re: Let the layoffs begin
Yes, the corporate finance model applies equally to individuals. For most the highest payout comes simply from paying down debt, and then staying out of debt to finance consumption or the purchase of depreciating assets.
The external shock can be a loss of wages or income from work or unexpected expenses from a long or complicated illness. Debt only exacerbates any cash flow shortfall.
Debt tied to your home mortage should be in local currency (of course), and long-dated to avoid higher interest rates due to inflation and/or any refinancing risk. That does not mean you cannot pay off the mortgage early.
The tax saving is simply not worth the extra risk and additional interest payments on top of the principle. Money saved from not making mortgage payments can be channeled into a diversified investment portfolio instead. If inflation is your concern then definitely a basket of foreign currencies as well as commodities and precious metals as well as a mix of foreign bonds and equities just in case.
The imbedded option in a long-dated fixed rate mortgage is that expected inflation will make those payments less over time even if they are higher today in nominal terms. Greenspan recognized this in a speech he gave in 1999 when referring to emerging market economies, but that did not stop him some years later fromrecommending this liquidity trap to American homeownerswhen he urged them to use lower priced ARMs instead of higher long-term fixed rate mortgages.
Quote:
For too long, many emerging market economies have managed their external liabilities so as to minimize their current borrowing cost. This short-sighted approach ignores the insurance imbedded in long-term debt. Insurance that is almost always well worth the price.
Source: Alan Greenspan, statement made before the Committee on Banking and Financial Services, US House of Representatives, May 20, 1999
I mean how could the Chairman of the US Federal Reserve possibly know that nominal interest rates of one percent were stimulative when world growth was surging at 4-5 percent per annum, and headline inflation was above two percent making real interest rates negative? A guy cannot know everything even if price stability is his raison d'etre, and he has thousands of analysts at his disposal!
Quote:
Former U.S. Federal Reserve Chairman Alan Greenspan said he doesn't regret any decisions he took and he's surprised by accusations that he may have helped start the lending and housing crises, the Wall Street Journal reported, citing an interview.
Greenspan, 82, said he's now being criticized for the same hands-off approach to the economy he used to be praised for, the newspaper reported. It was more important to learn lessons from the past for future policy than to assign blame, Greenspan told the Journal.
The former Fed chairman also said he wasn't at ease with low interest rates starting in 2003 because they conflicted with his ``19th-century'' aversion to easy money, the Journal reported.
Yet the only members of the Fed's policy committee who disagreed with decisions about rates were those who wanted to make them even lower, Greenspan told the Journal.
Source: April 8 (Bloomberg)
UPDATE: House Lust - VirtuousCycleturnsintoViciousCircle- The Liquidity Trap
I try to pick-out the key words that should be likeredflagsif you think of this in terms of an individual's capital structure that turns into a liquidity trap.
Quote:
Identifying ``primary drivers'' for what caused house lust, McGinn cites the revolution in home finance. Many homebuyers, whose only qualification for a mortgage was a human pulse, qualified for large loans. As rates dropped in the last decade, homeowners also operated like ``mini-CFOs, deciding just how much of their wealth to keep in their houses,'' he writes.
(continued)
The massive vacuuming of home equity has been huge in recent years and is a far cry from the way Americans saved after World War II.
Home equity fell to about 48 percent of total household real-estate holdings in the fourth quarter of 2007, the lowest level since the Federal Reserve began keeping records in 1951.
Americans used to store equity in their homes like a well-stocked larder. In 1952, American homeowners maintained more than 80 percent of the value of their homes in equity, according to Michael Rizzo, a senior economist at the American Institute for Economic Research, based in Great Barrington, Massachusetts.
Homeowners have ``taken on larger debt to buy their homes and increasingly spend down their equity via home-equity loans,'' Rizzo says.
A generation or two ago, McGinn says, ``the average family took out a 30-year mortgage, which they intended to pay off one day. There were no home-equity lines of credit, refinancing was unusual and whatever wealth a homeowner built up in the house stayed there until it was sold. No more.''
Viva Las Vegas
During the housing boom, homeowners became speculators, making double wagers on the bond market maintaining or providing low rates and properties delivering guaranteed appreciation.
This Las Vegas attitude toward homeownership was aided and abetted by the built-in cultural bias that homeownership was a solid investment, not a gamble. Is the irony lost that the state with the highest foreclosure rate through February was Nevada?
Not only was home gambling legal in Nevada, it was permitted in every state as mortgage brokers, banks and Wall Street got in on the action.
Hypnotized by the dual mantras ``buy as much house as you can afford'' and ``your home is your retirement plan,'' Americans were sold on the home-as-investment mythology.
Home investors also stopped or slowed their investing in non-real-estate assets as the nation's savings rate turned negative in 2005. Why squirrel away money in stocks or bonds when your house is a veritable cash machine?
Cheap Money
Since financing was cheap and popular optimism irrational, the participants in the boom felt like they were on a run at the craps table. So they upped the ante by buying bigger houses.
The average new-home size is more than 2,500 square feet (232 square meters), according to the National Association of Homebuilders, a Washington-based trade group.
That compares with 1,600 square feet in 1973. The number of single-family homes with three bathrooms or more has doubled in that period.
Almost 40 percent of new homes have at least four bedrooms, compared with less than 25 percent in 1973. Twice as many houses have three bathrooms or more compared with 1987.
Status was a powerful force in the building of ever-larger homes. Those who wanted to make their neighbors envious leveraged up to build three- and four-car garages, master suites and commercial-quality kitchens that would make Wolfgang Puck jealous.
Moving up into fancier digs didn't get the housing market into its current morass, though.
(continued)
The long-term reality is that homeownership in non-bubble times is unlikely to beat inflation once you subtract maintenance, taxes and financing costs.
Yale economist Robert Shiller estimates that homes gained an average of 0.4 percent annually from 1890 to 2004.
With the exception of rental properties, residential real estate produces no earnings or dividends. It doesn't split like profitable stocks.
The cost of ownership always goes up. If this is a love affair gone sour, then a new focus on building equity and the laws of supply and demand will make for a quicker housing rebound.
Source: John F. Wasik, author of The Merchant of Power
Bloomberg, April 7, 2008 _________________ The organized state is a wonderful invention whereby everyone can live at someone else's expense.
Joined: Jun 13, 2007 Posts: 3588 Location: Minniesotuh
Posted: Fri Apr 11, 2008 10:09 am Post subject: Re: Let the layoffs begin
DC schools offer 700 teachers a buyout
Apr 11, 2008 7:34 AM (3 hrs ago) AP
WASHINGTON - The D.C. school system is offering buyouts to as many as 700 teachers nearing retirement or working at 50 schools scheduled to close or receive an academic overhaul.
Officials say the Teacher Transition Award program will cost $10 million this year, but they expect the program to eventually save $13 million.
Buyouts will range from $1,000 to $20,000 depending on years of service. Eligible teachers are required to apply for the program by April 25.
Although 1,700 of the school system's 4,300 teachers are eligible for the buyout, city officials have limited the offer to the first 700 who apply.
In the fall, Schools Chancellor Michelle Rhee plans to close 23 schools and reorganize 27 others where students have repeatedly lagged on standardized tests.
No more pencils, no more books, no more teachers' dirty looks _________________ "RRrrruuuunnnn!!!" ~Apocalypto
Posted: Sat Apr 12, 2008 7:58 am Post subject: Re: Let the layoffs begin
In keeping within the theme of this post, I heard/read Freightliner out of NC was laying off 1500 employees and a carpet company out of GA is letting go of 300 employees. The sadness of it all.............
MrBill, I am just a simpleton and your explanation is greatly appreciated and your insight is extraordinary. Thank you.
Further questions:
1.) How can this corporate finance model possible work within todays financial market environment? Risk disclosures are not made public and fair value accounting is just a myth.
2.) How can governments, corporations, banks, and people have access to credit without being caught in this cycle?
More comprehensive layoff list for this week: Costar
The following future closings and permanent mass layoffs were reported in California.
• Bank of the West is laying off 46 employees on Jan. 31 at 1977 Saturn St. in Monterey Park.
• Cadence Design Systems Inc. is laying off 84 employees on Feb. 4 at 2655 Seely Ave. in San Jose.
• Centinela Freeman Regional Medical Center is laying off 202 employees on Jan. 31 at 333 No. Prairie in Inglewood.
• Construction Metals Inc. is closing down and laying off 102 employees on Feb. 8 at 12968 Santa Ana Ave. in Fontana.
• Countrywide is laying off 73 employees on Feb. 3 at 8501 and 8511 Fallbrook Ave. in Canoga Park.
• Fresno Bee is laying off 58 employees on Jan. 21 at 1626 E. St. in Fresno.
• Giant Merchandising Inc. is closing down and laying off 120 employees on Feb. 5 at 5655 Union Pacific Ave. in East Los Angeles.
IAP World Services Inc. started laying off 248 employees on Jan. 18 at 7000 East Ave. in Livermore.
• Kmart Corp. is closing down and laying off 90 employees on Jan. 17 at 1739 S. Victoria Ave. in Ventura.
• Lasco Bathware is laying off 149 employees on Jan. 11 at 3261 and 3255 E. Miraloma Ave in Anaheim.
• Lawrence Livermore National Security LLC started laying off 248 employees on Jan. 18 at 7000 East Ave. in Livermore.
• Long Beach Acceptance Corp. is laying off 135 employees on Feb. 1 at 500 North State College Blvd., Suite 350 in Orange.
• Marvell Semiconductor Inc is laying off 4 employees on Jan. 27 at 890 Glenn Dr. in Folsom, another 4 at 10955 Vista Sorrento Parkway, Suite 200, in San Diego, another 10 at 26880 Aliso Viejo Parkway, Suite 100 in Aliso Viejo, and 51 employees at 5488 Marvell Lane in Santa Clara.
• Oldcastle Precast Inc. is closing down and laying off 33 employees on Jan. 23 at 1495 8th St. in Colton.
• Optical Communication Products Inc. is closing down and laying off 130 employees on Jan. 29 at 6101 Variel Ave. in Woodland Hills.
• Option One Mortgage is laying off 157 employees on Feb. 2 at 6501 Irvine Center Dr. in Irvine and another 160 at 3 Ada in Irvine.
• Reliant Manufacturing LLC is closing down and started laying off 54 employees on Jan. 14 at 7390 Lincoln Way in Garden Grove.
• Resmae Mortgage Corp. started laying off 182 employees on Jan. 5 at 6 Point Dr. in Brea.
• SBMC Mortgage is closing down and laying off 46 employees on Feb. 7 at 14761 Califa St. in Van Nuys.
• Scan Health Plan started laying off 33 employees on Jan. 18 at 1770 Iowa Ave., Suite 110 in Riverside, another 33 employees at 2401 E. Katella Ave., #125 in Anaheim, another 41 at 2501 Cherry Ave., #200 in Los Angeles, another 51 at 3800 Kilroy Airport Way, #100 in Long Beach, and 33 at 500 N. Central Ave., #350 in Glendale.
• Sierra Cedar Products LLC is closing down and laying off 66 employees on Feb. 3 at 1401 Melody Road in Olivehurst.
• Target is closing down and laying off 133 employees on Feb. 2 at 1363 West Henderson Ave. in Porterville.
... _________________ "RRrrruuuunnnn!!!" ~Apocalypto
Posted: Mon Apr 14, 2008 3:15 am Post subject: Re: Let the layoffs begin
setag wrote:
MrBill, I am just a simpleton and your explanation is greatly appreciated and your insight is extraordinary. Thank you.
Further questions:
1.) How can this corporate finance model possible work within todays financial market environment? Risk disclosures are not made public and fair value accounting is just a myth.
2.) How can governments, corporations, banks, and people have access to credit without being caught in this cycle?
Again, thank you.
It is little bit like having access to alcohol, but avoiding becoming an alcoholic. If you cannot handle even a little bit of alcohol then abstinence is the best policy. I would suggest that governments that have to balance their budgets are the best defense against government prolifigy and waste.
On an individual or corporate level you have to distinguish between income producing and appreciating assets versus depreciating assets. And, of course, it is always easier to buy an asset than to fund it. So the easiest way to avoid the liquidity trap is to ask yourself how you intend to fund your purchases? If it based on unrealistic assumptions then you are likely walking into a liquidity trap.
Actually there is no separating the corporate finance model from today's financial market environment. The market rewards prudence and punishes risk in the form of lowering the cost of capital for the well-run company or nation and by demanding higher real rates of return from companies or nations that are seen as more risky.
However, interestingly, the market sometimes gets it wrong or take too long to digest new information completely and accurately. At the moment there is a flight to simplicity as many market participants realize how wrong they had gotten it with regards to complicated credit products they barely understood. I do not believe in perfect markets, but that is another story.
They will reward a country or a company for their faster growth, even if it is unsustainable or built on a shaky foundation, while spurning slower growing, more conservative firms and nations. Think the new economy versus the old economy during the dotcom bubble. This leads to a misallocation of resources, while that over optimism lead to over investment and later a busting of the bubble.
What we are saying is that if you consciously design your capital structure properly you will not fall into a self-reinforcing liquidity trap. Whether that is as an individual, company or country. The external shocks will always take place. We have not tamed the business cycle and we have not conquered nature. Therefore any capital structure has to be balanced and flexible. If you price everything to perfection then even a small credit contraction can have large implications.
In the United States, for example, unemployment, inflation, nominal interest rates and growth do not point to financial catastrophe per say when compared to other nations that have higher strucutural unemployment, higher inflation, higher nominal interest rates or lower growth. However, if individuals, firms and nations invest assuming that the virtuous cycle will never change for the worse then that leverage almost insures that even a relatively small wobble in the real economy can reverberate through-out the entire economy through financial markets or the cost of capital that everyone must pay.
5-6% interest rates alone are historically fairly consistant with stable long-term growth. So the economy must have been very unbalanced if it relied of ultra low real interest rates to keep the economy expanding nominally. In turn those ultra low rates were then priced into future rate expectations.
But as to your point about risk disclosures not being made publicly they certainly are. But they are also routinely ignored. Every single email that I receive from a bank or broker has a risk disclosure at the bottom. Every research report as well. However, very few people will bother to read a hundred page plus prospectus before deciding to buy a stock for example. Many do not bother to read the annual reports. I certainly do not have time to do proper research on each and every company that I own shares in. I rely to a certain extent on their financial ratios.
We have existing laws to prosecute for corporate fraud. However, no one position should be large enough to wipe out your portfolio. If it is, then it is unbalanced. So if I take a hit on GE last week that is balanced by investments in other assets. I certainly do not have my life savings invested in my firm in the form of shares and pension, and neither should anyone else. That would be a liquidity trap as well as when the company runs into operating or competitive problems then it effects my salary, my savings and my pension. It would be a self-reinforcing vicious circle should anything go wrong, and anything can go wrong. That is the point as Enron employees found out to their disadvantage.
Fair value accounting is not so much a myth, but it relies on continuous pricing to be able to find market prices for assets at any given time. And again as you are likely aware the income statement and the balance sheet are snapshots of profitability and the book value of the company. They reflect past performance more than they are predictors of future profitability. However, if you look at financial statements using a corporate finance model you can see if a firm relies too heavily on short-term, variable interest debt. Or if too great a percentage of their sales and profits are dependent on too narrow a customer or geographical segment. That may be a warning signal to avoid this company or to limit your investment to a small percent of your overall balanced portfolio.
Unfortunately, there are no easy answers. No super-regulator exists or will ever exist that can protect investors from both market risk and from firm specific operating risk. They can punish fraud. They can demand that public statements meet a certain minimum threshold in disclosure. They can insist on compliance. They can change accounting standards. But at the end of the day when you buy a share you are exchanging your cash today in exchange for a share of the company's future revenues, and that will always create uncertainty and risk.
In terms of strategy a balanced portfolio of businesses will mean that a firm gets its revenues and profits from fast growing, profitable businesses and cash cows. In a two by two matrix it might look like this:
So your decision to invest in a company should be based just as much on its competitive position as on its financials. Again no super-regulator is going to help you out with those decisions. Nor should they. _________________ The organized state is a wonderful invention whereby everyone can live at someone else's expense.
Posted: Mon Apr 14, 2008 7:47 pm Post subject: Re: Let the layoffs begin
Most informative, MrBill!!
"I do not believe in perfect markets" - By MrBill
Perhaps, this may be the best lesson for me.
The following is a good article I read and thought you would be interested in reading it also. I have chosen not to paste it here cause it is rather lengthy.
It seems like Friedman became too hung-up on the ideology of monetarism to the detriment of critical thinking. Something we can all learn from. Cheers. _________________ The organized state is a wonderful invention whereby everyone can live at someone else's expense.
It seems like Friedman became too hung-up on the ideology of monetarism to the detriment of critical thinking. Something we can all learn from. Cheers.
wow just the first paragraph and I already disagree with 2 things the author mentions. ha ha To begin with if we go back to Victorian England as so "colorfully" described by Charles Dickens MOST people would agree wholeheartedly and call that a classic example of a "free market" economy-->"It was the best of times, it was the worst of times..." + "please sir can I have some more?" *holds up an empty bowl asking for more gruel* However I disagree. If we use the dictionary definition of "free market" then even the economy of Victorian England would not qualify. IMHO England was not "free market" enough to deserve to be called "free market". The first 100++ years of the USA would be a much better example.
///
I think one of the reasons why it's so difficult to find an economic theory that can properly explain all the craziness in this world is because humans are part logical + part chaotic emotional. Did "classical economics" failed to give explanations or solutions to the great depression? Maybe yes/no....so what, who cares? Newton's laws of motions did not properly explain the movements of subatomic particles but he's one of the greatest scientists the world will ever know. Just because a theory does not provide a complete solution to every scenario imaginable under the sun does not make it a failure. Good luck trying to find such a formula!
///
Posted: Wed Apr 16, 2008 1:39 am Post subject: Re: Let the layoffs begin
The evolution of economic theory is not unlike that of the field of psychology. You have a progression of theories. Like Freud and then the Jung and the anti-Freuds. Maslow's hierarchy of needs. Erikson's developmental view of man. Skinner's behavioral psychology. Up to the present view of pharma based psychology. They all provide a framework for understanding a particular problem or behavior, but none explain everything to everybody's satisfaction.
The best economic policy draws on a multi-disciplinary approach that borrows from biology, ecolology, statistics, engineering, the social sciences and even entomology for its inspiration. Economic theory tries to describe a physical problem. It is not divorced from it.
In the context of layoffs, downturns, recessions, depressions and economic collapse the challenge is not to explain such events in hindsight with a simple model, but to realize that it is the human element that we are most concerned about not the loss of wealth or productivity.
If economic events did not have social consequences then there would be far less controversy about which economic approach works best and why? I happen to believe that the wealth and poverty of nations rests on these questions, so it matters a great deal. In times of scarcity much more so. The poor benefit the most from good economic policies and suffer the most from bad ones.
Physical Reality > Economic Consequences > Social Reaction > Political Response > Feedback Loop > New Reality > Etc. _________________ The organized state is a wonderful invention whereby everyone can live at someone else's expense.
Joined: Jun 13, 2007 Posts: 3588 Location: Minniesotuh
Posted: Mon Apr 28, 2008 5:07 pm Post subject: Re: Let the layoffs begin
GM to cut truck shifts, leading to layoffs
High gas prices, slump in housing hold back automaker’s sales
DETROIT - General Motors Corp. said Monday it plans to cut one shift at four North American factories that make pickup trucks and big sport utility vehicles, laying off about 3,500 workers.
The world’s largest automaker said the cuts are due to sagging sales, brought on by high gasoline prices and an economic downturn.
GM said the cuts will affect pickup factories in Pontiac and Flint, Mich., and Oshawa, Ontario, as well as the full-size SUV plant in Janesville, Wis. …
Want a truck? Out of luck?
Joined: Jun 13, 2007 Posts: 3588 Location: Minniesotuh
Posted: Sun May 04, 2008 9:47 pm Post subject: Re: Let the layoffs begin
UBS May Cut 8,000 Jobs After SF12 Billion First-Quarter Loss
By Elena Logutenkova
May 5 (Bloomberg) -- UBS AG may cut as many as 8,000 jobs as it grapples with the biggest credit writedowns of any European bank and a 12 billion-franc ($11.4 billion) first-quarter loss.
Switzerland's biggest bank, which had a 3 billion-franc profit a year earlier, is set to spell out plans for layoffs when it reports detailed results tomorrow. The company will probably say it's eliminating between 2,500 and 3,000 jobs in its investment bank, more than 10 percent of the division, two people familiar with the matter said May 2.
``UBS is scaling down investment banking,'' including reducing trading bets and giving up off-balance sheet units, said Frankfurt-based Landsbanki Kepler analyst Dirk Becker, who advises clients to ``reduce'' holdings of UBS. It is ``realistic'' to estimate that the company will fire one tenth of its 83,000 employees overall, he said. ...
UBS _________________ "RRrrruuuunnnn!!!" ~Apocalypto
Joined: Jun 13, 2007 Posts: 3588 Location: Minniesotuh
Posted: Fri May 09, 2008 9:59 pm Post subject: Re: Let the layoffs begin
Space shuttle shutdown may kill 8,000 jobs
NASA estimates employment loss when fleet is retired in 2010
By Matt Sedensky Tues., April. 1, 2008
AP-MIAMI - More than 8,000 NASA contractor jobs in the nation’s manned space program could be eliminated after the space shuttle program is shut down in 2010, the agency said Tuesday.
The number of civil servants is expected to remain roughly the same, but dramatic job cuts are possible among private contractors as NASA transitions to the Constellation program, which is developing the next-generation vehicle and rockets to go to the moon and later to Mars.
Constellation isn’t scheduled to begin flights until 2015. …
NASA _________________ "RRrrruuuunnnn!!!" ~Apocalypto
Sharper Image stores to be closed and liquidated
Sun Jun 1, 3:39 PM ET
NEW YORK (Reuters) - All remaining stores of bankrupt gadget retailer Sharper Image Corp (SHRPQ.PK) will be closed and liquidated, its new owners said on Sunday.
More than $50 million of inventory is being sold at 86 Sharper Image store-closing sales throughout the United States, liquidators the Hilco Organization and Gordon Brothers said in a statement.
A joint venture led by units of Hilco and Gordon Brothers purchased the company's assets at a bankruptcy auction last week for $49 million, and plan to continue its wholesale, direct-to-retail, e-commerce and catalog businesses under a new licensing strategy.
...
_________________ "It's called the American Dream because you'd have to be asleep to believe it."
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