Housing Re-Virginization

I found out something interesting this past week.

Did you know that if you sell your primary residence and are out of the market for 2 years that the IRS considers you a "first-time homebuyer" again?

That's right! I read about this online and called the IRS to confirm that it is correct.

I was directed to Publication 590, page 55

"Generally, you are first-time homebuyer if you had no present interest in a main home during the 2-year period ending on the date of acquistion of the home which the distribution is being used to buy, build or rebuild. If you are married, your spouse must also meet this no-ownership requirement"

This means that if you sold your house more than 2 years ago, you can take up to $10,000 out of your IRA with no penalties (you do still have to pay income taxes). If there's two of you buying a house, each person can take out $10,000!

The big caveat on this is that

"When added to all your prior qualified first-time homebuyer distributions, if any, total qualifying distributions cannot be more than $10,000."

So, if you already dipped into that well the first time you bought a house, that penalty free withdrawl is no longer available. However, if you only took out $5,000 from your IRA the first time you bought a house, you could take out another $5,000 for the next house.

This is also only for IRA accounts. You cannot do this if you have a 403b or 401k (those plans often allow you to borrow against your balance if you need the money).

Given that I didn't use any IRA money for a down payment on my house back in 1998, I will now be able to use this, if I want to, starting in January, 2009. My next big question is would I qualify for all the various "first-time homebuyer" programs available in Santa Fe?

Please contact a tax advisor for more information about this if you are going to use this strategy.

Why I hate George W. Bush and 3 Shocking Predictions

Ronald Reagan coined a great phrase when running for reelection in 1984. He asked, "Are you better off now than you were 4 years ago?". His reasoning was that if the answer was "yes", then you should vote for him. We all know that 49 states went for Reagan in 1984. What a glorious time to be a Republican.

Asking that question now, I would have to answer "yes" again. Since 2001, my net worth has doubled and then it doubled again. I should be in the rabid, hard core Republican consituancy (you know, the 25%-32% that still think the President is doing a good job or the 19% of the population that thinks the economy is going in the right direction).

Fortunately, I am not in that brainwashed camp. I think this administration has done more harm to our economy, our foreign policy and our laws than any other administration (maybe even all previous administrations, combined).

So where does this venom come from? Point of fact, I never voted for George Bush. I was more ambivalent about him than anything else back in 2000 (not being a big fan of the first George H.W. Bush administration, I wasn't eager for a sequel). In 2004, I was not liking what was going on with a Republican controlled congress and executive branch, so I voted for Kerry in an effort to bring some balance back to the branches of government even though I thought Kerry was a putz.

My turning point happened during Hurricane Katrina. That was when it finally clicked for me that this administration, despite all of it's pandering and efforts to keep us "safe" from the terrorists, was found to be nothing more than one big lie. Watching those people at the Superdome, which was a FEMA designated Hurricane shelter, literally starving and dying on television while our government did NOTHING was enough to send me over the edge.

All that money that was spent on forming the "Homeland Security" department, all the money that was designated to help states, cities and communities "prepare" for a horrible terrorist event was wasted on ineffective, politically connected contractors that never did a damn thing. My biggest issue with Katrina was what would be the difference in Al Queda loaded up some big trucks with high explosives and blew up the levees around the city? The end result would have even been more death and destruction (remember, the city was virtually abandonded when Katrina hit, imagine those floods with it's 2 million citizens trying to get out).

At that point I made a drastic move with my investments. Over the next two years I moved most of my money to investments outside of the American Financial system. I purchased foreign equities, bonds and currencies. I purchased gold, silver and precious metals stocks. I purchased oil, energy and commodity positions as well.

I could see what a falling dollar was going to do to our economy. I could see how a housing bubble was going to devastate our economy once it popped (it was still going strong in 2005). I could see the fraud permeating from the highest levels of government and business and it made me sick.

I found myself betting against the United States and I was rewarded richly for it.

That is why I hate George W. Bush so much. He made me bet against my country. Our country, the shining city on the hill, the last greatest hope for the world has devolved into the bubble chasing, conspicuous consuming, debt addicted, gambling addicted, balkanized society we see today.

Of course, not all of this is President Bush's fault, but his policies made these problems worse during his tenure and that's where I fault him. If you look at almost all of his policies and initiatives they all have the same fundamental problem. He hires politically connected lobbiests to run his various departments and he stops enforcing the laws that are on the books.

Why do we have an illegal immigration problem? Because he defunded the department in Immigration and Naturalization that enforces immigration law on employers. The result of this is the construction, hospitality and agriculture industries were able to hire as many illegal immigrants as they wanted with almost no chance of getting caught. It's the same as outsourcing our jobs for cheap foreign labor.

Why did we have a housing bubble? Because he used the Office of the Comptroller of the Currency (OCC) to stop states from passing any anti-fraud laws against predatory lenders back in 2001-2002. The result is that fraud exploded by both lenders and borrowers because they knew there would be no repercussions. Likewise I can't help but think, in my most cynical thoughts, that the banks encouraged this fraud because they knew when the whole thing blew up, Congress and the President would bail their sorry asses out because they are "too big to fail". I am still holding out hope that Bush vetoes the latest housing bailout legislation that's moving through Congress, maybe he can be redeemed in the next few months.

In Iraq we have notorious contractors like Halliburton and Blackwater who receive billions of dollars on no-bid contracts, with no accountability and are given complete immunity from our government. We also conduct a costly and, in my opinion, neverending war but don't ask the citizens of this country to sacrifice one tiny little thing outside of that small minority of citizens that have actually served in Iraq. Of course, we are still sacrificing at the pump, but instead of that money going to the government to pay for this war (through a gas tax)- it goes to Exxon Mobile and to fund the very foreign governments in the Middle East that hate us and want to kill us. In the meantime, Osama Bin Laden and Al Queda are allowed to reform and regroup unmolested in Pakistan. This is insanity!

There are dozens of other issues (trade policy, dealing with Iran, outsourcing, growing the size of government the most since LBJ's Great Society, government surveillance, repealing Habeus Corpus etc.) where I am in complete disagreement with George W. Bush. Shoot, even things I agree with him on, like privatizing Social Security, were completely bungled by this President. It's like he can't do anything right!

I am not one of those "hate America" or "blame America first" types. However, I do think our country has become the drug addicted son that I am no longer willing to help. This self destructive behavior has to stop or else the country will die. That's right, our country is on the verge of a massive O.D. unless it drastically changes its ways. Unfortunately, the pusher is George W. Bush and nothing's going to change as long as he's in office.

That is also why I am flummoxed by John McCain. I actually supported McCain's bid for the presidency in 2000, but in my eyes he has lost all of his independent and "maverick" credibility during the course of his current presidential campaign. He is parroting the same crap policies that Bush has been forcing down our throats for the past 8 years. It's like he sold his soul to the devil in order to be the nominee. For God's sake, John, you've got to distance yourself from this administration if you have any hope of getting elected

In the end, I offer the following predictions for our President by the end of his term:

1. On January 20, 2000 the Dow was at 11,351. I predict that by election day, the Dow will be lower nominally. Adjusted for inflation, the stock market will have lost 25%+ during the course of his administration.

2. November will see a full scale rout of Republicans at the National, State and Local levels. Karl Roves "permanent majority" dream will come true. Unfortunately, it will be the Democrats who inherit this mantle. The Republicans will become a permanent minority party and may split up (cultural/religous conservatives seem the most likely to start their own party).

3. The Dollar index will sink to 60 before election day (it's currently at 72). That means this President will have overseen a 50% drop in the value of our currency during his tenure.

Mr. President, if I may coin a phrase, you are the WORST. PRESIDENT. EVER. You have been a disaster for this country and we will be a better place once you are gone. I hope you appreciate the scale of your efforts. You destroyed the economy. You destroyed your party. You have failed in nearly every effort you have undertaken as President.

I will be one that cheers on January 20, 2009. Don't let the door hit your ass on the way out!

FJ Quote of the week

In a bust that has lasted three years, they have gone through phases: denial, blaming the media for messing with the heads of buyers, predicting bottom soon and laying off staff. Now a chastened industry has reached a new stage, openly acknowledging its mistakes.

“‘We’ve effectively stolen from the future. The demand we should be having now we stole in 2005 and 2006. We’re paying for the sins of our past right now.’”

President Tom Sullivan of San Diego's Sullivan Group Real Estate Advisors.

http://www.sacbee.com/103/story/975645.html

My Take on Inflation versus Deflation

It is really hard to make a case for deflation when the price of just about everything is going up right now. My previous post was about $4 gas (up 25% in a year). Likewise, commodities and precious metals have been soaring over the past year and have been in long bull markets for the better part of a decade now.

But what if I was to tell you that we are actually in a deflationary environment right now. Deflation is defined as a contraction of the money supply, it is achieved by banks lending out less money and credit being destroyed in the marketplace.

If you look at the housing market and the credit markets, they are screaming deflation right now. Yesterday, the Case Schiller Home index says that housing values fell by 2.2% in March! That's on top of a 2.6% drop in February (revised up). That's almost a 5% loss in two months! Annualized out that's a 30% drop in home values.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aYDfc3P6rZys&refer=home

The value of housing in America is about $20 trillion. That means we lost $440 BILLION in housing wealth in March alone. We lost nearly $1 TRILLION in housing wealth in those 2 short months!

Can the price increases were seeing in food and energy possibly offset that gap?

Oil prices have risen from $80/barrel to $135/barrel in the past 6 months. America consumes 20 million barrels of oil a day. That means we are spending $1 BILLION a day more on oil than we did last year. That's only $30 Billion a month in inflationary pressure against that giant wall of deflation coming down from the housing market.

When you consider the fact that the energy market is bigger than any other commodity, and it has moved up much more than any other commodity over the past 6 months, it's easy to conclude that commodity inflation is no match for housing deflation.

The housing market is too big. Even when you add in the inflationary pressure from a falling dollar, it doesn't appear to be enough to overpower the losses in the housing market.

Just today there was a major move down in commodities and oil. I'm thinking most of these markets are overbought at this point and we will see a pretty good pullback over the next few months. That's deflationary, too.

In deflation, cash is king. People scramble to unload their assets at greater and greater losses. Those with the cash can buy up this stuff for pennies on the dollar. I still think this is the end scenario, but we may not see it until after the election.

The losses in the housing market are almost unfathomable they are so huge!

Follow Up on FJ Prediction from February 11th, 2008

Back on February 11th, I predicted that we would be seeing $4 gas by Memorial Day. Here's a link to the previous post.


http://www.blogger.com/post-edit.g?blogID=1336300683106618557&postID=2190842543631246914

BTW, the picture above is from a local gas station here in Santa Fe. As you can see, I was damn close in my prediction! Of course, at the rate oil is going up right now, I'm probably a week early on my prediction. But $4 gas is a reality now in many parts of the country.

Saudi Arabia and OPEC have us literally over a barrel right now. Poor pathetic Bush went to Saudi Arabia begging them to pump more oil, but why would they do that? Of course they said no, and they also told him that they don't like us devaluing our dollars like we've been doing.

They've told us they are going to raise the price of oil $4 (or 3%) for every 1% the dollar goes down in value. That's a pretty steep penalty but I'm still not sure that our leaders get it, yet.

Well, they get it, but they're doing the wrong thing. Congress is talking about suing OPEC, like that's going to help us get more oil. We've also got Hillary and Obama wanting to increase taxes to oil producers (which I think is a big mistake).

The biggest impact our Government could have on energy prices right now is to support the dollar. Just think what would happen if Bernake on Tuesday made a surprise 1% rate increase to the Fed Funds rate. Immediately, you'd have a flood of money move out of the commodity market and into dollars. Likewise, ending the war in Iraq and bringing the troops home would also be a big support to the dollar. Pipe dreams like a balanced budget would also work, but I'm not counting on that happening until China and Saudi Arabia decide they don't want to loan us money anymore.

In the meantime, the best way we can fight back is to use less oil. That means driving less, being more strategic with your errands so you can combine trips helps. Keep your car tuned properly and make sure the tires are properly inflated. If you're in the market for a new car, buy a more fuel efficient vehicle.

Oh yeah, call your congressmen and women and tell them you're not going to vote for them in November unless they do something to strengthen the dollar!

More predictions coming soon! They will be doozies!

Masking a lousy market with a declining dollar

So, what do you think of the bull market in stocks that we've been in since 2003? In 2002 the Dow bottomed out at 7701. It recently closed at about 13,000, and has been as high as 14,000. That means the market has gone up about 81% during that time.

The S&P also doesn't look that bad. It bottomed out at 800 in late 2002. It currently sits at about 1423, which is about 78% higher.

However, during most of this time, the dollar index has been declining against most other major currencies in the world. In 2002 the dollar index topped out at about 120, today it sits at 73, which is a decline of 39%. That means that the dollars you hold can purchase, on average, 40% less than they could just 5 short years ago.

So what, you say? After all, if your investments are up 80% and the dollar is down 40%, then that means you are still up 40%, right? Actually that's wrong. Losses are magnified on the way down. A 50% decline wipes out a 100% gain.

It's important to view our market from a foreigners perspective. After all, they have lots of money and they choose where they want to invest it. Many foreigners like to invest in the United States and our stock market because it has been such a good place to keep their money for many years. That is, until this latest bull market.

From 2002 to 2004, the stock market was in major rally mode. Aggressive rate cutting by the Federal Reserve (down to 1% on the Fed funds rate) gave the stock market a reason to rally. The market jumped up 33% during this time, but to foreigners the rate was not that great because the dollar declined 30% during this time. So all the gains in the market were not realized by foreigners, they essentially broke even on a nominal basis.

2005 was a more interesting year. The Federal Reserve decided to start raising interest rates again. They steadily moved the Federal Funds rate up from 1% in mid 2004 to 5.25% in early 2006. During this time the dollar rallied 10%. However, on the stock market side, it was the weakest year of the rally. The stock market went up about 5% in 2005. For American investors, this was a so-so year. Foreigners, on the other hand, had their best year of the current market because the 10% gain in the dollar juiced their 5% market gains to give them a 15% return for the year.

Then, starting in 2006, the dollar resumed it's slide down from 90 all the way down to where it currently sits at 73. That's a 19% decline in the value of the dollar. However, on the stock market side, the S&P 500 went from 1285 to it's current value at 1423, that's only a 10.7% gain. This means the market has been declining for foreigners during this time, they're down 8% even if nominally the market is higher.

So, over the past 5 years the average foreign investor has not made any money in the stock market. I could make the argument that it's the same for American investors because our dollars buy so much less than they did back in 2002 (thank you inflation).

I have talked in the past how dependent we are on foreigners to fund our excesses. If you were from France, or China or Saudi Arabia, how much longer would you have patience in the American stock market if it's earned you a big fat goose egg for 5 years running? I've got a feeling that their patience is wearing thin and they're looking for any excuse to pull their dollars out of our market and go invest it in something else.

Of course, everyone is talking about how the dollar is set to rally right now. After hitting an all time low of below 71 in March, it has moved up to 73 currently. However, what is going to cause foreigners to want to buy more dollars (more demand for dollars will cause the dollar to rally)? I don't see any rally in the dollar until Ben Bernake grows a pair and starts to raise interest rates.

Despite the tepid rally in the dollar right now, I think it's setting itself up for another 10% plunge before the end of the year, maybe more. In the meantime, any rally in the stock market will be completely offset by declines in the dollar.

There is no new wealth being generated in our country, there hasn't been for a long time.

Meat!

With all the bad news about inflation going on right now, especially regarding food and energy prices, there is some good news out there.





The price of meat is going down. Way down.





In fact, last week I picked up some 85% lean hamburger meat for $1.65/pound. I also picked up boneless, skinless chicken breasts at $1.88/pound.





This week in my Albertsons circular they are advertising USDA Choice Top Sirloin or Petite Sirloin steaks at $2.99/lb. Roast beef is only $6.99/lb. These prices have to be about 30% lower than they were a few months ago!





Are you ready for the horrible reason why these prices are going down? The herds are being culled. Feed and grain has gotten so expensive that many ranchers are killing off a big portion of their herds to save money. This has created a temporary glut of meat in the marketplace. Therefore prices are going down!





It is time to go to your local grocery store and stock up! Fill your freezer to the brim with as much as you can now, because in a few months the glut will be over and prices are going to rise in a dramatic fashion.





A typical frost free refrigerator can keep meat fresh for about 6 months. A deep freezer can keep meat fresh for years. I recommend you try to estimate how much meat you will eat during the next 6 months to a year and go out and purchase it now!





Likewise, look to milk, eggs and other dairy products to keep going up (hens and dairy cows are getting slaughtered, too).