The recession is cranking up into full gear.

There is a little boutique downstairs from my office that is going out of business.  I always thought it was a such a cute little store and I even bought my favorite candle ever (voluspa’s vanilla bourbon–which is so romantic and boudoir-ish) there.  I thought their window displays were cute but most of the stuff was a little out of my price range (denim in the $150-$250 range, tops $50+, and dresses $100+) and they never put much stuff on sale.  I probably would have marketed and merchandised my store a bit differently, but it is still sad to see it closing its doors.

Almost every day I read about more companies laying off employees.  Today Macy’s announced it is laying off 7000 jobs.  That is just another company to add to the list of Boeing, Microsoft, Starbucks, Kodak, and others.  It is really quite distressing and everyday I am thankful that I have a job.  Really the best way to ensure you keep your job is to work harder.  No longer are the days of coasting and hoping things don’t happen–now it is even more important to pound the payment, try and toil, and truly put in the effort to earn your paycheck.

We have really been trying to cut back ourselves.  We are trying to cut out eating out at restaurants and cooking more.  I am also trying to only buy things on sale at the grocery store. I think it is necessary for everyone to really stop living beyond their means and focus on cutting back on the little extravagances and really try and save money.  Even if you think you have job security, no one really does (just ask my good friends at Microsoft that watched their whole division get cut).  Everyone is expendable.  That means it is time to work harder and put it in a little more elbow grease.

Make sure you have a plan for how to spend your money.  You need to be prudent in saving and plan what your expenses are each month.  You should know how much is in all of your accounts.  Budgets are a good thing.  Planning and goals are also good things.  Make sure you have them for all aspects of your life including your finances.  It is important to be able to set aside some savings should something unfortunate happen.  It is likely things may get worse before they start improving.

Here are my very simple steps for prudent finances in 2009:

1. Spend less than you earn and save money.
2. Work hard at your job.  You don’t want to risk losing your source of income.
3. Set a budget and plan what happens in your life.  Don’t let things happen to you.

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Oprah and Suze Orman have teamed up to provide people a free financial plan for 2009.  I went ahead and downloaded it (I love Oprah, not as much of a Suze fan, but she has good common sense advice), and here is my summary:

1. Get out of credit card debt.  Credit card companies are trying to reduce leverage and are taking tactics like lowering credit limits, canceling accounts and rising interest rates–this means you need to read each and every notice you receive from a financial institution so you are knowledgeable about what is happening with your accounts.  These are not borrow friendly conditions.  The best thing you can do is get rid of this type of debt (this is also a good thing to do, anyway, because credit card debt is the highest interest debt).
2. Stock up an emergency fund.  Credit cards are no longer the place to borrow in a pinch (see point above), and unemployment is skyrocketing.  This can have a rippling effect and may even put your job at risk.  You need to be prepared.  You don’t want to get behind on your payments because of an unforeseen emergency.
3. Keep investing in your retirement accounts.  This is so important–you need to have a vehicle for your savings.  You should continue to buy stocks, bonds, and whatever asset mix is appropriate for your age and goals.  Even though a lot of retirement accounts lost as much as 30% it is not the time to stop putting money into stocks.  Don’t be afraid, it is still a great time to invest–there are a lot of bargains and opportunities out there.  I think that Suze does a great job outlining all the excuses and scenarios people have made with regards to putting more money into their 401ks–if you disagree with this advice you should certainly read the ebook.
4. Be prepared to convert your IRA or old 401k to a Roth IRA in 2010.  They are removing the income limit and allowing you to pay the taxes over 2 years.  Roth IRAs are good because your money can go tax deferred.
5. Spend less.  It is the easiest way to achieve financial freedom.  You should always spend less than you earn.  Separate wants form needs and learn to do without the things you don’t really need.  Then make sure you save that excess.  Aim to have at least 8 months of living expenses tucked away. Suze also provides a handing worksheet to help catalog and inventory your monthly spending, so you can see where you might be able to cut back.  And remember, every little bit helps.
6. Get health insurance (being prepared for the worse), and have your estate in order.  You need to protect yourself and your family, make sure you have taken the necessary steps to ensure that happens.

And her 3 big takeaways, which are really words to live by:

• When it comes to money, if it sounds too good to be true, it is.
• If you cannot afford it, do not buy it.
• Always choose to do what’s right, not what’s easy.

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I hope everyone had a very Merry Christmas!  I am finally back, after a bit of a winter hiatus.  We had some pretty fantastic weather in Seattle, with over a foot of snow!  It was fun–we built a snowman and frolicked in the snow, but not being able to drive and being cooped up in the house meant less gifts (I had planned to do some of my shopping at the last minute but was unable to venture out, and no packages arrived on time from my online purchases) and a serious case of cabin fever (we ended up doing every jigsaw puzzle we had in the house!).  It was a very fun time though, and I am sad that Christmas is already over.

And with the sadness that marks the end of Christmas I was also sad to return to bad news about retail sales.  According to this article, retail sales were down 4% despite deep markdowns and clearance prices.  Analysts had orginally forecasted that they would only *increase* 1-2% (last year they were up 2.4%) so the 4% decline is really quite big.  This is going to translate into more layoffs, less consumer spending and I can only guess that things are likely to start improving in the beginning of 2009.  So put on your seatbelts, this is going to be a really unpredictable and wild year.

As for investments, I am betting on a bear market for the short while.  Although there are a lot of good stocks that are certainly bargains, I think things are going to get worse before they start to improve.

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I have been worried about the economy for some time.  It seems like everyday there is more news of lay offs and everytime I look at my 401k I worry about how the rest of America is doing.  I consider myself lucky since I have a in-demand skill set and make enough money to be able to save enough every month.  Of course I worry about my friends, our tenants, and certain members of our family.  It seems like everyone you talk to is being affected by the economy.  So when is it all going to end?

The interesting thing is that more bad news, decreases consumer confidence, which decreases spending–effectively putting the whole thing in a downward spiral.  I have been doing my best with my little fashion binge recently to increase consumer spending, but now I am feeling guilty and am back into save mode (with the exception of Chistmas, but those are gifts for other people so it doesn’t count).  It is definitely an interesting time.

On a more personal note, I have been thinking about investing recently.  So I did buy some stocks and they haven’t really done all that well (no surprises here), but I also converted my 401k out of mutual funds and into cash (which minimized some of my losses), but now I have a bunch of money I am trying to figure out when to invest.  So I have been watching the stock market and thinking it over. I am thinking the end of Q1 may be the best time, so that is my current plan in effect.

As for real estate, there has been a lot of local news about depressed housing numbers–but there has also been bits and pieces about Seattle being a good prospective investment.  Of course that same article also says that you can expect the housing market to be a downer for 2009 and 2010, with some sign of recovery in 2011 (which they describe as a slow recovery).  This can be good news for some though, because it gives you a good 1-2 years to start saving now (since you will likely have to put 20% down on most properties).  Needless to say, this is a good time to start cutting back and saving more.

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I have been so busy getting ready to go on my vacation I feel like I haven’t had time to even check email let along post.  I wanted to write a brief post though so at least people felt like I hadn’t just disappeared.

The economy is really scary.  There are lots of blog posts going up now about how the world is sprialing into the abyss.  I have been reading it for some time but I guess I never really believed it.  I think the optimist in me keeps hoping everything is going to bounce back.  I sure hope that is indeed the case.  I still haven’t sold my stocks, and I am actually thinking about maybe buying some more while the market is down–call me crazy.

Since I don’t have much to talk about–here is some good advice for clear or stormy climates…..

http://www.docstoc.com/docs/1822343/CEO_ALL_HANDS_10-7-08_FINAL

http://blog.weatherby.net/2008/10/a-ceos-sequoia.html

From The Funded:
Today, Sequoia Capital hosted a mandatory CEO All-Hands Meeting on Sand Hill Road. There were about 100 CEO’s in attendance and let me tell you, the mood was somber. I’m not one to perpetuate doom and gloom or bad news, but let me underscore this for you: We are in a serious economic downturn and this is just the beginning. Immediate, decisive and swift action is required, along with frugal, day-to-day management of expenses and our business is required.
***Here are my notes from the meeting. Keep this note in your in-box and read it every day. I’m serious folks, this is for our survival.***
Speakers:

• Mike Moritz, General Partner, Sequoia Capital (he moderated the speakers).
• Eric Upin, Partner, Sequoia Capital (Eric ran the $26-Billion Stanford Endowment Fund and knows a few things about Economics and investing.)
• Michael Partner, Sequoia Capital (Michael was recruited to start Sequoia’s very first hedge fund, coming from Maverick Capital and Robertson Stephens. I know him from my BEA days.)
• Doug Leone, , General Partner, Sequoia Capital

Slide projected on the huge conference room screen as people assembled inside the conference center to take their seats: a gravestone with the inscription: RIP, Good Times

Mike Moritz:

• The only time Sequoia’s assembled all CEO’s like this was during the dot.com crash.
• We are in drastic times. Drastic times mean drastic measures must be taken to survive. Forget about getting ahead, we’re talking survive. Get this point into your heads.
• For those of you that are not cash-flow positive, get there now. Raising capital is nearly impossible if you’re too far off of cash flow positive.
• There will be consequences for those who hesitate. Act now.

Eric Upin:

• It’s always darkest before it’s pitch black.
• Survival of this storm means drastic measures must be taken now, so you will have the opportunity to capitalize on this down turn in the future.
• We are in the beginning of a long cycle, what we call a “Secular Bear Market.” This could be a 15 year problem. [many slides on historical charts of previous recessions, averaging 17 year cycles.]
• The credit market [versus the Equity markets] are the issue and will take time to recover.
• Inflection point: Make changes, slash expenses, cut deep and keep marching. You can’t be a general if you turn back.
• This is a global issue and not a ‘normal’ time.
• There is significant risk to growth and your personal wealth.
• Advice:
  • Manage what you can control. You can’t control the economy, but you can control everything else.
  • Cut spending. Cut fat. Preserve Capital.
  • Don’t trust your models and spreadsheets. All assumptions prior to today are wrong.
  • Focus on quality.
  • Reduce risk.

Michael Beckwith:

• Note: Michael had a lot of slides that were charts, data points and comparisons.
• A “V” shaped recovery is unlikely
• Cuts in spending will accelerate in Q4/Q1. Look at eBay—this is just the beginning.

Doug Leone:

• This is a different animal and will take years to recover.
• Getting another round if you’re not profitable will be rough.
• Do everything possible to get to cash flow positive. Now.
• Nail your Sales and Marketing message.
• Pound your competitors shortcomings. They’re hurting and they will be quiet. Take the offensive.
• In a downturn, aggressive PR and Communications strategy is key.
• M&A will decrease dramatically and only lean companies, with proven sales models will be acquired.
• Spectrum discussion:
  • Capital Preservation ß———————————-à Grab Market
  • Everyone should be far to the left (capital preservation)

Requirements of our companies.

1. You must cut  expenses. Now and deep.
2. Your product  should reduce expenses and drive revenue
3. Honestly  assess your solution vs. your competitors.
4. Cash is king  [have you gotten this message yet?]
5. You must get  to profitability as soon as possible to weather this storm and be  self-sustaining.

Operations review:

• Engineering:  Since you already have a product, strongly consider reducing the number of  engineers that you have.
• Product: What  features are absolutely essential? Choose carefully and focus.
• Marketing:  Measure everything and cut what is not working. You don’t need large Product  Marketing, Product Management teams.
• Sales &  Business Development: What is your return on this investment? The Valley has  gotten fat with Sales people: Big bases, big variables. Cut base salaries on  sales people, highly leverage them with upside (increase variable) and make  people pay for themselves via increased sales productivity. Don’t add sales  people until you’ve achieved your goals with sales productivity. Be  disciplined.
• Pipeline:  Scrub the shit out of it and be honest with yourself.
• Finance: Defer  payments, what is essential? Kill cash burn.

Death Spiral (Nobody moves fast enough in times like these, so get going and research later.)

• The death  spiral sucks you in, you’re in it before you know it and then you die.
• Survival of  the quickest.
• Cutting deeper  is the formula for survival.
• You should  have at least one year’s worth of cash on hand.

Tactics:

• Assess your  situation. Drop your assumptions, start with a blank page and start zero-based  budgeting.
• Adapt quickly
• Make your cuts
• Review all  salaries
• Change sales  comp
• Bolster your  balance sheet—if you can add $5M to your coffers, take it and save it.
• Spend like  it’s your last dollar

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For those of you who want to learn more about the credit crisis and how we got there here is a link to an NPR broadcast that does a great job breaking it down so it is easy to wrap your head around it:

Listen to the show: http://www.thislife.org/Radio_Episode.aspx?sched=1242

Read the transcript: http://www.thislife.org/extras/radio/355_transcript.pdf

Also here is a good graph that depicts the history of home prices and how things were affected from the aggressive lending: http://www.nytimes.com/imagepages/2006/08/26/weekinreview/27leon_graph2.html

I was reading an article last night that was on on cnn money, that said go ahead and get mad about the bailout, but then feel comfort in the fact that things would be much more painful without it (which may very well be true).  But to be honest, I am really frustrated for a couple of reasons–I feel completely powerless to change the decisions, it is going to impact me in a negative way.

There are two parties that can benefit from the bailout–the rich wall street bankers or the reckless homeowners.  It seems like every article you read is looking for someone to blame.  Of course it is easy to look at the incredibly wealthy executives with the golden parachutes and think that their greed finally got up with them.  Part of me thinks they are to blame and should suffer for the risks they took–after all isn’t that what the whole free market is about?  You take risks and sometimes they pay out (everyone knows about the big paychecks and bonuses the guys on wall street received year after year), and sometimes they don’t (when your risks don’t pan out).  It only makes sense those people should be responsible for these losses.  Of course I am slightly jealous of these people.  I am all for saving our economy, but I think we should figure out a way where these people could have hiring taxation or should have to help pay for some of the losses from their risks.  Of course, I would love to one day be able to have a job like that–when I can work hard I can really be rewarded for that hard work.

Here is a good blog post that lays out some rules for the bailout that helps with the richer side of the story.  All of the rules seem really fair and seem to place blame on some of the people who made the hefty profits.

Other people look at the poor reckless homeowners that are losing their homes and think they need rescuing and should be the recipients of the payout. In some ways that makes me even more mad.  if you listen closely to each of these stories, there is almost always some track record of irresponsible spending, people living beyond their means. These people took out loans they knew they couldn’t afford–many of them bought mountains of junk (the reckless consumerism that plagues our society), many took expensive vacations, and some leveraged their investments on speculation hoping to make some easy money.  Why should these people be saved?  The only family I know who could be considered one of these victims certainly spent their way into their problems.  The wife has a nanny and doesn’t work, the husband wears a rolex.  They eat at the most expensive Seattle restaurants and have two brand new cars.  Every time I would talk to them they were buying something new.  In my (perhaps heartless) opinion these people deserve to lost their home.  They should have made sacrifices, not bought so many new things, and saved money.  Didn’t live a champagne lifestyle they could not afford.  Of course it is easy to feel sorry for someone who is losing their home, but it is hard for me to blame a mortgage broker for giving them a loan–it is much easier for me to blame the people for their exuberant lifestyle.

So that leaves the people who have been living within their means, working hard, and trying to get ahead–those people are the real victims in this whole scandal.  It makes me sad that this is the way things shake out.  I know life isn’t fair and I truly hope that when all is said and done the government will think about the responsible citizens.

Just my $0.02.

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Over the past month or so we have been hearing about big banks failing under the credit crisis (you can’t really call it a mortgage crisis anymore).  Merill Lynch, Lehman Brothers, Washington Mutual all have suffered headlining losses.  Now there are rumors that Morgan Stanley and Wachovia are next (and possibly Goldman Sachs).  We know more bank failures are on the horizon:

Many economists are predicting bad things but I am trying to stay optimistic (finding global data on what is really going on is actually *really* hard to do!).  However, history has shown that even in down times there are still good stocks to buy and a bear market can mean opportunity for those who are willing to stick their neck out and take advantage of it.  So what does this mean for you?  Should you be worried?

To figure that out I went through most of the things on people’s minds and tried to address each one:

1. Savings Accounts. Make sure that you don’t have more money in any one institution beyond the amount that is FDIC insured ($100,000 generally).
2. Financial Stocks. If you own stock in any of these troubled banks it will be unlikely you will likely be unable to recoup your shares if they go bankrupt (the stock price decreases until it is less than $1 then after 30 days at that threshold it will be moved off the NYSE, etc–and regular common shareholders end are the last ones to be paid out).  If I owned shares in these places I would consider selling them now–my guess it buying them will still be a bargain towards the end of the year as most investors will be gun shy about putting there money back into these big banks.  A lot of mutual funds had stock in many financial institutions so it is likely your funds may be suffering.  If that is the case, just hold tight I have no doubt the fund managers are scrambling to adjust the funds (and if you have an index fund, well at least you know you won’t do worse than the market!).
3. Stocks. If you have stocks you might be best to just hold tight.  We are entering unknown territory and while it is likely index stocks will trend downwards, buying a good company is always a smart move.  This could be a great time for great deals.  But it is not necessarily the best time to sell–things are too volatile so if you don’t need the money within the year you are probably best to hold tight and ride out the storm.
4. Your home.  Keep paying your mortgage.  Even if your lender fails there is a good chance your debt will be sold to another institution.  As far as home prices, just hold tight–it looks like there might not be much appreciation in home prices, but the lower mortgage rates will probably even out the housing market some.  I still don’t think real estate is a great investment yet, but for the most part shelter is always a worthwhile investment so as long as you can afford your mortgage you should just hold tight.
5. Retirement accounts. If you are not close to retirement age, and are properly diversified (I should write a post on how to do this–but if you don’t know how you should do some research or ask for help) then you should resist the urge to look at your account.  It is protected even if your institution fails and looking at it everyday is only going to stress you out.  Ride it out and remember that even severe decreases seem insignificant over time.
6. Credit cards.  Even if you bank goes under you should still keep paying.  The debt will likely be transferred to another institution.  This should be obvious, but I figured I would point it out just in case.
7. Insurance.  Even though AIG failed, the consumer arm was never in trouble.  For the most part you are probably okay here, since even if your provider fails there are some fail safes and it will go to a state regulator.  I don’t know much about these insurance policies though so you should really check with your carrier.
8. Budget. Spend less, save more.  You should be doing this anyway, but as the economy moves into troubled times trying to save money and be frugal is always a good move.  This is probably the biggest concern for most people since recessions can mean less jobs and having a good safety cushion is important to handle anything that is unexpected.

Did I miss anything?  Feel free to leave it in the comments!

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Last week UPI published an article:

This is certainly an interesting side effect of the economy, and it kind of makes you think a little more about the psychological impact of times like these. I definitely think people tend to be a bit more prudent about their spending but I wouldn’t necessarily conclude it would extend to their extracurricular activities. It would be interesting to read the research that came to this conclusion. Is it possible that maybe less women were on the beach (having less spare money for vacation)?

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Over the weekend the NYT ran an article of The Debt Trap a series of video and articles about various people in America who have ended up victims of the credit crisis. It is shocking to hear the stories of these people and how they tried to get ahead and despite their best efforts they ended up losing their homes. These people are hardworking Americans who were given too much credit. The greediness and profits of the investment banks and credit card companies allowed these people to borrow more than they could afford. Banks charged fees on everything: late payments, over limit charges, and of course interest. Is it right to blame the banks? Should we really feel sorry for these people? People have consistently lived beyond their means only thinking about today, and the banks have taken advantage of that. In the forums there are people on both sides of the discussion. I think the scariest part about the whole thing is that the repercussions we are starting to see is just the beginning.

Mortgages was the first thing, but pretty soon people aren’t going to be making car payments and other debt payments. Loans are already harder to get, but I believe that increasingly loans are beginning to fail. The Seattle housing market which was initially strong compared to the rest of the country is starting to see massive increases in unsold inventory. Pretty soon, prices are going to start to fall as there is a shortage of qualified buyers and excess inventory. I have also felt like consumer spending must be decreasing. I was shopping online last week and I have started to notice far more items on sale–and things are deeply discounted (I found a pair of Kate Spade pumps for $78 on ShopBop.com which is basically unheard for the most part). It really makes me start to worry. We are starting to see the effects of increased fuel prices and the lack of credit.

There are lots of articles about inflation running rampant, and there is new legislation being proposed to help bail out the banks that made the bad loans (at the expense of tax payers)–will any of these actually have an effect and change the outcome? With inflation heading near 5% most workers won’t even see pay increases high enough to compensate for the increase in their cost of living. This are all kind of scary when you think about it. Especially when you consider so many Americans have been living largely on credit and have little to no savings.

So what can you do:

1. Start saving. For many people this is a lot like trying to be on a diet, easy to say but often hard to do in practice. However, if you don’t have an emergency fund now is the time to start saving one. Just listen to the videos in the NYT article on debt–the young couple could have likely saved their home if they had 2-3 months of income put away.
2. Decrease your spending. If you have credit cards and can’t control your compulsive spending then cut them up, or pour them in a bowl of water and freeze them so you don’t use them except in a dire emergency (by the time the ice defrosts you can decide how much you really need to make the purchase). You should always spend less than you earn. And try to live by the rule that if you can’t pay for something in cash (i.e. you don’t have the money in your bank account) then you shouldn’t spend the money.
3. Get out of debt. If you owe money then come up with a payment plan. Sit down with your bills and accounts (or have someone sit down with you–I have done this for lots of my friends) and figure out a plan on how to get ahead. Starting with small steps and having a clear goal will give you a better chance at success.

The most important thing is: do not ignore your situation. Make sure you have a clear plan on what to do if you lose your job or something bad happens and you lose your income. If the economy continues to decline make sure you have a plan and an emergency fund.

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I came across this article today and I was really bummed to find out that our economy is in as bad of a state as it is.  Starbucks announced that is was going to close 500 stores and lay off 7% of their work force.  The article insinuates this is because of weakened consumer spending, in addition to companies like McDonalds encroaching on their market share.  It makes me worried about what lays ahead as energy prices continue to rise–and there doesn’t seem to be an end in sight.  I think I have been spending a little more than normal (the summer sales and the fact that I have lost some weight and not all my clothes fit).  I just thought this was sad, since Starbucks is one of my favorite companies, headquartered in Seattle (where I live), and of course it reinforces my worries the economy is just going to get worse.

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