A Long Cold Winter ...

The economic news is abysmal. California is crumbling as its cities and towns enter bankruptcy after years of profligacy [WSJ]. Its state employee pension fund shows one large loss after another on silly, speculative investments such buying raw land with recourse financing. State infrastructure spending is being canceled.

Unfortunately, more pain must be borne there as its multi-decadal mass delusion of endless real estate value increases vaporizes.

Some data:

California median sales price for single family, detached homes was $311,000 in October, down 40% from $517,000 in October 2007. Of course, in a national comparison, that California price is still very, very high. The national median price is just $181,000.

The median income for those filing joint tax returns in California is about $67,000.

What can that family afford ?

Assume a 5%, 30 year self amortizing loan at 80% of value, and that real estate taxes and insurance is 2% of value. Standard mortgage loan underwriting rules provide that 28% of income can go to principal, interest, taxes and insurance. For the median family, that is $1,563/month. The assumed mortgage loan will have monthly debt service of $537 per $100,000 of principal. Some algebra can solve for the affordable home value of $250,000 (rounded) and home mortgage of $200,000 rounded.

So assuming the median income family is the marginal buyer for the median priced home, home prices in California are still overvalued by 20%. Ugh ..

A New Reader

I must welcome Obama or his transition team as new readers. Proof ? His team is now leaking that the economic stimulus will approach $1 trillion, an amount I proposed a few weeks ago in this blog. I don't expect him to acknowledge this, but he's welcome as a non-posting reader. [joke]

Now if only he spends the money as I suggested .... and doesn't waste too much on green crap.

Actions

More stocks for Santa's list: small oils AREX, ME, GPOR, ROSE, GMET (maybe), CRZO (maybe); HWD, WFT, CETV, and FCT. FCT was suggested by a posting reader and looks good.

As of January 1, I will temporarily rename the "Alpha Fund" as the "Obama Fund" as this speculative investment fund can reach its goals only if Obama succeeds in the first two years of his regime.

A note on stock selection: all my stocks are very risky. I eliminated stocks that showed evidence of stupid CFOs who excessively repurchased stock at high prices or made acquisitions for debt at high prices. I chose sectors that performed well in the recovery from the 1974 bear market and selected other sectors since the world is somewhat different now. One obvious difference is the importance of emerging markets and resources.

I have made few purchases yet. I expect to trade quite a bit, rotating in the list. I expect to hold about 15 stocks with good diversification over sectors and time. As the list has about 25 stocks (not final yet), you can see I will maintain some flexibility.

Objective: multiple returns of 5-10x over two years.

Margin: none until a good bull market trend develops. Then I'll go to 150% on dips and return to 100% on recovery to new trend highs.

I reserve the right to change my mind at will.

Word of the Day

"Cacology" - noun [$10]
Cacology means 1. a bad choice of words; 2. bad pronunciation.
Sentence: I suppose I'll be criticized for promoting cacology for the new name for my speculative find, viz., the Obama Fund. But I'm not adulating him. I'm really using his name as a good luck charm. He's the new bull elephant in the herd and I'm hopping on his back to ride to the new waterhole, I hope.