Calton Homes, Again September 24, 1998February 6, 2017 You know I rarely write about specific stocks, if only because I’m not so great at picking them. But I did fall into the trap not long ago of telling you about Calton Homes and then to my amazement see some good news. I think it’s worth a follow-up, because of the curious way it is unfolding. To refresh your memory (and fully disclose my interest): I bought a little of this dog at 5, more at 3, and lots more at three-eighths. It is an American-Stock-Exchange-listed homebuilder that did pretty well under its founder, a guy named Calderone, who then I guess figured he should take some time to enjoy his success and largely sold out. The new guys didn’t do nearly so well, witness the stock price, so when we entered this story (or at least when you did), Calderone had reacquired control to try to rescue his investment (and maybe us shareholders). Of the 29 million shares outstanding, he and his family own 11 million. And when I wrote about it here this summer, the stock was trading between 50 cents and five-eighths of a dollar. Sure, it could go to zero, I acknowledged (and still do), but here’s a guy with 11 million reasons not to let it – and who apparently has demonstrated the ability to build a decent house and perhaps even a decent company. (Not that I’d ever been to one of the Calton-built homes or met or spoken with Calderone – I still haven’t.) Anyway, less than a month later (after years of waiting on my part), Centex announces on September 2 that it will acquire CN’s principal (only, I think) asset, its homebuilding subsidiary, in return for assuming all CN debt and $50 million in cash, which works out to a little better than $1.70 a share. So the stock jumped to $1 but last I looked was trading a few pennies below $1. Huh? Well, there was the fear the deal might not go through (which is still a fear, though it seems to be headed for completion). And there was the issue of taxes (I really should have checked this out, but even if the subsidiary had a zero basis and the entire purchase price were a taxable-to-CN capital gain, they’d still be left with a pretty penny). And there was the issue of what CN would do with all that cash. Because, you see, the public company was not being bought – that would remain and I would still own my little piece of it – only the public company’s homebuilding subsidiary. What if Calderone took that $50 million and managed to turn it into $3 million? That is certainly a possibility. But, again, he has 11 million reasons not to do something dumb with it. So my sense has been that he’s at least as likely to make it grow as to make it shrink. And then there’s also the smallish but real value of being a public company in good standing with the various stock exchanges and regulatory authorities. Now, just a few days ago, CN filed its proxy statement explaining its plan for the future. If I read it right (and you should absolutely do more research on this than I have if you are considering investing any of your hard-earned dollars in this speculation), the plan is, first off, to repurchase up to 10 million shares in the open market. If this doesn’t include any of Calderone’s own, then that would be about half the remainder. So if the deal goes through, it seems unlikely the stock would drop much, given this repurchase plan. And think about it. If you could buy $1.70 coins for, say, $1 each, wouldn’t you? Between all the people just eager to get out of CN after all this time, or anxious to take their tax loss, maybe a lot would sell an uncertain $1.70 for $1. (Remember, that $1.70 may be diminished by taxes CN will owe; I haven’t checked.) So the more shares CN can buy for less than their worth, the more the remaining shares are worth to Calderone and those of us who don’t sell. Let’s say CN really gets $1.70 a share after tax (I’m not sure about the taxes) and that for $10 million it can buy up 10 million shares. Now there are 19 million shares outstanding, not 29 million, and the shareholders have a $40 million pile of cash, not $50 million. Well guess what: that’s $2.10 a share. The proxy says the company will explore other investment alternatives, or it may just wrap everything up after 18 months and distribute the cash. So am I suggesting you buy shares in this? No. That would be really dumb, because if it works out, you’ll forget who suggested it (you’re human) and if it all turns to disaster, you’ll remember exactly who suggested it. But is this something perhaps to research and consider? Well, that could be a useful exercise. Tomorrow: Let’s Buy Mars
Save for the House or Prepay the Education Loans? September 23, 1998February 6, 2017 From Eric: “Here’s our situation. My wife and I just finished getting our credit card balance down to $0. I have one year left on a car loan at 7.5%, ten years left on three education loans at 8-9%, and we both do pretty well, so we have about $1,800 per month left over after expenses. We are trying to put money away for a down payment for a house next year (we have about $10,000 put away already). The question is, should we put everything away for the house, start pre-paying some of the loans, or a combination of both?” A.T.: Your answer will likely be better than mine, because you will give it/have given it hours of thought. But here’s the 30-second reaction: Good for you re the credit cards. And good for you re the car … just keep paying the monthly payments and then, with luck, keep driving an old car with no payments. (At which point you may have $2200/month left after expenses.) From a numbers point of view, if you expect the house you buy to appreciate at 3% a year (say), then on a 20% down payment, your investment is appreciating at 15% a year because of the leverage. And to earn 15% is better than the 9% tax free you earn prepaying your education loan. Then again, the house will have lots of extra expenses versus renting, so in figuring whether it will appreciate 3% a year, you should try to subtract from the expected appreciation the extra costs of home ownership. (This is easier said than done, because (a) you can’t know for sure how much extra, if anything, owning will cost versus renting (i.e., when you might need a new boiler); (b) you should adjust your calculations for taxes (on which you will get a break for the mortgage interest and property taxes); (c) you should allow for the possibility rents might rise faster than your home-ownership costs (so that renting might one day seem more expensive than owning); (d) you should not “charge” to this equation any extra happiness you derive from owning the home (charge it to “spending” rather than investing, as no one says you’re not allowed to spend some extra money to have a happier life); and (e)how the heck can you know how much the home will appreciate?) Then again then again, the larger the down payment you save up, the better loan terms you are likely to be able to get. If you can put down 20% or more, you may not have to pay for mortgage insurance — and that can save you a pretty penny, also. Another case for saving extra hard for the house. In short, there is so much guesswork here, you should probably do what you want; i.e., probably save up for the home now (much more fun) and then, as soon as you can thereafter, start earning 9% tax free and risk free by prepaying the education loan. (I like to think that apart from all this, you are also making steady contributions to employer-matched retirement plans, with much or all of that money being steadily added to your holdings of stocks here and abroad.)
Congress’s Extraordinary Hypocrisy September 22, 1998March 25, 2012 “Public disclosure of once-secret industry documents,” reported the Associated Press recently, “has shown that Big Tobacco privately considered tobacco addictive and harmful at least four decades ago, even as it brushed aside claims that it manipulated nicotine in cigarettes to hook smokers.” It is now clearer than ever that those seven tobacco-company CEOs were lying April 14, 1994, when they raised their right hands and swore to Congress and the American people that they did not believe nicotine was addictive. This lie was part of a decades-long attempt to addict millions of people to a product that, in about 400,000 cases a year in the U.S. alone, leads to premature death and, often, terrible suffering. Why is that perjury not worth investigating and punishing? What would be the downside to the nation if those CEOs suffered some consequence? Yet the Republican-led Congress – financed not insignificantly by the same tobacco interests that so hate the Clinton administration – has in four years called for no action whatever in this regard. But have an affair and lie to cover it up, if you are president – that is a matter of such gravity that swift and devastating action must be taken. To be the second president in history to be censured is not enough. Remember, we are talking here about SEX between two consenting adults. This – and lying about it in hopes of getting away with it without dragging everyone through the mud – rises well above the small matter of 400,000 premature deaths a year. Thus it is perfectly appropriate for Congress to deluge the Internet and airwaves with precisely the sort of material they fervently hope our young people will not see. It is perfectly appropriate for Congress to risk destabilizing global economic confidence by plunging the government into paralysis and possibly beginning impeachment hearings for only the second time in the history of the republic. After all, the president had an affair and lied about it! Let me turn the sarcasm off for a moment and acknowledge that the president’s behavior truly was disappointing. He is not perfect. And I understand people legitimately differ on the gravity of his actions (both the sex and the deception). But if you are one who believes he should actually be forced out of office, at least promise me this: that you will scream bloody murder until the tobacco CEOs are called to account. And until the congressmen who have protected them – mostly the same ones so outraged by Clinton – are voted out of office for their incredible hypocrisy. If you don’t think all those congressmen should be kicked out of office (surely condoning willful deception that contributes to widespread death and disease is more serious than an affair), then maybe, upon reflection, you don’t really think the president should be kicked out of office either.
POSH September 21, 1998February 6, 2017 Many of you joined Mark Brady in setting me straight. “Your comments today on Posh being a travel acronym [Port Out, Starboard Home] are a little misplaced. Actually, the acronym was supposed to refer to travel to India from England. There was a long discussion about this on the urban legends newsgroup. The relevant URLs are: www.urbanlegends.com/language/etymology /posh_etymology_of.html where they reference The Browser’s Dictionary by John Ciardi and www.urbanlegends.com/language/etymology /posh_etymology_of_more.html. They also reference the OED, which has six entries, one where Posh is a nickname of a friend and another referencing a Murray Posh. Still, my favorite use of it was in Ian Fleming’s Chitty Chitty, Bang, Bang.” Adds Robin Sahasranam: “The Port Outbound Starboard Home referred to the desirable cabin bookings on journeys between Britain and its Asian and Pacific colonies like India, Malaya, and Australia. These journeys were before the days of air-conditioning. Port-side cabins on outbound journeys from Britain and Starboard-side cabins on inbound journeys to Britain were on the shady side, and thus more desirable. By the way, all etymologists are not in agreement over this origin of the word posh. There are some who have traced the origins of this word to some Indian languages.” And this from Mike Schiffer: “John Ciardi, in his Browser’s Dictionary series, argues that the word derives from the Romany word ‘posh’ meaning ‘half,’ which entered into London thieves’ cant as meaning swag or loot, and hence became ‘rich’ or ‘fancy’ in more general slang, but I don’t have that book in front of me. I highly recommend the Ciardi books both because they’re interesting in themselves and because they’re great for checking derivations like this. (A check at Amazon indicates that they are out of print, but they shouldn’t be hard to find used.) In my experience, just about any derivation based on an acronym from before the twentieth century is suspect, though I’m sure there are exceptions. (‘Cop,’ meaning policeman, doesn’t come from ‘Constable On Patrol’ either, even though the World Book Encyclopedia of my youth told me that it did, and ‘tips’ aren’t originally To Insure Promptness.) On the other hand, there are still some neat discoveries to be made: daisies are called that because they look like the Sun, or the ‘day’s eye,’ for example.”
Fun September 18, 1998February 6, 2017 “A difficult question I’d like your insight on: How might I identify stocks which I have a reasonable chance of holding forever and enjoying roughly a (U.S.) market rate of return? I am primarily interested in holding in taxable accounts.” – Gilman Miller A.T.: Your question is either very simple or very difficult, so let me take the simple way out: Just buy SPY, a synthetic security that trades like a stock and mimics the Standard & Poor’s 500, and you will be assured of getting essentially a market rate return (minus a mere two-tenths of one percent) all your life — and with relatively mild tax consequences. You will, thus, outperform most — very possibly 90% — of all your friends and neighbors. Of course, simply buying SPY is boring. Your friends and neighbors will have more fun. And speaking of fun … Thanks to Brooks Hilliard for turning me on to www.bobsfridge.com/skew.htm. The day I looked, the lead story had Janet Reno very convincingly calling for the arrest of Congress for posting 445 pages of porno on the Internet. It’s a very funny site.
How Long IS the Long-Term? September 17, 1998February 6, 2017 “In your recent article, you stated that if a person may need the money in 5 years do not consider putting in the stock market. Why do you feel that way? Five years seems to be a nice length of time for your stocks to grow as opposed to leaving it in a bank and getting 3-5% interest a year.” – JPNappy A.T.: Well, say you have $10,000 you may NEED for something in the next five years and that when you DO need it, it’s only worth $6,300, because stocks are down. That would not only leave you short of cash but force you to sell at what might be close to the bottom. Better to have bumbled along in a bank or money market or Treasury Direct and have $11,500 instead. Obviously, five years is arbitrary. If you will literally need the money in five years and one day, that doesn’t make the market a completely safe place for it, any more than at four years and 11 months it’s suddenly dangerous. But the notion that stocks can never go down and stay down for more than a few months — or even a few years — is a very modern one with little regard for reality. To me, for money you really can’t afford to lose, five years would be a sensible minimum — and even then there are no guarantees. One reason “the rich get richer” is that they can afford more risk. They have that first $5 million safely in bonds. <grin> (Hey, I hate “<grin>s” as much as the next guy — what a tragedy it would be if writers had to begin signaling <irony> or <humor> or <tears> with brackets. But I have this morbid fear one of you might actually think I don’t realize how preposterous $5 million IS to most of us — let alone $5 million safely in bonds. <downward-drooping envious pout>)
Early Adopters Wanted for Free Financial Plan September 16, 1998February 6, 2017 An Internet start-up in which I have a small foolhardy investment wants to offer you a free “financial plan.” They assure me it’s not a trick to grab your innermost financial secrets but rather a way to get some early feedback on their service, and to get users in all 51 jurisdictions (D.C.? Guam?). If you’re curious, you can do it by phone — and grill the reps with whatever questions or reservations you might have (888-736-9720) — or else proceed straight to the very-much-a-work-in-progress Web site: www.PaceFinNet.com. There — after you click “Sign In” at the upper left, scroll down to First-Time Member and “register” — you’ll be able to choose one of the following reports, based on the info you provide: College Retirement Insurance Estate Comprehensive Note: To find these, click the TOOLS option and then PERSONAL FINANCIAL REPORTS. The company assures me: “As you might expect, PFN’s privacy and security policies are very strict and require that all information be kept confidential and secure. PFN’s requirement of a personal account name and number provides one level of security. Another level of security is provided through constant monitoring by PFN and IBM to prevent and detect any unauthorized access.” Of course, it’s way too late for me to unload this investment if it’s a turkey, but let me know what YOU think, if you try this. All feedback will be forwarded and appreciated.
Reader Mail — Generators, Coffee, Pennies … September 15, 1998February 6, 2017 RE: BILL BUYS AN ELECTRIC GENERATOR “Does Bill’s ‘idiot-proof’ generator contain an embedded microprocessor? Is it Y2K certified?” – James Keenan “Honda does make great generators. I have a little 700-watt model that is enough to run my computer and a few lights, or, if it’s cold, just a little space heater. It’s been a work horse, and when I worked at home on my computer, it paid for itself in one winter (with frequent power outtages [sic]).” – Seraphim Larsen “Can’t afford it, and don’t have a place to put it, but for the only way to go with emergency power generation check out: www.radius-defense.com/scupp.htm. Unbelievable.” – Jim Cobbs [I did. Talk about the ultimate in disaster protection! Don’t miss the $1,900 food/fuel package, either. Enough food to last your family of four more than a year. If we need that, we in big trouble. I am persuaded that the power outages in 2000, if any, will most likely be relatively few and short-lived. At first, all the power plants are likely to be taken OFF grid, so problems at one don’t cause problems at another. This could make for brownouts or outages in certain localities. But then, as it proves safe to do so, plants could be added back onto the interconnected national system. – A.T.] “Here is the best web site I know for ‘Non-grid’ living [non power grid, that is] — www.realgoods.com. It doesn’t have your generator bike but lots of other cool ‘Solar’ stuff.” – Dave Dierking LOW BILLS, BIG LEGS “My ex-boyfriend runs his whole apartment off of bicycle and solar power. (Their electric bills are about $2 a month!!!) He mounted a bicycle onto a stationary adapter (so he can still use his bike) and pedals about an hour a day to get full power. I don’t know the details on how to do it, but I know it can be done!” – Prefers Anonymity RE: USEFUL WEB SITES “Your list of web sites was pretty good. But here’s one you left out. It links a lot of the news services in the search for stock related news: www.justquotes.com.” – Elliott RE: THE PHYSICS OF COFFEE “I do believe coffee tastes different in a glass than a ceramic cup. However, though it pains me environmentally, I think the best comes in a paper cup.” – Dana Canzano RE: THE PENNY DISH “I have an 8 year old son and 5 year old daughter so the ‘penny dish’ rules are real to me, because I have to be able to rationalize what I’m doing at EVERY moment to them. Our rules are, 1 or 2 pennies is okay, never any more than that because it would seem to [sic] much like taking other people’s money which is WRONG. All rules eventually find their root in the ‘do unto others as you would have them do unto you’ basis.” – Jim Strickland “Need a penny? Take a penny. Need two? Get a job.” – Ray Van Tassle RE: Y2K FEEDBACK “You say you haven’t heard of DeJager? He was one of the first to make a big deal of Y2K. He now spends all his time traveling around giving talks, consulting, etc. on the subject. He also started (and may still run) the web site that is the first place to start with Y2K questions: www.year2000.com. Personally I would rather listen to Ed Yourdon (25 books and 30 years in data processing) whose last book, ‘Time Bomb 2000,’ covers the waterfront; or Ed Yardeni of Deutsche Bank who has a good feel for the economic impact. Both have web sites.” – Jim Cobbs
Roth IRA Conversions September 14, 1998March 25, 2012 Remember all the talk about converting to Roth IRAs? As The Wall Street Journal and others have ably pointed out but it may warrant my repeating in case you missed it the recent market drop has this silver lining: If you do qualify to convert your existing IRA to a Roth IRA (because your 1998 adjusted gross income is likely to be below $100,000), it’s now less taxing to do it. Why? Because the tax is based on the value of the IRA at the time of the conversion. If the value of your IRA has dropped 20% or 30%, so has your tax bill! (Or nearly so.) Hence, conversion may be worth another look. There’s also this nice amendment to the tax law. If you convert thinking your income will be under the $100,000 ceiling and nuts! you get a nice bonus, you are allowed to UNconvert without penalty so long as you do so before your 1998 tax return is due (i.e., April 15). So it’s not the gamble it might have been. For free software aimed at helping you decide whether to convert or not convert, you might check out www.owlsoftware.com.
Face the Nation September 11, 1998March 25, 2012 Goldman Sachs market strategist Abby Cohen and I were on "Face the Nation" last Sunday talking about the stock market collapse she, because she’s one of the most highly regarded analysts on the Street, and I, because Peter Lynch was unwilling to screw up his Labor Day weekend and I have two things to report. The first is that I’m not really as pessimistic as I may have sounded. I did mean, and do believe, that anyone who’s in the market on margin should sell enough to get off margin (and that anyone in the market who runs credit card balances or pays 10% on a car loan is, in effect, in the market on margin, only paying high non-deductible interest). But that’s always true. I did mean, and do believe, that people should not invest money they may NEED in the next five years, possibly even longer but that’s always true. And, finally, I did mean and do believe that anyone in the market should pay special attention to transaction costs and fees easy to overlook when the market is going up 25% a year, but a terrible drag on performance at any time, and painfully so when the market is actually stagnant or going down. And that’s always true as well. (It’s never smart, in my view, for example, to pay a 2% or 3% annual "wrap" fee to have some venerable brokerage firm manage your money it’s insane.) I even did mean and do believe that we probably haven’t seen the bottom yet. But on that point I would have liked to bold face and italicize the caveat: "Needless to say, I don’t have a clue where the market’s headed." Hunches, yes (more often wrong than right, I’d say), but a real clue? Nah. So Abby was a lot more confident not to say she was issuing any guarantees in her expectation of a market back at 9300 by year’s end than I was/am in my hunch that we probably haven’t seen the bottom. And sure enough, with the Labor Day Weekend over, the market opened up 380 points. So maybe we have seen the bottom, though my hunch … well, you know my hunch. But over the long term, one should certainly be excited by and optimistic about our nation’s and our world’s prospects. We have to do a lot of things right to keep from blowing it mainly, we have to resolve our conflicts peacefully, or as nearly so as possible but the power of technological advance holds out the possibility for extraordinary gains in productivity and prosperity. The second thing I wanted to say is that I got a lot of e-mail from friends snickering over Abby Cohen’s presumed unstated interest. Namely, that Goldman Sachs hopes to go public next month, so of course Ms. Cohen is, consciously or subconsciously, touting the market. But interestingly, and to her credit, this may be dead wrong. Ms. Cohen is not a partner at Goldman Sachs; she is an employee (albeit a highly regarded, senior one). Which means that while the partners will, in effect, be "sellers" when Goldman goes public and would not mind seeing a strong market for their offering, Ms. Cohen will in effect be a buyer in that her stock options will, one presumes, be tied in some way to the opening price. The lower, the better. So Abby Cohen may be right about the market or wrong about it, but she’s not bullish just to pump up her Goldman stock she doesn’t own any.