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  • Archive for April, 2009

    If gold/silver is good, diamonds must be good?

    Posted by Frugal on 27th April 2009

    I have been asked by several people (mostly females), my wife and my mother-in-law included, that if gold/silver is a good investment, then diamonds must also be a good investment. And my answer is always an emphatic NO!

    Yes, diamonds are very precious in the sense that they are probably one of the most expensive items per weight, much much more expensive than gold indeed. However, the value of an item is always subjective according to the observers. The value of diamonds and the sale of all kinds of jewelry go up in peace and economically prosperous time. However, they tend to go down in economic distress. In fact, in respect to investment, diamonds function more like investment in art works. The value of arts go up in a stock market boom, and they go down when stocks go down. In fact, artwork boom is the last indicator for a stock market making its final top back in 2007.

    Why the big difference? The people buying diamonds thinking that they are buying into same class of investment as gold/silver do not understand what money means. One of the most important criteria for gold/silver being used as money historically is because of the divisibility of gold/silver metals. Been able to divide gold/silver into smaller pieces easily and still retain exactly the same value when summing back up is extremely important to function as money. Can you divide your 1 carat diamond into 0.5 carat diamonds and still get the same total for the values of the two pieces of diamonds? NO! Because 1 carat diamond is much more rare than 0.5 carat diamond. The price of rarity is higher in the eyes of beholders. Because of that, diamonds can never function like investment in gold & silver.

    So if you like to buy diamonds, fine, just buy them. But don’t kid yourself into thinking that their value will go up along with gold/silver. In fact, the opposite is more likely to be true. Gold usually outperforms in a wild inflation and also deflation. Silver tends to under-perform gold, until the last final stage of gold bull market. Diamonds on the other hand will only perform in an inflationary environment, not in a deflationary environment, simply because diamonds are not money.

    Posted in Gold/Silver | 3 Comments »

    A decision guide on what you should do for your home/mortgage

    Posted by Frugal on 20th April 2009

    Here is just some decision flowchart on what I think you should do for your home/mortgages in many circumstances. It’s based on my personal opinion, and you should always consult professionals & legals when it applies. There aren’t many solutions for you besides out-right sale, short sale, refinancing, loan modification, foreclosures, and walkaways. But you should choose carefully on each option. Anytime you choose short sale, foreclosure, and walkways, it’s implicit that you will lose all the amount of any down payment that you have put into the home when you first bought it.

    1. Case #1: if you are “underwater”, meaning that your loan amount is greater than your home market value, your decisions should be dependent on your loan type.
      1. Case #1A: if your loan was a PURCHASE loan, meaning that you have never refinanced your loan since your home purchase, in many states such as California, where there are laws protecting home buyers from loss of incomes or jobs, you should probably walk away from your home. In such cases, you should be protected by state laws, and you should not be responsible for lenders’ loss. The laws however cannot protect you if you have lied about your income and assets on your loan application. Please make sure that you consult lawyers for specific details, because I cannot be responsible for your legal troubles. Please NOTE that if you have a second loan, but the second loan was a purchase loan which you’ve probably paid PMI insurance on, you should still be okay. However, the same does NOT apply to home equity or piggy-back loan. Home equity loans are recourse loans, and it means that banks can theoretically or legally hunt you down, extract all of your current assets and future salaries, until you file bankruptcy.
      2. Case #1B: if you have more than one loan, and the second loan is home equity loan, you should probably try a short sale first, and then try doing a loan modification. The short sale is better in the sense that your credit is just partially ruined. The banks need to take their deserved losses. If you cannot do a short sale, you should try to modify your loan thru Obama’s home affordability program. With this method, I believe that your credit profile stays the same. However, you’re stuck with your own losses, banks get off the hook, and taxpayers may be stuck with your losses if later down the road, you walk away.
      3. For both of Case #1A or #1B, you may want to stop or slow down on paying your first loan or the purchase loan, so that you can force bank to come to the negotiation table with you. However, you will be risking a real foreclosure. Also, in case #1B, you should continue paying down your home equity loan regularly because it’s a recourse loan.

      4. Case #1C: if you have refinanced your home loans, then you’re out of luck. Legally, you’re 100% responsible for your loans. Nevertheless, you should try contacting banks for short sales, and doing loan modifications, like in Case #1B. Both will be to your advantages, if they go through.
    2. Case #2: if you are at about the same the “water level”, meaning that your loan amount is about the same as your home market value, you should in general try to refinance, and/or short sale if you decide that you don’t want to keep your home.
      1. Case #2A: If the prevailing rent is still higher than your home cost: mortgage payment after tax benefits, plus any property tax, or potential interest credits, then you could try wait out the downturn (although I think the downturn will be much longer than anyone expects). You should at least try refinancing and see if you can lower your monthly cost. The Obama’s home affordability program will allow refinancing of up to 105% of your home value, if your mortgages are owned by Fannie Mae or Freddie Mac. You can check that at the home affordability page.
      2. Case #2B: If the prevailing rent is lower than your home cost, I think you should try to do a short sale, and forget about doing any refinance. Your short sale will be easier to go through bankers. And this way, it will prevent you from suffering further home losses down the road.
    3. Case #3: if you still have substantial equities in your home, meaning that your loan amount is smaller than your home value, you are financially sound. I would advise to do refinancing through the normal channels, cash out any equities that you can, and hold on to your cash in 5-year US treasury for another two to three years for better opportunities. The best refinancing time is either now or possibly in Oct/Nov if stock markets take a dive at that time.

    Here is the Obama’s home affordability page, in case you don’t know about it. If you follow thru the links, you can find out how to verify that your loans are owned by Fannie Mae or Freddie Mac.

    And for potential new home buyers, my advice stay the same: just stay put and wait for year 2012. Your patience should be rewarded (in my opinion). That $10,000 home buying tax credit cannot come close to the amount that you may gain through further home value erosion.

    Posted in Mortgage, Real Estate | 3 Comments »

    How long will the good time last?

    Posted by Frugal on 9th April 2009

    As I have said that stocks should rally towards April, it had arrived quite a bit late than I expected, but arrived nevertheless. The question is how long will it last, and how far will it go?

    My original tentative sell-out date was about third week of April, and it’s almost here. Since the stock markets started to rally later than I have expected, I’m willing to stay out partially into May and possibly beyond. The counter rally will continue to be VERY BUMPY with violent pullbacks and also dramatic rises. However, this is a COUNTER RALLY. What I meant by that is that I believe that there will be new lows probably within three years (at least on the gold-price adjusted basis).

    It’s probably safer in my opinion to pull out maybe one fifth of your stake before third week of April. Frankly, I don’t think one would miss out too much even if the counter rally continues beyond May. S&P 500 most likely will not exceed 1000 by too much. That’s some 15% left out, but would be better than another 30% to 40% cut in the event of new low.

    On a sector basis however, oil and especially natural gas sectors, and also high-tech and possibly retails will rally further than general stock market. Therefore, it begets one to possibly stay on but with extremely watchful eyes. Trade if you must, since the rally won’t do much for buy-and-hold investors.

    The absolute pull-out date I believe may be in mid-October. It’s really too far to project in this volatile market. However, the further out that one goes, the more danger of facing a cliff. Most people believe that the cliff was behind us. However, I think with option ARMs 5-year initial teaser rates expiring this year and the next, coupled with rising unemployment rate, what FASB and banks cannot do even after changing mark-to-market rules, is going to be rising prime mortgage defaults. Eventually, one cannot hide from the real losses. Since stock markets look forward, I believe that the drop may start at the beginning of the teaser rates expiring in the fourth quarter of 2009, rather than at the end near about late 2011. Note that the first massive wave of subprime mortgage hit throughout the year of 2007, but stock market fell in the third quarter of 2007. Again, I assume that stock market participants may be slightly smarter this time around, and begin to sell in drove earlier. The only positive factor that works in favor of this market is that it had dropped very far very fast last round. Therefore, maybe the next cliff-drop will be “less painful”.

    For the new/upgrade home buyers, patience will be required. I’ve said many times that the first real bottom for NOT arrive for home prices until 2012. Beyond 2012, home prices probably will just limp up and down slowly along the bottom. Since in all human history, a financial bubble would never come back in fashion after 20 years of its burst, you can totally forget about real estate investing with a negative or cashflow breakeven basis (accounting for tax gains) until year 2006/2007 + 20 years, which will be about 2027. (No, I’m not kidding, and I hope you would listen to me on this for your benefit.) In the unlikely event that the USA goes into very high inflation (8+% annualized), there is a chance that buying home will give you some return through leverage of mortgages. However, more than likely, in such event, hot money will rush into other inflation-fighting assets, rather than homes, especially I believe that long term interest rates will sky-rocket under such circumstances, sapping any potential demands from investing in real estate for inflation protection.


    It’s easier to predict for a slow-moving train wreck (real estate) than a fast-throttling train with low and foggy visibility (stock markets). Let’s us take a step at a time slowly at this dangerous time. I beg your pardon, but the worst is ahead of us, not behind. It’s sad to see that first Black American president may get sacked totally by the worst ever credit bubble, which may in turn, prevent the next Black president to come for quite a number of decades to come. I truly hope that I’m wrong on my dire predictions, but one needs to take actions based on the facts, not based on the hopes.

    Best luck.

    Posted in Investing | 4 Comments »