Speculation in the market

This is not something new, but its worth to mention.

If we go back in 2000, there was a speculation in the Stock Market, and bubble were created what we called dot com bubble. The market capital of the companies, which did not make profit was in billions. NASDAQ stock index soar from 1500 to 5000 in 2 years. When the market crashed, Fed Reserve rescued companies by cutting the borrowing cost and reduce the interest rate to 1% (retiree get hurt oouch). Now NASDAQ is half way to that top.

There was a another bubble during the same time, energy bubble, where the prices of the electric city and gas was artificially inflated by Enron. Which eventually burst.

Because the interest rate was too low in 2003-4, that enable housing boom, and house price start to soar, many houses increase its value to 70-80% in this years. Lot of speculator (Banks, Loan Agents, etc) jumped into market. Consumer use their equity as credit card and use the money to spend. Now we see the housing prices are going down as much as 30% and that created another problem called Credit Crunch in the financial industry. Many hedge fund and mortgage company are bankrupt.

In late 2006, when housing price goes down, it create another bubble. This bubble is in the commodity market.

In this bubble,
Crude oil soar from $50/barrel in Jan 2007 to now $118, whopping 150%
Wheat prices jumped 130% since March 2007.
Rice prices jumped 140% since Jan 2008
Soy prices jumped 80% since 2007.
Coal price is almost double since 2005.
Gold price rose 90% in a year.


Not to mention the speculation in the currency market, as US Dollar drop 20% in last 18 months. It never happened before.

The number one reason for each of this bubble in past decade is Speculation. The speculation is easy to implement, especially when the trading market is computerized. (Thanks to Enron who found the idea of selling the contract through electronic exchange).

Other reason is Media, they too much spread the negative news. Like house prices going down, rice price going up and so forth.

I personally believe the reason is Globalization, Open Market and De-regulated System in the United States. The country like China (Totally Regulated and Close Market) get benefit out of this.

Even though we go through this bubble and burst, the S&P 500, which is US broad based index, has return just 1% in last 10 years. So if you have put the money in S&P 500 in 1998, than you just get 1%. Check this WSJ article.

One more monster to worry about

In silicon valley, the big labor market is from the pre-IPO/Startup, that market is been HOT since M&A started back in 2002-03. VC put lots of money in the valley to find one company like Google, Youtube, Facebook, VMWare and so forth.

With the problem in the Financial Industry, it spill little bit over to the Startup in the bay area. One of the oldest startup Red Envelop shut its door today laying off all of its 200 employee according to Valleywag. Is this a beginning? Its a monster question.

If it continue like this people will forget the Financial Market in terms of how bad it was. Being said that, it make two prominent economy of US i.e Bay Area and New York, will struggle in the near future. The consequences will be much worst, as there is no remedy for this. Back in 2001 at least Fed has a room to lower tje interest rate. And now, there is not much Fed can do today.

Lets hope startup market won't fall.

Job market in 2009...may be 2019

LOL

Money can buy happiness

Well over the period, I was in debate (disagree) with the argument whether money can buy happiness, but I have to agree now. Money can buy happiness only if you spend on others. People works day and night to make money and still they are unhappy in their personal life, still they think missing something. They spend and buy lot of stuff to make them happy, but it does not somehow feel really happy so they end up spending more.

Recent research found century old belief, ( "It is more blessed to give than to receive." ) that it can buy happiness, if you spend on others or if you give away money to charity.

There is no wonder why more and more rich people give away money to charity, they realized that this is the only way to be happy, not to mention Warren Buffet. "Indeed, although real incomes have surged dramatically in recent decades, happiness levels have remained largely flat within developed countries across time," they wrote. That mean, if you go from low income to medium you certainly feel happy, but after certain stage it does not.

In our Indian culture, there is saying that its better to have "prasaana" rather than "khush". "Khush" is temporary while "prasaana" is eternal. There was one classic example one of our saint told during Diwali. If you use the firework for yourself, it gives you happiness, but its temporary However if you give fireworks to others who need, it feel you eternal happiness which is called "prasaana".

Meet our future president and his vision

Speech is truly intelligent and inspiring. I can't wait to vote him.

Price of Freedom

Do you wonder why United States is not interested in Tibet Freedom?
Oil? No.
Uranium? Nope.
Any other economically feasible natural resources? Nada.
Significant potential trading/economic partner with the U.S.? Never

How Bear Sterns fails?

If someone don't know how the financial compaines are facing the credit crunch, here is I am trying to explain what happens.

In 2003, when household person went to refinance their loan to Loan Broker.

Household: Hi Mr Broker, I want to refinance house, because the rate is very low, I will save lot of money in my Mortgage. (Household spend the money and economy went up, Thanks to Mr. Greenspan)

Broker: Sure thats way to go. But, hey do you want to buy another house for investment, since the rate is low, and when you rent it you will have positive cash flow.

Household: But I don't have down payment or monthly income that I can get loan

Broker: You don't worry about it, we will manage it. Congratulation, you are just qualified for $400k loan.

Now he goes to real estate agent to buy $350k house

Household: I want to buy this house, I have my loan approved.

Real Estate Agent: Sure, but you have to bid 50k higher, as there are many interest in this property.

Household: No problem, my loan is approved for $400k, here is my offer for $400k.

Real Estate Agent: Congratulation, you got the house.
Broker: Congratulation, you got the loan, with 0% down, and 1% loan for 2 year, and it is interest only, the payment is less than the rent you get, so you get a really good deal.

In 2004...

Household: Wow, my house has gone up to $500k, I have a profit of $100k, with no money to invest, this is GOLD

Next time broker call for Equity Line of Credit

Mr Broker: Hey bro, do you want to take equity from the home? You have 100k in there that you can use either to buy home or spend for vacation. Its like an ATM card, where you can get the money when you want.

Household: Can I do that?

Broker: Sure, here it is, spend any way you like.

I guess lot of people did this way...year goes by.

Now lets see what happend on the back side, where consumer has no idea what's going on.

In 2005...

Brokerage Firm: In there team meeting they tell the Business Situation. We have $xxx Billion of open order to buy AAA securities, don't we have anything to fill this order? Also we have lot of MBS that we just finance. Guys lets work on it. They decided to work on this and come up with, new financial instrument, called CDO, Corporate Debt Obligation. The biggest scam of the century. Its a structured investment instrument, which is 80% backed by Mortgage (so called subprime mortgage) and 20% is the tranches, which makes its rating AAA by major credit agency such as Moody's and S&P. To understand this tranches you have to read 80,000 pages of document. I never understood what it is. They start filling the order from the banks, so here is what happend:

Mr Hedge Fund Manager: I have a fund, if you invest it gives you 8% return and it is AAA, fantastic deal.

Mr. Bank : Wow, that's cool. I am very must interested in it. How do you do that? I want $100 securities, so I will get $8. How about If I want to buy more.

Mr Fund Manager: Sure, give me more money, I have to buy more CDO, that will give this return. Basically its a Mortgage backed bond.

Mr. Bank: Sure, I want to lend you money, you just pay me 6% of that money and you keep 2%, how about If I lend you $3000?

Mr.Fund Manager: Wow, so for $3100, I get $248, and if I pay you interest i.e 180, I keep $68 on my original $100 investment. i.e. 68% return, my customer will be very happy with this return. Lets do it.

Times goes by...2006... the house price fall because mortgage rate reset after 1 or 2 year and the new payment household cannot afford. Still get money so its worth to sell, so lot of inventory and price fall further more. Economy 101, supply and demand.

So, In 2007 this is what it happen.....

Banker: Hey Mr Hedge Fund Manager, remember I lend you money $3000 at 6% ? I still have a promissory note. Can I get $1000 back as we think that most of the mortgage that CDO has will go bad.

Hedge Fund Manager: Dude! The price of CDO is already down 5%, If I sell bond to get you $1000 then I would get $50 loss (1000*.05) . So for $100 of my original investment I h ave $50 loss, which 50% lost on investment. And, I have to mark to market and need to report to my investor.

Banker: Well, we really need our money back, at the value of the underlying document is not worth that much.

Hedge Fund Manger: Damn! Everybody else doing just like you. If I keep selling this bond, the price of the bond will go 20% down. Which mean I have to take $200 loss, and I just invested $100. That means now only I wiped out but you also loose $100. And if you want all your money back then you will lost $600 of your $3000 investment too.

So banks has taken the hit and write off in the next earning.

Below is the description of the character described above:

Household: Person living somewhere in Atlanta and has job in Mcdonald. Many of them are in forclusure. I personally was one of them back in 1997, back then I didn't have any credit, nor much down payment and they got me house.

Real estate Broker: Toll Brothers, Lennars, Pulte, Dean Horton etc.. They all struggling to sell the houses.

Loan Broker: Countrywide, Washington Mutual, Fremont Bank etc, atleast 90 of them went bankrupt already. Many of them wind up with real estate so call REO.

Hedge Fund Manager: Carley Group Fund, Bear Sterns, Lehman, some I don't remember, and more are coming. Some of them are bankrupt already, and some in severe trouble.

Bankers: Citigroup, all major banks, international bank from Europe, China, India, Japan, and so forth. Most of them are expected to write off.

They borrowed 2.5Trillion loan in last 3 years, if you count the value of the underlying security lost by 20%, then there is $500B loss some or all combined has to take. So far, they have declared $185B, so $315B loss still to go....

US Treasury is not safest investment in the world anymore.

Over the decades, US Treasury Bond is the most safest investment in the world by far. And that is the reason Japan and China hold 50% together of our debt.

For a two days in the last week, the Treasury Bond is loosing the ground against the German Bond. This was due to the fact that Fed Reserver Bank has announced that they will pump up $200B dollar US Treasury into the system in exchange of MBS based security and for 28 days. Wow. Fed never took this debt obligation before and not for that many days.

This means that Fed want to bail out some few wall street company such as Bear Sterns which is going to bankrupt anyway.

With this news, Dollar and Treasury both lowered. Some people are speculating that US Debt obligation are too much now, (approx $9 Trillion), that US may not able to pay off and may default on it. So China and Japan should worry about it!!! LOL

There was Tech Bubble and it burst , and lot of company went bankrupt and people lost job and money, Silicon Valley was mainly affected, and now we are facing Credit Bubble or Credit Crunch, where lot of company like Countrywide, Bear Stern, and not to mention this hedge fund will go bankrupt, unless someone rescued them, and New York is facing similar problem. First time ever I saw that rich people are feeling the bleeding.

Billionaire : Transfer of the wealth.

Over the past decade, Bill Gates was #1 richest man. Not any more! Its Warren Buffet. Next year will certainly other, as Warren donated the money to Charity.

People and Company were dominated by US in the past. Due to globalization, transfer of wealth occured across the country. China has more wealthier company than any other country in top 10. US is still dominated by Billionaires, out of 1145 Billionaires, 456 is in US. First time there are more than 1000 are Billionaires. Approx 70% of Billionaires came from US, India, China and Russia. So this countries will be certainly financial power in the world. Interestingly, 4 out of top 10 Billionaires are Indians, taking 4,5,6 and 8 spot, namely Laxshmi Mittal, Mukesh Ambani, Anil Ambani and KP Singh (Real estate king). If you consider family, Ambani Family is the richest in the world.

What a few years make a diffence!!

How to live your life?

This post is inspiration from the last lecture of Prof. Randy Pausch. He recorded this session because it was his last lecture of life and he want his kids to see this lecture, if you have not listen to him here it is:

10 min version

Full version.

Here is the main points of this lecture, some of the philosophy is same as Swami Vivekanand's, but to listen from the person who knew, he is going to die, that's make it different.

1. Its ok to dream, let your child dream what they want to be or to do. Never loose the spirit. Vivekanand also said Set the goal, and do not sleep until you reach it.
2. Its ok if someone tell you that you are not doing good, that means the person care about you. If you do a bad job and nobody point out then it means they given out of you, but if they do it, means they care you better.
3. While archiving your goal there could be a lot of rejection. Rejection is good. The brick wall that you see on your way is for reason. They are not to keep us out, they are there to give us a way to show how much we wanted. So they are there to find how badly we wanted. This illustrate the same philosophy of Swami Vivekanand. Here is the small illustration that I remeber for a long time now. One day he went to his Guru (Ramkrishna Parmanhans) and said there is no God in the real world. His Guru, take him to the Ganga River, and then told him to jump on the river. He does not know how to swim. He jumped on the River, Guru also jumped. Then his Guru keep pushing him down, so he won't come out of water. After some time he pulled him out. Then his Guru said to him, Listen if you want to achieve the God, you have to do the same effort that you did when you were in the water to come out.
   
4. Have a fun all the time. Mother are the people who loves you when you pull her hair. Its important for a kids to have a good parent. Let kid do whatever they want. It could be anything. The creativity of kids is more important than any other thing. Never underestimate the result of fun.
   
5. Don't let other to felt bad or guilty, just because you don't like it. He gave a very good example of kids throw out when they were sick, in his new car.
   
6. If you want to achieve your dream, and live with integrity then always tell the truth. Secondly, always apologize. Apology has three part: Sorry, its my fault and how do I make it better. Most of the people forget the last part in the apology.
   
7. Another point is my favorite, No body is evil, its your thought that makes other Good or Evil. Give some time on the people you don't like, do not give up, they will show you their good side. This always works.
8. Do not complain or whine, because simply it does not solve the problem. Just work harder. If you complain it, then it divert your force away from your work, which makes you fail. So do not spend time in complaining.
   
9. If you live properly, as mention above, then the dream will come to you.

Click here to see latest on his health.

God bless him.

Few reasons housing will go down further.

Here is my research, why housing will have a trouble ahead.

1. High Inflation, risk of rate up is higher, so mortgage rate will remain higher for now. 30 Year Fixed loan is already high since Oct 2007. This is all with anticipation of Fed will reduce the interest rate by 750 basis point. So how much lower it can go?
2. Appraisals : Now lender is using their own apprizer, its funny they did not realize that, mortgage broker who are looking for their commission used their own appraisers to inflate the prices, to take new loan or take money out of house. Fannie Mae also will not buy the loand until they have their own appraisals apprise the value of underlying securities. More detail news here.
   
3. Tight Credit, LTV 75% : Most of the big bank like Wells Fargo (here is the news), already annouce to consider LTV to be 75%, so to get a better rate, one need to put 25% down. Same thing for refinancing, lot of homeowner would not able to refinance, even though the rate become lower.
4. There is a huge inventory, approx 10 month of supply, this will nothing but bring the price down. Mortgage delinquencies rate is going up, which bring more houses on the market. Today in WSJ, there was an article that people who afford to pay the mortgage they are walking out of the house, because the equity in the house is negative.
5. Job market is starting to get weak: First time claim is high since Iraq war. Consumer Confidence is down, lowest since 1992. The main reason for consumer confidence down was that people on the survey says that "its hard to find the job". IMO consumer confidence is forward looking econmomic number. And lastly, almost everyday I saw the news of layoff.

Needless to say the Credit Cruch is not over, CDO market is shaky and no one with confidence says that we see some good sign. This year we will see more and more Hedge fund will go bankrupt. This will wide spread the problem in the Financial and Real Estate Market.

Update 3/3/08 : Lender now required FICO 680 up from 660

Update 3/4/08 : Federal Reserve Chairman Ben Bernanke warned on Tuesday that mortgage delinquencies and foreclosures are likely to rise, with more declines in house prices

Visa : A must own stock in your porfolio

Visa, a Credit Card Company, going to public next month, March 19, 2008. This company is formed by the several bank, so many banks own the stock of Visa. Unlike Amex and Discover Card, it does not provide the Credit Card, it just provide the network to verify the card and for that they charge small fees. Its main competitor is MasterCard, which went Public last year.

Here is some analysis I have made:

They have 967 Outstanding Shares, out of which they are going public with 406M Class A share.
The offering price is between $37 and $42. So they are collecting around $17B from the public and insitutional investor; which makes the biggest IPO in the history of United States and Second in the World. They will use some fund to pay of the Lawsuit. JP Morgan, BofA, Goldman Sachs, Citigroup and Merill Lynch are the underwriter.

Last year, they have Revenue of 5.2B and lost 861M . Last Qtr they have 1.5B Revenue and made 424M in Profit. Their Revenue grew by 100% and Profit grew by 76%. This is just like when Google went public. They are planning to pay dividend of 42c/Share.

IMO, it is a must own stock for a very long time.

Bankruptcy

Over the past year I saw many company went out of the business. If Globalization enables corporate to increase the profit, it also trigger bankruptcy. The company has to change the model or a way they do the business.

In the technology and pharmaceutical, many company went out of business or acquired/merged. Software is very sensitive to the downturn of the economy, and so is hardware. Small software company can grow faster but at some point they rely on consulting services or support business, which has low margin. So they cannot spend money in R&D. On the other hand, hardware company has very low margin it is really difficult to sustain profitable. Many e-commerce company also went out of business during .com bubble.

Interestingly, in the retail lot of company either change the business model or went out of business. I saw circuit city stop selling appliances. Kmart, Montogomery Ward (both are 50+ year old company) went out of business. Recently few more on the list Levitz, CompUSA, Drug Emporeum. HD Supply closing lot of stores and so what Sears.

From the investment perspective, we have to watch how company changes the business model over the time. They have to be agile and reinvent themselves or it will be really difficult to sustain in the business. Same thing apply to the small business, in this category it has highest percentage of the bankruptcy.

Do not worry about Recession

Recession is a single word that scare everybody from President to Factory Worker.

What has happen in past 10 years is that American has created a lot of wealth due to Globalization and Innovation. This are the only two factor one can get rich. I discuss in my earlier post based on Bill Gross finding.

One can be rich by innovation, not necessarily in products and services but any thing to leverage the fortune. For example, CDO, (Financial innovation in 2005) make company like Blackstone lot of money. The second reason to get wealthy is to know how to use others people money. This is a broad topic and I cannot cover in detail here, but simple example would be Mortgage loan. This is wonderful instrument for anyone to make wealthy and rich. I will cover someday how to become rich and retire early.


Now lets talk about Recession, which generally refers to slowing in Economic Activity, such as Spending, Employment, and some other macro economic factors. Lets looks at Employment which is currently 4.5%, if it goes up to 6% still its not bad. There could be a mental distraction in the market but overall still not bad. The other big factor driving the economy is Spending, and it could be Consumer Spending and Corporate Spending (Capex). Consumer contribute 70% and Capex contribute 30% of GDP. As far as Capex go it can go down let say 20%, still its not bad if consumer keep spending. This is what happen in 2001-2002.

Now, what if consumer fall back on spending this will certainly cause the recession. But the key point I am trying to explain here I still have not heard/read from anyone yet, may be I am wrong.

Consumer spending will slow down if housing market goes down, intrest rate goes up or unemployment goes up. Nothing new here. How much it can go down? Not much. I mean it. As I mention earlier that consumer wealth went up significantly during past 10 years due to Stock Market went up, Employment remains low, Low Interest Rate for long time, Housing market was up, and probably some other reason. Here is the proof.

As you can see, Top 20% of American has 90% of total wealth. Or top 1% has 40% of the total wealth. It means that they (wealthy) drive 80% of people. This number is based on 2001, so by 2007 this number could go much higher, because this are the people who do investment. If there is big problem in 80% of people, 20% are somewhat affected. So when you talk about the spending this (20%) are people who significantly spend compare to other 80%. If something goes wrong, probably this 80% will spend less in Vacation, Travel, and some other discretionary spending. How much that could be very little compare to the 20% group.


Net.Net. Limited Spending and 6% unemployment would not cause the recession.

12 Pillars of Financial Freedom

The 12 Pillars of Wisdom.
Indeed, these twelve sensible guidelines to successful investing are lessons that investors should have learned before the bear market arrived, but that many are only learning now. Bull markets come and bull markets go, inevitably followed by bear markets, which too come and go. But these pillars of wisdom are timeless, and should serve us well in all seasons.
John Bogle

Pillar 1. Investing Is Not Nearly as Difficult as It Looks.
The intelligent investor in mutual funds, using common sense and without extraordinary financial acumen, can perform with the pros. In a world where financial markets are highly efficient, there is absolutely no reason that careful and disciplined novices—those who know the rudiments but lack the experience—cannot hold their own or even surpass the long-term returns earned by professional investors as a group. Successful investing involves doing just a few things right and avoiding serious mistakes.

Pillar 2. When All Else Fails, Fall Back on Simplicity.
There are an infinite number of strategies worse than this one: Commit, over a period of a few years, half of your assets to a stock index fund and half to a bond index fund. Ignore interim fluctuations in their net asset values. Hold your positions for as long as you live, subject only to infrequent and marginal adjustments as your circumstances change. When there are multiple solutions to a problem, choose the simplest one.

Pillar 3. Time Marches On.
Time dramatically enhances capital accumulation as the magic of compounding accelerates. At an annual return of +10%, the total value of the initial $10,000 investment is $108,000, at the end of 25 years, nearly a tenfold increase in value. Give yourself the benefit of all the time you can possibly afford.

Pillar 4. Nothing Ventured, Nothing Gained.
It pays to take reasonable interim risks in the search for higher long-term rates of return. The magic of compounding accelerates sharply with even modest increases in annual rate of return. While an investment of $10,000 earning an annual return of +10% grows to a value of $108,000 over 25 years, at +12% the final value is $170,000. The difference of $62,000 is more than six times the initial investment itself.

Pillar 5. Diversify, Diversify, Diversify.
By owning a broadly diversified portfolio of stocks and bonds, specific security risk is eliminated. Only market risk remains. This risk is reflected in the volatility of your portfolio and should take care of itself over time as returns are compounded.

Pillar 6. The Eternal Triangle.
Never forget that risk, return, and cost are the three sides of the eternal triangle of investing. Remember also that the cost penalty may sharply erode the risk premium to which an investor is entitled. You should understand unequivocally that investing in a fund with a relatively high expense ratio—more than 0.50% per year for a money market fund, 0.75% for a bond fund, 1.00% for a regular equity fund—bears careful examination. Unless you are confident that the higher costs you incur are justified by higher expected returns, select your investments from among the lower-cost no-load funds.

Pillar 7. The Powerful Magnetism of the Mean
In the world of investing, the mean is a powerful magnet that pulls financial market returns toward it, causing returns to deteriorate after they exceed historical norms by substantial margins and to improve after they fall short. Reversion to the mean is a manifestation of the immutable law of averages that prevails, sooner or later, in the financial jungle.

Pillar 8. Do Not Overestimate Your Ability to Pick Superior Equity Mutual Funds, nor Underestimate Your Ability to Pick Superior Bond and Money Market Funds.
In selecting equity funds, no analysis of the past, no matter how painstaking, assures future superiority. In general, you should settle for a solid mainstream equity fund in which the action of the stock market itself explains about 85% or more of the fund’s return, or an low-cost index fund (100% explained by the market). But do not approach the selection of bond and money market funds with the same skepticism. Selecting the better funds in these categories on the basis of their comparative costs holds remarkably favorable prospects for success.

Pillar 9. You May Have a Stable Principal Value or a Stable Income Stream, But You May Not Have Both.
Contrast a money market fund—with its volatile income stream and fixed value—and a long-term government bond fund—with its relatively fixed income stream and extraordinarily volatile market value. Intelligent investing involves choices, compromises, and trade-offs, and your own financial position should determine the most suitable combination for your portfolio.

Pillar 10. Beware of "Fighting the Last War."
Too many investors—individuals and institutions alike—are constantly making investment decisions based on the lessons of the recent, or even the extended, past. They seek stocks after stocks have emerged victorious from the last war, bonds after bonds have won. They worry about the impact of inflation after inflation, having turned high real returns into so-so nominal returns, has become the accepted bogeyman. You should not ignore the past, but neither should you assume that a particular cyclical trend will last forever. None does.

Pillar 11. You Rarely, If Ever, Know Something The Market Does Not.
If you are worried about the coming bear market, excited about the coming bull market, fearful about the prospect of war, or concerned about the economy, the election, or indeed the state of mankind, in all probability your opinions are already reflected in the market. The financial markets reflect the knowledge, the hopes, the fears, even the greed, of all investors everywhere. It is nearly always unwise to act on insights that you think are your own but are in fact shared by millions of others.

Pillar 12. Think Long-Term.
Do not let transitory changes in stock prices alter your investment program. There is a lot of noise in the daily volatility of the stock market, which too often is "a tale told by an idiot, full of sound and fury, signifying nothing." Stocks may remain overvalued, or undervalued, for years. Patience and consistency are valuable assets for the intelligent investor. The best rule: Stay the Course.

Confidence builds your life

Generally speaking confidence is good in terms of result you achieve from the task you are doing. However there is no real way to measure it. Of course you can measure with the result of your past action. But again, that really don't tell the ability of controlling the result of the future action. So you may be over confidence. When you reach at that level, I mean over-confidence, your sense of learning, listening, planning will go away. This make significant fall back for your personal growth.

One of the best think of being child is their ability to learn and listen and apply those to the life. That the reason you see growth in the child. They tried different things. They listen to the different source, ask questions and so forth.

I was listening a lecture from one Hindu Saint in the temple, last week. She was talking about this subject. She explains how to find you are in overconfidence. She said, if you are leaving all your work at the end than their are high chances that you are in over confidence. Another one is, you do not apply different approaches to try things out. I think it means you are not listening. And, my favorite is, you think your are right. She further said that when you do that and fails, you internally get upset, angry and try to find a way to blame others. And then eventually your find yourself in pressure and you put others in the pressure too. This make lot of personal problem in terms of efficiency, health and wealth. Yes, this will certainly hurt your financial as well.

SURGEON GENERAL'S WARNING: Any overconfidence in your ability, willingness and need to take risk may be hazardous to your health.

Confidence build your life and ruins too.

Payoff Mortgage. Oh no. Never.

I alway get to explain what I think, I don't want to, but here is why one should not pay off the mortgage.

First let's ask question to yourself:

1. Are you paying of so that you can sleep well? If yes, No argument go ahead. But look for #2.
2. Are you going to invest the interest you save every month? If yes, great you might be ok.
3. Are you able to get (Mortgage Rate + (Mortgate Rate * Tax Rate / 100) return of investment? If yes you better not pay your mortgage. For example, 6% mortgage rate, 25% tax rate, you will need 7.5% return.

Now lets look into more detail.

Lets say you earn 50k a year. And your mortgage is $1000/month. Let's assume you get a raise 3% a year. That means your salary will be 100k in 24 years. So after 24 year, you pay $1000/month even though your salary is double. So basically you pay $500 of todays money.

Now let look in a different way i.e. inflation. If inflation is 3% that mean the cost of the goods you purchase will increase at the rate of 3%. That mean the thing you buy for $1 will cost you $2 after 24 years. For example, today Burrito cost $1 at Taco Bell. Lets say if we want to pay the mortgage with burrito. For simplicity lets say 1 burrito = $1000. So based on the above situation you have to give one burrito to bank today every month. After 24 years, $1 can buy half burrito. So you have to give bank half burrito and other half you eat rather than bank eat your whole burrito.

So if you keep mortgage you are paying the debt with cheaper dollar, because $1000 is not $1000 tomorrow. It will always (well most of the time unless we hit deflation) less tomorrow.

Few other reasons are some basic financial freedom rules, such as always keep money on your side, you will need if something go out of whack, e.g your health, financial debacle etc. You need money in this case and owning house wont' give you money. You can sell it, but hey you will get price at that time whether its up or down and you wont get immediately. House is not considered as a liquid asset.

Furthermore, you certainly don't want to payoff at the second half period, as you are paying interest less to the bank.

I hope it make sense.

Is Countrywide Rescued?

Fed Surprised decision to reduce the discount rate to 5.75 will help a bank like Countrywide to borrow the money that they have to borrow through Line of Credit which is 10-11%.

With the help of discount window they can put the mortgaged based collateral, MBS, CDO etc to get the money from the Fed for 5.75%. And, Fed encouraged Bank to use this rate to solve the liquidity problem.

It could be temporary solve the problem, as the CDO which nobody worth how much it is, Fed will give money on those collateral. Within 30 days, the Fed will have meeting and will reduce the target rate to 5% which further solve the problem. BTW, the CDO is the biggest joke of the century, created by Wallstreet some of the hedge fund and Retirement fund has bought this securities. They have no clue what this worth; and none of the others. Funny thing is European Countries, China, Korea etc are fooled baught this thinking AAA rating, they will loose money that they invested with their surplus. They will learn the lesson.

This is Bush like step, where they try to rescue corporate, and some wall street nitwiz who make a mistake and want to bail them out. Lot of rich people has money in the hedge fund they will be bailed out at the cost of "inflation", which average Joe is suffering.

Another thing I suspect is the "news" that fed will redue the rate was come out on Thrusday during the late market hour, which keep market goes up on that day.

Why we need to own the house?

Here is what I think after owning the house for 10 years.

1. The home make us proud. If you own the car you take care and drive better than rent one. Just like that, house is you will keep more clean and organized than you live in apartment. You like to go to home. When you are in the house you fill pride and ownership.

2. Children has more space to explore and do the other thing which is hard in apartment. They love hiding in the closet, playing in the backyard. You raise better children in house than in apartment. The mentality of the children changed in unnoticed way. After all, its all about thinking.

3. You spend more time with family than you were in apartment, in apartment you do nothing, watch tv and that it, in your own house you fix something, spend time on it, learn lot of thing, have party, stuff like that. You always been busy thinking what to do? Where to put the stuff? How would we organize? How to decorate?

4. You have a little status in the society of owning the house. People look you with a different angle. It does not really matter but this think help sometimes. Your lifestyle is better.

5. Home ownership enforces financial discipline, something people may not have. So if you are not good at investing buying house absolutely make sense. The whole idea is you pay more earlier and pay way below later. It take very long view, as it is life long investment.

Even though, some of the bill is higher than in apartment, this is one way to become wealthy. Every millionaire bought their first house earlier in the life.

VMWare IPO : Analysis

VMWare is coming out public on Aug 13, 2007. It is a spin out from EMC, but EMC still have control over the company through equity.

Symbol: VMW
Price expected: $29/share
Amount to raise: $957M
Share Outstanding: 365M (detail below)
326.5 M (EMC Owned, 26.5M Class A, 300M Class B) i.e. 87%
4.x M : Sale to broker for option
4.xM : Owner by INTC (2.5%), CSCO (1.6%)
33 M : Going to Public for $29/Share

1. Raising almost 1B, they will use to payoff the debt of 350M, rest for general operation.
2. They are growing at the rate of 100%, as per last qtr
3. The market cap of the company will be 10.xB at the price of $29
4. They are buying building from EMC which is located in Palo Alto, for around 150M
5. They do not own any other building, all are leased or subleased.
6. They were baught out by EMC in 2004 for $650M (now worth 10B, wow)
7. FY2006, they earn 87M or 26c/share, with the revenue of approx 705M
8. Last qtr they earned 34M (last qtr: 15M), with the revenue of 297M, 98% more than last year same qtr

My Estimate: The expected earning for FY2007 is $0.50-0.70 on the revenue of 1.2-1.3B. With the lower end expectation and offering price ($29), the stock is IPO at 60PE. IMO, VMW worth $50 based FY08 earning expectation.

Disclaimer: This is just my analysis. It do not represent the opinions on whether to buy, sell or hold shares of a particular stock. Please buy/sell/hold on your own risk. I am not responsible for any loss you may have, please contact your financial advisor for investment risk of IPO stock. All investors are advised to conduct their own independent research into individual stocks before making a purchase decision. I do not have any relation with the company or employee of the compnay. This finding is based on the news I read and S-1 filing registration statement.