For the first time in history, U.S. banks have suffered large, ominous losses in a giant sector that, until now, they thought was solid: bets on interest rates.
In a moment, I'll explain what this means for your savings and your stocks. But first, here's the alarming news: According to the fourth quarter report just released this past Friday by the Comptroller of the Currency (OCC), commercial banks lost a record $3.4 billion in interest rate derivatives, or more than seven times their worst previous quarterly loss in that category.1
And here's why the losses are so ominous:
Until the third quarter of last year, the banks' losses in derivatives were almost entirely confined to credit default swaps — bets on failing companies and sinking investments.
But credit default swaps are actually a much smaller sector, representing only 7.8 percent of the total derivatives market.
Now, with these new losses in interest rate derivatives, the disease has begun to infect a sector that encompasses a whopping 82 percent of the derivatives market.2
Thus, considering their far larger volume, any threat to interest rate derivatives could be far more serious than anything we've seen so far.
Meanwhile, time bombs continue to explode in the credit default swaps as well, delivering another massive loss of nearly $9 billion in the fourth quarter. And remember: These represent the aggregate total for the entire banking industry, after netting out the results of banks with profitable trading.
Why This Crisis Could Be Nearly as Bad as the Banking Crisis of 1929-31
Yes, I know the standard argument: In 1929, bank regulation and depositor protection was primarily run by state governments. Now, with the FDIC, the OCC, and more direct Federal Reserve intervention, it's far more centralized.
But offsetting that strength are serious weaknesses in the banking system that did not exist in the 1930s:
• In 1929, there were fewer giant banks. They controlled a smaller share of the total market. And they were generally stronger than the thousands of community banks around the country. Today, by contrast, the nation's high-roller megabanks dominate the market.
• In 1929, derivatives were virtually nonexistent. Not today! U.S. banks alone control $200.4 trillion; and it's precisely in this dangerous sector that the megabanks dominate the most.
According to the OCC's Q4 2008 report, America's top five commercial banks control 96 percent of the industry's total derivatives, while the top 25 control 99.78 percent. In other words, for every $100 dollar of derivatives, the big banks have $99.78 ... while the rest of the nation's 7,000-plus banking institutions control a meager 22 cents!3
This is a massively dangerous concentration of risk.
The large banks are exposed to the danger that buyers will vanish, markets will suddenly become illiquid, and they'll be unable to unload their positions without accepting wipe-out losses. Has this ever happened? Unfortunately, yes. In fact, it's the primary reason they lost a record
$3.4 billion in the last three months of 2008.
The large banks are exposed to the danger that, with exploding federal deficits and new fears of inflation, interest rates will suddenly surge, delivering a whole new round of even bigger losses in the months ahead.
Worst of all, the five biggest banks are exposed to breathtaking default risk — the danger that their trading partners could fail to make good on their gambling debts, transforming even the best winning trades into some of the worst losers.
Specifically, at year-end 2008,
-Bank of America's total credit exposure to derivatives was 179 percent of its risk-based capital;
-Citibank's was 278 percent;
-JPMorgan Chase's, 382 percent; and
-HSBC America's, 550 percent.
What's excessive? The banking regulators won't tell us. But as a rule, exposure of more than 25 percent in any one major risk area is too much, in my view.
And if you think these four banks are overexposed, wait till you see the super-high roller that the OCC has just added to its quarterly reports: Goldman Sachs.
According to the OCC, Goldman Sachs' total credit exposure at year-end was 1,056 percent, or over ten times more than its capital.
The folks at Goldman think they're smart, and they are. They say they can handle large risks, and usually they can. But not in a sinking global economy! And not when the exposure reaches such stratospheric extremes!
Major Impact on the Stock Market
In the 1930s, the banking crisis helped drive the economy into depression and the stock market into its worst decline of the century.
The same is happening today. Whether the nation's big banks are bailed out by the federal government or not, the fact remains that they're jacking up credit standards, squeezing off credit lines, and even shutting down major segments of their lending operations.
And regardless of how much lawmakers try to arm-twist banks to lend more, it's rarely happening. With scant exceptions, bank capital has been reduced, sometimes decimated. The risk of lending has gone through the roof. And many of the more prudent borrowers don't even want bank loans to begin with.
Those credit shortages, both acute and chronic, have a big impact on the economy and the stock market. Moreover, unlike the 1930s, banks themselves are publicly traded companies whose shares make up a substantial portion of the S&P 500.
The big lesson to be learned: Don't pooh-pooh comparisons between today's bear market and the deep bear market of 1929-32. From its peak in 1929, the Dow Jones Industrials Average fell 89 percent. Compared to the Dow's peak in 2007, that would be tantamount to a plunge of more than 12,600 points — to a low of approximately 1500, or an additional 81 percent decline from the Friday's 7776.
Even a decline of half that magnitude would still leave the Dow well below the 5000 level, which remains our current target. Does this preclude sharp rallies? Absolutely not! From its recent March 6 bottom to last week's peak, the Dow has already jumped a resounding 21 percent in just 20 short days. And the rally may still not be over.
But this is nothing unusual. In the 1929-32 period, the Dow enjoyed even sharper rallies, and those rallies did nothing to end the great bear market. My father, who made a fortune shorting stocks in that period, explains it this way:
"In the 1930s, at each step down the slippery slope of the market's decline, Washington would periodically announce some new initiative to turn things around.
"President Hoover would give a new pep talk promising ‘prosperity around the corner.' And often, the Dow staged dramatic rallies — up 30 percent on the first round, 48 percent on the second, 23 percent on the third, and more.
"Each time, I sought to use the rallies as selling opportunities. I persuaded more of my clients to get rid of their stocks and pile up cash. I even told them to take their money out of shaky banks."
Your approach today should be similar.
Specifically,
Step 1. Keep as much as 90 percent of your money SAFE, as follows:
For your banking needs, seek to use only institutions with a Financial Strength Rating of B+ or better. For a list, click here. Then, in the index, scroll down to item 13, "Strongest Banks and Thrifts in the U.S."
Make sure your deposits remain comfortably under the old FDIC insurance coverage limits of $100,000. The new $250,000 per account limit is temporary and, in my view, not something to rely on long term.
Move the bulk of your money to Treasury bills or equivalent. You can buy them (a) directly from the U.S. Treasury Department by opening an account at TreasuryDirect, (b) through your broker, or (c) via a Treasury-only money market fund. For further instructions, click here and review sections 1 through 3 — "How to Buy Treasury Bills or Equivalent," "How to Use Your Treasury-Only Money Fund as a Bank," and "How to Set Up a Single, Safe Account for Nearly All Your Savings and Checking."
Important: You may have seen some commentary from experts that "Treasuries are not safe." But when you review their comments more carefully, you'll probably see they're not referring to Treasury bills, which have virtually zero price risk. They're talking strictly about Treasury notes or bonds, which can — and probably will — suffer serious declines in their market value.
Step 2. If you missed the opportunity to greatly reduce your exposure to the stock market in 2007 or 2008, you now have another chance. And the more the market rises from here, the more you should sell.
Step 3. If you are still exposed to stock market declines, seriously consider inverse ETFs, ideal for helping you hedge against that risk. (For more background information, see my 2007 report, How to Protect Your Stock Portfolio From the Spreading Credit Crunch.)
Step 4. If you have funds you can afford to risk, seriously consider two major profit opportunities in the months ahead:
To profit handsomely from the market's next decline. The best time to start: When Wall Street pundits begin declaring "the bear is dead." They'll be wrong. But their enthusiasm can be one of the telltale signs that the latest rally is probably ending.
To profit even more when the market hits rock bottom and you can buy some of the nation's best companies for pennies on the dollar. The ideal time to buy: When Wall Street is convinced the world is virtually "coming to an end." They will be wrong, again. But that kind of extreme pessimism could be one of your signals that a real recovery is about to begin.
1 For the banks' $3.42 billion loss in interest rate derivatives, see OCC's Quarterly Report on Bank Trading and Derivatives Activities Fourth Quarter 2008, table at the bottom of pdf page 17, "Cash & Derivative Revenue," line 1. As you can see, that was 7.2 times larger than the previous record — the fourth quarter of 2004, when the nation's banks lost $472 million in interest rate derivatives.
2 See OCC table at the bottom of pdf page 11, "Derivative Contracts by Type." In it, the OCC reports total U.S. bank-held derivatives of $200,382 billion at year-end 2008. Among these, the single largest category is interest rate derivatives, representing $164,404 billion, or 82 percent of the total. In contrast, credit derivatives are only $15,897 billion, or 7.93 percent of the total. Within the credit derivative category, the OCC reports (page 1, fourth bullet) that nearly all — 98 percent — are credit default swaps, which have proven to be the most toxic and damaging category of derivatives so far. But they represent only 7.77 percent of all derivatives (7.93 percent x 98 percent).
3 OCC. In Table 1, pdf page 22, "Notional Amount of Derivatives Contracts."
4 OCC, table at bottom of pdf page 13.
This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.
Monday, March 30, 2009
Saturday, February 28, 2009
Shifting Tides
Sir Isaac Newton’s third law of motion: For every action, there is an equal and opposite reaction.
This law, discerned by Newton in 1687, applies to the laws of physics, but it could just as easily apply to every aspect of life, including the current economic crisis sweeping the Globe. Eastern philosophy refers to this idea as Ying and Yang. Everything is a product of two fundamentally opposite forces: cold, hot; light, dark; feminine, masculine; bull market, bear market.
The simplicity of this concept is somewhat overwhelming. Do we really need Newton or ancient philosophers to tell us that everything has an opposite? Intuitively, this is an easy concept to understand; of course everything has an opposite and overtime a balance is reached between the opposite poles of any situation. If this is an intuitively basic concept, how do we succumb to such drastic extremes? How do we lose ourselves in the euphoria of the highs or the doldrums of the lows? We listen to our minds rather than our intuition; we follow the herd rather than thinking for ourselves.
The economic bubble, built from the tech boom of the 1990’s into the housing boom of the 2000’s, is a clear example of being caught in a euphoric state and misunderstanding the intuitively simple concept of balance. The amazing growth the World experienced was unsustainable, and the economic crisis we are experiencing is the market exacting an equal and opposite reaction to that unsustainable growth. The crisis is clear, and it is spreading at an unprecedented pace. 2008 was one of the worst years on record; any number of gruesome statistics can be used to support this claim, but I’ll choose one near and dear to most gainfully employed Americans: on average 401K’s fell 27% in 2008! Retirement may have to wait; especially for Baby Boomers. To add insult to injury, 2009 is on pace to be much worse: jobless rates have climbed to 7.6%, 600K jobs were lost in January alone, it is estimated that the crisis has caused more than $13 TRILLION of lost assets and climbing!
It is difficult to speak about this crisis in terms that do not seem shocking, but just as the Eastern philosophers would point out, EVERY aspect of life has Ying and Yang. On a macro level we are experiencing the Ying to the Bull Market’s Yang, but on an individual, micro level, there is always positivity to be found. “For every buyer, there’s a seller;” one investor’s panic can be another’s profit opportunity. The “market” is not closed for business; we just need to be exceptionally careful with our investment decisions.
The economic crisis is in its initial growth phase, and the growing pains are sure to be with us for an extended time, but with great uncertainty and change comes great opportunity. The daily news has become a soap opera for investors, with as much rumor and in-fighting as the worst cliques in high school. The silver lining to this constant change is that patterns are forming and agendas are beginning to take hold. No question these patterns and agendas will continue to develop, but as patterns form and grow, investment opportunities will grow along with them.
The Obama administration is only one month old and the markets are already showing an increasing lack of confidence in the administration’s plans, but is that lack of confidence well founded? What is the focus of the administration, and how will this focus create investment opportunities?
Considering the severity of this crisis, any lack of confidence is well founded, however, the Obama administration is beginning to show signs that their plan will deviate from the course laid by the preceding administration. While this deviation may not be a cure-all, the current strategies are gathering increased disdain from citizens and demonstrating no discernable improvements; so, a new course is a welcomed change, and with a new course comes new opportunity. It may not be a “change we can believe in,” but it is a change and the patterns that develop will create investment opportunities.
Fed’s focus shifting from Wall St. to Main St.?
Treasury Secretary Tim Geithner’s plan to end the financial crisis was vague and lacking key details, and Wall St. responded accordingly with a 382 point drop in the Dow Jones Industrial Average which began while Geithner was still making his speech. While the lack of clarity of the plan raised questions on Wall St., it is understandable when we consider that the Geithner Plan began as a back-up plan that was moved to the forefront when it became clear that other plans for stability fell drastically short. In addition, as the Geithner Plan begins to unfold it is clear that the Obama administration is up against major political obstacles.
Originally, the discussion to come up with a plan to stabilize the financial system focused on two ideas: 1. Creating a “bad bank” to buy distressed financial assets to get them off the banks’ balance sheets, and 2. The government would extend guarantees to banks against catastrophic losses; similar to guarantees already made to Bank of America and Citigroup. However, these two ideas had major drawbacks that eventually led the Treasury Department to conclude that they were not feasible solutions.
•The tremendous expense would force the administration to ask Congress for additional money to put towards banks/Wall St., and it is clear that public sentiment (anger really) will not support any further “bail outs” to Wall St. Without at least lukewarm public approval it would be very difficult to get Congress’ approval.
•The government would be left in a weak position with the banks. Banks would have a position of control over the government if it was clear the government felt the banks were “too big to fail.” Leaving the banks with control would create further public and Congressional resistance.
•The government would be forced to determine the value of the banks’ assets, most of which are not even trading now.
The Geithner plan attempts to find solutions to these drawbacks. The plan shifts the Fed’s focus from saving the troubled banks at all costs to exposing the reality of the situation, and exposing reality is not always politically popular. The Geithner plan addresses the political impasse of offering further “bail outs” to banks. Instead of offering additional funds to banks based on information the banks provide, the Fed is now sending government regulators to apply a “stress test” to 20 of the country’s largest banks. These “stress tests” are likely to expose some brand name banks as insolvent. The general population expects this insolvency to some degree, but up to this point the potential for insolvency has been ignored, or at least pushed “under the rug” while offering more and more funds to the banks. Bringing the insolvency to light is key. We need to understand the true implications of this crisis. We need to know what we are up against in order to create a realistic plan. The hope is that when the true seriousness of the situation is revealed, it will be easier to create political support to enact drastic measures.
In addition to forcing the banks’ hands, Geithner’s plan shifts the balance of power in favor of the government. The current plan has allowed banks to hoard massive amounts of money in the hopes that eventually their assets would regain their value; in the mean time the banks are using their hoards of cash to slowly write off their assets rather than selling them off. The “stress tests” will expose the balance sheets for what they are.
A third step in deviating from the current plan is to allow the government to guarantee private investors from losses when they buy the troubled assets from banks. Private investors are sitting on the sidelines because no one knows how much the troubled assets are worth, and the banks are not pricing them attractively because they are sitting on government money trying to buy time. Geithner has proposed that the government buy the downside risk in these assets. This converts the high degree of uncertainty from a liability to an asset. A private investor can feel confident that if they invest 40 cents on the dollar they won’t lose that 40 cents and if the asset is worth more they could find a profit. Uncertainty and volatility adjust from a negative to a positive. This approach does mean the government (i.e. the taxpayer) could lose money, but it could also mean that if the market improves or the regulators are great at setting the guarantee prices, the taxpayer could actually profit. Either way, it’s a much more creative method of spending the “bail out” money currently flowing to banks.
If and when major banks are declared insolvent, the government will be forced to invoke the dreaded “N” word…Nationalization. At this point Nationalization is a feared term, but it is becoming clear that it is inevitable to some degree. Even free market advocates like former Fed Chief Alan Greenspan are beginning to discuss the inevitability. However, the Obama administration cannot discuss this step yet. From a political stand point, the only way Nationalization can be discussed is once there is clear evidence that it is the only option. The “stress tests” will create this evidence. Until that evidence is found the Geithner plan will continue to lack key details. Announcing plans to Nationalize would send Wall St. into a downward spiral greater than we are already experiencing.
If the government is shifting their focus away from artificially boosting up the banks, where is their focus turning? Obama’s recent speech in Arizona outlining a plan to reduce foreclosures shows a strong step towards supporting Main St. rather than Wall St. The Obama mortgage plan is designed to encourage a procedure that has been taking place through the financial crisis, but has yet to make a large impact; loan modifications. The Obama plan offers subsidies and payments to loan servicers, mortgage investors and borrowers encouraging all parties to take part in loan modifications to create affordable payment plans. The idea is to encourage more servicers and investors to allow modifications, rather than move straight to foreclosure out of fear home prices will continue to drop.
In addition to loan modifications, the Obama mortgage plan permits Fannie and Freddie to refinance mortgages they already hold up to limits of 105% of loan to value rather than the current limit of 80% loan to value. Lastly, the plan is pushing legislative efforts to allow bankruptcy judges to cram down mortgage balances. The goal is to allow judges to treat the portion of a mortgage exceeding the current value of a home as unsecured debt, thus allowing the judge to reduce the unsecured debt.
These are significant changes, but much development is needed to increase the plan’s impact. First, the modification plan only applies to owner occupied homes; this leaves a large population of second homes and investors without assistance. It is estimated by the National Association of Realtors that 40% of existing homes sold during the peak of the bubble, 2005, were purchased as second homes or investments. While helping these individuals isn’t politically popular, it is an absolute imperative if the intended purpose of the plan is to at stability to the real estate market. In addition, increasing the limits on refinances, while generous, will not impact many homeowners whose loan to value ratios are hovering as high 150%. Lastly, the plan does not address the main issue in the housing crisis; houses are greatly overvalued. In order for a mortgage plan to have any traction, loan principals need to be reduced. The general population is not willing to commit their dwindling cash flow to homes worth far less than the loans attached to them. However, principal reductions are exceptionally unpopular with lending institutions…perhaps another political chasm that may be crossed once the “stress tests” indicate the true nature of the banking crisis.
The Obama mortgage plan has clear drawbacks, but the shift is being made towards supporting Main St. The plan will help some borrowers and some lenders avoid some foreclosures, but it’s not a cure-all. Significant improvements to the plan are needed to create a larger impact, but a pattern supporting individual tax payers rather than large banks is a major deviation from the current plan, and this deviation has the potential to have large implications to personal lives and investments. The Obama plan could help you if you are a borrower at risk of defaulting on your loan or if you are already heading towards foreclosure. As the crisis and the plans to stabilize the crisis continue to develop, investment opportunities will continue to materialize. It is the task of every investor to make only well informed decisions, and understand that every investment carries inherent risks, especially in such a volatile investing climate.
The Opportunity in Real Estate
The key to investing in real estate is to educate yourself on the current market conditions, find quality investment opportunities, and act before the conditions change. PropertyVestors is here to help you accomplish these goals. In this edition of our monthly newsletter, we have highlighted three separate partners/projects that approach investing in the current market from different creative angles. Each of these strategies is designed to capitalize on the current market conditions, and because the strategies use different approaches to investing and utilize various locations, diversification of your investments remains a high priority. For institutions that are looking for additional strategies, please visit our asset management company website at www.PhoenixGAC.com.
Purchasing Rehabs for Rentals:
Blue Moon Capital
A $5,000 down payment is all it takes to transfer ownership while Blue Moon Capital completes the rehab of your rental property for you. BMC will facilitate, manage, complete & pay up-front for property rehab of an average $35,000 Scope of Work. You will get 20% Equity in the property as a head start, based on your lender's final appraisal, along with a 12-month home warranty. Current focus is Pittsburg, Atlanta, Baltimore, Cleveland, Kansas City, and Philadelphia. Property Management companies are ready to fill your rental property. Great cash flow opportunity!
The mortgage crunch has created the perfect investor opportunity....Experts say "BUY NOW" in modest markets such as Cleveland, OH. Foreclosures are high, prices are low and the rental market is strong. Yet, high down payment requirements and tight lending standards still prevent investors from taking advantage of one of the best buying periods seen thus far. Blue Moon Capital offers a $0 down financing, turn-key investment model not seen anywhere else. Learn how Blue Moon Capital is a great source for taking advantage of the BUYERS MARKET with a creative in-house financing model that requires $0 down and only a $5,000 Investment. Please contact PropertyVestors for more information.
Select Private Lending Investments:
American Homes
Due to the strict guidelines and "red tape" associated with bank financing these days, many real estate investors with great projects are turning to Private Lenders to obtain financing. The investors are able to obtain the financing quicker and easier, and the Private Lenders are able to have a great return with a secure investment. We have strong relationships with successful and established real estate businesses with strong track records. Our Spotlight for this month's newsletter is on our partner American Homes (AH). In December, a PropertyVestors member funded one of AH's projects, and you will notice a very positive quote from them in the newsletter. We currently have Private Lending opportunities open in Richmond, VA with AH, and the opportunities range from $15-$45k, offer 12% annual return, and have solid execution plans and security. Get more return than CDs, Bonds and Mutual Funds!
Preconstruction Syndicate Investments:
BridgePoint
A preconstruction syndicate is our most exciting, cutting edge strategy. PropertyVestors works closely with BridgePoint on our "Preconstruction Syndicate" deals as they are the leader in this market space. BridgePoint has created an amazingly creative strategy to capitalize on today's market conditions, with possible returns beginning at 40%. Their strategy includes protective addendums that are key to promoting profits and minimizing risk. Markets that we are currently focused on are Panama and Dominican Republic. Immediate opportunities available.
BridgePoint has developed a proprietary strategy that grants them the unique privilege of providing developers with the means to fulfill their requirements and, in exchange, negotiate terms that transfer much of the market risk from their purchasers to the developer.
Please contact us to learn more about these strategies and upcoming projects at invest@propertyvestors.com.
PropertyVestors is an investment group of CEOs, entrepreneurs and savvy real estate investors that are taking active steps to maximize their profits, while minimizing their risk by creating a diversified real estate portfolio. Investors are able to easily apply diversity in real estate geographically and by asset class through its various investment strategies and types of inventory.
Furthermore, PropertyVestors enables investors to capitalize on different market conditions. The strategies include conservative, private lending options; moderate with preconstruction syndication; and aggressive with partner deals in emerging markets, coastal regions and waterfront properties. With PropertyVestors, you can take advantage of a new investment model and innovative real estate strategies. PropertyVestors' real estate strategies and ongoing education can position you build your net wealth, while minimizing risk.
For general information about PropertyVestors or its offerings, email invest@propertyvestors.com or call 1-877-90-BUYER.
About the Author
Sarah Barry is the founder of PropertyVestors (www.PropertyVestors.com). PropertyVestors is a successful real estate investment group that creates above-market returns at below-market risk.
This law, discerned by Newton in 1687, applies to the laws of physics, but it could just as easily apply to every aspect of life, including the current economic crisis sweeping the Globe. Eastern philosophy refers to this idea as Ying and Yang. Everything is a product of two fundamentally opposite forces: cold, hot; light, dark; feminine, masculine; bull market, bear market.
The simplicity of this concept is somewhat overwhelming. Do we really need Newton or ancient philosophers to tell us that everything has an opposite? Intuitively, this is an easy concept to understand; of course everything has an opposite and overtime a balance is reached between the opposite poles of any situation. If this is an intuitively basic concept, how do we succumb to such drastic extremes? How do we lose ourselves in the euphoria of the highs or the doldrums of the lows? We listen to our minds rather than our intuition; we follow the herd rather than thinking for ourselves.
The economic bubble, built from the tech boom of the 1990’s into the housing boom of the 2000’s, is a clear example of being caught in a euphoric state and misunderstanding the intuitively simple concept of balance. The amazing growth the World experienced was unsustainable, and the economic crisis we are experiencing is the market exacting an equal and opposite reaction to that unsustainable growth. The crisis is clear, and it is spreading at an unprecedented pace. 2008 was one of the worst years on record; any number of gruesome statistics can be used to support this claim, but I’ll choose one near and dear to most gainfully employed Americans: on average 401K’s fell 27% in 2008! Retirement may have to wait; especially for Baby Boomers. To add insult to injury, 2009 is on pace to be much worse: jobless rates have climbed to 7.6%, 600K jobs were lost in January alone, it is estimated that the crisis has caused more than $13 TRILLION of lost assets and climbing!
It is difficult to speak about this crisis in terms that do not seem shocking, but just as the Eastern philosophers would point out, EVERY aspect of life has Ying and Yang. On a macro level we are experiencing the Ying to the Bull Market’s Yang, but on an individual, micro level, there is always positivity to be found. “For every buyer, there’s a seller;” one investor’s panic can be another’s profit opportunity. The “market” is not closed for business; we just need to be exceptionally careful with our investment decisions.
The economic crisis is in its initial growth phase, and the growing pains are sure to be with us for an extended time, but with great uncertainty and change comes great opportunity. The daily news has become a soap opera for investors, with as much rumor and in-fighting as the worst cliques in high school. The silver lining to this constant change is that patterns are forming and agendas are beginning to take hold. No question these patterns and agendas will continue to develop, but as patterns form and grow, investment opportunities will grow along with them.
The Obama administration is only one month old and the markets are already showing an increasing lack of confidence in the administration’s plans, but is that lack of confidence well founded? What is the focus of the administration, and how will this focus create investment opportunities?
Considering the severity of this crisis, any lack of confidence is well founded, however, the Obama administration is beginning to show signs that their plan will deviate from the course laid by the preceding administration. While this deviation may not be a cure-all, the current strategies are gathering increased disdain from citizens and demonstrating no discernable improvements; so, a new course is a welcomed change, and with a new course comes new opportunity. It may not be a “change we can believe in,” but it is a change and the patterns that develop will create investment opportunities.
Fed’s focus shifting from Wall St. to Main St.?
Treasury Secretary Tim Geithner’s plan to end the financial crisis was vague and lacking key details, and Wall St. responded accordingly with a 382 point drop in the Dow Jones Industrial Average which began while Geithner was still making his speech. While the lack of clarity of the plan raised questions on Wall St., it is understandable when we consider that the Geithner Plan began as a back-up plan that was moved to the forefront when it became clear that other plans for stability fell drastically short. In addition, as the Geithner Plan begins to unfold it is clear that the Obama administration is up against major political obstacles.
Originally, the discussion to come up with a plan to stabilize the financial system focused on two ideas: 1. Creating a “bad bank” to buy distressed financial assets to get them off the banks’ balance sheets, and 2. The government would extend guarantees to banks against catastrophic losses; similar to guarantees already made to Bank of America and Citigroup. However, these two ideas had major drawbacks that eventually led the Treasury Department to conclude that they were not feasible solutions.
•The tremendous expense would force the administration to ask Congress for additional money to put towards banks/Wall St., and it is clear that public sentiment (anger really) will not support any further “bail outs” to Wall St. Without at least lukewarm public approval it would be very difficult to get Congress’ approval.
•The government would be left in a weak position with the banks. Banks would have a position of control over the government if it was clear the government felt the banks were “too big to fail.” Leaving the banks with control would create further public and Congressional resistance.
•The government would be forced to determine the value of the banks’ assets, most of which are not even trading now.
The Geithner plan attempts to find solutions to these drawbacks. The plan shifts the Fed’s focus from saving the troubled banks at all costs to exposing the reality of the situation, and exposing reality is not always politically popular. The Geithner plan addresses the political impasse of offering further “bail outs” to banks. Instead of offering additional funds to banks based on information the banks provide, the Fed is now sending government regulators to apply a “stress test” to 20 of the country’s largest banks. These “stress tests” are likely to expose some brand name banks as insolvent. The general population expects this insolvency to some degree, but up to this point the potential for insolvency has been ignored, or at least pushed “under the rug” while offering more and more funds to the banks. Bringing the insolvency to light is key. We need to understand the true implications of this crisis. We need to know what we are up against in order to create a realistic plan. The hope is that when the true seriousness of the situation is revealed, it will be easier to create political support to enact drastic measures.
In addition to forcing the banks’ hands, Geithner’s plan shifts the balance of power in favor of the government. The current plan has allowed banks to hoard massive amounts of money in the hopes that eventually their assets would regain their value; in the mean time the banks are using their hoards of cash to slowly write off their assets rather than selling them off. The “stress tests” will expose the balance sheets for what they are.
A third step in deviating from the current plan is to allow the government to guarantee private investors from losses when they buy the troubled assets from banks. Private investors are sitting on the sidelines because no one knows how much the troubled assets are worth, and the banks are not pricing them attractively because they are sitting on government money trying to buy time. Geithner has proposed that the government buy the downside risk in these assets. This converts the high degree of uncertainty from a liability to an asset. A private investor can feel confident that if they invest 40 cents on the dollar they won’t lose that 40 cents and if the asset is worth more they could find a profit. Uncertainty and volatility adjust from a negative to a positive. This approach does mean the government (i.e. the taxpayer) could lose money, but it could also mean that if the market improves or the regulators are great at setting the guarantee prices, the taxpayer could actually profit. Either way, it’s a much more creative method of spending the “bail out” money currently flowing to banks.
If and when major banks are declared insolvent, the government will be forced to invoke the dreaded “N” word…Nationalization. At this point Nationalization is a feared term, but it is becoming clear that it is inevitable to some degree. Even free market advocates like former Fed Chief Alan Greenspan are beginning to discuss the inevitability. However, the Obama administration cannot discuss this step yet. From a political stand point, the only way Nationalization can be discussed is once there is clear evidence that it is the only option. The “stress tests” will create this evidence. Until that evidence is found the Geithner plan will continue to lack key details. Announcing plans to Nationalize would send Wall St. into a downward spiral greater than we are already experiencing.
If the government is shifting their focus away from artificially boosting up the banks, where is their focus turning? Obama’s recent speech in Arizona outlining a plan to reduce foreclosures shows a strong step towards supporting Main St. rather than Wall St. The Obama mortgage plan is designed to encourage a procedure that has been taking place through the financial crisis, but has yet to make a large impact; loan modifications. The Obama plan offers subsidies and payments to loan servicers, mortgage investors and borrowers encouraging all parties to take part in loan modifications to create affordable payment plans. The idea is to encourage more servicers and investors to allow modifications, rather than move straight to foreclosure out of fear home prices will continue to drop.
In addition to loan modifications, the Obama mortgage plan permits Fannie and Freddie to refinance mortgages they already hold up to limits of 105% of loan to value rather than the current limit of 80% loan to value. Lastly, the plan is pushing legislative efforts to allow bankruptcy judges to cram down mortgage balances. The goal is to allow judges to treat the portion of a mortgage exceeding the current value of a home as unsecured debt, thus allowing the judge to reduce the unsecured debt.
These are significant changes, but much development is needed to increase the plan’s impact. First, the modification plan only applies to owner occupied homes; this leaves a large population of second homes and investors without assistance. It is estimated by the National Association of Realtors that 40% of existing homes sold during the peak of the bubble, 2005, were purchased as second homes or investments. While helping these individuals isn’t politically popular, it is an absolute imperative if the intended purpose of the plan is to at stability to the real estate market. In addition, increasing the limits on refinances, while generous, will not impact many homeowners whose loan to value ratios are hovering as high 150%. Lastly, the plan does not address the main issue in the housing crisis; houses are greatly overvalued. In order for a mortgage plan to have any traction, loan principals need to be reduced. The general population is not willing to commit their dwindling cash flow to homes worth far less than the loans attached to them. However, principal reductions are exceptionally unpopular with lending institutions…perhaps another political chasm that may be crossed once the “stress tests” indicate the true nature of the banking crisis.
The Obama mortgage plan has clear drawbacks, but the shift is being made towards supporting Main St. The plan will help some borrowers and some lenders avoid some foreclosures, but it’s not a cure-all. Significant improvements to the plan are needed to create a larger impact, but a pattern supporting individual tax payers rather than large banks is a major deviation from the current plan, and this deviation has the potential to have large implications to personal lives and investments. The Obama plan could help you if you are a borrower at risk of defaulting on your loan or if you are already heading towards foreclosure. As the crisis and the plans to stabilize the crisis continue to develop, investment opportunities will continue to materialize. It is the task of every investor to make only well informed decisions, and understand that every investment carries inherent risks, especially in such a volatile investing climate.
The Opportunity in Real Estate
The key to investing in real estate is to educate yourself on the current market conditions, find quality investment opportunities, and act before the conditions change. PropertyVestors is here to help you accomplish these goals. In this edition of our monthly newsletter, we have highlighted three separate partners/projects that approach investing in the current market from different creative angles. Each of these strategies is designed to capitalize on the current market conditions, and because the strategies use different approaches to investing and utilize various locations, diversification of your investments remains a high priority. For institutions that are looking for additional strategies, please visit our asset management company website at www.PhoenixGAC.com.
Purchasing Rehabs for Rentals:
Blue Moon Capital
A $5,000 down payment is all it takes to transfer ownership while Blue Moon Capital completes the rehab of your rental property for you. BMC will facilitate, manage, complete & pay up-front for property rehab of an average $35,000 Scope of Work. You will get 20% Equity in the property as a head start, based on your lender's final appraisal, along with a 12-month home warranty. Current focus is Pittsburg, Atlanta, Baltimore, Cleveland, Kansas City, and Philadelphia. Property Management companies are ready to fill your rental property. Great cash flow opportunity!
The mortgage crunch has created the perfect investor opportunity....Experts say "BUY NOW" in modest markets such as Cleveland, OH. Foreclosures are high, prices are low and the rental market is strong. Yet, high down payment requirements and tight lending standards still prevent investors from taking advantage of one of the best buying periods seen thus far. Blue Moon Capital offers a $0 down financing, turn-key investment model not seen anywhere else. Learn how Blue Moon Capital is a great source for taking advantage of the BUYERS MARKET with a creative in-house financing model that requires $0 down and only a $5,000 Investment. Please contact PropertyVestors for more information.
Select Private Lending Investments:
American Homes
Due to the strict guidelines and "red tape" associated with bank financing these days, many real estate investors with great projects are turning to Private Lenders to obtain financing. The investors are able to obtain the financing quicker and easier, and the Private Lenders are able to have a great return with a secure investment. We have strong relationships with successful and established real estate businesses with strong track records. Our Spotlight for this month's newsletter is on our partner American Homes (AH). In December, a PropertyVestors member funded one of AH's projects, and you will notice a very positive quote from them in the newsletter. We currently have Private Lending opportunities open in Richmond, VA with AH, and the opportunities range from $15-$45k, offer 12% annual return, and have solid execution plans and security. Get more return than CDs, Bonds and Mutual Funds!
Preconstruction Syndicate Investments:
BridgePoint
A preconstruction syndicate is our most exciting, cutting edge strategy. PropertyVestors works closely with BridgePoint on our "Preconstruction Syndicate" deals as they are the leader in this market space. BridgePoint has created an amazingly creative strategy to capitalize on today's market conditions, with possible returns beginning at 40%. Their strategy includes protective addendums that are key to promoting profits and minimizing risk. Markets that we are currently focused on are Panama and Dominican Republic. Immediate opportunities available.
BridgePoint has developed a proprietary strategy that grants them the unique privilege of providing developers with the means to fulfill their requirements and, in exchange, negotiate terms that transfer much of the market risk from their purchasers to the developer.
Please contact us to learn more about these strategies and upcoming projects at invest@propertyvestors.com.
PropertyVestors is an investment group of CEOs, entrepreneurs and savvy real estate investors that are taking active steps to maximize their profits, while minimizing their risk by creating a diversified real estate portfolio. Investors are able to easily apply diversity in real estate geographically and by asset class through its various investment strategies and types of inventory.
Furthermore, PropertyVestors enables investors to capitalize on different market conditions. The strategies include conservative, private lending options; moderate with preconstruction syndication; and aggressive with partner deals in emerging markets, coastal regions and waterfront properties. With PropertyVestors, you can take advantage of a new investment model and innovative real estate strategies. PropertyVestors' real estate strategies and ongoing education can position you build your net wealth, while minimizing risk.
For general information about PropertyVestors or its offerings, email invest@propertyvestors.com or call 1-877-90-BUYER.
About the Author
Sarah Barry is the founder of PropertyVestors (www.PropertyVestors.com). PropertyVestors is a successful real estate investment group that creates above-market returns at below-market risk.
Friday, January 16, 2009
Another Bank Crisis on the Way
We are closely monitoring the activity of many sources to determine the forecast for our investments and strategies in 2009. When have witnessed a number of historical events that have taken place in the last three months, but I wanted you to be aware of the latest updated that came out just today that you’ll be hearing more of. Thank you to Money and Markets for sending us the following information.
*Bank of America posts massive $1.79 billion loss in last three months of 2008, slashes dividends, accepts $138 billion emergency lifeline ...
*Citigroup reports total losses of $18.7 billion in 2008 — $8.29 billion in the fourth quarter ALONE ...
*New phase of bank crisis beginning ... soaring unemployment, plunging stocks, canceled dividends, and sinking investment income ahead
Just when everyone thought we’d seen the worst of the carnage in the U.S. banking system ...
Despite the $350 billion in TARP funds Washington already spent to save the big banks ...
Despite Treasury Secretary Paulson’s emphatic assurance to CNBC’s Maria Bartiromo that the banks are no longer in danger just a few days ago ...
And regardless of the $138 billion ADDITIONAL lifeline he’s just been forced to throw Bank of America yesterday ...
A new, more virulent strain of the bank panic contagion is now hitting Wall Street! Just this morning, Bank of America posted its first loss in 17 years — a whopping $1.7 billion in October, November and December — and cut the dividend it pays to stockholders.
Plus, Citigroup, which had already received $45 billion in government handouts, posted its fifth straight multi-billion dollar quarterly loss — $8.3 billion in the last three months of 2008, bringing its total losses for the year to a staggering $18.7 billion!
No wonder Obama’s advisers have freely admitted that they see an increasingly grave banking crisis beginning to unfold! No wonder they have scrambled to gain control over the second $350 billion in bailout funds! And no wonder ...
The Great Financial Famine of 2009
After the prior phase of this great banking crisis struck last fall, U.S. job losses surged, bringing the total number of paychecks lost by U.S. families to 2.6 million for 2008.
The stock market had a nervous breakdown — with stocks plunging as much as 1,000 points in a single trading session and the Dow crashing by nearly a third in less than 30 days. Reeling from the carnage, many companies delayed, postponed or even cancelled dividend payments to investors — and the Fed slashed interest rates, cutting yields on other income investments.
But now, it’s looking like last year’s disaster was little more than a dress rehearsal for the new phase of the banking crisis that’s beginning now!
Please take a moment to subscribe to our free newsletter at www.PropertyVestors.com to learn more about the importance of a diversified real estate portfolio and receive our monthly newsletter that outlines strong strategies for survival.
About the Author
Sarah Barry is the founder of PropertyVestors (www.PropertyVestors.com). PropertyVestors is a successful real estate investment group that creates above-market returns at below-market risk. Access to PropertyVestors' smart real estate strategies enables investors to achieve double- to triple-digit returns on their real estate investments.
The Money and Market's portion was provided by Martin Weiss. This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.
*Bank of America posts massive $1.79 billion loss in last three months of 2008, slashes dividends, accepts $138 billion emergency lifeline ...
*Citigroup reports total losses of $18.7 billion in 2008 — $8.29 billion in the fourth quarter ALONE ...
*New phase of bank crisis beginning ... soaring unemployment, plunging stocks, canceled dividends, and sinking investment income ahead
Just when everyone thought we’d seen the worst of the carnage in the U.S. banking system ...
Despite the $350 billion in TARP funds Washington already spent to save the big banks ...
Despite Treasury Secretary Paulson’s emphatic assurance to CNBC’s Maria Bartiromo that the banks are no longer in danger just a few days ago ...
And regardless of the $138 billion ADDITIONAL lifeline he’s just been forced to throw Bank of America yesterday ...
A new, more virulent strain of the bank panic contagion is now hitting Wall Street! Just this morning, Bank of America posted its first loss in 17 years — a whopping $1.7 billion in October, November and December — and cut the dividend it pays to stockholders.
Plus, Citigroup, which had already received $45 billion in government handouts, posted its fifth straight multi-billion dollar quarterly loss — $8.3 billion in the last three months of 2008, bringing its total losses for the year to a staggering $18.7 billion!
No wonder Obama’s advisers have freely admitted that they see an increasingly grave banking crisis beginning to unfold! No wonder they have scrambled to gain control over the second $350 billion in bailout funds! And no wonder ...
The Great Financial Famine of 2009
After the prior phase of this great banking crisis struck last fall, U.S. job losses surged, bringing the total number of paychecks lost by U.S. families to 2.6 million for 2008.
The stock market had a nervous breakdown — with stocks plunging as much as 1,000 points in a single trading session and the Dow crashing by nearly a third in less than 30 days. Reeling from the carnage, many companies delayed, postponed or even cancelled dividend payments to investors — and the Fed slashed interest rates, cutting yields on other income investments.
But now, it’s looking like last year’s disaster was little more than a dress rehearsal for the new phase of the banking crisis that’s beginning now!
Please take a moment to subscribe to our free newsletter at www.PropertyVestors.com to learn more about the importance of a diversified real estate portfolio and receive our monthly newsletter that outlines strong strategies for survival.
About the Author
Sarah Barry is the founder of PropertyVestors (www.PropertyVestors.com). PropertyVestors is a successful real estate investment group that creates above-market returns at below-market risk. Access to PropertyVestors' smart real estate strategies enables investors to achieve double- to triple-digit returns on their real estate investments.
The Money and Market's portion was provided by Martin Weiss. This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.
Tuesday, December 30, 2008
Now is a Good Time to Assess Your Retirement Accounts
I am passionate about Self-Directed Retirement Accounts. Combine the time of year with the current market conditions and it is a good time to assess your retirement accounts and plans to get you where you want to be.
A Self-Directed Retirement Account allows you to truly diversify your retirement investments. If you stick to the standard market stocks, bonds and mutual funds as one goes up or down they all eventually follow. The investments are correlated investments. Current market conditions are a perfect example. They will move together - not identical - but together. A Self-Directed Retirement Account allows you to go outside of that market restrictions and invest in uncorrelated investments for true diversification. Real estate or commodities, fishing rights or private loans; you get to choose what your Self-Directed Retirement Account invests in.
A Self-Directed Retirement Account can be a Traditional IRA or a Roth IRA. A Traditional Self-Directed Retirement Account is funded with pre-tax money. That is, you put money into the account prior to taxes being taken out. The result is that you have more initial money to invest. Over time this grows, and when you want to take it out, the idea is that you will be in a lower tax bracket than when you put the money in. A Roth Self Directed Retirement Account is funded with post tax money. That is, you pay taxes on your money and then put it into the account. The money in your account grows tax free. When you take a normal distribution, there is no tax consequence.
Now Is a Good Time to Convert a Regular IRA to a Self Directed IRA
The economy is dismal and additional economic hardship is on the horizon with the auto industry, a second wave of defaulting mortgages, increased unemployment, businesses collapsing, and the market feeling the pain. Don't be stuck in a bad market. Think about alternative investments, investments that are not correlated. Use your team of accountant, financial planner, attorney and PropertyVestors to determine your best approach. Don't lose any more in the market.
Now Is also a Good Time to Convert a Regular IRA to a Roth IRA
While writing this article, a daily e-newsletter came into my inbox from Money and Markets. I have been following this source for economic information for over a year and appreciate the perspective it brings. So, as the e-newsletter happened to be about Roth IRAs and converting from the Traditional to the Roth, let me share the information directly from them. Remember while you read that a Self-Directed Account can be either a Traditional or Roth; it is your choice.
"Yes, I'm always talking about Roth IRAs. I can't help it ... I think they're one of the best deals going. As I've told you before, they offer you many basic advantages over other retirement plans AND they can be a great way for you to pass along wealth to heirs.
However, they've only been around for ten years. So even if you've been maxing out a Roth since the beginning, it's unlikely that you've been able to build a huge amount of money in your account.
No problem. You can always convert your traditional IRAs into Roth IRAs. And given the market's recent slump, now is a great time to consider doing so!
That's because when you do the conversion, you will be forced to pay taxes on pre-tax contributions and earnings made in the account.
So if the account's value is down substantially on paper, you will pay taxes on a much smaller chunk of change ... and from then on, the money will be able to grow tax-free for you and your heirs.
Before you rush out and convert your regular IRAs, there are a few things you need to know.
First, you currently must fall within a certain income threshold to convert a traditional IRA to a Roth ($100,000 in modified adjusted gross income for both single and joint filers). As of right now, that limitation is set to expire in 2010. Conversions that occur in 2010 will be allowed to have half of the taxable converted amount taxed in 2011 and the other half taxed in 2012.
Second, you will need to have enough money set aside to pay for the taxes on the conversion. Unless you're 59 1/2 or older, the money will have to come from a source outside the account or you'll pay the 10% early withdrawal penalty, too. And even if you're of retirement age, I wouldn't want to see you diminish the value of your account's future earnings power by using funds from within the account.
Third, the conversion could move you into a higher tax bracket and prevent you from getting other tax benefits like dependent child and college tuition credits.
Still, for many investors - especially younger folks and those looking to leave their accounts to heirs - now is a very good time to consider a Roth IRA conversion.
As always, you should do your homework before making your final decision, and a quick chat with a financial planner or accountant might be worth your while.
But the bottom line is that even though the daily market action is beyond our control, there are always smart proactive decisions that we can make to keep our financial lives as efficient and profitable as possible."
So, schedule the appropriate meetings with "Your Team" of professionals to consider and move appropriately with your Self-Directed Retirement Account. There is still time to make 2007 roll-overs and deposits.
Have a safe and happy holiday season. While we need to have a secure financial plan and provide for ourselves, the most important thing in the world is people. Enjoy these times with your family and friends.
To learn more about Self-Directed Retirement Accounts, visit www.propertyvestors.com, email invest@propertyvestors.com or call PropertyVestors directly at 804-874-0141.
A Self-Directed Retirement Account allows you to truly diversify your retirement investments. If you stick to the standard market stocks, bonds and mutual funds as one goes up or down they all eventually follow. The investments are correlated investments. Current market conditions are a perfect example. They will move together - not identical - but together. A Self-Directed Retirement Account allows you to go outside of that market restrictions and invest in uncorrelated investments for true diversification. Real estate or commodities, fishing rights or private loans; you get to choose what your Self-Directed Retirement Account invests in.
A Self-Directed Retirement Account can be a Traditional IRA or a Roth IRA. A Traditional Self-Directed Retirement Account is funded with pre-tax money. That is, you put money into the account prior to taxes being taken out. The result is that you have more initial money to invest. Over time this grows, and when you want to take it out, the idea is that you will be in a lower tax bracket than when you put the money in. A Roth Self Directed Retirement Account is funded with post tax money. That is, you pay taxes on your money and then put it into the account. The money in your account grows tax free. When you take a normal distribution, there is no tax consequence.
Now Is a Good Time to Convert a Regular IRA to a Self Directed IRA
The economy is dismal and additional economic hardship is on the horizon with the auto industry, a second wave of defaulting mortgages, increased unemployment, businesses collapsing, and the market feeling the pain. Don't be stuck in a bad market. Think about alternative investments, investments that are not correlated. Use your team of accountant, financial planner, attorney and PropertyVestors to determine your best approach. Don't lose any more in the market.
Now Is also a Good Time to Convert a Regular IRA to a Roth IRA
While writing this article, a daily e-newsletter came into my inbox from Money and Markets. I have been following this source for economic information for over a year and appreciate the perspective it brings. So, as the e-newsletter happened to be about Roth IRAs and converting from the Traditional to the Roth, let me share the information directly from them. Remember while you read that a Self-Directed Account can be either a Traditional or Roth; it is your choice.
"Yes, I'm always talking about Roth IRAs. I can't help it ... I think they're one of the best deals going. As I've told you before, they offer you many basic advantages over other retirement plans AND they can be a great way for you to pass along wealth to heirs.
However, they've only been around for ten years. So even if you've been maxing out a Roth since the beginning, it's unlikely that you've been able to build a huge amount of money in your account.
No problem. You can always convert your traditional IRAs into Roth IRAs. And given the market's recent slump, now is a great time to consider doing so!
That's because when you do the conversion, you will be forced to pay taxes on pre-tax contributions and earnings made in the account.
So if the account's value is down substantially on paper, you will pay taxes on a much smaller chunk of change ... and from then on, the money will be able to grow tax-free for you and your heirs.
Before you rush out and convert your regular IRAs, there are a few things you need to know.
First, you currently must fall within a certain income threshold to convert a traditional IRA to a Roth ($100,000 in modified adjusted gross income for both single and joint filers). As of right now, that limitation is set to expire in 2010. Conversions that occur in 2010 will be allowed to have half of the taxable converted amount taxed in 2011 and the other half taxed in 2012.
Second, you will need to have enough money set aside to pay for the taxes on the conversion. Unless you're 59 1/2 or older, the money will have to come from a source outside the account or you'll pay the 10% early withdrawal penalty, too. And even if you're of retirement age, I wouldn't want to see you diminish the value of your account's future earnings power by using funds from within the account.
Third, the conversion could move you into a higher tax bracket and prevent you from getting other tax benefits like dependent child and college tuition credits.
Still, for many investors - especially younger folks and those looking to leave their accounts to heirs - now is a very good time to consider a Roth IRA conversion.
As always, you should do your homework before making your final decision, and a quick chat with a financial planner or accountant might be worth your while.
But the bottom line is that even though the daily market action is beyond our control, there are always smart proactive decisions that we can make to keep our financial lives as efficient and profitable as possible."
So, schedule the appropriate meetings with "Your Team" of professionals to consider and move appropriately with your Self-Directed Retirement Account. There is still time to make 2007 roll-overs and deposits.
Have a safe and happy holiday season. While we need to have a secure financial plan and provide for ourselves, the most important thing in the world is people. Enjoy these times with your family and friends.
To learn more about Self-Directed Retirement Accounts, visit www.propertyvestors.com, email invest@propertyvestors.com or call PropertyVestors directly at 804-874-0141.
Friday, November 28, 2008
Three Big Questions to Ponder this Holiday Weekend: Commentary from Money and Markets
It's a beautiful, long holiday weekend. I've been celebrating Thanksgiving with my family, and I'm sure many of you are also busy with relatives and friends. So I'm going to keep this week's column short.
Specifically, I'm going to highlight three big questions we should all be thinking about — and offer up my best answers. I feel these are the most important three questions to ask right now because the answers will determine the next big moves in the market and the U.S. economy.
First, is the Citigroup rescue the end of the financial crisis?
We gained 494 points in the Dow Jones Industrials a week ago and another 397 points on Monday. The dollar also gave back some of its recent gains, and the large rally in Treasury bonds petered out. Clearly, Wall Street greeted the bailout of Citigroup with a big sigh of relief.
Will the rally stick? I hate to sound jaded. But haven't we heard after EVERY SINGLE ONE of these bailouts: "This is it. This will put the floor under the financials. Now is the time to buy, buy, buy?"
We heard it after Bear Stearns was rescued.
We heard it after Fannie Mae and Freddie Mac were taken under the government's wing.
We heard it after AIG was bailed out.
And we heard it when the TARP plan was originally rolled out. In fact, this rally so far looks A LOT like the one we got on September 18 and September 19. The Dow surged 410 points on the eighteenth and another 369 points on the nineteenth after news of the government's TARP plan first leaked.
But just like every other short-term rally before it, that rally quickly failed — and the market soon set new lows. So forgive me if I sound skeptical about this being the "end" of the financial crisis. It's more likely just another way station on the road to lower stock prices.
Second, will an economic stimulus plan work?
President-Elect Barack Obama's revised stimulus plan looks a lot more aggressive than what had been talked about previously. It's also much larger than the tax refund plan that was put into place in the spring. So it's definitely worth paying attention to exactly how the plan — and the prospects for its passage — evolves.
But is the stimulus plan a reason in and of itself to get bullish on the market? I don't think so.
Several hundred billion dollars is a lot of money. But the economic challenges we face as a country are extremely large. And the losses our financial institutions are piling up — both here and abroad — are much larger.
This plan could buy the economy some time, keeping it stronger than it would otherwise be. Still, if the underlying economy can't heal ... if the credit market problems don't get better ... then we'll be right back to square one when the impact of the stimulus wears off.
Indeed, the very real risk is that NO amount of stimulus can prevent the de-leveraging process from running its course.
Japan's experience in the 1990s is instructive. The government there passed repeated "bridge to nowhere"-type infrastructure plans, and the central bank slashed interest rates to zero in an attempt to help the economy recover from twin busts in the stock and real estate markets. End result: The economy struggled through a "Lost Decade" anyway.
Third, how in the holy heck are we going to pay for it all?
My daughters are three and six. They wouldn't know Treasury Secretary Henry Paulson or Fed Chairman Ben Bernanke if they ran into them at the grocery store.
But the decisions that Paulson and Bernanke are making today are going to bury them ... and maybe even THEIR children ... under a mountain of debt the likes of which the world has never seen.
Do you know how much we have committed as a country to rescue the financial system and credit markets? How does the number $7.8 TRILLION ... half the country's GDP ... sound to you? That's the price tag The New York Times put on all the bailouts and credit plans recently.
Included in its tally:
• The Fed's $2.4 billion program to buy commercial paper,
• The $1.4 trillion commitment from the FDIC to backstop interbank lending,
• The $29 billion bailout of Bear Stearns,
• The $306 billion in guarantees of Citigroup assets,
• The Term Auction Facility,
• The Money Market Investor Funding Facility, and
• All the other programs the Fed and Treasury have implemented.
It also includes yet another pair of programs just announced this week. The Fed has agreed to buy up to $800 billion in Fannie Mae and Freddie Mac bonds, mortgage-backed securities and securities backed by credit cards, auto loans, and small business debt.
I simply cannot figure out how we're going to pay for it all without borrowing an astronomical amount of money — and sticking future generations of American citizens with the bill.
For now, flight to safety buying is bolstering Treasury bond prices. But that effect will fade at some point. And when it does, you will likely see the price of Treasuries tank — and interest rates surge — due to the nation's profligacy.
So be sure to keep your head when investors around you are losing theirs. I do NOT think the answers to these key questions are as clear-cut as the bulls would have you believe. And I DO think focusing on safety remains the best course of action.
Specifically, I'm going to highlight three big questions we should all be thinking about — and offer up my best answers. I feel these are the most important three questions to ask right now because the answers will determine the next big moves in the market and the U.S. economy.
First, is the Citigroup rescue the end of the financial crisis?
We gained 494 points in the Dow Jones Industrials a week ago and another 397 points on Monday. The dollar also gave back some of its recent gains, and the large rally in Treasury bonds petered out. Clearly, Wall Street greeted the bailout of Citigroup with a big sigh of relief.
Will the rally stick? I hate to sound jaded. But haven't we heard after EVERY SINGLE ONE of these bailouts: "This is it. This will put the floor under the financials. Now is the time to buy, buy, buy?"
We heard it after Bear Stearns was rescued.
We heard it after Fannie Mae and Freddie Mac were taken under the government's wing.
We heard it after AIG was bailed out.
And we heard it when the TARP plan was originally rolled out. In fact, this rally so far looks A LOT like the one we got on September 18 and September 19. The Dow surged 410 points on the eighteenth and another 369 points on the nineteenth after news of the government's TARP plan first leaked.
But just like every other short-term rally before it, that rally quickly failed — and the market soon set new lows. So forgive me if I sound skeptical about this being the "end" of the financial crisis. It's more likely just another way station on the road to lower stock prices.
Second, will an economic stimulus plan work?
President-Elect Barack Obama's revised stimulus plan looks a lot more aggressive than what had been talked about previously. It's also much larger than the tax refund plan that was put into place in the spring. So it's definitely worth paying attention to exactly how the plan — and the prospects for its passage — evolves.
But is the stimulus plan a reason in and of itself to get bullish on the market? I don't think so.
Several hundred billion dollars is a lot of money. But the economic challenges we face as a country are extremely large. And the losses our financial institutions are piling up — both here and abroad — are much larger.
This plan could buy the economy some time, keeping it stronger than it would otherwise be. Still, if the underlying economy can't heal ... if the credit market problems don't get better ... then we'll be right back to square one when the impact of the stimulus wears off.
Indeed, the very real risk is that NO amount of stimulus can prevent the de-leveraging process from running its course.
Japan's experience in the 1990s is instructive. The government there passed repeated "bridge to nowhere"-type infrastructure plans, and the central bank slashed interest rates to zero in an attempt to help the economy recover from twin busts in the stock and real estate markets. End result: The economy struggled through a "Lost Decade" anyway.
Third, how in the holy heck are we going to pay for it all?
My daughters are three and six. They wouldn't know Treasury Secretary Henry Paulson or Fed Chairman Ben Bernanke if they ran into them at the grocery store.
But the decisions that Paulson and Bernanke are making today are going to bury them ... and maybe even THEIR children ... under a mountain of debt the likes of which the world has never seen.
Do you know how much we have committed as a country to rescue the financial system and credit markets? How does the number $7.8 TRILLION ... half the country's GDP ... sound to you? That's the price tag The New York Times put on all the bailouts and credit plans recently.
Included in its tally:
• The Fed's $2.4 billion program to buy commercial paper,
• The $1.4 trillion commitment from the FDIC to backstop interbank lending,
• The $29 billion bailout of Bear Stearns,
• The $306 billion in guarantees of Citigroup assets,
• The Term Auction Facility,
• The Money Market Investor Funding Facility, and
• All the other programs the Fed and Treasury have implemented.
It also includes yet another pair of programs just announced this week. The Fed has agreed to buy up to $800 billion in Fannie Mae and Freddie Mac bonds, mortgage-backed securities and securities backed by credit cards, auto loans, and small business debt.
I simply cannot figure out how we're going to pay for it all without borrowing an astronomical amount of money — and sticking future generations of American citizens with the bill.
For now, flight to safety buying is bolstering Treasury bond prices. But that effect will fade at some point. And when it does, you will likely see the price of Treasuries tank — and interest rates surge — due to the nation's profligacy.
So be sure to keep your head when investors around you are losing theirs. I do NOT think the answers to these key questions are as clear-cut as the bulls would have you believe. And I DO think focusing on safety remains the best course of action.
Friday, October 24, 2008
The Credit Virus Spreads Worldwide: Commentary from Money and Markets
Back in 1997, a minor currency crisis in Thailand rattled a few regional market players. But the rest of the world ignored it ... at first. They said it wouldn't matter to the U.S. and would be just a blip on the radar screen.
But soon the decline in Thailand's currency, the baht, accelerated. It went from a gentle slide to a full-scale rout. Before long, currencies in the Philippines, Indonesia, and South Korea began to fall out of bed.
Then regional stock indices later crashed. Our Dow suffered what was then one of the largest point declines on record. And the International Monetary Fund was forced to step in and bail out several economies — to the tune of tens of billions of dollars.
It was a scary time. But compared to what is happening now, the 1997 crisis looks like a day at the beach. Right now ... in far-flung corners of the world as diverse as Iceland, Hungary, Argentina, India, and elsewhere ...
Currencies aren't just declining. They're crashing.
Stock markets aren't just falling. They're collapsing.
Foreign investors aren't just walking for the exits. They're running ... and trampling anyone in their paths.
You may not keep a chart of the Hungarian florint, that nation's currency, on your screen. You probably don't look at Argentina's Merval Index very often, if ever. And you may have never touched an Icelandic krona in your life.
But if you could look at charts of all of these obscure indicators, like I have, or if you studied the fundamental behind the moves, as I have, you would conclude the same thing that I did a while ago: The virulent credit virus has spread worldwide. And that has serious implications for you and your portfolio. Here's more ...
Crisis in Hungary, Argentina, Iceland, oh my!
In Hungary, the currency has been plunging for weeks on end as global investors pare risk and withdraw funds from higher-risk emerging markets. The forint recently traded at 214 against the dollar, a huge decline from the 143 level back in July. In other words, one U.S. dollar buys many more forints than it did a few months ago.
That prompted a serious reaction from the Magyar Nemzeti Bank, Hungary's central bank this week. It jacked up the nation's benchmark rate to 11.5% — an increase of a full three percentage points — to defend the currency and stem the flight of capital.
Meanwhile, in Argentina, the country said it plans to seize $29 billion of private pension funds. This caused bond yields in the country to surge. The Merval stock index plunged 11% on Tuesday, then another 10% on Wednesday. It is down more than 55%on the year.
The government last raided pension fund investments to service its debt in 2001. But it didn't help. Argentina then defaulted in a move that sent shockwaves throughout the global capital markets.
As for Iceland, the market has all but collapsed. The country's three biggest banks have been nationalized. Its currency has lost more than half its value in the past two years. It's being forced to pursue a multi-billion dollar bailout from its Scandinavian neighbors and the IMF.
The most shocking of all: Its benchmark stock market gauge, the OMX ICEX 15 index, has plunged 89% year to date! To put that in perspective, if our Dow did the same thing this year, it would be trading around 1,460.
Even bigger countries, like India, are running into trouble. Overseas funds dumped a record $12 billion of Indian shares so far this year. Foreign exchange reserves have dwindled by $42 billion as the Indian rupee has imploded. It recently slumped from 39.20 against the dollar to 49.50 — a record low.
Bottom line: The credit virus is now spreading its sickness to the four corners of the world.
What it means back home
Some pundits have made a big deal about the recent improvement in certain domestic and developed market credit indicators. The gains stem from the Federal Reserve's and Treasury's largesse, as well as the banking bailouts being put into effect in continental Europe, the U.K. and Canada, among other places.
But the improvements have been minor when compared to the hundreds of billions of dollars in aid that has been thrown at the markets. There are also disturbing signs that the aid isn't getting at the core of the problem — the housing market.
One indicator of ongoing weakness there: The latest Mortgage Bankers Association figures on home loan applications. The group's index, which tracks demand for home purchase and refinance loans, plunged 17% in the most recent week. The purchase application sub-index is now plumbing depths not seen since October 2001, a sign that housing demand remains anemic.
All of these problems are now coming home to roost — again — in the U.S. stock market. The Dow plunged 232 points on Tuesday and another 514 points on Wednesday. Despite yesterday's bounce, it appears to be headed much lower over time.
I hope this underscores the message Martin and I have been preaching for months on end ...
Stop listening to the happy talk out of Washington.
Understand this is a dangerous, treacherous economy — and a market with many potholes, time bombs, and hazards ahead. You have to come at it with a clear head and a realistic approach.
Stay the heck away from vulnerable stocks. Maintain high levels of cash in safe investments like short-term Treasuries or Treasury only money funds. Or, if you're a more aggressive investor who's willing to go on the offensive, consider shooting for big profits using vehicles like inverse ETFs and put options. They're making some investors a killing in this market.
But soon the decline in Thailand's currency, the baht, accelerated. It went from a gentle slide to a full-scale rout. Before long, currencies in the Philippines, Indonesia, and South Korea began to fall out of bed.
Then regional stock indices later crashed. Our Dow suffered what was then one of the largest point declines on record. And the International Monetary Fund was forced to step in and bail out several economies — to the tune of tens of billions of dollars.
It was a scary time. But compared to what is happening now, the 1997 crisis looks like a day at the beach. Right now ... in far-flung corners of the world as diverse as Iceland, Hungary, Argentina, India, and elsewhere ...
Currencies aren't just declining. They're crashing.
Stock markets aren't just falling. They're collapsing.
Foreign investors aren't just walking for the exits. They're running ... and trampling anyone in their paths.
You may not keep a chart of the Hungarian florint, that nation's currency, on your screen. You probably don't look at Argentina's Merval Index very often, if ever. And you may have never touched an Icelandic krona in your life.
But if you could look at charts of all of these obscure indicators, like I have, or if you studied the fundamental behind the moves, as I have, you would conclude the same thing that I did a while ago: The virulent credit virus has spread worldwide. And that has serious implications for you and your portfolio. Here's more ...
Crisis in Hungary, Argentina, Iceland, oh my!
In Hungary, the currency has been plunging for weeks on end as global investors pare risk and withdraw funds from higher-risk emerging markets. The forint recently traded at 214 against the dollar, a huge decline from the 143 level back in July. In other words, one U.S. dollar buys many more forints than it did a few months ago.
That prompted a serious reaction from the Magyar Nemzeti Bank, Hungary's central bank this week. It jacked up the nation's benchmark rate to 11.5% — an increase of a full three percentage points — to defend the currency and stem the flight of capital.
Meanwhile, in Argentina, the country said it plans to seize $29 billion of private pension funds. This caused bond yields in the country to surge. The Merval stock index plunged 11% on Tuesday, then another 10% on Wednesday. It is down more than 55%on the year.
The government last raided pension fund investments to service its debt in 2001. But it didn't help. Argentina then defaulted in a move that sent shockwaves throughout the global capital markets.
As for Iceland, the market has all but collapsed. The country's three biggest banks have been nationalized. Its currency has lost more than half its value in the past two years. It's being forced to pursue a multi-billion dollar bailout from its Scandinavian neighbors and the IMF.
The most shocking of all: Its benchmark stock market gauge, the OMX ICEX 15 index, has plunged 89% year to date! To put that in perspective, if our Dow did the same thing this year, it would be trading around 1,460.
Even bigger countries, like India, are running into trouble. Overseas funds dumped a record $12 billion of Indian shares so far this year. Foreign exchange reserves have dwindled by $42 billion as the Indian rupee has imploded. It recently slumped from 39.20 against the dollar to 49.50 — a record low.
Bottom line: The credit virus is now spreading its sickness to the four corners of the world.
What it means back home
Some pundits have made a big deal about the recent improvement in certain domestic and developed market credit indicators. The gains stem from the Federal Reserve's and Treasury's largesse, as well as the banking bailouts being put into effect in continental Europe, the U.K. and Canada, among other places.
But the improvements have been minor when compared to the hundreds of billions of dollars in aid that has been thrown at the markets. There are also disturbing signs that the aid isn't getting at the core of the problem — the housing market.
One indicator of ongoing weakness there: The latest Mortgage Bankers Association figures on home loan applications. The group's index, which tracks demand for home purchase and refinance loans, plunged 17% in the most recent week. The purchase application sub-index is now plumbing depths not seen since October 2001, a sign that housing demand remains anemic.
All of these problems are now coming home to roost — again — in the U.S. stock market. The Dow plunged 232 points on Tuesday and another 514 points on Wednesday. Despite yesterday's bounce, it appears to be headed much lower over time.
I hope this underscores the message Martin and I have been preaching for months on end ...
Stop listening to the happy talk out of Washington.
Understand this is a dangerous, treacherous economy — and a market with many potholes, time bombs, and hazards ahead. You have to come at it with a clear head and a realistic approach.
Stay the heck away from vulnerable stocks. Maintain high levels of cash in safe investments like short-term Treasuries or Treasury only money funds. Or, if you're a more aggressive investor who's willing to go on the offensive, consider shooting for big profits using vehicles like inverse ETFs and put options. They're making some investors a killing in this market.
Sunday, September 28, 2008
The Market, Keeping Your Money Safe, and Investment Options
It would be extremely difficult to miss the tumultuous activity in the financial markets these days. Everyone is talking about the financial industry, the debt market, failing systems, corporate collapses, bailouts…it goes on and on. The financial landscape is changing by the hour, if the not the minute. This is a historic time in the United States - one that we have not seen for many years and hopefully will never see again. In this article I will discuss the Government's Backstop Plan and the effects it could have on you and the real estate market. I will also touch on the fundamentals you need to focus on in a volatile market.
Friday morning (9.26.08), President Bush came out with a brief statement using very decisive words to stress that a plan will be put together. There is no disagreement in the need for aiding the market, but there is great disagreement in how. Regardless of your political perspective or stance, the country must come together to ensure that the financial markets are stabilized and limit the detrimental effects of this tremendous downturn.
Today it seems that the market and the economy are in a holding pattern, waiting for details on the government's backstop plan. These details will add light and life to the financial market and add liquidity to the market so that credit will be granted again. The details will also add light to the real estate market. We are not at the bottom of prices. We are not done with foreclosures. However, the Plan could help to minimize the foreclosures by adjusting mortgages that are hurting people. This in turn reduces the number of low comparables entering the market to slow, and hopefully stop, sinking real estate prices. In addition, with liquidity in the market, community businesses and individuals will be able to get the credit and cash they need to continue business, send children to college, and buy that house that is currently sinking in value.
From a real estate and investing perspective, there are some fundamentals and attractive strategies to consider to help keep your money safe and even create a healthy return. At the very base of keeping your money safe you need to think about the failing banks and brokerage institutions; you need to think about deposit insurance and the amount of money you have in your accounts.
The Federal Deposit Insurance Corporation (FDIC) insures bank deposits. You should visit the website www.fdic.gov and review your accounts to ensure that you are covered and what you need to do if anything should happen to your bank. Here is some of the important information taken from the FDIC website:
What Does the FDIC Insure?
The Federal Deposit Insurance Corporation (FDIC) is a government corporation that insures all deposits at insured banks, including checking and savings accounts, money market deposit accounts, and certificates of deposit (CDs), up to the insurance limit. Use this form to find out if your bank is insured.
How Much Does It Cover?
The basic insurance amount is $100,000 per depositor per insured bank. Certain retirement accounts, such as Individual Retirement Accounts, are insured up to $250,000 per depositor per insured bank.
Ways To Increase Your Coverage
Since accounts at different banks are insured separately, the easiest way to increase your coverage is to simply keep less than $100,000 at any one bank. You could have $100,000 each at 500 different banks, and be insured for $50 million in total.
You may also qualify for more than $100,000 in coverage at one insured bank if you own deposit accounts in different ownership categories. For example, here is a way that a husband and wife could qualify for $600,000 in total insurance all at one bank:
The Securities Investor Protector Corporation (SIPC) helps to recover losses for investors if a SIPC member broker/dealer is closed due to bankruptcy or other financial hardship. If you have brokerage accounts you should visit the website at www.sipc.org to ensure you are working with an SIPC member and that you understand what you would need to do if something should happen to your brokerage firm.
Once you have peace of mind about your money in banks and institutions, you can turn your focus to the money you have invested in real estate. You know that the best strategy is to buy low and sell high, but how do you do that and where do you do that today? You don't want to buy a second home or vacation property to hold for a short time and look for appreciation. Those days are gone. We are not yet close enough to the bottom of prices and you will need a lot of cash to hold these properties to eventually see the return. Here is what you can do:
Do Nothing: Put your money in a safe account and wait until you see the market cycle start to climb again. The advantage is that you won't lose. The disadvantage is that you won't gain.
Private Lending: Credit markets are dry and the legalities around them are stricter. That means there is more demand for private lending and more return to be obtained. Look to established channels to lend through, and do plenty of due diligence before jumping in. The advantage to this is you don't need to utilize your credit or purchase anything. You gain a return for lending your own money.
Rental Property: Buy a cash flow positive rental property. Look for a market that has seen slow and steady growth, has increasing population and employment, or a market that has a housing shortage due to that growth or due to high foreclosures. As I have written about before, if people cannot or are not buying homes, people will rent. The rental market is climbing as the home buying market is falling. You do need to be able to obtain an attractive mortgage. The upside is that your money is working for you, there are no out of pocket costs, and the market will eventually turn up again.
Look Internationally: The international market offers many advantages. Off shore investing offers diversification, foreign exchange advantages, tax and legal benefits, and many times higher returns. No investment is without risk, so there is due diligence to be done. You need to look for credible and experienced companies to work with if you don't want to go at it alone. You will share some of the return, but you will also gain by their involvement in due diligence, legal, tax and negotiation activities.
Distressed Assets: If you are an accredited investor, please contact us for more information about purchasing distressed mortgage assets.
The financial, credit/debt, and real estate markets are in turmoil. Politics has been interjected as well. It is a tough time for everyone, but you can be sure that just as the cycle is down today, it will be up again in the future. Take care of your cash today! And if you can, continue to invest. There are always the right investment vehicles in any market cycle.
Article Link: http://www.propertyvestors.com/article_i22-08.php
Friday morning (9.26.08), President Bush came out with a brief statement using very decisive words to stress that a plan will be put together. There is no disagreement in the need for aiding the market, but there is great disagreement in how. Regardless of your political perspective or stance, the country must come together to ensure that the financial markets are stabilized and limit the detrimental effects of this tremendous downturn.
Today it seems that the market and the economy are in a holding pattern, waiting for details on the government's backstop plan. These details will add light and life to the financial market and add liquidity to the market so that credit will be granted again. The details will also add light to the real estate market. We are not at the bottom of prices. We are not done with foreclosures. However, the Plan could help to minimize the foreclosures by adjusting mortgages that are hurting people. This in turn reduces the number of low comparables entering the market to slow, and hopefully stop, sinking real estate prices. In addition, with liquidity in the market, community businesses and individuals will be able to get the credit and cash they need to continue business, send children to college, and buy that house that is currently sinking in value.
From a real estate and investing perspective, there are some fundamentals and attractive strategies to consider to help keep your money safe and even create a healthy return. At the very base of keeping your money safe you need to think about the failing banks and brokerage institutions; you need to think about deposit insurance and the amount of money you have in your accounts.
The Federal Deposit Insurance Corporation (FDIC) insures bank deposits. You should visit the website www.fdic.gov and review your accounts to ensure that you are covered and what you need to do if anything should happen to your bank. Here is some of the important information taken from the FDIC website:
What Does the FDIC Insure?
The Federal Deposit Insurance Corporation (FDIC) is a government corporation that insures all deposits at insured banks, including checking and savings accounts, money market deposit accounts, and certificates of deposit (CDs), up to the insurance limit. Use this form to find out if your bank is insured.
How Much Does It Cover?
The basic insurance amount is $100,000 per depositor per insured bank. Certain retirement accounts, such as Individual Retirement Accounts, are insured up to $250,000 per depositor per insured bank.
Ways To Increase Your Coverage
Since accounts at different banks are insured separately, the easiest way to increase your coverage is to simply keep less than $100,000 at any one bank. You could have $100,000 each at 500 different banks, and be insured for $50 million in total.
You may also qualify for more than $100,000 in coverage at one insured bank if you own deposit accounts in different ownership categories. For example, here is a way that a husband and wife could qualify for $600,000 in total insurance all at one bank:
The Securities Investor Protector Corporation (SIPC) helps to recover losses for investors if a SIPC member broker/dealer is closed due to bankruptcy or other financial hardship. If you have brokerage accounts you should visit the website at www.sipc.org to ensure you are working with an SIPC member and that you understand what you would need to do if something should happen to your brokerage firm.
Once you have peace of mind about your money in banks and institutions, you can turn your focus to the money you have invested in real estate. You know that the best strategy is to buy low and sell high, but how do you do that and where do you do that today? You don't want to buy a second home or vacation property to hold for a short time and look for appreciation. Those days are gone. We are not yet close enough to the bottom of prices and you will need a lot of cash to hold these properties to eventually see the return. Here is what you can do:
Do Nothing: Put your money in a safe account and wait until you see the market cycle start to climb again. The advantage is that you won't lose. The disadvantage is that you won't gain.
Private Lending: Credit markets are dry and the legalities around them are stricter. That means there is more demand for private lending and more return to be obtained. Look to established channels to lend through, and do plenty of due diligence before jumping in. The advantage to this is you don't need to utilize your credit or purchase anything. You gain a return for lending your own money.
Rental Property: Buy a cash flow positive rental property. Look for a market that has seen slow and steady growth, has increasing population and employment, or a market that has a housing shortage due to that growth or due to high foreclosures. As I have written about before, if people cannot or are not buying homes, people will rent. The rental market is climbing as the home buying market is falling. You do need to be able to obtain an attractive mortgage. The upside is that your money is working for you, there are no out of pocket costs, and the market will eventually turn up again.
Look Internationally: The international market offers many advantages. Off shore investing offers diversification, foreign exchange advantages, tax and legal benefits, and many times higher returns. No investment is without risk, so there is due diligence to be done. You need to look for credible and experienced companies to work with if you don't want to go at it alone. You will share some of the return, but you will also gain by their involvement in due diligence, legal, tax and negotiation activities.
Distressed Assets: If you are an accredited investor, please contact us for more information about purchasing distressed mortgage assets.
The financial, credit/debt, and real estate markets are in turmoil. Politics has been interjected as well. It is a tough time for everyone, but you can be sure that just as the cycle is down today, it will be up again in the future. Take care of your cash today! And if you can, continue to invest. There are always the right investment vehicles in any market cycle.
Article Link: http://www.propertyvestors.com/article_i22-08.php
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