The economy is now officially in a recession.  It finally happened.  It feels like a self fullfilling prophecy to me, but we'll truly never know how that tail wags.  The news on the personal front has shifted a bit from retirement and stock holdings to layoffs.  I've had two friends lose jobs on Friday and a few more that are uneasy.  The thing to remember is that your personal economy can crash very quickly and without warning.  Reflecting back to my windfall allocation discussion regarding buying stock vs. paying down the mortgage, this is a great example of where folks could do right by themselves to pay off the house.  If you live within your means as it is, you could probably come close to making ends meet bagging groceries if you had no debt to pay (house, car, all paid off, no stupid credit card debt).  If you can't, that should be your goal.

While it is important to keep an eye on the macro, you can't do much about economic cycles.  The president and congress cannot do much about it either (even though they like to tell you they can, or at least how the other guy messed it all up).  However, you can do a ton for your personal economy.

All of the items I blog about ... trading systems, option plays, ETF and even individual stock buys should be considered after your financial house is clean.  I take it for granted that my readers are probably well aware of this, but I think it bears the occassional repeat just in case you missed it.

This is a good time to bring up an argument that has been absent recently.  I enjoy listening to personal finance talk shows from time to time.  Mostly it's folks who don't know how to make a budget or know how to make a budget but are unable to stick to it.  As a result, they're in a jam and call the host du jour to help bail them out.  From time to time, you get a caller who realizes a windfall of some sort.  Stock options, inheritance, bonus, etc.  Sometimes this is enough to pay off their home or at least put a big chunk against it.  However, caller X calls up the show with the bright idea to put the money in the market and keep debt.  Typically the responsible host will let them know how foolish this is.  While the caller explains the outsized return they will inevitably earn, the host explains the outsized risk they're assuming.  Naturally, it's tough to communicate this risk during days when the VIX is around 10.  Can we find anyone willing to do this with the VIX at current levels? Mysteriously, calls of this nature have dried up.

In real-time, I'd like to point out to those who may be considering this option.  I'm not of the mindset that it's a particularly bad idea to put some "found money" into the markets so long as you truly understand the risk.  Someone who decided to do this last summer probably has a spouse belittling them at this point.  But let me just say this from someone who understands the risk, if I were so fortunate as to run into some money that could put a substantial dent or pay off my mortgage, I'm paying off the mortgage.  Although at current levels, the thought of getting into the market with "found money" is much more attractive than it's been in quite some time for me.

For the long term, paying off the house may not be the most financially advantageous move one could make from a dollar perspective, but part of sleeping well at night is having a place to sleep.

I've been very good about following my plan.  I've remained fairly emotionless during the recent volatility and scooped up shares the whole way down.  Yesterday I did something very stupid.  I'd be making very good progress on the upswing (as I'm sure everyone had).  So I got nervous that it wasn't going to last and put a hedge in place.  This was completely against my plan.  Then I got on a 2 hour long phone call that took me past the market close.  On my way home I realized just how stupid I was.  I lost sleep over it, so I knew it was wrong.

I closed it out first thing this morning at a loss.  I probably could've waited for the pullback, but good discipline says don't try and correct a mistake, you'll likely only make it worse.  I can already tell you, I feel a lot better.  Psychologically it still stings, but there is no longer a knot in my stomach.  The very next thing you must do (or at least I must do) is remove that quote from your display.  Almost without failure, the mistake will move back in your favor and you'll get to kick yourself twice for the same mistake.

The gas shortage has caused most of the southeast, especially Atlanta (and I hear Charlotte is pretty bad as well) to reconsider our activities.  So now, even though I currently have enough gas to get to work this week, everyone in the household has curtailed activities that involve driving somewhere.  We're making conservative and likely prudent decisions to ensure that we can perform our responsibilities as we get through this crazy time.  To me this type of "tough" decision making is what separates responsible people from the vast majority that are irresponsible.  We don't go to football games, cruise the strip, visit a friend across town instead of conserving what we have to handle our responsibilities in the coming weeks.  So here again, I see those running out of gas at football games and other things that don't matter.  These are the same people that probably won't make it to work on Monday thinking they have an air tight excuse.

This can directly translate to the current financial situation.  Too many people made decisions for the day without any respect for the consequences that lie ahead tomorrow.  Like those that aren't going to make it to work Monday, they have a sob story and an "air tight excuse", but the bottom line is that they acted irresponsibly and need to suffer the consequences.  While we continue to reward bad behavior, the markets, the economy and the country will continue to suffer. We're going to lose, or may already be losing our edge as we spend our efforts giving candy to the crying babies.  It warmed my heart to see some people taking to the streets to oppose this bailout.  Even if the alternative is a lot of pain for this country, I'm in favor of it.  It's time that people developed a sense of fear. Hopefully this fear will turn into more responsible decision making in the future instead of hopes of being bailed out again.

And on a lighter note, for those not in the southeast, I may snap some photos of the gas lines and stations with no gas (which is the vast majority of them).  You see the pictures from the 70's and it seems strange, and the first few times you see stations with the gas prices blanked out, it's very strange.  Now it's strange to see stations with gas.  The unfortunate thing is that people are getting mean and rude.  Slight panic is setting in and people are going to bizarre extremes to make sure their tank gets filled.  What's worse is that people are topping off, which only adds to the problem.

So my weekend plans consist of planning a way to get fuel at some point this week, seeing where my money ends up and how I can access it (thanks to the WaMu failure), and seeing how much of my tax dollars go to undeserving people.  Certainly not your typical weekend.

My bank failed.  However, we're lucky to have JPM come in and keep the day to day operations up and going.  I was half hoping to experience the FDIC in action for a life experience.  Call it sick, and you're probably right.  Of course, we did not keep amounts that were uninsurable in there, so at worst I would've been out some time and maybe a few bounced check fees?  As it stands, none of that is going to happen.

But another big icon falls.  As in the tech boom and subsequent bust, names that had become ubiquitous seemingly overnight were crumbling and becoming memories. Me and a friend recently spoke of WebVan.  This wasn't a company that crumbled that long ago (2002?), but half of the people at the table gave puzzled looks.  So it will go with Lehman, WaMu, IndyMac.  It will all be something we can point back at as experience.

There's some speculation that the jobless claims number is acceptable since the number of claims fell this week by 10,000.  I'm here to say it's not good.  Anything over 400,000 is bad, it's particularly bad when the moving average is well over 400K.  The standard moving average to smooth out the jobs number is 4 weeks.  Apparently this is a volatile number, but I don't think it's that bad.  This feels like a repeat of 2001-2002 and the numbers are much the same.  The only thing different are the players.  The 01-02 jobless claims hit the tech sector the worst.  I am in the tech sector and I can tell you that everyone that I knew from friends to ex-coworkers were on the chopping block.  So everyone lost their jobs, but the good news is, every one pretty much stayed employed throughout.  They either took pay cuts or had to accept short term contracts to make ends meet.  I didn't actually lose my job at the time, but my employer quit paying me.   So I had to move along.  The employer eventually made good, but he was in an expansion phase and the capital he supposedly secured to do it with dried up on him.

So fast forward to today where we have a repeat in the trend and about the same numbers.  The situation is not good, only this time it's not good for the financial, homebuilders and construction businesses.  Everyone I know (which isn't a lot) associated with these sectors has had a job change, pay or work reduction or at the minimum some tense times.  The good news for them is that I'm breaking out my crystal ball and I can see that people will need money and homes in the future.  These sectors will make a fashionable come back, I'm sure of it.

If you're currently employed in the hardest hit sectors and have lost or are in fear of losing your job, I'm telling you to hang in there.  It'll work itself out and just about everyone I knew in the tech sector who lost their jobs is actually better off today than they were ... some very substantially.

All right, the old blogging software finally got on my last nerve.  There were just too many basic bugs in the thing and the last straw was justifiable complaints that people couldn't find anything since the calendar and category links seemed to be broken.  I think the only thing that worked right was the search and even it had cosmetic problems.  There have also been no updates to the software since I started using it.  This makes me think that it's probably been left out to dry.

So here's some new software.  It was a bit painful, but I managed to migrate all posts and your valuable comments over to the new system.  So far the back end administration stuff seems quite nice.  The layout is a little plain, but compared to the other layouts with this software, this is the most fitting.  Don't be surprised if I switch themes once or three times just to see how it turns out.  I do admit that this software seems clean and things are easy to find.  Everything seems to be in the right spot.

I hope it will provide a slightly better experience and those who only visit us once or twice are able to easily find what they're looking for.

Oh, and another pretty nifty feaure is that with a single click you can rate my article.  It's completely anonymous, so don't be afraid to give me the rating I deserve. 

<rant>

The headline regarding the Amex miss is

"Card giant's results underscore dire state of the U.S. economy, as even some customers with good credit histories fall behind on bills."

Well, duh!  Good credit histories which are represented through good credit scores outline the true problem with this barometer.  A good credit score is nothing more than someone who paid their bills in the past and has the capacity to have a lot of debt going forward (did you know that closing a credit card out can actually HURT your credit score?).  It does not seem to take net worth into consideration.  So someone who has been eeking by all of these years living the proverbial paycheck to paycheck American dream is experiencing their first lesson.  This lesson propagates to Amex's bottom line.

I believe credit scores should be banished or at worst, their significance diminished.  This "people with good credit" line that we'll undoubtedly be hearing more of is misleading.  I have a feeling that this will begin to irritate much like the "people with less than perfect credit" did during the home loan extravaganza.

</rant>

If I had to take a guess at this week's action, I'm going to guess that people are already going to get tired of hearing "we only lost 5 billion instead of 10 billion, pop the corks!".  The sell off in (good) financials was overdone most likely and last week was a pop back.  The better companies (C, JPM) popped back harder than the ones that could find themselves in serious trouble before this thing is over with.  However, I think we'll be giving back a little of those gains this week.  The only thing throwing a wrench into my theory on a quiet, down week is earnings.  There are some serious earnings reports this week, including my newest fund pick AXSYS on Tuesday.  I still think a lot of volatiliy this week as the reports are processed, but all in all, probably slightly down.

I hope I'm wrong.

I don't know why I'm getting a kick out of this, but FDIC insured was always just fast lawyer speak at the end of banking commercial.  I don't think anyone ever considered whether or not their account is/was insured before opening an account somewhere.  Fortunately, I think you'd have to go out of your way to open a non-FDIC savings or checking account at any bank.  But what's truly comical is that now FDIC is coming up in normal conversation.  When was the last time you and your loved ones talked about FDIC?  Do we have it?  What is the max insurable amount?  What do we have at risk and where?  And I've even heard a story of a little old lady who has withdrawn her entire life savings out of a big bank here in Atlanta.

Just so you don't have to look it up, the FDIC insures $100,000.  To basically insure more than that, you need to open multiple accounts.

I once said if I had to run around town opening up bank accounts to make sure all of my funds were FDIC insured, what a wonderful time that would be.

OK, completely off topic, but fun (or funny), I think.  It's a glimpse into the American psyche.  The constant quest of getting something for nothing, or at least getting something on the cheap.  You've probably experienced this even among random strangers on an airplane who ask how much you paid for the ticket.  Their eyes light up if they paid less than you and they're down right depressed if they didn't.  Who cares.  Gas prices are another good example of this.  Living in Georgia, our gas prices are typically lower than most.  Talking to relatives in different states, they feel I'm "lucky" because I'm paying 3 cents less than they are.  Please.

So now I'm reading stories of people lined up out the doors to get this Apple iPhone because the price had been lowered from $399 to $199.  Woah!  $200 off.  I'm fully aware of how corporations constantly try and fool people into thinking they're getting something for nothing, so I dug deeper.  Come to find out, you'll actually pay more for that phone in the long run and here's why.

Signing up with AT&T requires a 2 year committment.  I've been told that the iPhone is really no better than any other phone without getting a data plan.  The data plan is currently priced at $30 per month where the original iPhone data plan was priced at $20 per month.  Over the course of two years, phone + data with the original plan was $1,875.  The new phone with data plan is now $1,975.

Oh so, why did I name this article "Krazy Tuesday?".  This all reminds me of a brilliant gas station owner close to where I used to work in the mid 90's.  The Citgo station would have cars piled out into the street, blocking traffic each and every Tuesday.  Why?  Because premium gas was the same price as regular!  What a steal!  Well, except for the fact that he didn't actually lower the price of premium much, he raised the price of regular unleaded.  He called it Krazy Tuesday, but it certainly wasn't the operator of the gas station that was crazy.

Enjoy your Krazy Saturday iPhone buyers.

The usual "we've been busy coding" applies, but I'm surprisingly quiet on all things market right now.  The oil thing makes me turn green (sick of hearing of it), the crash bats are out as usual, and while they're still rolling many off the line, I haven't really seen an ETF lately that has caught my eye enough to write about. 

As far as my positions, I'm still sticking to my plan and this morning looks like there are a couple more ripe for the picking on the buy side.  I've already sold puts on my two favorites (GE & MSFT), so it's really just time to add to longer term holdings while things are on the cheap.

Could they get cheaper?  Sure.  Much cheaper?  Absolutely.  But this could also turn around in an instant and you'll miss out.  I've been in this predicament before.  The only thing you can do is buy when it's relatively cheap and not worry about picking bottoms or tops.  My trading systems have also flagged some buys today.  There's probably too many buys for my taste right now.  I'd like to leave some dry powder available.

Oh, and if you want something useful to read, there is an interesting little article over at gummy-stuff that discusses a pain (drawdown) calculation.  It's fairly interesting (click).

If I don't talk to you by the end of the week, have a great 4th of July.

In the mind of a trader the first thing that is usually analyzed is risk.  What happens if the trade moves against me?  Where do I sit if the asset moves away 10%, 20%, 50%?  The second piece dissected should be reward.  I know a lot of us count on our income to make the mortgage payment.  But what happens if that "underlying" decreases 10, 20, 50, or 100%.

Back in 1999 when I bought my home I was absolutely floored at the amount the lender qualified me for.  Sure, I had good credit and a decent income, but if I would've purchased a home with the approval amount, I would have no cushion at all.  This amount made me immediately start number crunching and after I realized how ridiculous it was, I came up with the number I felt I could handle in good times and bad (it was less than half of the lenders number).  So as I look at the news and see that Ed McMahon stands to lose his multi-million dollar home, I start to wonder, who's the fool here?  I don't mean this about Ed in particular, although it's certainly applicable, but the question posed casts a wide net covering borrowers and lenders.  If I were a bank, I would not have extended the amount of money to me that they did.  And as I stated above, as a borrower, I knew that borrowing that amount of money would put me in a very risky situation.  A prolonged illness, a layoff, a salary cut, or any other situation that choked income for a month or two would've put me in a bad situation in a hurry.  Investors and traders talk about risking their trading accounts or retirement funds, but what's riskier than gambling with your home?  Also, I was glad to hear Ed say what do you expect when you "spend more money than you make".  At least he's not trying to blame the economy, the president or the federal reserve.

So what were the lenders thinking in this situation?  They should know by now that bad things happen to good, payment making people from time to time.  Why would they accept this level of risk for a relatively low return?  I understand it's a numbers game, but even if a sector of the economy tanks, that's a lot of people unable to make payments, and apparently such a small fraction is taking these big institutions out.  Who does risk analysis here and are the shareholders of these institutions so fixated on reward that they completely ignored risk?