Wine country foliage

On our last trip to Sonoma County we were accompanied by our good friends Vavoom and Mrs. Vavoom. So naturally, this weekend we thought of them often as we ate and drank our way through the Russian River Valley. This beautiful tree outside our B&B made us think of them even more as they are now residing in New England, famous for its foliage. How does this compare, Vavoom?

U.S. Housing: A soft landing?

Last week we took a look at some pretty compelling evidence that the U.S. housing market is a bubble ready to burst. There is already a great oversupply in housing, the Fed will overshoot neutral causing the yield curve to invert and high energy prices will have a profoundly negative effect on the U.S. economy. The combination of these factors will cause a "perfect storm" for the housing market.

Today, we'll examine the argument that prices will moderate but supply will not dramatically outpace demand and the market glides in for a perfect landing.

Housing
In this scenario, both demand fundamentals (household formation from immigration and population growth) and affordability (interest rates and wages) continue to prop up home prices. While the supply of new homes for sale is currently at 4 1/2 year highs, this supply level will remain manageable because long-term interest rates are still close to historical lows, the rate of new ARMs is declining and a pullback in the use of home equity loans has begun.

A Steepening Yield Curve
While the Fed has raised the discount rate 12 consecutive times, from 1% to 4%, and could continue to tighten, there is no danger that the Fed could "overshoot neutral". Even if rates rise another 50-75 basis points, that would not be restrictive for growth. There will be no yield curve inversion and we may, in fact, see inflation creep upward.

Energy Prices Moderate
While higher prices, especially for natural gas this winter, will be economically dampening, this will be temporary and manageable. We've already seen oil prices fall significantly and they will continue to moderate and stabilize below $60/barrel.

Provided that these factors hold true, a bubble-bursting dramatic decline in housing prices is not likely.

Data from the October 27, 2005 ML RIC Report

Russian River Valley

The Russian River Valley is one of the finest grape growing and wine making regions anywhere and this weekend we're taking some time to relax here.

This year, 57 wineries are participating in "A Wine and Food Affair-Tasting Along the Wine Road". It's a weekend full of food and wine--pretty tough duty, but somehow we'll get by.

Off with their thumbs...or whatever

The mayor of Las Vegas has an interesting solution for the city's graffiti problem.

Las Vegas Mayor Oscar Goodman has suggested that those who deface freeways with graffiti should have their thumbs cut off on television.

What do you suppose he would have done with rapists?

Allies and Molotov Cocktails

From the San Francisco Chronicle:

An anti-Bush demonstration in San Francisco ended with the arrest of several people, including one who was found carrying several Molotov cocktails after such a device was thrown at The San Francisco Chronicle building on Wednesday, police said.

Just a couple of points: First, how much sense does it make to protest war by throwing bombs? Secondly, lamebrain, the Chronicle is on your side.

Stansky surrenders helm at Magellan

Fidelity announced today that Robert Stansky, long-reining manager of the Magellan Fund, is retiring but his legacy may be clouded by the fund's faded performance.

Magellan, a $52 billion fund has consistently underperfomed the S&P 500 during Stansky's tenure. The fund has averaged a 6.85% total return over the last ten years while the S&P 500 averaged 9.49%. Critics debate whether a fund of Magellan's size can be managed by one person.

Footnote: When Peter Lynch took over the fund in 1977 it had only $20 million in assets.

U.S. Housing: A triple whammy?

The debate over the fate of the U.S. housing market rages on and no one can be sure how it will play out but here's a three-pronged argument supporting a bubble bursting theory.

Supply and Demand
It's a simple case of supply and demand. Housing starts, annualized, have exceeded two million units for six consecutive months which has only happened three other times in modern history. Household formation last year was much lower than it was during any of the three other periods. The result is an oversupply in housing that is beginning to be evident. The backlog of unsold new homes has moved to a 4.9 month supply, the highest since December of 1996.

Yield Curve Inversion
The Federal Reserve has raised rates eleven times in sixteen months and has given little indication of letting up. Over the last three decades there have been eight other tightening periods and the yield curve inverted five of those times as a result of the Fed "overshooting neutral". The U.S. economy slipped into recession as a result of all five of those Fed-induced inversions.

Energy Prices
Energy prices have more than doubled in the last year and, with more than half of American homes heated by natural gas, an impact on consumer discretionary spending is a given. Households have spent $100 billion more on energy this year than last and, while energy prices have eased a bit, we're likely to hit $150 billion by year-end. Add to that the impact of higher short-term interest rates and we can subtract 2-3% from consumer spending. Merry Christmas.

Seem dismal? Later we'll take a look at the arguments for a soft landing.

*Data from the October 27, 2005 ML RIC Report

Bearish on Google

Shares of Google soared past $358 yesterday, more than quadrupling their IPO price from last year. And while the average target price of 22 analysts surveyed by Reuters Estimates is $384.55 for Google, one analyst has a "sell rating" on it and a target of $225.

But Eugene Walton of Walton Holdings LLC in New York reiterated his "sell" rating, although he raised his 12-month price target to $225 from $200.

Mr. Walton runs a one-man independent research firm out of his apartment on Manhattan's Upper West Side. He set up shop after the big 2003 settlement with regulators that required some of the largest Wall Street brokerages to offer independent research to their clients alongside their in-house reports.

How does a guy like this end up being featured in the WSJ anyway? I suppose it's the whole "Man bites dog" thing they told us about in journalism school.

Of geese and homeless people

Lake Merritt is home to hundreds of Canadian geese that have made Oakland their permanent residence. Migratory by nature, these waterfowl have decided there's no reason to leave. Flying south for warmer weather and abundant food just isn't necessary as the weather in Oakland is mild year 'round and the good citizens completely ignore the signs not to feed them.

Oakland's homeless are a lot like the geese. They've just decided to stay because the weather is nice and people feed them. I only wish they wouldn't pee on the sidewalk.

Stuck with Chuck

Charles Schwab says he's staying put as CEO of the company that he founded and that bears his name.

"I will remain here as CEO as long as it takes, but not a day longer," Schwab said. "I will remain as chairman probably indefinitely."

Ya gotta love the "not a day longer" part. My guess is that he's gone before the end of '06.

The second hundred years

Scientists are thawing the remarkably well-preserved body of a WW II airman that has been encased in glacial ice ever since his plane crashed, probably in the 1940s.

FRESNO, Calif. - As the frozen body believed to be a World War II airman slowly thaws after decades encased in a glacier, forensic experts say a picture is emerging of a fair-haired man in an Army uniform who suffered broken bones when his aircraft crashed in the wilderness.

I'm really showing my age, but this reminds me so much of the 1967 sitcom,The Second Hundred Years.

While prospecting for gold in Alaska in 1900, Luke Carpenter, thirty-three years of age, was buried and frozen alive when caught in an avalanche. Sixty-seven years later, Luke's Son, Edwin Carpenter, sixty-seven years of age, widower and retired businessman, is informed of a recent avalanche in Alaska and of a find--his father, alive. Luke was brought to the home of his now aging son in Woodland Oaks, California. Chronologically Luke was 101, but he hadn't aged while in deep freeze and was physically still 33--younger than his own son.

Why do I devote valuable brain space to remembering stuff about a 38 year-old TV show?

Who needs a degree, anyway?

Elizabeth Paige Laurie has returned her degree to USC after being accused of paying her freshman year roommate to do her homework.

Laurie is the daughter of Bill and Nancy Laurie, billionaire daughter of Wal-Mart co-founder, Bud Walton. Bill and Nancy had given the University of Missouri at Columbia $25 million for a sports arena and asked to have it named after Paige. When the allegations of her college highjinks surfaced, MU was forced to take Paige's name off of the project.

"Paige Laurie voluntarily has surrendered her degree and returned her diploma to the university. She is not a graduate of USC," the school said in a statement dated Sept. 30. "This concludes the university's review of the allegations concerning Ms. Laurie."

Call me crazy, but somehow a degree from USC just doesn't seem to mean so much when your parents are worth billions. It's not as if she needs that bachelor's degree to get a job.

Carnival of Personal Finance

This week's Carnival of Personal Finance is up at MyMoneyBlog. Knock yourself out.

Tax cheats

Nine new KPMG officials, including the former CFO, were named today in a criminal indictment on charges of tax-shelter fraud.

U.S. regulators said in a statement this is now believed to be the largest criminal tax case ever filed, which generated at least $11 billion in fraudulent phony tax losses and resulted in at least $2.5 billion in tax evaded by wealthy individuals.

KPMG said in a statement, "All of the nine individuals who received indictments today separated from the firm at an earlier time. Therefore, since the indictments do not involve the firm, it would be inappropriate for KPMG to comment further."

Yeah, since we fired 'em we don't think we need to dicuss it further. In spite of the fact that they (allegedly) designed, marketed and implemented the illegal tax shelters for KPMG clients while employed by KPMG.

Financial Illiteracy

 













A recent poll by the Roper Center for Public Opinion Research reported that the average American family spent $1.22 last year for each dollar it earned and 1.6 million Americans filed for bankruptcy.

According to U.S. News and World Report, 25% of workers age 45-54 have less than $25,000 saved for retirement.

Cardweb.com reports that in 2004, average household credit card debt rose to $9,312 from $7,842 in 2000.

These figures accurately point out that many Americans are financially illiterate. And this concern looms even larger when you consider that we are being asked to take on more and more personal responsibility through tougher bankruptcy laws, consumer-driven health insurance plans, possible Social Security reform and the shift from guaranteed pension plans to defined contribution plans.

An editorial in InvestmentNews suggests that these problems would improve if financial literacy could be raised. While schools have begun to take on this task, they have not embraced it wholeheartedly. It is up to the financial services industry to raise consumers' awareness and help people understand the steps they need to take for their own financial well-being. It's going to take a great deal of hard work.

Vintage fire

This is the sort of fireside scene one expects if the fire resulted in the loss of loved ones or pets or perhaps the family home. But this was really bad. The sobbing and shocked expressions stem from the loss of something really irreplaceable.

Up to $100 million of California's finest wine was destroyed Wednesday in a huge warehouse fire.

Tens of millions of dollars worth of vintage wine were believed to have been destroyed by a relentless fire Wednesday at a huge Vallejo warehouse that was considered one of the most secure places for wineries and individuals to store prized collections.

The three-alarm fire at Wines Central sent plumes of smoke more than 700 feet high that could be seen for miles. The blaze could not be controlled by firefighters because the Mare Island building -- a 1942 structure that once housed Navy torpedoes -- had steel doors and 3-foot-thick concrete walls and a concrete roof that could not be penetrated.

Part D, what you must know

The long-awaited Medicare prescription drug coverage begins January 1st, 2006 and, if you're a participant in Medicare, you can sign up as early as November 15th. What you must know is that doing nothing is not an option. You need to look at the alternatives and make a choice.

Medicare beneficiaries will be able to choose from at least two of the stand alone drug plans that contract with Medicare to provide the new benefit. If you do not sign up by May 15th, 2006 however, you will pay higher premiums for the rest of your life--to the tune of 1% for each month late that you sign up. Exceptions are participants who are covered by an employer-sponsored plan that is at least as rich as the new Medicare plan. They can stay with that plan as long as they like and will not be penalized for joining Part D later. Weigh your options.

Here's how the drug plan works: The participant pays the first $250 in prescription costs as the deductible. Of the next $2,000 spent for prescription drugs, Medicare picks up 75%, the participant, 25%. So, of the first $2,250 spent, the participant pays $1,136, $386 in premiums ($32.20 per month), the $250 deductible and $500 as the 25% co-pay.

Now is where the plan gets a little strange. It covers nothing from $2,250 to $5,100, the "catastrophic level". Zip, zero, nada. This has come to be known as the doughnut hole. Then, above $5,100, Medicare pays 95%.

The rules are a bit convoluted, just like anything in government. But the plan offers tremendous protection against having to pay huge sums for prescription drugs in the event of catastrophic illnesses.

Sex, lies and doctors

This story has been making the rounds today, but everyone is missing the most important question.

An Oregon woman is suing her doctor because he claimed that he could remedy her lower back pain by having sex with her. There were a number of 45 minute sex sessions, for which the Oregon Health Plan paid the doctor $5,000. Think of it, not only did this guy convince a woman that there was therapeutic value in having sex with him, but he got the state to pay him for his time. Brilliant, except that he lost his medical license and had to spend 60 days in jail.

What I'd like to know now is, how's the woman's back?

We win!

Back in early June I posted about PG&E's 20/20 Summer Savings Program. The utility challenged its customers to reduce their average daily usage of electricity by 20% cumulatively for June through September and those who were successful would be rewarded with a 20% rebate on all electricity used for the period.

Twenty percent is a lot to shave off a household's electrical usage, but they dared us, dammit. So for four months we were diligent about turning off lights and eliminating unnecessary consumption. We won. The September bill came yesterday and it showed a 22% reduction in consumption for the period. Take that, PG&E!

I suspect that the most important steps I took were turning off the seldom-used little refrigerator on the wet bar and unplugging the Insta-hot water dispenser at the kitchen sink. Nice conveniences, but we've hardly missed them.

It also didn't hurt that we didn't run the air conditioner for a single day during the period. We never needed it and we probably only ran it for a handful of days during the same period last year.

I haven't done the math but I don't think our rebate check will amount to more than $75. Oh well, it wasn't about the money, it was about the challenge!

Bloggers' Paradise

Imagine, free internet access anywhere in San Francisco.

Google Inc. has offered to blanket San Francisco with free wireless Internet access at no cost to the city, placing a marquee name behind Mayor Gavin Newsom's effort to get all residents online whether they are at home, in a park or in a cafe.

The implications are amazing.