 |
|
The Independent Investor: The Devil Is In The Details |
|
By Bill Schmick On: 05:28PM / Friday May 25, 2012 |
|
|
It has now been over three years since the CARD Act was signed into law. You remember that bit of consumer legislation that sailed through Congress with nary a nay vote? How then have the Credit Card Accountability, Responsibility and Disclosure Act performed since inception?
Well, it depends on who you ask. Its advocates say it has accomplished its goal, which was to stop the predatory policies against middle/lower class consumers by the nefarious money-center banks and credit card companies.
For the life of me, I really can't see much difference between today and back in the bad old days, can you? Take interest rates, for example, here we are in the lowest interest rate environment in modern history and yet my Visa rate is 15.24 percent for standard purchases. And if, God forbid, I need a cash advance, well then I have the privilege of paying 25.24 percent for that loan plus a fee that could amount to 4-5 percent of the advance.
There is also a clear warning on my bill that states if I fail to pay the minimum balance within the 23 days (my monthly grace period) then my late payment interest rate charge will be 29.99 percent plus a $35 late fee. My second credit card company charges me even more for transgressions. It is true that the fine print on the back of the bill has gotten bigger and so have the explanations for how they calculate the interest rate they charge me. At last count it was a 19-line explanation that never once actually told me the interest rate I'm paying.
And how about those "balance transfer" offers we find in the mail every other day or so. You know the drill:
"Save on Interest. Get a low 0.00% APR on balance transfers until 04/01/13. After that, your variable purchase APR will apply, currently 15.240%"
The ad is accurate enough, but what it fails to make clear is that the offer only applies to balances you transfer. Any new, additional purchases will be charged the 15.24 percent rate. And if the offer also includes the lower rate for new purchases, the time period is very short, no more than 4 or 5 months. Many times there is also a fee for the transfer itself, often amounting to 3-5 percent of the balance.
There can also be another hitch. You need to qualify for the offer. If your credit rating doesn't pass the muster, you might simply be transferring the balances from one high-charging credit card to another. Don't even think about being late on your payments either, because even one mishap will send your rate soaring on your entire balance despite the original offer terms.
To be fair, there are fewer late fees today, especially the kind that compounded a credit cardholder's debt through ballooning charges for over-the-limit purchases and the like. There has also been some roll back in debit card fees, but in exchange consumers are losing things that until recently were free within the banking universe.
The debit card reward program is dead and there are little to no price savings anymore for restaurant or other retail purchases. Retailers are actually boosting prices on many small-ticket items as a result of the Durbin Amendment. The legislation was a last-minute addition to the Dodd-Frank Wall Street Reform and Consumer Protection Act that went into effect on Oct. 1, 2011. The amendment capped the debit interchange or "swipe fees" that franchisees pay to accept Visa and MasterCard debit cards by about 70 percent.The swipe fee cap has had an unintended but disproportionate impact on transactions for small amounts.
A new study by the National Association of Convenience Stores also found that drivers are paying 6 to 10 cents a gallon in hidden bank fees every time they use a credit card to gas up. At the same time, the banks swipe fee goes up with the price of gasoline. Convenience stores paid more than $11 billion in card fees last year, a jump of almost 25 percent. As gas hit $4 gallon in some markets, the bank's average cut of swipe fees alone increased to 7 cents, if you pay with a debit card and 10 cents with a credit card.
The government's legislation still allows credit card issuers to impose plenty of obscure and hard to understand charges such as fees on purchases abroad ( usually about 3 percent) or for having a zero balance (punishment for paying off your debt).
Companies can close accounts and reduce or withdraw lines of credit without notice or reason although they must wait 45 days before applying over-the-limit fees or a penalty rate on a newly lowered credit limit. They can raise your interest rates as high as they want, after giving you 45 days' notice. If you dispute it, the card company will close your account and give you five years to pay off the balance. Finally, you must go through mandatory arbitration to address grievances rather than the courts.
It should come as no surprise that banks have had to look elsewhere once the law made their former abusive and usurious practices illegal. As a result, the credit card issuers are more selective in obtaining new customers and turning down those they don't want. In order to replace lost revenues, the banks have begun to increase charges on checking accounts and minimum balance requirements. So in today’s checking account environment, the typical customer will not only receive zero interest for the funds they deposit in a bank's checking account but also pay increasingly higher costs for the privilege of losing money.
The bottom line: all the credit card legislation has done is switch the chairs around the same old slippery deck, in my opinion. Although credit cards are so prevalent that many of us think a credit card is a necessity (some will go as far as say it is a right), it isn't. You can opt out of the system and pay in cash anytime you want. For some of us it has become a convenience item, which we pay for, in lieu of carrying around bundles of cash. For others it has become much much more and that is dangerous. Credit cards were never intended to become your plastic loan shark or an alternative to a payday loan or check cashing storefront, but for many that is exactly what they have become. If so, it's time to make a change because legislation can do only so much.
Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or e-mail him at wschmick@fairpoint.net . Visit www.afewdollarsmore.com for more of Bill's insights.
|
|
|
The Independent Investor Credit: The Real Cause Behind The Great Recession |
|
By Bill Schmick On: 03:10PM / Friday May 18, 2012 |
|
|
It has been almost five years since the start of the financial crisis. In its second year, the so-called recovery has been disappointing, unlike any other economic cycle since World War II. At the heart of this failure lies our country's inability to recognize why this time it is truly different. That difference can be summed up in one word — credit.
We must reach back to the Great Depression to find the last time there was a large-scale banking crisis in which leverage and excess credit were the main cause of a recession. Too much credit (sometimes called leverage) is the "Achilles heel" of any economic system. Unfortunately, neither government nor the private sector has much experience in dealing with the aftermath of an economic credit binge. Instead, we have all tended to try and jump start the economy using the same tools we have been using since WWII. It won't work.
Up until the aftermath of WWII, real private lending had grown about the same pace as economic activity. But in the early 1970s, credit began to grow at about twice the rate of economic activity and it continued expanding from there. Economists think that the credit binge was ignited by the collapse of the Bretton Woods international monetary system. That agreement, established in 1944, was forged in an effort to reconstruct the world's economy after the war.
Forty-four Allied nations agreed to peg their currencies to the U.S. dollar. In turn, the dollar was pegged to the price of gold. The U.S. took the world off this dollar/gold standard on Aug. 15, 1971. Currencies from that point on were allowed to fluctuate based on the economic fortunes of each nation and that's where credit came in.
Governments and their economists figured out that the more credit (leverage) you used, the higher the growth rate of your economy and the longer that growth could be sustained. If you wanted a strong currency, the ability to borrow, and be able to make a name for yourself on the global block, the expansion of credit was a good way to do that. The challenge was balancing that credit growth with the underlying capital base of your financial sector. Up until then, that had not been a problem, but times change.
During 2004-2007, we expanded credit further and faster than anyone really understood. Like children with a new but dangerous toy, our financial wizards had no idea what excessive credit could do to an economy. Anyone that had firsthand experience (during the 1930s) had long since retired. Readers are now intimately aware of the sub-prime mortgage debacle, our credit collapse and its resulting impact on our financial system.
As a result of the crisis, a large fraction of the global banking systems' capital base was erased almost overnight. In Europe it continues to unfold today. When something like that happens, it takes a long time to rebuild that capital base. In the meantime, lending is put on the back burner as banks struggle simply to survive. Without lending, the life blood of economic growth, the economy will and has experienced a deeper recession and slower recovery. That is the natural result of a credit crisis and there's not much a government can do about it.
In the past, it took at least five years before lending (and investment) once again approached pre-recession levels. Credit, after all, has much to do with the trust and faith by the lender that the borrower will be able to repay the loan. A credit crisis like the one we experienced in 2008-2009, destroys that faith. No matter how low the Federal Reserve forces interest rates, lenders won't lend until that faith is restored and they feel their capital base is once again secure. That takes time. The on-going turmoil in Europe's banks simply delays that from happening.
In the meantime, ignore all the promises of both candidates. "Getting America back to work again" and similar slogans would require an understanding of the nature of the slowdown and an entire new set of tools to address it. Neither party's candidate appears ready to recognize that this Great Recession is truly different from any in their lifetime. I doubt they or the armies of experts advising them will ever recognize the truth, except in hindsight.
The good news is that time does go by. It's been three years since we have officially entered a "recovery." In another two years or so we should be getting back to normal. I hope.
Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or e-mail him at wschmick@fairpoint.net . Visit www.afewdollarsmore.com for more of Bill's insights.
|
|
|
The Independent Investor: Cyber Attacks: Who Is On The Frontline? |
|
By Bill Schmick On: 04:56PM / Thursday May 10, 2012 |
|
|
John McClane (Bruce Willis): Hey, what's a fire sale?
Matt Farrell (Justin Long): It's a three-step ... it's a three-step systematic attack on the entire national infrastructure. Okay, step one: take out all the transportation. Step two: the financial base and telecoms. Step three: You get rid of all the utilities. Gas, water, electric, nuclear. Pretty much anything that's run by computers which... which today is almost everything. So that's why they call it a fire sale, because everything must go."
'Live Free or Die Hard'
|
There is a war being waged today in this country, one that could have severe repercussions for each and every one of us. It is costing us billions of dollars a year and yet neither business nor government wants to spend the money necessary to fight back.
This week on Capitol Hill lawmakers are getting down to debating the pros and cons of passing one of several versions of a cyber-security bill. Everyone hopes the eventual legislation will launch a counterattack on an army of highly sophisticated hackers bent on some serious mayhem. The debate boils down to who is going to pay for a defense system that will prevent the bad guys from accomplishing a "fire sale," a la the last "Die Hard" film.
 The Obama administration backs a Senate bill sponsored by Sens. Joe Lieberman, I-Conn., and Susan Collins, R-Maine, that would implement new rigorous standards and require companies to notify the government when their networks have been breached. The business community opposes it as just more intrusion into the private sector that will mean more costly regulations on top of more regulation. Instead, they would prefer a bill promoted by Sen. John McCain, R-Ariz., which wants the government to issue alerts about imminent cyberattacks but would not require a company from acting on the information unless they thought it was a threat to their business.
Unlike other wars the United States has fought, this one is on our territory and the frontline troops are increasingly the IT departments of American corporations. To date, those troops have been both outnumbered and outfought by the enemy. The rates of infiltration by organized gangs or state-sponsored hackers are escalating. In a multinational study by the Center for Strategic and International Studies, the three countries ranked as most vulnerable to attacks were the U.S., Russia and China, while the biggest potential source of attacks was our own country.
Today, we only hear of the biggest cyber-attacks such as the 2011 theft of over 200,000 customer names, account numbers and contact details from Citigroup or the 100 million accounts pilfered from Sony Online Entertainment's PlayStation Network. I was on the receiving end of the Citigroup theft, and believe me, it drives home the danger like nothing else.
These attacks are costing American companies big money. It costs on average over $7.2 million in costs (lost business, legal defense and compliance) or $214 per customer record in costs. If it is a first time breach, it can cost 30 percent more, not to mention the inconvenience to its customers like me. Yet, the real danger is not in the consumer sector. It is in the potential for a breach in the nation's infrastructure system.
As you read this, for example, our natural gas pipeline companies are currently battling a major cyber-attack from a single source, which was launched in December 2011. Don't dismiss this threat. As early as 1982, the CIA managed to blow up a Siberian gas pipeline by using what was called a "logic bomb" involving the insertion of a portion of code into a Russian computer system overseeing the pipeline.
Those involved in cyber security worry that our infrastructure companies (power, water, nuclear, etc.) do not realize how vulnerable their systems are to outside invasion. Computer systems and safeguards that were originally installed years ago are out-of-date. But managements are loathed to upgrade their systems simply on a bet that someday, maybe, their company might be targeted by hackers. It is a persuasive argument since to safeguard a company against all possible dangers — earthquakes, tornados, floods, nuclear fallout, to name a few — would be cost prohibitive.
On the other hand, no one wants another 9/11. Maintaining a head-in-the-sand attitude until something happens is just the kind of strategy that has organizations such as Homeland Security experiencing perpetual nightmares. It is a tough one but somewhere in the debate lurks a compromise. I just hope we can find it.
Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or email him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.
|
|
|
The Independent Investor: 'Sell in May and Go Away?' |
|
By Bill Schmick On: 04:42PM / Thursday May 03, 2012 |
|
|
If I hear one more person spout that line, I think I'll go nuts. Suddenly, because this cliche has worked for the past two years, it has become gospel to believe it will happen again this year. Investors should be wary.
Back in July 2008, I wrote in "Myths of the Market":
"Sell in May and Go Away," is one often quoted saying that implies that stock market returns are higher in the November-April period than in the May-October months. After 27 years experience in global markets, I tend to agree. My belief is backed up by multiple studies that indicate that in 36 out of 37 developed and emerging markets this indicator works the majority of the time. Although no one can provide one single cause for this, I believe it has something to do with summer vacations, especially in Europe, where the effect has been noticeable since 1694."
As a contrarian, when everyone is expecting the same thing, (in this case, a sell-off in the markets lasting into the fall), I tend to lean the other way. There certainly are plenty of good reasons to be concerned that this third year will be the charm. Questions over QE3, the ongoing Euro crisis, a slowdown in China, an incredible first quarter rally in stocks—all of these would indicate we need a correction or at least a healthy pull back.
The most convenient thing for all of us would be to cash in our chips, get to the sidelines and enjoy our summer. If you had done so in 2010, you would have missed a meager 1 percent gain in the markets between April 30 and Oct. 31. In 2011, you would have dodged a 6.7 percent slump in the averages. But markets usually do what is most inconvenient for the greatest number of investors.
A recent report from Ned Davis Research pointed out that the Selling May strategy doesn't work nearly as well when it occurs in a presidential election year. They looked at every presidential election since 1900. Investors on average would have missed a hefty 4.4 percent gain as measured by the Dow Jones Industrial Average in those years by selling in May. If an incumbent wins, the gains are even higher (7.6 percent).
Now, before you reverse course and buy everything in sight, a word of caution is appropriate. The same study did show that, on average, a correction did occur during the second quarter of presidential election years. The duration of the pullback is what differs.
Usually, a summer rally occurs after the second quarter sell-off in an election year. When the incumbent party has lost the election, the summer rally fizzled out and the Dow made a new low in late October, followed by a weak year-end rally. When the incumbent won, the summer rally was stronger and the pullack in the fall was mild, followed by a strong gain into the end of the year.
The explanation for the differences in these presidential election-year markets comes down to uncertainty. That uncertainty is compounded when the economy has been weak, as it is now. Leadership in times like these is extremely important to market investors. Some would argue that the incumbent (the devil you know) is preferable to one you don't know, who may or may not, usher in successful policy changes. The presidential candidate's party affiliation did not appear to have any bearing on the results.
So the moral of this tale is that there may still be a sell-off between now and the end of June, but politics will have an inordinate influence on what happens this summer and fall.
Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or email him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.
|
|
|
The Independent Investor: Not In My Back Yard |
|
By Bill Schmick On: 06:30PM / Thursday April 26, 2012 |
|
|
Part II in a look at the boom in natural gas; Part I can be found here.
The oil and gas boom in this country has had some serious side effects. Everything from earthquakes to polluted water has been blamed on the industry. Residents near the areas of hydraulic drilling and exploration are fighting back using the Environmental Protection Agency, lawsuits, lobbying and the media. The challenge is separating fact from fiction in this on-going fight.
There is no question that there has been a remarkable increase in the number of earthquakes in the middle of the country, for example, or that an entire neighborhood of homes in Dimock, Pa., claimed it was threatened with explosive levels of methane gas. Twenty water wells in the same area, the site of natural gas drilling in the Marcellus Shale, showed the presence of sodium, methane, chromium or bacteria.
A recent documentary, "Gasland," on HBO featured another Pennsylvania village caught in the controversy over America's oil and natural gas boom. The movie allegedly uncovered the "secrets, lies and contamination" of natural gas drilling. As a result of the growing controversy three states — New Jersey, New York and Pennsylvania — have called a moratorium on any further drilling or hydraulic fracturing for the time being. That is a big deal because the Marcellus Shale sits below those states and has enough natural gas to fuel this country for the next 20 years.
Environmentalists and people living near drilling sites are saying not in my back yard. They believe that attitude is justified since the risks are great and who can blame them? I'm sure I would feel the same way if someone proposed to drill a well in the parking lot of my condo. The moratorium is needed, so its advocates argue, simply to study the impact of this drilling before people get hurt or sick. Naturally, the energy industry is arguing that the risks are small and that thousands upon thousands of wells have been drilled with no negative impact whatsoever. They have a point.
Take the earthquake issue, where a study by the U.S. Geological Survey identified a sixfold increase in manmade quakes in an area including Arkansas, Colorado, Oklahoma, New Mexico and Texas. All the headlines pointed to natural gas drilling as the culprit. The gas guys were found guilty, strung up and buried before the survey team could come to a conclusion. Only then did the scientists admit that the quakes were not directly caused by hydraulic fracturing with one exception, one lone well in Arkansas.
The 20 "contaminated" wells in Pennsylvania I mentioned were later found by the EPA to present no threat to human health and the environment. As for the earth beneath the affected homes in Dimock, it did contain methane among other elements, but the EPA could not prove a connection between the contaminants and the oil and gas developments. In fact, they concluded that the presence of these elements could just as easily have been caused by naturally-occurring background levels or other unrelated activities.
I have learned that most studies tend to reflect the bias of those conducting them. In other words, you can make a study say anything you want given enough samples. This battle, in my opinion, has already been won by the weight of public opinion. A cessation of exploration will have a negative impact on the economies of all three states. At the same time, the declining price of gas will not justify continued drilling in a land of litigation.
Free market capitalists might moan and argue that a person has the right to do whatever he wants with his property including fracking. On the other side, advocates will contend (rightfully so) that there is no such thing as zero-impact drilling. One's decision to allow fracking in your backyard can and does directly impact my property next door.
The industry heightens the paranoia surrounding it by refusing to disclose what potentially toxic chemicals (if any) are used in the drilling process. The regulations do not require disclosure so they won't provide it. They are also exempt from EPA regulation thanks to the Bush Administration's 2005 loophole legislation dubbed the "Halliburton Loophole" by opponents.
As a result, all sorts of fears can be invoked (real or imagined) by any blogger or tree-hugging anarchist that wants to invent their own bizarre plot against humanity. Is the nation's watershed in jeopardy of contamination? Many environmentalists claim it could be impacting millions of unsuspecting Americans. Without the data, we don't know. Others worry that in the vacuum caused by the absence of federal regulation, undermanned and revenue starved state regulators are turning a blind eye to industry regulation.
Back in the day, when the United States was still a powerhouse of industry, a growing and vocal group of concerned citizens began uncovering the seamier side of this formidable industrial base. We discovered that the byproducts of these industries were causing enormous amounts of air and groundwater pollution. At the same time, workers were coming down with all sorts of ailments from asbestos poisoning to cancer. Instead of helping the industrial sector transform itself into something more acceptable, we drove it away.
Politicians swooped in to pass bill after bill creating new safety standards, stricter codes and of course higher taxes on these bad boy industries. Industrial companies found themselves spending more time and money defending their practices from lawsuits, sit-ins and protests. In the end it wasn't worth it. They started looking for less hostile manufacturing locations abroad and found them.
Americans today lament the loss of that U.S. industrial base. We conveniently forget that part of the reason for that exodus was caused by a sea change in how we viewed those industries. Although the present challenges facing further gas drilling in our country should be taken seriously, let's try not to apply the same "not in my back yard" attitude toward gas drilling that sent our industrial base packing in the past.
Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or email him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.
|
|
|
