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Uh-Oh: Cars/Vacations/Flat Panels Not Tax Deductible

Monday, March 31, 2008 | 06:30 PM

Here's some more bad news for John Q. Public:

We all know that the fun of the past few years Housing binge / ATM withdrawal / GDP Party is long since over. But it turns out that the hangover isn't nearly done.

Why is that? Well, one of the advantages of Home Equity financing is that if you use the proceeds for capital improvements to the home -- *new floors, walls or lighting, installing central A/C, removing trees, refurbishing bathrooms, new lawns or gardens -- then it has the same tax deductiblity as if it were a primary mortgage.

What abut if you use the proceeds for other, non-capital improvement purposes? 

From Realty blog Patrick.Net:

"Word from the IRS is that they are auditing people based on refiances on their house. If you refied and pulled money out of the house and use for other purposes than home improvement you can not claim that as Mortgage Deduction, needs to be claimed as Interest expense. Guess what, they want proof of home improvements…"

Uh-Oh !

Why do I smell some big trouble coming down the road for some people?


Refi Interest Trap?
March 28th, 2008

* What we did to our home

Monday, March 31, 2008 | 06:30 PM | Permalink | Comments (22) | TrackBack (0)
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Wall Street Trader

Monday, March 31, 2008 | 03:45 PM

Amusing cartoon:


Monday, March 31, 2008 | 03:45 PM | Permalink | Comments (11) | TrackBack (0)
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Barron's "Truthiness" Instead of Truth

Monday, March 31, 2008 | 02:30 PM
in Media

Barron's used our Truthiness post from last week for their Market Watch section:


"Truthiness" Instead of Truth
Big Picture by Fusion IQ

March 24: Whether overstating job creation [or growth, or] understating inflation, a shocking amount of debate about the economic expansion has been primarily spin....[as] a parade of sycophants, despite knowing better, continued to cheer-lead punk data....First, they denied what was happening; then we got the whole "contained" thingie; then they blamed da Bears. Now they've unwittingly embraced Marx, and successfully pled for the central planners to rescue them from their own stupidity...Has "truthiness" replaced truth? [Will we] be saddled forever with these hallucinatory hacks?


MARKET WATCH:  A Sampling of Advisory Opinion
Barron's MONDAY, MARCH 31, 2008

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Was 2007 Q4 GDP Positive -- or Negative ?

Monday, March 31, 2008 | 11:52 AM

Many breathed a sigh of relief over the final revision of 2007 Q4 GDP. However, we took a closer look to at some of the data to see what was happening beneath the surface.

0328bizwebeconrealeconOur advice to those who think we escaped recession in Q4 2007: Not so fast.

As you might have guessed, actual below-the-headline data was less encouraging than even that weak 0.6% final number.

Under Gross Domestic Purchases, the BEA wrote:

"Real gross domestic purchases -- purchases by U.S. residents of goods and services wherever produced -- decreased 0.4 percent in the fourth quarter, in contrast to an increase of 3.3 percent in the third."

Real gross domestic purchases are purchases made by U.S. residents of goods and services wherever they are produced (domestic and imports). They decreased 0.4% in the Q4, very significant drop when compared to the 3.3% increase in Q3. Add to that the Gross private domestic investment decline of 2.2% in Q4.

Given those huge swings, how was it possible that GDP in Q4 was still positive? 

It all comes down to the Current-dollar GDP (and the implied implied price deflator). Current dollar GDP was lowered by a significant 0.3% more than was expected.


Why does this matter? Real GDP (after inflation) is obtained by dividing nominal GDP by the GDP deflator (x 100).  The smaller the deflator is, the less of GDP gains can be attributed to inflation. Had the change to above not occurred, Real GDP would very likely have been 0.0% -- or worse.

UPDATE: March 31, 2008, 1:30pm

I just got off the phone with BEA -- in the current GDP release, the changes in Q4 Current-dollar GDP were due to lowered "Imputed Financial Services" prices.

Let me also emphasize that I am not in the "books-got-cooked" camp. I am merely trying to wrap my head around how Real GDP was the same, but current dollar GDP fell so precipitously when compared to the last revision . . .


Given the impact of Inflation on GDP, is there another measure that might provide a clearer picture of the economy's direction without the pernicious impact of rising prices?

It turns out there is: Last year, Fed economist Jeremy Nalewaik suggested a different measure: GDI, or Gross Domestic Income. Nalewaik argued in a 2007 paper that GDI "has done a substantially better job recognizing the start of the last several recessions than has real-time GDP."

According to Nalewaik, GDP-based models did much worse at forecasting recessions than did GDI: The past four recession odds at their actual starting points were only of 52%, 40%, 45% and, for the 2001 recession, just 23% according to GDP data. The alternative measure of GDI did much better, signaling odds of a recession of 78%, 44%, 72% and, for 2001, 70%.

And what of today? Recent data shows an annualized GDI decline of 1% -- its largest drop since the 2001 recession.

While many people are debating whether or not the economy will fall into recession, the GDI data suggest that we are already in one -- and have been for several months.


MARCH 27, 2008

Estimating Probabilities of Recession in Real Time Using GDP and GDI
Jeremy J. Nalewaik
Federal Reserve, December 19, 2006

Did Economy Really Escape Fourth Quarter Drop? 
Brian Blackstone
WSJ Real Time Economics, March 27, 2008, 2:02 pm

4th-Quarter Data Confirms Frailty of the Broad Economy
Published: March 28, 2008


Monday, March 31, 2008 | 11:52 AM | Permalink | Comments (21) | TrackBack (0)
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SFAS 157: Market Prices Too Low? Just Ignore Them!

Monday, March 31, 2008 | 06:47 AM

Here's a honey of an idea that almost slipped by unnoticed last week. Thankfully, the NYT's sharp eyed business columnist, Floyd Norris, caught it.

An SEC opinion letter advising companies how to deal with their Level 3 assets made a rather curious suggestion. They advised that if the prices of mark-to-model crappy paper are underwater, well then, declare it the result of forced  liquidation -- and then you can simply ignore them.

It truly boggles the mind.

Would someone please explain to me how providing an official mechanism for allowing companies to ignore market values of the bad investments they made help investors? Instead of working towards transparency, the SEC is providing a mechanism to allow banks to hide losses from their shareholders. This is nothing short of an invitation to commit fraud.   

Here's the offending passage:

“Under SFAS 157, it is appropriate for you to consider actual market prices, or observable inputs, even when the market is less liquid than historical market volumes, unless those prices are the result of a forced liquidation or distress sale. Only when actual market prices, or relevant observable inputs, are not available is it appropriate for you to use unobservable inputs which reflect your assumptions of what market participants would use in pricing the asset or liability.” (emphasis added)

Norris suggests this is an invitation for banks having two sets of books. One for Bank disclosures for shareholders: Ignore these paper losses, the prices are only due to a forced liquidation -- and another for Margin calls: Hey! You are underwater by XX% in this; send in more money! Apparently, the SEC believes prices are irrelevant, except when it comes to margin calls.

Stop and think about this for a moment: Every margin call is essentially a forced sale. Consider the alphabet soup of highly leveraged derivatives out there, where many of the most recent trades  have occurred because some hedgie has blown up. What might the unintended consequences of this rule actually be?

Today is the last day of the quarter. There is often window dressing to the upside the last few days before a Q's end to make the fund's performance look better. Imagine if there was an incentive to make a huge category of derivatives' last trade appear to be the result of a margin call? We would have this enormous window dressing down -- so as to not have to come up with a legitimate value for tier 3 junk.

This is a directive to banks to make the situation much, much worse. They can clean up their own books by forcing liquidations elsewhere. Un-fricking-believable.

Holy shnikes, have any of these people at the SEC every worked on a trading desk?


If Market Prices Are Too Low, Ignore Them
Floyd Norris
NYT, High and Low Finance
March 28, 2008,  6:21 pm



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Delay Cost

Monday, March 31, 2008 | 04:00 AM

Another cool widget:


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Goldman: Total Leveraged Credit Losses = $1.2 trillion

Sunday, March 30, 2008 | 10:52 AM

Barron's Alan Abelson praised Goldman Sachs economic team this weekend, saying, "They're not always right . . . but they do tend to call them as they see them, they avoid as much as possible the usual economic gobbledygook, and the numbers they collect -- the raw material, as it were, of their analyses and forecasts -- are commendably reliable.

Abelson specifically cited Andrew Tilton's recent report on leveraged losses: "that is, losses inflicted on banks, broker-dealers, hedge funds and government-sponsored outfits by the cruel credit crunch."


"The sorry total weighs in, by Goldman's reckoning, at a cool $460 billion. And that's after loan-loss provisions.

Now, $460 billion is a nice round figure, with about half of it losses on residential mortgages and perhaps 15%-20% from commercial mortgages. As Tilton comments, "although we have made considerable progress in the residential-mortgage area, U.S. leveraged institutions have written off less than half" their projected losses. Manifestly a cheerful type, he feels "there is light at the end of the tunnel, but it still is rather dim." So dim, we must admit, that these tired old eyes, strain as they will, have trouble making it out.

We hate to add to what we consider a pretty gloomy prospect, but Tilton takes care to note that the $460 billion that Goldman expects to go down the drain is "only part of total credit losses," which it anticipates will reach a tidy $1.2 trillion. However, he explains, the leveraged losses are especially critical, as they cause a significant tightening of credit as institutions curb their lending to conserve shrinking capital. Which, for us, anyway, makes the tunnel a lot longer and the light a lot dimmer."

A trillion here, a trillion there, pretty soon, you're talking real money . . .

The True Contrarians
Barron's, March 31, 20080

Everett Dirksen   



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Arthur Levitt on the Bear Bailout, SEC, Fed

Sunday, March 30, 2008 | 03:00 AM

Former U.S. Securities and Exchange Commissioner Arthur Levitt talks with Bloomberg's Carol Massar from Palm Beach Gardens, Florida, about the Federal Reserve's involvement in the rescue of Bear Stearns Cos., and potential implications for the financial-services markets and regulators.

click for video
(launches Windows Media Player)


Play Watch


Levitt Says Bear `Bailout' Raises New Regulatory Issues: Video
Bloomberg, March 26   2008




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How to Get Your Comments Deleted and Yourself Banned

Saturday, March 29, 2008 | 05:30 PM

My own policies are clearly and humorously stated here, under sections titled Posting Comments and Trolls and Asshats -- but I like Teresa Nielsen Hayden's description of how to get your comments banned over at boingboing:

Q. What's likely to land me in your bad graces?
A. Since you've asked, here's a nowhere-near-exhaustive list:

1. Spamming. Linkwhoring. Re-posting text you've already posted on a dozen other sites.

2. Making supercilious and unpleasant remarks in a civil liberties thread about how the victim had it coming. This is not to say that victims never have it coming; but there's a species of internet demi-troll that appears to specialize in posting such comments. Try not to look like you're one of them.

3. Making snide comments and insinuations about the editors. That's right out. You don't like one of the editors? Take it up with them in e-mail. If you're going to comment on an entry, talk about the entry.

4. Being nasty to no purpose. (This is the catch-all.)

5. Using unnecessarily exciting language. Making an argument is fine. Making your argument in language guaranteed to make your hearers see red? Bad idea. It practically guarantees that you're going to have a dumb (and therefore boring) argument. And if the argument's not going to be interesting, we don't see the point.

6. Jeering, sneering, condescending, or one-upping when there's been no provocation. Telling people they're naive idiots for caring about whatever-it-is. Like the "I'm bored" pose, it's empty attitudinizing, and it's remarkably unpleasant.

7. Failing to notice that there are other people in the conversation. Posting a remark that's already been made five times and answered six. Coming back and re-posting essentially the same material after a twenty-message thread has discussed your previous comment. Trying to forcibly wrench the conversation onto one of your own pet topics. Posting a stale, canned rant you've posted a dozen times before at other sites. Not coming back to see how others have responded to you.

Why post comments at all, unless you expect to be read? And if you expect to be read, you must know you're part of a conversation. Therefore, you should act like it. Engage with what the other commenters are saying. Read the thread before you add to it.

8. Posting a snotty but otherwise worthless anonymous comment. It's a lot easier to get away with snotty comments if you're a registered user.

9. Dragging in one of those topics that's guaranteed to generate a huge thrash that goes nowhere, like gun control, abortion, or Mac vs. PC vs. Linux. You're only allowed to discuss those if (a.) they're relevant to the entry; and (b.) everyone in the discussion is doing their level best to say something new.

10. This list will undoubtedly get longer.

Well said!

Saturday, March 29, 2008 | 05:30 PM | Permalink | Comments (27) | TrackBack (0)
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Volatility Spike, parts III and IV

Saturday, March 29, 2008 | 10:00 AM

On Thursday, we noted the increase in volatility  via a Financial Post column. Today's chart porn comes via the NYT & Barron's.

First up, the NYT, with this gorgeous info-graphic on volatility -- note the peak in 2002, which marked the bottom of the Bear markets (Oct 2002/March 2003):



Chart courtesy of NYT



Second, have a look at Dick Arms column in Barron's. Dick believes the recent volatility surge is a Bullish sign.

I have a lot of respect for Dick, as his methodology is statistically based and empirically driven.

Even if you disagree with him, you can at least respect his methodology, which has zero cheerleading content in it.



Chart courtesy of Barron's



Buy Volatility (January 14, 2006)


For Stocks, It’s the Wild West, East ...
NYT, March 29, 2008

Whiplashed? That's a Bullish Sign
Now Is the Time to Buy, Not Sell
Barron's, MARCH 31, 2008



Saturday, March 29, 2008 | 10:00 AM | Permalink | Comments (38) | TrackBack (0)
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