July 18, 2008

- Mortgage Debt Consolidation – What to Watch Out For

credit card logos.jpgMortgage debt consolidation can be a smart financial move if you do it right and your financial situation warrants it. On the other hand, it may not be the smart thing to do. You should know that even if it may be the right move for you and your financial situation, you can (easily) make some mistakes and end up in a worse financial situation than before.

Yes, you can still consolidate mortgage debt, or get a mortgage to consolidate debt, even though the number of available lenders seems to be....well that seems to be consolidating too, as this lender and that either goes out of business, or rethinks their strategy altogether. Are we going to have any lenders left??

I was in a Bank of America branch the other day and overheard one of the bank managers explaining to a prospective mortgage refinance customer why Bank of America was in no danger of having the same sort of troubles as IndyMac or any of the other recently (or soon to be) departed. What was his reason for this revelation? He went on to explain that Bank of America was more selective when choosing their mortgage customers, and avoided those with credit problems that would go on to plague so many other lenders.

Upon hearing this bit of salesmanship, my first thought was “If that's the case, and it's worked out so well for you, why the hell did you buy Countrywide?” Seems like good old BofA would stick with what had worked so well in keeping them off the mortgage default express, rather than dumping $2 billion in cash and another $4 billion (at the time) in stock into the sick, California based, mortgage lender, Countrywide. Oh well, maybe the deal could still pay off for Bof A down the road. After all, greater minds than mine concocted it.

If you're looking for mortgage debt consolidation, you're after one of two things, depending upon your interpretation of the term. Either you have a first and a second mortgage and you want to combine them into a single loan, or you have high interest consumer debt, typically of the unsecured variety, and you'd like to roll it into a single, secured loan with a lower aggregate payment that all the little loans that preceded it. Either way, you'll be consolidating multiple loans into one (hence the term consolidation loan).

Here are some pitfalls you'll want to watch out for when getting one of these loans.

Mortgage Debt Consolidation Flag -

Using a small, unheard of mortgage company.
Don't do it. As we've recently seen, merely being a behemoth is no guarantee of safety, either. However, when you're consolidating loans, and anytime you're playing around with your mortgage in general, using a reputable company is of paramount importance. Make sure that their sterling reputation precedes them.

Mortgage Debt Consolidation Flag -

The “Pay Up Front” loan scam.
This loan scam is used for all sorts of personal loans, not just mortgages. It targets those with bad credit or folks with no equity in desperate need of a refinance; basically those debtors with no place else to turn. The legality of absolutely guaranteeing someone a loan never enters into the equation. The scam works like this. The lender claims they'll guarantee you'll be approved for the loan, but they require 2 or three months of payments in advance. Don't write the check!! You'll get no loan, and they'll be on a beach, earning 20% (on your money).

Mortgage Debt Consolidation Flag -

High, hidden, and inflated fees -
You could well be required to pay some fees when getting one of these loans, but in many cases the fees go far beyond reasonable. On many occasions you'll be asked to pay points, but also many other fees, most of which go directly to enriching the lender. If you're getting a loan from a broker, and your credit is decent, don't pay an origination fee.

You may not know this, but the broker is already getting a fee from the lender for your loan. Don't facilitate the broker's double dipping by paying origination fees on your consolidation loan.  If your credit's good, they didn't have to do all that much to get you the loan. On the other side of the coin, if your credit is shot, you could reasonably expect to pay a fee, because the broker probably had to work their tail off to get you financed with a decent interest rate.

Don't pay a separate application fee, credit report fee, and appraisal (don't forget to get a copy of the appraisal, they have to provide you one by law) fee. In most cases the application fee will contain the costs for the appraisal and the credit report. If you pay all three, you're just lining the lender's pockets (or sending their kids to Harvard). Another trick used by some lenders is marking up the fees that they're asking you to pay. You should pay fees such as wire transfer fees or title fees, but you should not allow the lender or broker to mark them up.

Mortgage Debt Consolidation Flag -

The Over Eager Lender –
If your lender seems too over the top, especially of you have bad credit, take a step back and look at all the details one more time. You may just have the employee of the year at your disposal, but you could also be headed for trouble. This type of lender or broker can often be leading you into a trap known as…

Mortgage Debt Consolidation Flag -

The Old Bait and Switch –
Mortgage lenders aren’t the only businesses to be guilty of this little scheme. One thing that could tip you off that your lender may be a bit sleazy is if they treat your loan papers as a “living, breathing document”. That’s to say that the loan you negotiated may not be the one they set in front of you on the closing table. Even though you agreed to certain terms verbally, or got an offer sheet, it is still incumbent upon you to be sure the loan documents you’re signing reflect the same loan you agreed to.

If you have really crunched the numbers (all of them), feel that a mortgage debt consolidation is the right financial move, and are comfortable putting your house on the line, than go for it. If you’re just consolidating more than one mortgage into a single mortgage, you house was already collateral any way. If you’re consolidating high interest, unsecured debt, think it through a few times before committing your house full of family memories (and possibly substantial equity) as collateral for a dent consolidation loan.

In any case, you should only get one of these loans if the financial situation that caused you to go into debt has been erased. If you had an extraordinary event, such as a auto accident or medical problem, that’s one thing. If you just can’t seem to stop hoppin’ in the Jag for trips to Westfarms or the Fair Oaks, spend a bit too much time at the casino, or think nothing of rolling in at 4:30 after dropping a wad at Marquee on a regular basis, that spending pattern’s got to stop. Unless you can reign in a pattern of excessive spending, you have absolutely no business getting a debt consolidation loan. You’ll just run up your debt level again and then where will you live?

July 15, 2008

- The Right Debt Management Solution – How It Can Help You Succeed Financially

credit cards.jpgHow can you find the right debt management solution? Nearly everyone needs a good debt management solution, weather it's one they developed and use on their own, or through the services of a professional debt management company. The ability to properly manage debt is one of the primary determinants of an individual's, and many businesses, financial success or failure. Managing debt correctly will allow you to effectively use leverage, one of the most powerful wealth generating financial principles.

Effective debt management will minimize extraneous fees and other charges that chip away at your financial well being, and competently managing your debt will allow you to keep a high credit score. The importance of a high credit score cannot be understated, especially in the really ugly credit situation that has developed over the past couple of years. Don't get me started on that, please.

What is the right debt management solution for you? Determining that requires looking at your financial situation and taking stock of not only where you are, but how you got there. Debt management is one of the things that, to put it bluntly, many people screw up royally. Get it right and you could be living in fat (phat?)city. Get it wrong and bankruptcy could be a few short stops down the line.

One of the biggest problems is that too many people simply don't manage their debt at all. They don't look at what's causing them to be in debt, and they put little or no planning into getting in debt or getting out of it. They're not proactive, they just react to their next Visa bill with a mixture of fear and derision. You can avoid being part of that vicious cycle by actively planning what level of debt you'll take on, and why. Include a percentage for emergencies. How much emergency debt you'll provide for varies depending on your financial situation.

Here are some debt management rules that will help you develop a personal debt management solution -

Debt Management Rule 6
Avoid going into debt for depreciating assets. Unfortunately few people can manage this step as they use one of their largest depreciating assets to get them to work everyday. As the average price of a new car has gone above $25,000, few people can afford to purchase one without an attending rise in their debt level.

There are some ways to mitigate this. You can purchase a used car. Depending on the car, a large percentage of depreciation is gone after the first 2 years. Buying a car that is 2 to 3 years old will still get you a solid, reliable car, with years of trouble free service ahead, and much of the depreciation behind it. The wrench in this works is very low or zero percent financing. You can get low interest, incentive financing plans with some manufacturer's certified used car programs, and promotional financing offers change daily, so check into these before you take on more car debt.

Other depreciating assets are nearly anything besides your house or certain investments. That is where many people make a huge mistake. Not only do they go into debt purchasing depreciating assets, they also violate debt management rule number 5.

Debt Management Rule 5
Don't go into debt for non-essential items. Sadly, much of America (and the rest of the world) completely ignores this debt management rule, treating the next sale at Macy's or Bloomingdale's as a date not to be missed. In the majority of cases, this pilgrimage to the pillars of modern consumerism is financed entirely by debt. Not just any debt mind you, but the 17%, plus a hefty annual fee variety. Although many would argue vigorously the other way, that new sweater just doesn't qualify as an essential item.

Debt Management Rule 4
Time your debt correctly. Timing of debt is very important. Too many people put something on a credit card or other type of credit account when they could have waited one or two days and paid for the item with cash. This is poor debt management. You're increasing your debt levels unnecessarily, and in most cases it is magnified by simultaneously violating debt management rule 1 or 2 (possibly both).

Debt Management Rule 3
Make your debt payments automatic. This automates a good part of your debt management tasks. It will help prevent you from making your payments late or forgetting to make a payment; two of the sins of debt and credit that can follow you around for years. Not only that, but it's a heck of a lot easier than writing all those checks every month.

Debt Management Rule 2
Make money on your debt. Only go into debt when you will earn a higher return on your debt than it costs you. If you go into debt at 7%, you should earn at least 8% on the debt. If you can do this, you've won the debt management game and debt is your friend. You can go deep into debt and come out ahead; way ahead. Unfortunately the majority of people are never able to put this rule into effect, and suffer instead form years of oppressive credit card and other high interest consumer debt that costs, rather than pays, them money.

Debt Management Rule 1
The number one rule of debt management is spend less than you make. That will allow you to follow all the other rules, and use debt rather than having it use (and abuse) you.

You may not be able to effectively develop or implement a personal debt management solution. You may have to retain the services of a debt management professional. There are all sorts of pros, and like any other profession, some are very good, and others border on criminal. Due to the circumstances surrounding individuals seeking debt management services, the industry can attract more than its share of the latter, so be careful. There are definitely benefits to using a good firm. They can get you out of debt comparatively quickly and help increase your credit score.

Keep in mind that there are two definitions to debt management. Some debt management firms negotiate down your debt with the credit card companies or other creditors. After they've done this, they then put you on a strict payment plan through the debt management agency itself. While this can result in your getting out of debt much more quickly than you would otherwise, be prepared to take a fairly large credit score hit, and heaven forbid you should miss a payment or two. You could lose much or all of their fees or other money you've paid in.

Other debt management firms are more akin to credit counseling agencies. Here's what to look for if you're contemplating using a debt management solution company. Although this is not a hard and fast list, and there may be some excellent firms that do not meet some of the criteria, it's a great place to start.

Make sure the company is a member of the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies. Although it's not mandatory, look for non profit firms (Don't ever confuse non-profit with free). Make sure they show exactly what will be required of you and give you a list of their fee structure. Get from them exactly what services they provide and when they'll provide them. In most cases paying for all their services in advance is huge red flag and you should run like the wind should they ask you to do so.

One thing a good debt management firm can do for you is to get your account 're-aged' where it no longer appears as past due on your credit report. This takes some sweet talking to the creditor, but if they have a good relationship with said creditor, it is often done.

Debt management and a good debt management solution can often be the difference between coming out on top financially and slogging through years of huge Visa bills. It's up to you.

July 14, 2008

- How to Make Sure Bank Deposit Insurance Keeps You From Losing Your Bank Deposits

FDIC signing.jpgIf you live in the U.S. you're fortunate to have bank deposit insurance. Depositors in U.S. banks are protected through the auspices of the Federal Deposit Insurance Corp (FDIC), who's been with us since 1933. A product of Roosevelt's New Deal policies, the FDIC was enacted to quell the public's fear of using public banks after thousands of banks failed during the Great Depression.

The way to ensure that you're completely protected by the FDIC's insurance policy is to keep less than $100,000 on deposit at any one institution. The other way to ensure that your deposits are covered is to use both an IRA and a traditional savings account to store your money. An IRA is ensured by the FDIC for up to $250,000.

The importance of this strategy was highlighted this past week when IndyMac Bank, a quasi financial giant with about $19 billion in deposits, was taken over by Federal Regulators as it became apparent they could no longer meet depositor's demands. NY Senator Chucky Schumer (D) took considerable flack for writing a letter that eroded public confidence in the troubled lender. When the contents of the letter reached the public causing depositors to pull their money out or transfer it to other institutions. The day after the letter became public, .5% of IndyMac's deposits were withdrawn by frightened customers.

Although Schumer was fundamentally correct in his accusations, many have questioned the wisdom of calling so much attention to the problems, which in effect created a self-fulfilling prophecy, when depositors came running for their money. The Office of Thrift Supervision opined that "the immediate cause of the closing was a deposit run that began and continued" when the senior Senator from NY sent his letter.

July 11, 2008

- The ARM – What is an Adjustable Rate Mortgage Loan, and How Did it Get So Many Homeowners Into So Much Damned Trouble?

COlumbia_SC_299K.jpgUnless you've been on an extended expedition to places where you can't get CNN, you're well aware that ARM is the abbreviation for Adjustable Rate Mortgage. Just what is an adjustable rate mortgage, how does such a mortgage work, why would anyone want one, and how did they get so many people into so much damned trouble, anyway?

When shopping for a house many people are payment shoppers, just as they are when shopping for cars. It's all about the monthly payment. That's why so many people are attracted to the adjustable rate mortgage loan; it keeps their monthly mortgage payment lower than a conventional, fixed rate mortgage product. The problem is that that's only true for a while. Eventually the mortgage payment will rise, and with it will go the home owner's blood pressure. This is because, as the name suggests, the ARM's interest rate adjusts. In case you had any illusions, it adjusts up, and so does the mortgage payment.

When looking at an ARM, you'll be confronted by a set of numbers used to describe the terms of the loan. They'll be stated in fractional looking terms, such as 3/1, 5/1 or 7/1. This is simply the number of years that the initial mortgage interest rate stays the same, and how often it will adjust after that. A 3/1 ARM will stay at the initial rate for 3 years. After that it will adjust every 1 year.

Just how does an ARM adjust? Do the lenders sit around the bar at the country club and pull interest rate numbers out of their....well, you get the picture. Actually the loan's interest rate is tied to an index, which is simply one of several reference interest rates used by major financial institutions. Depending upon the specific index, it is set by the federal government or the applicable financial institutions.

The most common indices used to compute the mortgage interest rate on an ARM are the London Interbank Offered Rate (LIBOR), the Prime Rate, the Cost Of Funds Index (COFI), and 1, 3 or 5 year U.S. Treasury note rates. Ah, but you won't just pay these rates, you'll pay the index rate plus what's called a margin. The margin is just a percentage over the index rate. So, if you have a 5/1 ARM that's tied to the 1 year LIBOR, and your margin is 3%, when your ARM adjusts, you'll pay the current 1 year LIBOR rate plus 3%. Currently the LIBOR is 3.29%, so you'd pay 6.29%. That rate would hold until the next adjustment period, when it would adjust again. In the case of the example 5/1 ARM, it would adjust in 1 year.

There are several other important things to look at in an ARM. One of these are the caps. An ARM cap is simply that, a cap on how much the interest rate can go up. Typically the loan will have lifetime caps and periodic caps. While caps can be beneficial, they can also work against the borrower if there is what's called a carryover provision in the terms of the loan. A carryover lets the lender carry over interest rate increases they couldn't apply because they exceeded the cap.

For example, if your ARM adjusted upwards but was capped at a 2% increase, your lender could only increase the interest rate upwards by 2% in any given period. If the index went up by more than that, say 3%, a carryover provision could let them carry over the extra 1% increase to future adjustment periods and apply it then. So if the index increased 3% this year, but only 1% next year, the lender could increase your mortgage interest rate 2% each year, because the 1% over the cap they couldn't apply in the first year would be carried over and applied the next. Got that??

People love ARMS, especially when they're starting out in their careers, because as they earn more money they can afford a larger payment. The other common strategy, in fact the one that many people counted on, is to refinance the ARM into a fixed rate mortgage loan before the dreaded adjustment occurs. If you have a 5/1 ARM you have a 5 year window to enjoy the low, introductory rate before the loan adjusts (also called resetting) to a higher rate. Most people thought it would be no problem to simply refinance their mortgage before they got caught with the higher rate, because as home values rose, they'd have enough equity in the home to qualify for a fixed rate mortgage with a low interest rate.

That's how so many people got into so much trouble with ARMs. They did two things that came back to bite them. They got too much house, and they thought real estate appreciation would continue unabated, or at least until they could refinance. The problem arose because in many areas the real estate markets were showing double digit annual appreciation for the better part of a decade. People forgot that that's not really how things work over the long term. Eventually the chickens will come home to roost; and they'll crap all over the coop when they do so.

Here's a common example that occurred in many areas. First of all, you'll note that this was a classic example of “the bigger they are, the harder they fall”. Most of the big problems happened in areas that saw the largest and fastest home value appreciation, such as Las Vegas, south Florida and Southern California. If a borrower got a 5/1 ARM tied to the LIBOR for $400,000 in 2003, in 2008 their ARM is due for a reset. If their initial interest rate was 4.75% their monthly P&I payment would be about $2,087 per month. Now, when their mortgage resets (if it was calculated today), they'll be paying $2,473 per month.

Now $390 a month isn't chicken feed (the price of chicken feed's going up, just like everything else), but it could have been even worse. Many people used special mortgage products, like interest only loans to buy their properties. That keeps the monthly payment low, because you're only paying the interest for the first part of the loan. As with the standard ARM however, the interest only loan will eventually reset, leaving you holding the bag for both the principal and the interest. The increase is compounded because the interest rate can also adjusts upwards at the same time, depending upon the terms of the loan. So, you could be hit with the added costs of repaying the principal, but also an increasing interest payment at the same time.

How the majority of people got into trouble with their ARMs, was they either neglected to refinance in time (very stupid financial decision) or their home's value dropped to the point where they couldn't refinance because they owe more on the house than it's worth (that also had it's roots in a stupid financial decision, although not nearly as poor a decision as neglecting to refinance before it was too late). When this happens, you can't get a new mortgage for enough to pay off the ARM because the value of the collateral used to secure the new loan (your house) isn't enough to cover the loan.

To compound matters, many lenders are skittish that home values will continue dropping in many regions, so they are requiring higher down payments than in the past. If they want a 20% down payment, you'll need 20% equity in your house in order to refinance it. This is something many people just don't have.

So, there you go. That's what an adjustable rate mortgage loan is, and that's how so many home owners got into so much trouble with them. Here's to helping you get debt free, and have a great weekend.

July 10, 2008

- Is Fannie Mae (and Freddie Mac) Done For??

FED_HQ.jpgReports are surfacing this morning that officials in the Bush Administration are meeting to determine the ultimate fate of the mortgage lending giants Fannie Mae and Freddie Mac. This is on the heels of reports from the financial press such as Bloomberg and the Wall Street Journal that the two federally backed corporations are, if not in trouble, at least feeling a bit queasy.

Much of the furor has been caused by statements by former (retired in March) Federal Reserve Bank President William Poole in an with Bloomberg yesterday, and an interview with Reuters at the end of June. In his Bloomberg interview, Poole indicated that Fannie Mae is upside down, owing more than their asset total. The fair value of FNMA's assets fell some 66%, as real estate deflation takes hold in many markets.

William Poole has a long history of criticizing the federally backed mortgage lending corporations, and as recently as last year called for revocation of their federal charters.

He is also of the opinion that continuing to cut interest rates, as the Fed has done for a while now, is not going to help the economy, but rather cause an inflation problem. Here are some quotes from the interviews:

"I think policy has been too accommodative and there is a substantial risk we'll see inflationary pressures more generally unless the Fed reverses."

"The longer they delay, the greater the risk it will get into inflation expectations and wages,"

"I would look for opportunities to raise interest rates sooner rather than later."

"If we pump up demand in these circumstances with expansionary monetary policy ... we'll end up with inflation rather than higher demand resulting in more output,"

"It is adequate at this time to say, 'We'll undo the emergency rate cuts, and define the magnitude (of that easing), and once we get there, we'll reassess the (situation)."

“Congress ought to recognize that these firms are insolvent, that it is allowing these firms to continue to exist as bastions of privilege, financed by the taxpayer,''

``We know in a crisis the Federal Reserve tap would be open,''

According to past statements, Poole is of the opinion the the Federal Government will probably have to take over the two mortgage giants as the mortgage foreclosure situation worsens.

What does this mean for us little people? Well, current Fed Chairman Ben Bernanke feels that the two corporations should be used exclusively to back affordable housing loans. Could they be retooled to serve such a function? Possibly, then the majority of the taxpaying public could see more of their money used for subsidizing low income housing. Currently FNMA repackages about 23% of all U.S. mortgages as mortgage backed securities to be sold in the world's financial markets. One doubts that 23% of all U.S. housing could fall into the affordable housing category, so their allocation would be changing.

How much would it cost the American taxpayer and the economy as a whole if the two were to fail or require a massive government bailout to avoid failure? Currently they are much the same position as many banks. The security they're using is based upon a depreciating asset, in this case U.S. residential real estate. They posted a Q1 loss of over $2.1 BILLION against assets of $42 billion and an outstanding loan portfolio of about $2.7 TRILLION. If only 2% of their loans were to become uncollectable, that would consume all their capital.

As a reference, the current default rate for 8 quarter old loans originated in 2006 is about 6/10 of 1%. Nothing to be afraid of, right? Guess again. Looking at the 8 quarter old point for loans originated in 2000 – 2003 reveals that when those loans were 8 quarters old, their default rate was about .1 - .15%. Moreover, those loans have gone on to default rates of an average of 1%, trending upward. That would mean the newer mortgages are on pace to experience a 5% - 6% default rate, far beyond the point where Fannie Mae's resources would be exhausted. Guess who'll pick up the tab then? Where will all that money come from, anyway?

July 09, 2008

- Stock Market Terms – The Top 10 Terms You Need to Know (Part 2)

wall street buildings.jpgWelcome to part 2 of Stock Market Terms. Here are the next 5 terms you need to know to navigate the stock market. The other 5 definitions are in my previous post on stock market terms here.

Stock Market Term 5 -
Market Order – A market order is an order to buy or sell a stock that will be executed on a stock exchange. When you place an order with your broker that includes no other conditions, that's an example of a market order. You agree to buy or sell a stock at what ever the market price is when the trade is executed. Due to the time difference between when the trade is requested and when it's executed, there can be substantial difference in the price you buy or sell a stock at compared to where you wanted to buy or sell at.

For example, if you're looking at a stock on your computer screen and it's sitting at $20.00 a share, it may have moved to $21.75 from the time you place the order to the time a trader actually buys the stock for you on the exchange. Remember that stock exchanges are just markets filled with buyers and sellers. The price offered and the price that sellers are willing to sell for changes constantly as the trading day progresses.

Stock Market Term 4 -
Limit Order – As the name suggests a limit order is an order to buy or sell some stock that's limited by price. There are buy limit orders and sell limit orders. When you place a limit order, the transaction can only occur when the stock's price reaches, but doesn't exceed a certain price. This can occur either on the high or low side.

For example, you want to buy some shares of XYZ Corp. (You just love that company) and it's currently trading at $10.00 per share. You can place a limit order that will not be executed if the stock is trading at greater than $12.00 at the time the order is executed. That prevents you from paying more than you wanted to for the stock, which can easily occur with a fast moving stock due to the lag between the time your order is placed and when the trade is actually executed on the stock exchange.

You can also use a limit order when selling. Say you're holding XYZ Corp at $10.00 per share. You can place a limit order to sell your shares but set a limit at some amount, say $8.50, below which you don't want the trade to be executed. If XYZ falls below $8.50 before the trade can be executed, the transaction won't be made.

Stock Market Term 3 -
Stop Order – The stop order is basically the flip side of the limit order. With a stop order, you set what's called a “stop price”. When the stock reaches your selected stop price the trade will be turned into a market order, not before. As with the limit order, there are sell stop orders and buy stop orders. These are great for locking in profits or limiting losses.

For example if an investor is holding XYZ at $10.00 per share, they can set a sell stop order at $9.00/share. That way if the stock drops to $9.00 it will trigger a market order to sell. If the investor (you?) bought the stock at $7.00 they are locking in the $2.00 per share appreciation as profit. Keep in mind that they may not receive the entire $2.00 due to the time difference between when the market order is placed and when the trade is executed.

Stock Market Term 2 -
Stop–Limit Order – If you really aren't comfortable with the market fluctuations that can cause your trade to be executed at a price above or below your stop or limit order, you need to use what's called, appropriately enough, a “stop–limit order”. The stop-limit order is a marriage of both types of orders. As with the stop order you set a stop price. The difference is that the when the stop price is reached the order converts to a limit order, rather than a standard market order.

Why wouldn't you always use a stop-limit order? Well sometimes you can't, because your broker prohibits it with certain classes of stocks, such as over the counter bulletin board (OTC-BB) stocks. When they allow you to place these orders should be clearly spelled out in their service terms. The other reason you may not want to use a stop-limit order is that, as with a standard stop order, if the price of the stock never reaches the limit, your trade will not be executed.

Stock Market Term 1a -
Ask – You'll see the term “ask” on your computer screen when looking at different stocks and their activity. The Ask amount is what the seller of the stock is willing to sell it for.

Stock Market Term 1b -
Bid – Bid is the flip side of Ask. It's what the buyer is offering to pay for a specific stock.

That wraps up the top 10 stock market terms you need to know. There are hundreds more terms that are used by investors, brokers, and traders. Like lawyers, they have a language that is all their own. I'll post the definition of more stock market terms in the near future.

July 07, 2008

- Stock Market Terms – The Top10 Market Terms You Need to Know (Part 1)

NYSE building.jpgIf you're investing in the stock market there are stock market terms you have to know in order to understand what the heck you're doing. With that in mind, here is a list of the top 10 stock market every investor should know. I hope everyone had a great 4th of July Independence Day holiday and came through it all relatively unscathed.

Stock Market Term 10 -
Sell short – Selling short (also called “shorting” a stock) isn't a term that applies only to investors under 5' tall. Selling short refers to a strategy where the investor bets that a stock is going to fall, and if it does they'll realize a profit. Basically to sell a stock short an investor will borrow from their brokerage house in order to purchase a specific number of shares of a specific stock. They never actually own the shares, they're on loan to the investor.

At some point in the future, they have to repay those shares to the brokerage house. If they were correct, the shares will cost them less than they paid. For example, if they short 100 shares of XYZ corp at $10.00 a share, it costs them $1,000, except that they don't actually have to pay the $1,000 yet. They are obligated to repay the 100 shares of XYZ at some point in the the future, however. In this example if XYZ corp's stock drops to $7.00 a share, the investor can repay the brokerage house the 100 shares and realize a $3.00 per share profit.

One could have made tremendous profits shorting mortgage company stocks in the past year, but the shorting strategy does have a downside. One downside of short selling is that the upside is limited. You can only earn an amount per share that's equal to the share price. Obviously there isn't any more money in there. So, in this example, you could earn a maximum of $10 per share on XYZ. On the other hand in a traditional purchase your upside profit potential is pretty much unlimited. If XYZ went to $100 at some point in the future, you'd have made $90 a share.

Stock Market Term 9 -
Equity – An equity is analogous to a stock. It's an ownership stake in a company. When an investor purchases a share of stock they're purchasing a portion of ownership in the company. This is also called taking an equity position in the company. It's one of the two main ways a company raises money. Selling ownership in the company is called equity financing. The other way is selling bonds or notes, which are financial instruments that a company promises to repay with interest. Selling company bonds or notes is called debt financing.

Stock Market Term 8 -
Margin – Buying stocks on margin is borrowing money from your broker to buy shares of stock. This is strictly regulated by the Federal Reserve. It is a way an investor can use leverage to grow their investment, because they're using borrowed funds. This is just like when you purchase your house with 10% down, you're leveraging the 10% down payment to control a much larger asset. When the house appreciates you get the benefit of the entire appreciation, although you only paid 10%. As you can imagine, an investor can lose big time if the stock goes down, because you are leveraging both gains and losses.

The Fed requires investors to have a 50% equity in their accounts when buying on margin. So if you want to buy 100 shares the ubiquitous XYZ corp's stock at $10 per share you have to have at least $500 in your account to do so. In reality, because of Federal Reserve regulations, you can't get a margin loan from broker unless you have a minimum of $2,000 in your account.

Stock Market Term 7 -
Call Option – A call option is a contract that two investors enter into where one sells the other the right to purchase a certain security at a certain time for a certain price. The buyer is not obligated (hence the term “option”) to make the purchase, but the seller is obligated to make the sale for the agreed upon price, should the seller so choose. The buyer realizes their profit because they are buying an option to purchase a stock they are hoping they can sell on the open market for more than they paid. It's similar to (but not the same as) employee inventive stock options.

Say XYZ corp is trading at $10 a share and the buyer purchases options to XYZ for $12 a share. The seller locks in a $2.00 share profit because of the $2.00 premium. The buyer pays the $2.00 per share premium as a nonrefundable deposit. Should the stock rise above the $12.00 share price, the option buyer can then buy the stock for the $12.00 agreed upon price, and sell them for whatever the market value is on the day they sell them. The difference between the option price and the sales price is the investor's profit.

Stock Market Term 6
Put Option – A put option is basically the flip side of a call option. It gives an investor the option to sell a specific stock or commodity at an agreed upon price (known as the the “strike price”) at some point in the future. When an investor purchases a put option they are hoping the asset is going to lose value before they exercise the option.

For example, if they buy a put option for, you guessed it, XYZ corp, at $20 a share and XYZ drops to $15 a snare, they'll realize a $5 per share profit, minus the amount they paid for the option. If they paid $2 per share for the option their net profit would be $3 per share. It works like this:

The owner of the put contract buys XYZ at the market price of $15 a share then sells it as per the terms of the put option for $20 per share. They earn $5 per share, but had to pay $2 per share for the option, so they net $3 per share.

Stay tuned for Part 2 of the Top 10 Stock Market Terms - I'll post them tomorrow.

July 01, 2008

- Online Bank Feature – WTDirect – High Interest Savings Accounts

money stack.jpgOnline banks have become very popular in recent years as many banking customers wonder why they should pay for all the infrastructure of a traditional bank. Some online banks are also regular banks, and nearly every traditional bank now has at least some online banking features for their customers, so the line between online and traditional banks has blurred latley.

Today I'm featuring one of the leading online banks, WTDirect. As with some of the other online banking leaders, they have much going for them. Founded in 2006 as a division of Wilmington Trust FSB, have been at the forefront of the online banking space since that time.

In early 2008 they further increased security by adding an additional layer of security to help authenticate their website. This helps WTDirect customers know they are at the genuine website, and not a phishing or other fraudulent site. It's one of the measures they've taken to boost customer confidence and be proactive in the fight against online fraud.

They are known for their high interest savings accounts, and they are consistently in the top 5% of interest rates for U.S. banks. That's great, because my off line bank pays about 40% less than this right now. Some of their other features include:

  • No fees, No minimum to open (Note- To receive the high interest rate you must have a minimum of $10,000 in your account after the first 60 days)

  • FDIC-insured (as are all U.S. banks. That's like when car companies say “We have anti-intrusion, steel door beams to keep you safe. Well, so do all the other car companies, it's required by law.)

  • Higher transfer limits (Transfer up to $500,000 in and $200,000 out)

  • Direct connection to real people through 1-800-WTDIRECT (What? Real people?)

As of June 19th WTDirect is paying a robust, 3.26% on savings accounts, so if you're looking for an on-line bank, and if you're not getting this kind of interest rate, you should be, check them out here.


June 30, 2008

- What is the Cause For the National Debt?

US treasury building.jpgJust what is the cause for the national debt? If you're wondering how our country got into such a financial hole, you've probably asked yourself that question. If you're in debt yourself, you're in good company, because hey, our nation is in the same boat as you are. First of all a definition of national debt is in order to clear up any misunderstandings about what the national debt actually is.

The national debt is cumulative amount our federal government has spent in excess of the revenue it has collected. This is done by the federal government issuing debt securities (bonds, notes, and bills) which are sold to investors. These securities are issued by the Federal Financing Bank and are known as public debt.

In addition to the debt sold to private investors, there are also intra-governmental holdings. These are government securities that are issued by one government agency and held by another. Such debts can include revolving accounts and trust funds. These intra-governmental holdings amount to about 40% of the entire national debt and are actually growing at a faster rate than the public debt portion of the national debt.

The national debt is not the total private debt of U.S. citizens, so don't think that outstanding debt on your Visa is contributing directly to the national debt. It's not, it's only hastening your own financial demise.

Although federal tax revenues have grown to record numbers either in spite of, or because of the Bush tax cuts, depending on whose side of the aisle you happen to sleep on, our federal debt has ballooned out of all proportion to the country's population increase. Although Bush cut the tax rate, the amount of revenue actually grew. This helps to illustrate that if you're trying to increase total tax revenues, you have to cut taxes to the point where the increase in economic activity generated by the larger amount of money in the private sector maximizes total tax revenue; no more and no less. If the tax rate is too high it takes money out of the private sector to the point where economic activity contracts, and tax revenues are actually reduced. If the tax rate is too low, the increase in economic activity doesn't compensate for the decrease in the tax rate.

As I write this our national debt is approximately $9.37 TRILLION. After you complete the task of wiping the vomit from your keyboard, you should know that it hasn't always been like this. If the growth rate of the national debt from 1945 to 1970 was maintained, our national debt would stand at about $1.9 trillion after adjusting for inflation, a staggering sum, but only a fourth of it's actual total. Even taking the growth rate from 1970 to 1975 our debt would be at about $3.9 trillion, or only about half what it is today. What the hell happened that has caused our national debt to explode in such a sick fashion?

A succession of over spending administrations and congresses have combined pork barrel projects, entitlement programs, and defense spending have caused the total of our national debt to spiral out of control. With the exception of the last 2 years of Carter, the first 2 years of Regan and Clinton's second term, the spend happy federal government has devoted most of it's energy to pleasing all those in the private and public sector, in addition to different voting blocks, that have been lining up with their hands out.

The mindset of many people in the country seems to be that of “buy me more stuff and I'll vote for you”. Just as coddling your kids in a search for popularity can run up your visa bill, congress and the various administrations have sought to please this block of voters and that by basically bribing them for their votes with entitlement programs and special projects, and in so doing, have blown up the national debt.

Say what you will about President Clinton, and I've said most of it myself, one thing he did help to do (aided tremendously by the Republican congress, before it jumped on the “let's spend more money” express) was actually reverse the growth of the national debt. As America swings more toward being a nation of citizens that expects to be provided for, (and politicians that are only too eager to comply), rather than one populated by self reliant, independent (I use that in economic, rather than political terms) citizens, the trend of a ballooning national debt will be harder to contain.

Where do we spend our federal dollars that have caused the national debt?

Here is where the Intra-governmental funds are spent according to the treasury's National Debt Schedule from 2007 and the agency that is responsible for it.

Fund                                                                               2006      2007

SSA: Federal Old-Age and Survivors Insurance Trust Fund 1,968,262 1,793,129

OPM: Civil Service Retirement and Disability Fund 687,665 675,936

HHS: Federal Hospital Insurance Trust Fund 319,377 302,186

SSA: Federal Disability Insurance Trust Fund 213,830 202,178

DOD: Military Retirement Fund 190,232 181,810

DOD: DOD Medicare-Eligible Retiree Health Care Fund 92,191 72,740

DOL: Unemployment Trust Fund 74,923 66,213

FDIC: The Deposit Insurance Fund 47,515 46,216

DOE: Nuclear Waste Disposal Fund 39,435 36,482

HHS: Federal Supplementary Medical Insurance Trust Fund 39,248 32,306

DOL: Pension Benefit Guaranty Corporation 35,775 36,635

OPM: Employees Life Insurance Fund 32,965 31,282

OPM: Postal Service Retiree Health Benefits Fund 25,491 0

HUD: FHA – Liquidating Account 22,405 22,030

Treasury: Exchange Stabilization Fund 16,436 15,711

OPM: Employees Health Benefits Fund 15,890 14,822

DOS: Foreign Service Retirement and Disability Fund 14,378 13,876

DOT: Highway Trust Fund 12,205 10,998

VA: National Service Life Insurance Fund 9,752 10,189

Other Programs and Funds 86,373 85,114

Interest on the national debt is a large amount of the debt , and although that percentage has fallen with interest rates the total amount continues to grow, in 2007 the federal government spent $430 billion on just national debt interest payments, compared to $405 billion in 2006. You can see that debt service is a large problem.

The greatest public uses of the national budget and thus the debt are, in order:

#1 Health and Human Services $670 Billion

#2 Social Security Administration $625 Billion

#3 Department of Defense $575 Billion

#4 Treasure Dept (includes interest) $480 Billion ($430 Billion of that is interest)

#5 Department of Agriculture $ 93 Billion

#6 Department of Vets Affairs $ 74 Billion

#7 Dept. of Education $ 54 Billion

You can see that the largest contributors to the debt, by far, are HHS, SSA, DOD, and Interest on the debt itself. So that is the cause for the national debt, but spending too much is the root cause and will remain so as long as we spend so much on ourselves.

June 28, 2008

- Buying a New Car to Save Gas – Does it Make Sense?

Honda Civic Hybrid.jpgThese days many people, sick of the rising price of fuel, are looking at buying a new car to save gas. That’s all well and good, buy does taking the major step of buying a new car just to save at the pump actually make sense? After all, just the hassle of dragging yourself around to various dealerships for an afternoon of abuse seems like a high price to pay, let alone the opportunity cost, depreciation, and interest that go along with a new car purchase.

I decided to look into the whole question of buying a new car just to save gas, because while I would love nothing more than to buy a new car, I find the process of actually doing so kind of revolting, and the thought of increasing my debt on a depreciating asset such as a car seems like financial suicide. Not to say that I don’t like cars. As you can tell from my frequency of automotive related posts, I actually love cars, but like many other loves, my attraction for things of a motorized nature has little to do with their financial appeal.

The first thing you have to examine is your current vehicle. Obviously that will have a tremendous impact on your decision. The gas mileage of your existing vehicle, how much you pay for insurance, it’s age and weather or not it’s nickel and diming you to death all enter into the equation. For the purposes of this discussion I’m going to choose a basic, 5 year old family sedan that actually gets pretty good gas mileage.

Let’s say you’re driving a 5-year old Honda Accord EX. It was one of the best selling cars in 2003 and there are sure plenty of them out there. The EPA combined fuel economy rating, revised for the new stricter standard is 25mpg. If you drive 15,000 miles per year you’ll burn 600 gallons of regular gas.

One note here:
Do not waste your money by burning premium fuel for this car. The manufacturer doesn’t recommend it, and as long as you’re using top tier gas, regular grade fuel has basically the same detergent additive package, so it will keep your engine just as clean as running premium. Only spend extra money to buy premium gas if your vehicle’s manufacturer recommends that you do so.

Back to the Accord. 600 gallons of regular will cost you roughly $2,460 at current prices. Yes, I know that gas prices will probably go up by the end of the year. They’ll probably go up by the end of the month. Lets say you were to trade in the Accord in on another Honda, the winner of my Top 10 Best Gas Mileage Cars (You Can Drive Every Day) Civic Hybrid. Now the Civic Hybrid gets 42mpg combined according to the EPA ratings, so for the same 15,000 miles you’d burn 357 gallons, at a cost of roughly $1,463. This means that you’ll save almost exactly $1,000 in annual fuel costs by switching to the Civic Hybrid over your old Accord.


That’s great, but you have to look at the other costs associated with the transaction. For one, your Accord, if you bought it new is paid off, or just about to be. That means from a pure cash flow basis you’ll be way behind by taking on monthly car payments of $455, assuming you could actually get a new Hybrid for the list price of $23,270, delivered. That also assumes you got a loan at today’s average auto loan rate of 6.48%. Honda actually has special 1.9%, 60 month financing for those who qualify, so you may be able to lower that to (only??) $413.


Average trade in for that car is $9,794, meaning you financed $13,476. If your Accord was paid off and you traded it in, your monthly payment would drop to an almost palatable $264. Edmunds.com lists the average annual cost for insurance, depreciation, and maintenance on the 2003 Accord LX as $3,200. Add that to the annual fuel bill of $2,460 for an annual cost of $5,660.

For the Civic, it’s much, much higher, mostly due to depreciation. Weather a hybrid will still depreciate at current rates is debatable, but there’s only past history to go on, so that’s what I used. Depreciation, maintenance, and insurance for the new Civic Hybrid totals a staggering $22,752 for the first 5 years of ownership. Over $12,000 of that sum is due to depreciation. The 5 year annual average is $4,550 + the fuel cost of $1,463, and the annual interest of $469, for a total annual cost of $6,582.

SO, it’s almost $1,000 cheaper annually to continue driving you old Accord, at least until you start having to fix things. If you have to replace a starter, timing belt, water pump, wheel bearing, CV joint or any one of the dozens of things that can go wrong on a used car as it goes past 150,000 miles, the equation could swing back in favor of the new Civic Hybrid.

For right now if you’ve got a similar car to the Accord, or something that costs less to operate and own, I’d say it isn’t worth it to buy a new car to save gas. If you’re driving a big truck or a car with a big V-8, I’ll see you at the Honda dealership!


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DISCLAIMER - I do this for fun and to pass along knowledge I think others may find useful. I AM NOT A FINANCIAL PROFESSIONAL. Use the information contained herein for personal enjoyment only!

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