Should We Cry For General Motors and Chrysler

I have been waiting to write this blog since both these car companies filed for bankruptcy. However, I wanted some proof before I proffered my theory about the so-called American Auto Industry. I subscribe to an on-line website called the Deal.com. In today's edition, there was a story about a recent survey by Grant Thornton, a leading consulting and accounting firm regarding the future of the American Auto Industry. The article stated that due to the restructuring of the American auto industry, foreign carmakers will produce more automobiles in the United States than the Big Three by the year 2012. Foreign automobile companies are expected to increase production by 20% during this period of time. The big impact will be felt by US automobile suppliers who have feasted at the trough of the Big Three for far too long. The US automobile suppliers will have to actually compete for new business with foreign automobile suppliers. There will be no allegiance by the foreign automobile companies to US automobile suppliers like the Big Three. I don't see why this news is a shock to anyone. When in the last ten years have you read about the Big Three opening a new automobile assembly plant in the United States. Yet, BMW, Nissan, Toyota, Honda, Hyundai, Mercedes-Benz and I may be missing a few, have all opened assembly plants during this period of time. Has it come down to "Buy American, Buy Toyota."

Does the whole Madoff scandal reveal something about ourselves

I felt compelled to write this blog not based on any article I had read (See I don't spend my life reading newspapers) but on a recent seminar I had attended regarding the psychology of investing. Most of the people on the panel make a living coaching people to invest or make business decisions based on their heads not their hearts. Basically, don't let emotions get the best of you. There was also a lawyer and a wealth advisor on the panel as well. The discussion focused on how to control your emotions while investing and to not live and die on every utterance from some television or radio pundit. If you can't control yourself, the consensus of the panel seemed to be that you should hire some professional help ie. wealth advisor, financial planner etc. Thereafter,most of the night's conversation seemed to focus on that aspect. No great surprise in my mind since it was the wealth advisor's firm that was sponsoring the seminar to begin with. In the discussion of hiring such a professional, the word "Trust" kept coming up. People kept asking questions like "How do I know if the advisor is a good fit for me," and "What can I do to check the advisor's background." Finally, one of the panelists said that there has to be element of trust whenever you choose a professional that provides a service to the public. It doesn't matter if it is a doctor, lawyer, accountant, wealth advisor or for that matter a car mechanic, carpenter or plumber. I can check all the professional associations, Better Business Bureaus, client references I want but at the end of the day I am placing my trust in them to perform a service that benefits my interests. If I knew as much as they did about the service they were going to perform, then I wouldn't need to hire them unless I was required by Law to do so. I admit that when it comes to inside the hood of my car or pretty much anything to do with maintenance of my house, I am a moron. When it comes to my car or my house, I pretty much blindly listen to whoever is fixing the problem. If some suggestion seemed innately wrong to me I would certainly question it or perhaps seek another opinion but at the end of the day you have to have some trust in the person your hiring and believe in THEIR judgment not yours. They are considered the expert not you. The medical profession is a perfect example. You are relying on the doctor's skill and judgment. The reliance shouldn't be blind but it is not equal either. So the discussion inevitably turned to good old Bernie. Why did so many people drink the Kool-Aid. There are many reasons. Everyone knows the expression, "If something is too good to be true, then it probably is." Yet, many people whom I would consider to be very smart business people lost their shirts and in some cases were completely wiped out. Someone said that success in business doesn't equal success in investing. I agree with that statement to a point but successful people have certain personal characteristics that can crossover to different fields of endeavor. However, there is an X factor as well called "Ego." Some people believe that success in one field means they are an expert in every field. They know it all. I also believe that Madoff's appeal was the sense of exclusivity. I was being allowed to invest in a fund that was not open to everyone, even people as wealthy if not wealthier than me. Madoff preyed on the snob appeal. And of course the greed appeal as well. You can make money no matter what the market does. It was almost pitched like municipal security. No risk involved, as good as gold. What did P.T. Barnum say years ago. Oh, how it still rings true today.

Can Twitter Cause Revolutions

What can I say. Again I read today's New York Times with my morning coffee and came across two interesting articles. The first one concerned a request by a staff member of the White House asking the company Twitter to delay a global maintenance of their service which would have shut the service down for a period of time so that the White House could continue to receive up to date news on the civil unrest in Iran. Dissidents in Iran have been Twitterring away (Is that such a word) by the second about the disputed election and it's repurcussions. Recently, We have seen this before where massive protests were organized through the use of some social networking site. In this new world, a large number of people can be mobilized in a very short period of time. Are these sites the new tools of Democracy. The United States Government may look at this with glee when it comes to other countries, especially ones considered hostile to our own interests but I wonder if the government would feel the same way if massive protests were being organized in this country using the same tools. This leads me to the next article. The increased scrutiny by the National Security Agency over people's e-mails and phone calls. Big Brother is watching. Technology has done wonderful things. We can now get more information faster over the Internet. We can communicate with people continents away with a touch of a button. We can organize people with similar interests. But have we lost something in return. We have to be extremely careful what we we say or pictures we post in our e-mails, blogs,websites etc. You never know who could we looking at it and for what reason. Someone might consider me a subversive after reading this blog. All of this just seems so Orwellian (Is that a word) to me.

Can We Hold Back the Foreclosure Tsunami

People reading this blog may think I only read the New York Times as this is the second time I am referring to information found in the paper. However, I have to admit that there is nothing better to read, despite perhaps their liberal leanings with your morning coffee. On Friday May 29th, there was an article about the continuing rise of residential foreclosures despite the government efforts through the commercial banks to stem the tide. The conventional wisdom was to refinance homeowners out of the burdensome adjustable rate, interest only and other mortgage products that has left most homeowners on the verge of losing their homes into fixed rate mortgages with lower interest rates. Everyone knows the story by now. Homeowners took out mortgages with these teaser rates that were well below the market rate. When these rates re-set after a certain time at a much higher interest rate, the monthly mortgage payment doubled or in some cases even tripled. What homeowners were counting on with the encouragement of mortgage brokers and lenders was that the value of their homes would continue to rise and they could re-finance their mortgage to a lower interest rate at the time of the re-set resulting in the same mortgage payment as before or lower. Lo and behold, the real estate market took a severe downward turn where home values declined in some places by as much as 50%. When it came time to re-finance, homeowners were caught in a bind. In many cases, the value of their homes were worth less than the mortgage. Upon the re-set, the mortgage payments doubled or tripled. The end result was that either people couldn't make the new payment or decided it was crazy to continue to make higher payments on a piece of property that was continually losing value. The mantra was "Why throw good money after bad." From a pure investment perspective, that is always the best thing to do. However, most people felt that it was somehow morally wrong for the homeowner to just give the keys back to the bank and tell them it's your headache now. It seems kind of ironic to me that in every other type of investment, it is considered prudent to cut your losses except when it comes to real estate. People buy stocks on margin which is a form of leverage. Other type of investments use debt to increase return. Real estate is no different. We just call it another name ie. mortgage. Anyways, the government decided something has to be done. It browbeat the banks to modify the loans. Almost all of them have instituted some type of modification program. Another irony is that the banks' investors are now suing the banks for modifying the loans. Do I smell another bailout. All of this leads me to the point of the article. The highest percentage of foreclosures are among the loans that have been previously modified. The culprit is unemployment. They expect the national unemployment rate to rise to 10% by the end of the year. This rate is only the average. There are some states in this country with close to 30% unemployment. I have been preaching this for a long time now. It doesn't matter what the interest rate is or your monthly payment is if you don't have a job or your hours have been severely reduced if you still have a job. YOU CAN'T PAY PERIOD. This was a Great One. New York City was for a short time charging people to live in homeless shelters. IF YOU COULD AFFORD TO PAY RENT, YOU WOULDN'T BE IN A HOMELESS SHELTER. What is the solution. Should government just pay your mortgage until you find a new job. What happens if you don't find a new job or a new one that pays you a salary anywhere close to one you were previously making. The government has thrown money at banks, car companies, insurance companies and various other businesses that come to Washington with their hand out. What about the American People. Where are the incentives to put people back to work. They love to talk about it when making public speeches but if you actually read the bills, it is actually a small percentage of the government spending or guarantees. To me, all of this seems to be a bandaid to the real problems and an early Christmas present to Corporate America.

Real Estate Feeding Frenzy All Over Again

There was a very good article in today's New York Times (May 24th) about the mad rush by individuals or funds to purchase foreclosed properties. In some cases, a bidding war has ensued which has driven up prices. It never ceases to amaze me where fundamentals of sound investing seem to be continually thrown out with the bath water. We only have to look around us to see an economy still staggering despite TARP and the other Government measures to try and breathe life into the American economy. Unemployment continues to rise and I don't see Corporate America replacing these jobs in the near future. Just walk down Main Street, Wall Street or any other street for that matter and you just see row after row of empty stores. Commercial and residential rents keep going down as landlords struggle to keep and attract tenants. I listen to presentation after presentation where promoters tell me that rents are only going to go up and therefore you should invest in my real estate project. "We can ring more money from existing and new tenants." Doesn't this sound all too familiar. Denial is such a wonderful thing. Anyways, I am depressing myself more than usual. Signing Off
Michael Felman
MSF Capital Advisors