Archive for March, 2012

Opinion: Do Not Forgive All Student Debt

My girlfriend forwarded me an article titled “The 1% of the Student Debt Crisis: Owing $150,000 in Loans.” The article told the follow-up story of Kelli Space, a girl who racked up $200,000 of debt getting a sociology degree from Northeastern. The article also had a link to Kelli Space’s website that follows her journey of paying down her debt. On this website, Kelli Space is actually asking for money to help combat her debt. I checked our her website until I hit something that pushed me over into a frenzy.

A link to Signon, an online petition to forgive all student debt. The Website has a brief statement stating their cause which is found below:

Forgiving the student loan debt of all Americans will have an immediate stimulative effect on our economy. With the stroke of the President’s pen, millions of Americans would suddenly have hundreds, or in some cases, thousands of extra dollars in their pockets each and every month with which to spend on ailing sectors of the economy. As consumer spending increases, businesses will begin to hire, jobs will be created and a new era of innovation, entrepreneurship and prosperity will be ushered in for all. A rising tide does, in fact, lift all boats – forgiving student loan debt, rather than tax cuts for corporations, millionaires and billionaires, has a MUCH greater chance of helping to rise that tide in a MUCH shorter time-frame. The future economic success of this country is wholly dependent upon a well-educated, prosperous middle class. Instead of saddling entire generations with debt from which there is no escape, let’s empower the American people to grow this economy on their own! .

Reading this makes my blood boil. Is this where our society is heading? Make a giant mess and then beg and cry for a bailout? Making the argument of “I would stimulate the economy if I had $1000 extra a month” is just flat out sickening. I agree people who spend money do stimulate the economy, and I think you already have stimulated the economy when you spent money you didn’t have.  All this petition is doing is asking the taxpayers to give free money to students who were reckless.  Although it’s hard to take this petition serious when it has the phrase “With the stroke of the President’s pen,” as if it is just that simple.

I was blessed with the opportunity to get out of college (Ohio State University) without debt, but it’s not lost on me what my family has provided for me. Also, when I was looking at majors for my degree, I factored employability and potential salary very heavily. It might seem a tad shallow to factor such things, but at the end of the day, it’s going to determine what kind of life you have. If you want to get the sociology degree and try to land a job in your field most likely earning $40-$50k, that’s great, but be prepared to live with the rewards and consequences of your career choices. 

The bottom-line is that this girl made a mess for herself and made completely reckless choices. I do not wish harm to her, but she has to live with the result from her actions. That is why the SignOn petition is so frustrating to me. The idea almost implies that these students weren’t responsible for their actions, and as if someone needs to help them because of the crimes against them. I feel worse the homeless beggars in Cincinnati that were  veterans or factory workers. Those people were blinded-side by what happened to them, unlike these students who logically should have known that when you borrow money, you owe it back.

I personally knew people in college who received loans for living expenses in addition to tuition, and I watched first hand as they purchased everything from Macbooks to Alcohol with their loaned money.  But I  also knew people who worked two jobs and borrowed the bare minimum in loans to graduate with a reasonable amount of debt or no debt at all. I look at people like my girlfriend who attends University of Cincinnati, a great school with a reasonable price for tuition (unlike Kelli Space’s college). I see a person who is fighting every step of the way to avoid expenses and ultimately reduce her student debt. If you forgave all student debt, her hard work and constant sacrifice would have completely been in vain.

So what is the solution to preventing people from recklessly destroying themselves? Recently it has been suggested that you could regulate people from being able to borrow absurd amounts of money for low paying and low placement degrees, but I would argue that financial education would probably be move effective. Education that focuses around the cost of education, personal finances, and risks and rewards of pursuing a degree. I also think every student should be provided job placement and salary information based on the university for his or her major/field.

The petition is now bragging about having 668k signatures, but I’m not impressed since this petition is basically asking people with debt “If you want free money, sign here.”

The Housing Market Post 2012 is Looking Terrible

Today there was a revision to the housing market predictions for 2012. Over one hundred housing analysts and expert were surveyed by Zillow. The conclusion made was that they believe housing prices will drop 0.7% in 2012 and will hopefully return to “trend levels” by 2016. “Trend levels” apparently now mean roughly 3.5% a year of appreciation. These statements have officially made me view housing as one of the worst possible investments you can possibly make in the foreseeable future.

All of these realtors and experts don’t talk about one of the most important factors, inflation. If you have a 0.7% decline in the housing market in 2012, you also have to add in yearly inflation in as a loss as well. Think about it, if you own you home outright, you need your house to increase at the rate of inflation to break even (although wise it’s a deprecation asset). So that 0.7% decline is really going to be  3.2% loss if inflation is 2.5% for 2012 (2.5% is a complete guess on inflation rates). Own a $250,000 house? You are looking at an inflated adjusted net loss of roughly $8,000 in 2012.

Let’s also note that these experts are hoping that it recovers to these “trend levels” by 2016! “Trend levels” would be roughly 1% if you also adjusted them to 2.5% inflation. So basically in 2012, 2013, 2014, 2015 you are probably going to see an inflation adjusted net loss on your property and in 2016 they are hoping you score an inflation adjusted  1% gain.

If these analysts were right, which they rarely are, a linear transition to these “trend levels” would look something like this:

2012
: –0.70% 2013: +0.35% 2014: +1.40% 2015: +2.45% 2016+: +3.50%

Housing Market 2012


Adjusted for 2.5% inflation the actual net would be:
2012: –3.10% 2013: –2.15% 2014: –1.10% 2015: –0.05% 2016+: +1.00%

Housing Market 2012 Recovery


Sadly would take you 2016, 2017, 2018, 2019, 2020, 2021, and half of 2022 to recover the 6.5% inflation adjusted loss in years of 2012 through 2015. These analysts are usually bias in favor of the housing market, but what they are predicting is that you will break even sometime in 2022, assuming a 2.5% inflation rate. You want to take it a step further? Assuming you put 20% down on your home and you could have earned just 5% return on that money, it would add 1% of your home value off opportunity cost. Adding that opportunity cost into the inflation adjusted numbers above you get:

2012: –4.10% 2013: –3.15% 2014: –2.10% 2015: –1.05% 2016+: +0.00%

Housing Market 2012 is Going Down

 


Total Inflation and Opportunity Cost:  10.5% of your home value (ignoring all other costs of buying, selling, and owning a home).

 

I am a homeowner and when I hear and read about the housing market, it scares me. The reason it scares me the most is the only way home ownership makes any sense financially is if the “trend levels” go back to pre-bubble and I absolutely never want the “trend levels” to be that high ever again for the rest of my life. Even at today’s prices I view home ownership as terrible investment and if prices go higher, I don’t think I would ever want to own a home again. Although according to these housing experts, that doesn’t seem to be a concern since prices are probably going to decline when you factor in inflation.

Disclaimer: Home ownership is much large than just investing, I cannot place a value on any personal factors when it comes to a housing decisions (family, personal pride, etc.). This article is strictly opinion and has made assumptions that are not backed up by anything (2.5% inflation and 5% return on money). This article should not be the base of any decision making. Always consult a professional.

Why Cover Calls Make a Down Day a Little Brighter

Selling cover calls on your stocks is a conservative position for your portfolio, a position that at times can be very frustrating. Nothing is worse than watching your stocks rise, but your cover calls negating many of the gains. Imagine you have 100 shares of a stock at $34 a share and you sell an option at a strike price of $35. The stock rises to $36 a day later and suddenly you are regretting your decision to sell a cover call.

Most brokers show any cover calls as a negative equity position (example shown below in the red box). The amount of negative equity is equal to what it would cost you to buy out your option, so therefore if the stock goes up the option will cost more to buy back. Your account might say you gained $200 on this stock, but your option is now –$100 more, effectively counteracting your gains on the stocks.

options negative on account

It might be discouraging if the stock is on the rise, but there are two ways these options can quickly become your friend. The first way is your option will lose negative equity, is the passing of time. As the option comes closer and closer to expiration, the cost for you to buy that option out will decrease. The second way the option will lose negative equity is when the stock deprecates (like in example above). My position in Dow Chemical took a $57 hit on Thursday, but this was counteracted by my cover call to negative almost half of the loss.

This is why you sell cover calls on your positions, to offer you downside protection. It is easy to lose focus on why you sell cover calls on your stocks while stocks are rising, but easy to remember when they are falling. That is why cover calls definitely make a down day a little bit brighter.

Giving Pandora Stock a Second Look at $10.56 a Share

Pandora Stock

A while back I wrote about Pandora’s stock (Symbol: P) saying I was going to completely avoid the IPO. I previously stated “I think this stock has a realistic chance of being on the decline unless they can should warranted profits soon.” Well the stock is down 56% off the high an I’m taking a second look at the stock because I think some profits might show up in the short-term. I am a heavy user of Pandora and what I have recently noticed is a large increase in ads. Not just audio ads either, local ads and even video ads.  I’m so frustrated with Pandora in fact that I am about to pay the fee to “upgrade” to have ad fee radio.

Pandora generates $36 a year from users who opt to “upgrade” their services to avoid ads, and my guess is that because of their aggressive ad strategy, many users like myself will consider ponying up some cash. I’m not surprised to see such an aggressive push for advertising shortly after their IPO.  It is clear to me that Pandora wants to generate more money either through ads or “upgrades” to show revenue growth.

Pandora’s stock has been extremely volatile, but I like it at its current price given that revenues are likely to increase. I am surely not willing to bet the farm on the stock, but I think its very for-seeable to clock in a relatively quick 10% to 25% gain. The main reason I am concerned for the long run on Pandora is the competition. Similar to the Amazon and Netflix streaming services of movies, content is always king, but not always cheap. Pandora’s content expenses have been increasing at a very high rate, and if they keep up, it ultimately could mean more ads and higher fees for “upgrades,” which would be a real turn off for many users.
pandora options

I considered investing in Pandora options, but they appear to be entirely broken. Take a look at them. Ask price of an option @ $10 is $4.70, but the bid is only $.85! Translation, your option is worth about 82% less the second you purchase it.

Just as interesting is the strike price of $3 with an ask of $9.90 and a bid of $5.40. If the stock was to go to $20 a share you would execute such option, you would have paid $12.90 for your shares which is over $2 more a share than current market prices. It just doesn’t make sense. Just buy the stock!

Interesting to see how far the spreads are on such a volatile stock. Brokers must love Pandora. Update to come soon whether or not I take the plunge.

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