Recovery or Bear Market Rally Top

I've been neglecting this blog of late, but I think an update is in order.

Looking at the Dow chart for the last few months, it looks like there is a full scale recovery in effect. The market seems to be climbing back toward 10k. Or is this really just a bear market rally that is just about to reach its top?

Robert Precter, the technical guru and founder of Elliot Wave International, author of Elliot Wave Principle: 6th Expanded Edition, Key to Stock Market Profits, At the Crest of the Tidal Wave: A Forecast for the Great Bear Market, and Conquer the Crash: You Can Survive and Prosper in a Deflationary Depression (Hardcover w/ Updates for 2009) includes Bonus CD-ROM says it's a bear market rally, and the top is in.

Under the Elliot Wave Theory and socionomic theories Precter uses, the market is driven by predictable social moods, and all the signs are present for for a major deflationary depression. Check out his stuff, he's got a pretty good track record as a forecaster.

Housing Deflation, Current Inflation, and Politics

OK, the rhetoric in public is that the bailout plan is designed to get money circulating again to "stimulate" the economy; the theory that the Keynesians are advancing is that this will pull us out of the recession. On the other hand, the Austrian school and the Chicago school are predicting inflation, even hyper-inflation from the bailout. Since the dry-up of the credit markets is the result of a housing bubble, it should be interesting examine what needs to happen in order for the bailout to loosen up credit again.

Looking at median housing prices over the last 35 years corrected for inflation (red line on chart), we can see that prices were relatively flat in terms of real value from 1975 until about 1997, when prices started to climb dramatically. This is even more interesting when we consider that the Bureau of Labor Statistics changed the way the Consumer Price Index is calculated around 1980 so that it reports inflation about 3% lower than it did before. If inflation was actually 3% more than the chart corrects for, the run-up in prices is even more dramatic.

Looking at the chart, it appears that the "real" cost of a median house went from about $140,000 to about $265,000; almost doubling. This is the "bubble" that burst. If I'm a bank looking at this chart, I'm going to predict that prices will need to fall back to the 1997 levels before I can make a loan secured by a home. Otherwise I'm risking having the value fall and the borrower ending up in a negative equity situation; an open invitation to default. Banks don't do that. Banks that have done it by mistake end up failing. This is what happened in 1930. The values of farm land in the midwest started to fall and wiped out hundreds of small farmers and a large number of banks.

But what happens if we dump a lot of currency in to the money supply? Well, history tells us that this always causes inflation. Amounts as large as the bailout and Obama budget could easily cause hyper-inflation. Will this cause the economy to stop contracting? Maybe. But what it will do is cause the value of the dollar to shrink. So if that median house falls from $265,000 to $140,000 in real dollars, but the dollar is devalued by inflation by 50%, then the current (inflated) value of the house will be $280,000.

So, is it the plan in Washington and among the G20 to fix the current crisis by creating a monsterous inflation rate? I hope not. It will certainly change the political landscape if they do.

Its a bit early for this but....

A friend of my father-in-law works for a company that sells flavors and equipment for Hawaiian Shave Ice. The two of them were talking and Dad thought of Amy and me as potential distributors. I've been working for the last three days on developing a business plan for a single sales location that would service between 150 to 200 customers per day with these yummy frozen confectionaries.

Developing business plans is a wonderful experience. It is amazing what you learn as you ask questions about how to make a business work. For example, in order to do the proforma financials, I had to ask myself what a reasonable customer volume would be. According to Dad's friend, we should expect about 200 customers per day; if we get only 100 were doing something wrong; and if we get 300 we'd be hopping. Using those numbers, I ran projections on costs and revenues. At 100 customers, we'd end up losing about $5000/year. At 200, we'd make about $5000, and at 300 we'd make about $17,000.

So the next question I had to ask was "How do we ensure we get at least 200 customers/day?" Opens up a whole series of questions about marketing and location.

What about the 300 customers per day? Well, that works out to one customer every 2 minutes. Is is possible to serve more customers than that with a single employee in a 5 x 8 portable building?

I will be going back to the drawing board tomorrow and running numbers on a different plan. we'll see how it all works out.

Friday the 13th. In spades.

Amy and I are in the really strange real estate deal. We have leased a home that we own about five miles from here to a couple of investors. They have an option to purchase it, and their intention was to find a tenant buyer and do a lease option until the prepayment penalty expired.

Meanwhile, we are leasing the house we live in from the same investors. The whole idea was to move my family closer to the our community theatre. We tried selling the other house, but with the prepayment penalty, we couldn't find a buyer at a workable price.

The investors took out a second mortgage on their home (the one they live in) to facilitate the deal, and set it up as a line of credit. They used this line of credit to cover the down payment on the house we now live in, to make some repairs and upgrades to our old house, and to carry the mortgage, taxes, and insurance on the other house.

They didn't do their due dilligence on the first set of tenant buyers, and the family that moved in couldn't keep up the payments on the option. To make matters worse, the investors allowed the tenants to finance the option premium. First the tenants reneged on the purchase option, but stayed in the lease. Then they decided to divorce and walked out on the whole enchilada.

House has been vacant since.

Investors are in about $50,000 total so far.

With real-estate values falling, the investors debt to income ratio fell, and the bank stopped their line of credit. It looks like they managed to make the March payment, but we're watching to see if it reverses. (Crossing fingers that it doesn't.) Got and email from one of the investors today, asking if she could lower the asking price to make a sale more attractive. She is hoping for a quick sale to unload it.

Which leaves Amy and me with a dilemma. Both of the investors are friends, and one is a really close friend (though there is another strain on our friendship at the moment). If they can't come up with the cash to carry the vacant house or sell it quickly, we have to choose between carrying it ourselves and defaulting on the lease on the house we live in to save our credit, or letting that other house go into foreclosure and destroying my credit.

To make it more complicated, we like the house we're in and don't want to move back to the old house.

Oh, and since it's been on the market and it's a rental, the lender won't even talk to us about a refi.

Are we having fun yet? Blech.

What we need is an income increase of about $1500 per month so we can carry that house too.

Employee or Self-employed? or just some radom ramblings from Amy

As you know Tad and I have been looking at several different ways to bring in income. I recently took a position with Great American Senior Benefits offering various insurance products to seniors. It is a self-employed position. I was told that the greatest benefit and the hardest thing about the job would be time freedom. I am finding this to be very true. It takes a great deal of self discipline to do the things that are required to actually make money. I can go to work every day and be busy as a beaver and still not make one cent. I have been toying with the idea of getting a "job" where as long as I show up I get a paycheck.

I am most definitely a product of the public school system I have been programmed to be an employee, and trying to do something that doesn't fit that mold is requiring a paradigm shift that is making me very uncomfortable. I was also raised to believe that momma should stay home with the kids and that is difficult to overcome too.

I've been told "you'll never get rich being an employee." Do I want to be rich? Am I willing to do what it takes? or should I go where I will be comfortable?

So here's my plan. I am going to stay where I am for the time being and see if I really have what it takes. (Tad already thinks I do so that's a help)

I do know that I don't want my kids to have to overcome these same obstacles. That's just one of the reasons we homeschool.

I am betting that one of the reasons that so many people fail at having their own businesses is because they have been trained by our wonderful public schools to be worker bees and nothing else.

Evaluating a Network Marketing Opportunity

Last night my wife and I attended a presentation for a multi-level marketing business. I don't have the heartburn many folks have about a multi-level marketing business model that many folks have, but I'm not anxious to get involved with one either. This particular company, called ACN, (if you want to join, contact me directly and I will hook you up with my friend... May as well help her out here if I can) markets telecommunication products like telephone, cellular, Internet, and small aperature satellite TV that it bundles from other vendors. It also offers a "gee whiz" technology product in the form of a video phone. ACN even has Donald Trump as its video spokesperson.

So how does one evaluate the "opportunity" offered by this company?

As anyone who has ever attended a multi-level marketing presentation should have figured out, the presentation is based on selling the lifestyle that comes from doing this business successfully. Using assumed numbers, the presenter will show how building an organization can leverage your time and build a substantial residual income. In the case of the presentation we saw last night, the assumptions were: Average customer's local and long-distance bill of $38/month, an "up to" 10% commission" on 20 customers, and a downline organization of 8 levels with each level being the square of the preceding level (1,2,4,8,16,32,63,128 for a total of 255 people below the "Qualified Team Trainer," each with 20 customers). Using these assumptions, the presenter forecast a monthly income of $11,000.00/month. And, of course, the presenter then infers that this income is perpetual without any further work on your part; you are assumed to go on vacation for the rest of your life, and the business is willed to your heirs, who never have to work a day in their lives.

And, of course, the cost to join the club is kept until the very end. (A sales technique that uses building value by discussing "benefits" before cost). In ACN's case, the initial cost is $499.00, with an annual renewal of $149.00. One of the lures, which is also a significant drawback to network marketing, is that it appears to be a low entry cost business with high earning potential. Unfortunately, this low cost can have negative side effects: people don't consider the initial cost as an investment and over look it while salivating over the benifits of the lifestyle they are being sold; and the low cost of buying the franchise often results in a minimal level of committment, which inevitably results in failure. (Contrast this with the hundreds of thousands or millions of dollars to purchase a fast food or other franchise: these franchise owners do their homework, master the system, and work hard to make their business work using the franchise system. They have to, because they are usually heavily leveraged and can't afford to fail.)

There is a serious bit of information missing from these presentations regarding the amount of work that is necessary to make this business work, and the amount of time necessary to build the business to a point where it will pay the rent. At best, this information is downplayed in all network marketing presentations, and this flaw, in my mind, makes all of these presentations suspect. And I get especially suspicious when someone tries to tell me that network marketing isn't "sales." It most certainly is sales, but in this case it isn't selling ACN's product, but selling other people on the "lifestyle" that allegedly comes from selling ... the "lifestyle." The actual products become an afterthought. (Although there is a legal requirement that there be genuine products and that the parent business's primary focus be on selling products.) You are encouraged to buy the products through "loyalty" to your own business.

Is this business model evil? No, I don't think so, but I'm not jumping at the lure either. There are a lot of people doing it, and its variations, and have been for a very long time. Many have become very successful doing it. So how do you evaluate this kind of business and decide whether or not to get involved?

First, you have to separate the facts from the hype. Yes, everyone uses soap, but not everyone uses premium soap, and not everyone uses enough soap to justify buying the minimum (to borrow a phrase from Amway). Research the market. Is there a solid market for the product you'd be offering, or would you be selling "lifestyle." Do you know enough about this market and product to be credible? Do you have access to enough of this market that you can sell the product? Can you justify purchasing the product for your own use? At the quantities recommended to sustain your own business? Is the product really price competitive? Are there bars to entry that would kill your sales, like customers that need to allow their existing service contracts to expire before doing business with you? Are there market risks that could kill this business (think Betamax vs. VHS; Macintosh vs. IBM PC; or Dot.com bust)

Second, recognize that there will be work involved, whether you are selling the products or the lifestyle. The amount of work you will have to do will depend on how fast you want to build the business and how good you are at selling the product or lifestyle. You should consider that you will only capture a small percentage of your existing "natural market," and you should be prepared to continue on with cold sales. How much of this work are you really willing to do? How much time can you devote to it?

Third, build a pro forma set of financial statements based on realistic estimates of what you think you will do with your business. Ask what costs there will be, such as admission to training events, motivational or training tapes and videos, gas and maintenance costs for your car, costs for the paper goods you will use (order forms, contracts, etc.), initial licensing costs, etc. This represents your investment in the business. Then project realistic estimates of earnings based on how quickly you can build your business. I would recommend building two sets of these pro-forma financials: one that uses the goals your sponsor in the organization wants you to reach (and which you should try try if you do join) and one that is based on only hitting about half of those goals (or less...). Ask the question, "When will I get my initial investment back?" If that date is farther out than you want it to be, do a third set and figure out the amount of effort necessary to recover your investment in a time period of your choosing.

For example, using the $499 initial start-up cost for ACN, and the 10% commission figure, and the $38/month figure, you would have to enroll one new customer per month for 15 months before you will have recovered your original $499 investment. At that rate, after two years of building the business, your income will still be less than $100/month based on your own customer base, and still pretty negligible from down line. At two customers per month, the investment will be recovered in 11 months, and the two year income level still be just over $200/month. You can project earnings from downline, but I would suggest caution in doing so; most of the new "representatives" you enroll will fall away without adding anyone else to your business, and the commission rates (for ACN at least) don't return significant revenue until you start to get several layers deep. Of course there are bonuses, etc., but in evaluating the business, you should examine the minimums and middle of the road in making a decision, then once you've opted in, strive for the maximums.

Once you've done those projections, decided if the return on investment is really enough to justify the cost in both dollars, effort and time. If it is, then go for it, and good luck!

If you do decide to take this path, there are a number of books available on the subject of network or multilevel marketing. Here is a partial list available on Amazon:

• The Ultimate Guide to Network Marketing: 37 Top Network Marketing Income-Earners Share Their Most Preciously Guarded Secrets to Building Extreme Wealth
• Your First Year in Network Marketing: Overcome Your Fears, Experience Success, and Achieve Your Dreams!
• How to Sell Network Marketing Without Fear, Anxiety or Losing Your Friends! (Selling from the Soul. Ancient Wisdoms. Modern Practice)
• The New Professionals: The Rise of Network Marketing As the Next Major Profession
  
  

Of course, if you do join in a network or multi-level marketing business, get involved with their training progrmas and follow their proven systems. These systems are built around the success of those that have blazed the trail ahead of you, and are designed to be duplicatable by almost anyone.

More on the Nvidia Paper Trade

Mara and I have let the paper trade of Nvidia stock run, with a trailing stop that stays $0.50/share above the lowest price. The lowest it reached was $7.31, which put the stop at $7.81/share. On Friday, the stock opened at $7.85, which would have triggered the automatic buy order on the stop and taken us out of our position. Since we bought the stock at $8.50, our net was $0.99/per share or $990 on the trade. Not bad, all things considered.

Nevertheless, Amy and I have decided that we're going to invest in our bookstore and affliliate marketing businesses instead of the stock market. Perhaps we'll come back to stocks when we have more than $7000 available.