Tag Archives: bonds

Is this the end of the credit markets again?

Business, Government, Money, Politics, , , , , ,

The world as we know it is over, unless something drastic happens in the next 24 hours or so.  For the entire history of our nation business has been the engine that has spurned our growth.  And the engine of big business has been the ability to raise and borrow money.  This has been done by selling bonds, basically chunks of debt.

This is how corporations work.  A corporation is a business owned by the stockholders.  Most companies sell stock to raise money to start out with, this is called an IPO.  But after a while if you keep selling stock you dilute the amount that each person owns.  It is basically like taking on more and more partners in your company, meaning you own less, and you control less, and these partners share in the profits.  So most companies find it much cheaper to borrow money by selling bonds.  These stakeholders do not share in the profits or any upside in the company, but they also are the last to be hurt by and failure in the business.  As the business operates they also accumulate other debts, to vendors and to employees.  If a company fails it is just like a small business that fails.  The owner equity is wiped out first, the assets are sold and the bond holders get paid first and in full, and then if there is any money left over the other debts are paid.  Only after all of this is paid does the owner get anything.

In the history of large American business many companies have gone bankrupt, and it has always worked this way.  Almost every time the stock is wiped out.  Some companies survive by getting bought out, others simply restructure and are able to get out with little pain.  But here is the big change.  In recent times the government has gotten involved in being the largest bond holder of many companies, but the government does not look our for the best interest of US the tax payers, they don’t mind taking a loss.

Supreme Court ChryslerSee a few weeks ago Chrysler declared bankruptcy, and their stock was wiped out.  The company basically had three large creditors; The Government, the Union for future pension and health insurance payment, and the bond holders.  Lucky for Chrysler they found a buyer in Fiat for 35% of their restructured company, the problem is that this buyer is only willing to pay much less than what the company actually owes.  The Government is not really looking to get their money back so they are willing to take a major loss, the problem is that the Government used TARP money to invest in Chrysler and that was illegal, but that is a mute point now, they are just rolling over.  But the problem is that the Government and Obama have decided that the BULK of the money should go to the Union, heck Unions are the ones that put democrats in office.  So the Government decided to write the plan in such a way to pay only 29% of debt owed on the 42.5 million of debt of the bond holders, the people who should be first in line.  While the unions are getting 55% ownership in the new company, and the federal government is getting 10%.  A group of the bond holders spoke up and rightly said that they were not being treated right, that they should be first in line, not last.  The one Justice of the Supreme Court of the US saw it this way also and decided to stop the sale to Fiat under this current plan.   A huge amount of pressure came from the White House to allow the Fiat sale to go on, and the Court caved today and let it go on.

Now what this does is it creates a terrible precedent in US law that bond holders are no longer first.  This means that the people who invest get in bonds get none of the upside and much more of the downside risk, all for very little return.  This move will freeze the bond markets even more, in a time that we need them very much.  This also sets up the precedent for when GM finally gets done with their restructure.  The correct thing to do would be to wipe out the Unions.  These unions are the root cause for the failure of these companies.  Line workers start at more than $70 per hour in pay and benefits, many with tenure make well over $100 per hour.  And then they retire with a huge pension and a huge health care bill.   With such a high labor cost the average vehicle made by GM had over $7,000 in labor cost.  Newer, non-union plants owned by Nissan, Toyota and such have average labor costs per vehicle under $1,500.   So if GM wanted to make a vehicle for a cost of $20k (Sales price much higher), they would have much less money to work with to buy materials and make profits, in fact they have not made profits for many years, and now pay thousands per vehicle to cover their debt.  So if you spend only half that as your competition on the parts going into your product then your product can not be as good for the same price.  So during the 80’s and 90’s they just built a lower quality car, and recently they started building a much higher quality car, but at a much higher price.  In both situations it caused a steady march of customers away from these companies, and a vast loss in market share, making it even harder to do business.  The unions were like a boa constrictor, killing the company by squeezing tighter and tighter, but the Obama plan for GM is to give the unions over 90% of what they were promised, and they have taken no real concessions, not even a payout.  While the Government is willing to take only 60% of what GM owes the tax payers, and what about the bond holders.  Well they are going to get somewhere between 19% and 29% of what they are owed.  This is crazy really.  But this is payback to the unions for supporting the democrats, and a step into the much more socialist America that we find ourselves in.
If secured creditors keep loosing their rights then our capital markets will simply fall apart.  I was getting hopeful about our economy recently but this will really put a crimp on things.  It also does that help that the federal government needs to issue over $100 billion in bonds each month just to stay afloat with all the spending that is going on.  How much longer will people keep trusting in these bonds, when you see interest rates start to go up you will know that the trust is fading, and when that happens there will be even more trouble for us.

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Recession is a good thing if you have knowledge.

Bootstrap, Business, concepts, Entrepreneurship, Inspiration, Investment, Money, real estate, , ,

Ok, maybe this title is a bit shocking.  In easy time it only really takes money to make money.  In good times you can use a dart board at a page of stock symbols and make a decent return.  But when times get bad, like they are for many right now, most of the money gets really scared.  They don’t invest in the great companies that still exist, they don’t short the walking dead, they don’t buy the houses that are dramatically reduced.  They simply sit there and they buy bonds and Gold or just keep the money in CD’s if they can find a bank they trust.  Bike Race up Cat's Hill

It is said that on a long marathon, or in a long bike race that the best racers are hopeing for the hills to come, because it is the hills that lets them show their mastery and where they can gain ground on the competition.  When it course is flat and easy it is much harder to get ahead.  In the same way a recession is a great time for the smart and knowledgle person to get ahead. I am confident that if I was given $1 million dollars to invest as I see fit I could turn it into $3 million or more before this recession is over.  More self made millionares are made during a recession than during any other time.

During any time of significant change those that figure out the new way things will work and form a profitable business plan around it first are very likely to succed.  The people who are failing the most now are all the people who still have not found themself in the information age, the ones who still think that we live in the industrial age, you know the people who like to work for a factory, get a pension and live forever.  That age has been gone for 15 years or more, but most americans still live in it.  During this time there will be many people entering the information age, maybe for the first time.  People who will make a living online.  And there will be people like me there to help them, there to show them the way, and of course I will make a small profit on the activity.  This actually has been my main source of income for some time now.

So what would I do if I had a million dollars right now.  Well first I would build some online businesses, and make oppertunities for those who want to join the information age to do so with me.  But most of my readers can not do that I would guess.  So what would I do if I was them, and I just wanted to invest.  Well first I would take most of that money and start looking for good real estate.  There is plenty of it around, and there is plenty of it at prices that are lower right now than where the bottom will settle.

Just last week I was presented with a deal on a rental house, it sold for $180k only 3 years ago.  It now sat ready to buy for only $37k, and it could be rented for over $800 per month.  Using simple math that means that in less than 4 years your rental income should pay for the entire house.  That is like getting a stock with a P/E ratio of 3.8.  Sit on this one for 4 years and you get all of your money back, and by then housing prices will be out of the whole and you could sell this house for $120k or so, pure profit.  Do that over and over with half of the money and you could buy over a dozen houses, worth at least 1.5 million total 5 years from now.  Now that you know how to buy them cheap maybe other investors would like in on the deal, and you can let them buy some of the houses from you.  So lets say you buy 10 houses at an average of $40k each (Something that is easy in the phoenix market if you know where to look.) You invest another 5k in to making them nicer, and in getting them rented out to nice tenants.  Then you sell the house, and the future cash flows, you can do this at a rate of 10 times the projected yearly earnings, this is what investors look for.  That would be near $90k or so per house.  Now do this as fast as you can.  Lets say you buy 5 each month and sell 5 of the other houses each month, that would be an income of over $200,000 per month.

I am confident that I could do this already, I have the connections, I have the renters, I have the knowledge, my only problem is that I don’t have the money, because I was distraced with my other businesses, and my investment in them does not let me walk away.    My plan is to work hard in my current business, make $100k or so and then get started buying, filling and then flipping houses to other investors who don’t want all the trouble.  Take all procedes from each sale and buy more houses with it, do this until I am so busy that I can’t sell all the houses, so then start to keep some of them.  Do this until the recession is over then ride the wave of the readjustment back up, it will not be as large but should be good.  Now these rentals are my retirement fund.  Sell one when I need money.

This is a lot of work, and the key to success is partnerships.  This was my plan back a few years ago but things happened that distraced me, a wife and two kids later I was ready to go, but I got stunned by the economy a bit, but now I am over it and ready to go.  Anyone want to join my team and work with me.  Send me an email.

The flow of investment capital and how to keep it active

concepts, Investment, , , , , , ,

Well here is a quick mental exercise. I am going to think about, and share with you, my thoughts about investment money.

Well the main areas of investment I see are:

  • Real Estate (Commercial and Residential Property)(I am not counting owner occupied housing because that is not primarily an investment.)
  • Securities (Stocks, Bonds, Mutual Funds, Futures)
  • Private Equity (Direct investment in private companies)
  • Metals and Jewels (Large amounts of money are kept in Gold, Silver and other precious metals)
  • Cash (Yes many people keep money in cash, CD’s and deposit accounts.)
  • International Investing (All of these areas but outside of the US)

Now, because the total amount of money is VERY QUICKLY increasing, the actual value of a dollar must be going down. This is evident by looking at the price of the dollar verses most any investment. You could have invested in most any are for the last 5 years and had a positive outcome vs. the dollar. Over 90% of this money is owned by less than 3% of the population. The total size of all of this investment money is well in excess of 70 TRILLION dollars. That is more money than most people can even imagine.

One important concept that I have noticed is the fact that money shushes around, from one investment type to another. In the late 1990’s the stock market was all the rage, and most other areas of investment were growing slower than normal, most investment money went there so the values went sky high. Then the hype popped in 2000-2001, and people started taking their money out of stocks, the people who left early took most of the profits.

From 2002 until 2006 the hype was all about Real Estate, as a whole the US made over 6 TRILLION dollars investing in real estate. That is about $40,000 for EVERY adult in the United States, and this number does NOT count the house you live in, only investment properties. By the start of 2007 people made a ton of money and started to see an end to the run-up in prices of Real Estate, so they started cashing out. Again the people who did it first made the most money.

Now this money STILL is out there. Where is it going? The easiest way to find this out is to look at what is going up in value. Metals is one huge area that has seem price spikes from 2007 until now. Another area is Private Equity. Most people who made this huge money qualify to invest in Private Equity and they have done so. They have brought companies private, they have started new companies.

Another area that has seen a huge increase in investment is the INTERNATIONAL segment. New cities are being built all over the world. The rate of investment in much of the world is on record pace.

Because of the vast size of stocks, and the fond memories many investors have, much of the money has returned to stock market. But many people who made a ton of money in Real Estate are looking to return to that market also.

So where should you invest??? The key is to move into the segment first and leave first, but it is hard to predict what will happen. For example I think metals were HOT but they are now near the top, and as we have seen when this happens there often is a fall. A lot of money has gone back to the stock market and more will follow, so there will still be a few years to make money in that area. Real Estate has taken a huge hit but should come up later, the returns will not be huge but at least there will be returns. So the two areas I see, where I would invest my money is in Private Equity and in International. In much of the world the Real Estate boom is just starting.

The best thing would be to start a company in a fast growing nation, and take advantage of the growth. This is hard so the next best thing would be to invest, using Private Equity, in a US company that does a good deal of business internationally.

When we stated Capital Active, this is exactly what we thought about, the fact that there is a huge amount of Capital out there, and that it needs to be kept moving around, kept active doing different things at different times.

Tell me what you think, please leave a comment to this blog, tell me if you agree or disagree.