Your Money Book

Starbucks, as if they didn’t have enough problems in a recession where people aren’t interested in spending four bucks for a coffee, had a big hiccup on the May long weekend. More than one million customers who paid with credit or debit card were double charged because of a computer error. The company fixed it internally, but it’s another reason to always, always check your statements!

An old 1980’s scam is back that you should make sure you know about. It’s that you’ve won the Jamaican lottery. But you need to first pay for the transfer funds. Sorry, you didn’t win – honest, but this fraud has really taken off again. In fact, gangs in Jamaica are killing each other in fights to get the sucker and reload lists, it’s that hot.

Bankrupt General Motors is cleaning house some more. They just sold their Saab division, which apparently never ever made a dime of net profit for them. OK, and they didn’t actually sell Saab – they gave it away to a small Swedish luxury car maker.

President Obama is proposing a new consumer legislation agency in the U.S. If it passes, and that’s not a given, one big goal of the agency is that disclosure on credit cards and other products be in plain language. The goal is to have any disclosure written at a grade 11 level, one page or less, where someone can read it AND understand it in less than four minutes. Now that’s a great goal.

Have you noticed that the big no-service banks are now in the product sales business in a bigger way? In a mailer this month from the Scotiabank, I received a flyer to buy a Garmin 255 GPS. Why is the bank selling GPS systems? Their price is $300, while Amazon sells them for under $200!

Last week’s American Express rewards catalogue had something I would really really like to buy with my points: A new 2009 Elise SC sports car from Lotus. It’s 14.2 million points. You might guess I’m a little short. But I’d like to know who runs up over $14 million of charges on their American Express!

There was a survey a couple of weeks ago that should be great news: When the economy recovers: 25% of people said that they will return to their regular spending habits, but 61% said that they will stay with their reduced spending and budgeting.

Would you like to have lunch with Warren Buffet in New York? Sure, who wouldn’t! It’s a fundraiser auction for the Glide Foundation and you can bid on E-bay until this weekend. But before you log on: Last year, the price was $2.1 million! It’s for you and seven of your friends. So if you do bid: I would love to be your friend!

Poor retailer Eddie Bauer. They went bankrupt for the second time in four years last week. This time it involves about $420 million in debt. Gees, you’d think they would learn the first time that heavy borrowing doesn’t work. But then, it’s another retailer that we can learn from, because, over the long term, debt doesn’t work for us, either.

Merced, California is a small town of about 80,000 people that most people have never heard of, about 140 miles SE of San Francisco that was recently profiled in Fortune Magazine.

In February this year, the unemployment rate already reached 20%. A TV reporter recently stood in front of a new subdivision at the edge of town, right on a brand new four-lane highway, and waited for 15 minutes before anybody came along at all.

In 2002-2004, mostly San Francisco speculators drove home prices up over 50% in Merced. By 2005, the sleepy small town had a median house price of $382,000. In March of 2009, that was down to $105,500. Let me say that again: The price went from $382,000 to $105,500 – that’s less than a third in four plus years!

Back in 2004 and 2005, nobody asked, questioned, or seemed to care who was going to keep buying homes at these skyrocketing prices. Or even stopped to think who could ever afford to rent them! The population hadn’t grown – it was purely speculators who were buying these houses.

But it was more like gambling, instead of investing, because these investors were never going to move into these homes. They were only looking for the quick flip and profit, mostly with an interest only mortgage just to tread water. While the price wave kept going up, these investors/speculators or gamblers were looking for the next victim in a perfectly legal ponzy scheme.

At the peak of the market, the income needed to finance one of these average priced homes would have been $120,000. Two minutes of checking would have found that the town had always had unemployment issues, and the average income in town was $35,000.

There was no chance 90% of people in town should have gotten a mortgage, and no chance anyone was ever going to pay off one of these homes. For 90% of the population, even a 40-year mortgage was never going to be affordable.
The average resident with a $35,000 income could afford a $1,000 mortgage payment. That’s 35% of their income, and that’s the typical formula. But the average home was going to be $2,100 a month just for interest payments! Who could afford that? Someone whose entire net income was going to go to interest only payments and who NEVER paid property tax, gas, never bought groceries, clothes, car insurance or had anything else to pay, because this average home was going to cost them their entire net paycheck.

What a surprise to investors and all those mortgage lenders this didn’t work out! Yes, that was sarcastic but it just shows that for a number of years, the banks didn’t care about proof of income or that nobody was going to be able to pay these payments. And no buyers seemed to care either, and they’re just as responsible for the mortgage mess.
These so-called X subdivisions are the furthest out of town. It’s the last developments at the edge of town because land was cheap there. They will be the last to recover in prices, and it’s where the most foreclosures are. Economists might be talking about a recovery soon, but I doubt it. Logic says the housing market has to stabilize and right now, the foreclosure rate is still going up and there are over 1.6 million homes that lenders haven’t even put on the market. I would say don’t hold your breath.

It turns out that all that economic happy-talk is mostly that – talk. The U.S. Federal Reserve just released the minutes from their last meeting, and don’t really see much light – just more tunnel. They now expect the economy to shrink by over 2% this year and don’t see much improvement in consumer spending. That’s something I said for two months. About 95% of people get a tax refund this time of the year. Of course consumer spending looks good in March and April. But that’s not a trend.

Newsweek actually ran a story a few weeks ago with the headline: Stop Saving Now! Here we go again, politicians and now the media telling us to spend money to help the economy. Sorry, you gotta look after yourself first, and spending money we don’t have is exactly why we’re here in the first place.

We talked a few weeks ago that for us, just like businesses, debt is a house of cards that won’t last forever. By now, we’ve all heard the stories of the Phoenix Coyotes bankruptcy. The NHL team had over $80 million in debt, and was losing $30 million a year. That’s on top of the City of Glendale, where the Coyotes play, who borrowed $180 million to help build the arena! It’s another example of a business model based on debt that doesn’t work.

If you thought you’d heard of everything in the world of internet dating, think again. There is now a website, creditscoredating.com, where you’ll find dates based on your credit rating. Yes, this site does believe that romance and a good credit score equal success. I’m not sure how or why, but NOW maybe you’ve heard it all – for a while at least. I’m single but someone’s credit rating isn’t going to attract me to someone – sorry.

In this recession, our definition of what we think of as necessities versus luxury items is rapidly changing from three years ago. A Pew Research poll from April shows that our finances definitely influence what’s a must have, instead of a want-to-have:
We think of necessities as a home computer, high speed internet and our cell phone.
But what’s now considered luxury items include microwaves, televisions, dishwashers, and air conditioning.

No More Lineups?
IBM, and the grocery chain, Giant Foods, in the Mid Atlantic area, have rolled out a new way to get in and out of the grocery store in one-third of their stores.
What do we do now? We load items into a basket. Line up at the cash register and unload everything so it can be scanned. Then everything gets re-loaded into bags.
Well, a few years from now that will be about as antiquated as a typewriter. Instead, you’ll get a small portable scanner as you enter the store. Just pick what you’re buying off the shelf and scan it. The scanner will show the price of the item and keep a running total of what you’re purchasing. Put everything you’re buying into a bag, and walk out of the store. That’s it! The total will be debited right out of your bank account, or off your credit card – whatever you have already set up with the store.

Just imagine – no more lineups, no more cashiers, no more unloading and re-packing everything. It’s literally as simple as pulling your purchases off the shelf, scanning them and getting out of there.

Producer Michael Moore, who has done documentaries on President Bush, the U.S. healthcare system and GM, is now making one about Wall Street and the meltdown. It is still unnamed, but scheduled for release in October, and you have to know it’ll be controversial.