Is the US On Sale, With Very Attractive Prices?

Sovereign wealth funds are buying in bulk

Sovereign wealth funds owned by foreign governments apparently see potential in the beaten US real estate and financial sectors. Sovereign wealth funds are buying in bulk investing billions of dollars in banks and buildings.

Only recently the Abu-Dhabi Investment Company (ADIC) acquired the Chrysler building, one of the most famous of Manhattan skyline’s monuments. Located in the heart of Manhattan the Chrysler building is well known for its brimming terrace crown and its classic Art-Deco design.


The Abu-Dhabi Investment Company paid, according to some reports, approximately 800 million dollars for the building to Prudential Real Estate Investors, a subsidiary of the Insurance giant Prudential.

Is the US on sale, with very attractive prices?

According to the NY Times, last year foreign investors poured a record $414 billion into securing stakes in American companies and properties.

There are three main reasons for the increased attractiveness of US companies and properties:

1. The Dollar is relatively weak, especially compared to the EURO.


2. Many countries hold huge Dollar reserves, from China to the Gulf States.


3. Both the stock and real estate markets have suffered severe losses creating many investment opportunities.

Foreign investments in real estate and investment banks stood out in the headlines but there have been other significant foreign investments.

In the steel industry according to the NY Times The German Company ThyssenKrupp Stainless broke ground in November on what is to be a $3.7 billion stainless steel plant in Calvert, Ala. Furthermore, foreign giants like Toyota Motor and Sony have increased investments in their American subsidiaries with $43.3 billion invested last year from $39.2 billion the previous year.

The weak dollar significantly increases the effectiveness of manufacturing in the US. This, in turn, will draw more and more foreign investments and plants creating more jobs and giving the US a significant push out of the current jam.

According to the Boston Globe, Sovereign wealth funds, which are found mostly in the Middle East and Asia but also in European countries such as Russia and Norway, control an estimated $2.5 trillion in assets. Some experts predict their holdings could reach $12 trillion by 2015. Similar numbers are reported by Morgan Stanley for the Economist.

Notable deals

Citigroup announced earlier this year that it had sold a 7.8% stake in the company worth $14.5 billion to a group of investors, including the government of Singapore and Saudi Prince Alwaleed bin Talal, as it revealed a colossal $10 billion loss for the fourth quarter of 2007.

Merrill Lynch, which also suffered massive losses, sold a special class of stock worth $6.6 billion to funds managed by South Korea and Kuwait.

In NYC The General Motors building was purchased for $2.8 Billion by the government of Dubai and The Flatiron building was sold to an Italian real estate investor.

There have been fears of increased foreign involvement in US leading investment banks and companies but it seems these fears are unjustified.

As visibile on the chart to the right sovereign wealth funds have relatively few assets under management compared to pension funds and mutual funds.

Sovereign wealth funds have traditionally concentrated on buying less than 10% of stocks usually with no board seats or any real influence on the company.

Naturally, a 10% share gives you all the influence you need but it seems fears of a hostile takeover on the US economy are, to say the least, over exaggerated.

Similar fears have been expressed in the 1980's with increased Japanese involvement in US corporations and capital markets. I think it only did the economy good.

Images by: wallyg, paphio

Deeper into Debt, Day Trading Secrets and the Psychology of Money @ The Roundup

The customary weekly roundup

I had time for two posts only this past week. Hopefully I’ll fare better the week to come. I always aim for at least three quality posts each week, on Mondays, Wednesdays and Fridays.

The following are very interesting articles I was fortunate enough to read this past week:

• Uncomfortable Answers to Questions on the Economy @ NY Times
• Given a Shovel, Americans Dig Deeper Into Debt @ NY Times

Last Wednesday I recommended an excellent buy or rent calculator from the NY Times. Today I’ve stumbled across this nifty emergency fund calculator @ Yahoo! Finance. I recommend giving it a go.

On to carnivals:

The Money Hackers Carnival #20, Chicago style was hosted by This Writer’s Wallet. I enjoyed the following posts:

• A CD Ladder Plan For Beginning Savers @ Free From Broke
• Why Does it Feel Like You’re Going Backwards @ Inspired Money Maker

The Carnival of Money Stories #68 was hosted by Funny about Money. I recommend reading the following posts:

• 6 Reasons Why I Hate Cash @ Broke Grad Student
• Making Money Through Day Trading: The Secret Lives of Stay-At-Home Mommy Speculators @ The Digerati Life

The Carnival of Personal Finance #161 was hosted by The Budgeting Babe. The following posts caught my eye:

• Living Expense Tracking Methods @ Pasadena Financial Planner
• Do Stocks Get Less Risky With Time? @ Amateur Asset Allocator
• The Psychology of Money: The Power of Suggestion Can Cost You @ Greener Pastures

More recommended readings from fellow personal finance bloggers:

• Delusion, 'Non-Bottom Callers' & The Afflictions of the Investor's Mind @ The Financial Philosopher (Highly Recommended!)
• Soft Landings and Golden Parachutes @ Moment on Money
• From the Front Lines: Changing Your Risk Tolerance Based on a Bear Market @ GenX Finance
• Carnival of 20-Something Finances @ Budgets are Sexy
• Carnival of Debt Reduction #148 @ Not the Jet Set
• Finance Fiesta #7: Mamma Mia Edition @ Living Almost Large
  
  

Is It Better to Buy or Rent?

Another look at this timeless question. Now better explained with a great tool by NY Times.

The NY Times has one of a few calculators that actually get the comparison between rent or buy right. I strongly recommend visiting Is it Better to Buy or Rent @ NY Times to get a feel of it.

This post is essentially an improved older post in which I've explained my approach to the buy or rent question, the same approach taken by this simulator.

There are many psychological aspects to the question of rent or buy. While these may be debated in length it is important to get the financial part of the question right (A deeper look into the psychological aspects is available related posts further down the page).

In this article I will examine the financial aspects of the decisions in the form of the alternative 'loss' in each option (Rent Vs. Buy). We are not always aware of the entire financial picture.

When addressing a financial question we should isolate those variables which can be measured and compared. We should regard a house as every other asset and ask ourselves which way to purchase the asset is most desirable financially.

In order to compare the two options we must first have a common basis for comparison. Evaluating rent or buy, financially can only be made by considering the same asset, of course. Thus, we shall look at two alternative paths to own a house in a certain period of time:

Option A: Buy the house today and live in it for that period: The Buy Option.

Option B: Rent the house today and buy it in the end of the period: The Rent Option.


Option A: The Buy Option

Let's assume our future home owner buys a house with the common combination of equity and mortgage. His 'losses' would include:

1. Interest paid on mortgage - The most obvious would be the interest paid monthly as a part of the mortgage payment. This is essentially 'throwing' money away much like rent.
   
2. ROI on equity - A bit less obvious would be the optional return on investment on his equity. Our home owner would have invested his money instead of using it as a down payment for the house. This alternative investment could have potentially yielded significant return which is lost when invested in a house (to be gained, possibly, by a rise in house prices)
   
3. Deal costs - The costs of deal itself that include taxes, real estate agent's commission, lawyers etc.
   
4. Home maintenance and improvement costs - House ownership often means maintenance and home improvements otherwise avoided.

What about potential gain? In the buy option our home owner has a great potential gain as his investment in the house is a leveraged investment (An investment made with a combination of equity and debt).

The possible gain extends to funds he didn't have in the first place. Here's an example: Our home owner has invested his equity of 100K US$ in a portfolio which yielded a 5% return of 5,000$. Assuming his house has yielded the same return (5%) but was purchased with the same combination of equity and mortgage (say another 100K US$) his return on investment is now 10,000 US$ (with some paid as mortgage interest but with a relatively low interest rate).

Notice the return on his house is gained also on the debt or mortgage part of it (Higher absolute return).It is important to note that this potential gain is also a source for potentially greater loss since in the case of loss on his investment our home owner is left with mortgage payments unaffected by the devaluation of his property.

Option B: The Rent Option

Let us now examine the 'losses' in the rent option:

1. The monthly rent - Self explanatory.
   
2. The potential gain on the house as an asset - While renting housing prices may rise significantly without any benefit for the one renting (the renter will eventually have to pay more).

The potential gains for the rent option are

1. Return on equity - Return on equity not invested in a house but alternatively invested in a portfolio.
   
2. Return on monthly savings - Not having to pay a mortgage leaves the renter with the ability and duty of saving the principal part of the monthly payment so that he or she may buy the house at the end of the period. These funds generate return on investment as well.

When comparing the two alternatives we should always compare them for the same asset and for a set period of time in order to achieve a true comparison.

After getting the financial part out of the way we must make room for the psychological aspects of house ownership vs. periodical rent. I'd like to dwell on one unique psychological aspect: The motivation to save. In the buy option our home owner is forced to save in the form of timely mortgage payments. In the rent option our home owner needs some discipline in order to save the money for future house ownership. As available money always has its uses the mandatory part of the mortgage is an excellent motivator for the less disciplined savers.

Related Posts:

• Why A Mortgage Is An Opportunity And Why We Shouldn’t Fear Mortgages
• The Perfect Home is a Financial Nightmare - Don’t Get Caught Up In the Costly Race
• Why Buying a Home is More Important than You Think
• How to Make Sure this is your Dream Home: 7 Practical Tips
• Buying a Home – an In-Depth Look at the Process
• Understanding Important Hidden Psychological Aspects of Rent vs. Buy Comparisons

A Look at Global Stocks Markets 6 Months into 2008 – 4 Important Lessons Learned Yet Again

Some things never change

It’s been a painful 6 months for stock markets worldwide. We’ve all felt the impact of the current crisis and the ripples it sent throughout global economies.

Ominous news is all around and waves of hacks and slashes in many corporations are clouding the sky. However, if I were to ask the average Joe just by how much exactly did global stock markets drop what would be the average response? I believe it would paint a much darker picture than things really are (I certainly hope so).

I felt I needed the following chart to clear things up a bit. It describes how well (or how badly) stock markets did the in the last 6 months:


We’re still in a crisis but I believe it could have been much worse. Hopefully I’m not wrong. We can learn quite a few things from this graph.

#1 The media thrives on an atmosphere of crisis and intimidation

There have been crisis before and there will be again. Every time the crisis we face at the present seems to be the hardest. No wonder, it’s happening right now. It’s important to keep everything together and not get overly excited. This is the nature of stock markets and humans.

#2 There is a direct link between risk and return

Emerging markets may generate high returns but they also come crashing down first. About half a year ago the prevailing truth was that China and neighboring stocks markets, mostly emerging markets, are now relatively independent and may not suffer from the US crisis. We all got a pretty good lesson in globalization.

Russia lost only 5% this year. This could lead to mistaken conclusions on the nature of risk and return. Russia is one of the more risky stock markets of the bunch and has done so well due to skyrocketing oil and commodity prices and the many natural resources which are abound in Russia. Should oil prices drop (as I’m quite positive they will, in the near future, half a year or a year from now) Russia will suffer as well.

#3 When it’s raining everybody gets wet

Diversification will only get you so far. We cannot diversify the market risk only specific risks. If the market, as a whole, takes a dive, we all follow. Defensive industries often thought as safe havens in turbulent times. They are indeed, but don’t expect brilliant or even positive returns.

#4 Opportunities aplenty

It’s not possible each and every single company is now worth 20% less. Therefore, there are opportunities and they are plentiful. It’s getting the right ones that’s the tricky part. We have two options:

1. Either try to locate the more attractive stocks using analysis, analyst recommendations and Wigi boards. Or;




2. Take small timely dips into the market buying a bit every week or month slowly accumulating a nice investment with a very attractive average buy price. By using dollar cost averaging on an index you won’t get rich or get phenomenal returns (risk and return again) but you will be able to capitalize on low prices. I’ll write about this technique in detail later this week.

Happy hunting.

Related Posts:

• The Financials of 2008 – What Will We Talk About?
• Is the Chinese Stock Market Bubble Bursting?
• Diversifying your investments over time
• Why Diversifying my Investments Hasn’t Worked This January

Make Things Last Longer, Survive a Down Economy and My 200th Post @ The Round Up

The customary weekly roundup

I only just noticed my previous post on 10 Tips on More Efficient and Economic Use of Air-Conditioners was my 200th post at The Personal Financier!

I remember starting this blog after writing 30 articles at Helium.com about 8 months ago. I remember staring at my archive trying to think how to come up with three writing topics a week. I wish I had more time since my head is exploding with ideas and thoughts.

I’d like to thank all my readers and fellow personal finance bloggers for their support. I’m looking forward to writing 200 new posts.

Without further a due, this week’s roundup:

The Festival of Frugality #133 was hosted by Squawkfox. My post on My View of Frugal Thinking was chosen as an Editor’s Pick! I enjoyed the following posts:

• Setup Google Alerts to Get Coupons and Deals @ MoneyNing
• The Plastic Made Me Do It! @ Can I Get Rich on a Salary?
• 75 Tips to Survive a Down Economy @ Frugal Dad
  

The Money Hacks Carnival #19 was hosted by Money Hackers Network. Here are my favorite posts from this edition:

• Frugal Tips: How To Make 10 Ordinary Things Last Longer @ The Digerati Life.
• Save like you’re paying off a high interest debt @ Bible Money Matters.

More from fellow personal finance bloggers:

• Investing in the 'Movement of Things' @ The Financial Philosopher
• Learn to think bigger @ Brip Blap
• A Reader Asks #15: Using Retirement Money for Education @ Moment on Money
• Behavioral Finance - Bias from Deprival, super-reaction syndrome @ The Financial Engineer
• The Carnival of Personal Finance #160 @ Mighty Bargain Hunter.
• Investing Carnival #2 @ Dividends4Life