Testing - Amazon Protein

Optimum Nutrition 100% Whey Gold Standard, Rocky Road, 5 Pound

I am going to try out Amazon Associates and see how it works.  It has been awhile since my last post.  That is all I got.

Wall Street is Dead

Wall Street as we know it, exists no longer. This is not to say that all the firms are gone. However, Bear Stearns, Lehman Brothers, Morgan Stanley, Merrill Lynch, and Goldman Sachs are no longer in their same capacity (to varying degrees). There are still plenty of smaller firms that one day may take there place in size and scope.

Nothing that happens in the market these days is small. The Dow Jones is down 777 points one day and up 450 the next. It seems there are more 100+pt moves in the DJIA these days then anything else. One day a bet you made makes you look like a genius and then the next day it makes you look like a fool.

I am against bailouts and believe that the market should allow firms to fail so that moral hazard is prevented. At least I believe in the theory. In practice, I'm not sure if this is the best. The government (including The Fed and Treasury) has been directly or indirectly bailing out practically every big financial firm their is. Now they claim that the systematic risk is too great to allow these to fail. I believe their right. The financial world these days is so intertwined that the collapse of one means other firms will start to struggle.

A bank takes a mortgage and sells them to another institution. That institution will pool all the mortgages together and form a Mortgage Backed Security (MBS). These pools of mortgages can be divided up into Tranches with different degrees of risk and return that suits somebodies unique needs. Then you can create many different types of derivatives off these pools as well. Keep in mind that each one of these assets has a buyer and a seller (so 2 parties). When you think about it, a small pool of mortgages can have many different institutions with their hands in the "cookie jar". If one of them were go bankrupt that would mean that another party may lose out on the deal they had with them which could put them in a tough spot. If they were to go under as well then somebody else would be effected. Take that small example and expand it out to the entire financial world and you can see how one firm failure could mean a lot of systematic risk to the global economy. The government did let Lehman Brothers fail which hurt a lot of people. I was glad they did let them fail and I hope that for many years we can look back at this point in time and see what happened in the market. Lehman Brothers was involved in many financial instruments and it would beneficial to all to learn how their failure impacted each one and the rest of the market. I think that knowledge would go a long way to see how interconnected everything really is and how future financial crises should be treated.

I would like to think (and maybe I'm wrong) that there can be some happy middle ground here. In most cases, these bailouts have basically caused the equity holders to be wiped out and in some cases the debt holders. The management of the firm is usually replaced as well. I would like to think that since the owners and operators (equity holders and managers) got wiped out that it will illustrate the importance of risk management. Companies will know that if they take too much risk in search of higher profits, then the government might have to step in and when that occurs....they lose.

That being said, I don't like my tax dollars going to help people that did things wrong. I'm relatively young but I write the following though as if I was near retirement and had "played by the rules" my entire life. All these years I have saved way more than is recommend for retirement. I have lived well within my means and never bought anything that I could not easily afford. Now somebody else goes out and lives well beyond their means for years and never saves anything. Eventually it all comes back to that person and then the government has give some of my money (i.e. tax dollars) to him. Where is my incentive to save? Why not live high on the hog for years knowing that my excesses will be paid for by somebody else. I've talked to mortgage brokers that first hand saw people purchase houses they could not afford. They knew that going in but thought that the real estate bubble would go on forever and they could use that equity go buy things they "earned" and "deserved". We hear on the news a lot about how banks made loans to people that could not afford it and now those people are in foreclosure and have no roof to put over their families heads. That is sad to hear. What you don't hear in the news is the people who knew they could not afford the house but were planning on flipping it in a few months to make a quick profit. Things go south on them and now its "poor me".

I work on the retail side of a bank. Some might call a retail bank a place where "the rubber meets the road". We are the face of banking that everybody see's and one of the first places that many will go in times of panic. I have seen some concerned people but they are fine as long as they are within their FDIC insured limits. Even FDIC insurance won't stop a lot of people from withdrawing their money if they sense trouble. Just ask Wamu.

Mental Accounting

The Psychology behind investing is argued by many to have serious impacts on the way people invest their money. I could spend all day citing books and the whatnot about the subject but for the moment I will only focus on one part of it.

The idea behind "mental accounting" is that people will treat money differently based on how they account for it in their head. They could have many bank accounts for different purposes or different brokerage accounts for different trading strategies. People (and I am one of them) will be riskier with money in one account but not in another. If they made a lot of money on a stock they might treat that profit as "not their money" and be riskier with it when in reality it is their money and a rational person would treat all their money the same.

When developing and using financial models there are many assumptions that are made. One is that people will behave rationally. This is not always the case. This may not be the worst thing in the world and it certainly doesn't invalidate hundreds of years of financial and economical thought. I am guilty of doing these things probably more so than the average person. I like to invest money and I like following the markets each day. I know that I am no expert by any means but I do know enough to make me interested in it all. I know that I need to save for retirement and other life evens now as opposed to later. I don't want to be too risky with that money so I leave it up to professionals to manage that money for me. However, I like to have a separate account that is under my direct control that I can just buy individual stocks (heck even penny stocks) that catch my interest. I'm not going to call it gambling with that money but some may argue that is whats being done with it.

It is just interesting how people (including me) do this everyday. I really don't have anywhere else that I am going with this. I was just thinking about it and thought I would post something here before hitting the hay. Since its almost a year since my last post...I feel like I needed write something down here. I hope you didn't find it a waste of your time.

Nonbinding Congress

It makes me upset to find that the House passed a "non binding" opposing the President's plan to send 21,500 troop to Iraq. Congress gave the President power to fight the war in Iraq and after public opinion of the war starts to sway they change their mind about the whole ordeal. Congress has the power to cut funding for the war and in that way force troops to withdraw. However they don't want to be responsible for anything that might happen if our troops are in fact withdrawn. So they pass a "non binding" resolution so they can announce their dislike of what is going on but not take responsibility for anything. Whether you are for or against the war is irrelevant. Don't try to have it both ways while laying all the responsibility with the Executive Branch. If you really don't like what is going on then use your constitutional power by cutting the purse strings. Don't sit there and say "we don't agree with it but you keep doing it because we don't want to be responsible for what might happen".

The author would like to say that he supports President's Bush efforts in Iraq. Of course things could of been handled better but that is the past and we must work on improving the future. We can't cut and run because the consequences would be to great.

The FUTURE of Gambling

I know it has been awhile since I have updated but I can never find a time where I am bored and can't think of anything to do. But today I will write on a topic that I was introduced to last semester. ..

As many of you know, Congress effectively banned online gambling in October by attaching the the law to the Port Security Bill. I did not like this because I enjoy playing online poker and online bingo as of late. I personally don't think the law is going to be around that long because its stupid. The United States casinos were lobbying for the bill since they couldn't compete with these online casinos and were losing business to them. There are many solutions to this problem and I don't think that banning it is one of them. You could either let American casinos operate their own online sites in order to compete fairly. If the United States legalized online gambling they then could start taxing that revenue which is something they couldn't do before. This was probably another big reason they banned it.

In my Investments class last semester my professor showed us this site called TradeSports.com which lets you take out "Futures Contracts" on certain events happening. This is basically the same thing as betting because I can take out a "contract" that the Packers will beat the Bears by at least 7 points or what have you. I can buy this contract if I think it is going to happen or sell this contract to somebody else if I don't think it will happen. Lets say I think it will happen and I pay 52 cents for 1 contract. If it does happen then I get a dollar which is basically a profit of 48 cents. Depending on what the "market" thinks is going to happen will effect the price of this contract. So maybe if the Packers take an early lead the value of this contract will go up because it looks like it will be more likely. Notice that when the value increases from lets say 52 cents to 60 cents...this contract becomes less profitable to buy since you will make less on it. However since I bought it for 52 cents...I could now sell my contract before the game was even over and make an 8 cent profit. Futures contracts are good for the market because they allow individual, institutions, and companies to diversify their risk. I could keep going on these contracts but I stop, I hope you kind of get the picture though.

Since these contracts are used to allocate risk to willing parties...whats the difference on taking out a contract on the price of gold or a contract on how much snow will fall in Central Park this year. There are also contracts for when they will catch or kill Osma Bin Laden. The most interesting contracts are for who will win elections in our government. When people have to put their money where their mouth is they will use all available information to make the best decision on who will win an election race. So really when you look at the price of the contracts for lets say....Hillary Clinton running for president, you are seeing what the market thinks the probability of her running and winning is for president. In my opinion this information is more accurate than any exit polls or other statistical process. So even if you yourself don't want to buy/sell these contracts you can use this information to help you prepare for the future.

So if Congress is trying to ban online gambling...then you would think this is a form of online gambling as well. But it is a form that the market needs to diversify its risk. So they can't get rid of it but its basically another avenue for casinos to take if they want to get online gambling go again. You could just take a "futures contract" out on the the ball landing on #36 or an odd number. I didn't really research much to see if that website listed above is legal in the United States or not...but I am assuming that it is. If you are interested in this then I encourage you to go to the site and find out more about it.

Ballparks and Figures

A couple days ago I recall reading an article about how the 4th of July would affect the United States economy. Especially this year since it fell on a Tuesday. I don't have any exact numbers but I'm assuming that a lot of people took monday off as well so they could get a 4 day weekend. Having all these people off work will mean that many companies will not be as productive as normal. Even people that do work on those days won't be able to be as productive as normal. Since most companies are constantly communicating and working with other companies there will be less people there to work with and hence less will be accomplished. I don't know what the exact dollar amount affect this will have on the economy but you would think it would be worth mentioning. It normally isnt to bad if holidays are just on a monday or something but since it fell on a tuesday this year it effectivley created a 4 day weekend for most people.

On the flip side of the coin...Since all of these people are not working they are probably out at picnics and BBQ's. Maybe buying that new patio set they wanted or whatever it is that is popular these days. So maybe in that respect the extra day off will cause more consumer spending and hence will help the economy. But knowing most people they just use credit cards and overburden themselves with debt. Which brings me to my next topic.

As we all know, the housing market is cooling off. A lot of people are in homes right now that they should not be able to afford. Thanks to the wonderful "invention" of interest only loans, ballon payments, variable rate loans etc...people could/can "afford" bigger houses. They see that if they do an interest only loan they can buy a $250,000 house. Man, what a deal. Not only are they accruing no equity with each payment; the interest rate is probably a variable one. So when the rates were low it was all fine and dandy (thats how they could make/afford the payments). But do they really think that the rates are going to stay low for the entire duration of their mortgage? Now with rates going up their payments are going through the roof and they can no longer afford this house they are in. This will lead to increasing forclosures/bankruptcies and will create a situation where people with a lot of cash on hand will have great deals on these houses. I know that I will be getting a 30 year fixed rate loan (most likely) when I buy my first house. The reason I get upset about it all is because people act like they didn't know it was going to happen to them. I work at a bank and I had a customer that was furious that her payment had gone up so much latley and how she wanted to close all her accounts and everything because she was so upset. Well what did you think was going to happen when you signed that piece of paper that said that it was a variable rate loan. Oh sure, the rate for a fixed loan was a bit higher at the time but look what you could of avoided.