Bailout part.... three? four?

I'm sorry but I have to address yet another bailout. And at the risk of running out of fingers to point, I can only address this to EVERY person living in the beltway who has a vote.

STOP SENDING ME CHECKS! That means you, speaker Pelosi, congressmen English and Altmire and Senators Specter and Casey.

The government, in their infinite wisdom, has decided that another round of stimulus checks is required to "kick start" the economy. Excuse me? Apparently the $835 billion they've passed already isn't enough of a kick start? If we need more, I would label this a quadruple bypass requiring electric paddles.

Remember folks. This is the same government that sent us a stimulus check over the summer. The same government that spent $43 million to tell us, via postal service, that we were getting a refund. Who knows how much it cost them to print the darn checks.

Somewhere down the line, don't ya think someone, somewhere would raise their hand and say "hey guys, maybe we should let things work themselves out. You know. Give the 'free market' a chance to right the ship."

Adam Smith is rolling over in his grave (he's my hero, by the way. If you want to learn more about him, read "The Wealth of Nations.")

The summertime bailout ran us about $100 billion. Apparently none of us spent our check at Walmart buying big screen televisions; instead opting to do crazy things like pay bills, fill our car with gas, save it for a rainy day.

The late summer bailout cost us $835 billion. Let's round everything up to a trillion bucks so far.

MY KIDS DON'T WANT TO PAY THIS DEBT! The Ola family is already on the hook for $33,000 EACH for the national debt. This doesn't include the defecit at the federal level or the defecit Pennsylvania is facing (abotu $3 billion.)

Isn't it time to give our kids a break and not make them pay for our sins of overspending, extending our credit and keeping up with the Jones's? Give me a break.

If you can keep a little secret, I'll let you in on something. I think the economy is already on the way back up folks. To be sure, there is room left for the dow to go down (I'm betting we'll see about 7500 before it's 'the bottom.') But have you noticed that you have a few bucks left in your wallet at the end of the week yet? If not, you will begin to feel it soon.

Want to know what it is that created that little jingle in your pocket? It's called saving your money for stuff that's really important like gasoline and lunch meat for your brown bag lunch. It's called being uncertain about how you'll make another credit card payment, so you only pay cash. It's called being responsible. It's something we all should be everyday.

To answer this call with extending another freebie is called enabling, and if we enable an alcholic another drink or a drug addict another hit from the crackpipe we are shunned by society. Why is the government enabling us and why are we sitting here taking it?

Please, fight back. If you do nothing else today, take a few minutes and call your congressman and tell him or her to stop sending you checks. You're tired of putting your kids, or grandkids, further into debt.

Tell them to paydown the national debt with the new money.

Here is what you're going to see happen, by the way. And you don't need a fancy degree to figure this one out.

We will receive an artificial infusion of cash via $1 trillion stimulus package and another round of checks to each of us. OPEC is going to reduce output, thus reducing the supply of oil. Everyone knows that as supply dwindles, prices go up.

Since there will be an extra $1.1 trillion bucks floating around by the early part of next year, prices for other things will go up. That's called inflation. We will see inflation of approximately 6% to 8% next year. So if you like the way your food bill looks this year compared to last year, you'll LOVE next year!

By the way, your wages won't keep pace, so enjoy your 3% cost of living adjustment next year. You'll be starting the year of 3% - 5% behind the 8-ball. But don't worry. By this time next year, the credit markets will be unfrozen and you can borrow again!

Remember, there's nothing a line of credit can't fix...

Please follow this simple advice. Take their check, put it in the bank and don't touch it. Payoff your credit cards and cut all but one up. Continue paying cash for everything. There's something real about knowing that $50 debit for a Wii game is coming out of your checking account immediately. Live below your means.

Sorry to go off on this tangent, but I can't take this anymore. I am going to ensure that my kids don't inherit my debts. It's unfair and it's bad parenting. It's a terrible message we are sending to them.

You must be positively negative

Ah the dreaded bye week. Those of us here in Pittsburgh have come to loathe a weekend away from the Steeler football season. After all, what else is there to do on a Sunday afternoon after church and brunch besides watch football?

Glad you asked! We can talk about positive and negative coorelation and how it relates to your portfolio of stocks and investments, of course!

Let me start with a simple illustration. How many of you are married? Oops. I forgot that I can't see if you're raising your hand or not, but I can tell you this. For those of you that are married, I'm fairly certain that you and your significant other don't often see eye to eye on what to do during the dreaded bye week. Am I right?

After all, some of us (myself included) are excited that we can still watch Brett Favre throw a couple of zingers or the Colts play someone, etc. Football doesn't stop just because (gasp) the Steelers aren't playing.

Others (usually the other half of the married couple) find this a perfect excuse to head to the shopping outlets, meet aunt Ethel for a late lunch, shop some more and basically avoid the television set at all costs.

Hmph... a dilemma here for our married couple, isn't it? Well, not really.

This couple has (in investment terminology) a "NEGATIVE" coorelation. They are moving in opposite directions, and while it might not be a good thing at the time, it has great long term ramifications that are a good thing. For instance, the husband may compromise and shop for a while, so long as they can stop at the Quaker Steak and Lube for the 4 o'clock game and some wings. Both parties win out by meeting in the middle. This compromise is what eventually makes the marriage stronger, the bonds thicker and the relationship great.

The newlyweds, however, cave to each other and try to do whatever the other wants, right? This is called "POSITIVE" coorelation, and it can be deadly; not just to the strength of the marriage, but to a portfolio of stocks.

Huh? How does this relate to stocks?

Think of it like this. If you had a portfolio of stocks that had Microsoft, Dell, Gateway and Hewlitt Packard, how would all of them react to a slowdown in the economy? Well, since they're all technology stocks, all would likely respond the same way. This is just like the newlyweds reacting the same way to every issue. POSITIVE COORELATION is very bad for a portfolio.

Now think of a portfolio that has MSFT, Exxon, Pfizer and Wells Fargo. All four of these stocks are in different industries (software, oil, pharmaceuticals and banking) so all four might react differently given the same economic conditions such as an oil crisis, recession, war or market meltdown. This is NEGATIVE COORELATION and something we desperately want for our portfolio. In fact, we strive to acheive total negative coorelation in portfolios (at least the eggheads running our mutual funds do, anyway.)

We can then either OVERWEIGHT or UNDERWEIGHT our portfolio while still maintaining negative coorelation. For instance, you might really think that the oil industry is set to boom, so you can own more shares of Exxon while at the same time, still own Microsoft, Pfizer and Wells Fargo. This is what CFA (Chartered Financial Analysts) do on a daily basis to ensure diversification and negative coorelation for their clients.

With all this said, it would be unfair to NOT mention the recent pummeling the market has taken in the past two weeks. However, with proper BETA weighting, portfolio diversification and patience, I can tell you that I believe there is light at the end of the tunnel - although the Feds had nothing to do with this.

It is my best guess that there is another six to nine months of market jitters remaining, but we are through the worst at this point in time. As soon as consumer confidence rebounds (again, my opinion, but when gas prices drop below $3.00 per gallon nationwide) and we have a president elected, things will come back. It is going to be a slow, methodical climb out, but one worth watching.

I would also suggest that we are near some historic price lows for some very strong companies that have been dragged down by the market, such as GE, Pfizer, Coca Cola and Altria (Phillip Morris.) These are companies with strong fundamentals, good balance sheets and solid products that traditionally can survive a recession. I do not currently own any of the companies listed, but I plan to very shortly.

Well, the 4 o'clock game is on now (we compromised today) and that's all for now.

Click on our Google and Adsense partners to help me pay the rent and please send me some comments. It gets lonely here in cyberspace.

Deviant Behavior and Beta

As promised from last week, now it's time to analyze risk and put some numbers to risk.

We've already discovered the difference between market risk and diversifiable risk, so how do we eliminate risk and what kind of risk can we focus on eliminating?

Well, we cannot eliminate market risk, so we are only left with the possibility of eliminating diversifiable risk. And being a finance geek, I like numbers to help me choose which project is the least risky. Let's look at an example first.

Assume that since you're my friend, I left you $100,000 to invest anyway you see fit and you're left with two possible choices. Choice "A" is to invest in a little stock we'll call "GE." GE has been around 100 years and is very steady and consistent, although not very sexy or glamorous when it comes to a crazy return. You can expect to earn 9% per year from GE.

Choice "B" is a little-known company called "Ola's Tapioca Mine and Tattoo Parlor." The main office is located in Key West, FL and they hope to franchise the concept throughout the country. They, too, expect to give you an 9% return on your investment next year.

So where do you invest and why?

Unless you have a real strong, strange urge for a new tattoo and some tapioca pudding, you will most certainly put your money into GE since there is far less risk and the return is exactly the same as a risky proposition. This is an investors natural reaction to avoid risk and maximize returns and the only way you'd consider "Ola's Tapioca Mine..." is if they had an expected rate of return greater than 9%.

But remember, greater return comes with greater risk. Let's call this risk "BETA."

Now let's also assume that the stock market has a BETA of 1.00, and we know that the average return in the stock market is about 9%. We need a number to show how much more, or less, risk is associated with our investment.

GE is old and consistent. When I hit YAHOO Finance and checked out their key statistics, their BETA was .75. This means that for every 1% the stock market moves up or down, GE will move 75% of the distance. So, if we expect the stock market to go up 10% next year, we would expect GE to go up 7.5% next year. Similarly, if we expect the stock market to go DOWN 10% next year, we'd expect GE to go down only 7.5%. So while our expected rate of return is the same as the stock market, our risk is actually 25% LESS. Hmmm..

Our Tapioca Mine might have a BETA of 1.5. This means that if the stock market went up 10%, we'd expect the Tapioca Mine to go up 15%, and vice versa if the market went down. In essence, our investment is 1.5 times riskier than the stock market and offers only a similar return. Not good.

There is a different figure we can use as well that capitalizes upon standard deviation, but that's not necessarily a blog type of entry. I just want you to be comfortable when you see the term BETA Coefficient going forward and recognize what it means.

Also recognize that BETA is utilized to compare projects that you are considering as a business, along with standard deviation and coefficient variation. If you'd like help with any project analysis, including PERT charts, please let me know as I have experience in these things and would be delighted to assist you.

Finally, recognize that you can get most of these figures for free from YAHOO Finance, CNNFN, etc. Research doesn't have to be expensive or time consuming.

Former Magellan Fund Manager and investing legend Peter Lynch often said his best source of research was his wife and his teenage daughters. They knew retail trends and hot fashion better than a 50-year old investment fund manager, so he learned to trust their judgment on what was hot and what was not. He simply put pen to paper to see if the numbers made sense, which they often did.

Use your common sense when looking at investment choices. Many times, you know something the pros don't or something they miss in their analysis; something you can use to make a lot (or save a lot) of money.

Next up: Positive and Negative Coorelation (not much of a teaser, but certainly a reminder to me of what the heck to write next week.)

Visit our sponsors and help me keep the lights on! Click the links above and please send me a comment or two. It gets lonely out here in cyberspace.