dwot (99.50)

How Good Are Blogs?

April 06, 2008 – Comments (10)

As adults media -- newspaper, radio, TV and now internet -- are extremely important for how we learn new information about the world around us.  Before the internet media has been narrowly owned and narrowly controlled.

The internet has opened the world to sources of information to a level never known in history.  I can access information from other countries with the analysis written with the priorities of that country.  I can access that which is not main stream.  I can reject conventional media that drive me crazy with their waste-your-life attention to reporting that it is raining outside, or there's a traffic jam.  Seriously, with the advertising drivel and then the reporting priorities, you can watch an hour broadcast and get 5 minutes or less that was worth your time.

Blogs are a great source of information.  A short coming is there isn't a editorial review board that interested parties can meet with a raise an issue with the media source, but there are comments, uncensored comments.  Perhaps not completely uncensored, blog owners do delete rude and unrelated posts.  Some blog owners probably also delete opinions they disagree with.  But, the model allows for far less censorship and more feedback than popular media.

Blogs are as good as the blog owner and their objectives.  I personally find the blogs I read screen many more sources of news then I could possibly screen on my own, so they cut through the drivel, and they have a level of expertise different than the writer and they critically evaluate points that the writer makes.  I find blogs a far more efficient source of information.

I use Google Reader.  I get the headlines from Reuters, CBC, the Globe and Mail and WebMD.  Then I read blogs.  It is so easy with Google Reader to set up a blog you like to automatically come to you.  I've screened hundreds.  I have an advantage that I have excellent analytic, critical thinking and media literacy.  I have worked where I have tried to get media to report on issues and I know how media works.  I have issued press releases that have shown up word for word as I wrote it.  I don't think it is common knowledge to people that some of the "news" you read is completely written potentially in a highly bias and misleading manner, and Goldcorp's press releases are an excellent example. 

I just looked and I thought for sure I'd find a post I'd written specifically tearing apart a Goldcorp press release, but rather I went much deeper, into their annual report.  Certainly I showed what they report, and what is far more important to investors to assess.  You look at their press releases and they headline "Goldcorp's revenue reach new highs," or something like that, yet when you look at the share dilution, the revenues per share have declined and with news reporting that kind of stuff should not be getting through in the headline and it is far, far, far more important to investors that they understand the value of their share has grossly declined because of dilution, but that isn't what the news shows.

When I read something I constantly assess it for if it makes sense to me.  I have assessed what is happening in the world markets enough on my own at this point that anyone saying the problems can be corrected by the second half of this year has low credibility with me.  They might have higher credibility if they actually supported that position with reasonable arguments, but in general, the arguments I've seen to support that have significant goldilocks assumptions built into them.

Do I agree 100% with the blogs I read?  No, but, I assess enough of how they come to their conclusions that I trust there is merit to what they say even if I am only skimming information.  One of the great things about Google Reader is that I can easily send anything I am reading to my shared page.

The way that I look at the economy is that the housing bubble is the biggest bubble mankind has ever known.  The economic data shows that people have been living grossly outside of their mean for years and in the US there has been a negative savings rate for years.  Many people have their job based on other people spending money they don't have.  It is highly unlikely that many debts will be repaid.  Many people's "investments" are other people's debts.  This doesn't go away by the second half of this year.  Anyone suggesting it does has very low credibility with me.  They need to get their thinking out of the box that is so small an atom feels crowded.

I am not vested right now, well, I did pick up a high risk "gamble" stock for my hubby about 2 weeks ago, but otherwise, I hope I'm doing a reasonable job of hiding.

Anyway, I don't see how good businesses carry on business as usual when other people and businesses are likely to default on far more credit then the historical norm.  Business that are tight are going to be pushed under.  Strong businesses in the "right" area simply are more likely than not to miss earnings expectations due to an inability to collect what's owed to them.

I keep looking at the Great Depression for reference because I see more in common with the depression than historical events since the depression.  I can't say that I've studied this enough to be an "expert," but I've seen enough red flags that even though popular media is that "we'll never get that bad again," it seems to me that some of the economic factors are much worse, for example, credit is much looser.  They had 15 year mortgages back then.  In my post "Six Degrees of Leverage" I calculate what extending a loan term can do, which was done to help in the Great Depression:

In the Great Depression the fed was able to do something because 15-year mortgages could be extended to 30-years. Borrowing at 8% interest over 15 years would allow the 100k family to borrow $262k versus the $340k they can borrow over 30 years. If you then need to increase the payment to be over 30 years, you can reduce payments by 23%, $578. You only reduce payments by . Changing that 30 year mortgage to 40 years and you reduce payments by a piddly 6%, $140. Read the numbers, no amount of refinancing can fix this.

In the link this is under the bolded heading "So, in how many ways is mortgage leverage playing out in the economy that it can collapse?" about 1/3rd down the page.  The above example is for a $100k household income family with 30% or 30k, or $2500/month going to mortgage payments.  The difference between a 15- and a 30-year term at 8% means they qualified to borrow 30% more than they would have for the Great Depression.  Currently 6% is a more common mortgage rate. 

At 6% with a 30-year mortgage you can borrow $416k.  With a 15-year mortgage you can borrow $296k, or 40% more is borrowed with today's slutty lending standards, clearly a much worse problem for investors than when interest rates were 8% and you compare today's loose lending standard's to the depression's loose lending standards.

Popular media is that this isn't as bad as the Great Depression, but extending that loan term from 15- to 30-years was an important tool available in the Great Depression that isn't available today.  $140/month isn't going to make that much difference to the problem for families.  I don't care what the "experts" or popular media says, this is a huge, enormous, googplex red flag in my mind. 

So, what was I reading when I got onto this tangent?  Financial Armageddon had a post about "Experts don't see extended bear market."

"That's because stock valuations aren't at the absurd levels that they were during the dot-com era, said Eric Bjorgen, a money manager at The Leuthold Group in Minneapolis."

You truly don't need to break this crap up if you understand that households have been living beyond their means and aren't making ends meet, that credit has been driving not household investment, but household daily expenses. But, this is lost on the "expert" in this article, or the reporter lacks the expertise to ask the right questions.  P/E ratios are not based on sustainability, but on people borrowing for daily living expenses, and credit is tightening and this borrowing to make ends meet is coming to an end.  In some cases it is already over.  P/E ratios doubling or tripling in this environment would not surprise me.  P/E will begin their ascent to the stratosphere from three sources,

1. not being paid for services rendered,
2. reduced demand as people are forced to live within their means, and
3. increasing debt services charges.

Will it happen with all companies?  I do not know.  The uncertainty as to where the defaults will show up puts all investments at level of risk that can not be assessed as risk was historically assessed. 

I completely agree with " Wise investing, especially during tumultuous market downturns, is difficult because it requires moving against the crowd," but I don't see that the "crowd" has yet responded to the degree of problems out there.  There is no question that historically, six months after a down turn is a good time to reinvest.  But right the game is being played against a lot of people with this similar experience and people exiting and trying to get back in lower and not miss bottoms they know to have existed historically in about this time frame.  But, this bubble is far, far, far bigger, yet the "correction" so far is much, much smaller than the dot com bubble correction.  The entired stock market data from the dot com bubble is based on unsustainable practices and negative savings rates.  It is meaningless data.

The dot com bubble was dot com stocks and they corrected instantly.  I know, I lost a bundle very quickly.  When I took a closer look at my "expert's" recommendations, well, their ought to be a mechanism that these people are reported and must defend their right to continue in their occupation.  There isn't and these people continue to advise others with gross incompetence.  Indeed, with my "Making Sense of My World" blog I've had one of these a--holes read my blog and privately email me challenging my right to say anything about investments because I am not a registered investment adviser and threaten to report me. 

Housing corrects slowly.  It isn't a process of everyone heading for the door as quickly as possible.  I did very well selling my home in January, yet I felt huge loss over selling my home, not financial loss but emotional loss.  I thought about selling my home for two years before I actually sold it.  There is far less emotion for a paper investment than a home.  I sold it while prices were still strong and I see there are now three homes in my complex listed for 8-15% more than I sold at.  Vancouver's bubble is still intact, although the number of people jumping on the cashing out bandwagon have increased enormously and I suspect these won't be easy sales.  Indeed, I know of a 4th must sell unit coming on the market in the next month or so and it will likely sell first because it will under cut these other units. 

Selling in a declining market is different.  You have to accept a double loss, your home and what you thought your home was worth.  There are numerous stories out there already of people walking the market down.  They wanted $750k, got an offer for $725k and refused.  They get no other offers to they reduce to that $725k, and now they get an offer at $675k and they are outraged.  I've seen this play out in the 93-95 bubble in Vancouver.  Friends of mine listed at about $340k and quickly got an offer for $320k.  They were in for $340k to break even and they refused.  A year and a half later they sold for $299k, but their place had sat empty for a year and they were forced to rent in their new city.  Instead of taking a quick $20k loss, they took a $41k loss plus the double payments of rent and owning a second home for a year.

The housing bubble will take at least another year to finish in the places that it burst first, and probably 3-4 years to finish nation wide.

I keep coming to the conclusion that what is happening today is different than in anyone's experience and we are not seeing people respond to what the problem is, but rather previous experience and I suspect it will be costly.