Wednesday, July 30, 2008

Safeway's Lucerne Yogurt Downsized But Price Unchanged

A few days ago I noticed that Safeway's Lucerne store brand of yogurt had a brand new package and look and sported the words "New smooth and creamy recipe". What I didn't notice until my father-in-law pointed it out this weekend is that the new yogurt container is also 2 oz. smaller than the old packaging. Of course, Safeway did not change the old price - effectively increasing the price per ounce by 33%... I was planning a large post about this, but JD of Get Rich Slowly beat me to the punch yesterday. Darn, I got scooped.

What Safeway did is not fraud, however, it clearly misled customers like me who have been buying the product for years and did not notice the change. Essentially, they pulled a fast one on us. There should be a law that requires manufacturers and retailers to clearly state in bold letters on the packaging if they decrease the product size from previous levels . The language should be simple and clear, something like: "warning: container now smaller". God knows they shout it out from the roof tops every time there is a slight increase in the size of the package. They should be required to do the same when package size is reduced. Specifying the new size of the package on its own is not sufficient, since consumers do not have a frame of reference unless they happen to remember the size of the old container (and who on earth does or can?). The only reason my father-in-law noticed the difference is that a new and old container were sitting next to each other in our fridge.

Anyway, I think that instead of its "new smooth and creamy recipe" tag line, Safeway could have chosen a more imaginative description, so I thought I would suggest a few ideas:

"Now more expensive!" - OK, unimaginative, but factually accurate.
"It's now richer, but you're not"
"There's one born every minute, and your number is up"

Let me know if you have any good new tag lines in mind. Maybe we can get Safeway to adopt one of them...

Monday, July 28, 2008

The Great Money Give Away

As I write these lines Congress is taking it upon itself to give away my money. It is doing so cynically and under the guise of helping out the needy. It is doing so through the insidious instrument of a housing bail-out bill. I first warned about this possibility back in April 2007, in an article titled A Subprime Bail-Out? Hell No! However, Congress is coming out with a resounding "Hell, Yeah!" and the President announced that he will sign the bill. What am I upset about? Here is a brief summary.

During the housing boom, me and millions like me sat on the sidelines. We all saw what was going on and knew that a bubble was being inflated. We either could not afford a home because of rising prices or we decided that house prices were so unrealistic that they were getting set-up for a dramatic decline. For whatever reason we did not jump into the market. In my particular case it was a combination of both reasons. Living in the San Francisco Bay Area means that even with two good salaries, buying a decent house (newer than about 50 years old and in an area of town where no drug deals are happening in broad daylight) is a just barely within our grasp, and not without considerable financial risk. We also looked at the price appreciation and judged it to be unsustainable. Congress is rewarding us for our financial prudence and skepticism by taking our money and giving it to the beneficiaries of the housing boom.

Those folks who bought more house than they could afford, who took out ridiculously structured mortgages knowing full well that they were accepting a major economic risk, those who laughed at us for not getting in on the get-rich-quick real-estate scheme - those are the people who are getting our tax Dollars, to assist them as their house of cards comes tumbling down and their exotic mortgages are being foreclosed.

Essentially, Congress in its infinite wisdom, has turned the housing market into a "heads you win, tails I lose" proposition for us lowly renters, who never bought a house. If house prices continued to appreciate do you think Congress would come out with a rescue package for renters whose prospects of getting a house became slimmer? Do you think Congress would ask home owners to share their outlandish real estate profits with those of us who rent? So, home owners got all the returns during the boom and we are getting the downside risk during the bust. This is Washington justice for you, also known as sheer lunacy.

The New York Times published a detailed article covering the specifics of this wealth transfer bill, under the title "Housing Bill Has Something for Nearly Everyone". Read it and you can decide for yourself. My own very strong opinion is that government should stay out of the asset markets with the exception of providing robust regulation.

For you guys out there who will profit from this new housing bill, enjoy my money.

Friday, July 25, 2008

A $10,000 Windfall: What to Do?

Last year my uncle, who I loved dearly, passed away from lung cancer - well, that's what you get when you are a surgeon who knows better but choose to smoke all your life. Anyway, in his will my uncle left me, my brother and my sister a sum of $10,000 each, and last week I received this amount by cashier's check.

The circumstances of getting the money suck, but now that I got it, what should I do with it? For now it's just sitting in my bank account earning interest at a rate of about 3 cents a decade. If we had any debt I would use the money to pay it down. But we have no debt. I am not a big believer in using windfall money to go on a shopping spree. I am not the shopping type, and we pretty much buy everything we need or want from our regular income. I suppose I could use the money to buy a new car - but my current vehicle still has 4 wheels and it moves forward when I press the gas pedal. I think the junk car stays.

I guess I could invest or save the money, that's my inclination anyway, but it seems like something is missing. There should be a bit more to this than sticking a $10K check into some index funds. I'm still trying to make up my mind. Any suggestions out there?

Wednesday, July 23, 2008

Where Gas Costs Most, and Why It's a Bargain...

The NY Times published a little survey of gas prices around the country. At first glance I immediately started to grumble and feel abused. As I suspected! Prices in California are highest in the nation! Those lucky stiffs in the Mid-West have it so good they pay at least 20% less for their gas.

BUT my feelings turned around pretty quickly when I looked at the other two charts published as part of the same survey: median income and percent of income spent on gas... well, now that those two little pieces of data are added into the picture, it's time for me to shut up and give thanks. It turns out that some of those folks who pay least for a gallon of gas are spending a very high percentage of their income on the stuff that makes their cars go. Up to 16% in some areas, compared to the Bay Area's meager 2% or so.

Now that's what I call expensive gas. I think some of those guys should consider buying a hybrid.

It would be interesting to look at the relative cost of other items in the same manner. Two examples that come to mind are housing and childcare. I think that in Bay Area we are probably paying a dramatically higher percentage of our income on housing than most folks around the country, and the same is likely true for childcare. Maybe I'll take up the challenge and play a bit with census data to figure it out for myself.

Monday, July 21, 2008

iPhone and the Road to Financial Ruin

A week ago on Sunday the family and I took my folks - who are visiting from out of town - to lunch in Palo Alto. The restaurant we went to was close to an Apple store, where a line of about 100 people snaked out the door and around the corner. Californians in their multitude stood around for hours in line to get themselves a brand new iPhone. On Monday, I witnessed the same phenomenon at the Stanford Shopping Mall, where another Apple store is located. It occurs to me that the line for the iPhone symbolizes much that is bad about U.S. consumers and the reason for why our economy is in such dire straights these days.

To be pointed about it, the American consumer is akin to a five year old who is unable to delay gratification for even a few days. They want their toys, and they want them now. Tomorrow will simply not do and next year is completely out of the question. How is this a problem, you ask? It's not that I have any problems with the iPhone- in fact, when the lines disappear I will probably get one myself - it's just that the willingness of people to stand for hours in line just to get the latest toy - be it an iPhone, a Wii console, a Harry Potter book or a ticket to the newest blockbuster - is simply irrational. Guys, those toys are not in short supply. Go to your nearest book store and ask for a Harry Potter and you'll no doubt get one. Wait for a few weeks and the same will be true for the iPhone. Why the rush?

This is probably not a major issue when you are talking about relatively low cost items, but the same phenomenon is what got us into our current economic malaise. I can't afford to buy a house - never mind, I'll take a crazy loan that I can't repay and get one anyway. I can't delay my satisfaction. I can't afford to take a Caribbean vacation. Never mind, I'll just put it on my credit card and pay it off twice over with interest. I can't save for retirement because I have a burning desire to buy a new pair of shoes, car, big screen TV, whatever. My immediate wants far outweigh my future needs.

Many Americans have apparently lost their capacity for rational thought and delayed gratification in the face of consumer culture. So, get it all now if you must, but remember that the time will come when the Piper will demand payment in full.

On an unrelated note, check out the latest Carnival of Personal Finance where my recent post about the benefit of the long bear market is also included.

Wednesday, July 16, 2008

All Hail the FDIC!

It's old news by now - IndyMac, a major mortgage lender has failed. Industry insiders believe that before all the economic mess is over, many more banks will follow in IndyMac's footsteps and go belly-up. Amazingly, most people who have money in these failed banks will lose exactly: NOTHING. This is all thanks to a very smart invention of the U.S. government: the FDIC. I know, it pains and amazes me to admit it, but sometimes government can... hrrr... do acceptable work...

So who is the FDIC? Here is how that agency introduces itself:
"The Federal Deposit Insurance Corporation (FDIC) preserves and promotes public confidence in the U.S. financial system by insuring deposits in banks and thrift institutions for at least $100,000; by identifying, monitoring and addressing risks to the deposit insurance funds; and by limiting the effect on the economy and the financial system when a bank or thrift institution fails.

An independent agency of the federal government, the FDIC was created in 1933 in response to the thousands of bank failures that occurred in the 1920s and early 1930s. Since the start of FDIC insurance on January 1, 1934, no depositor has lost a single cent of insured funds as a result of a failure.

The FDIC receives no Congressional appropriations – it is funded by premiums that banks and thrift institutions pay for deposit insurance coverage and from earnings on investments in U.S. Treasury securities. With an insurance fund totaling more than $49 billion, the FDIC insures more than $3 trillion of deposits in U.S. banks and thrifts – deposits in virtually every bank and thrift in the country.

Savings, checking and other deposit accounts, when combined, are generally insured to $100,000 per depositor in each bank or thrift the FDIC insures. Deposits held in different categories of ownership – such as single or joint accounts – may be separately insured. Also, the FDIC generally provides separate coverage for retirement accounts, such as individual retirement accounts (IRAs) and Keoghs, insured up to $250,000. The FDIC's Electronic Deposit Insurance Estimator can help you determine if you have adequate deposit insurance for your accounts.

The FDIC insures deposits only. It does not insure securities, mutual funds or similar types of investments that banks and thrift institutions may offer. (Insured and Uninsured Investments distinguishes between what is and is not protected by FDIC insurance.)"
This is an excellent institution that adds stability and security into the financial system. Can you imagine a situation where if your bank failed you would lose your life savings? Luckily you probably don't have to.

Nevertheless, FDIC has some very clear limits. Most accounts are insured only up to $100,000. This doesn't automatically mean that you would lose every dime above $100K if your bank failed, but it does mean that you would probably not get it all back. This has some important implications for me. I have been very cognizant of these limits and have made sure that our FDIC insurable funds never exceed $100,000 per institution.

Incidentally, note that the FDIC insures bank deposits, not other forms of investment. If you have a brokerage account you may also want to read about another entity that may be insuring you assets against brokerage firm failure (not investment losses), the SiPC.

Monday, July 14, 2008

It's Been a 10 Year Bear Market...

In this weekend's Wall Street Journal I read two articles that tackle the sinking feeling many investors are feeling these days when they see their portfolios shrinking on a daily basis.

The first of these two articles is titled Stop Worrying and Learn to Love the Bear. I strongly recommend it. If you are a regular reader of this blog, you know that I am strictly a buy and hold index investor. Well, here's what the Journal has for me:

"When you bought into the gospel of "stocks for the long run," did you have any idea how long the long run can turn out to be? Exactly 10 years ago, the Standard & Poor's 500-stock Index was at 1164; it closed Friday at 1239. That's an annualized average return of 0.63%. At that rate, it will take you 111 more years to double your money in the stock market."

Huh... 0.63% average annual return? Hmmm.... That's gonna make it a bit difficult for me to join the millionaire's club. But wait... there's hope:

"In the last long bear market, 1969 to 1982, stocks returned just 5.6% annually; after inflation, investors lost more than 2% a year. That mauling by the bear made stocks so inexpensive that over the ensuing 18 years they went up 18.5% a year, enough to turn $10,000 into more than $200,000.

The people who so far this year have yanked $39 billion out of U.S. stock funds, and $6 billion out of exchange-traded stock funds, do not understand this. But if you are still in your saving and investing years, a bear market is a gift from the financial gods -- and the longer it lasts, the better off you will be. Instead of running from the bear, you should embrace him."

Well, embrace him I shall, mauling and all. Over the past year I have continued to regularly invest more of our available funds into stocks, not only by maxing out my 401K (my wife does the same), but also by investing more into our taxable accounts. I plan to stick with this plan even if stocks continue to decline. Yes, people, here it is. The higher long term returns of stocks comes with a higher degree of risk. Deal with it. Of course, that doesn't make it any more fun to see your portfolio getting smaller by the day, but this pain will be followed by some gain... or at least that's the LONG term plan.

The other WSJ article I read this weekend was originally published on, but unfortunately, I cannot find a link to it. The article, titled "Stocks - a Matter of Time", compares the value of the DJIA to the U.S. GDP. Here is a brief quote:

"The average is currently around 11,000, which can be seen as a ratio of 0.76 - once a few zeroes go away - to the 14.4 trillion U.S. economy.

That is only a little higher than the 0.75 average since 1949, calculated quarterly. By that standard, the market looks like it is fairly valued."

Well, if you buy that, maybe the pain is almost at an end. Regardless, suck it up and keep going.

One thing you have to give me credit for is being consistent. I wrote this article almost exactly one year ago, before it was clear just how nasty the market was going to turn.

Wednesday, July 09, 2008

What You Buy Can Hurt Your Credit

In its June 30 issue, Business Week published a piece about how some credit card companies are monitoring what customers are purchasing, and in some cases reducing their credit lines accordingly. This type of practice came to light in a recent FTC complaint against Compucredit Corporation for unfair practices. If you want to read about some pretty incredible predatory lending practices, I highly suggest you read that complaint - 44 pages of double spaced, highly readable, credit card horror stories. Wow.

Anyway, the topic of this post is one specific lending practice that Compucredit allegedly followed. Here is a direct quote from the complaint (page 34):

"CompuCredit has based these credit line reductions on an undisclosed "behavioral" scoring model that penalized consumers for using their cards for certain types of transactions, including transactions touted in their solicitation materials such as cash advances and transactions with the following types of merchants:

  • Direct marketing merchants
  • Marriage counselors
  • Personal counselors
  • Automobile tire retreading and repair shops
  • Bars and night clubs
  • Pool and billiard establishments
  • Pawn shops
  • Massage parlors.

76. In some instances, CompuCredit reduced subscribers’ credit limits to levels below their existing balances and then charged over-limit fees."

Emphasis on the last sentence is mine. I want to talk about these practices on two levels. One is the high-level business practices type of analysis. The other is the actual approach that was taken. First, let's talk about this business practice in principle. Generally speaking I think that looking at behavioral data, including purchasing data, to make credit allocation decisions is not a bad idea. If someone is shown to be a bad credit risk by their very purchasing activities, should the lender be forced to keep throwing good money after bad?

Let's look at a couple of the specific examples given: marital counselors - if someone is going through some marital issues, which may or may not result in divorce and financial hardship, I think it is very reasonable to consider them a higher credit risk. The same can probably be said for pawn shops. I am guessing that few people in good financial standing frequent these establishments, and in any case, there is probably a correlation between people who patronize pawn shops and people whose financial situation is less than stellar... So, in principle, if I was running a credit card company I would certainly want to consider factors that would increase my credit risk - including the types of establishments my customers were spending my money at...

Of course, this brings us to such questions as consumer privacy and adequate disclosure. As an avid free market capitalist, I am a strong believer that knowledge is the best form of regulation. For example, once the government forced food manufacturers to disclose the trans fat content of their food, this harmful ingredient quickly disappeared from many products available on the market. If customers are clearly told that their purchasing behavior is a criteria for the level of credit they receive, and they still choose to apply for the credit card, I have no problem with this practice. In principle, at least.

Now let's talk about the specific practice. The ability of credit card companies to lower the credit line after a purchase has already been made, such that the new credit limit is lower than the outstanding balance, is preposterous. The fact that companies are then able to charge their customers an "over the limit" fee is both ludicrous and criminal. This only works in the credit card industry. Can you imagine a situation where a car dealer would be able to increase the selling price of a vehicle three months after you bought it? What if the person selling you a house was able to change his mind about leaving behind his appliances after the deal had already closed and you moved in? How are these examples any different from the credit card company changing your credit line such that you are then forced to immediately re-pay money you don't have?

Congress, the FTC, or whoever is in charge should quickly correct this situation. Credit card companies should be able to make changes that apply to future credit decisions, but never to balances that are already outstanding. Want to change the interest rate? Fine, your decision only applies to future purchases, not to ones that have already been made. Want to reduce the credit line? No problem, so long as it is not below the outstanding balance at any given time.

Monday, July 07, 2008

Cost to Raise a Child: Study Results

Last week's Business Week had some data distilled from Agriculture Department studies regarding the cost of raising a child through age 17. The question why the Agriculture Department would be interested in such studies is besides the point, but it is a bit curious. Anyway, I found the data interesting enough to search out the source document on the USDA website and here are some of the interesting things I discovered:

Not surprisingly, the amount of money a family spends on raising a child is proportional to that family's level of income. Families making under $45,800 on average spent $148,320 per child; families earning between $45,800 and $77,100 spent $204,060 and families making more than $77,000 a year spent on average $298,680. That's a big chunk of change, regardless of what income level you are at.

About one third of this total cost across income groups was spent on housing. Food accounted for 20% of the lower income group's spending, but only 14% of the high income group spending. Education accounted for just under 10% of the low income group spending but 13.5% of the high income group spending. Proportionally higher income families spend less on food and more on education, however in absolute dollar terms the higher income group spend more on everything.

By the way, if you happen to live in the "Urban West", such as is our case, the total estimated cost for raising a child to age 17 is around $315,000 if you are in the high income group. A similar family living in the Midwest would spend only $279,000 on average, and a similar family living in a rural community would spend $281,000 on average. That's pretty surprising. I always thought things would tend to be cheaper away from urban centers. Guess that's not necessarily so.

So how does this mesh with our own experience? Let's compare the education portion of the survey to our actual spending, since expenses on education are much easier to allocate than, say, expenses on housing. In our case, I think the numbers are way, and I mean WAY off.

According to the study, an average family in the Urban West would spend about $40K on education and childcare per child by age 17. Problem is, in the San Francisco Bay Area, day care costs about $1,000 per month per child in preschool. We also pay about $600 per month for my older son's after school program (and in both cases this is a city owned facility, not some expensive, yuppy program). Putting these numbers together gives me a total of about $127,000 on education and childcare alone, per child, through age 17.

Yikes! Anyone wants to adopt a pair of cute (but often demanding) twins? Reasonable rates offered. Some restrictions apply. See your Northern California dealer for details and to schedule a test drive.

Thursday, July 03, 2008

I Am About to Join the Millionaires' Club...

In a much publicized press release, Merrill Lynch and Capgemeni last week released the findings of their global wealth survey for 2007. The results: about 10.1 million individuals globally have $1 million or more in assets (up 6.1% over 2006), with the average net worth in the group equal to about $4M. The fastest growing part of the group comes from the Middle East, Eastern Europe and Latin America, however, India is the country whose ranks of millionaires grew at the fastest rate. It had 22% more millionaires in 2007 compared to the previous year.

CNN also reported that the group of ultra-rich, those with $30M or more in assets, grew to a total of 103,000 globally. I guess you can say it's good to be the king...

So, all that leads to the question: when will my wife and I join those growing ranks? I guess that depends on the question of how you define a millionaire... the survey looked at individuals, not couples, so I am guessing that to get a realistic answer I would need to divide our net worth by two. Also, net worth for the purpose of the survey does not include the value of the primary residence. In our case, we rent, so in that sense we have an unfair advantage for the purpose of the calculation. Taking all of this into account, my best guess is that if everything goes smoothly (typical rates of return, no global melt downs, no major periods of unemployment, no run away inflation, our typical savings rate, etc.) we should be able join the ranks of millionaires, as the survey defines them, somewhere in the neighborhood of 2020. So, as I said, we are about to join the millionaires club, it's just that we're taking the scenic route to get there...

Hey, good enough for me. Of course, there is always the hope that my company will go public and propel me into the ranks of the ultra-rich faster than you can say: "keep on dreaming, you imbecile".

Tuesday, July 01, 2008

What Real Estate Crisis?

News outlets everywhere are filled with stories of gloom, doom and implosion in the real-estate market. If you believe the stories, California home prices are down about 18% from a year ago, but out here in the San-Francisco Bay Area, or to be more specific on the Peninsula, where most folks make their living from the high-tech industry, prices have barely dipped.

For example, home prices in Mountain View (home to Google) are actually up about 5% year over year, according to Zillow. The same source shows prices in Menlo Park, center of the venture capital industry, are up about 12%, and Palo Alto, home to Apple Computer and Stanford University has gained about 13%. What gives?

Well, I don't know this for a fact but here is my theory. Our local economy is more closely tied to the technology sector than to anything else. Silicon Valley has been churning out millionaires at amazing rates in recent years. Google and VMWare on their own have no doubt made several thousand of new millionaires out of their stock option holding employees. The average person around here cannot afford to buy a house using his regular income. Your two options are to undertake a long range commute from some of the more remote and affordable suburbs (I know several folks who commute 40 or even 60 miles each way), or to hit the jackpot when your company goes public.

Since the tech sector has been largely unaffected by the downturn until recently, home prices in this area continued their seemingly never ending climb. Well, I think things are about to finally change. Last week I read an article that stated that not a single venture backed company went public last quarter. In addition, venture capital firms have been much more conservative in their investments in recent months (which means fewer high-tech jobs, and fewer future IPOs). This suggests that the flow of money may taper down if not cease altogether.

In my opinion, it's only a matter of time before our local real estate market takes one on the chin. The market is already showing some signs of slowing - there are now multiple houses for sale on my street - something that previously was very rare, as available homes would be immediately snapped up. In the counties of San Mateo and Santa Clara, which together cover Silicon Valley, prices have already started to decline in recent months. In my opinion there is a decent chance that this measured decline will turn into a more dramatic drop in the near future.

I guess we'll just have to wait and see.