A look at mortgage defaults in Los Angeles County

The credit/mortgage crisis has been all the rage in the news lately. I thought I'd take a quick look at the real meaning behind all the facts and figures. To start with, let's look at the Census Bureau's American Community Survey for Los Angeles County from 2005.

Number of households: 3,184,396
Owner-occupied: 1,562,853 (49.08%)
Renter-occupied: 1,621,543 (50.92%)

So what we're interested in here is the owner-occupied residences. How many of those have mortgages?

Housing units with a mortgage: 1,208,550 (77%)
Housing units without a mortgage: 354,303 (23%)

Obviously the 23% of the people without mortgages can't default. So now let's look at the 77% of the homeowners that DO have mortgages. According to la-foreclosure.net, here are the number of foreclosures in LA county in the past 7 months.

Jan-07: 3,270
Feb-07: 3,532
Mar-07: 3,893
Apr-07: 3,514
May-07: 4,264
Jun-07: 4,243
Jul-07: 5,317

Total: 28,033

That doesn't seem like a huge number for a city the size of Los Angeles, but look at that as a percentage of the number of mortgages - 28,033 / 1,208,550 = 2.32% of all mortgages defaulted in only 7 months.

When you think about it, that's a big deal. Mortgages are LONG term loans. It can take a homeowner 30 years to pay off a house. Annualized, that works out to a 4% default rate. Banks lose money on the houses that default. According to this blog (original article gone from the news website), the average foreclosure costs banks 20-25% of the loan value, or $60,000 nationwide. What would the loss be in California?

The average California borrower took out a $436,749 mortgage during the first half of 2007, according to DataQuick Information Services -- just $19,749 over the conforming loan limit.
Say we take the low end of that figure at 20%. That's a loss of $87,350 per default.

From the same article, the average interest rate for a conforming loan with a good credit score and 20% down was 6.22%. How much will the bank make from these mortgages? According to this article, Washington Mutual is projected to have a net interest margin of 2.51% in the third quarter of 2007. The net interest margin is the difference between what they have to pay depositors for checking/savings/cd/money market accounts and what the rate they can lend the money out.

The credit crunch could very well turn into a vicous cycle. Investors in mortgage backed securities will demand much higher premiums to compensate them for the increased default rate. In turn, banks will demand higher interest rates for new mortgages to keep their net interest margin at acceptable levels. These higher rates push down the affordability of a house. From the above example:

$436,749 mortgage @ 6.22% for 30 years = ($2,680.62) monthly payment

Assuming that's the max you can afford to pay per month, what amount can you borrow if the rate goes up?

7% = $402,918
8% = $365,325
9% = $333,153
10% = $305,459

Obviously, at a certain point this buyer drops out of the market because they are unable to find a house that is affordable. Supply probably drops as well, as people can't sell their homes because the value is lower than what they owe. Distressed sellers, who MUST sell due to financial hardship become more likely to default. This increases the default rate further, and results in even higher rates.

Eventually it all shakes out and we reach an equillibrium point again. I believe this is probably about 3-4 years out. In the meantime, I would expect house values to stay about the same or possibly drop a little bit in real dollars and inflation adjusted, I expect them to drop by somewhere in the 10% range.

GTD: Levenger Pen Pocket Briefcase Review

I'm a big fan of David Allen's Getting Things Done (GTD) system. I think he's got a lot of great ideas that can make a difference in your life. Unfortunately, I've been struggling a bit with implementation. My problem is mostly the capture device. I just can't seem to find a tool that doesn't fail me in some annoying way.

I started out with a Hipster PDA (hPDA). It has the advantage of being exceedingly cheap, easy to implement and light weight. For a week or two, I thought it was going to work out for me. Then I realized the fatal flaws: I'm a big guy and my body constantly is pouring off enormous amounts of heat. As a result, I sweat a lot, even in normal room temperature. Unprotected 3x5 cards in my pant pockets get ruined pretty quickly from the mildly damp environment. The cards lose their stiff cardboard quality, then become sort of soggy and unwriteable. The corners get bent. The edges get ruined. It's not as annoying in my shirt pocket, but only about 50% of my shirts have pockets.

I decided I needed something to protect the cards. At first, I tried a cheapy buxton 3x5 holder from Staples for $10. After I cut off the annoying pen loops and removed most the extraneous garbage from the inside, I had something that worked. Sort of. The corners of the 3x5 were covered, and thus I only had a writing surface of about 2x4, which reduces the usefullness greatly. And it was on the wrong side (left) for a right hander.

The next thing I tried was a moleskine. I started with a cahier. It worked alright, but the flismy cover and bendable quality quickly got on my nerves. I switched over to the full pocket notebook. It has a lot of advantages over the other systems; the full leather cover protects the paper, the bookmark, the rubber band to keep it closed. I organized the last chunk of the book into a datebook/calendar by putting one week per page. I put my open projects in the front of the book with an index. I used the middle portion for other data collection: maps to places I needed to go, phone numbers, email addresses, ideas, lists. It works pretty well. But I hesitate to write in it for some reason. I'm afraid to fill it with garbage, after I've invested so heavily in the format. It really is a top quality notebook though. Durable, good quality, easy to use. I still carry it with me, only I leave it in my car or at my desk.

After nearly a year of drooling over the levenger shirt pocket briefcase, I finally decided that it was time to just bite the bullet and order one. $38 is a hefty chunk of change for a glorified piece of leather though, and the shipping from levenger isn't exactly cheap either ($9 for a $38 pocket briefcase by USPS, ouch.) I hesitated. I pawed through the catalog again and again.

Then I did something I don't normally try - I tried eBay. It turns out that Levenger was unloading some outlet merchandise for CHEAP. I got a levenger pen pocket briefcase for only $19.40 shipped! (Normally $68 + shipping) Of course, it is monogrammed with some mistaken initials, but hey, I don't care and it's hardly visible.

Here are my impressions of the item so far:

  • The Pen: I'm not a huge fan of it. In fact, I took it out and left it on my desk. It's got a strange square shape that takes getting used to, but the real killer is the fact that it's a ballpoint. After being spoiled with years of using Pilot Precise V rolling ball and Pilot Varsity fountain pens, I really can't go back. If it were a gel pen, I might be able to handle it. But not a simple ball point. It doesn't do well on 3x5's at all. I can't imagine paying the extra $30 for this feature, or $32 for the pen by itself. It's just not worth it.

  • The Pen Holder Pocket: It fits the pen that comes with it just fine, although it seemed to try to slip out. Annoying. It also makes the whole thing sort of rigid and puts a bump on one side of the writing surface if you don't remove the pen. I tried putting a different pen in there. A precise V will fit, but just barely, and then you have to pull it out by the cap. I'm really not too impressed. I think it's far better without the pen at all.

  • The Briefcase: It really is like a little briefcase. Has three pockets. You can tell by feel alone which one is which. I use the outside pocket with the lip indentation for my context oriented cards (@Home, @Work, etc), the center pocket for blank cards (which I've been carrying about 7 of), and the remaining pocket for used cards that have random thoughts and information on them. The leather is top quality, the stitching is perfect, everything about it is nice. It holds 3x5's very well without covering too much of the writing surface. The whole thing is nice and flexible, and it's hardly noticeable in the pocket.

    Overall: It's definitely worth owning. I'd say it's even worth the $38 plus $9 shipping. It takes the hipster PDA to the next level: Better organization, easier access, more protection for the cards from the harsh environment of the pocket.

  • The Economics of Extreme Commuting

    For a number of years, I commuted 30 miles each way, usually spending about 50 minutes doing so. It really took a toll on me, both financially and in draining my energy levels. A while back I moved to a 15 mile/25 minute commute and the difference was astonishing. Apparently, it has been a growing trend for people to commute really extreme distances. In this post, I'm going to take a look at the financial impact of the decision to work really far away from home.

    What is the Average Commute?

    There has been a lot of media attention in the last few years on the subject. I found an interesting poll conducted by ABC news that not only lists average commute time, but also distance.

    Poll: Traffic in the United States
    Analysis By GARY LANGER
    Feb. 13, 2005
    "Life for commuters can be heaven or hell. They report an average one-way commute time of 26 minutes (over an average distance of 16 miles). But the variance is huge: On the best days, the average commute is 19 minutes; on the worst days, 46 minutes. That means traffic, at its worst, can double the average commute time, adding 27 minutes each way."
    16 miles / 26 minutes = 36.92 mph

    16 miles x 2 = 32 miles roundtrip

    32 miles x 50 weeks x 5 days a week = 8,000 miles

    If the average American drives 12,000 miles a year, this means 4,000 miles are non-work related.

    Average Commute in Los Angeles

    According to the US Census, the average commuter in Los Angeles spends
    29.0 minutes getting to work. Assuming they are commuting the same distance as in the ABC poll, LA commuters are driving much slower at 33 mph. This is no big surprise if you've ever been to LA.

    Extreme Commuting

    Here's a story that defines what extreme commuting is in a few short sentences.

    Think your commute is tough?
    By Debbie Howlett and Paul Overberg, USA TODAY
    Posted 11/29/2004 11:17 PM
    "3.4 million Americans who endure a daily "extreme commute" of 90 minutes or more each way to work. They're among the fastest-growing segment of commuters, according to a Census study, Journey to Work, released in March. Their commute times are more than triple the national average of 25.5 minutes each way."
    How many people are doing this extreme commute? The Census Burea says "Nationally, just 2.0 percent of workers faced extreme commutes to their jobs." But in Los Angeles, that number is much higher at 3.0% (PDF warning). Note that these numbers date back to 2003. With the effects of the housing price boom, I would expect significant growth to those numbers.

    Let's take those numbers of 90+ minutes and apply it to the average speed of 33 mph in the Los Angeles area.

    33 mph x 1.5 hours = 49.5 miles
    49.5 miles x 2 ways x 5 days x 50 weeks = 24,750 miles

    Plus an additional 4,000 miles a year for non-work related driving = 28,750 miles.

    Cost Per Mile

    The absolute cheapest Edmunds.com TCO per mile I could find also belongs to the cheapest car in America - the Chevy Aveo special edition. Over a span of 15,000 miles per year over 5 years in Los Angeles, it supposedly will cost $0.44 per mile. Here's how they came up with their numbers.

    Price:


    And the breakdown of different costs:



    If this is for 15,000 miles per year, we need to modify these costs for our extreme commute of 28,750 miles per year.

    Depreciation:

    We'll assume that a Chevy Aveo with 143,750 miles will be worth zip. Total depreciation = $10,340 / 143,750 miles = $0.07193 per mile

    Financing:

    Total cost = $2,173 / 143,750 miles = $0.01512 per mile

    Insurance:

    Total cost = $9,774 / 143,750 miles = $0.06799 per mile

    Taxes & Fees:

    Total cost = $1,139 / 143,750 miles = $0.00792 per mile

    Fuel:

    Year one = $1,456 / 15,000 = 0.0971 per mile x 28,750 = $2,790.67
    Year two = $1,500 / 15,000 = 0.1000 per mile x 28,750 = $2,875.00
    Year three = $1,545 / 15,000 = 0.1030 per mile x 28,750 = $2,961.25
    Year four = $1,591 / 15,000 = 0.1061 per mile x 28,750 = $3,049.42
    Year five = $1,639 / 15,000 = 0.1093 per mile x 28,750 = $3,141.42

    Five year total = $14,817.75 divided by 143,750 miles = 0.1031 per mile

    Maintenance:

    Edmunds says $4,462 for 75,000 miles = $0.05949 per mile
    We'll assume that scales the same for the huge number of miles.

    Repairs:

    The Aveo has a 100,000 mile powertrain warranty. If you do minimal repairs, Edmunds says that you on need to spend $774 over 75,000 miles. We'll up that to $2,500 to cover the period after the warranty runs out - but we'll assume major parts like the transmission and engine don't die until the end of the five year period.

    $2,500 / 143,750 miles = 0.01739 per mile

    Summary:

    Depreciation: 0.07193
    Financing: 0.01512
    Insurance: 0.06799
    Taxes & Fees: 0.00792
    Fuel: 0.10310
    Maintenance: 0.05949
    Repairs: 0.01739

    Total Cost Per Mile: $0.34294
    Cost Per Year: $9,797.80
    Required salary using the 4-6-10-25-33 budget: $58,786.77

    Normal Commute:
    Cost Per Year: $5,280.00
    Required salary using the 4-6-10-25-33 budget: $31,680.00

    Required bump in salary: 85%

    Housing Cost

    What would motivate someone to live so far away from work? Why not just move closer? Let's take a look at housing costs in two cities - Los Angeles, with lots of high paying jobs, and Palmdale, with cheap housing. I personally know of at least a few people that make this commute daily.

    Average house price in Palmdale, CA (2005): $303,800
    Average house price in Los Angeles, CA: $513,800

    Difference: $210,000

    So using this data, I'm going to plug it into this very good rent vs buy calculator which seems to take almost everything in housing costs into account. Note that I'm not using the rent feature, as that complicates things significantly. I got the following assumptions for these calculations from the Freddie Mac Weekly Prime market for 8/9/07

    Rate: 6.59%
    Fees/Points: 0.4

    The following information came with the calculator, and it looks to me to be a good wild guess at what they will cost.

    Loan origination: 1.000%
    Other costs: $800
    Property tax rate: 1.00%
    Home Insurance: 0.50%

    I used a down payment of $65,022 based on 20% of the cost of the house in Palmdale plus fees and closing costs. The calculator gives two results. Total, which includes all cash flowing out, and net, which includes the tax benefits of writing off interest/property taxes.

    House Payment (total/net)

    Palmdale: $1,930 / $1,536
    Los Angeles: $3,741 / $3,015

    Using the 4-6-10-25-33 budget and the net amounts:

    Palmdale: $1536 x 4 = 6,144 a month x 12 = $73,728
    Los Angeles: $3015 x 4 = 12,060 a month x 12 = $144,720

    So you require a far lower income to live in Palmdale. But then, there are less jobs and less money in Palmdale. So if you live there and commute to Los Angeles, do you end up ahead?

    Cost of the commute: $4,517.80 per year / 12 = 376.48 more a month.
    Palmdale net: $1536 + 376.48 = $1,912.48 - $3,015 = $1,102.52 ahead per month

    That advantage shrinks over time thanks to inflation. But so does the tax benefit of the larger interest payment on the house in Los Angeles.

    Will you have enough time for an extreme commute?

    If you work 9-5, that's 8 hours a day. Add 29 minutes to each end, and you have a 9 hour work day. Extreme commuting of 90 minutes x 2 adds another two hours to that, for an 11 hour work day. 8 hours of sleep plus another 1/2 hour to get up and get ready/eat = 19.5 hours. That leaves you with 4.5 hours a day to do other things. Not so bad, eh?

    Of course, how many Americans really work a 9-5? With a half hour for lunch, that's only 37.5 hours a week. According to the Bureau of Labor Statistics, in 2006 the average full time employed American worked 42.9 hours a week. Almost 10% of the people worked more than 60 hours a week and another 13.7% worked more than 49 hours.

    42.9 hours a week = 8.6 hours a day + 0.5 for lunch = 9.1 hours a day
    9.1 hours a day + 3 hours commute + 8 hours sleeping + 0.5 hours getting ready = 20.6 hours = 3.4 hours a day to do other things.

    Now say you get in a traffic jam and it takes you an extra 1/2 hour each way. Now you only have 2 hours a day of free time. You can see pretty clearly that if you work extra hours or hit heavy traffic or drive more than 90 minutes, your free time can be quickly reduced to ZERO. Then you have to start cutting into other activities like sleeping in order to do other required activities like eating dinner, going to the grocery store, etc.

    Conclusion:

    I don't think it makes sense to commute much further than a half hour. If you can't afford to live within that distance, then you probably should move elsewhere, rent or find another job. Business Week had a similar conclusion.
    "This is what economists call "the commuting paradox." Most people travel long distances with the idea that they'll accept the burden for something better, be it a house, salary, or school. They presume the trade-off is worth the agony. But studies show that commuters are on average much less satisfied with their lives than noncommuters. A commuter who travels one hour, one way, would have to make 40% more than his current salary to be as fully satisfied with his life as a noncommuter, say economists Bruno S. Frey and Alois Stutzer of the University of Zurich's Institute for Empirical Research in Economics. People usually overestimate the value of the things they'll obtain by commuting -- more money, more material goods, more prestige -- and underestimate the benefit of what they are losing: social connections, hobbies, and health. "Commuting is a stress that doesn't pay off," says Stutzer."

    The Rule-Of-Thumb Personal Budget: 4-6-10-25-33

    I always hear numbers thrown out about what you SHOULD be spending on various things. "1/3 of your income on housing." "$10 a day on food." But none of these systems are really comprehensive in guiding you for a budget. Wouldn't it be nice to know how you are doing compared to everyone else? Are you spending too much on your house? Did you buy a car that is more money than you can really handle? How much should you really be spending on clothes?

    The US government puts out a lot of statistical reports on all sorts of things. I found one in particular that seems like it should be pretty useful for this purpose:

    Consumer Expenditures in 2005
    U.S. Department of Labor
    U.S. Bureau of Labor Statistics
    Report 998
    February 2005
    It contains all sorts of data. What I was really interested in was the average percentages of expenditures of most consumers.

    In 2005, the average consumer unit has 2.5 people. It made $58,712 with 1.3 wage earners ($45,163 per wage earner). It spent $46,409 on a variety of things. The average top 6 as a percentage of expenditures over the four years of data were:

    Housing: 32.60%
    Transportation: 18.55%
    Food: 13.10%
    Healthcare: 5.83%
    Entertainment: 5.08%
    Apparel and services: 4.15%

    Which is still a little confusing, since you have to know what percentage your expenditures are of income, and does that include taxes? So to make it even simpler, here are some rules of thumb using your PRETAX income. Everyone should know what they make a year, right? Well, here you go:

    Housing: 26% or about ONE QUARTER. This includes utilities, maintenance, mortgage, rent, etc.

    Transportation: 15% or about ONE SIXTH. This includes maintenance, the cost of the vehicle, gas, etc.

    Food: 10% or about ONE TENTH. This includes eating out and food made at home.

    I'm going to skip healthcare, because that varies based on age/location and health.

    Entertainment: 4% or ONE TWENTY-FIFTH

    Clothes: 3% or ONE THIRTY-THIRD

    So there you have it. A very basic rule of thumb for how much you SHOULD be spending if you want to be average.

    1/4 on housing
    1/6 on transportation
    1/10 on food
    1/25 on entertainment
    1/33 on clothes

    Applied Example #1:

    Your household income is $50,000 per year. Here's what you should be spending (year/month):

    Housing: $12,500 year / $1041 month
    Transportation: $8,333 year / $694 month
    Food: $5,000 year / $417 month
    Entertainment: $2,000 year / $167 month
    Clothes: $1515 year / $126 month

    An interesting way to look at transportation is to use Edmunds.com True Cost To Own. For my Subaru Impreza, it's $0.52 per mile. $0.58 x 12,000 for a year is $6,960. Using the rule of thumb of 1/6, you reasonably need to make $41,760 to afford that vehicle. At least, on the average definition of "afford" over all consumers.

    Applied Example #2

    Your household income is $24,000 a year.

    Housing: $6,000.00 year / $500.00 month
    Transportation: $4,000.00 year / $333.33 month
    Food: $2,400.00 year / $200.00 month
    Entertainment: $960.00 year / $80.00 month
    Clothes: $727.27 year / $60.61 month

    How much can you afford per mile for your car? $4000 / 12,000 = 33.3 cents per mile.

    How much can you spend a day on food? $200 / 30 = $6.67

    Conclusion

    Now obviously, these numbers don't add up to 100%. And it doesn't scale well to the high or low end of the income spectrum. But it gives you a general idea of what Joe average is spending, and it's a quick guide to start your own budget.

    Is it cheaper to bake your own bread or buy it at the store?

    For some reason, yesterday I got going on breadmachines. Amazon.com has a pretty nifty Sunbeam 5891 automatic bread maker for $42.24 (with free shipping!) I got to thinking, gee whiz - how much does bread really cost to make? I hardly know ANYONE that makes their own bread anymore.



    So I went looking. I found the simplest possible bread recipe using hardly any expensive components like dried milk, butter, etc.

    BASIC FORMULA FOR A ONE-POUND LOAF
    (Serves 12)

    This simple recipe can easily be modified to suit your taste.

    1 cup liquid (water, soy milk, or apple juice for example)
    1 Tablespoon sweetener
    1/2 teaspoon salt
    3 cups flour (a combination of any two or more white, oat, rye, or
    whole wheat bread flour)
    1-1/2 teaspoons active dry yeast

    Total Calories Per Serving: 107
    Fat: less than 1 gram
    I figure it can't get much less complicated than that, right?

    Then I went to the store and looked at the price of various components. Note that it MAY be cheaper where you live - I happen to live in an expensive area. These aren't warehouse prices in huge bulk either. Here's what I found:

  • Sugar: $1.99/5lbs
  • Bread flour: $1.89/5lbs
  • Fast acting dry yeast: $9.39/4 ounces
  • Salt: $1.40 / 4.75 ounces

    Converting into the units of the recipe, I found the following:

    Sugar: $0.0130 per tablespoon
    Bread flour: $0.1972 per cup
    Yeast: $0.4081 per teaspoon (OUCH!)
    Salt: $0.0512 per teaspoon

    The total recipe cost of components is as follows:

    Sugar $0.0130
    Flour $0.5915
    Yeast $0.6122
    Salt $0.0256

    Subtotal: $1.2423

    Then you have the cost of electricity and the wear and tear on the equipment. Since it has a one year warranty, I figure it could be used 365 times. $42.24 / 365 = $0.1157. The machine peaks at 600 watts and it takes three hours to bake. Figuring at $0.10 per kilowatt hours, that's 1.8 kilowatt hours or $0.18.

    Total cost: $1.5380
    Total calories: 12 x 107 = 1,284
    Calories per dollar: 834.83

    At the very same store, they had a loaf of "value" bread for $0.89 with 22 slices at 120 calories per 2 slices. 11 x 120 = 1320 calories, or 1483.15 calories per dollar. Much cheaper.

    "But wait!" you say. "What if I just used the oven instead?"

    Well, I believe an electric oven OR a gas oven would cost more to operate than the bread machine. This site says it costs $0.20 per hour to operate an electric oven and $0.18 per hour to operate a gas oven. Even if the oven lasts 20 years, it costs $350 for a cheap one, or 4.8 cents per day. You would also need a bread pan, and more tools to make the bread since you would have to mix it yourself.

    Figure:
    - $0.048 per day (cost of oven over 20 years)
    - $0.180 per hour (cost to operate gas oven, 1 hour)
    - $0.010 per use (cost of a bread pan over a 3 year life)
    - $0.040 per use (other tools - bowls, spoons, etc)

    Total cost: $0.278

    Which may slightly edge out the breadmaker at $0.2957 per use, but ONLY over the very long term. This also ignores the connection fee that might actually make gas more expensive than an electric oven.

    So assuming the breadmaker is the most efficient way, how can you reduce the costs further?

    1) Make your own yeast. It's easy if you like sourdough bread. Instructions. This would save $0.6122 per loaf.
    2) Buy the flour in huge bulk at a warehouse store. I'm sure it's much cheaper than $0.1972 per cup if you buy a 50lb bag at costco. But where do you store it?
    3) Buy the salt and sugar in huge bulk. Actually, since it's in a 5 lb bag already, you have a 153 day supply of sugar. The salt is expensive "real salt" which I'm sure you can completely crush if you bought a big bag of generic salt somewhere.

    So let's assume the following:

    Flour: $0.10 per cup
    Sugar: $0.013 per tablespoon
    Salt: Free, or darned close to it
    Yeast: Free

    New total:

    Flour: $0.3000
    Sugar: $0.0130
    Yeast: $0.0000
    Salt: $0.0000
    Machine: $0.1157
    Electricity: $0.1800

    Total: $0.6087

    Or 2,109 calories per dollar. I suppose, given your willingness to work harder and make more of the components, bread CAN be cheaper than store bought. But just barely. It's pretty damned hard to compete at home with the giant production line and enormous buying power of a large bakery.

    Better bread typically runs $2.29 per loaf. The problem here is that in order to make a similar product at home, you need far more components like honey, dried milk, butter, etc - which are very expensive. Unless you want to make a very specialized recipe that you can't buy at the store, it makes more sense to just buy the bakery made bread.

  • Prosper.com: Debt to Income (DTI) shenanigans.

    I've been wondering what would drive a person to Peer-To-Peer (P2P) lending. Why would anyone want to take out a loan from a website like Prosper.com when it seems like every day the huge banks are trying desperately to loan you money in one form or another.

    Big Banks Vs. Prosper.com:

    The bank I chose for comparison was Bank of America Corporation (BAC) one of the largest banks on earth. I found some data on their loan rates in this Supplemental Second Quarter 2007 Financial Information on page 9, titled "Quarterly Average Balances and Interest Rates - Fully Taxable-equivalent Basis"

    Yield
  • Credit card - domestic: 12.67%
  • Other consumer: 9.28%
  • Direct/Indirect consumer: 8.46%
  • Home equity: 7.57%
  • Residential mortgage: 5.70%

    Now let's look at Prosper.com. They have a nifty chart of loans made in the past 30 days, but I didn't think it was all that helpful as it didn't tell you amounts or give you an idea of weighted rates for comparison to Bank of America. Here it is anyhow, for your amusement.



    Instead, I found the following data on their loan performance page for June 30, 2006 - June 30, 2007.

    Average annual return
    AA: 9.13%
    A: 10.07%
    B: 10.91%
    C: 11.18%
    D: 11.65%
    E: 8.64%

    Then I thought it would be interesting to look at recent activity, so I pulled the data for June 1, 2007 - June 30, 2007 and ran a few numbers.

    Loans Originated: $2,571,711
    Number of Loans: 327
    Average loan: $7,864.56

    AA: $764,958 - 82 (Average = 9,328.76) - 29.7%
    A: $475,316 - 55 (Average = 8,642.11) - 18.5%
    B: $493,534 - 57 (Average = 8,658.49) - 19.2%
    C: $465,625 - 62 (Average = 7,510.08) - 18.1%
    D: $284,127 - 48 (Average = 5,919.31) - 11.0%
    E: $61,100 - 15 (Average = 4,073.33) - 2.4%
    HR: $27,051 - 8 (Average = 3,381.38) - 1.1%

    Using the above average returns and assuming that 100% of the HR loans will default (0% return), I got a weighted average APR of 10.19%.

    Compare this to Bank of America's average rate for a direct consumer loan of 8.46%. That's a premium of 1.73% over Bank of America's average return. What's the deal here? Why would you pay a premium to throw your life story on the internet where anyone can read it? Is it because the borrowers have low quality credit?

    Credit Quality: Fico Scores

    I wanted to see how credit quality works with FICO scores. The distribution of scores (Source) looks like this:



    Prosper.com's credit grades (Source) look like this:



    And to be helpful with your analysis, Prosper.com also provides you with this nifty chart of historical defaults by credit grade. Please not something VERY important on this chart - the note that says "for borrowers with debt to income ratios of 20% or less".



    Going back to the loan data from June 2007, it appears that most of the loans are being made to high quality credit. 48.2% are going to A or beter, which are people with credit ratings of 720+. That should be a default rate of less than 0.9%, right? WRONG.

    Debt To Income (DTI)

    Let's look at what Prosper has to say about DTI.
    "What is a debt-to-income ratio?

    Part of a borrower's credit profile is a debt-to-income ratio. Debt-to-income ratio (or DTI) is a measurement of the borrower's ability to take on additional debt. This number takes into consideration how much debt the borrower had prior to their loan in addition to what their debt will be if the loan they are requesting is made. (Their debt history is part of their credit history, and is reported to Prosper in the initial credit check.) The DTI is calculated by dividing the borrower's annual income (before taxes) into their annual non-housing debt payments. It is expressed as a percentage.

    Generally a DTI of 20% is at the upper end of normal when excluding housing debt. Loans with debt-to-income ratios exceeding 20% are more risky—in some cases very risky—and much more difficult when trying to estimate default risk. In fact, whereas Prosper provides general default rate estimates when debt-to-income is 20% or lower, no estimates are provided for debt-to-income ratios greater than 20%.

    If the DTI is shown as "N/A" (not available), it may be for one of two reasons. First, it may be that Experian (Prosper's credit reporting partner) has not been able to provide a reliable number for the borrower's monthly debt burder. Second, it may be that the borrower cannot provide documented proof of income, and has stated so in his or her application.

    If you are a beginning lender or unsure of how to factor in high-risk borrowers, we recommend that you stick with borrowers who have a DTI of 20% or less."

    Looking at current loan listings that are at 100% funding meaning the loan is going to be made for sure, here's what I found for average DTI. (Ignoring loans that didn't list DTI.)

    AA: 13 loans, $128,501, weighted average 20.8%
    A: 12 loans, $98,560, weighted average 24.8%
    B: 14 loans, $105,900, weighted average 19.44%
    C: 15 loans, $107,600, weighted average 37.08%

    So MOST of these loans are being made to people that are listing their DTI at ABOVE 20%. No wonder the big banks won't give these people money. According to the the US Census, renters spent 29% of their income on housing in 2001. So say 20% is the upper guideline for DTI. 20% DTI + 29% housing = 49%. That leaves 51% for food, transportation, savings, luxury items, insurance, etc. It seems pretty iffy.

    Now look at the C grade debt at 37.08% DTI. 37.08% + 29.00% = 66.08%, leaving 33.92% for food, clothing, utilities, etc. At under 20% DTI, the C default rate is 3.30%. What do you think the default rate is above 35%?

    But it gets worse - I believe their listed DTI ratios are questionable at best.

    Information Quality:

    Check out this example. If the link is dead, you can read some excerpts here:
    "Purpose of loan:
    I want to stop my collection accounts from accruing more interest by making a settlement on the larger one, and paying in full the smaller one. As you see in my listing, my total delinquent amount is about 3600. The larger account is 3300 of that total. I recently received a settlement offer of 1300$ for that account. I used to work in the debt collection industry for Northland Group (about 1 yr) and FRS (Financial Recovery Systems, about 6 months) and I know that summer time is the hardest time for them, so I'm writing a counter offer of $700. I'm sending my correspondence by certified mail, and only accepting an offer if I receive it in writing. If they do not accept my smaller offer I will immediately make another offer slightly higher until I come to an agreement with them. I know they will NEVER offer me in writing the lowest they can accept. That's taking money out of their own pocket. I'm asking for the SMALLEST amount of a loan that I can because I don't like to borrow money anymore, but I know now is the right time to try to get my deal accepted by the collector. That's why I am asking here.

    My financial situation:
    I have around $500 in savings in a sharebuilder account, as well as some old series E savings bonds which were given to me by my grandparents as a gift, which now are valued at around $350.00. I would not want to cash them in unless I had to, but the sharebuilder account is my emergency fund.

    Monthly net income: $ 2000.00

    Monthly expenses: $
    Housing: $ 900.00
    Insurance: $ 60.00
    Car expenses: $ 90.00 (gas, oil change, filters, car is owned 100%)
    Utilities: $ (included in my rent)
    Phone, cable, internet: $ 60.00
    Food, entertainment: $ 100.00
    Clothing, household expenses $ 40.00
    Credit cards and other loans: $ 30.00 (both cards I'm currently using I pay more than double the minimum 5$)
    Other expenses: $ 65.00 (cell phone)"
    I think something might be askew in the numbers, don't you? Theoretically, he SHOULD have $655 a month of free cash, right? Obviously he doesn't, or he wouldn't be borrowing money to pay off $3600 in defaulted credit cards. For example, I strongly question the food expense of $100. Food stamps are $155 a month for a single individual and that's supposedly hardly adequate. Yet somehow he's able to live on $3.29 a day?

    More importantly, he lists a DTI of 2%. Even if he only needs to pay $30 a month towards the two cards - what about the cell phone? Isn't that an open account at $65 a month? What about the phone line? The internet? The cable? Something isn't right here.

    Conclusion

    While it's a lovely idea to want to help people with their problems AND make money doing it - clearly there is a reason that these people have to go to Prosper.com to get the loans. They are already loaded to the gills with debt and shouldn't get anymore. Further, since you can't possibly predict the actual default risk - since the information is flawed at best, you can't figure out what your required return needs to be.

  • Electricity: The Failure of the US Government in Iraq

    In yesterday's news, there were some numbers on current electricity production in Iraq.

    "Despite the setbacks with the power plant, Bowen said Iraq's electricity supply still rose to 4,230 megawatts, compared with 3,900 megawatts during the previous quarter and 3,800 before that. But that is still below the prewar level of 4,500 megawatts, he said."
    A focus of the problem is the Al-Doura (also spelled Dora) power plant, which produces 320 megawatts primarily for Baghdad.

    In a story from July 20th on Boston.com:
    "Bechtel National won a $1 billion contract to rehabilitate the electricity sector in Iraq and began work on Doura in August 2003. The two turbines, Unit 5 and Unit 6, were refurbished in June 2005, at a cost of $90.8 million, and Iraq's Ministry of Electricity took control of the plant. Worried that the staff at the plant would be unable to maintain the turbines, US officials spent $81 million more on "coaching, mentoring and on-the-job training" for 239 staff members at the Ministry of Electricity."
    In addition:
    "More than a year after the Doura Power Station was handed over to Iraq's Ministry of Electricity, neither of the two steam turbines that the United States paid $190 million to repair is operational, according to the report, released Wednesday evening."
    So pretty much, we spent $81MM to "train" the Iraqis and within a year the two turbines failed.

    $81MM / 239 = $338,912.13 per employee.

    Now I don't want to say that Bechtel skimmed money, but frankly I'm a little skeptical considering the cost of attendance at Harvard is only $50,950 per year including room/board/tuition/etc. It seems like we could have flown every one of those employees to the United States, given them a year of extremely intense training at one of our many fine technical colleges, then put them in a year of training in our power plants and wound up MASSIVELY ahead. Even if we only did it with 50 employees, it would be a big start.

    Why is electricity so important?

    From a simplistic economics perspective, you need four factors for production:
  • Land
  • Labor
  • Enterprise
  • Capital

    So say I want to make widgets in Iraq. Can I get the land? Sure. How about labor? No problem (60% unemployment.) Enterprise - that's me. Capital is where we run into a tid bit of a snag.

    Modern factories use a wonderful invention we like to call "ELECTRICITY" to drive the machines. From air compressors to conveyer belts to 10 ton presses, the vast majority require electricity at some point to operate.

    When your supply of electricty is tenous at best (3-6 hours a day), how do you apply labor to your capital to produce goods? Do you just tell the workers they won't get any money while the power is out and they stand about the factory floor in the sweltering heat and darkness?

    Electricity is the key to the whole Iraqi puzzle. Without it, there will never be serious production of goods in Iraq. Oil alone is not enough. 60% unemployment is like a bad joke and I would venture to say that it's the cause of many of the problems.

    Possible Solutions

    Electricity production isn't magic. What you need is some form of energy, a power plant, and lines to deliver it to consumers. Iraq has SOME electricity. It's just not produced in a reliable fashion. So what can be done? Here are some steps I'd take immediately.

    1) Decrease demand: Dramatically raise the price of electricity. Cut off areas that don't need it immediately. FLOOD Iraq with the new energy efficient light bulbs. 100 million of them would go a long way, and I'm pretty damned sure we could buy and deliver them for less than $3 a piece. Even if 95% were sold off and only 5 million were installed, 5MM bulbs at 20 watts instead of 60 watts = 40 watts x 5MM = 200 megawatts savings or 62.5% of the entire production of the Dora plant.

    2) Increase supply: Electricty can be transmitted over long distances (up to 4,000 miles per wiki). If we can't build and maintain a plant inside Iraq, why don't we build one OUTSIDE Iraq? Kuwait City is only 344 miles from Baghdad. Iraq also shares a long border with another of our allies - Saudi Arabia. If the environment is unacceptable - let's just put one across the border. Supposedly a 1,000 megawatt coal plant only costs $1.5 billion. We could build three just outside Iraq for only $4.5 billion and increase total electrical production to 7,230 megawatts - a 71% increase! With big money and heavy political pressure, I imagine we could get these plants built in a matter of 2 years or less.

    3) Education Education Education: If there is one HUGE advantage the United States has over the rest of the world, it's having the best universities on the planet. Let's take advantage of that. Let's try rotating 50 engineers from every plant to our universities for a year of training. It'll be good for the Iraqis, it'll be good for our goals in Iraq. Give them each a degree or certificate of some sort. Then rotate them through American power plants for another year. Send the Iraqi managers to business school. Why not? It only costs $150k - that's CHEAP compared to what Bechtel spent on it's failed education attempts. Why are we trying to reinvent the wheel inside a war zone when we have wonderful wheels at home?

  • Monster.com (MNST) cuts 800 jobs - a brief look at their operations.

    Monster.com today, in connections with their second quarter earnings, announced that they would be cutting 800 people from their workforce.

    "July 30 (Bloomberg) -- Monster Worldwide Inc., the world's largest network of online job-hunting sites, said it will cut 800 jobs, or 15 percent of its staff, after reporting that second-quarter profit fell. The shares rose 6 percent.

    Net income slid 28 percent to $28.6 million, or 21 cents a share, from $39.6 million, or 30 cents, a year earlier, the New York-based company said today in a statement. Sales rose 20 percent to $331.1 million, missing the $337 million average estimate of 15 analysts."
    Now I haven't used Monster in years, but I was under the impression that it had seriously degraded in quality. Apparently, I'm the only one that feels that way as it hasn't lost much in the way of traffic.



    I also thought this was a fairly interesting factoid:
    "Job cuts in human resources and finance will eliminate duplication in the U.S. and Europe, Iannuzzi said in an interview. The U.S. sales team will also shrink as Iannuzzi tries to boost the percentage of job ads Monster clients place on the Internet themselves. Monster processes only about 15 percent of ads electronically, he said."
    What is it, 1978? Why on earth are most of their ads being placed by workers and not directly by the companies themselves?

    A few quick numbers:
  • 800 workers / 15% = 5333 workers.
  • $170MM / 800 = $212,500 per worker.

    Following that formula: 5,333 x $212,500 = $1,133,262,500.00

    Gee, something's amiss, seeing as how their total operating expense for Q1 2007 was only $270MM x 4 = $1,083MM.

    So how can they save that much per worker?

    You can read more straight from the horses mouth here. (Not the official 10Q or I would've linked to it below).

    According to the June 2007 Media Metrix report, Monster.com was the 22nd most hit US website with 25,825,000 unique users. Close competitor Careerbuilder.com came in 30th with 21,723,000 users. Other close competitors that offer other services that weren't broken out of the rankings include #1 Yahoo with a total of 133,093,000 unique users and #28 CRAIGSLIST.ORG with 22,529,000 unique users.

    A few interesting things from their first quarter 2007 10Q:

  • Careers – North America: $184,017
  • Careers – International: $106,206
  • Internet Advertising & Fees: $38,805

    Total Revenue: $329,028
    Revenue at our Internet Advertising & Fees segment increased 19.6%, a much slower growth rate than throughout the periods in 2006. Several factors contributed to the reduced growth of the Internet Advertising & Fees segment, however the main drivers were slower growth in overall users and reduced lead generation volume. Revenue from lead generation approximates 48% of our revenue base and is generated from many sites across our network. During the first quarter of 2007, we experienced a reduced volume of users to our sites, and were unable to deliver a high volume of quality leads to our advertisers. Display advertising approximates 25% of our revenue base and is the other main source of our revenue. Our websites across our network realized a higher ratio of remnant versus brand advertising during the first quarter of 2007, resulting in excess inventory and a lower cost per impression, contributing to our overall slower growth rates. We continue to believe that online advertising represents a significant growth opportunity for us, as our audience is appealing to both brand and remnant advertisers.
    It seems that Monster.com has lost their way and are wandering into the "LOTS OF ADS!!!!" as a solution for growth instead of "Let's make our system better for users"

    Another quick analysis:

    25.8MM unique users per month
    $38.8MM revenue per quarter / 3 = $12.93MM per month

    So they are making $0.50 per unique user per month. Not too bad!

  • Business Idea: Rent Your Wifi Connection

    My DSL connection is a waste of money most of the time: I pay $19.99 a month plus the cost of the landline from AT&T. Most of the time, it's not being used at all. The maximum hours I have available to use it works out something like this:

    Monday-Friday: 6pm-12am = 6 hours x 5 days = 30 hours
    Saturday-Sunday: 8am-12am = 16 hours x 2 days = 32 hours

    Out of the 62 hours I'm actually home to use it, I probably really only use it something like 10-12 hours a week.

    And that's not looking at bandwidth at all. I mostly read news sites. I get around 120K down and 40K up. While I'm actively using it, I probably average 20K down and 5K up. Maybe. Considering it's idle most of the time.

    Like most people, I have a wireless router. My laptop tells me that there are usually around 10 other wireless routers in range that are broadcasting SSIDs. There might be 12-15 total. And just like most people, my router is setup as a closed system. Without the WPA key, you don't get to use my DSL at all.

    I have a few reasons I won't share my wifi:

  • Performance: I don't want my connection to be slow.
  • Fear: I don't want some fool to download Beyonce's newest and get me a nasty letter from the RIAA that I can't defend myself against.
  • Security: You have to have a key to have a secure connection.

    Really though it's pretty stupid for all 15 of us in range to be paying $19.99+ a month for broadband. We could probably all get by just fine with 5 connections. But I'm not about to walk up and down my neighborhood trying to work out some complex network sharing arrangement to save a few bucks a month.

    Today I've been looking at Skype Wifi phones. I came to the conclusion that the Netgear SPH101 for $149.99 - $50.00 mail in rebate from Amazon.com is a pretty good deal. For another $29.95 a year, you get unlimited calling inside the US and Canada. Hard to beat that. The downside is that outside of my home and office, it can be tough to find a wifi connection.

    If you want to pay, you can get t-mobile hotspot to go for $29.99 a month with a one year contract. Or with a voice plan, $19.99 a month. Course, it mostly only works in Starbucks and Borders. Some deal that is.

    What if I wanted to use my skype phone someplace else? It would be nice if there were more wireless connections available. Especially if they weren't that pricey.

    I had the idea that it would be pretty nifty to rent out the connections. It would work something like this:

    A new company handles the transactions and accounts. Wireless router makers (Cisco? Netgear? Etc?) installs software on their router to connect to the company website and use a company proxy. From the owner end, you set up an account with the company and set a price for wireless access. Users with Wifi devices see a list of available accounts and a price per minute. It can be competitive. Could look something like this:
    Joe's Broadband
    Signal Strength: 7/10
    Last speed test: Yesterday
    Upstream: 20K
    Downstream: 40k
    Cost per minute: $0.005

    Jan's Broadband
    Signal Strength: 6/10
    Last speed test: Today
    Upstream: 5K
    Downstream: 15k
    Cost per minute: $0.001

    Mary's Broadband
    Signal Strength: 3/10
    Last speed test: Today
    Upstream: 10K
    Downstream: 100K
    Cost per minute: $0.10
    The company is responsible for the following:
  • Setup of accounts (collection of money, etc)
  • Testing line speed to make sure its not being oversold
  • Proxy to record internet usage to protect the wifi provider
  • Public key encryption to keep your use private from the provider or anyone who is snooping

    In exchange, they take some portion of the money - say 30%.

    So say you login to Jan's broadband and use it for 5 hours. 5 x 60 x $0.001 = $0.30. Jan earns 70% of that, or $0.21. Jan has a highspeed connection, so she has 10 available slots (50K upstream, 150K downstream, plus extra for her own use). If all the slots are filled, she can make $0.42 an hour. Say she averages 65% of capacity for 6 hours a day, 30 days a month - she ends up getting paid = .65 x .042 x 6 x 30 = $4.91 for the month. Is it a lot? No. But maybe it brings her DSL expense down dramatically. If she were on the edge of a college or some other busy spot, maybe she ends up actually making a profit by raising her price!

    Following in Google's footsteps, the company would only send out a check when the account balance reaches $100. Also, the providers can use their credits to go out and use other people's wifi connection when they need to.

    In this manner, I think a real market would be rapidly created for dirt cheap wifi access and micro payments to the providers. With the ability to actually profit from a broadband connection, open wifi would become far more common, and the use of nifty wifi internet devices like the Skype VoIP phones would be far more common.

  • Chrysler debt sale postponed. Underwriters to carry debt themselves.

    In a BAD sign for Detroit, the underwriters of the Chrysler/Cerberus deal weren't able to sell the debt to other investors or banks, and are now stuck with it.

    Bankers Postpone Chrysler Debt Sale
    By SERENA NG and GINA CHON, July 25, 2007

    Both Cerberus and Daimler, however, will be helping to lend $2 billion to Chrysler because of weak investor interest in buying its debt, a person familiar with the deal said. The debt underwriters, which include J.P. Morgan, Citigroup, Goldman Sachs, Bear Stearns and Morgan Stanley, will initially lend the auto business $10 billion, but intend to sell some of that to investors at a later date.
    This is an unusual occurance. Underwriters aren't usually a big fan of taking on billions of dollars in risk - especially given that this type of debt is the last in line to get paid during a bankruptcy.
    Chrysler bond deal changes 'very untraditional'
    By Leslie Wines
    Jul 25, 2007

    The underwriters also will hold some Chrysler debt on their books, an unusual practice. "This is a 'sweetheart deal' for Chrysler," Atkins said. "Usually underwriters sell the debt to investors so they don't have to hold it on their books. But this time they are going to hold onto some of it and try to sell it at a later time. This is a big gamble. This is an underwriter-driven deal, not an investor-driven deal and that is very unusual."
    But no one tell the fools in Detroit. They've already started changing signs and planning a big party!
    As changing of signage begins, Aug. 1 party is in the works
    July 24, 2007
    BY TIM HIGGINS
    FREE PRESS BUSINESS WRITER

    As lawyers from Cerberus Capital Management and DaimlerChrysler AG push to complete their Chrysler deal, officials at the Auburn Hills automaker are beginning to remove "Daimler" from some signs and are making plans for a celebration next week.

    Allison Transmission deal in trouble: Is this the death knell for the Chrysler deal?

    On June 28, 2006, Yahoo reported the sale by General Motors of it's Allison Transmission Unit to two private equity firms - The Carlyle Group and Onex Corporation.

    The terms of the sale were:

  • General Motors gets $5.575B in cash
  • Carlyle and Onex put up $1.5B in cash (split evenly)
  • Allison takes out $3.5B in bank loans
  • $1.1B in "high yield" or "junk" bonds are issued by the company.

    The underwriters of the loans - "Citigroup Inc., Lehman Brothers Holdings Inc. and Merrill Lynch & Co." had planned to sell $3.1 billion of the loans to other banks.

    Well, it turns out that other banks don't want any part of it.
    "Allison Transmission, a highly profitable unit of General Motors Corp. based in Speedway, Ind., has gotten stuck in a traffic jam in the debt-financing market.Wall Street firms postponed a sale of $3.1 billion in loans that would pay for the leveraged buyout of Allison by private-equity firms, said a person familiar with the matter. While the sale of Allison to Carlyle Group LP and Onex Corp. is highly likely to proceed, the trouble raising debt from investors complicates matters for the company and its bankers."
    So now the underwriters are stuck and the junk bond issuance is on hold. I would assume the deal will still close though, since Allison is a very profitable company and it makes sense to me to buy it. Also from the WSJ article:
    "The company posted $2.3 billion in revenue last year and posted an operating profit of nearly $350 million, making it one of GM's highest-margin divisions."
    By my calculations, that's an Operating Profit Margin of 15.22%.

    From their website:
    "Having literally invented the category, today the company continues to dominate with an 80% market share of all medium- and heavy-duty commercial fully automatic transmissions produced."
    Further:
    "This support network provides service and technical support worldwide to the division's 250 OEMs, and the many fleet owners and operators, and end users. Allison Transmission has a workforce of over 4,000 salaried and hourly employees."
    I believe it also comes with a big chunk of intellectual property. From the President's Message:
    "The employees of Allison Transmission have over 600 patents, making the company one of the most prolific patent organizations within General Motors."
    So if a company that has 80% marketshare and 15.22% operating profit margin isn't able to get 1.1 billion in Junk Bonds, how is a company like Chrysler going to get $60+ billion from the debt markets for a buyout from Daimler by Cerberus?

    And how are GM/Ford/Chrysler going to fund a VEBA plan to shift the pension plan/health care benefits over to the UAW? This is going to require even MORE debt.

    The news of the postponement of the Allison Transmission deal caused a pretty big shift in the derivatives markets.
    "The cost of protecting GM's debt for five years with credit default swaps widened by 61 basis points to about 568 basis points a year, or $568,000 for every $10 million of principal protected, according to data from various brokers and dealers."
    Unless the appetite for risk increases again in the credit markets AND the unions give some hefty concessions, I believe the Big 3 are in very big trouble.

  • "College Cost Reduction Act of 2007" will bring some interesting volatility to SLM

    Last Friday, the US Senate passed the "College Cost Reduction Act of 2007" with a vote of 78-18. You can read the text of the bill, sponsored by Representative Miller of Georgia, here. A variation of the same bill was also passed by the House of Representatives on July 11th witha vote of 273-149.

    Speaker Pelosi's blog had this to say about the bill:

    The bill will provide the single largest increase in college aid since the GI bill in 1944. The legislation invests about $18 billion dollars over the next five years in reducing college costs, helping millions of students and families. It comes at no new cost to taxpayers, and is funded by cutting excess subsidies paid by the federal government to lenders in the student loan industry.
    Basically, this is in response to the student loan scandal. Congress decided to punish the big lenders by taking away subsidies. It appears that some of these subsidies will go towards lowering student loan interest rates, increasing pell grants to $4,900 in 2008 and $5,200 by 2011.

    SLM Corporation (SLM) aka Sallie Mae is particularly interesting because they are in the middle of a $25 billion private equity buyout by Friedman Fleischer & Lowe, J.C. Flowers, Bank of America and J.P. Morgan Chase.

    Apparently, J.C. Flowers believes this massive reductions in subsidies will reduce the value of Sallie Mae significantly. This article from last Friday's Wall Street Journal said:
    The buyout group, an investment group led by private-equity firm J.C. Flowers & Co., has said that the bills "could result in a failure of the conditions to the closing of the merger to be satisfied."
    As the bill makes it's way through committee and to the President's desk (where I suppose it could be vetoed), it will be very interesting to watch the ups and downs in SLM stock. I strongly suspect you could make some money betting in either direction as the stock swings wildly up and down based on congressional rhetoric and private equity jockeying for position.

    Movie Review: "Maxed Out" documentary

    Over the weekend, I rented the movie "Maxed Out", which I thought would be a fairly amusing look at the American credit card debt addiction.

    Boy, was I wrong.

    I knew something was immediately wrong when it started by following along a woman in Las Vegas. She's drives around in her Mercedes, giving a tour of the fancy new developments in Las Vegas. Then she starts talking about her house. "I couldn't afford to build it if they hadn't have given me a loan based on it's value when it was completed." Then the screen goes black and in a nearly unreadable font it says "This is the same accounting technique used at Enron..."

    I believe the accounting technique they are referring to at Enron was "mark-to-market" in which Enron booked the entire present value of a contract immediately.

    Example: Enron signs a 10 year contract to deliver 1,000,000 MMBtu of natural gas to a factory per year. The contract is booked at $6.45 per MMBtu and they use a 6% discount rate. The total present value of the contract is $49,598,875 - and so instead of booking $6.45MM in revenue per year you book the entire present value now.



    This woman had a construction loan for her new house. This is WILDLY different than booking the present value of future revenues. For starters, the bank releases the money in segments. If construction stops, or something goes wrong, the bank stops releasing money and the total value of the loan is much lower than it would be if they had just handed the home owner a big check. Furthermore, it's a pretty safe assumption that the completed house will be similar in value to other houses in the market. And this is a secured loan, which means if the woman fails, the bank can take possession of the house and resell it (at a loss, but a much smaller one than an uncollectible unsecured loan.)

    So already I wasn't too impressed. It got much worse from there. It followed the stories of three people that apparently ended up committing suicide over credit card debt, and made it seem like the big bad banks were dealing crack cocaine. It then mixed in some loans made to a boy with mental problems, then went off on a wild tangent about the national debt.

    You might enjoy this poorly researched, poorly edited, poorly captioned film if you are uneducated and possibly intoxicated. Or if you're a film critic (same thing?)

    Otherwise, save your money. If you're like the people in the film, you probably need it to make the minimum payment or to increase your collection of collectible plates.

    Zucca Ristorante, Los Angeles: Extremely Mediocre

    I recently dined at Zucca Ristorante in downtown Los Angeles, which is part of the Patina Restaurant Group, which also owns the excellent Cafe Pinot by the downtown library. Zucca has four and a half out of five stars on Citysearch. I was expecting it to be fairly good.



    From the Dinner Menu (flash warning), I ordered:


    Linguini vongole
    Linguini pasta tossed with cockle clams, garlic, parsley, white wine and diced tomatoes $17.95

    Which was extremely disappointing. It came with five (5) small cockle clams, which were chewy and not particularly good. The pasta was also sort of chewy and cold, and there wasn't very much of it either - perhaps 2/3 of a cup. It wasn't satisfying at all.

    Tortelloni di Zucca con burro e salvia
    Handmade roasted pumpkin tortelloni, butter, sage and Parmigiano-Reggiano 18.50

    Lasagna Bolognese
    Thin home made sheet pasta layered with meat ragoût, béchamel and Parmigiano 17.95

    The lasagna was half decent. The tortelloni was downright terrible - mainly because it was served luke warm, and some of it was downright cold.

    For desert, we ordered tiramisu, which was nothing to write home about, and a chocolate tort - which was like a giant piece of fudge made up to look like a cake. It wasn't very good either.

    The worst part about the whole experience, beyond the bad food, was the service. It was awful. Dinner came out in three groups, broken apart by 10 minute spans. The waitress waited for 20 minutes to check up on us. When we complained about the terrible tortelloni (which came out last and should have been hot), the waitress barely apologized and offered a free desert. She then cleared the table, including the barely eaten tortelloni. 10 minutes later, the manager came out and made another half-assed apology then offered a free desert. We didn't get the desert menu until 15 minutes later, almost a half hour after we finished the meal.

    We ordered desert and coffee. Desert came out 10 minutes later. About 5 minutes after that, the waitress wandered out with a couple cups of cofee and no creamer. 10 minutes later, another guy showed up with the rest of the coffee - but was short one cup. By this point, we'd almost finished the desert.

    The bill arrived, and they had gone ahead and charged us for the inedible tortelloni. I was deeply impressed. There are too many good restaurants in Los Angeles to waste time with bad food and pisspoor service. I certainly wouldn't return to Zucca.

    Congrats to Tuan (Tommy) Vu on his big World Series of Poker Win!

    I'm not much of a gambler, and I don't really follow poker. An old post of mine on Tom Vu has been getting some hits lately, and I wondered why.

    It turns out that on June 5, 2007, Tom Vu (aka Tuan Vu) placed 2nd at Event 8 (No-Limit Hold'em w/Re-buys $1000 buy in) at the 2007 38th Annual World Series of Poker - winning $364,761. He also place 207th at Event 15 (No-Limit Hold'em) on June 9, 2007 winning $3,408.

    By my count, that puts him $365,669 ahead of his buy in. Not bad for a few days work!



    Poker is great. Poker is glorious. But how does it compare to real estate investing? I'd say not too well looking at some of his old infomercials on youtube. (Since you can't attend his seminars, the three little words to success are "Don't Give Up!") Check out the babes in this recut clip!

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    I borrowed the "Make Money Now!" pic from this awesome website on ridiculous infomercials. Another gem from the same site:



    What a blessed life Tom Vu has lived. You can see his overall poker stats here.

    Junk bond market sell off = Bad news for the Big 3

    The collapse of the subprime mortgage market has spooked the so-called "junk" bond or "high yield" bond market.

    10 days ago:

    "US HIGH YIELD-US junk bonds sell off, threatening LBO financing. The U.S. junk bond market is being shaken by the subprime market, raising concerns about the viability of a number of proposed high-yield debt sales which are tied to company buyouts."

    Yesterday:

    "Spreads, which are the extra yield investors get for sinking cash into riskier securities, have widened by their biggest margin since December 2006. On Thursday, the risk premium for junk bonds hovered at about 300 basis points, or 3 percent, over Treasury bonds - up sharply from the 246 basis points, or 2.46 percent, at the end of May. That's because prices move in the opposite direction from yields, and prices have been falling."

    Today:

    GMAC's bonds fall 3 points amid junk bond selloff

    NEW YORK, July 20 (Reuters) - GMAC's long bonds fell three points on Friday as the U.S. junk bond market suffered a broad selloff, according to MarketAxess.

    GMAC's 8 percent bonds due in 2031 fell to 93.56 cents on the dollar on Friday, down from 96.56 cents on Thursday, MarketAxess reported. GMAC, the former finance unit of General Motors Corp. (GM.N: Quote, Profile, Research), is now majority-owned by Cerberus Capital Management."


    Speaking of Cerberus, a few days ago, I made a post titled "Has Cerberus bit off more than they can chew in the Auto Industry?" in which I talked about the difficulties Cerberus is having raising the required capital to complete the Chrysler deal. In today's Wall Street Journal, there was an article titled "Red-Flag Sale: LBO Debt Deals Face New Snags"

    Banks raising nearly $40 billion in buyout-related debt for Chrysler Group and the United Kingdom's Alliance Boots PLC are being forced to sweeten terms for investors and face delays in their sales, in another sign of turbulence in global debt markets.

    Chrysler just started contract negotiations with the UAW, and already started by blaming the unions for it's woes.

    Also in today's news: 2,000 of 17,000 Delphi Workers are ready to strike.

    So to summarize, capital is drying up in the junk bond market. Cerberus is already having a tricky time getting the money they need to buy out Chrysler. The Big 3 have started the negotiations process for a new contract with the UAW, and Chrysler came out swinging. And some of the unions are still prepared to strike, causing a crippling shutdown.

    The Big 3 are going to need more capital to fund a potential VEBA plan where they pass the pension and benefit plans over to the Unions. And more importantly, they are going to need the cooperation of the Unions if they hope to survive.

    It seems like the winds of change are blowing in the wrong direction for the Big 3 automakers. The Unions aren't in a cooperative mood. The flush capital markets are drying up. By the time negotiations are complete, the VEBA plan could be impossible. And they are running out of cash. I would be particularly nervous if I were a shareholder in Ford, which seems to be the weakest of the three.

    *UPDATE*

    Two more related stories in the Wall Street Journal.

    The Junk Bond Market Hangs the Gone Fishin’ Sign

    ---

    Citi May Be Stuck With Bridge Loans

    A look at Adjusted Gross Income (AGI) and Taxes Paid in California.

    The IRS states that Adjusted Gross Income (AGI) is defined as:

    "your taxable income from all sources including wages, salaries, tips, taxable interest, ordinary dividends, taxable refunds, credits, or offsets of state and local income taxes, alimony received, business income or loss, capital gains or losses, other gains or losses, taxable IRA distributions, taxable pensions and annuities, rental real estate, royalties, farm income or losses, unemployment compensation, taxable social security benefits, and other income minus specific deductions including educator expenses, the IRA deduction, student loan interest deduction, tuition and fees deduction, Archer MSA deduction, moving expenses, one-half of self-employment tax, self-employed health insurance deduction, self-employed SEP, SIMPLE, and qualified plans, penalty on early withdrawal of savings, and alimony paid by you. Do not deduct your standard or itemized deductions."

    In a previous post, I had some Data on this subject dating from 2004.

    Los Angeles County:

    Median adjusted gross income (AGI) based on personal income tax returns, 2004:
    Individual: $28,686
    Joint: $52,170

    California:

    Median adjusted gross income based on personal income tax returns, 2004:
    Individual: $33,223
    Joint: $61,084

    With a little bit of research, I found more recent data from the Franchise Tax Board 2005 Personal Income Tax Stats by Zip code (pdf warning). If you are feeling adventurous, you can produce statistics for Los Angeles County from this list of zip codes (pdf warning).

    I'm feeling lazy, so here's some statistics using the state totals at the end of the file.

    Returns: 14,607,696
    AGI: $849,740,344,000
    Tax Liability: $38,747,288,000

    Basic Analysis:

    Average AGI: $58,171
    Average Tax: $2,653
    Effective Tax Rate: 4.56%

    More in Depth:

    I pulled some additional data from the California Department of Finance Financial and Economic Data on the State of California as a whole.

    Population in households (1/06): 36,307,217
    Households: 12,366,218
    Civilian labor force, 2006: 17,901,900
    Non-workers: 18,405,317

    Population/household (1/06): 2.936
    Workers per Household: 1.448
    Nonworkers per household: 1.488

    Returns per person: 0.402
    Returns per household: 1.181
    Returns per worker: 0.816

    AGI per person: $23,404.17
    AGI per household: $68,714.65
    AGI per worker: $47,466.49

    Tax per person: $1,067.21
    Tax per household: $3,133.32
    Tax per worker: $2,164.42

    Conclusion:

    Obviously, this data isn't hugely meaningful by itself. AGI has some pretty oddball adjustments. But it does sort of paint a picture of the financial situation of the average Californian worker and household.

    Los Angeles County Demographics and Statistics.

    I'm always interested in learning more about where I live. The US Census has fairly good information, but sadly even though they update estimates on some data, a lot of it is hopelessly out of date because the census is only conducted every 10 years.

    Today I discovered the California Department of Finance Financial and Economic Data. They have much more recent data on all the various California counties. For use in later posts, I'm going to list some of their key data on Los Angeles County here (data accessed on 7/19/07.)

    Population:

    Population, 7-1-06: 10,292,723
    Percent of California: 27.5%

    1-1-06
    Population in households: 10,066,953
    Population/household: 3.123

    Schools:

    Enrollment, Fall 2006 (public & private schools) Kindergarten-12: 1,833,725
    Enrollment, Fall 2005 Colleges: 539,562

  • UC, Los Angeles: 37,221
  • California State Universities: 100,181
  • Community Colleges: 380,987
  • Independent: 21,173

    Employment:

    Civilian labor force, 2006: 4,860,600
    Civilian employment: 4,631,600
    Unemployment: 229,000
    Unemployment rate: 4.7%

    Nonagricultural wage & salary employment, 2006 (BLS series): 4,092,542
    Percent of California: 27.2%
  • Trade, Transportation and Utilities: 814,083
  • Professional and Business Services: 594,667
  • State and Local Government: 536,267
  • Educational and Health Services: 481,300
  • Manufacturing: 462,275
  • Leisure and Hospitality: 387,508
  • Financial Activities: 248,042
  • Information: 209,692
  • Construction: 156,675
  • Other Services: 145,717
  • Federal Government: 52,333
  • Natural Resources and Mining: 3,983

    Personal income, 2005 (mil.): $342,231.0
    Percent of California: 25.6%
    County Rank: 1

    Per capita income, 2005: $34,426
    Percent of California: 93.2%
    County Rank: 19

    Avg. earnings per job, 2005: $51,806
    Avg. wages per job, 2005: $46,228
    Avg. earnings per nonfarm proprietor, 2005: $33,858

    Median family income, Census:
    1979: $21,135
    1989: $39,035
    1999: $46,452

    Median household income, Census
    1979: $17,563
    1989: $34,965
    1999: $42,189

    Median adjusted gross income (AGI) based on personal income tax returns, 2004:
    Individual: $28,686
    Joint: $52,170

    Number of Employers by Firm Size: (1999)
  • 1-4: 124,760
  • 5-9: 38,613
  • 10-19: 26,286
  • 20-49: 20,150
  • 50-99: 7,123
  • 100-249: 4,008
  • 250-499: 1,008
  • 500-999: 352
  • 1000+: 213
  • Total: 222,513

    Housing: (1/1/2006)

    Housing stock: 3,364,750
    Percent of California: 25.6%
  • Single family: 1,876,512
  • Multiple family: 1,431,547
  • Mobile homes, trailers, etc: 56,691
    Vacancy rate (percent): 4.2%
    Median Home Price
  • January 2007: $525,000
  • January 2006: $490,000

    Retail/Consumer Spending:

    Total taxable sales / Taxable Retail Sales / % of California
    2003: $113,685.4 MM / $79,426.7 MM / 24.7%
    2004: $122,533.1 MM / $86,496.7 MM / 24.5%
    2005: $130,722.4 MM / $92,271.2 MM / 24.3%

    Sales and Use tax rate (includes state, local, and district taxes): 8.250%
    * Rate may be higher in some areas of the county.

    Obviously, there is a ton more data available. But these in particular are what interest me. If you need more in depth data, check out their data sources.

  • Motley Fool: Giant Spam Machine

    I am not a big fan of Motley Fool.com. Their headlines drive me absolutely batty. Check out these "gems":

  • Knock These Stocks Out of the Park
  • Read This Before the Market Crashes
  • 3 Ways to Beat the Market

    See, you just need to add "!!!!!!!!" to the end of each one and gmail will throw it right into your spam folder.

    And the hats? The hats are about enough to make me want to puke blood.



    They might have the greatest advice in the world (as far as I can tell, they don't.) But the way they push information and they way they advertise makes me downright angry. Examples:

    Punch the monkey, win a free iPod?



    Click here to claim your FREE credit report?



    Didn't this kind of crap go the way of the Dodo? Or is it 1999 all over again? Let me jump on my 28k modem and log in to my AOL account! I'll hit you up on instant messenger! Oh no, someone sent me up the blue screen of death! Now my Windows 98 won't load right!

  • The death of traditional media.

    This morning on my way to work, I listened to an NPR story about the loss of book reviews in newspapers. It was sort of interesting in a technologically inept sort of way. Listen to it here: "Book Reviewers Decry Fewer Newspaper Pages by Martha Woodroof"

    If you don't have time for that, here's a quick summary. How do people find books to read? Supposedly, it used to be through book reviews published in newspapers. And now newspaper editors, faced with BIG PROBLEMS such as loss of subscribers and disappearing advertising dollars are consolidating sections that don't generate much revenue for the expense. It turns out that newspapers are a business, who knew?

    This is a real problem for "people who buy a lot of books professionally" aka librarians. Now who can they trust to spoon feed them brief book reviews for their purchasing pleasure?

    In a related subject, on slashdot.org today, there is a story titled "Blogs Are Eating Tech Media Alive" Again, it's the same story. Advertising dollars are leaving, readers are leaving, and it turns out that tech media like Red Herring and PC Magazine can't cope with the changes.



    Instead of lamenting the loss of "REAL JOURNALISM", let's talk a little bit about the economics of journalism. How does dead tree journalism work? Say it's 1980. You want to open a magazine. What do you need?

  • Market Niche: something that people will buy to learn more. You want something that has as broad of a readership as possible without trying to compete too much with established companies that will eat your lunch.

  • Content generation: After all, the content is why people are buying your magazine. This means photographers, illustrators, writers, and editors.

  • Support staff: Just like any other business. Salesmen to sell advertising. Buyers to order supplies. Secretaries to answer the phones. Bean counters to handle the money. Janitors to clean the toilets. Managers to make sure everyone is doing their job and working together.



  • An Office: A place with a roof where everyone goes to work. This means you need desks, utilities, phones, typewriters (or computers, but after all, this is 1980), office plants, etc.

  • Customers: Since you probably aren't going to start by selling every magazine directly to the consumer, you need someone to push your magazine. Like a newsstand, a bookstore, or a grocery store.

  • Advertisers: If you don't have advertising in the publication, you have to charge the full cost of the magazine to the end user. This doesn't work out well if your competition DOES have advertising and can sell the same amount of content for a much cheaper price.

  • Printers: The most important part of dead tree media. You have to have a way to put all that information together on a piece of paper which you can then distribute. This means money for paper, money for ink, money for the printing machines, money for the logistics - warehousing, trucking, postage, etc.



    Almost all of these things share something in common; they require MONEY and lots of it. Photographers have to eat, even if you are just paying them for the photos you use. Paper mills don't give their product away. All of that gets folded into the price of the content.

    Now let's contrast that with the economics of "NEW MEDIA" aka blogs. What do you need to run a blog?

  • Market niche: Or not. You can write about anything you damn well please. Content aggregators and search engines will connect your content with people seeking that content. Today, Britney Spears, tomorrow US Foreign policy. Of course, if you want a large amount of regular readers - you probably want to stick with a single subject.

  • Content generation: You don't need professional writers to run a blog. Would it help? Sure. But professionals are expensive. Most people just write their own, and the market (such as Digg) decides which posts are worthy of reading.



  • Support staff: Probably not necessary at all, unless you run some incredible volume site like slashdot.org. Even then you probably don't need a secretary.

  • An Office: Definitely unnecessary. A "one man" shop that can work from anywhere doesn't need to pay for expensive commercial space.

  • Customers: Content goes directly to the consumers. Or to robots that steal your content to sell advertising. Either way, no grocery store is ever going to sell a paper copy of my blog.

  • Advertisers: You can go out and actively sell your ad space if you really want. Or you can just use Google Adsense like everyone else. Since the cost of the above is ZERO - you can even have no advertising at all.

  • Printers: Blogspace is completely free. Hearts of the Gods is hosted on blogger - which has cost me zip from day one. If you don't like the restrictions of a free service, you can always register your own domain and get hosting. If you pay for 3 years in advance, you can get hosting from Godaddy for $2.80 a month (and there are usually coupons out there to make it even cheaper.) If you look hard, you can find hosting cheaper than that.



    So let's really think this through. What does Hearts of the Gods cost me to publish? Nothing but my time. And eventually, I may even be compensated a bit for that. What would it cost me if I wanted to publish a hardcopy version of Hearts of the Gods? Figuring I'm reaching ~40 people a day x 30 days a month x 12 months a year = 14,400 copies. Say I can print them at $0.07 a page with a cheap high volume laser printer and dirt cheap paper and only print one page - that's $1008. Now I have to find a way to distribute them. Stand on a street corner? Drop them from an airplane? Too much trouble!

    The reason traditional media is being wiped out is that it costs so damned much to produce. You simply can't compete with a free blog. Supply and demand. There are millions of alternative sources of information that cost zip. And all of them can compete directly with dead tree media for eyeballs. Market forces are unstoppable no matter how much you dislike the new reality.

    So what are the librarians to do? How about reading blog reviews by people who read the book? Can't trust a single source? Read three. Or look at the "most popular seller" list on Amazon.com. It can't be that hard.

  • Adobe apparently employing the Irish to spread misinformation.

    Yesterday, I made this post about free software for windows in which I recommended Foxit Reader over the craptastic Adobe Reader.

    A while later, at around 02:20am east coast time "anonymous" made this reply:

    "Regarding the Adobe Reader, It's large, but buggy? C'mon, that's rubbish! Foxit is small and neat but i've had problems with it."

    I say "anonymous" in quotes because my statcounter recorded this tidbit of information:



    If you can't read that, it says "vpn-dublin-ext.adobe.com"

    Why hello there, Dublin-based Adobe employee. You don't think your negative opinion about Foxit reader could be biased do you? The use of the word "rubbish" made me laugh out loud.

    I use Foxit reader every single day. I've never had a single problem with it, even opening very large PDF files. Acrobat, on the other hand, takes forever to load, crashes my computer and occasionally prints page after pages of random characters.

    Budgeting for a move to China.

    In the near future, I am planning on moving to China for the purpose of learning Mandarin and experiencing the culture.

    Budgeting is a tricky thing. You have to be able to adequately plan for the future and guesstimate costs. Even moving to a new city inside the United States can be very tricky. How do you find a job? How can you find a place to live? Is it the right neighborhood? How do you get all your stuff there?

    I plan on going to China to study for about a year. I'll probably move to one of the less expensive schools I discussed here. We'll use Jilin University in Changchun as an example.



    Recurring monthly costs:

  • Food: I figure 45 RMB per day per person should be mostly adequate. This works out to about 1,350 RMB per month.
  • Housing: From discussing it with people familiar with the area, I believe I could rent a moderate quality apartment for 800 RMB a month.
  • Utilities: Since it's the frozen north, I figure 400 RMB per month may be enough.
  • Transportation: I'm guesstimating something like 10 RMB per day for travel within China, or 300 RMB per month.
  • Other: I figure I'll need another 700 RMB a month for incidentals.

    Total recurring expenses: 3,550 RMB per month



    One time expenses:

  • Getting there: A one way airline ticket will probably cost in the neighborhood of $500 x 2 = $1,000. Figure the cost of getting to Changchun from Beijing at another $150 each way. Total cost = $1,300
  • Student visa: An X visa seems to cost something in the range of $50. I'm a little vague about this, so we'll say $100.
  • Tuition: Jilin University costs 16,000 RMB for a year of study.
  • Other: For furniture, bedding, other travel costs, etc - $1,500

    Total one time expenses:: $2,900 + 16,00 RMB



    Coming home:

    I figure I will be able to store what little possesions I need to keep with family in a nearby state. Everything else I will sell or dump. I probably will keep my car, but this means the connected expenses of finding a place to store it and insuring it. So perhaps I will get rid of it as well. With a little help, I figure $5,000 will probably be enough to get started back up when I return to the states (find a job, get an apartment, etc).

    Total return expenses:: $5,000



    Notice that I didn't convert from RMB to dollars yet? That's because I'm concerned about the possibility that the RMB will keep appreciating against the dollar. We'll run with my projected exchange rate from that post of 6.9 RMB to the dollar.

    Recurring expenses: 3,550 x 12 = 42,600 RMB / 6.9 = $6,173.91 USD
    One time expenses: $2,900 USD + 16,000 CNY / 6.9 = $2,900 + $2,318.84 = $5,218.84
    Returning expenses: $5,000.00 USD

    Total cost: $16,392.75

    Add a margin of safety for unknowns of 20%, and it'll be just about $20,000.

  •