Who Could Have Seen That Coming?! (PG&E Update)

On January 14th, NSFW wrote the following:

“So that means there is something that is still POSSIBLE…not likely, but possible. That PG&E is basically bluffing and that California will announce a further form of bailout before the bankruptcy actually goes into effect. While both the company and the state have both publicly stated that they see no other option than bankruptcy, remember how back in November the state head of public utilities commented that he couldn’t foresee the possibility of letting the company go bankrupt? Then the stock shot up about 37%?

As of writing, shares are trading at $8.20. That means the company is still priced at about $4.25 billion. Moody’s and S&P dropped PG&E’s credit ratings to junk last week, but several levels higher than their credit rating was in 2001 when this happened (Moody’s Baa vs Caa2). Bonds are still trading in the 75-85* range vs 55 back in 2001. Imagine, what happens when the markets price for bankruptcy and California even mentions some form of bailout or further protection. Obviously, some investors are betting on exactly that. We sure as hell aren’t saying that this bankruptcy won’t take place, but remember it’s not official for 15 more days.”

 

Well, the company got what it wanted:

 

PG&E is soaring after a California probe cleared it from causing the state’s second-most destructive wildfire

pcg stock 1.24.19
Market Insider

 

Now to be clear, this is California clearing them for the 2017 Tubbs fire (note: one of our writers worked for FEMA in 2017 and confirmed that FEMA knew that PG&E was on the hook for the fires) 2018’s Camp Fire “investigation” is still developing.

BlueMountain Capital, the hedge fund that doubled up on their bets in December had this to say:

“The news from Cal Fire that PG&E did not cause the devastating 2017 Tubbs fire is yet another example of why the company shouldn’t be rushing to file for bankruptcy, which would be totally unnecessary and bad for all stakeholders,” said a spokesperson for BlueMountain Capital Management. The fund earlier last week said a bankruptcy filing by PG&E was unnecessary.”

 

It pays to pay attention to history and the news if you want to do well in the markets…

It also helps when voting for those that allow things like this to happen…

The next step will be to see if they are let off the hook for 2018. A judge’s wildfire safety proposal for the company will cost billions if enforced and the utility company is threatening to raise rates as much as 5x the normal amount. For more news reports, see below.

 

PG&E claims rates could skyrocket five-fold if ordered to clear trees, inspect electricity system (Mercury)

PG&E wildfire plan could kill 100M trees, cost more than Trump’s border wall (SF Gate)

PG&E Stock Soars 74% as California Fire Agency Clears it in Fatal 2017 Wildfire
(The Street)

BlueMountain Seeks to Replace PG&E’s Board (WSJ)

Private electrical system caused deadly 2017 California wildfire, authorities say
(Fox News)

No other conservative news site articles found

RIP John Bogle (1929-2019) The Old Man Who Made Investing Easier For The Little Guy

Alright fine, so he wasn’t old when he started doing stuff that actually mattered, but still… Have you ever heard of Vanguard? This is the guy that started it. On it’s own, that still doesn’t matter if you don’t have money there. It matters because of how it got started.

 

John Bogle started Vanguard essentially based around the creation of the first index fund in 1975. If you’re new to investing, an index fund means instead of buying a bunch of stocks individually, you can buy ALL the stocks in a certain market by just buying a share of an index fund. The other name for this approach to buying is passive investing. The index fund is the passive investment vehicle you now get to use to not have to pay high priced fund managers or waste time pretending you know how to pick stocks.

Think of indexing like this: instead putting your money into one slot machine or another or playing a hand in black jack and hoping for the best, you just buy the damn casino and call it a day. That’s what he created. Before Bogle’s index fund came on to the market, every fund out there was actively managed. You HAD to pay the price of somebody choosing the stocks for you. The issue is that in the late 60’s the academic nerd types realized that 90% of fund managers people were paying weren’t beating the overall market. Once this information became public,  a few pension funds started trying to take advantage by just buying every company in the markets. It didn’t take long to realize …it sucked. Remember, this is the late 60’s, early 70’s. Try buying 500 companies over the phone and you’ll get a fair idea.

The second reason the creation of this index fund matters is cost. It wasn’t uncommon in the 60’s for mutual funds to have sales charges of 8%+ and on-going expenses in the multiple percents. Today, sales charges are usually referred to as “loads” but it means the same thing: before your money gets invested, they get to take a big chunk of it. At first, when the First Index Investment Trust was being underwritten Bogle charged a 6.5% fee for small investors down to 1% for $1 million+. This was used to help with the underwriting costs of getting the fund moving. Only 6 months later, he had to board vote to throw out the sales charges altogether. On the expense ratio side:

“In our final proposal to the Directors, in April 1976, we nervously prepared a draft prospectus. I sent the Board the articles referred to above and projected the costs of managing an index fund to be 0.3% per year in operating expenses and 0.2% per year in transaction costs. Since fund annual costs at that time appeared to be about 2.0%, I concluded that an index fund should reasonably be expected to provide an annual return of +1.5% above a managed fund. Ever vigorously selling the idea, we also presented a table showing that $1 million invested at an assumed market return of 10% would be worth $17.5 million after 30 years, while a similar investment at 8.5% (using the 1.5% cost differential) would have been worth but $11.5 million. The cost saving resulted, I noted, in a $6 million payoff that was a mere six times the original amount of the initial investment. “

Flash forward to today:

If you wanted to buy just 1 share of every stock in the S&P 500 index, it would cost approximately $51,215 before commissions as of the close on 1/16/19. Most of the big discount brokers are charging an average $6 commission (give or take a few bucks). So you can tack on an extra 493* commissions for $2,958. For $54,173 you get 1 share of each of the companies in the SP500 without rhyme or reason to how much of each company you own. After all, one share of company A might represent a bigger share of the business than a share in company B.

As a result of John Bogle’s creation, today you could just buy 1 share of the Vanguard S&P 500 index ETF fund (VOO) with no sales charges and a .04% expense ratio. Meaning you can buy all of the same companies as above, have them proportional to their size as a company in the US market and you’d pay about $245 including commissions. A 99.55% savings. You also wouldn’t have to worry about switching companies out or buying more or less of them in the future. That’s all done for you. For their efforts, you’d pay Vanguard about 10 cents a year based on today’s share price. Pretty incredible contribution for those who don’t have $50k to throw around just to get started. A NSFW Hall-of-Fame level contribution. Thanks John Bogle!

Oh… and also he died today. So that’s pretty lame…

Useless Trivia: The name Vanguard comes from the HMS Vanguard, Horatio Nelson’s battleship in the Battle of the Nile. Bogle got the idea from a book on British naval history that an antiques dealer gave him.
*Index funds are constantly changing constituents, especially when the market is moving a lot, so it’s very rare for the index funds to hold exactly 500 stocks while things are being recalculated and moving in and out.

Further Reading:

The First Index Mutual Fund: A History of Vanguard Index Trust and the Vanguard Index Strategy (Vanguard)

PG&E’s Bankruptcy: How It Affects Investors and More Things For Californians To Get Mad About (UPDATE)

PG&E’s stock (PCG) crashed 48% this morning after reports that the CEO resigned yesterday and the company will be filing for Chapter 11 bankruptcy. California law mandates notification of intent must be made at least 15 days prior to filing, so we can “expect it to become official” on January 29th. We’ll come back to that in a minute.

 

pcg stocks bonds zerohedge
Source: ZeroHedge

“PG&E expects that the Chapter 11 process will, among other things, support the orderly, fair and expeditious resolution of its potential liabilities resulting from the 2017 and 2018 Northern California wildfires, and will assure the company has access to the capital and resources it needs to continue to provide safe service to customers” – PG&E

 

Typical corporate speak for a public announcement. Governor of California Gavin Newsom essentially said the exact same thing. Oh, the company did forget to publicly mention one thing that the privately disclosed to SEC…

 

“Williams (CEO) will receive severance. That payment will likely be $2.36 million to $4.46 million, depending on how her departure is categorized, according to the firm’s most recent proxy statement (8-K). She also has $3.1 million of pension benefits that may be in flux if the firm enters bankruptcy court. She was paid $8.6 million in 2017” – Bloomberg

Maybe they’re just getting better at cherry picking what to say to the public. In all fairness, they probably picked up some pointers when they first filed for Chapter 11 in April 2001. Without getting into the details (Google it) PG&E emerged just fine 3 years later. Most people understandably don’t know what Chapter 11 means, so the quick answer is that it means that the company is “restructuring” to get out of debt aka it’s working out a payment plan. While they figure out how to pay all of this crap off (about $30 billion in liabilities), nobody can touch them. They also don’t have to pay interest to any of those bond holders they hiked up their rates for. 

Here’s what the SEC’s says about Chapter 11: “During Chapter 11 bankruptcy, bondholders stop receiving interest and principal payments, and stockholders stop receiving dividends. If you are a bondholder, you may receive new stock in exchange for your bonds, new bonds or a combination of stock and bonds. If you are a stockholder, the trustee may ask you to send back your stock in exchange for shares in the reorganized company. The new shares may be fewer in number and worth less. The reorganization plan spells out your rights as an investor and what you can expect to receive, if anything, from the company.”

OK…that was boring. Obviously, the first thing you have to know, is they don’t pay anybody anything (well, except for that CEO that’s leaving). Everything is essentially frozen. Then they come up with a payment plan to get out of debt (which must be agreed upon and approved in court). If that doesn’t work out, the assets are going to get divided up so that ideally everybody get paid off. The hierarchy of who gets paid first goes like this

  1. Taxes (paid first, of course)
  2. Secured Debt (loans they took out and posted collateral for)
  3. Unsecured Debt (the majority of bondholders and those liability claims)
  4. Preferred Stock Holders
  5. Common Stock Holders

We’re going to go ahead and guess that 90% of you don’t know what preferred stock is, so when we talk about stock we’re talking about common stock. Stock owners are on the lowest rung when it comes to getting their money back when things go to sh*t.

pge bonds1
PG&E Debt Breakdown

So the current situation looks like this: PG&E doesn’t have to pay anybody anything. The CEO will get millions in severance. People who are “customers” still have to pay the higher rates that state approved in 2017. Another rate hike may be coming if the state approves it. California may also decide to go with a form of a statewide tax bailout like it has in the past (2001)

So that means there is something that is still POSSIBLE…not likely, but possible. That PG&E is basically bluffing and that California will announce a further form of bailout before the bankruptcy actually goes into effect. While both the company and the state have both publicly stated that they see no other option than bankruptcy, remember how back in November the state head of public utilities commented that he couldn’t foresee the possibility of letting the company go bankrupt? Then the stock shot up about 37%?

As of writing, shares are trading at $8.20. That means the company is still priced at about $4.25 billion. Moody’s and S&P dropped PG&E’s credit ratings to junk last week, but several levels higher than their credit rating was in 2001 when this happened (Moody’s Baa vs Caa2). Bonds are still trading in the 75-85* range vs 55 back in 2001. Imagine, what happens when the markets price for bankruptcy and California even mentions some form of bailout or further protection. Obviously, some investors are betting on exactly that. We sure as hell aren’t saying that this bankruptcy won’t take place, but remember it’s not official for 15 more days.

 

*Bond pricing is based off $100 par value (which is actually $1000 …yea, bonds are confusing). So $75-$85 means the bonds are trading at a 15-25% discount to what they would trade for if the company was in good shape.

 

NOTE –  Here’s a stupid, but effective way to remember the bankruptcy hierarchy. Tea Soup for the Commoners. TSUPC.
Tea (T for Taxes) Soup (SUP – Secured, Unsecured, Preferred) for the Commoners (Common stock holders).

 

 

Further Reading:

PG&E, utility tied to wildfires, will file for bankruptcy (CNN)

PG&E stock crashes nearly 50% as utility says it will file for bankruptcy because of wildfires liability (CNBC)

PG&E’s Former CEO to Walk Away With Millions After Wildfires (Bloomberg)

PG&E CEO Resigns, Utility Signals That Bankruptcy Looms (The Street)

PG&E Stock Is Plunging Amid Bankruptcy Talk. Here’s Everything You Need to Know (Barrons)

PG&E Was A Hedge-Fund Darling. That Bet Flopped (WSJ – A Must Read for Investors)

PG&E Prepares for Bankruptcy Amid Wildfire Fallout (WSJ)

California lawmakers traveled to Hawaii with utility executives as wildfires raged
(Fox News – the only popular conservative site we found with any news on PG&E)

PG&E Bonds Crater, Shares Crash 50% As CEO Quits Ahead Of Bankruptcy Filing (ZH)

Embattled PG&E Has Long History With California’s New Governor (Bloomberg)

PG&E State Review Puts Board Shuffle and Breakup on the Table (Bloomberg)

PG&E bonds fall; Calif. outlook cut (MarketWatch 2001 Article)

 

Is The Market Done “Crashing” or Is This A Fakeout? (What To Do Now)

Around Christmas Eve nearly everybody you know was freaking about their account and the safety of their retirement. Now we’ve bounced up around 5% or so in the last five days and people already seem a lot more calm. When people are terrified, buying is generally what you want to do. When complacency sets in, things may still be shaky. We covered this briefly in our recent article about Apple’s fall. It’s called a sentiment indicator.

So we just fell off a cliff in December and now we’re bouncing up a bit. The Wall Street term for this is a “dead cat bounce*” typically used by as*holes who want to sound like they’re market technician geniuses. We find it’s better to picture a tennis ball. You throw the ball way up in the air (or you drop it from high up) and what happens? It’s going to fall at high speed, hit the ground, bounce back up (never quite reaching as high as the first peak) then fall and keep on bouncing until it stops completely. So the question is, the ball already getting thrown back up into the air? Or is it just bouncing from that big drop?

bull trap possibility
The second red arrow is theoretical but likely, even if it doesn’t go below the last one.

Nobody can say. Anybody who says they know 100% is full of it. Our “educated guess” is that the market is going to get thrown back into the air very soon, but this is probably just the bounce. If it stops at the levels we’re seeing now, that’s nearly a 50% bounce off the fall (which is a pretty typical pattern to see.) But we need to know if that December low you see above is “the ground”

Buying back in right now may be buying into what’s called a bull trap. The drop down of December made the bulls cry (people who think the market is going up.) This bounce makes the bears cry as they lose money thinking they’re wrong (people betting the market is going down.) The bulls now laugh at the bears and kick them in the d*ck  while buying back in. Then the bears take back over and the market falls back down and the bulls lose all hope. When the bulls lose all hope is when you REALLY want to buy. Might wanna pad that crotch…

So how the hell does anybody make decisions if we don’t know what’s going to happen? Simple: you buy in chunks. It’s what’s called dollar cost averaging. Let’s say you have $5,000 you want to put in to Apple (AAPL). You could put all that money in right now, but if the market falls back down again you’re going to be one of those crying bulls. Now if you buy as many shares as you can around $1,250 right now (you’d get 8 shares for about $1,216) then in a month you buy as many shares as you can for another $1,250, then another the next month etc. In 4 month’s you’ll have around $5,000 worth of Apple that you bought at 4 different prices. You’ve then averaged in to your position and taken much less risk than just buying a huge chunk at once and risking a huge drop. If you make contributions to your 401k or IRA and it automatically buys into mutual funds, you’re essentially already doing this without realizing it.

For people who think the market is going to drop more and possibly pass the previous lows, this may be a good time to take on a small short hedge position while hedges are a bit cheaper (if you haven’t already). If you don’t know how to do this, we’re not going to cover it here, because you’ll almost certainly end up doing something too risky at this point.

Right now, stocks are the best value that they’ve been in quite a few years. We’re getting into crazy sale prices on some stocks and others are just reverting to their long term averages (based on price/earnings) Either way, the market is no longer way overpriced like we’ve seen for the last few years. It’s not an exact science, but most estimates are showing the market is now around a forward P/E of 14 – 16.  Basically the historical average. If you don’t at least have a watch list of things you’ve been wanting to buy: FIGURE IT OUT NOW. This time zone right now is probably the last time you’ll see things this cheap for quite a while. It’s completely understandable to wait for a return to the uptrend (with confirmation of that bottom) but to us it’s looking like a damn good time to average in.

UPDATE: Sentimentrader just posted a very similar analysis of the market movement. Highly suggested reading. 

 

Note: If you’re a beginner and wondering why the chart says SPY that’s an ETF (exchange traded fund) that tracks the S&P 500. The prices aren’t the same as the index you see on the news, but that fund is made to match it exactly. It is the most commonly bought ETF for people who want to “buy the market.”

 

*The idea being that even a dead cat will bounce a little if you drop it from high enough.

How To Start Fires and Force Customers To Pay For Them

Reuters released another market bomb this morning. PG&E (PCG*) is getting closer to filing for bankruptcy protection. In case you hadn’t heard, PG&E is the company largely to blame for California’s Camp wildfire in 2018 …and the wildfires in 2017. It all because of sparking, under-maintained utility lines. We’ll also throw out there that they’ve also been found guilty of causing disasters in 2010, 1997, and 1994 to name a few. California is already one big tinderbox when it doesn’t rain and that does certainly cause a problem. But a fairly simple issue to address is when a utility company has a long track record of not trimming back growth from their lines. Multiple years in a row citizens have reported seeing their utility lines throwing off sparks hours before the fires started. In the past, the company has gotten away with tap on the nose and a multi-million dollar fine. Reason? They supply power to almost half of California.

California isn’t a right to choose state. Depending on where you live, you pretty much have to go with the one company that supplies power to your area. So it’s pretty easy to understand the big, black pickle that arises for the state when things like burning city-sized chunks of land and killing people happen. You can’t just shut down the only company that provides power to your citizens. Even if you you’re considering charging the company with murder and manslaughter.

The company was already on the line financially for it’s involvement in the 2017 wildfires, and with the new liabilities added in they’re looking at about $30 billion in total. The problem is that, as of today, the company is only valued at about $9.83 billion (shares dropped 22.34% today). They already maxed out their credit back in November. They also used another new lifeline last year; bonds they were allowed to issue because of a new Governor endorsed bill. Then in December, they requested that the state allow them to pass on a rate hike to their customers to the tune of $2 billion dollars.

The next logical step is bankruptcy, which they say they are “trying to avoid”. Filing for bankruptcy will allow them to evaluate their options while being shielded from liabilities. One option being considered is selling off their gas business to help finance paying off death and injury charges. The other is to issue more of those bonds used in 2017.

For the new guys, a bond is basically an IOU with interest. If you need money for a project, you borrow the money from investors by selling bonds and pay interest on the loan until you can give the entire amount back. In 2017, as an emergency measure, the governor of California signed a bill saying that PG&E could issue bonds (financed by customers) to allow the company to secure money to pay off their liabilities. Obviously, the state couldn’t allow the company to just go under. Signing this bill was viewed as a way to settle the matter for good. We know this because the bill didn’t say anything about allowing them to issue bonds in 2018 or going forward. But that’s exactly what PG&E was hoping to get approval for when they asked for the customer rate hike back in December (decision still pending)

The 2017 bonds were a pretty nice little proposition for investors. They get to invest in a bond where the only real risk is if citizens decide they don’t need to have their electricity turned on anymore. PG&E gets the loan, and the investors get the interest paid from surcharges levied on customers that can’t use any other company. As of today, with liabilities stacking and bankruptcy looming, the bonds outstanding are all over the place in value from the low 70’s to low 90’s. All bonds traded today are at least 8% below par value (which means they’re selling at a discount). Bond investor’s (which some view as the “smart money”) don’t seem to know what to expect. This is getting into fairly unprecedented territory.

With stock shareholders (PCG), their sentiment is a bit more obvious. The stock tanked over 22% today when the news was released. However, we’ve already seen once in the last few months what happens when the state even talks about stepping in to help these guys out. From November 8th to November 15th, 2018 the stock crashed from $48.80 to $17.26 as news about liabilities kept rolling in and people found out that the company’s credit was maxed out. Then, after market close on November 15th, Michael Picker (the head of the California Public Utilities Commission) reportedly said he “could not imagine letting PG&E go bankrupt as it faces billions of dollars in potential liability from the wildfires ravaging California.” The stock surged 37.5% overnight.

Utility companies, like PG&E are historically a great “defensive” play. Meaning that when the markets get shaky, people switch to stocks that they think can weather the storm and aren’t as susceptible to a crash. The protection offered from utility stocks is two fold: 1. Nobody will ever stop needing water and electricity. 2. They usually pay pretty high dividends (PCG paid dividends as late as October 2017) With a company like PG&E, the protection is even greater since they’re the only utility available in most of the areas they serve. “Sales” are essentially guaranteed. That explains why even after the fallout of 2017, hedge funds and institutions still held an enormous amount of shares of the utility company. In the third quarter of 2018 alone, Seth Klarman (a market deity) of Baupost Group loaded up on almost 14.5 million shares. After the November stock crash, some companies even decided to go even bigger or go broke. In a December letter to shareholders, BlueMountain Capital Management ($21 billion AUM) included a chart predicting insured losses for the two fires to be $11.7 billion total. They also wrote that the likelihood of back-to-back years of fires of Camp and Tubbs’ magnitude “was approximately 1 in 150.”

Our lesson is this…

You may see opportunity in these events to make money on things going up or down, but you don’t have to have money to be informed.  Right now, millions of Californians are footing the bill for a company that has habitually proven themselves to be irresponsible. Not only are customers paying the company, they’re paying investors interest for the negligence of their only electricity provider. You may agree or disagree with how the state is handling this issue, but when we say that learning this stuff can change how you vote this is exactly what we’re talking about.

According to the 9/30/18 13-F filings, the number of PCG shares owned by hedge funds went up 40.94% in the quarter between June and September 2018. The number of hedge funds that owned PCG shares went from 20 to 87. The Camp fire started November 8, 2018. There were 86 fatalities and over 18,804 structures destroyed.

Further Reading:

Exclusive: California utility PG&E explores bankruptcy filing – sources (Reuters)

PG&E stock tumbles 21% on bankruptcy concerns (CNN)

PG&E shares tumble after bankruptcy reports (FT)

After California fires, PG&E proposes raising electricity bills to bolster precautions (CNN)

PG&E Power Line Near California Wildfire Had Damage (WSJ)

Insurance companies sue PG&E over California wildfire damages (MW)

Blue Mountain has doubled down on PG&E since the wildfires (BI Prime)

Gov. Jerry Brown signs wildfire safety bill slammed as PG&E bailout (Mercury News)

*PCG is the stock symbol for PG&E
**Apx. 16 million customers vs California population of 39.54 million in 2017

 

Apple (AAPL) Is About to Give Everybody Ulcers: An Important Lesson For Beginners

Most investors don’t know it yet, but Apple is going to ruin their day tomorrow. After the market closed today, Apple slashed their revenue guidance. Meaning they told the news reporters that when they report their earnings (Jan 29) they expect to have sold around $84 billion for the past quarter vs the $89-$93 Billion previously estimated by analysts. They said it was primarily because of weak sales in China, but the truth is it doesn’t matter. After the news was released, the stock dropped 7.5% in the after hours market* from $157.92 to $146. There are 2 huge reasons you should give a sh*t even if you don’t own Apple…

Reason #1

Sales were expected to drop by apx. $7 Billion for the quarter (only 1/4 of the sales for the year) which is about a 7.5% drop. The stock dropped $11.92, which is apx 7.5%. On the surface, that seems more than fair. But you need to understand what Market Capitalization (Market Cap) is. Market capitalization is how the news can say who is the biggest company on the planet. It’s very simple:

Share Price x Shares Outstanding = Market Capitalization

Share price is obvious, we started with $157.92 when the market closed today. Shares outstanding means how many shares of a stock are available to buy on the open market. For Apple, that number is currently at 4,745,398,000. That means at the end of trading today Apple was worth:

$157.92 x 4,745,398,000 = $749.4 Billion

After hours the stock drops 7.7%, which means Apple is now worth:

$146 x 4,745,398,000 = $692.8 Billion

That’s a loss of $56.6 Billion in a matter of minutes, because they said they would sell $7 Billion less in a 3 month period. Think about how ridiculous that is. But that ridiculousness is exactly how good investors make money. Do you honestly think that in a few years people are going to give a sh*t how much Apple sold in the last 3 months? Of course not, not in the long run. It doesn’t matter. The lesson is this…

Investors can make money buying things when the market over-reacts. Benjamin Graham (the man who taught Warren Buffett) called it Mr. Market, and said that Mr. Market was bipolar. Sometimes he gets irrationally excited and sometimes he’s incredibly depressed. If you like Apple and think it’s a good company worth owning you want to see Mr. Market depressed about it so you can buy the shares on sale. You want to buy Apple for $56 billion dollars less, because they’re going to sell only $7 billion dollars less.

All told though, since the market started going down… Apple is selling for $415.1 billion less than it was at its peak on Oct. 3.  Look around you. Is everybody you know throwing their iPhones in the toilet? Are hipster douches not going into the Apple stores at the mall? Hell no. Apple is selling for 37.5% less, but that doesn’t mean that the company is WORTH that much less (intrinsic value). Now would be a good time to figure out if you think Mr. Market is right or he’s just depressed. If you do own Apple, hopefully you now realize there is no need to panic just because everybody else is. Do you really want to sell your shares because Mr. Market is a cry-baby? Apple isn’t going anywhere anytime soon.

Reason #2

As of right now, Apple is the 4rd largest company in the world. Microsoft is number 1, Amazon is 2, and Google is number 3 based on Apple’s new Market Cap. When companies are worth 3/4 of a TRILLION dollars; any little shift in their price moves the entire market. Apple just dropped over 7% and the entire market is going to feel it. Tomorrow you will see the market down, including most of the stocks or funds you hold. Most people won’t know what’s happening, they’ll panic, they make talk about getting selling out their retirement accounts before the big market crash. But not you… because you know this is nearly all because Apple “maybe” sold about $7 billion dollars less than some smart guys had guessed between October and December 2018.

 

Dont Panic

*The after hours market is offered by some brokers as a way to trade a bit after the main trading has shut down for the day. There is WAY less action than the normal hours and its often hard to get your order to go through if you can’t find a buyer or seller at the price you want.  Check with your broker to see if it’s available or you and if not you can still see if any stocks made a big move over at the Nasdaq After Hours site. There is also a Pre-Market, in case you were wondering.

Is Real Estate In A Bubble? The Only Chart You Need

When the economy busted out in 2009 everybody noticed how much real estate prices plummeted around the country. You probably heard at least a few horror stories about people who owed more on their mortgage than their homes were worth (underwater)Now, the majority of Americans have recovered enough to be able to try to buy a home or an upgrade from their current one. The problem is that those bust out prices set a precedent. People love seeing on the news that economy is strong “MAGA derrrrrrrp!” but don’t want to pay strong economy prices. They want the income of “things going well”, but the home prices of “the economy is in the shitter”. So in the interest of pulling the veil back of where housing stands it then makes sense to compare how much money people are making vs. how much homes actually cost.

The National Association of Homebuilders/Wells Fargo publish a study called the Housing Opportunity Index, which pits income and home prices against each other.

Infographic: Soaring House Prices Hurt Home Affordability | Statista

You can see that the yellow Opportunity line doesn’t deviate a huge deal from its average. It typically hangs right around 60. When that line dropped to 40 in Mid 2006 is when we got in trouble. What the number is showing you is the percentage of households with a median* income that can afford to buy a median priced home. The key is that the number doesn’t have to move very much to have a huge impact. Just think that if it moves from 60 to 40 that means approximately 20% less of the population can afford to buy a home.

Now here is the catch to that chart. Its really damn hard to average out costs when you include places like San Francisco and Bumf*ck, Mississippi. This is why you need to go local and look at your closest metro area. The easiest way to go about it is to just google something like “Los Angeles Housing Opportunity Index”. With that search we can find the most recent LA housing opportunity numbers.

california 2018 3rd quarter housing.JPG

This tells us that right now 30% of people in the Los Angeles metro area can buy a home and that the household minimum income to qualify for a mortgage is $112,200. San Fran you need to make over $200k. Over 3.5x the national average. Bummer, right?

Here’s the thing though, real estate doesn’t just “crash” locally. The LA opportunity number is less than half of the current national number of 56.4 from the the NAHB/Wells Fargo study**. Some areas will always run at a premium because of where they are and what they offer, but we have to look at the big picture. So…

Real Estate might be ungodly overpriced in your area, but nationally we are far from a bubble. Homes are just slightly above the historical average pricing. With a National average of 56.4% of households in the US able to afford a home, it appears people holding out for a crash to buy a home in LA, NY, San Francisco, etc may have to wait quite a while.

If you want all the data for the NAHB/Wells Fargo Opportunity Index, including metro areas and histories, you can get it all here in nerdy little excel spreadsheets. Otherwise, Google is your friend…

BONUS TRIVIA: A commonly sited rule of thumb is that in healthy economic conditions the cost of your home should be no more than 2.6 years of Household Income.

Household Income x 2.6 = Home Price

Stay Tuned to learn about what we can learn about real estate from two guys named Case and Shiller!!

More info to digest:

Housing in the US is too expensive, too cheap, and just right. 

75 percent of LA residents can’t afford to buy in LA

*For those that don’t remember, median means middle. It’s not the average, but it’s halfway between most and least of something.
**Yes, we realize on the CA opportunity numbers, their US average is a little lower. Likely due to timing and data sources of the studies/calculations but it’s close enough for our purposes.