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December 26, 2008

The Great American Ponzi Scheme: Part II

(Continued from The Great American Ponzi Scheme: Part I)

The government didn't step in to regulate these credit default swaps because a boom in all these industries makes people happy. Happy enough to re-elect those in office, happy enough to pay more taxes. By the way, because the economy was doing so well in the early stages of this Ponzi scheme, the tax base grew and taxes could be cut on things like capital gains without the effects really being felt even while the government itself was spending just as recklessly as many consumers.

Eventually, though, like all Ponzi schemes, the mortgage companies and the building developers simply ran out of people on whom they could perpetuate the hoax. Those left to take out new mortgages became worse and worse credit risks. Housing prices started to level off. This meant no new value was being created and added into the system. No more home equity loans were being taken out to finance home improvements, new entertainment systems, or new cars. People slowed down in their purchase of big ticket luxury goods. Gas prices shot through the roof coincidentally which drained even more cash from the average paycheck, and at the same time many of those earlier mortgages came due to reset their terms. You remember, the ones that the buyer couldn't afford, but thought they could refinance based on the increased value of their home.

Companies started laying people off because of lower sales revenue, people started defaulting on their mortgages, and the banks that had promised to "insure" and credit defaults found they didn't have nearly enough cash available to pay the "insurance" they had issued. These banks faced collapse. Since many companies rely on those same banks for their day to day operating funds, a collapse of the banks would mean a great number of other companies would collapse as well. Millions of jobs would be lost and the whole thing would spiral out of control. The government had no choice but to step in and rescue these banks from their own greed and stupidity. The most important banks were propped up or forced into marriages with other healthier financial institutions. Then, because the easy money for new cars was gone, the car companies found themselves floundering. With millions of jobs again at risk, the government had to step in again.

This week, the Wall Street Journal reports that building developers are asking for their piece of the bailout pie, with an extra scoop of ice cream, please. Thank you, very much. This is where the line in the sand gets drawn. The developers are among the principal provocateurs of the current mess. They helped fuel the fires, and continued building more and more homes, until they began to ruin the value of those they had already built.

If we could have, we would have let the banks fail, and let the auto industry fail, but the consequences to the average American would have been too great to have them all collapse at once. If they fail at a rate of one or two a year for the next decade then so be it, but not all of them right now. As for the developers, their bankruptcy will not collapse the economy. It won't be pleasant, but it will be a smaller blow. Let these developers go under if they must. The only reason the government should offer corporate bailouts is to protect the integrity of the greater economy.

December 24, 2008

The Great American Ponzi Scheme: Part I

Mortgage banking for the last ten years or so has been the biggest Ponzi scheme ever conceived and it has all been legal. Builders, developers, and bankers have been perpetrating what amounts to outright fraud on the American consumer. Don't get me wrong, it is the greed of those consumers that got them into trouble in the first place. If people hadn't looked at buying property as a get rich scheme, and bank-rolled that "investment" with money they didn't have and credit they couldn't afford, none of this would have happened either.

The classic elements of a Ponzi scheme are paying the initial investors with money from later investors. That's great for the first guy who gets his money, but at some point you run out of new victims to come along and pay all the earlier investors. Then the whole thing collapses, there's no new money coming in, all the old money is gone, end of game. That's almost exactly what happened in the real estate mortgage market in the last decade.

A customer would hear over and over again about how real estate prices are always going to go up over time and how owning a home provides not only a place to live, but also a great investment for the future. They saw people making their living by buying and selling homes over and over again. They got greedy and wanted a piece of that action. When they went in to a bank to ask for a mortgage, they were offered all kinds of loans. "You don't have a down payment? Don't worry, we can provide a zero down mortgage. You can't afford closing costs? Don't worry we can roll them into the mortgage. You can't afford the monthly payments? Don't worry, we can offer an Adjustable Rate Mortgage with interest for the first three years that is way below market prices. You can't afford monthly payments even with lowered interest? Don't worry we can offer interest only loans, where you need not pay back a dime of the principle for a few years." It was almost impossible to get turned down for a mortgage. If you did, you could go to a subprime mortgage broker who would get you a mortgage with the terms you wanted, but with a much higher interest rate that only kicks in later on.

Sometimes a customer would ask, "What if I still can't afford those higher payments when the interest rate increases?" Often the answer would be something like, "By then your home will probably have increased in value and the additional equity will give you enough for a conventional down payment to refinance under better terms." Few customers asked the next logical question, "What if it doesn't?" If they did ask the question, they most likely would have been diverted again by the likelihood that housing values will continue to rise forever. Typical Ponzi scheme tactics. The price will always go up because you'll always be able to find someone willing to buy it from you for more than you paid.

How could banks afford to give out these mortgages? Surely they must have known that these people could not afford them? There are two possible answers to that question. The first is that the banks believed what they said; they thought real estate prices would rise forever. The second is the more likely scenario however. The banks had a double Ponzi scheme going. They didn't care if the people paid or not because they sold the mortgage notes to other investors almost before the ink dried. That gave them the money to loan out to a new crop of mortgage seekers, and they just kept piling it higher and higher.

When the banks sold the mortgages, they offered a new kind of insurance policy along with them against the mortgage notes defaulting. Of course, they couldn't call it insurance because there are rules governing insurance. Basic common sense rules like, if you give someone a million dollar insurance policy, you have to be able to pay out the million dollars if they need to collect. This simple rule would have prevented the vast majority of banking industry liquidity problems that we see today. Instead the banks were allowed to sell the low quality mortgages with a guarantee called a credit default swap which amounted to a nebulous promise that if the mortgages went bad, somebody somewhere would find a way to reimburse the purchaser of the loan. In a sense, this also relied on the promise that real estate prices would rise forever. Worst case, they thought, we'll foreclose on the property and resell it. It'll probably be worth even more than is owed on it, so there'll be no trouble getting the money back. And everybody bought it.

This easy credit for anybody, led to a boom in the housing market. That led to a boom in construction, appliances, building materials such as lumber, and all the skilled trades involved in building and selling a house. And of course it also led to a boom in the banking and financial industry. The banks were flush with profits from all these new mortgages and offered car loans and every other kind of loan to make even more money. Credit cards with limits in the tens of thousands of dollars were offered. Consumers snapped up the credit cards and went out to buy big screen televisions, fancy new laptops, power tools, or anything else that struck their fancy. After all, if the credit card debt became too onerous, guess what, they could always take out a home equity loan because the value of their home would increase to cover it.

(To be continued in The Great American Ponzi Scheme Part II)

December 22, 2008

Filing Bankruptcy Pro Se: Choosing The Option That Works Best For You

If you're considering filing for bankruptcy then obviously you're experiencing some serious financial difficulties. Perhaps bill collectors are hounding you, your paycheck is being garnished, or your home is at risk of being foreclosed due to your inability to keep up your mortgage payments. All these reasons and more would push anyone to file for relief through bankruptcy. If only bankruptcy attorneys understood how distressing being in debt can really be and charged little or no money to represent individuals in bankruptcy cases, but unfortunately most attorney fees are high. If you're facing such a challenge and can't foresee how you could possibly afford high fees but need relief that only filing bankruptcy can provide, you can still file bankruptcy without paying an attorney money that you don't have, by representing yourself.

Ditch Your Bankruptcy Attorney

Since hiring an attorney to handle a bankruptcy case isn't an absolute necessity, although highly recommended by the courts, representing yourself, or filing pro se, is a low-cost alternative. In order to file pro se, all you have to do is ensure that you have all of the necessary documents filled out properly and the filing fee, which is below $300. You will also have to participate in a credit counseling class prior to actually filing, as well as a similar money management class prior to discharge, if you're filing for total liquation or Chapter 7. These required classes cost approximately $50 or less, depending on which agency you choose. One thing that you must know is that the agency that you choose must be on the list of approved counseling agencies for your bankruptcy court. If your income falls at or below a certain percentage and you can't comfortably afford to pay the required bankruptcy filing and credit counseling fees, these fees can be waived. A special form must be filed with your documents and approved by a judge in order to have the filing fee waived. In order to have the fee waived for the credit counseling, contacting the individual agency and following their instructions is necessary. When you're ready to start the bankruptcy process, you'll need to decide which route you should go, as you have several options for filing without an attorney.

The Power of Paralegals

For those who are able to cough up the hefty fees to pay an attorney to represent them in a bankruptcy, that's fine, but all the attorney actually does is oversee the paralegal, who completes the documents for the attorney to file, file the paperwork after completion, and show up for the 5 minutes or less meeting-of-the-creditors session. Since it's the paralegal that is actually completing all the paperwork anyway, why not simply pay a paralegal to complete your paperwork while you file pro se? You would certainly save more than 75% off attorney fees, and you'll have peace of mind knowing that your paperwork has been completed correctly. You should be able to locate a paralegal by checking your local yellow pages and calling around to law firms that handle bankruptcies. Of course the Internet is a great way to research firms in your area as well.

Really Do-it-yourself

If you've done your research on the bankruptcy process and feel comfortable completing all the necessary paperwork, there are websites that allow you to purchase bankruptcy software. This software contains all the documents necessary to file your bankruptcy, as well as instructions on how to fill them out. The fee for the software can be as low as $25, but sometimes more. If you don't wish to download software onto your computer, there is always the option of simply obtaining copies of the forms you'll need, which can be purchased for a small fee. You'll need to figure out a way to get them filled out, as they must be typed, not handwritten. Many people no longer own typewriters, but this may be one of the few situations when a typewriter would really come in handy. There is a definite advantage to choosing the software as opposed to simply purchasing the forms, as the software provides totals for you, and you have the convenience of simply filling out the forms right from your computer.

Complete Online Bankruptcy Preparation

Unlike bankruptcy software that requires you to complete most of the work yourself and practically "learn as you go," full service online bankruptcy companies only require you to provide all the necessary information. After conveniently entering all the necessary information through the website, all you have to do is wait approximately 3 days for the documents to be prepared and then print them before heading to the court. Although this type of service can cost as much as $300, it's well worth the cost, as you don't have to worry yourself with figures or any other possibly perplexing forms, and it's a lot less time-consuming. Additionally, by choosing to have your papers prepared through an online preparation service, you are still able to save a ton of money, since $300 is still a great deal less than the thousands that attorneys charge.

Representing yourself during something as life-altering as a bankruptcy can be a scary situation, yet it doesn't have to be. As long as you thoroughly research the new bankruptcy laws as well as information regarding filing pro se, you shouldn't encounter any problems. There are numerous books and online forums available to teach you all about filing without an attorney. Even if your situation is more complex than the average case, many bankruptcy attorneys will often give free legal advice and/or consultations. If you need assistance from the bankruptcy court, visiting the court to find out specifics, such as how many copies of your paperwork is needed, if the papers should be stapled, etc., is probably a great idea. After your bankruptcy process is complete, you will almost certainly feel a sense of accomplishment to have represented yourself during a bankruptcy, and you'll finally be able to sit back and relax without cringing in anticipation every time the phone rings or someone knocks at the door.

December 19, 2008

How to Accept Online Payments

Accepting online payments is a great way to boost sales, no matter what kind of products you sell. Setting up an online payment system is easy, even for a beginner. All that is needed is a little time, a website and a merchant account with an online payment service.

To start, anyone who wants to sell merchandise needs a website. Before you worry about the cost, many website hosting services can help you setup a simple website for under $10. To find these, simply Google "website hosting service" and choose one that fits your needs and budget. Be sure to choose one that allows you to setup a shopping cart system; not all hosting services are created equal.

After you have found a website hosting service that will allow a shopping cart system, it is time to choose a merchant account service. A merchant account service will allow you to accept online payments on your website. Most merchant account services accept a variety of payment types, such as Visa, MasterCard, Discover and American Express. Some merchant accounts may also offer the option of accepting online checks. Other popular forms of merchant accounts include Skype, Paypal and Xoom. It is important to read all of the terms before you sign up with a merchant account service. Some require a sign up fee, monthly fees and per transaction fees and some services may even require you to sign up for a specific length of time such as six months, a year or several years.

Once you have a website and a merchant account, you're ready to set up your online store. Most merchant account service providers will assist you in adding a shopping cart and buy-now buttons on your website. Alternatively, many web hosting services also can assist you with this when you are setting up your website. After you have added the products, payment buttons and shopping cart to your website, you'll be able to accept online payments. In no time at all you'll be enjoying an increase in sales and the peace of mind that comes from having a merchant account that handles online payments for you.

December 15, 2008

Consider Inflation When Planning for Retirement

Inflation has been tame for so long that it's easy to ignore when planning for retirement. However, even inflation of 2% or 3% per year, over a period of many years, can seriously erode the purchasing power of your funds. At 2.5% inflation, $1 today will be worth 78 cents in 10 years, 61 cents in 20 years, and 48 cents in 30 years. That can have a major impact on those entering retirement for several reasons:

• New retirees are less likely to have defined-benefit pensions. Thus, they must rely more on Social Security benefits and personal savings, including defined-contribution plans such as 401(k) plans.

• Cost of living adjustments for Social Security benefits are less generous. While Social Security benefits are still adjusted for inflation based on the consumer price index (CPI), the methodology for calculating the CPI changed dramatically in 1999, reducing increases in the CPI.

• Retirees are living longer. As life expectancies increase, retirees are spending more years in retirement, so their retirement savings are subject to the impact of inflation over a longer time period.

• Health-care costs are becoming more of a burden to retirees. More and more companies are reducing benefits or eliminating health-care insurance for retirees, and health-care costs tend to increase faster than overall inflation. For instance, in 2006, the overall CPI increased 3.2%, while medical care costs increased 4.0% and hospital and related services increased 6.4% (Source: Bureau of Labor Statistics, 2007).

To combat the effects of inflation on your retirement income, consider these tips:

Use a conservative inflation rate for planning purposes. Since your retirement is likely to span decades, consider inflation over long time periods. For instance, while inflation has averaged 2.54% over the past 10 years, it has averaged 4.31% over the past 30 years (Source: Bureau of Labor Statistics, 2007).

Consider investment alternatives likely to stay ahead of inflation. Thus, a significant portion of your portfolio will probably be invested in stocks, which have typically earned returns in excess of inflation.

Invest in tax-advantaged investment vehicles. Look into 401(k) plans, individual retirement accounts, and other retirement vehicles. While each has different rules for taxing contributions and earnings, all provide some tax-free or tax-deferred benefits. Since you aren't paying income taxes on earnings throughout the years, that typically means you'll have a larger balance at retirement than if you were paying taxes throughout the years. Thus, you'll start out with a larger retirement base to help combat inflation's effects.

Keep fixed expenses as low as possible. Try to enter retirement with as few debts as possible. If you aren't using a significant portion of your income to pay a mortgage, car payment, or credit card debts, you'll have more flexibility to deal with higher prices.

Decide how you will deal with health-care costs. While Medicare will help once you turn age 65, it still does not cover many health-care costs. Look into Medigap policies and prescription coverage to help with those noncovered expenditures, especially if your employer does not provide health insurance after retirement.

Minimize withdrawals from your retirement assets, especially during the early years of retirement. To counter inflation, you need to withdraw larger and larger sums just to maintain the same purchasing power. To make sure you don't run out of funds late in life, keep withdrawals during the early years to a minimum.

Be prepared for change. After retirement, keep a close eye on your investments. If inflation increases and you are concerned that increasing withdrawals may deplete your investments, you may want to look for ways to reduce your living expenses or go back to work at least part-time.

December 12, 2008

The Habit of Saving Money

Habits are all about the principle of human inertia: we tend to keep doing what we've always done and shy away from doing something new. That principle may work against you at first. If you're not used to saving money, it can be hard to get started. But once you gain some inertia in your new saving habits, it'll be relatively easy to keep it up.

We all need to save money to meet our financial goals. If you haven't started saving or aren't saving enough, here are some tips:

1. Take full advantage of payroll saving plans. Payroll deduction is, without doubt, one of the greatest financial innovations. With just a few strokes of a pen on an authorization form, you hook yourself up to a savings program that works for you without any more effort. It doesn't matter what type of plan it is or how much you put in. Just get started, and you have a new habit.

2. Aim to max out on company matches. When a company offers you a matching contribution, it's like they're saying, "Here's some free money. Want it?" What sane argument can anyone make to turn it down? The only conceivable one is that you need all the money you make to pay bills.

3. Treat saving like a bill. The old adage for saving is, "Pay yourself first." It makes perfect sense, and the trick is to treat saving like any other bill. Name an amount and a date to pay it, and make the payment when it comes due. Instead of driving to the bank, you can mail your deposit in, or better yet, transfer the money online or over the phone.

4. Set up automatic checking debits. Many financial institutions offer automatic withdrawals from your checking account into your savings account, money market, or other investment account. Known as Automated Clearing House (ACH) debits, these automatic withdrawals are nearly as good as payroll deductions to make saving easy.

5. Set annual goals for account balances. You can never reach a goal if you don't have one. Specific annual targets for your account balances become incentives to save, and by dividing the difference between your current balance and your target, you can easily derive the periodic amount you need to contribute.

6. Devote your raises to saving. When you get a raise, don't forget to increase your savings. If you can afford to, bank the entire raise. If not, at a minimum increase your savings proportionally.

7. Save your loose change. Keep a savings jar, and at the end of the week put your loose change in it. This can mean more than coins. It can be bills below any denomination you choose, like anything less than a 10- or 20-dollar bill. At the end of the month, take it to the bank.

Saving is all about discipline -- denying yourself immediate gratification in favor of securing your future. For some people, this is instinctively difficult, but at some level it's a challenge for everyone. Following the seven steps above can take some of the pain out of creating a new habit or adjusting an existing one to help you pursue your goals.

December 10, 2008

How Home Equity Loans Have Changed

When home prices were increasing, home-equity loans were a convenient way to finance numerous types of expenditures. While the loan is secured by the home's equity, the proceeds can be used for anything, including expenditures that have nothing to do with the home. In addition, home-equity loans have a significant advantage over other forms of consumer credit -- interest paid on up to $100,000 of home-equity loan proceeds can be deducted on your tax return if you itemize deductions. Home-equity loans typically offer competitive interest rates, usually no more than the prime rate or 1% or 2% over prime. Competitive interest rates combined with tax deductibility can add up to very attractive after-tax rates.

With all those advantages, it's no wonder home-equity debt became popular with homeowners. Until recently, lenders were often willing to offer home-equity loans on up to 100% of your home's value, with a simple application process and a quick check of home prices in your area.

But with declining home values and increasing numbers of foreclosures, lenders are not as anxious to approve home-equity loans. While the loan is secured by the home, it is a second lien that is subordinate to the mortgage. Thus, following a sale, the home-equity loan won't be paid until the mortgage is paid in full.

Many homeowners are being notified by lenders that their home-equity line of credit is reduced or frozen. Most contracts contain a provision allowing the lender to reduce or suspend the line if home values fall significantly or the homeowner's ability to repay the loan decreases. Signs to the lender of a decreased ability to repay include a poor credit rating, a small down payment with no private mortgage insurance, or late payments noted on your credit report. If you receive such a notice but still need the line, call and discuss the situation with your lender.

If you are trying to obtain a home-equity loan, be aware of possible changes:

• The loan-to-value ratio will probably be lower. In the past, it was not uncommon for a mortgage and home-equity loan to total 100% or more of the home's market value. Nowadays, anything over 90% is rare, and that percentage may be much lower in markets with declining home values. Some areas have limits as low as 65% of the home's value.

• Your credit score is more important. In the past, it was fairly easy to obtain a home-equity loan. Now, lenders are more concerned about your credit rating. If your credit score is less than 680, it will be difficult to find a lender willing to approve the loan. The higher your score, the more options available.

• You'll need a full appraisal of your home. In the past, a simple review of home values in your area was often enough for a home-equity loan. Now, you'll probably need a full appraisal, including a walk-through of your home.

December 9, 2008

Unemployment at 6.7% and Rising

With unemployment in the US already at 6.7% in the United States, Dow Chemical (NYSE: DOW) has released a statement saying they are going to cut 5,000 full-time jobs and send 6,000 contractors packing. Merry Christmas.

As part of a program to reduce costs, Dow is permanently closing 20 of its plants and temporarily closing another 180. As CEO Andrew Liveris noted, "The current world economy has deteriorated sharply and we must adjust ourselves to the severity of this downturn." Dow hopes to cut costs by $700 million per year.

As we reported last week, DuPont Chemical is also putting 2500 jobs on the chopping block, and now 3M (NYSE: MMM) is joining the other two chemical producers by sending 1800 more to the unemployment lines as we head into the holidays. In total, roughly two million jobs have been lost during 2008. It seems unlikely that the pace will slow in early 2009, but perhaps by the end of the year we might see some stability in the jobs market. Although any such predictions remain largely speculative at this point, one thing we do know is that the incoming administration is planning on massive aid packages for the states to use in putting people to work rebuilding America's infrastructure. That means highways, bridges and the like will be jam-packed with construction crews this summer if the stimulus is passed.

We also know that many individuals may take the loss of a job as an opportunity to start their own businesses. While some of these businesses will fail, others will succeed and grow, adding workers as they do. In a year or two as these businesses get off the ground the economy should be in full recovery mode and making up for lost ground. This rising tide will inevitably carry some of these entrepreneurs to great heights.

Meanwhile, laid-off workers in Chicago have decided to take matters into their own hands. Indeed they have taken the entire factory into their own hands, staging a sit-in to protest being fired with only 3 days notice and without what they claim is legally required severance and vacation pay. While the factory only employed about 250 workers before shutting down, it has become a symbol of the recession. Even President-Elect Obama has commented on the situation. The New York Times quotes Mr. Obama as supporting the worker's actions, saying "I think they're absolutely right and understand that what's happening to them is reflective of what's happening across this economy."

The privately held company, Republic Windows and Doors, has been hard hit by the construction slowdown. Prospects for at least the next six months left them little hope of a near-term recovery with mounting debt and creditors knocking at their doors. While, they could have, perhaps, handled the closing better, there was really no alternative to closing the business one way or another. The New York Times also reported that company owners would meet with the occupying workers as early as today to try to reach a settlement. I expect there to be plenty of shouting, watch the television news tonight for the most inflammatory of the sound bites.

December 8, 2008

Currency Fluctuations and Foreign Investments

An international investment's return is based on two factors -- the investment's return in its local currency plus currency fluctuations. For example, suppose you purchase a British stock whose price increases 10% in one year in terms of British pounds. If, during that same year, the British pound increased in value by 5% compared to the U.S. dollar, your total return would be 15% -- 10% from the investment's return and 5% from currency fluctuations. However, if the British pound decreased by 5%, your total return would be 5%.

When the U.S. dollar declines in value compared to the other currency, your investment increases in value since more dollars are required to purchase the investment. An increase in the U.S. dollar compared to the other currency means your investment decreases in value. Over the past couple of years, the falling U.S. dollar has caused increased returns for international investments. One study indicates that for the 2 1/2 years ended May 31, 2008, two-thirds of the gains in the EAFE index were a result of the dollar's decline against currencies in that index (Source: On Wall Street, August 2008).

Most countries use a system of managed floating exchange rates. Supply and demand factors set the exchange rate most of the time, as international banks, investors, tourists, consumers, and multinational companies buy and sell foreign currencies and goods. Governments typically only intervene to prevent massive fluctuations in exchange rates.

Demand for a particular currency is determined by many factors, including a country's inflation rate, interest rates, political and economic outlook, monetary policies, and speculation. The U.S. dollar does not move uniformly against all currencies -- it can be rising against one currency while it is declining against another one.

In general, a rising dollar makes it less expensive for Americans to travel abroad, to import foreign goods, and to purchase foreign investments. However, U.S. companies may suffer since cheaper imported goods hurt sales of domestic products. When the dollar is declining, it becomes more expensive for Americans to travel abroad and to import foreign goods, but U.S. goods become more competitive in international markets.

When looking at international investments, consider these tips about currency fluctuations:

• Foreign bonds are subject to more currency risk than foreign equities.

• Currency fluctuations tend to be more moderate in parts of the world where political and economic factors are stable and the local currency is strong. Avoid areas where inflation rates are extremely high.

• Diversifying your investments by country and region can help reduce the overall effects of currency risk.

December 5, 2008

Four Things to Look for in a Small Business Employer

When you are looking for a job, you might naturally lean toward larger companies because they are usually associated with financial stability and better business. However, a smaller employer can offer some advantages that larger employers do not. Here are four things that might suggest a small business is the right employer for you.

1. Niche Market. If you are looking to join a niche market (such as a local karaoke business), your opportunities for employment may be limited. The small business that offers you a job might just be the perfect opportunity to enter this market and get some experience.

2. Flexibility. Some small businesses are well-known for giving employees more control over their own work. If you have been referred to this company by one of its employees, you can meet personally with the owner or manager to see what kind of job flexibility may be offered that will suit your needs. Referrals from happy employees of a smaller business are worth your consideration before eliminating the small business from your job search.

3. Compensation. Although the small business may not be in a financial position to offer you the highest starting salary, working personally for one business owner may offer you more financial rewards over the long-term. If the business owner's financial success depends on your work performance, you may be in a better position to earn more over a shorter time period. Larger companies typically offer periodic raises. Many companies still do not offer pay for performance.

4. Growth. Working for a small business might teach you two valuable things. The skills you acquire on this job might equip you to become a future partner in the business. Another possible outcome is that you will gain the knowledge to open a similar business in another market. Running a small business teaches you a type of resourcefulness that you may not find in a larger organization.

Deciding to work for a small business is a risky decision. However, small businesses offer unique opportunities that may not exist in larger companies. Consider all relevant factors before eliminating small businesses from your job search.

December 4, 2008

The Recession, Commodities and the Automakers

In a major recession, production slows. That means that factories are making fewer cars, fewer computers, fewer factory machines, and fewer of just about everything else as well. With less production, the need for raw materials drops as well. This is the reason why we see things like falling oil prices, falling steel prices, and so on. Unfortunately, this means a second wave of recessionary pressures as the producers of those raw materials feel the pinch and begin scaling back their operations to keep pace with the shrinking demand.

This week we see several visible examples. The first is U.S. Steel (NYSE: X), who announced on Wednesday that it plans to close three US plants and send as many as 3500 workers to the unemployment lines. The Pittsburg Business Times reports that the factories to be shut down are Keetac in Keewatin, Minn., Great Lakes Works near Detroit, and Granite City Works near St. Louis. These shut downs are billed as temporary and the workers are being laid off, but may return to work if demand picks up and the factories are restarted. There is, however, no current schedule for when that may happen. An outside observer would bet that these shut downs would last for at least all of 2009, but that will depend greatly on the changing economic conditions going forward.

The second indication of the raw materials slump is from the copper mining industry. Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) after already suspending its share buyback plan, has decided to cut output and eliminate its $2/ year dividend. Of course this news did not help the share price which fell sharply on Wednesday morning after the news. The falling prices of copper and molybdenum mean that Freeport cannot afford to continue working some of its higher cost mining operations and still turn a profit. Consequently these operations will be shuttered until metals prices revive. With far flung operations all around the world, Freeport did not indicate its press release how many jobs would be cut, or where they would be lost. Freeport also mentioned that they are reducing their purchasing as well in an effort to cut costs. The slowdown keeps rolling along like so many dominos stacked in a line.

Imagine now that one or more of the big three automakers were to declare bankruptcy and start closing all or most of its factories. The demand for steel and metals would drop even further, hurting not just the employees of the car factories, but even more employees of companies like U.S. Steel. In the case of the car companies, the trickle down effect is quite large since Detroit buys all kinds of materials and parts from hundreds if not thousands of US and global suppliers. Every one of those suppliers would feel the blow like a debilitating body punch, knocking the wind out of their operations. The cascading effect of factory closings and laid off workers would be immense and would continue to feed the recession both at home and abroad.

As Americans, we should care about what happens abroad, because America, though we are a net importer, does still export a substantial amount of goods and services. Many American companies also have foreign operations whose profit is funneled right back into the United States. Without these export markets to buy American goods, the American economy takes another crippling shot.

Right now, the economy needs all the help it can get, that means preserving jobs through the next year so that more people are still out their buying goods. One way to preserve a million or more jobs that might otherwise be in jeopardy is to help the automakers through this rough patch. Certainly some of their troubles are their own fault and are the result of poor business planning, but at this point that's not as important as keeping Americans working. Let's give them the Federal loans for which they are begging, this time, but only because we can't afford another million or more workers thrown out the door of closing factories right now. Let's include with those loans equity positions for the government so the taxpayer eventually gets their money back -hopefully, with a profit, and let's include some real accountability and control over how the loans are used. We don't want to be in the bail out game at all, but the economy is in crisis. During a crisis, it is necessary to take unpalatable steps to get through to the other side. In a healthy economy, we could tell the automakers that they made their own mess and it is up to them to fix it or declare bankruptcy, but we don't have a healthy economy, and as a country we can't take the additional hit right now.

December 2, 2008

Yard Sale Finds: 97% Stake in Midway Games

Although it is no consolation for those of ordinary incomes, the recession is hitting even some of the country's richest men. Sumner Redstone is holding a yard sale of sorts. According to the Wall Street Journal, he has sold his 97% share of the videogame company, Midway Games (NYSE: MWY). While only 3% of the company trades on the market outside of his control, the current share price was $0.38 each as of Friday. That would put the value of Redstone's portion at well over $30 million dollars, but as with any yard sale, no one really expects to pay full price.

Redstone's entire stake in Midway Games which he owned through his holding company, National Amusements, was sold to Mark Thomas, an individual investor. The discount price? Not $30 million, not $10 million, not $1 million, not even half a million. Thomas purchased Midway Games for a mere $100,000. Now that's a yard sale find. Of course, to be fair, he did also agree to assume $70 million in senior secured and unsecured debt along with the company. On Monday, Midway also announced that it had been notified by the NYSE that it no longer meets the criteria for listing on the exchange. Normally, the NYSE notice means that the company has a grace period to try to reestablish its financial standing to qualifying levels, so Midway will remain on the NYSE for some time at least.

Media giant Sumner Redstone is reportedly trying to work out a deal with the banks to keep National Amusements afloat. The company has accumulated as much as $1.6 billion in debt with Reuters reporting that fully half of that figure must be paid by the end of the year. Although the $100,000 he received for Midway doesn't sound like much compared to that debt figure, National Amusements will be able to take an $800 million tax deduction based on its original purchase price and investments made in the company over the years. That will certainly help.

Once a leading video game developer, Midway has failed find any top sellers in recent years. In its heyday, Midway was responsible for such all time classics as Mortal Combat, Galaga, Tron, Joust, Gauntlet, NBA Jam, and NFL Blitz among many other recognizable titles. Midway games were an arcade staple in the eighties.

Despite the $1.6 billion in debt, we expect that poor old Sumner Redstone will end up OK since he has a few other items that he can add to his yard sale; items like the slot machine company WMS Industries (NYSE: WMS) which has a current market capitalization of over $1.1 billion. He also owns a controlling stake in those little media companies, CBS (NYSE: CBS) and Viacom (NYSE: VIA-B).

December 1, 2008

Handling Credit Collection Agencies

When you start to get behind on your bills, you may begin to receive calls from one or more collection agencies, or companies contracted by consumer creditors to collect money on delinquent accounts. When receiving a call from a collection agency, it helps to know how to handle the pushy personality on the line.

Remember, there is power in knowledge. You should understand what is in the power of the collection agency to do to collect on your debt. It is acceptable for them to contact you by phone and regular mail. However, be wary of tactics that might be used by unscrupulous collection agencies. The actions of a collection agency fall under the jurisdiction of the Fair Debt Collection Practices Act (FDCPA). When you suspect that you have been handled illegally by a collection agency, you may have legal recourse under this legislation.

Here are some tips on what a creditor is obligated to tell you. The agency must notify you of your debt obligation in writing within five days of calling you about that bill. The letter should include: how much you owe, who you owe the bill to, the explanation that you have 30 days to argue this debt, if you argue the collector must send you proof regarding the validity of the debt, and the statement that you have 30 days to request the identity of the initial creditor on the account. When you keep these things in mind, it is easier to deal with credit reporting agencies.

In your communication, do not feel obligated to give out private information or commit to payment arrangements that you cannot afford. If you want to make payment arrangements with the creditor, then you must make that decision. You do have the right to not be harassed by the collection agency. It takes a strong person to deal with pushy agents. If you can be firm, then you can avoid dealing with them. You can also choose to only communicate with them in writing because you might find it less stressful than engaging in verbal battles over the phone.

Just because you have bad debt doesn't mean that you do not have legal rights. As a consumer, you are protected by the FDCPA. Get to know more about your rights today!


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