The Unknown
As we know,
There are known knowns.
There are things we know we know. We also know
There are known unknowns.
That is to say
We know there are some things
We do not know.
But there are also unknown unknowns,
The ones we don’t know
We don’t know. —Feb. 12, 2002, Donald Rumsfeld, Secretary of Defense in a Department of Defense news briefing

There are known knowns. What do we know about the credit crunch?

1. We know that a lot of the mortgages and home equity loans that were done with underwriting guidelines that frankly didn’t work. Underwriting guidelines are meant to determine which borrowers will have the likelihood of repaying the loans. Many of those loans have gone bad.
2. We know that there was a lot of fraud happening in the mortgage business. Much of it was outright fraud, much of it was, as Chris alluded to, not the black and white kind of fraud, but the “gray” misstated income type of fraud. Like the guy working at McDonalds who makes $20,000 a month? Yeah right…..
3. We know that virtually every bank and financial institution in town has lost a sizable sum of money (but of different sizes) because of this credit crisis. How much each one lost or is going to lose depends on how conservative their underwriting guidelines were.
4. We know that many people bought more of a house than they should have because underwriting guidelines were too lax and credit was too cheap.
5. We know that many of those people are going to lose a lot of money, if they haven’t already.
6. We know that many people took out mortgages that they didn’t understand and all they were concerned about was, “how much is my payment?” Then when their option arm started adjusting, they were in trouble, big trouble.
7. We know that the financial institutions on Wall Street took mortgages and made then into a very complex very highly leveraged house of cards that is in the process of collapsing.
8. We know that there are a lot more zeroes in this world than we thought. (As in all of the zeroes following the losses and writedowns that the firms have taken).
9. We know that the days of very easy credit caused housing prices in many areas to rise to literally unsustainable levels, rising much faster than the income levels were rising.
10. We know that now that the credit bubble is bursting, housing prices are going to adjust back to more affordable levels.
11. We know that former Fed Chairman Greenspan (a.k.a. Maestro) who once had an impeccable reputation as a wise man now has to wait for history to be the judge.

There are known unknowns. Things that we know we don’t know about the credit crisis. We don’t know:

1. Will Countrywide survive?
2. Will Washington Mutual survive?
3. Will Bank of America buy Countrywide?
4. Will Citibank survive it’s financial mistakes in it’s present form?
5. How many “big” bank mergers will we see this year?
6. How low will the Fed go in an effort to save the banking industry?
7. How far into this ball game are we?
8. How long is it going to take Countrywide to liquidate the over 15,000 homes that it currently owns?
9. How many homeowners, when they find out they are underwater on their homes, are going to do the “jingle mail”and give up on their homes?
10. What effect are all of the ARM resets that are coming going to have on the real estate and mortgage markets?
11. How many changes will Fannie Mae and Freddie Mac put in place and what will that do to the real estate markets?
12. How many mortgage lenders and Realtors will be gainfully employed in other lines of work by the end of this year?
13. Will consumers start asking more questions and reading mortgage documents more carefully?
14. Will consumers start looking at mortgage companies differently than they look at banks? Will they want to work with banks for their mortgage needs more than they will mortgage companies? Will banks continue to want to buy mortgages from brokers as much as they have before?
15. Will the government proposals make things better or worse?
16. How big of an impact will this mess have on the 2008 Presidential elections?
17. How many more losses are buried on the books of the financial institutions in our country and the others who bought mortgage backed securities?

There are unknown unknowns. There are things we don’t know we don’t know about the credit crisis. Since we don’t know we don’t know them, it’s purely hypothetical guestimations about some of the things we don’t know we don’t know…..

1. Will the Chinese and other foreign countries stop buying our debt?
2. How far will the crisis that started as a “subprime” crisis spread?
3. What effect will oil prices have on the credit crunch?
4. What will happen with Iran and Iraq?
5. Will there be any notable bank failures?

So, in light of all of the known things, the known unknowns, and the unknown unknowns, what should one do? It would seem that paralysis would be the operative word for the day (don’t do anything). On the contrary, I think that today’s market is a good one to take part in, but with the following items of “advice:”

1. Make sure you work with experienced professionals who you can trust. By experienced, I would recommend that they be people who have been in the business for longer than 5 years. It would really be helpful to work with people who have been through not only rising markets (like the last five years) but also tougher markets. Oh, by the way, it’s 20 years this year for me.
2. Read all of the documentation on everything before you sign anything.
3. Fixed rates for everything except for maybe a 10% second mortgage.
4. Get recommendations on who to work with from those you trust.
5. Do your research and become an expert.

2008 is going to be a challenging year in the real estate and mortgage markets. I’m looking forward to helping many people navigate the challenges, the ups and downs, and the difficulties of a transitioning market like this.

So what do you think?

Share This

Share This

Filed under: Television, Google (GOOG), Marketing and advertising, Entrepreneurs, Videos

So far this year, online video is making a big mark. Just look at the Iowa caucuses, where voters posted their efforts on YouTube and then spread them across social networks like MySpace and Facebook. So what else might we see in 2008 for online video?

Well, I had a chance to interview Chase Norlin, who is the CEO of Pixsy (an online video company). According to him:

1. Expect to see continued enforcement by copyright holders over their online video assets; this will drive wider adoption of DRM and licensing platforms.

2. The online video ad category is growing but not at the pace to support the multitude of companies pursuing this market, and a shakeout is therefore likely.

3. More consolidation in the online video space and all other key internet categories.

4. Continued growth in the semipro video publishing market as content producers create and distribute their material in a more cost-effective manner than traditional outlets.

5. More unique video programming, created for the web, making its way to television.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar Online Guide to Decoding Financial Statements. He also operates DealProfiles.com.

Permalink | Email this | Comments

Share This

Filed under: Earnings reports, Forecasts, KB HOME (KBH)

Among companies reporting earnings next week are KB Home (NYSE: KBH) and Constellation Brands Inc. (NYSE: STZ). Here is a quick look at each of them.

Homebuilder KB Home has been hit hard by the housing slump, reporting a loss of $6.19 per share for the third quarter, way off the 75-cent loss estimated by analysts surveyed by Thomson Financial. For the current quarter, analysts expect a loss of $1.08 per share, and a loss of $8.60 for the full year.

While analysts don’t expect a profitable quarter in 2008, the narrower losses give KB Home a forecast growth rate of 68.9 percent for the next year, compared to -248.3 percent for the home construction industry average. But the analysts’ consensus recommendation is to hold KB Home. The share price has tumbled from its 52-week high of $56.08 last February, and reached a 3-year low of $18.36 on Friday.

For news about KB Home that could influence the earnings results, check out BloggingStocks’ KB Home coverage.

Continue reading Earnings previews: KB Home and Constellation Brands

Permalink | Email this | Comments

Share This

Filed under: Google (GOOG), Berkshire Hathaway (BRK.A), China, Bristol-Myers Squibb (BMY), Reliance Steel and Aluminum (RS), Valero Energy (VLO), Huaneng Power Intl ADS (HNP), Chasing Value, Oil, Anglo Amer ADR (AAUK), Newcastle Investment (NCT), Raytheon Company (RTN), Best Stocks for 2008, Bunge Ltd. (BG), Loews Corporation (LTR)

A few days behind schedule, but here is my list of eight stocks. Included in the list there are two holdovers from the 2007 list of seven stocks. I do not see any value in creating an entirely new list when I have done well over the years riding the winners. This is particularly true if the reasons you bought the stock in the first place remain valid.

These eight picks for the year will be tracked monthly with updated results. The initial share prices are from December 28, 2007. They are focused on defense, energy, food, gold, metals, mining, oil, power, and every one pays a dividends. The following are my “Quick Takes” in alphabetical order with links to the complete stories.

Anglo American plc (ADR) (NASDAQ: AAUK) is a world-class player in precious metals, diamonds, and commodities, which are all growing in demand. When the world economy is booming, all of its mining products are sought after, and when the market runs scared, gold goes up. It pays a dividend yield of 1.9% and is trading almost 25% off its 52-week high. For full story: Chasing Value: Anglo American diamonds and gold are your best friend. The closing price on December 28, 2007, for AAUK was $30.79.

Continue reading Chasing Value: Final list — 8 stocks for 2008

Permalink | Email this | Comments

Share This

Filed under: Cisco Systems (CSCO), Dell (DELL), Intel (INTC), United Parcel’B’ (UPS), salesforce.com inc (CRM), Small business

Since launching Salesforce.com (NYSE: CRM) in the late 1990s, Marc Benioff has built a multi-billion dollar operation, which is still growing at a break-neck pace. Interestingly enough, Benioff thinks that a big key to success has been his company’s philanthropic efforts - that has helped with employee morale, community involvement and even customer loyalty.

To this end, Benioff used the 1-1-1 model. When Salesforce.com was founded, 1% of the stock went into a foundation. After that, 1% of the profits were put into the foundation and employees have spent 1% of their time on philanthropic activities.

Last year, Benioff wrote a book on the topic, called The Business of Changing the World. He interviews a variety of companies, such as Cisco (NASDAQ: CSCO), UPS (NYSE: UPS), Dell (NASDAQ: DELL), Intel (NASDAQ: INTC) and Timberland.

So what can your business do?

Continue reading Entrepreneur’s Journal: How your business can change the world

Permalink | Email this | Comments

Share This

Filed under: Analyst upgrades and downgrades, Industry, Cisco Systems (CSCO), Motorola (MOT), Nokia Corp. (NOK)

Motorola Inc. (NYSE: MOT) was hit with downgrades late in the week. Some analysts think that it sold only 40 million handsets in the fourth quarter. Rival Nokia Corp. (NYSE: NOK) usually moves about 100 million. The Razr’s success is now just a memory.

Citi Investment Research lowered its price target on Motorola from $22.50 to $18.50. Most shareholders wish that the stock would hit the lower number. In after-hours trading on Friday, the shares fell to $15.

There has been much talk about breaking the company into pieces. When the company traded at $20, that was less likely. But, the MOT market cap is now only $34 billion.

Continue reading As Motorola (MOT) share price falls, break-up more likely

Permalink | Email this | Comments

Share This

Filed under: Deals, Management, Competitive strategy, Berkshire Hathaway (BRK.A), Entrepreneurs, Bargain stocks, Chasing Value, Best Stocks for 2008, Loews Corporation (LTR)

This was one of my last to make the list of 8 for 2008, and did not show up in previous stories, but investors should take note. Everything we read and hear about the investment climate in 2008 makes one rather tepid about the stock market. One of my friends even suggested to me a few days ago that he was considering going to all cash. That is a bad idea. A better idea is to find investments that will do well in this environment. Loews Corp. (NYSE: LTR) might very well be that company. The stock closed on December 28, 2007, at $49.35.

In a recent news release, Loews announced a plan to spin-off Lorillard. By mid-summer LTR should be separated from this tobacco company and maker of the Newport brand of cigarettes. This will free up some cash for stock buybacks, according to the article, and also from some liability. This might be good news to many but is not the reason I like Loews so much.

The real reason is that in searching out investment opportunities I took an interest in Diamond Offshore (NYSE: DO) as a major player in the search for oil offshore. Well it turns out that Loews is a major shareholder. When I was reviewing insurance companies, which were way down in 2007, and I think oversold now, I came across CNA Financial (NYSE: CNA), which has fallen on hard times and may be a comeback story. Then I learn that Loews owns a major stake in CNA too.

Continue reading Chasing Value: Loews Corp. has all the right pieces

Permalink | Email this | Comments

Share This

Filed under: Other issues, Columns, Housing

Anyone with any money invested in U.S. stocks must check out a recent Financial Times (UK) piece about the United States economy.

“At the heart of the problems is the bursting of the housing bubble that helped to power American growth since this economic cycle started six years ago. The end of the bubble has brought a brutal slide in home construction, house price falls that threaten to undermine household wealth and consumer spending, and turmoil in the credit markets that are used to finance housing.”

Indeed, the housing market’s collapse had serious ramifications outside of the weakening homebuilders. Subprime mortgages have shaken the credit markets into almost complete fear of providing credit, especially to real estate loans. Consumer spending has been suffering as a result of adjustable rate mortgages (ARMs) and an inability to cash out of real estate.

Continue reading Concerns surround 2008

Permalink | Email this | Comments

Share This

Filed under: China, Huaneng Power Intl ADS (HNP), Chasing Value, Aluminum Corp of China ADS (ACH), Stocks to Buy, Best Stocks for 2008

I have wriiten so much about Huaneng Power International ADR (NYSE: HNP) that I am not sure there is much more to say. This is another one in my must-own category, so it is just a matter of when you get in. Most of my sentiments can be found in Volatile Markets: Huaneng Power (HNP) is my pick for the next 50 years.

HNP pays a sizable 3.6% dividend yield and has plenty of room to run. It has come down a lot with the rest of the inflated Chinese stock market, but this one is not threatened by competition and is a good long-term value. It is the largest utility company in China, entrenched in government projects and receives support that would be full of conflicts of interest in a western economy.

I have made the case recently that electric utilities have been great investments over the long term in Serious Money: Electric utilities are the place to be, and I am still a believer. China’s growth curve will continue to dwarf that of the United States. It takes electricity for all the things you know about and many you do not. I am not sure that the average investor is aware for example that the production of aluminum consumes a lot of electricity. And it is being used in increasing amounts as reducing energy costs often means reducing weight.

Aluminum is used in windows, cars, planes, electronics, and this is a great trend to follow as well. One of my top picks last year was Aluminum Corp of China ADS (NYSE: ACH), and I would have included it here if not for its sky-high price.

Continue reading Chasing Value: Huaneng Power still the one in China

Permalink | Email this | Comments

Share This

Filed under: Monster Worldwide (MNST)

If I had $61 million in cash, I think I could do much better with it than Monster Worldwide (NASDAQ: MNST). That’s how much the company shelled out for Affinity Labs, which got its start last year.

In fact, the company says it is in the “development stage” and has about one million registered users. So yes, I guess Monster is expecting a monstrous number of job listings to come from this deal (at least I hope so).

OK, what is Affinity all about? Basically, it’s a network of sites that cater to certain professions and vocations, such as PoliceLink, FireLink, GovCentral, and so on.

True, these sites have social networking features, such as profiles, photo sharing, and videos. Yet, the technology seems fairly generic.

But keep in mind that the founder of Affinity, Christopher Michel, sold Military.com to Monster.com back in 2004. That site is a thriving community with more than 10 million members.

So perhaps Monster is trying to snag Michel to get his social networking credentials. But, it sure does look like a hefty price tag.

In yesterday’s trading, Monster.com’s stock was down 4% to $27.73.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar Online Guide to Decoding Financial Statements. He also operates DealProfiles.com.

Permalink | Email this | Comments

Share This