Ask Uncle Bill

Snowed In In Texas

Actually frozen and sleeted in so have to go rescue dogs, cats and cars.

Interest Rates and Houses

For somebody that worked in finance for 25 years I never showed a tremoundous interest in interest rates, no pun intended.  Obviously they were there and you did the analysis and came up with an all-in finance cost and said, here, this is what this stupid project of yours is going to cost.  Take it or leave it.  Well, I wasn't quite that cavalier but close.  I was always more interested in how the business worked and how much money could be generated by becoming more productive. 

But when it comes to housing, interest rates are pretty important.  Plus I am always amazed at the impact of an interest rate change on the monthly payment.  I mean the difference between 6% and 6.1% isn't all that huge but the difference between, say 6% and 9% is.  How much you say?  Well, first, the question should be "When have rates ever been near 9%?"  Certainly not in your lifetime.  Wrong.  If you are in your mid-20's mortgage rates have been as high as 15%.  Early in your lifetime but in your lifetime, nonetheless. 

So what is the impact of an interest rate change on your monthly payment.  Let's assume a $150,000 mortgage at 6%.  Not counting insurance or property tax escrow or points, your mortgage payment on a 30 year loan is $899 a month.

If somehow the rate goes to 9% your payment is $1,206.  Not a killer, we hope, but you still have to cough up an incremental $307 a month.  I doubt if your pay goes up automatically like that so probably a tough nut to swallow. 

Just for fun, let's do 15%.  Now you are paying $1,897.  Close to a $1,000 more a month than a mortgage at 6%. 

Not going to happen, you say.  Sorry, it already is.  People that, for some reason, took out adjustable rate mortgages are seeing their payments double and more.  Which is why you see a lot of homes, mostly new homes, foreclosed on recently.  People get a sucker rate and then it changes and so do they--they are homeless. 

So never do an adjustable rate mortgage, right?  No, I did one once.  Everybody said I was nuts but I did it and I made money because fixed rates were 14% and adjustables were 10%.  I figured that the traditional fixed rate of 9% was much lower than 14% so took the risk on 10%.  This is when people were saying oil was going to $100 a barrel and gold to a $1,000 an ounce.  Kind of like now in some circles. 

The rule of interest rate management is Are Current Rates Below The Historical Average?  If so, fix the rate.  If rates are considerably above the historical average, go adjustable.  Finance is easy.

How Not To End Up In Jail

Saw today that two top executives of something called Affiliated Computer Services in Dallas lost their jobs over stock option backdating.  The CEO left earlier this year.   

I assume that most people know how stock options work but perhaps not,  so here goes.  The company picks a day that they will record the offering and execs get the option to buy the stock at that price some time in the foreseeable future.  So if XYZ stock is $10 today and today is the offering day, then some time in the future the exec has the 'option' to buy the stock at $10.  If the stock is $30 in three years then he/she will exercise.  If the stock is below $10 the exec will not.  Unless the exec is really stupid. 

So what did these guys do?  They looked backwards and picked the date.  Here's how it was reported in the paper--"According to the newspaper's analysis, ACS stock options issued to Rich between 1995 and 2002 bore dates on which ACS's stock either had just fallen sharply or was about to rise.  Rich told the newspaper at the time the dating was "blind luck," but the Journal calculated the odds of hitting consecutive lows over several years at about 3 billion to 1."

The paper here is the Wall Street Journal.  These guys are not stupid.  If they come after you, watch out. 

So looks like these guys got caught with their hands in the cookie jar.  They are not alone.  58 senior executives and directors at 31 companies have lost their jobs over backdating of options.

Never really bothered me.  I was never in on pricing the options.  I was told--here are your shares, here is the price, come back and see me in three years.  Most were under water.  Made a pretty good bunch on some but made my money the old fashioned way--I saved it. 

I don't really worry about the guys at the top making the dumb decisions.  I always worried if something I did could come back and haunt me.  Because at the lower, mid and junior senior (?) levels, you are not the decision maker.  But what if you are asked to do something illegal?  The bad thing is most people don't know if something at that level is illegal.

If your boss asks you to stick up the 7-11 on your way to work, you can probably figure out that it is probably illegal to do so.  But what about a wire transfer to Colombia?  Or changing the way you account for contracts?  Don't laugh--they nailed a guy at Haliburton for doing so even though I am pretty sure he did so on orders and the new way was probably ok under GAAP.  What about doing what your boss says to do?  What about not paying taxes?  I have done all these things and perhaps could have lost my job or gone to jail for it.  Were they illegal or unethical?  Maybe.  You don't know till after you are  caught.

So if you think that something you are doing is borderline, think up a defense.  I didn't pay payroll taxes at one company because we didn't have enough money to pay the payroll.  If we had paid the taxes, the employees checks would have bounced.  But I sure made up for not paying.  Then left the company when the stupid owner did it again. 

When in doubt go the policy manual.  If somebody says transfer $10 billion dollars to Colombia, check the policy and if the policy says ok, do it.  And make a copy of the policy.

Most decisions in business are not black or white.  The world is gray.  So if you have doubts, figure it out for yourself and think up a rationale.  This is a case where you look out for Number 1 because nobody else will.

The US Going Down Hill?

Some interesting facts from the 1950's--

America controlled two thirds of the world's productive capacity,

Americans owned 80% of the world's electrical goods and produced 40% of the world's electricity,

America produced 60% of the world's oil and 66% of the steel,

99.93% of the cars sold in 1954 were US brands,

America's 5% of the world's population had more wealth than the other 95%,

By the end of the 1950's GM was a bigger economic entity than Belgium,

Los Angeles had more cars than Asia,

The 1958 Lincoln Continental was 19 feet long.

A lot of people would probably argue these facts (except for the 19 foot Lincoln) illustrate the decline of America.  I don't.  What it shows is how far the rest of the world has come in getting out of poverty and in to global prosperity.  The engines of the growth are the free enterprise system and capitalism.  Sorry but that is a fact.  There is no other explanation. 

Because in the 1950's the rest of the world was a mess.  An economic, military, political mess. 

Most countries looked around and, while trying to beat us, they all basically gave in and copied us.  Us being the United States.  Russia is more like us than when fat communist dictators ran the place and China, well, China is light years ahead of where it was.  Japan, Korea, India--the same thing.  These economies didn't pop up over night.  It took decades of mistakes, failed economic policy, and finally globalization to get things rolling. 

I know globalization is a dirty word in many places but go back to the 1950's and look at the alternative.  You won't want to go there.   

Why I Don't Subscribe To The Wall Street Journal--And Taxes

The Wall Street Journal is, hands down, the best newspaper in the world.  My opinion, but hey...

And that is why I don't subscribe to the Wall Street Journal.  If I did I would spend half the day reading it.  But once in a while somebody leaves one in the gym so when I go work out I end up spending an hour reading the Journal. 

Interesting article on income differentials where the gap is growing between the middle class and the 'upper class.'  Seems the population is a bit upset about this and is being cited as a major reason for the Dem's win a few weeks ago.  Which means the population expects them to do something about it.  Good luck.  So what can be done to erase this gap?

Cap executive pay.  Great idea.  Been tried already and failed.  During the last spate of corporate scandals the Congress fixed them by capping the tax deduction companies can take for executive compensation at $1 million.  So companies threw stock options at executives to take care of that little problem.  Rule Number 1-the average tax lawyer is smarter and sneakier than the average congressman.

Raise taxes on the rich.  The Up Against The Wall School of Taxation.  Eliminate the 15% tax on dividends and capital gains.  Hike the marginal rates back up to 39.6%.  This one folks is not a winner and if allowed to happen will have a very negative impact on the market and the economy which means unemployment will go up which means fewer middle class jobs.  Not good.

Spend more on education.  I thought we were already doing that.  (Read an interesting fact about the recently deceased Milton Friedman.  He thought public education was a bad as it is because it is a monopoly.  Interesting idea.)

Anyway, none of those ideas for "narrowing the gap" look like real winners to me.  I'm also not convinced that the middle class is doing so poorly.  If you want to see a middle class in trouble, or non-existent, go to Latin America.

But I'm open to new ideas.  Anybody got any?

News From The IRS

Not much time with the holidays fast approaching but with year end approaching as well it is time to think about the IRS.

Here are some facts at http://biz.yahoo.com/cnnm/061120/112006_irs_audits.html

This Is Probably Why I Don't Run A Mutual Fund Company

I have long thought that I should not run a mutual fund company because I obviously do not understand the business model.  At least the business model that should be focused on people just starting out. 

I have railed against Vanguard, Fidelity and T.Rowe Price for their $2,500-$3,000 inital deposits thinking they are losing young people that would probably stick with them for life if they offered something like $500 to get in.  I'm sure they don't want to because the cost of managing an account will outweigh any money they could make.  But if they kept the account for forty years and it grew...  Well, I'm sure they have meetings and analysis done on this stuff all the time so, again, I must be missing something. 

Thought I found it when I got this in my e-mail.  (I'm starting to get stuff from investment houses and consultants so somebody is reading this stuff and deciding it just may be worth their time to send a press release.  Don't waste time sending stuff to me.  Call your buddies at Forbes, Fortune, Business Week, NY Times, Washington Post and have them do an article on me and make me famous.  I will gladly kick back some of any outrageous money I make.)  Back to 'this' which is this

News Release link
http://www.americancentury.com/welcome/news_rels.jsp?press_release=20061117"
target=_blank
>http://www.americancentury.com/welcome/news_rels.jsp?press_release=20061117

American Century Investments is introducing the "My [Whatever] Plan," a
package of web-delivered investment products and services designed for
people at the beginning stages of investing, specifically Gen Xers and
Millennials.  This new service features multiple components that make
getting started and staying on track simple and understandable. It
includes
a no-load, low-cost asset allocation mutual fund, a lower minimum
investment of $500, ongoing access to investing tips, education and a
special new website to manage the investor’s new plan — all online.
Check it out at         http://www.mywhateverplan.com"
target=_blank >http://www.mywhateverplan.com

Contacts:   Jami Schaefer    816 786-2206 or JQ5@americancentury.com
            American Century MEDIA LINE  816 340-7033 or

I have to admit that when I mention funds I usually stick to Vanguard and Fidelity.  I tend to forget American Century which I should not because I know they are huge and low cost, I think, but I don't know much more about them.  In the future I will include them.  Sorry, Jami.

Anyway, I thought this was a great idea.  Having my doubts after reviewing the site but still the best of a bad lot.  Let's go to the site. 

A bit busy for my tastes but I'm sure it was market tested to death.  I like the low $500 inital deposit, don't like the $100 a month.  I think this will scare off a lot of people.  $100 a month is not what it used to be but still, well, a $100 a month.  Why didn't they just do $500 to start and $25 or $50 or $75 or $100 a month as options?  People like to start out slow, put in the big toe and go from there. 

Then you define your goal.  A bit busy.  My goal, if I were you, would be to start saving painlessly with a small amount every month.  The $100 already scared me off. 

Choose a fund--visual overload.  Why don't funds ask this question--do you need the funds in the next six months? One year? Two years? Five Years? Ten Years?   Then "tell" people that this is the fund for the six month investor.  This is the fund for the one year investor and so on.  Funds do not want to do this because they may get sued but it is what people want because...it is simple.

Get started.  This is the application.  Not too hard, no big deal.

Hmmm.  I think I missed something.  Or it isn't there.  Didn't see any mention of fees.  It is long accepted financial advice to go with the lowest fee structure.  Hard to do here since there is no discussion of fees.  Maybe there was.  I'll go back and check.  Nope, didn't see anything about fees.

So here are the pluses.  $500 to get in.  Regular investments that do the weighted average investing thing by default.

Minuses--FEES?  $100 a month.  Too many managed funds--no index funds.

Overall, a good deal but not simple.  Well, it is simple but could be a lot simpler.  If you want to set it and forget it, probably not bad.  If you want to mazimize, save up the $2,500-$3,000 and go for index funds.

It's your choice.

Don't Read This By Suze

Ole Suze is certainly annoying but sometimes has good advice.  It's just getting past her that is the hard part.  So if you want to see the advice go here http://finance.yahoo.com/columnist/article/moneymatters/11727.  But this article doesn't seem to be aimed at her target market of young people.

I'll try to summarize and then let you know why you don't need to read the article.

The article is titled The Five Signs of Bad Financial Advice.

Here's why you don't need to spend much time on it.

1. You own a mutual fund with the letter "B" in its name.  Vanguard and Fidelity and T. Rowe Price don't have, I don't think, A or B or Z funds.  So if you stick with those guys you don't have to worry about it.  A and B funds are usually marketed by big firms like Merrill Lynch, UBS and others who charge a lot.  You don't have to worry about them because you don't have enough money to interest them at this point.  They'll come smelling around later.

2. You pay the advisor through commissions rather than a flat rate.  Remember you are with Fidelity or Vanguard and they don't have commissioned 'advisors' so you don't pay commissions.

3. Your life insurance is a cash-value policy.  Jeez, Suze, c'mon.  Unless you married at 18 and have twelve kids and a stay at home wife/husband YOU DO NOT NEED LIFE INSURANCE.  Who do you have to take care of if you get hit by a bus?  If no one, don't even think about it.  If you get some at work, view it as a worthless benefit that you will swap for anything else.

4. You own a variable annuity inside of an IRA.  The only thing stupider than owning an annuity inside an IRA is owning an annuity.  You are way too young to worry about an annuity.

5. You're saving for your kid's college education rather than for your retirement.  I told you not to read this article.  Worry about having kids first and then worry about their education.

So what should a young person do to avoid bad financial advice?  Find good financial advice.  But how?  Easy.  Look around the office and find somebody that is 3-5 years older than you that looks successful.  Observe them for a week.  I said observe, not stalk.

Don't go for the guy with the brand new Porsche because he is up to his eyeballs in debt or inherited a bunch of money.  That is not you.  Find the person that dresses well, drives a nice but not new car, seems to handle cash and money well.  Go for coffee, tell them you are just starting out financially, ask them what they do and then DO WHAT THEY DO.  If you have any questions, send them to me.

I told you finance was easy. 

MBA's As Leading Indicators of Financial Ruin

MBA candidates are either hot or not.  That means they are in demand or not in demand.  Now and for the past few years they have been hot due to the hot economy.  When I went to grad school they, or we, were not as the country was in a major recession.  But that's old history so let's look at what Forbes magazine has caught as a leading indicator of future financial trouble.

Seems MBA's are getting the last ticket on the Titanic.  By that we mean that MBA's take jobs in hot industries just before they go cold, or in some cases, out of business.  Forbes took a look at University of Pennsylvania Wharton School of Business grads and their job choices. 

In 2000, 17% of the grads took Silicon Valley jobs.  Bad timing there.  In 2001, 30% of the grads took investment banking jobs just before Wall Street "laid off tens of thousands of bankers over the next two years." 

So where are the grads and near grads heading now and have been for the past few years?  Private equity.  Private equity is hedge funds and non stock money buying out publicly traded companies and taking them 'private.'  Like a bunch of retailers including Nieman Marcus.  Burger King went private and then public.

The issue is not private equity.  The question is "Do MBA's head for the hot stuff just as it turns cold? " Hedge funds are super hot but the returns are beginning to sour.  And the folks that picked Silicon Valley and investment banking have had some serious career bumps.

So what is a MBA to do?  Go where the hot money is or look elsewhere?  I don't know as when I was in the job market it was take just about anything that came your way. 

But some advice for today's MBA's.  At least take a look at something out of favor.  I worked at a small, now large, pharmaceutical.  The chairman related his job search when he was at Harvard.  ATT or the small pharmaceutical.  Flew down to the start-up, saw the crummy plant, the two owners who were kind of nuts.  Got back on the plane to Boston and took out a piece of paper.  Two columns--pro and con.  The cons were easy, had a whole list in two minutes.  He had one pro- Opportunity.

Got home, went in the door, turned to his wife and she said, "Oh, no, you took the job in Texas."  Yep.  Lots of risk but he ended up chairman.

Not advocating it but take a look at your options and maybe give your ticket to somebody else.  Look at what happened to Jack.

San Francisco Does It Again

San Francisco just took a bunch of scholarship opportunities away from their high school students.  The school board, or somebody, banned JROTC.

JROTC is short for Junior Reserve Officers Training Corps.  It is the high school equivalent of college ROTC.  A kid that does pretty good in JROTC has a really good shot at getting an ROTC scholarship.

Here's what you get with a ROTC scholarship-

Full Tuition

Book Allowance

Approved Campus Housing Paid

Monthly Stipend-starts about $250, goes up to $400 per month.  I'm sure there is more but can't remember all the stuff right now.  But these are the basics my son (and I) got from his ROTC scholarship.

In return, the student does four years minimum in the armed services.  A pretty good deal with the risk of getting killed.  But everything has risks.  And you probably won't get killed but you will defend your country.

The debate over whether ROTC should or should not be on campus is tiresome and been around since I was in college so prefer not to beat a dead horse right now.  Plus the rhetoric is so '60's--big corporations going to war.  Please.

Let's talk economics and financial planning.  Unless you are a star athlete or a off the charts SAT brainiac the chances of a full ride to the college of your choice are pretty slim.  Slim like in zero.  You can patch together a bunch of little scholarships and tons of loans but a full ride paid for--forget it. 

Plus, when you get out you have a job.  A second lieutenant straight out of school makes about $40,000 when you throw in things like housing allowance, food allowance and clothing allowance.  Two years out you are making about $55,000.  Plus free medical and insurance. 

The key to getting this is JROTC.  Do it in high school, do it right and chances are that you will get the scholarship.  My son didn't know about JROTC so didn't get his scholarship till completing his freshman year.  Plus the scholarships are harder to get while in school as opposed to getting it before college starts.  The delay cost me $25,000.

But the folks in San Francisco said the hell with it.  So if you go to public school in San Francisco and want a full ride scholarship, you better be one hell of a football player.

They'll also miss the thrills of being in the military--my son's B-52 blew an engine on take off yesterday, they aborted the flight, punched the drag parachute.  Scared the hell out of me but just another day at the office for him.