Seven years after the stock market bubble busted, the troubles in the housing market look strikingly familiar. In fact, everything is going according to the textbook. The textbook in this case being CHARLES KINDLEBERGER’S 1978 classis entitled ‘MANIAS, PANICS, and CRASHES.”

Let me explain:

Mr. Kindleberger’s research revealed speculative bubbles tended to follow similar patterns. First, there is some “displacement” such as the development of the INTERNET or a prolonged period of ultra low INTEREST RATES. These events tend to radically improve the outlook for some area of the economy.

Investors and the public in general then take advantage of the opportunity, fueling a boom that is fed by progressively easier access to cash. At the height of the bubble, there is “pure speculation”. Assets are bought to quickly sell them again at a higher price. This occurred in the past with day trading in 2000, house flipping more recently, and if you know your economic history, tulips long ago.

Like always, the speculation eventually runs its course and in the ensuing downturn, swindles come to light. That leads to what Kindleberger calls “REVULSION.” Lines of

credit dry up and regulators, SARBANES-OXLEY style, rush in to shut the empty cow barn door and in the worst cases, selling panics follow.

“REVULSION” is where the housing market appears to be today.

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A jump in “early defaults,” where borrowers stop paying shortly after taking out their mortgage, stems in part from questionable lending practices and out and out fraud. In some instances, buyers tried to buy houses for more than they are worth in return for kickbacks from the seller. This is how the scam works:

The buyer might pay $500,000.00USD for a house that is really worth $450,000.00USD and get $50,000.00USD back from the seller. The kickback gets used as a “kitty” to make the mortgage payments while the buyer waits for someone to buy the house for more than they paid.

This “dipsey doosey” might get by in a rising real estate market but turns into a nightmare in a stagnant or falling real estate market.

Mr. Kindleberger documented that bubbles frequently come not long after the previous bust. The 1800’s included repeated bubbles in CANAL and RAIL securities in the U.S. and abroad. Housing was not the only place where low rates bred an easy money culture. EMERGING MARKET STOCKS and BONDS, CORPORATE DEBT, and BUYOUTS come to mind also. Read the book and utilize the data to insulate your investment portfolio.

 If you have any questions and/or require assistance, simply…

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Investors in the increasingly crowded COMMODITIES sector are betting not just on the price of raw materials but also on the cost of delivering them.

Trading OCEAN-FREIGHT RATES {prices for getting OIL, GRAIN, and COAL to their destinations} has become a hot new pursuit, with trades totaling an estimated $35 BILLION to $45 BILLION annually, up from roughly $20 BILLION to $30 BILLION a couple of years ago.

Fueling the trend are more volatile, and often higher, freight rates than in years past, as well as fluctuations in generally higher commodity prices themselves.

Let me explain:

Most of the action takes place in LONDON and is not conducted on “formal” futures exchanges, though some exchanges are working to expand their freight-related offerings.

Traditional ship-brokering companies, commodity merchants, banks, and hedge funds are buying and selling derivatives known as “FORWARD FREIGHT AGREEMENTS” that lock in future shipping rates without committing any actual tankers to the water!!!

The business also got a boost in the late 1990’s from ENRON CORP., the U.S. energy trading giant that failed amid accounting scandals in 2001. During its heyday, ENRON had an online platform that allowed participants to bet on dry and wet freight rates.

Europe was particularly receptive due to the deregulation of the regions electricity markets in the 1990’s. The power companies could no longer impose fees to offset unexpectedly high COAL costs.

Because freight can amount to a third or more of the price of delivered COAL, hedging services were very much in demand. Last year (2007), CITIGROUP added COAL and FREIGHT TRADING to its product mix in London.

THE BALTIC EXCHANGE, an old London maritime institution, has over the past few years become the market’s leading publisher of FREIGHT RATE INDEXES. Trading based on these indexes has grown more popular with the advent of “clearing” firms that guarantee payment on contracts between two counterparties.

 
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As with COMMODITIES, TRADING FREIGHT RATES is a risky business. If you do not have a large capital base behind you, it is virtually impossible to trade the market. For companies exposed to the freight market, trading can reduce risks. Utilities in Europe that import COAL may want to protect against skyrocketing freight rates by locking in prices for future shipments now. If freight prices go above what they paid, they have saved money, however if prices fall, they have loss money.

In theory making a financial bet is less messy than holding ships that can fall into disrepair, sink, or be in the wrong port at the wrong time.

Surging rates for shipping dry goods in bulk suggest that EMERGING ECONOMIES are voraciously consuming raw materials to build infrastructure, despite forecasts of a slowdown.

GOLDMAN SACHS GROUP INC. and MORGAN STANLEY both have a long history of TRADING FREIGHT RATES for clients and themselves. MORGAN STANLEY has taken things a step further to gain first hand insight into the market. For years, the firm has chartered ships to haul CRUDE and REFINED OIL products, and in 2003 it set up a specialized freight trading desk.

One of the big questions confronting the industry, that you must ask yourself is:

Will the recent building boom in big tankers flood the market and DEPRESS CARGO PRICES???

Some say it will not over the long term, because many ship owners, in a few years, will have to scrap the single-hull tankers that they have because they are more prone to oil spills than the newer, fortified ships.

If you have any questions and/or require assistance, simply…

ASK THE WIZ!!!

Recently a lone accountant defeated the IRS in a tax dispute. Not only that, but tax experts say potentially millions of other taxpayers could benefit from his victory.

The federal court recently agreed with the accountant’s interpretation. Thus, tens of thousands of people could be in line for a refund. There is a tremendous amount of money at stake. While it is not unusual for individuals to take on the IRS, most of them lose.

The dispute arose when more than 30 mutual life insurance companies became publicly traded corporations in the late 1990s and earlier this decade, in a process known as “demutualization”. Let me explain:

That could make a significant difference in what a taxpayer owes. If a company distributed shares worth $30 and a recipient subsequently sold them for $32, under the IRS’ view they would owe taxes on all $32. Per the accountant’s interpretation, the taxpayer would owe taxes only on the $2 per share gain.

The IRS was not pleased with the accountant’s view and accused him of promoting abusive tax shelters and demanded the names of his clients he was helping with this problem. He refused to provide those names and ultimately the IRS backed off in 2004 with the help of the IRS’s Taxpayer Advocate Office.

Judge Francis Allegra of the Court of Federal Claims in Washington sided with the accountant and called the IRS’ view “illogical” in a recent August 6, 2008 decision.

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It is not clear how many people could benefit from the ruling. Claims must be filed within three years of the April 15 tax deadline. That means the statute of limitations for taxes paid for 2004 ran out April 15, 2008.

The government could appeal the ruling and likely will fight refund claims, perhaps hoping for a different outcome in a separate court. A spokesperson for the Justice Department, said the government has not yet decided whether to appeal.

Still, taxpayers should request refunds if they are eligible, tax experts advise, because even if the IRS rejects the claim, doing so extends the deadline for a potential refund for two more years. Additional information can be found at: www.demutualization.biz.

If you have any questions and/or require assistance, simply…

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Unconventional income-producing strategies are gaining prominence as traditional sources of income become less and less attractive. For some investors, it is all about the yield-especially with the stock market’s wobbly performance in recent days.

With everything from long term TREASURY BONDS to DIVIDEND PAYING STOCKS offering relatively low payouts, a growing number of people are pursuing aggressive new strategies to generate income.

Among the strategies gaining favor with income-hungry investors are PUBLICLY TRADED ENERGY PARTNERSHIPS, FOREIGN REAL ESTATE SECURITIES, and more rapid trading of DIVIDEND PAYING STOCKS.

MUTUAL FUNDS and CLOSED- END FUNDS (which have a fixed number of shares that usually trade on an exchange) are quickly adopting these strategies as they aim to attract baby boomer investors who are on the brink of retirement and eager to generate a steady stream of income.

The new strategies give investors a relatively high and rising stream of income and the potential for investment gains, at a time when many traditional income oriented investments offer lackluster yields. However, they also come with potential pitfalls that investors in MONEY-MARKET FUNDS and TREASURY BONDS do not have to think about, and greater levels of risk.

While many income seeking stock investors turn to UTILITIES and REAL ESTATE INVESTMENT TRUSTS (REITs), those sectors are now highly valued and offer relatively low yields. Current times are also revealing that dividend paying companies are increasingly reluctant to boost their payouts. The number of STANDARD & POOR’S 500 companies raising their dividends so far this year (2008) is down about 13% from the same period last year (2007).

Let me explain some of these “exotic” new ways of generating income being utilized by investors craving income:

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Research from the SOCIAL SECURITY ADMINISTRATION indicates that if you take an average pool of 100 people at the beginning of their employment/working years and followed them for 40 years until they reached retirement age, ONLY 1 WOULD BE WEALTHY!!!

*5 would continue working, not because they wanted to but because they would have to

*36 would be dead

*54 would be dead broke, dependent on their meager SOCIAL SECURITY checks, relatives, friends, and even charity for a minimum standard of living

What this means is, only 5% of the employment/work force will end up being financially independent while 95% will retire destitute.

People are aware of the percentages. That why you will continue to see people lined up at convenience stores to buy lottery tickets. They have more faith in the odds of winning the lottery, than they have in their own ability to obtain financial independence.

It is sound economy specific investing that allows a person to become one of the 5% who become financially independent when they retire.

NOTE: Emphasis must be placed on the term economy specific!!!

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Financial magazines, financial advisors, and analysts a like all make mention of and give advice about, what stock, mutual fund, commodity, currency, bond, etc. you should buy.

An investment won’t do you any good unless you know when to sell it. Study the fundamentals and examine the cash flows and earnings growth pertaining to the investment. You also need to stay abreast of the sectors that your investments are in and their effect on the economy. You want to have positions in companies that are leading sectors.

It’s about understanding trends and knowing how to take advantage of them.

Remember, the ECONOMY both domestic and/or international should be your PREMIER determinant as to what you invest in and how long you keep the investment before you sell it.

If you have any questions and/or require assistance, simply…

ASK THE WIZ!!