The Federal Reserve Cuts Rates .75%

Tries to stave off a larger decline in the stock market The Federal Open Market Committee (FOMC) held an emergency meeting last night to determine how to address the sharp sell off of stocks from around the world yesterday and the impending sell off US stocks today. It was the first special meeting since 9/17/01 and the largest one day cut since 1984. They decided to cut the Fed Funds Rate (FFR) to 3.5%. Here's an updated chart showing the Fed Funds Rate, the Prime Rate and the National 30 yr. Fixed Rate average. For more information about this story click here... To learn more about how Fed Rate cuts affect mortgage rates, check out our blog entry from Jan. 15, 2008... Cashflow Coach

600 Jobs, 600 Families, 600 Homes

Free Markets work to create opportunity, jobs, growth and value in our region!
 
Many of you have already heard that Liquid Web has purchased a building and will begin renovating it to house their expanding web hosting and data center operations along with employee growth.  Read more on this story by clicking here.  More people than ever before believe that Lansing, MI is where they want to be to work, live and raise their family. 
  
WE HAVE:
 
Better paying Jobs coming here than in the recent past.
 
Better paying jobs bring families, not only singles.  Families have children; children go to our schools and do a wealth of other activities in Michigan together.
 
More Jobs being created than in the recent past!
 
More residents will stay and not leave; more companies will want to expand here as our work force grows, more home buyers and renters will remove homes from the market - fewer homes on the market will increase home prices.
 
We have a Greater diversity in Job creation than ever before.
 
This will hold many positives for us.  For example, both spouses will find employment in their field here in mid-Michigan now more often than before. 
 
Diversity in job sector opportunity is the number one priority for economic development in any region.
 
In and around Texas during the 1980’s after the drop in oil prices devastated that 5 state region, job diversity is credited as the reason why they made such a long lasting recovery.  It is no surprise to many that even in the last three years, many of the hard hit regions in Texas in the 1980’s are not experiencing real estate value decline right now.  Their growing economy, based on a very diverse job market, is almost unstoppable.
 
In addition to our staple manufacturing, university, and state government we are expanding rapidly in health care, technology and the insurance industry.  As we become known for having a presence in certain industries, we get “on the map”. For corporations considering new regions to expand into, qualified employees that insure their stable growth is high on their list or qualifying determinants.
  
All positive growth begins with the truth! 
 
Here’s the truth:
 
The best is yet to come in Lansing!

Warren Makes a Bet

By John Mauldin
FrontLineThoughts.com

The Sage of Omaha made a bet that was written up in a recent Fortune magazine article. Basically, Warren Buffett bet that the S&P 500 would outperform a group of funds of hedge funds over the next ten years. A million dollars to someone’s favorite charity is on the line. This week we will analyze the bet, using it as a springboard to learn about valuation and value investing. As we will see, there are times that making a bet on the S&P 500 to outperform hedge funds (or bonds or real estate or whatever asset class) makes sense and times when it doesn’t.

Warren Makes a Bet

Carol Loomis (one of my favorite financial writers) writes in this week’s Fortune about a bet that Warren Buffett made with a hedge fund management company. You can read the fascinating story

Quoting:
“And to that there is a certain history, which began at Berkshire’s May 2006 annual meeting. Expounding that weekend on the transaction and management costs borne by investors, Buffett offered to bet any taker $1 million that over 10 years and after fees, the performance of an S&P index fund would beat 10 hedge funds that any opponent might choose. Some time later he repeated the offer, adding that since he hadn’t been taken up on the bet, he must be right in his thinking.”

A New York firm, Protégé Partners, which manages $3.5 billion in a fund of hedge funds, decided to accept that bet. Basically, Buffet and Protégé each put $320,000 into 10-year zero-coupon Treasury bonds that will be worth $1 million in 10 years. The bet is straightforward. Protégé has chosen five funds of hedge funds, and these funds must return more than the S&P 500 over the 10 years beginning January of 2008. (The list of funds is a secret.) The winner gets the $1 million donated to their favorite charity.

Which way would you bet? If the online response at Fortune is any indication, 90% of you would bet with Warren. As one enthusiastic responder wrote, “How can you bet against Buffett? I’d bet my life savings on it …” Well, Tom, you might want to hedge your bet. Even Warren said he thinks his odds are only 60%.

The basic premise to Buffett’s position is that the high fees simply eat up any potential for extra profits, over those of a simple index fund. As Buffett writes:

“A number of smart people are involved in running hedge funds. But to a great extent their efforts are self-neutralizing, and their IQ will not overcome the costs they impose on investors. Investors, on average and over time, will do better with a low-cost index fund than with a group of funds of funds.”

And he is right about the fees. Hedge funds, and especially funds of funds, must do much better than average to overcome their high fees. Loomis sums it up as follows:

“As for the fees that investors pay in the hedge fund world – and that, of course, is the crux of Buffett's argument – they are both complicated and costly. A fund of funds normally charges a 1% annual management fee. The hedge funds it puts that money into charge an annual management fee of their own, which for funds of funds is typically 1.5%. (The fees are paid quarterly by an investor and are figured on the value of his account at the time.)

“So that's 2.5% of an investor's capital that continually goes for these fees, regardless of the returns earned during a year. In contrast, Vanguard's S&P 500 index fund had an expense ratio last year of 15 basis points (0.15%) for ordinary shares and only seven basis points for Admiral shares, which are available to large investors. Admiral shares are the ones ‘bought’ by Buffett in the bet.

“On top of the management fee, the hedge funds typically collect 20% of any gains they make. That leaves 80% for the investors. The fund of funds takes 5% (or more) of that 80% as its share of the gains. The upshot is that only 76% (at most) of the annual return made on an investor's money accrues to him, with the rest going to the ‘helpers’ that Buffett has written about. Meanwhile, the investor is paying his inexorable management fee of 2.5% on capital.

“The summation is pretty obvious. For Protégé to win this bet, the five funds of funds it has picked must do much, much better than the S&P.”

Oil, Dollars, inflation and Fed rates - great expanation here!

Fed leaves the rate alone today as expected – if you are curious about how some of these things relate to one another, read below. This is clear and easily grasped. Be the expert at the dinner table tonight!

Barry Habib is an analyst for CNBC and writes for his Mortgage Market Guide website. Many of you have seen this sight in my office, we watch it closely every day in order to advise our clients about locking rates.

Enjoy!

Oil,Dollars, Inflation and Fed Rates

By Barry Habib, CNBC Analyst

We actually agree with a more hawkish view - and although the Fed will not hike, we hope they decide to do so sooner than later. There is a possibility of a hike in August but it is not likely. The Fed is in a tough spot - the economy stinks, housing is struggling, confidence is low and costs are rising. You need only look at your last receipt from the grocery store or gas station to see how quickly things have changed. And a walk through your local shopping Mall tells another story of individuals who are less able to spend. That is the Fed's problem...the smart move is clearly to hike. Inflation is rapidly eating away the value of money. And while food price increases hurt, oil is the real story. So why has oil risen so wildly? The answer...The Fed. The evidence is too clear to ignore.

Let's take a look at where we were before the first Fed cut on September 18th. The Fed Funds Rate was at 5.25%, Oil was at $73 per barrel and the Euro was $1.35. Not great, but not bad. Fearing a recession, the Fed did the right thing to stimulate the economy - they cut. But cutting rates in the US makes higher rates in Europe appear much more attractive. So the Dollar began to tank against the Euro and just got worse as the Fed continued to cut. Now it takes $1.56 to equal one Euro. That is a huge swing. And here is where it gets interesting...Oil is priced in Dollars, so as Dollars decline, Oil price per barrel must rise.

Oil has gone from $73 a barrel before the Fed cuts began in September '07 to yesterday's close of $137 a barrel. And the European Central Bank President, Jean - Claude Trichet, has been talking about a rate hike in Europe even though they are headed for a recession. Remember there is a big difference between the US Fed and the ECB - the US has a dual mandate, fight inflation and promote growth. The ECB just fights inflation. And just the talk of a hike from the ECB has sent oil even higher.


Again, oil prices are surging mainly because of the Dollar weakness and the Fed cuts. Think about it - has demand for oil suddenly skyrocketed in the past 8 or 9 months? Sure it has gone up, but oil had already doubled in price when it was at $70. And higher prices for oil hurts everything. Sure at the pump and for heating, which allows less to spend, but travel, manufacturing, shipping...the list goes on and on.


Back to this morning's news - New Home sales for May were reported at 512,000, inline with expectations. The inventory of New Homes rose to a 10.9 monthly supply. This report suggests the new home sale market is still struggling.

The more "hawkish" the Fed statement, the better it will be for Bonds. But if the Fed does not at least talk tough, Bonds will be pressured and Oil will move higher.

March Madness - The Fed Cuts Again

The madness isn't just on the hardcourt.

You may have heard that the FED cut rates again last week; another .75%, bringing the fed funds rate to 2.25%. Contrary to popular opinion this does not translate to a lower 30 yr. fixed rate, in fact rates have started to rise again.

When you look at the last 5 rate cuts dating back to 9/18/07, the fixed rates have increased each time within days of each cut. The simplified explanation for this phenomenon is that fixed rates (bonds) dislike inflation and the rate cuts tend to be inflationary long term.

There's a lot of debate about how involved the FED should be in bailing out banks like Bear Stearns and other banks that took a "gamble" on these high risk loan portfolios. The free market people are calling for passivity and less involvement so the market can self correct.

A large segment of the investors that are or will have a lot to lose are asking for help to mitigate their losses. They argue that to let a bank like Bear Stearns collapse would be detrimental to ALL investors and the entire banking system.

We tend to side with the free market side of the argument. A lot of the self correction has already occurred and the people who took extra risks to get a better return need to be held accountable to their choices.

We also agree to a smaller extent that some intervention needed to happen in the Bear Stearns case because of the long ranging effects of it's collapse. We ALL would've been negatively impacted by a loss like that.

Why is the FED being so aggressive with their rate cuts? We believe that part of it is because banks are no longer loaning money to each other like they were prior to Aug. '07, so the banks need another source of money to meet their deposit requirements.

But, even more than that, we believe the FED has been agressively cutting rates to mitigate the impact of $400 billion to $600 billion in Adjustable Rate Mortgage (ARM) resets in this year alone. By agressively dropping the Fed Funds, the other short term rates like the LIBOR, CMT, MTA and the T Bills also drop.

For instance the 1 MTH LIBOR has dropped over 3% since August '07. Now when these ARM's start to adjust this year, the new rate will be closer to the starting the rate and the payment shock will be less which means more people should be able to keep making payments which means less defaults and foreclosures. This in turn helps to stimulate the housing market again.

Stay tuned for more madness, both the good (Spartans win the Championship) and the not so good.

Roth IRA: When's the Best Time to Start?

The best time to start or fund your Roth IRA is - NOW!

If you haven't started your Roth IRA, you should seriously consider opening an account ASAP! If you have a Roth IRA and haven't funded it yet for 2007, you still have time. Here's a good article on why you should have a Roth IRA.

The timing couldn't be better. For one, you can still fund your Roth for 2007 up until April 17th, your tax return deadline and then turn around and fund your 2008 contribution right afterwards in one lump sum or incrementally throughout the year.

For 2007, your max. contribution is $4,000 ($5,000 over age 50) and for 2008 the max. is $5,000 ($6,000 over age 50). If you're married, your spouse can also fund a Roth at the same amounts, even if that spouse doesn't have earned income, as long as you file a joint return.

If you're wondering where the money to fund your Roth will come from, consider investing your Tax rebate. If you're married and have 2 children, you could receive up to $1,800 depending on your Adjusted Gross Income. What's the value of that $1,800 over 20, 30, 40 years or more? Use this calculator to see (use 0% for the Federal & State taxes).

Not all Roth IRA's are created equal. The primary feature of a Roth IRA is that you can invest after tax dollars to grow tax free and to make withdrawals tax free. Before you set up an account, make sure you understand the internal fees for that Roth IRA. Some mutual funds inside your Roth have a lot of internal costs that will eat away at your rate of return. Warren Buffet recommends index funds for the non professional investor. Check with a qualified fee only advisor for the best account options.

If you have a son or daughter helping you in your business, help them understand the value of starting a Roth IRA as early as possible and the power of compounding. Their contribution can be equal to their annual earned income amount up to the maximum allowed. Try this on for size:

A 17 year old contributes $1,000 of earned income into their Roth IRA each year for 10 years and stops with a total contribution of $10,000. Assume a 10% rate of return. Here are some estimated results:

• When they are 27, the value of the Roth would be $17,531
• When they are 37, the value of the Roth would be $45,471
• When they are 47, the value of the Roth would be $117,941
• When they are 57, the value of the Roth would be $305,908
• When they are 67, the value of the Roth would be $793,448
• When they are 77, the value of the Roth would be $2,057,999

Remember, this is tax free income (as the law now stands) after 59 1/2. Start young and let the power of compounding work for you.

Self Directed IRA's

On another note, did you know you can buy and sell real estate through a Self Directed IRA? Why would you want to do this, you ask? What if you could pick up an REO property at discount, fix it and flip it or lease it and sell it later at a profit. That profit is not taxable.

This is a very simplified example, so you should definitely talk to someone in the know. A good company to get more information from is The Entrust Group.

If you don't have enough money in your Self Directed IRA to purchase a property alone, consider partnering with one or more trusted associates and buy a property. You know there's a lot of good deals out there.

As always, consult with a qualified CPA and Financial Advisor to determine how to set this all up to best meet your short and long term goals, but start now!

The Cashflow Coach

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RSS Dashboard

I'm hoping that I'm not the last one to know this and that this post will be valuable to a lot of my readers.

Most of you know what an RSS feed is and how important it is in getting people to subscribe to your blog. Have you ever wished there was an easy way to aggregate all of the different feeds that you subscribe to versus checking your email inbox throughout the day?

I know I did and the answer I found was................NETVIBES.

If you're not familiar with Netvibes, it is one of the coolest web aggregators I have ever found (which is not saying much) without the ads. That's quite a combination - Free and without ads, who would've thought?

It is a free site, you just need to register with a login and password. Once you do that, you can start customizing the page to display any and all of your RSS feeds along with a number of other widgets, including a Bookmark section where you can store all of your favorite websites. The advantage of storing your favorite websites in this bookmark widget versus your PC's web browser is that your bookmarks will be available from any computer with Internet access by logging into your Netvibes account.

Here's a quick blurb on the benefits of Netvibes:

• Helps you manage your digital life and share it with your friends
• Brings all your favorite MySpace, Digg, YouTube, Gmail, Flickr, eBay, del.icio.us accounts - you name it (no, really, you can rename our entire site) - together on your own personal Netvibes page
• Share with your friends or colleague your favorite modules
• 100% customizable - no ads, no logos, no corporate control

After you have your Netvibes account set up, you can make it your default home page and voila!, whenever you open up your web browser, you'll get a "dashboard" look of all of your favorite feeds on one page. This has been a great time saver because I can look at all of the titles and decide which one I want to read and which ones I'll wait to read until later.

Hope this website is as useful to you as it has been for me, hopefully, I'm not the last one to learn about it.

The Cashflow Coach

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