How Scary is Consumer Credit?

A crucial piece of figuring out exactly where our economy stands is in interpreting the statistical data that we get from the government and other sources. It can often be easy to take a headline number and assume that the simplest interpretation is the correct interpretation -- and this is what often happens in the press. Spend a little bit more time mulling the data and you may have a different picture.

Consumer credit is something I've been mulling a lot over the past year, and for good reason -- headline after headline screams about the death of the US consumer and the pile of debt that's drowning him (and her). If you keep up with the news, it's probable that at some point you've run into the statistic that there is currently over $3,100 of revolving (read: credit card) debt outstanding for every man, woman, and child in the United States. To me at least, that sounds scary at first glance. After all, if you take a family of four, the simple math tells you that they have roughly $12,700 in outstanding credit card debt.

Now here's a speculation that I actually don't have a data-supported answer for: a not insignificant portion of that revolving debt outstanding is not what most of us would truly consider debt. I'll explain. On a monthly basis, I charge almost everything that I consume to my credit card (gotta love those airline miles). When my billing period comes up each month, I pay off the card in full and haven't paid a single red cent of interest for years (and when I did it was because I spaced out and forgot to make my payment one month).

In my own mental accounting, I would not consider that true debt -- I spend the money on my credit card as if I'm spending the cash from my bank account. In other words, I only spend what I actually have. However, if you were to take a snapshot of my credit report at a given point in time, you'd likely conclude that I have a couple thousand dollars in credit card debt.

So if we break down the Federal Reserve statistics for revolving debt outstanding, it's well worth considering how much of that "debt" is truly debt weighing on consumers, and how much of it is what you might call "convenience debt" that consumers repay from month to month.

-AvgJoe

(Now if you have the facts on this question I'd love to hear them so drop me a line either by email or in the comments...)

Bears Behind Bars

Today two former Bear Stearns employees, Ralph Cioffi and Matthew Tannin, were arrested on charges of securities fraud and insider trading. You may remember the whole debacle as the tip of the mortgage iceberg last summer. A pair of hedge funds at Bear just absolutely blew up, and the magnitude of the losses seemed to finally wake everybody up to how much danger there really was in the subprime mortgage market.

One might even say that this hedge fund debacle was the first nail in the coffin for Bear Stearns itself. After all, it was primarily a complete loss in customer and creditor confidence that ended up forcing the firm to sell out for practically nothing.

Of course, running a hedge fund into the ground is hardly illegal -- as the hedge fund industry has grown by leaps and bounds there are undoubtedly a lot of funds that have either been unlucky or just mismanaged and ended up sending "I'm so sorry" letters to their investors. The rub here is that prosecutors are alleging that Cioffi and Tannin knew that the funds were in trouble but told investors other wise and -- worse yet -- may have misstated asset values.

Among the bits of evidence:

- Emails exchanged between Cioffi and Tannin in April of 2007 in which Tannin said that the subprime market "looks pretty damn ugly. ... If we believe [our internal modeling] is ANYWHERE CLOSE to accurate I think we should close the funds now."

- Cioffi pulled $2 million of his own money from the fund but still said that investors should stay in it.

Scapegoats or hucksters? If the above is true it'd be hard to argue that they were simply victims of a collapsing market.

-AvgJoe

The Goldman Sachs Firing Method

I'm not sure whether to love Goldman Sachs more for coming up with this or Dealbreaker.com for bringing it to my attention.

In short, it sounds like Goldman is looking to unload some of its analysts and instead of pulling the ol' Donald Trump and hollering "you're fired!" (which would hardly fit Goldman's white shoe culture) they decided to get more creative.

Now before I tell you what exactly they did, I should clarify what an analyst is in this context for those that haven't had the pleasure of being one (alas, I have). Analysts are the lowest of the low in the investment banking world. They are typically recent university grads (undergrad) who do thankless work and labor an ungodly number of hours -- for, of course, a pretty hefty paycheck when compared to their non-investment banking friends. An investment banking analyst program typically lasts two years, at which point the analysts are expected to head off to get their MBA.

So Goldman management brought in these hapless youngsters and instead of telling them that they're being laid off, they're claiming that the analysts have been put in an "accelerated program" which, conveniently, ends in August.

From Dealbreaker:

We just received a little more color on the revolutionary approach, from a young alum, who notes: "At one point I actually though the [managing director] was going to say, 'Congratulations!'" which we can obviously all agree would have been awesome.

Kudos to Goldman for deftly skirting the issue.

Here's a link to the original Dealbreaker story.

-AvgJoe

Good investing fundamentals

[note: I'm going to write as if this blog hasn't skipped a beat... hopefully those that have been waiting since March for a new post don't want to tar and feather me...]

When it comes to investing, there's a lot of talk about fundamentals. Usually, though, it's the fundamentals of the company we're investing in -- ie margins, sales growth, book value, etc. While finding good fundamentals in the companies that you invest in is definitely important, it's just as important to practice good fundamentals as an investor.

I actually got to thinking about this while watching golf over the past few days. I have to say, I was really pulling for Rocco Mediate to knock of Tiger Woods in the US Open. It's not that I dislike Tiger, it's just that Rocco is so darn likable -- plus I have a tendency to root for underdogs.

As I was watching, though, I was impressed -- as ever -- by Tiger. His fundamentals are tremendous -- keeping the ball on the fairway, sinking puts, etc. Rocco, meanwhile, played a very gutsy tournament, but did so by making some great shots to make up for prior poor ones. In the end, it was his inability to come back from a poor tee shot on the sudden death hole that sealed the victory for Tiger.

As an investor, it's crucial to be like Tiger. Do all the little things right to make sure that you're buying a quality company at a reasonable price each and every time. More importantly, keep focused and don't allow yourself to make infrequent, but big, mistakes that can seriously take away from all your other good investments. And through thick and thin demonstrate some mental toughness. The probabilities of investing assure that you will have investments that don't work out -- learn what you can from those, but don't let that disappointment cause you to do something stupid with a subsequent investment.

And as long as we're focusing on Tiger, I'd point out that if you don't feel like you have a solid investment process that you use to choose your stocks, then it's important that you take the time to step back from investing and establish that. Even though Tiger was one of the hottest golfers on the tour and was winning major events, he decided a few years back that his swing wasn't what he wanted it to be. So he made some major changes to it -- changes that led to an extended break in his winning ways. Today? Well, I'm no golf expert, but the results seem to speak for themselves.

It can be easy to get caught up in the actual investing of investing and not think much about the process of investing. So if you haven't thought much about your process lately, maybe now is a good time to take a step back and make sure your fundamentals are tip top. After all, it's fun to be Rocco playing for the US Open, but it's even better to be Tiger and winning time after time.

-AvgJoe