My 1st Million At 33 – yes, you can do it too

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  • Archive for June, 2008

    When will housing markets bottom?

    Posted by Frugal on 30th June 2008

    Ed Ross who just had a book “Forecasting for Real estate Wealth: Strategies for Outperforming Any Housing Market”, is saying that NOW is the time to buy and jump back into the housing market. It is my personal opinion that anyone claims such given the preponderance of evidence against him or her is just irresponsible. Yeah, housing prices always go up if your investment horizon is to hold it for more than 20 years. Oh no, 20 years was not a typo.

    Home as an investment vehicle is no different than any other kinds of investment, subjected to considerations of risk versus return. The best advantage is obviously that it affords you the leverage power of 5X to infinite X (if you put zero down, or even doing 125% financing) without the danger of getting a “margin call” (until you cannot make the mortgage payment). As I have explained in “Leverage: the secret of making big money”, those are the major reasons of why your home could be your best investment. But the days for 100% or >100% financing are over. And you only get to do such deals until you get busted and fail.

    But the leverage power that you get from investing/buying a home works both way, magnifying your percentage of potential return or loss. To make a statement of “home prices always go up in the long term” is just totally irresponsible. The only reason that it is true is because the inflation rate is always more than zero percentage in the long term. Obviously, inflation rate is positive because societies have gone away from gold standard to a fiat money system.

    Now if we look at the most recent housing bubble occurred in Japan as an example, we will find that the prices have NOT recovered to the peak of 1991. In fact, prices in 6 largest cities have dropped 64% from 1991 to 2004. And interest rates have been cut to almost 0% and loan terms extended to 90 or 100 years without being able to stimulate the housing economy. If such declines in home prices can happen in a country where the lands on islands are the most precious commodity and population density is relatively high, then there is no reason that it cannot occur here in the United States.

    While I don’t think US will follow the deflationary model of Japan, but rather Argentina’s inflationary track, housing market in nominal prices before adjusting for inflation is most likely to continue to fall towards 4th quarter of 2012. Certainly, my call on the bottom can be wrong, but at least I was intelligent enough to know that we are in the post-peak of housing environment back on August 4th 2006 (in the last paragraph of “Why Stock Markets Crash”).

    My date of 4th quarter of 2012 is based on the following observations. First and foremost, the second major wave of mortgage payment reset is not over until the first quarter of 2012.
    While the peak of the option ARM resets is at about mid-2011. Since option ARM holders can continue to choose to pay the minimum payment on their mortgage until right before their reset, I assume that the flood of REOs (real estate owned by lenders) won’t be in the market until 6 to 9 months after the first missed payment. With the number of the homes potentially going thru foreclosures and downsizing of the banks, I won’t be surprised that the foreclosure process will take a whole year. Therefore, the housing supply situation will probably be very bad in mid-2012 (1 year from the peak resets in mid-2011) until first quarter of 2013. If you add 6 to 9 months on top to the mid-2012 for the time to sell a REO, there will NOT be any real recovery until 1st or 2nd quarter of 2013.

    For the people who are looking to buy, the major bulk of the price declines should have happened by 3rd/4th quarter of 2012 or earlier. I believe that there is still a potential 15% to 20% downside from the current prices. If you’re looking forward to invest, there is just no reasons that you should put your money in a potentially sinking boat.

    Interestingly, from Martin Armstrong’s economic confidence model, the credit cycle probably will bottom near July of 2011, which is consistent with the above timeframe. The above date probably will coincide with a bottom in the financial stocks (or the stock market for that matter) will certainly occur first probably with a minimum lead time of 9 to 12 months ahead of the actual housing bottom.

    With an inflation rate that is probably going to be higher than normal going forward, a low Fed rate will not be helping much on the mortgage rate either. For those housing bulls who think that a low Fed rate will come to rescue, they don’t understand that an initial teaser rate at 1% (while the long term rate was still at 4.5% or above) will most likely NEVER come again. Since long term rates will most likely go higher due to heightened inflaiton, mortgage rates will be higher too. That certainly won’t help the housing prices.

    Posted in Real Estate | 6 Comments »

    Big market selloff after a good fake

    Posted by Frugal on 27th June 2008

    Yesterday was red everywhere. To those who believe in buy when there is blood on the street, I can only say good luck to you. Markets are still trading way above its fundamental. Another 20% from the level at Wednesday is properly more fairly valued. Falling knife is no fun at all. Especially when a stock goes to near zero, it doesn’t matter whether you buy it at 30% “discount” from the peak, or 50%, or 70%, or 90%. In every case, your loss is close to 100%, and the only thing that matters is how much in total you have invested in that stock. Putting $20K at 70% discount is much worse than putting $5K at 30% discount from the peak. Asset allocation almost always is more important than stock picking.

    Lately, it appears that after Fed’s meeting, the first reaction seems to be always a fake. I was itching to short into Wednesday’s higher close, but I decided that I should not get too greedy. Sometimes, it’s really hard to tell the difference between your own emotion and intuition. Emotion is usually wrong, while intuition is more right. Anyway, market reactions to Fed’s talk were certainly very bad. It was the worst of the both worlds for controlling inflation and stock market confidence. Because Fed seems to be or will not be fighting inflation hard enough. First dollar tanked, and then oil price broke new high, and then a high oil price will cause even more economic slowdown. Yeah, and stock markets certainly figured out all four steps of reasoning in a single day. Well, actually there may be one more step of reasoning, but it will require stock markets to plunge, for Fed to reverse themselves, and possibly easing further. It could make a full circle, but when stocks plunge thru the roller-coaster ride, it sure won’t feel good for most.

    At other places of headlines, news continue to be more weird and wild. Bank of America is really closing the transaction with Countrywide without re-negotiation on July 1st. I personally think that deserves a shareholder lawsuit. Countrywide business has certainly materially worsen. My only guess is that there may be lots of help from Fed reserve and Federal home loan bank. Will Fed runs out of treasury bonds to exchange for toxic mortgages, and will the federal bank goes belly-up? With so many cover-ups in financial companies, maybe no news can be surprising anymore.

    My best guess is that some of the banks out there probably really worth a negative value. If you assume that a 10X leverage under regular franctional reserve banking system, lending out 10X money using 1X of the depositors’ money. If your average loan loss is 15% on 10X, you will end up with 1X deposits -1.5X loss = -0.5X. Is that the reason for the negative 130 billions of banking reserves in the US (see below directly from Fed, second column is the non-borrowed reserve)?

    Oct. 42443 42188 41008 1435 824655 126 13 115
    Nov. 42672 42306 40976 1696 825471 315 0 50
    Dec. 42704 27273 40952 1752 823268 11613 3787 1 30

    2008-Jan. 42152 -3507 40519 1633 821416 44516 1137 0 6
    Feb. 42856 -17301 41146 1709 822524 60000 155 0 3
    Mar. 44259 -50264 41269 2990 826999 75484 1617 0 6 16168 1249

    Apr. 43535 -91875 41607 1928 824420 100000 9624 0 21 25764 0
    May 44158 -111622 42050 2108 826473 127419 14076 0 47 14238 0
    2008-Apr. 23 42643 -90384 40926 1716 823487 100000 9286 0 22 23719 0

    May 7 43828 -85367 41845 1983 823663 100000 11622 0 31 17544 0
    May 21 43406 -111012 41413 1994 825186 125000 13976 1 42 15401 0

    June 4 45441 -130855 43087 2355 830242 150000 15936 1 66 10295 0
    18p 41805 -130140 40030 1775 830797 150000 13260 112 69 8505 0

    I’m not sure if you notice the pattern. Stock markets seem to be in sync with the fall in reserve. The only time that is not in sync is when Fed had an emergency cut, and markets rebounded from March low. The rest of the time, it’s pretty much uni-directional, or down.

    Really, it’s simply unthinkable that having my money deposited in the bank, while the bank’s got nothing to back it up. Where is my money? The modern technologies have transformed the financial industries. Your total asset at a bank is only as good as an electronic record. With the barbaric gold going up more than $20 an ounce during the big sell-off of the market, maybe it’s time to re-think what really constitute as the real wealth.

    Posted in Investing | 1 Comment »

    The Upcoming Green Play

    Posted by Frugal on 25th June 2008

    With the presidential elections going in full force, candidates are trying to look smart, advocating clean & green technology to solve both oil prices and global warming.

    Probably starting September to next year, I believe alternative energies should exhibit a good performance going forward.
    Regardless of which party gets into the White House, alternative energy sectors are bound to benefit from all the political subsidies and focus. To stay clean and/or green, natural gas producers,biodiesel, clean coal technologies, wind, solar, and even geothermal or ocean energy companies will probably benefit. While US has always tried to avoid nuclear energy due to its waste disposal problem, many other countries are racing ahead to build more nuclear plants. Nuclear companies may not get a big boost from US, but eventually it will catch on.

    Having said that, I would also say that with Democrats having a much better chance (at least in my opinion) of getting into White House, one must be really careful about the potential windfall profit tax on the big oil companies too. A bigger tax bill on oil will most likely increase the gasoline prices, which will in turn further depress the economy, and domestic oil demands. And Democrats will probably tax the rich more, which in the past, has led to a reduction of economic activities. Higher taxes, more regulation, higher inflation. It’s hard for me to be optimistic about government doing the right things to fix all of our problems. Of course, they or Obama says that it’s “change that we can believe in” or “Obama for change”. Well, changes are certain, but they’d better be making things better, not worse.

    Anyway, to participate in the alternative space, one can either buy GEX or PBW or even NLR (nuclear) for the ETF. I currently don’t own any of those mentioned, but I look forward to purchase them. As on individual companies, probably one would want to focus on natural gas and solar energies once they pull back. Since they were the leaders of this pack, I would suppose that they would lead again once alternative energies are in vogue (if not already). Just remember to buy several companies if you are into stocks yourself. For example, the relative performance among solar energy companies: FSLR, ESLR, SPWR, STP are very different. Picking the wrong company will definitely make your portfolio to under-perform. ETF and mutual funds will probably serve you better.

    Frugal at

    Posted in Investing | Comments Off

    Fed meeting this week, with markets on hold for two days

    Posted by Frugal on 24th June 2008

    The trading volume for today and tomorrow before the fed meeting should be light just like yesterday. Market participants tend not to bet big before the resolution of the federal reserve meeting.

    Obviously, I don’t expect Fed will raise interest rate in this meeting to “combat inflation” as if that’s really their goal. In fact, I doubt that they will raise interest rate in August either. Fed is in a bind between “combating inflation” and reducing the impact from the burst of housing bubble. Unfortunately, I really can’t see what good news Fed can bring to this market. From the recent past talks, markets simply go down further every time a Fed governor opens their mouth. In fact, to be a Fed governor, you really have to be good in talking. How else are you going to talk down the inflationary expectation, while everyone on the main street is getting used to all the fuel surcharges in all kinds of services including pizza deliveries? Therefore, I’m guessing that the main message from Fed this year will be
    1. Slowdown will temper down inflation.
    2. If (and only if) crude oil stops going higher, the year-to-year inflation contribution from crude will no longer contribute to the overall CPI. (Yes, if crude stays at $130 from today to next June, there is no inflation, or price increase.)

    Unfortunately, in the coming year(s), there will be a lot more of cost pass-through from basic materials all the way to the end consumers, since businesses are realizing that high prices of crude oil are here to stay. The cost-push inflation will be taking the rein of the economy. At that time, I’m guessing that the main message from Fed next year could be arguing the pass-through of PPI to CPI will “soon be over” and “not expected”.

    As I have argued 2 years ago before the burst of housing bubble, inflation would be almost for sure be heightened for the next decade to come, in order to alleviate a dramatic fall in the inflation-adjusted housing price to a much less price adjustment in the nominal housing prices. The primary goal or the hidden agenda from Fed will certainly be creating lots of inflation, especially the most needed wage inflation (to support housing markets). However, wage inflation is very hard to come by in the globalized economy without lowering US dollar in the process. Poor Bernanke really has got the hardest landing job ever in the US history. He will need to do a lot of double talks, losing his credibility all the way until he gets replaced eventually.

    I hope that the markets or PPT (Plunge Protection Team) will do a dead cat bounce again. I have not hedged my long bets enough at all. Earning season is just right around the corner in another month. I’m expecting more dreadful writedowns from financial companies and more economic slowdown from all the companies. Better get out of the way before all the bad news come crushing the markets down.

    Posted in Market Pulses | Comments Off

    The purpose of this blog

    Posted by Frugal on 23rd June 2008

    With the blog reaching more people now, it’s a good time to reflect on the past.

    When I first started this blog, I never thought that there may be quite some ambivalence triggered among readers and other personal finance bloggers alike. After all, you can’t buy much with one million dollar these days, especially in the high-priced housing area in California. Besides I have always felt personally that the amount of money is just a number on the paper. Any other number such as 500K or 200K is just as good as 1 million. I have never attached any importance to such numbers. Choosing the title as “My 1st Million At 33″ was simply a marketing whiz, but definitely not a boastful gesture which has never entered my mind.

    The other subtlety that few people have noticed in the title is that it stated “My 1st Million At 33″ instead of “My 1st Million By 33″. I used “at” because I know so well that money comes and goes, and I don’t want to misrepresent myself as saying something untruthful. Certainly, I could have lost enough to let my net worth go below 1 million. Furthermore, the word “at” reflects my attitude on life. Life to me is about a journey of how we live daily, rather than a series of goals that one has to reach for. Every day in life, we shall strive our best. Do not waste your time to dwell in the past glory nor sorrow. Do not waste your time on futile worries or day dream about future extravagance or success. TAKE ACTION TODAY to improve your current and future life.

    Changing the title to “My 1st Million At 33 – yes, you can do it too”, fully reflects my original and continual purpose of blogging on this site. Yes, I have always believed in the best of everyone. I have always believed in everyone’s potential to go far and beyond, and I have never doubted that any of the visitors coming to this site can achieve further financial success (if not already) than I can. Yes, you can do it too. In fact, you can do better.

    Having said that, a financial success is not easy by all means. Achieving any kinds of success requires lots of hard work, perseverance, and some luck. I only hope to inspire the younger generation, or older alike. Yes, it is possible. And yes, given enough time, you can do it too. Even if you doubt it, I won’t doubt you.

    Have a long term plan. Start daily inching forward. And whether you can reach 100K or 1000K, or several millions, it doesn’t matter that much. What matters is that you’ve gained more financial independence for yourself throughout years of efforts, instead of staying at the same old comfort zone and do nothing about your own personal finance.

    (From Nike, ) Just do it.

    Posted in Miscellany | 4 Comments »

    Hindenburg omen sounded again for stock markets

    Posted by Frugal on 20th June 2008

    Hindenburg omen is one of the rare stock market crash signals. The fact that it is rare makes it even more significant. A rare signal or event in the Shannon’s information theories (the backbone of the modern day digital communications) is considered to contain higher amount of information. And this information from Hindenberg’s omen is obviously not a good news.

    I have written about Hindenburg omen (H.O.) before on my site at in 2006. Although in 2006 H.O. signal did generate a 7% declines out of the stock market, it was by no means a “stock market crash”. The current Hindenburg omen was triggered on June 6th 2008, and has been confirmed by subsequent repeated H.O. signals. The previous confirmed H.O. was in October of 2007, and stock markets definitely had a serious correction afterwards. The success rate for H.O. is only about 25%, or 1 crash in every 4 signals, and it will last for about 120 days during which it could crash. But if you could avoid those mini-crash period as a buy & hold investor, you obviously will do so much better.

    If you study the details of H.O. signal, it indicates an unhealthy stock market advance, with both new 52-week highs and new 52-week lows among different companies going on simultaneously in the stock market. The resolution for an unhealthy stock market is often a substantial decline (if it happens). It’s obvious that in the current state of stock market, the financial companies are breaking new lows, while energy stocks are breaking new highs. Isn’t that a bit scary with the crude oil advance stopped at $140? What’s going to propel the general stock market indexes higher, when crude oil is knocked out by the fear of a slowdown in global growth?

    With stock market technicians that I follow, Frank Barbera, Bill Cara, Jack Chen, Bob Hoye, and John Hussman all jumping into the bearish camp, I am fearful that a decline is just about anytime.

    You’d better watch out, you’d better not cry …. Unfortunately, I am guessing that Bernanke Santa Claus will not be able to save this one.

    Best luck.

    Frugal at

    Posted in Stock Market | 4 Comments »

    Another down day

    Posted by Frugal on 18th June 2008

    Markets are going down. What’s new?

    If you haven’t got out, I must say that I’m sorry. Because it’s probably going to get uglier before it gets better. The headlines is filled with bad news. Earning is down from Fedex, Goldman Sachs, Morgan Stanley, Fifth Third Avenue, etc. Home depot, and Walmart are cutting down expansion. Banks are facing to bring even more level 3 assets back to their balance sheets. It’s amazing that stock markets have not collapsed. And I don’t think the Plunge Protection Team will be able to save the stock markets at all, unless PPT is ready to monetize and buy up the market.

    I should be shorting more. Unfortunately, I have been too busy with my work. Only shorted enough to make peanuts.

    There is definitely a second wave of liquidity crisis going on behind the headlines. No one is talking about the big elephant in the room, until the greedy brokers get out before their clients. I am now expecting Washington Mutual, Indymac Bank, Downey Financial to probably fail and taken over by FDIC, unless a suitor comes along. Everybody in financials is drowning however. Whethery they go down along or go down together, the results are pretty much the same.

    Good luck. Hope that your portfolio doesn’t get whacked. And I know there are people who are advocates of buy and hold and index funds. Wait until 2011 and see if they will be even smiling. The down wave going towards 2011 is going to be the biggest down wave seen in the last 50 years probably. Only 1929 will be comparable to the current situation. Modern finances have improved a lot. So I don’t expect people’s lives to get destroyed like in 1929. However, it doesn’t mean that you won’t lose BIG money.

    Posted in Investing | 7 Comments »

    Housing market will have a very cold winter

    Posted by Frugal on 17th June 2008

    Mortgage rates have gone up quite a lot along with the fall in bonds. The rates have been rising across the board (by almost 0.75% now).

    I cannot understand who is selling the bonds, along with $US rising (just a little bit). This is truly a weird combination. Where is the money going?

    The only sensible scenario that I can come up with is that Fed is lending all the financial institutions treasury bonds on its book in exchange of toxic mortgage bonds. The financial institutions are selling the treasury bonds in exchange for cash right away to resolve their credit crunch to satisfy cash demands from customers or depositors. Since all the transactions are domestic, $US exchange rate is not affected much. In effect, Fed is indirectly creating these new cash through these financial institutions, and supporting the solvency and liquidity of the financial institutions.

    Still, eventually (or immediately) these new cash will find a new home. Apparently, they have blown up the commodity prices.

    Fed is obviously trying to prevent housing deflation. Apparently, they have opted to save the greedy bankers and brokerage houses, and dumped the homeowners. To bring down the mortgage rates, Fed should actually buy up treasury bonds and/or mortgage bonds. Reducing the supply of bonds will increase its price, and therefore reduce the yields. Of course, such monetization effort will result in the immediate increase of cash circulation.

    I guess Mish’s deflationary thesis has been right on. Cash is in demand. Not bonds, not stocks, not gold (yet) either. Before cash becomes trash, cash is still king. But I don’t think Fed has any ways out of this mess, besides trashing US dollar (or cash).

    Posted in Mortgage, Real Estate | 1 Comment »

    Crunch time at my work

    Posted by Frugal on 16th June 2008

    Sorry. I just couldn’t find time to blog, after working some 24+ hours through the weekend.

    I’ve got a rare last minute problem found in my delivered work. And I need to fix it ASAP.

    I should be back blogging tomorrow or Wednesday, I think.


    Posted in Announcement | Comments Off

    Tips from Selling My Old Camry

    Posted by Frugal on 13th June 2008

    I finally sold my 1994 camry for $2500.

    It’s not a bad price, even though Kelly’s Blue Book showed a higher price of some $3000. These days, it’s hard to sell any car, whether it’s new or used. Car sales are way down.

    I have advertised my car at craiglist which is a great advertising resources. Got a lot of email inquiry, but much less actual physical visiting. It appears that there are many people who wanted to get a car for close to nothing.

    Here are some tips that I’ve gathered around for selling used cards:
    1. Price competitively. There is a good demand for cars priced from $1500 to $3000. That also means that you probably won’t get any top dollars if you are planning to sell your new car just after 2 or 3 years.

    2. Washed, waxed, and detailed. Appearance matters. Remove all junks.

    3. Keep a good records of maintenance.

    4. Smog your car, and sell it in 90 days (at least in California). A car that has passed the smog, or guarantee to be smog-free, gives the buyer a peace of mind. A report from mechanics is pretty good too.

    5. Advertise your car in every way possible. Choose the venues where people are looking for bargains. You know, for people buying an used car, they are obviously bargain hunters. You should think like a bargain hunter, and put your ads where people will look at.

    6. Yes, you should add in your price that it’s NEGOTIABLE. OBO, or best offer is good too.

    7. Make all of your buyers to come to see your car with prepared CASH, and have all of them come on the same day, preferably one after another. This way you have a little upperhand in price negotiation. Yeah, you can definitely tell your buyer that if you don’t buy it now, it could go to the next buyer.

    So now I end up with just 2 cars. My insurance only went down by about $150 annually. I guess they figured that I could have only driven so much. I still have a camry that I drive. I’m contemplating when I should sell it and get a tiny commuting car, such as Smart from Mercedes, which gives some 60 miles per gallon. Don’t you wonder why car manufacturers don’t make cars like Lego blocks, so that you can drive just half of the 4-seat car, when you’re commuting, or even add another 2-seat to get to 6+ seats whenever needed. Wouldn’t that be extremely energy-efficient? Just a thought.

    Posted in Miscellany | 4 Comments »