A Message To Financial Professionals

“Yeah, yeah. Keep talking. I’m listening.”

 

Specifically, ones who submit to the Carnival of Wealth.

Dude, look at you in your Paul Fredrick shirt and snappy tie. Nothing personal, but writing isn’t your forte. Either farm that out, or learn to communicate.

We received a post from Scott Skyles at Mortgage 1a for Monday’s CoW. It’s got a valid and helpful point or two, but expecting readers to mine them out of the dross that surrounds them was too much work. Plus Mr. Skyles finds some industry terms necessary to define, but not others, with no apparent consistency.

Instead of being just another entrant in the CoW, this warranted its own, follow-up post. Here’s our CYC version of Scott’s explanation of the difference between FHA vs. conventional mortgages, followed by the impenetrable original, followed by our comments.

Should you get a mortgage backed by the Federal Housing Association, or a conventional one not insured by the federal government?

With the latter, you’ll have to put up 1/5 of the purchase price. You can put up less, but you’ll have to pay something called private mortgage insurance every month until you’ve paid off 1/5 of the principal.

With an FHA loan, you can put down as little as 3½%. The tradeoff is that you still have to pay the FHA’s version of private mortgage insurance, either for 5 years or until you’ve paid off 22% of the appraised value – whichever comes later.

And now, Mr. Skyles’s original:

While conventional and FHA (Federal Housing Association) mortgages have some similarities, there are distinct differences between the two and it is important for anyone who is considering taking out a mortgage to understand the differences in order to borrow in a way that best suits their specific financial and home buying needs.

Conventional Mortgages

A conventional mortgage is defined as any type of mortgage that is not insured by the Federal Government. Conventional mortgages are offered by credit unions, banks, and mortgage companies and brokers. The largest secondary market organizations that offer conventional mortgages are Freddie Mac and Fannie May. Conventional mortgages will usually require a down payment of around 20 %, but in today’s real estate and mortgage market, there are programs that may allow for a lower down payment if the borrower meets certain qualifying criteria.

With conventional mortgages, borrowers that are allowed a lower down payment are required to pay private mortgage insurance, also known as PMI. Once their loan-to-value amount is under 80%, they are no longer required to pay PMI insurance. It sounds complicated, but it is actually quite simple, as the LTV can decrease as the mortgage is paid down, as well as if the value of the home increases during the length of the loan. Conventional mortgages also take a borrower’s credit very seriously. In today’s market, if a credit score has blemishes or considered a possible risk, their application could be turned down.

FHA Mortgages

The FHA is not a direct lender, so their terms and conditions differ as far as credit and insurance. They insure FHA- approved lenders, and they are very specific about their terms. They take a classic approach to lending and they do not offer boutique loans. FHA-approved lenders are restricted to offering fixed rate loans, and the adjustable rate mortgages that they do offer are very conservative, which allows home buyers to easily understand their mortgage terms and manage their payments and insurance accordingly. For the first five years of an FHA loan, the borrower is charged an insurance premium that is added to their monthly payment. This payment is required until the borrower’s LTV decreases by at least 78%.

The down payment required for an FHA mortgage can be as low as 3.5 %, and the lenders also make their final lending decision using the “old fashioned” standards. Credit is still a consideration, but an FHA lender will also consider employment and rental payment history as part of the borrower’s profile. They will also give the borrower a chance to explain why their credit score may be less than satisfactory. FHA lenders consider the whole package, and this can be very helpful for first time home buyers, as well as anyone who may have experienced a run of bad luck due to the troubled economy.

Making an Informed Decision

While conventional and FHA loans both offer reasonable terms, it is ultimately up to the borrower to decide on the best type of mortgage to suit their specific needs. Buying a home is a big step, and it is important for borrowers to be educated on their options before signing on the dotted line. First time home buyers may benefit by consulting with a financial expert who can advise them on the various specifics of the two mortgage programs, and it may also be helpful to consult with a knowledgeable real estate agent or broker. By taking the time to weigh out the differences, home buyers can make an informed decision on their borrowing options.

You still awake? Of course you aren’t.

We shrank that to 1/6 of its original size and didn’t lose anything. This is why most people find personal finance and related topics so freaking boring. Most of the people who fancy themselves experts in the field couldn’t convey a thought to save their lives.

Which is why you should buy our book. 326 easy-to-read and informative pages that start with the assumption that you’re smart and value your time, but that you know nothing about money. We start with your standard checking account, and by the time you get to the end you’ll know

  • How to do your taxes
  • How to do your taxes without getting screwed, which is something quite different
  • How to invest, buy stocks, buy mutual funds, buy a car, buy a house, finance house, and more
  • How to start your own business so that you’re not at the mercy of some soulless boss who will shove you out the door the moment you become less profitable than a replacement might be.

No interminable paragraphs, we promise. Order it on our site (link up and to the right) and we’ll throw in one of our killer ebooks, too.

Date The Plain Girl With The Good Job

 

You folks are never going to learn, are you? By “you folks” we mean the investing public, never ones to be dissuaded by a tight sweater or hair extensions. (Or for a corresponding example, an Xtreme Couture shirt and a neck tattoo.)

Our latest entrant in the irrational exuberance category, Chipotle Mexican Grill. The first few chapters of Chipotle history were a classic success story worth emulating. The company opened its 1st store in 1993, and opened its 2nd

  • 2 years later,
  • using the cash flow from the 1st.

Chipotle didn’t expand for the sake of expanding. It didn’t develop an appetite for franchise fees, saturating the market and abandoning quality control. It grew modestly, as you do.

There’s a common misconception that Chipotle originated as a brand of McDonald’s. Not quite. McDonald’s became a minority investor 3 years after that 2nd store opened, and within another 3 became Chipotle’s largest shareholder. With the resources of one of America’s healthiest corporations behind it, only then did Chipotle start growing exponentially and forever casting off its humble Denver origins.

And then, the initial public offering. January 2006, $42.40. Which is about where CMG stayed for the 1st year.

Look at the chart, which comprises CMG stock’s entire history. Notice anything unusual about it? Not that we encourage technical analysis over fundamental analysis here, but again, regard the chart.

It’s a fractal! The movement from inception through 2007 is a smaller version of the movement from the start of 2009 through April of this year (when the stock hit its zenith of $442.40.) We’ve already been on this ride before, the one where Chipotle loses ¾ of its value. This time around, the stock has lost only 35% of its value.

That includes a 7% drop in 5 minutes. The company has the Department of Labor assailing it from one side (for hiring illegals, or more precisely for hiring illegals while not being a union shop or a proud political contributor.) On the other side are venture capitalists selling off their institutional holdings. Unless you were prescient enough to have loaded up on Chipotle when it bottomed out the first time, which you weren’t, you’re probably looking to bail out.

Chipotle trades at 34 times earnings. It’s profitable, but not crazily so. What do we have here, fundamentally?

  • A company that provides what’s on one hand a necessity (sustenance), but on the other, a luxury. (We’re in a protracted recession, remember? You can make your own burritos, perhaps in less time than it takes to wait for one if your local Chipotle has an exceptionally busy lunch hour.)
  • A company with competitors that make an almost indistinguishable and indistinguishably priced product. (Qdoba, Moe’s Southwest Grill.)
  • The market leader, which isn’t necessarily a good thing:

Chipotle operates 1310 stores throughout the United States and Canada (and another half dozen in the United Kingdom and France.) Revenue is about $4700 per store, per day. Qdoba has half as many locations, Moe’s half of that, and Baja Fresh slightly fewer than that. The subject of our post can only sustain so much more growth.

Are there any barriers to entry? If you’ve got a) the phone number of a grocery wholesaler and b) a kitchen, you’re a potential Chipotle competitor.

Chipotle is a $9 billion company if you measure by market capitalization, what its stock is worth. It’s a $1 billion company if you measure by stockholder equity, the difference between accounting assets and liabilities. To us, that’s a company that’s overvalued by something approaching a factor of 9.

The food is better than Taco Bell’s. That’s not the point. This isn’t about winning consumer accolades. It’s about showing profitability and the potential for growth. Goofing on the food at McDonald’s is the go-to material for hack comedians everywhere, but In-N-Out didn’t turn a $5½ billion profit with a 20% margin last year.

Ask your average CMG stockholder which he thinks the stock will do first: hit $430 (a 50% jump), or $191.16 (a 50% reduction.) It’s obvious, isn’t it? We’re now at the point where mathematical inevitability will trump all the investor confidence in the world.

Believe it or not, we don’t follow the movements of 5000+ publicly traded securities every single day. We don’t even follow market sectors all that closely. But a $400 price tag for a seemingly unremarkable stock got our attention. Was that merely a function of the IPO, the company just originally deciding to have divided itself into a small number of shares in the first place? No. Did Chipotle figure out a way to dramatically reduce costs? (Unless you count hiring illegals, no. And the company’s habit of rounding checks to the nearest nickel doesn’t quite count as “dramatic”.)

Have you bought lunch at McKesson recently? Has Cardinal Health ever caught your eye with a wacky promotional and/or advertising campaign? The questions are rhetorical, but the balance sheets are hearteningly real. If you’re going to buy stocks, research like crazy and don’t lose sight of the goal – making money, rather than patronizing businesses you have an emotional affinity for. And if you have no clue how to get started, don’t just buy our book, but read the free e-book that accompanies it if you buy it on our site.

Profit Off The Clueless. It’s Your Duty

 

The French dude in this picture? 27 years old.

 

Ah, les cigarettes. Ils sont magnifiques!

 

 

I think we are inviting God’s judgment on our nation when we shake our fist at Him and say, “We know better than you as to what constitutes a marriage,” and I pray God’s mercy on our generation that has such a prideful, arrogant attitude to think that we have the audacity to define what marriage is about.

(Journalistically abridged version: “Let’s kill all the queers, or at least not serve them.”)

The Chick-Fil-A story came and went, but we’d prefer to take a sober look at its absurdity after a few weeks have passed. People protested, Dan Cathy got assailed, and to the extent that a regional restaurant chain’s management can influence public policy, Chick-Fil-A’s chief operating officer remains committed to the non-marginal belief that marriage is between a man and a woman.

It makes no sense to shun a business because someone said something that hurt your feelings. Your actions either won’t make a difference, or the difference they’ll make will be a negative one.

Take the brief and unspirited Chick-Fil-A protests. What good did they do? That is, what tangible economic benefit did they achieve? How did they make the world a better place?

You could argue that such protests aren’t supposed to provide anyone with an economic benefit, they’re supposed to do the exact opposite to the targeted parties.

But a month later, Dan Cathy is still rich. Say the boycott had worked, to the extent that a few restaurants ended up closing. The company’s franchisees, most of whom have far less money than Mr. Cathy, would have suffered far worse than he. Any affected employees would have suffered even worse. All because a man whom you have no connection with, and who has an extremely modest impact on the crafting of marriage laws, gave his Biblically consistent and majority opinion as to what defines a marriage.

Dan Cathy could have said the Armenian Genocide was The Awesomest Thing Ever and it shouldn’t have made a difference to anybody. The actual business of serving chicken sandwiches isn’t connected to the opinions of the guy in charge.

Legitimate reasons for boycotting Chick-Fil-A:

  • They boil chickens alive.
  • The secret ingredient in the Polynesian sauce is toxoplasmosis.
  • New seasonal pricing – $300 a sandwich.

That’s it. Making a decision based on anything non-galline is part counterproductive, part foolish. And attempting to assess the values of the people in charge is 100% hypocritical. Either that, or every pot smoker who protested Chick-Fil-A must buy exclusively from pro-gay-marriage dealers.

Boycotts temporarily satisfy. (“Delta kept us on the runway for 3 hours. I’m never flying that airline again!”) Three months later, when you need to fly to London and Delta’s prices are hundreds of dollars cheaper than Virgin’s or American’s, your mind will probably change. That being said, almost all of us are guilty of this.

For instance, your humble bloggers refuse to do business with a local Toyota dealership that uses Michael Vick as its spokesman. It’s a 2-person boycott that will have a negligible impact on the dealer’s bottom line. We don’t expect other people to join our passive protest, although we can’t fathom why anyone would patronize a business whose management could have chosen any of 1500 active NFL players to hawk its products yet went with a convicted felon who did to dogs what Josef Mengele did to Jews.

So we established our position. Now, how far should we take it? Should we never buy a Toyota nor a Lexus from anyone anywhere, because how can we do business with a corporation that would grant a dealership to someone who would hire Michael Vick?

That same dealership’s vendors include companies we do business with – a couple of local radio stations, for instance. Should we refuse those companies’ money? If so, what about the radio stations’ vendors; their catering company, for instance? Are 2 degrees of boycott sufficient? How about 3? Where does, or should, it end?

We know a former vegan who quit and reverted to omnivority. Why?

It was too hard. She couldn’t eat beef or pork. Okay, fine. She couldn’t eat chicken. Yes, that’s how herbivority works. She couldn’t eat eggs or fish. The culmination happened when she refused a plate of pasta served with an anchovy sauce. The dish was 1% meat, but that was enough to taint it. At this point her hair had started falling out, and her skin had the pallor of a corpse. (She also smoked cigarettes, reinforcing that her restrictive diet had little connection to health.)

Which brings us to the most profitable company in America, as measured by return on shareholders’ equity. The difference between this company’s assets and its liabilities is $229 million. Which is equivalent to the profit it makes every 10 days.

Almost half the cigarettes sold in the United States come from Philip Morris International. Dividing that into the American Cancer Society’s figures, that means the company kills 217,000 of its own satisfied customers every year. (Of course, that’s a semantic mistake. The 217,000 kill themselves. Philip Morris only sells them the weapons.) That’s to say nothing of the myriads more around the world who die courtesy of Philip Morris cigarettes.

Philip Morris International pays a $3.08 dividend annually. That’s a 3.4% yield, which is excellent. (And remember that the lower that yield is, the higher the stock price is, which is not exactly a bad thing.)

Chick-Fil-A feeds people. A day without lunch is a miserable day indeed. Philip Morris International, even if its CEO were to register as a minister with the Universal Life Church just so he could marry as many homosexual couples as he can find, still sells death. His products have no worthy purpose, and do nothing to better the species nor our surroundings.

They’re also a fantastic buy. Philip Morris International has a diehard customer base, if you will, with hundreds of thousands of budding smokers waiting to take their place once the former check out. For every one who quits, plenty of others never do, taking their brand loyalty to the grave. Refusing to invest in the company that gives said consumers a reason to die is high-mindedness that leaves cash on the table.

Anheuser-Busch, too. Same thing. Last year, an $8 billion profit on $39 billion in revenue. Selling a product that numbs brain cells, impairs judgment and causes far more problems than it solves. Should we take the noble road and not purchase its stock?

Whatever for, if it continues to turn increased profits and pay regular dividends? It only does so because people like to get drunk. Millions of them. Are we going to do our best Carrie Nation, standing outside 1 Busch Place in our finest black bloomers, espousing the moral rectitude of temperance? Doing so wouldn’t convince a soul. As long as smokers and drinkers (and chicken sandwich eaters to a lesser extent, although Chick-Fil-A isn’t publicly traded) want their fix, someone’s going to get a cut of it. Why not you?

If your answer is “because I’m better than that”, good for you. We’ll let you know when your local organic yoga mat workshop does its IPO.