Market Thoughts

Today was an interesting day in the market, as stocks started up, wavered around mid-day, and crashed in the afternoon. Most indicators suggest that people fear stocks have had a long positive run, and is due for a crash, causing people to begin taking profits. The irony of situation is that if enough people believe that, it could be become a self-fulfilling prophecy.

I pondered the situation today, and I think in the next few months, stocks will still be up. Consider that technology and oil companies, such as Microsoft (MSFT), Google (GOOG), and Exxon Mobile (XOM) recently reported record earnings. While the housing market is slumping, I think the worst is almost over, with subprime mortgage issues clearing and the possibility of a Federal rate cut on the horizon.

Again, while I believe in the efficient market hypothesis, EMH works over the long run, and there is plenty of opportunity for both erratic movements up and down before the market settles down. I think a few more days of negative stock returns would signal a great time to buy into companies such as Microsoft and Google, who are down 3.6% and 2.5% respectively from just a few days ago when earnings were announced.

Obsessive Thoughts

Stephanie at Poorer Than You tagged me for this obsessive thoughts meme. I was asked to list five of my obsessions.

First off, Stephanie, I apologize I haven't had time to respond to that until now. Second, I would have chosen the five you chose, but since I'm not allowed to, I've decided to chose five others. For those of you wondering, I had a difficult time coming up with an image for this post, and since this is better than some of the more X-rated images that popped up on Google, Obsession by CK is how I choose to "picture-ify" my rantings (for the less literate).

Money: While it may appear that I talk about and pursue money, its not the material aspects that intrigue me as much as the accumulation process. I just enjoy watching the digits in my bank account go up, while at the same time, spending for life's wants and needs. A wise friend said it best, "When all is said and done, your bank account will be the measuring stick." While I certainly don't believe money is valuable in itself, it is the ultimate means to an end, and having money to spend is always better than having no money at all. With that said...

New Perspectives: I want to clarify I'm no Scrooge. I very rarely penny-pinch, and I consistently blog against doing that. I also know it is very important to have friends and family around, for both the support and the different perspectives they have on life. After all, its no fun to have money when you have no one to spend it on.

"Why"s: On a day to day basis, work requires me to ask about the "why's" behind data. I have to delve into mathematical models, customer feedback, or the fixed income market to ascertain trends and prognosticate. But to me, this is fun, because I already spend so much of my life asking "Why". A classic example is that I spend an unnecessary amount of time analyzing bathroom scribblings. This isn't because I have to be there longer, but rather, it intrigues me that in a public bathroom, someone would take the time to write a 100-word thesis ranting against George Bush, and then someone else would later run the thesis through a manual spell-check and grammar check. I ask myself, "Why?" and I imagine to myself the scenarios that could cause someone to have so much time.

Movies: I spend a lot of time watching movies. I enjoy the chance to escape reality, but more importantly, it gives me a fodder for fostering new relationships and finding new perspectives.

Simpsons: There is no rational explanation for why I watch it. I find it the funniest thing in the world, and I have personally watched every episode at least 2 times (that number would be 3 if you didn't count this season's episodes).

Networth Update Coming...

Soon. Although my paycheck has hit the bank, my 401(k) hasn't been reflected, so I am still waiting on that to get a more accurate view of my networth. However, since this whole month was a big transition month for me, networth is more than likely to decrease.

Next month, my goal is to have it increase, by at least $1,000. Let's see if I can hold myself to it.

Housing Update

Checked out my buying power today. My calculation was right on. Turns out I might actually be able to afford an apartment around here. Please read here for my last comments about mortgages. One of the most interesting things I learned about today are 3/1 and 5/1 ARMs. ARMs are normal adjustable rate mortgages, changing as rates change. 3/1s and 5/1s are fixed mortgages for the first 3 or 5 years and then adjustable annually after that.

These are a great deal for me, and others like me, because more likely than not, I will be moving within 3-5 years. These loans tend to be lower rates, because companies have to worry less about the interest rate environment turning against them.

Student Loans

A lot of people, including my own mother, have approached me recently to lecture me about the debt I currently hold. Of course, a majority of my debt is in federal student loans. The whole student loan industry has been in the media spotlight recently, with allegations of impropriety and other scandals. Why the uproar? Federal student loans are essentially government-subsidized loans.

Let me quickly explain that regardless of rather the loan is subsidized or unsubsidized (meaning interest is either paid by the government or accrued), the government is still providing a subsidy.

Consider the basics of a student loan. You are getting money to pay for an education that holds no value to the bank. Unlike an auto or house loan, if you default on the loan, the bank has nothing to repossess in order to get some of its money back. Typically, these loans are called personal loans, since the money has no particular use than for your own personal use.

Researching this type of loan online, the interest rate would be 13-14% if you had excellent credit. As a student, with little to no credit history, the rate could be much higher. Consider then that at the current 6.8%, you are getting at least a 6.2% discount on your loan(s).

You ask, "So what? The government gives me a better rate. Why shouldn't I pay it back anyway?"

Well consider this scenario:

You have $20K in cash. You owe $10K in student loans at 6.8%. You have no other liabilities. Let's also consider that you are considering buying a $20K car in the future.

Scenario 1:

You pay back the loans and borrow $10K for the car. Current auto loans are 6.9%. Simple interest a year is: $690

Scenario 2:

You keep the loans and use your cash for the car. Current student loans are 6.8%. Simple interest a year is $680.

Savings with the loans is $10 a year in interest alone. Now consider that this difference can be greater if (a) the loan amount is greater and (b) if the difference in interest rates were greater.

Finally, if you have bought everything you want, consider also there are investment opportunities for your cash. An average stock market return is about 8-10%, so keeping your student loan in place, you can make 8% in the market, pay the 6.8% on the student loans, and make 1.2% free!