Friday, December 31, 2010

There's Gambling at Rick's? I'm Shocked, Shocked!

Let me end an all too serious year on a lighter note. This is just one of those stories that is way too good to pass up. In “Authorities Crack Down on Flea Market Fakes” the Associated Press reports in shocked tones that counterfeit brand name goods are being sold in flea markets and swap meets, as well as by the traditional street vendors in major cities. I am reminded of the scene in the movie Casablanca where the thoroughly corrupt French police chief, Captain Renault finds an excuse to close down Rick’s American CafĂ©. He announces, “I’m shocked, shocked to find that gambling is going on in here!” Even as he is handed his share of the night’s take. Gee, you mean Rolex and Gucci do not extend franchises to New Orleans flea market dealers? I’m shocked, shocked, I tell you.

"If the price is too good, you have to think about it," said Lt. Mike McDonnell with the New Jersey State Police cargo theft unit. "If you see it at a flea market and it's half the price of normal, you have to think there's something wrong." Say it ain’t so. You mean that expensive watch I was once offered by an apparent drug addict on the streets of San Diego could have been a fake or stolen property?

The charges here are the possession of counterfeit trademark items. In one single raid, the police confiscated goods from flea market vendors “that included fake trademarks for Nike, Polo Ralph Lauren, Oakley, Ray-Ban, Coach, Louis Vuitton, Chanel, Gucci, Dolce & Gabbana, and UGG boots.” Did any of their customers seriously believe they were getting the same products sold in the best shops on Rodeo Drive, or were they just trying to make a low cost imitation of a fashion statement normally limited to the very wealthy?

The article estimates that 80% of such counterfeit goods come from China. I’ll bet most of the remaining 20% comes from our remaining Asian trading partners. The protection of foreign intellectual property is a relatively low priority in a country focused on building itself into a first class superpower. Not surprisingly, there was less of this nonsense when most of what was sold in this country was made in this country. Although, products like foreign manufactured counterfeit prescription drugs are extremely dangerous, most of the counterfeit products are probably made in the same city as the legitimate product. Comments by the readers indicate that at least in some isolated cases, such as that of a football jersey, the copycat goods are of similar quality to the authentic item.

Selling counterfeit trademark items should be a crime. I have a pair of Ray-Ban sunglasses that are over 20 years old. They were made in the good old U.S.A by Bausch and Lomb. They have proven themselves to be of the highest quality. That trademark means something and is worth something. If I owned the Italian company that bought the trademark and today manufactures Ray-Ban sunglasses, I would be quick to prosecute counterfeiters. The real problem is finding a way to return manufacturing jobs to this country. Then maybe more people would have enough money to buy an occasional luxury item even if it was what the article describes, “as the cheaper imitation versions found at major retailers, like Wal-Mart or Target,” that follow Consumer Safety Product Commission guidelines.

From the Movie Casablanca:

Rick: How can you close me up? On what grounds?
Captain Renault: I’m shocked, shocked to find that gambling is going on in here!
(a croupier hands Renault a pile of money)
Croupier: Your winnings, sir.
Captain Renault: (sotto voice) Oh, thank you very much.
Captain Renault: (aloud) Everybody out at once!

Saturday, December 18, 2010

From the Pen of A Grumpy Old Man

“The problem is that regulation is like medicine. If I give you the wrong medicine, I will make you sick. If I give you the right medicine, I will improve your health.”
"Black Swan" author Nassim Taleb

In a recent column by Robert Samuelson entitled “Our Allergy to Risk,” the author laments the new American aversion to risk. The major banks are unwilling to lend money to all but the most credit worthy customers, the ones who do not need any money. Individual Americans are reducing their household debt for the first time in a generation. American corporations do not want to borrow any money. Like the American family, they are paying down their debts, buying back stock, and hoarding cash.

Guess what? They finally get it. Excessive debt caused our problems. That is why U-6 unemployment is running around 17%. A record 42,000,000 Americans are receiving Food Stamps. In places like Spain it is worse. Their real estate bubble governmental regulations, expenditures, and borrowing have led to a situation where virtually no jobs are available for the generation that is just now graduating from school.

Excessive debt effectively killed some of the largest banks in the world including Bank of America and Citibank. They are now considered government owned “zombie banks” by many economic authors. Giant financial institutions like AIG and Bear Stearns suffered similar fates. General Motors, once the largest most profitable car company in the world is now the property of the American taxpayer.

Over 25 million Americans are unemployed or are working less than 40 hours a week. Their mortgages and credit cards are going unpaid. Many of them can not sell their house because they owe more than the house is worth. Easy credit to unqualified customers drove the price of residential real estate to unsustainable levels. Now there is hell to pay. As American families are heading for bankruptcy in record numbers, companies (particularly small companies) can not or will not hire new employees. There is simply not enough demand to justify the risk of new hires. Samuelson observes, “Americans are not merely reducing debts. They're erecting protections against unpredicted adversities. For a record 23rd straight month, more than half of U.S. households expect no income gains in the next year.” I know this is true in my case, President Obama announced no raises for Government employees and I am one of the lucky Americans blessed with a good job. Quoting the author of the University of Michigan Consumer Survey, Samuelson goes on to observe, “For many households, the recession's "primary lesson," notes survey director Richard Curtin, "was that the only sure source of financial security was their own savings.”

It’s about time. Nassim Taleb observes that the governments of Europe are beginning to get the message. "I'm not worried about Europe. I'm worried about here more. Europe is a patient who has been diagnosed with cancer and starting chemotherapy. That is the worst moment. Over here we have had a much larger tumor and we have not been diagnosed. When you are pumping more and more painkillers [qe2s], you stay in the same place and there are harmful side effects. Here, we are not yet at a consciousness. The problem we had was not a recession. It was simply a problem of too much debt."

How all this will work out remains to be seen.

Sunday, December 12, 2010

Debit Cards 2010

In 2009, for the first time, the volume of purchases made by debit cards exceeded that of purchases made by credit cards. Today, only 78% of consumers carry a credit card, while 80% have a debit card. Dave Ramsey should be happy. He does not believe in the use of credit cards. He considers the temptation to run up a balance too great to risk using a credit card; sort of like giving a two year old a loaded hand gun. There are two reasons for this change in American behavior. The first is the credit card reform act that took effect earlier this year. 15 Million Americans with questionable credit scores lost their credit cards as a result of this act. The second is a major change in consumer attitudes. After a 20 year credit binge, Americans have awakened with a nasty debt hangover. In the last two years the total debt carried on credit cards is dropping, “The lowest percentage of shoppers in the 27-year-history of a national survey said they used credit cards over the Thanksgiving weekend, while the use of general credit cards like Visa and MasterCard fell 11 percent in the third quarter from a year earlier, according to the credit bureau TransUnion.” (New York Times). America is moving from credit to cash or debit cards. However, there are risks associated with the use of debit cards. I believe these risks are so serious that I would rather use a credit card. If the balance on a credit card is paid off every month without exception, it is a better tool than a debit card. If it is misused, it is truly a significant danger to your financial wellbeing.

In spite of what the banks would have you believe, credit cards offer more fraud and theft protection than debit cards. The latest numbers (2008) indicate losses from debit cards totaled $788 Million. Even if debit and credit cards are issued by the same bank, they are covered by different laws. Credit cards are covered by the Fair Credit Billing Act. This limits the card holder’s liability to $50.00 period the end. If the theft is reported before the card is used, the consumer pays nothing-nada. The same protection covers the illegal use of the credit card number by means of phone or Internet purchases.

Debit cards are covered by the Electronic Fund Transfer Act. If a card holder reports the loss of a card within two days, liability is limited to $50. After two days, the liability jumps to $500. A card holder who fails to report the loss within 60 days could be responsible for the entire amount. The EFTA also allows the bank to freeze your losses for up to 10 days while they conduct their investigation. Not having access to your money for 10 days could be a real problem if you needed to pay your rent or your car payment in that time frame.

Banks advertize zero liability debit cards, assuring customers that 100% of stolen funds will be restored, usually within 24 hours. However, PIN transactions (those transactions that do not require a signature) are not covered by zero liability policies, but are subject to the individual policies of the particular institution that issued the card. This would include fraudulent ATM withdrawals. Debit card holders can also be held responsible for losses due to “reckless behavior.” The definition of reckless behavior is pretty much left up to the bank. It can include card holders who report two or more unauthorized transactions in any 12 month period. If it is discovered that the cardholder wrote down his PIN or shared it with someone else, this can be considered reckless behavior.

In short, consider a debit card cash. If you are carrying a checking account balance of $5,000 that is how much cash you have in your wallet. Check that balance every day. Keep track of all your purchases and record them, again on a daily basis.

There are other dangers associated with debit cards. Last year I heard a discussion of debit card overdraft protection. Someone I have known for many years currently has a daughter in college. He was attempting to straighten out her checking account. It seems she has a debit card that she uses constantly for everything. She frequently forgets to enter these debits into her check register, spends more money than she has, and incurs overdraft protection fees. These fees typically run $30.00 per charge. In this particular case, the girl ran up over $150.00 in fees.

“If you overdraw your account with the typical fee and you pay it back in two weeks, you're paying over 500% interest," said consumer advocate Jeane Anne Fox. Tony Soprano would be ashamed to charge such interest rates but banks think it just fine. They generate $38,000,000,000 a year in pure profit by providing their customers with such a wonderful service.

Another person participating in this conversation told a story from his college days. Of course he didn’t have much money and like most of his generation he was quick to use a debit card instead of cash for small everyday purchases, like coffee, lunch, and miscellaneous school supplies. Then, every evening, he would check his checking account balance on line. On one particular day, he incurred 7 overdraft protection fees totaling $210! He called the bank and threw a screaming fit. He demanded they remove overdraft protection from his account and withdraw the fees. The bank withdrew the fees but encouraged him to keep the overdraft protection, telling him that it would protect him from the embarrassment of attempting to pay for something when his account was empty. This individual was having none of it and informed the bank he could tolerate a lot of embarrassment for $210.

It gets worse. If a series of checks or fees will throw your account into overdraft protection, the bank will process the largest charges first so they can hit you with more fees. If you use a debit card to rent a car or a hotel room, the vendor will put a hold on your account that is significantly larger than the expected charges. Sometimes the vendor will then forget to inform you of this little fact. Let’s say a total car rental bill is expected to be in the neighborhood of $135. The car rental company might put a $500 hold on your account as a form of self protection. If you don’t know this, you could easily rack up a lot of fees, thinking you had access to that $500 when the bank considers it already spent when calculating such fees.

Whether you choose to use a debit card and avoid the risk of reckless credit purchases or you choose to use a credit card, understanding the dangers associated with, fees and usurious interest rates;

Please, let’s be careful out there.

Sunday, December 5, 2010

Where are You on the Net Worth Map?

Danko and Stanley, authors of The Millionaire Next Door, have proposed a simple formula to calculate a reasonable value for net worth at a particular age with a given income. This formula produces bizarre results for people in their twenties. However for ages over forty, the results are pretty realistic when compared with actual averages.

Net worth = Age X Pretax Income ÷ 10


A couple about 50 years old earning a combined family income of $65,000 a year should have a net worth in the neighborhood of $325,000. If they have been paying on a mortgage for over 20 years and have been contributing to their 401K, this is fairly reasonable as an average number.

If you are near this target, you are considered by the authors as an average accumulator of wealth.

If your net worth is less than half your target, you are viewed as an under-accumulator of wealth.

If you have more than double this target, you are considered a prodigious accumulator of wealth and I tip my hat to you, sir.

The Millionaire Next Door is on my short list of financial "must read" books.

Saturday, December 4, 2010

If you don't know where you are, you're lost!

Once upon a time my wife became lost while driving home at night. She called me on her cell phone, demanding that I tell her how to get home. The first question I asked was, “Where are you?”

Her answer, “I don’t know. I’m lost.” I asked her to find a street sign. She was in an apartment parking lot and couldn’t see any street signs. I asked if there was anyone around. She saw a man parking his car. When she asked him where she was, we discovered that she was only one block away from the road home. A few minutes later she was safely on her way home in familiar territory.

Determining your present location is the first step in planning any journey. Take a minute to calculate your net worth. Add the value of all your assets. Subtract all your debts and consider the results. If your net worth is a negative number, don’t despair.

Consider this journey through this vale of tears we call life.

Fred graduates from college with $500 in his checking account, $20,000 in college debt, a car given to him by his parents valued at $4,000, and a $3,000 car stereo. I would ignore the car and the stereo equipment and calculate his net worth at -$19,500.

Time passes, now Fred is married. Fred and Ethyl have two children a mortgage, a late model minivan, and a beater Fred drives to work. They still owe $140,000 on the mortgage. They have $15,000 in principal payments and the initial down payment on the house. The wife’s minivan is worth about $16,000. The car Fred drives to work might be worth $1,000 on a good day. They have about $5,000 in the bank but they are also carrying about $5,000 in credit card debt. Fred also has about $10,000 in his 401K.

-$140,000 + $15,000 + $5,000 - $5,000 + $10,000 = -$135,000 net worth ignoring the cars

Fred and his wife are serious people. They do a good job raising their kids, paying off their debts, and saving for retirement. At age 55 they have paid off the mortgage (finally after 30 years!). They paid cash for their two current cars that are worth a total of about $25,000. Fred has about $500,000 in his 401K and another $50,000 in savings. He pays off his credit cards every month. The house is currently worth about $400,000.

$500,000 + $400,000 +$50,000 = $950,000 (Good grief! Fred is almost a millionaire.)

How did that happen? Of course the answer is one step at a time. I am afraid the increase in property value in this example might be a thing of the past, Fred should have more than $50,000 in savings by age 55, and he would be lucky to put away that much for retirement with two kids, but you get the idea.

On the first of every month, I do a quick calculation of my net worth. This might take 15 minutes. I then compare it to the total from the previous month. If it drops, I make certain I understand why. Each year, on New Year’s Day, I compare the old number with the new.

Just make certain you are heading in the right direction. Eventually, you will get where you want to go.