Liquidity & Insolvency

When does a firm typically default? When they run out of liquidity. True, some firms voluntarily file for bankruptcy when they see that their assets are worth less than their liabilities, and don’t see any way out. Some firms are forced to file for bankruptcy when they trip a debt covenant. But most firms that find their net worth slouching into, or slouching deeper into negativity don’t file for bankruptcy. They play for time.

The E-Myth Revisited

I've been reading a book called the E-Myth revisited which came highly recommended to me by Virgil at our 10/10 meeting. He mentioned it would be difficult to apply to real estate, but with this in mind I find it applicable nonetheless.

Notes so far:

• The E-Myth is that everyone can start their own small business.
• There are three personalities in every small business owner:
• The technician -- a technician is a baker at a bakery or a mechanic at a car shop.
• The manager
• The entrepreneur
• There are different stages in a small business
• In the infancy stage, small business owners are on their own and the baker enjoys baking pies.
• As the business grows and more people want pies, the pie maker has to move on to the adolescent stage.
• The adolescent stage is where the pie maker manages by abdication. He does not wish to worry or know about the happenings with bookkeeping, hiring people, or other business related activities.
• The reason most small businesses fail is because too many technicians start businesses without thinking like an entrepreneur.
• Moreover, too many business owners think too much like a manager without thinking like an entrepreneur.
• You must have a vision for the future -- a direction for the company and a creative attitude to go along with it.
  

Meeting Notes -- 10/10/07

• Cashflow rich investors are preferred in deals more-so than equity rich deals.
• In residential real estate, there is much less of a margin of error than in commercial real estate.
• When starting out, become an expert in a specific market to learn how to spot deals.
• With this knowledge, make offers with purchase contracts (aka, contracts to buy).
• There are templates for these contracts, or you can benchmark pieces of other contracts.
• With a purchase contract, you can sell it to another investor or syndicate your offer by pooling capital from other investors.
• ***Has to be a desirable deal!!**
• Build valued relationships, even if there are only a few. Mentors are important in avoiding pitfalls that can cost you years.
• There are a million ways to reach a goal, and laying a step by step path is a waste of time.
• You can never predict the future, but always keep your eyes on your goals.
• Education is the MOST important part of your career. CONSTANTLY become more knowledgeable through reading book after book after book.
• Go to seminars, take classes.
• Take a 1031 Exchange course!
• Accountants are excellent sources for finding investors.
• If you are successful, investors will continue to come to you with their money.
• The three most important words in real estate are not location, location, location, but timing, timing, timing.
• If you get into real estate young, compound interest is on your side and you can invest in longer-term deals.
• When Virgil was young, he bought a piece of land for $35k and ended up exchanging it into his new home (tax free) for $900k years later.
• Take counseling courses to learn how to ask the right questions.

9/19/07

Forbes Notes:

Covering Home Base:

• China now has reputation for poor quality control.
• Chinese manufacturers usually elect to cut costs rather than obey rules.
• China is second largest vehicle manufacturer.
• Imported designs are usually a bust for U.S. carmakers.
• GM should let Koreans design small cars, Europeans design medium-size ones, leaving US engineers to trucks and SUV's.
• Rule Number One for any business is to hold onto home market.

CNN Money:

• The Fed cut its federal funds rate, an overnight lending rate banks charge each other and that helps to determine the rates for many types of consumer loans, to 4.75 percent.
• The market's interpretation: more rate cuts could follow later this year.
• "I wouldn't say a big rate cut was the wrong thing to do. And I don't think they did this to bail out borrowers and banks. The Fed was able to do cut rates because inflation pressures are coming down," Stine said.
• Wallstreet responded well, but could be missing the point: The economy is worse than thought.
  

9/18/07

Administration officials have said the full impact on the economy of the worst housing slump in 16 years and wildly gyrating financial markets has yet to play out. Wall Street has been betting on an interest-rate cut by the Federal Reserve - the first in more than four years - at its meeting Tuesday, to prod millions of borrowers to spend and invest more and thereby revitalize the economy.

9/17/07

The end of hurricane season should bring oil prices down, and with the end of summer driving season, the demand just isn't there to push gasoline processing much higher.

The numbers fueled worries that American consumers are feeling the pressure of an ongoing slump in the housing market, mortgage turmoil and also higher energy costs.

Mortgage rates dropped in the latest week, which could help home buyers who are looking to refinance, Freddie Mac reported Thursday.

The discount window is the way the central bank provides direct loans to banks. The Fed on Aug. 17 announced it was cutting the interest it charges banks to make direct loans by a half-percentage point. It has been the most dramatic move the central bank has made to signal that it was prepared to do what was necessary to contain the fallout from the credit crisis that began with rising delinquencies in subprime mortgages but has now spread to other types of loans. Jones said he expected the Fed to go further and begin cutting the more economically important federal funds rate next Tuesday at the Fed's regularly scheduled meeting. A cut in the funds rate, which has been at 5.25 percent for a year, would immediately trigger declines in banks' prime lending rate, the benchmark for millions of consumer and business loans.

Learning Notes -- 9/16/07

The New York Times had a fantastic article on a young entrepreneur named Gabriel Hammond, a founding partner of Alerian Capital Management.

• Hammond started on Wall Street and three years onto the job, decided to fore-go his MBA and start a hedge fund; raising 5 million dollars to do so.
• Successful traders said in interviews that they relished the challenge of their jobs, in addition to the lofty paychecks
• At funds that manage $1 billion to $3 billion, people with just a few years of finance experience will make $337,000 this year, and those with five to nine years experience will average $830,000.
• Key Words: Hedge funds, private equity banking, investment banks, certified financial adviser.

Apple: Missed opportunity to gain market share with lack of retail presence due to bad retailer relationships.

Credit market puts pressure on large-cap stocks. However, the feds response to lower interest rates could put downward pressure on the dollar. This will favor large corporations with global reach, i.e.blue-chip stocks.

Housing market will continue to be unstable in the near future. Foreclosure rates are rising. Lenders pulling back are lowering housing prices. Climbing mortgage rates could continue to push down housing prices.

10 year Treasury notes tend to be a barometer for longer-term mortgage rates. Brokers don't find you the best deal all the time.

Key words: Mortgage Bankers Association, S & P/ Case-Shiller Housing indices