Jason explores the benefits of being a direct investor and the problems of group investing or pooling money and going into other people’s deals, businesses, partnerships, LLC’s, REIT’s or TICS. Hear a chat with Jim Cramer of Mad Money and The Street.com.
Announcer: Welcome to Creating Wealth with Jason Hartman, President of Platinum Properties Investor Network in Newport Beach, California. During this weekly program, Jason is going to tell you some really exciting things that you probably haven’t thought of before, or a new slant on real estate, fresh new approaches to America’s best investment that will enable you to create more wealth and happiness than you ever thought possible.
Jason is a genuine self-made multimillionaire, who not only talks the talk, but walks the walk. He’s been a successful investor for 20 years and currently owns properties in nine states. This program will help you follow in Jason’s footsteps on the road to financial freedom through real estate. You really can do it. And now, here’s your host, Jason Hartman.
Jason Hartman: Hello and welcome to another edition of Creating Wealth. This is Jason Hartman, your host, and I’m glad you’re here with us today listening. We want to remind you to be sure to also subscribe to our video podcast. I will be the first to admit that we haven’t been as active as we’d like to on the video podcast, but we do have some really good stuff coming up for you there. If you are an iTunes user, you can go to the iTunes store, type in Jason Hartman, and you’ll notice that two podcasts come up. One is our audio podcast. That’s sort of our main foundational podcast where most of the content is, but some of it is better said via video. So be sure to subscribe to the video podcast. You can either do that at our website, www.jasonhartman.com or you can do it if you are an iTunes user, at the iTunes store.
Today, I’d like to talk about one of my favorite of my Ten Commandments for Successful Investors and that is Commandment No. 3. Thou shalt maintain control. This is probably one of the most important aspects of investing. My 93-year-old grandmother, a long time ago, told me a great word of wisdom here. She said, “Jason, the hardest ship to sail is a partnership.” Isn’t that brilliant? The hardest ship to sail is a partnership. And if you think about it, when you invest in a stock or a bond, or you invest in someone else’s deal, in someone else’s venture, in any way, you are basically, in a way, a partner in their business, in their real estate deal, in their finance company if it’s a bond, for example. And you are subject to whatever they do. You are either going to be the beneficiary of what they do or you’re going to be the victim of what they do.
And most of the time, as investors, when we invest in someone else’s deal, we find ourselves as the victim of what somebody else does, and if you’ve ever been in a partnership, in a business with another person, you know how difficult a partnership can be. We say that you should always be a direct investor. Thou shalt maintain control.
So when you’re investing, don’t invest in anyone else’s deal of any kind, whether that be a stock or a real estate deal. There are many companies out there offering tenant-in-common investments. TICs they call them for short. T-I-C, TIC, Tenant-in-Common.
You know, a friend of mine came to one of my seminars a couple months ago and he’s made some money in TICs as the promoter of TICS, not as a passive investor in TICs. He said to me when I was talking about Commandment No. 3, he said, I kinda understand why you have to bash TICs. It’s because you don’t offer them and you don’t sell them.
Well, I beg to differ. We have been asked to promote TICs a zillion times. People have called me. One time, just one time, several years ago, we had a TIC or tenant-in-common investment promoter come in and promote their TIC deal, which is a partnership in essence. Not the legal definition of partnership, but it, in essence, is a form of a partnership. We don’t like them. They pay commissions. They are constantly offering to come into our meetings. They want to talk to our investors. They want me to interview them on my podcasts so that they can promote their deal to you. But our core principle is that you should be a direct investor.
Now, this may somehow change sometime in the future, but as far as I can see, I don’t think it will. So maintain control. Don’t invest in anybody else’s deal.
When I talk about this in my seminars, and if you’ve heard me talk about the Ten Commandments of Successful Investing, which is a prior podcast many podcasts ago – I believe it might be No. 16, if my memory serves correct – I quote Lou Dobbs and Lou Dobbs wrote a book that I discovered while I was skiing in Colorado last year and it’s called War on the Middle Class. You may have listened to Lou Dobbs or seen his program on CNN, and my mom is what I call a knee-jerk capitalist, and I find that a lot of people are like this. And I am definitely a capitalist. I am all for someone making as much money as they possibly can. However, where I’m against it is when other people are paying for it and the compensation is not fairly tied to what the investor is making. Someone else is investing in their deal, their company, whatever it is.
And I’ll just start off with this and I’ve got a whole bunch more newspaper articles to share with you and then I’ve got an audio track I want to share with you that I think you’ll find interesting. But let’s start off with the Lou Dobbs part. He says in War on the Middle Class, he’s says “median CEO compensation went from $1.8 million in 1992 to $6.1 million in 2000. CEO pay increased 340 percent from 1992 to 2002” – that’s ten years, folks – “while compensation for rank and file employees increased a mere 36 percent. By 2004, the average CEO pay was $9.6 million with 100 CEOs making more than $10 million, and 40 making more than $20 million. In 2005, the median pay for CEOs of the 100 largest U.S. companies increased to $17.9 million, an increase of 25 percent from the year before. The average employee, by the way, got a raise of 3.1 percent during the same period.”
Well, with what Lou Dobbs is saying there, doesn’t it make sense that you need to set your own rules for finance and financial security in your life? Well, that’s what we’re doing here as smart, prudent, conservative real estate investors.
Dobbs goes on to say, “In the past few years, we’ve seen levels of pay for individual CEOs that is beyond most people’s comprehension, money that sounds like it belongs in a company’s Revenue column rather than on someone’s paycheck. In 2004, Terry Semel, Chairman and CEO of Yahoo! was paid $120 million. Lew Frankfurt, head of Coach, was paid $58 million. Robert Nardelli, who runs Home Depot, made $36 million. Ed Zander of Motorola got $32 million, and Meg Whitman of eBay got $26 million.
“Most CEOs were paid above and beyond these salaries in stock options, which gave them an incentive to run up their company’s stock prices for their own immediate benefit at the expense of long-term corporate gains.”
Now, I’ll stop with Lou Dobbs for a moment. This is me talking. How many of you have ever worked for or maybe you currently work for a publicly traded company? Think about that. Now, I have a lot of friends and clients who have worked for or currently work for publicly traded companies and I am constantly hearing them talk about how what goes on inside the company has almost no relation whatsoever to what is going on with the company’s stock. And you know what that tells me? It says why do I as an investor want to be susceptible to a market full of speculators, people trading, selling stocks short or long, or trading options, or whatever the heck they’re doing. When the company’s core business many times has nothing to do with what’s going on with the stock.
Now, I don’t know how many of you listening have ever owned your own business or you might currently own your own business. I have for the past 11 years and I will tell you that businesses are incredibly complex creatures. There are so many things that can go wrong with a business at any given time, so many incredible complexities that influence the value of that business and its future existence at all. So let’s go on with the Lou Dobbs here.
“The standard rationalization for these astronomical salaries by CEOs, their boards of directors, and their consultants” – and most of those, by the way, are friends, old college buddies of the CEOs – “is that the CEOs are worth it because the companies they run benefit from their leadership and bring great value to their shareholders.
“Well, how then do they explain the fact that over the past 5 years, the CEOs of AT&T, BellSouth, Hewlett Packard, Home Depot, Lucent, Merck, Pfizer, Safeway, Time Warner, Verizon, and Wal-Mart were paid an aggregate of $865 million in compensation – that’s almost a billion dollars – while shareholders lost during the same period, shareholders lost a total of $640 billion dollars. Clearly, these CEOs were not being paid for delivering value to those who held stock in their companies.”
You know what I found, everybody? I found that a company has three audiences that it needs to please at any given time. A company has its customers, its shareholders, and its employees. And so far, in my experience, I have never found a company that can consistently please all three audiences because these three audiences have conflicting agendas and conflicting motivations. I mean think about it. Employees want the highest pay and they want job security. Shareholders want the highest returns right now; they want instant gratification. And then customers want the lowest price and the best deal.
So think about the companies you know. I mean I think about the big name companies that I know. I think about companies that please customers. Well, Disney seems to be a company that pleases customers; Nordstrom, a company that pleases customers. Yet, with those two companies, I’ve certainly heard lots of news about how employees are upset with them, suing them over wage disputes and things like this. Now, this is just general data. This is not very specific, so pardon me if I’m not exactly an expert on this, but I’ve just kind of noticed that over the years in the news.
Now you look at a company that has great products, like Apple Computer, and has also, at least recently, been very pleasing to their shareholders. So what about employees? Well, Apple has kind of a cult following and their employees seem to love Apple. Now, I don’t know if they pay them really well. I don’t know if they just love their products, or all of the above. Maybe this is a company that has succeeded in pleasing all three audiences.
But then again, let’s look at Apple’s customers. Well, they seem to like their products, but hey, their products are expensive. I have a Mac Book Pro I’m looking at right now and an iPhone and I tell you, I can get much cheaper computers and phones elsewhere, but they’re really innovative products. Whatever the case.
So we see how the heads of companies, the boards of directors, and the consultants are not being paid in relation to their shareholders. I believe that is unfair. In fact, Lou Dobbs goes on to say, “CEO compensation is often directly inverse to the performance of the companies they lead because their compensation is not tied to how the business performs. Their pay isn’t a reflection of their executive ability, but an aberration. The former CEO of Time Warner, Gerry Levin, walked away with a $163 million package after his last year at what was then called AOL Time Warner. How much do you think he should have made that year if he hadn’t entered into the worst corporate merger in history? Interesting question, one that eventually led to the write-off of nearly $100 billion.
“Levin’s story is not unique. Alfred Lerner, the former CEO of MBNA” – you’ve heard of MBNA, sure you have; big credit card company, financial institution – “made more than $194 million in 2002, a $9 million salary, and another $186 million in options and other compensation. Lerner died that same year and his successor, Charles Cawley, was paid nearly $49 million.” That’s nearly a quarter of a billion dollars in compensation for just two people! Two people, quarter of a billion dollars! “With such high paid executives, how did you think people who’d invested in MBNA fair? Return to them was negative 18 percent.
And then there was Larry Ellison, founder and CEO of Oracle. From 2000 to 2002, Larry’s personal take from the company was $781 million.” That’s almost a billion dollars in just two short years. Not bad, huh? “But shareholder return was negative 61 percent during the same time period.”
Bonuses this last holiday season were just handed out on Wall Street. In an article, January 4, this is off www.msnbc.msn.com. It’s says, “$15,000.00 bottle of bubbly? No problem. Big holiday bonuses are flooding the New York City economy.” It says that a restaurant owner, “Michael Aaron learned that Wall Street investment banks were going to be shelling out record bonuses this holiday season, the savvy wine merchant uncorked his own plan to make serious dough.
“He paid for a double-page ad in The New York Times, boasting a rare Methuselah-sized bottle of 1995 Dom Perignon. The price tag – $14,950.00.”
Then there’s a little side story here. “Santa has been good to bosses. December 19: Are cushy executive bonuses an outrage or an essential part of the world’s largest economy?”
And then, you keep going on with the story. It says, “Jaw-dropping bonuses.” This is Goldman Sachs, okay? “The company reported a staggering profit last week of $9.4 billion.” Now hey, look folks, I do not object when shareholders are making money, when customers are getting good deals, to big bonuses. I am definitely a capitalist. So don’t get the wrong idea here. I just noticed that these things are not proportionate. They’re not related to each other. They were “dedicating $16.5 billion for salaries, bonuses, and other benefits. The upper echelon of Goldman Sachs – called the “golden 25” – could get at least $25 million each.
“Lehman Brothers Holdings, Inc., and Bear Stearns Cos. said they would pay out about $12 billion in compensation – more than $300,000.00 per employee.
“Morgan Stanley Inc., the second-largest U.S. investment house, gave chief executive John Mack $40 million in stock and options for 2006, reflecting one of the largest bonuses awarded to a Wall Street CEO.
“The bonus numbers are especially mind-boggling when compared to the average salaries of New Yorkers. The comptroller estimated that bonuses will average $137,000.00 in 2006. Most Wall Streeters make much more than that. Excluding people working on Wall Street, the average New Yorker earned $56,000.00 in 2005. Wall Street accounts for less than 5 percent of all the jobs in the city, but more than 20 percent of all the wages.”
Now, “real estate is a big beneficiary of these big bonuses, as plenty of bankers look to upgrade their digs or buy their first pad. A lot of Wall Streeters have been pounding the pavement anticipating the big bonuses and they’re prepared to pay tremendous amounts of money for real estate.
“Earlier this month, one broke in New York said she sold 11 apartments. More than half of those were buyers who worked on Wall Street. She said that she has about 200 apartments for sale ranging from $500,000.00 to $6 million. Many of those, she said, will go to bankers on Wall Street.” The bonuses heat up the market in another way because people anticipate them and there they come.
Now, let’s take a look at how this ties in. I can’t believe – I mean I entitled this podcast, “Thou Shalt Maintain Control and Pools are for Fools.” Why – folks, how long does it take us to learn our lesson that we shouldn’t be investing and pooling our money? Pools are for fools. We shouldn’t be investing in anybody else’s deal. We should be direct investors. We buy our own piece of property and then we keep the profits for ourselves. We keep the benefits for ourselves.
There’s a lot of bogus dealings in real estate. I mean real estate is definitely not immune to this kind of stuff. You know, when you invest in these TICs, tenant-in-common deals, LLCs, Limited Liability Companies, set up by promoters; REITs, Real Estate Investment Trusts, or any sort of fund or partnership in a real estate deal, think about what happens. Most of these promoters of these vehicles have big, fat expense accounts tied to them. Of course, they take an acquisition fee when they buy the property. They take a disposition fee when they sell it. They take a big management fee all along the way. They’re probably getting whined and dined by the property managers and getting all sorts of perks there, and then they fly out to see the project. They might fly out First Class on your dime. Then they stay at nice hotels. Folks, you just can’t control this stuff. Invest in things you have control over.
Now, let’s just look through the newspaper. So this is the Friday, January 18 Wall Street Journal. It says on the front page of the money investment section, “More Zeroes for Investors as Subprime Write-Downs Top $100 Billion, Dow Industrials Drop 307 Points; Small Investors Brace for More.” The pool of red – there’s a chart here – write-downs by banks, brokerage firms, and others in the subprime mortgage downturn. Merrill Lynch had write-downs of over $22 billion. Think about it. What if you own stock in Merrill? How about Citigroup? Almost $20 billion. UBS over $14 billion, Morgan Stanley, $9.4 billion, and the list goes on and on and on.
Why would you own stock in these companies? A stock market is necessary to help a capitalist society grow, but I’ll tell you, I want to maintain control over my investments. Under review on the same front page of the journal, “Ripple Effects of Much Harsher Debt Ratings.” When we were watching this whole subprime fiasco unfold and its totally irresponsible lending, I was talking about this three years ago, how this would come home to roost.
They package this money on Wall Street, not even disclosing what kind of debt instruments, these complicated financial instruments, were inside these funds that people purchased as mortgage-backed securities, as mortgage-backed bond funds, and investors like you and me, we were victims of all of this.
You look at the Los Angeles Times, December 14, ’07, just about a month ago. It said right on the front page of the California section, O.C. – that’s where I live, in Orange County – again seeing snags with Merrill. Investment firm blamed in county’s bankruptcy – remember Orange County claimed bankruptcy back in 1994 – was the largest broker of newly, shaky securities. You might remember that story about a guy named Bob Citron and how he invested with Merrill Lynch and they did all these derivatives and these really complex financial investments that led to Orange County’s filing bankruptcy.
You look at the Los Angeles Times January 18, just last Friday. It says, “Broker” – front page of the Business section – “Brokers did well in a bad 2007. The five biggest investment firms paid employees record amounts as investors struggled. It was a bad year on Wall Street for investors, but a great year to be a broker. Wall Street’s five largest investment firms paid record amounts in compensation in 2007, despite the fact that three of the five firms posted quarterly losses as a result of souring investments in sub-prime mortgages.”
And then it goes on to talk about Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers, Bear Stearns, etc, etc. They shelled out $65.6 billion in compensation, okay, up about 8 percent from last year, and investors were losing money the whole time.
Same front page, some key indexes hit a bear trap. Dow drops 306 points amid recession fears, despite Fed chief Bernanke’s backing his stimulus plan. Now, if you’ve been listening to my Creating Wealth podcast, you know that all of this stuff the Fed is doing, what will it mean to us as real estate investors? It’s actually good news because it will cause more inflation and with inflation, as we’ve talked about before, we win in not one, but two ways. We have an inflation index asset. Real estate and the commodities that go into building a house or a commercial building sitting on that land, as long as you are buying very, very cheap land at a high structural or high improvement cost, as we’ve talked about in the past, you should do very well in this loosening of the money supply that the Fed has created because the ingredients to build that structure go up and down. Real estate, historically, has performed better than inflation. It’s been a great hedge against inflation. That will benefit us.
And then in the second way, we borrow to buy real estate. We use someone else’s money, OPM, as much as possible, and with that “other people’s money” that we use, our debt gets cheaper and cheaper and cheaper to repay because inflation causes a decline in the value of those dollars we owe. Our tenant pays the debt back for us on our behalf and then inflation pays it down, too, and reduces the principle balance. If you pay a million dollars back in 10 years, that’s a lot cheaper than paying a million dollars today.
My favorite cartoon when I was a kid, Popeye, the character Wimpy understood this awfully well. Wimpy, his famous line was, “I’ll gladly pay you Tuesday for a hamburger today,” because he knew probably that the value of the dollars he paid back on Tuesday would be less than the value today.
Now, I’ve got more to share with you about this, some more headlines I want to talk to you about, but let’s take a break from me for a few minutes here and let’s go to the all-too-famous Jim Cramer. You probably watch Jim Cramer. Maybe you’ve read some of his books. I gotta compliment him; a fantastic marketer. But I don’t know if you heard about this little story of where he basically admits to manipulating share prices when he was running his hedge fund.
Now, the SEC, the Securities and Exchange Commission, investigated him and I don’t know what came of that. I don’t know if it’s resolved yet, but just listen in to the soundtrack of this video, and if you want to see the actual video footage, it’s on our website at www.jasonhartman.com. But just listen to the soundtrack here and I think you will be amazed at the – well, frankly, the arrogance of it. I mean imagine when he’s talking about manipulating the share prices of these stocks, imagine if you owned those stocks. Would you want them to be subject to the whims of someone in the market just totally manipulating them? So hang on for a few minutes here. Listen to this. I think you’ll find it very interesting and it’s kind of a smoking gun, and then I will be back to talk to you about a few more headlines.
Aaron Task: Welcome to Wall Street Confidential. I’m Aaron Task, joined again by Jim Cramer. Jim, welcome.
Jim Cramer: Good to see you.
Aaron Task: Thanks for being here. So, I’ve got some economic data today, but I wanna talk about something else first. Again, today, we have a misdirection from the futures. The futures played an up market and as of right now, it’s actually down again. Is this just because it’s the holiday period that we’re seeing this?
Jim Cramer: You know, a lot of times when I was short on my hedge fund and I was position short, meaning I needed it down, I would create a level of activity beforehand that could drive the futures. It doesn’t take much money. Similarly, if – or if I were long and I would wanna make things a little bit rosy, I would go in and take a bunch of stocks and make sure they’re higher, maybe commit $5 million in capital to it and I could affect it. What you’re seeing now is maybe – it’s probably bigger market. Now maybe you need $10 million capital to knock the stuff down, but it’s a fun game and it’s a lucrative game and you can move it up and then fade it. That often creates a very negative feel.
So let’s say you take a longer review with your day and you say listen, I’m gonna boost the futures and then when the real sellers come in, the real market comes in, they’re gonna knock it down and that’s gonna create a negative buying power, negative view. That’s a strategy very worth doing when you’re valuing on a day-to-day basis. I would encourage anyone who’s in a hedge fun, do it, because it’s legal and it is a very quick way to make money and very satisfying.
Aaron Task: Okay.
Jim Cramer: No one else in the world would ever admit that, but I didn’t care.
Aaron Task: That’s right and you can say that here.
Jim Cramer: I can because I’m not gonna say it on TV.
Aaron Task: Well, I know, there’s so many more hedge funds today than when you were managing your hedge.
Jim Cramer: Right.
Aaron Task: Do you think that – does that exacerbate the moves or does it make it tougher?
Jim Cramer: You know, the hedge funds are positioned long/short, okay? Not just long like mutual funds. So it’s really vital these next six days because if you’re payday, you’ve really gotta control the market. You can’t let it lift. When you get a Research in Motion, it’s really important to use a lot of your firepower to knock that down because it’s the fulcrum of the market today. So let’s say I were short. What I would do is I would hit a lot of guys with RIMM. Now you can’t ferment. That’s a violation of –
Aaron Task: Ferment?
Jim Cramer: You can’t foment. You can’t create yourself an impression that a stock’s down. But you do it anyway because the FCC doesn’t understand it. I mean that’s the only sense that I would say that’s illegal, but a hedge fund that’s not up a lot really has to do a lot to save itself, so this is different from what I was talking about at the beginning where I would be buying the queues and stepping on – this is actually just blatantly illegal, but when you have six days and your company may be in dap because you’re down, I think it’s really important to foment if I were one of these guys. Foment an impression that Research in Motion isn’t any good, but this Research in Motion is the key today.
So you would hit this guy and that guy and you would see offering – when you see a guy’s bidding, you’d wipe out that guy very quickly. What I used to do was called, if I wanted to go high, I would take in bid, take in bid, take in bid. And if I wanted to go low, I’d hit and offer, hit and offer, hit and offer. And I could get a stock like RIMM for maybe – that might cost me $15 – 20 million anny to knock RIMM down, but it would be fabulous because it would be legal. All the moron, morons, who are also queuing on Research in Motion.
Aaron Task: So that’s what’s going on today. [Inaudible].
Jim Cramer: We’re seeing – yep, we’re seeing it. That’s, again, when your company’s in a survival mode, it’s really important to defeat Research in Motion. You get the Pizanis of the world, people talking about it as if there’s something wrong with RIMM. Then you call the Journal and you get the bozo reporter of Research in Motion and you would feed that there’s a palm’s got a killer that’s gonna give away. These are all the things you must do on a day like today and if you’re not doing it, maybe you shouldn’t be in the game.
Aaron Task: Another stock that a lot of people are focused on right now seems to be Apple.
Jim Cramer: Yeah, Apple’s very important to spread the rumor that both Verizon and AT&T have decided they don’t like the phone. That’s a very easy thing to do because it’s also you wanna spread the rumor that it’s not gonna be ready for MAC world. And this is very easy because the people who write about Apple want that story and you can claim that it’s credible because you spoke to someone at Apple because Apple doesn’t issue a statement.
Aaron Task: They’re not gonna comment. They’re not gonna say –
Jim Cramer: It’s really an ideal short and I would, again, if I were short Apple, I would be working very hard today to get that, and the way you do that is you pick up the phone and you call the six trading desks and you say listen, I just got off the phone with my contact at Verizon and he’s already said, listen, we’re a Lucky G house, we’re a Samsung house, we’re a Motorola house. There’s no room for Apple. They want too much. We’re not gonna let them in. This is not – we’re not gonna let them do what they did to music.
And I think that’s a very effective way to keep a stock down. I might also, by the way, because the stock’s at $80.45, with a little bit of capital, you go buy some January 80 puts that makes it look like there’s gonna be something going on, so maybe you give Morgan an order to buy a 1,000 Jan 80 puts, then you go position limit with a – you know – use a hot fund that doesn’t know what the heck it’s doing. Maybe you could even go to UBS for puts and you just kind of create an image that there’s gonna be news next week, and that’s gonna frighten everybody and they all go out and say let’s put the buyer – buy UBS. Then they quote Pizani. You have to use those guys and say listen, I’m a – I see a big buyer puts and I’m told that it’s like the – it’s SAC. You would do that, too.
And these are all what’s really going on under the market that you don’t see.
Aaron Task: Right, that nobody else talks about, except for you.
Jim Cramer: What’s important when you’re in that hedge fund mode is to not do anything remotely truthful because the truth is so against your view, that it’s important to create a new truth to develop a fiction. And the fiction is developed by almost anybody who’s down like 2 percent to up 6 percent here. You can’t take any chances. You can’t have the market up anymore than it is if you’re up 6 because starting Jan. 2, you’ll have all your money come out. What would you do if you’re in that situation and you feel like you’re desperate? I say you would do these actions.
Aaron Task: So you’re talking about the mechanics of the market –
Jim Cramer: Well, no, cash is much more important than fundamentals.
Aaron Task: Okay, well, but in terms of fundamentals, you’ve been bragging about how you –
Jim Cramer: Who cares about the fundamentals? Research in Motion just blew out the cornbread. But look what people can do. I mean that’s a fabulous thing. The great thing about the market is it has nothing to do with the actual stocks.
Aaron Task: Right.
Jim Cramer: Now, look, over maybe two weeks from now, the buyers will come to their senses and realize that everything they heard was a lie. But then again, Fannie Mae lied about their earnings for $6 billion, so it’s just infection, infection, infection. And I think it’s important that people recognize the way that the market really works is to have that nexus of hit the brokers’ houses with a series of orders that can push it down, then leak it to the press, and then get it on CNBC. That’s also very important.
And then you’ll have that kind of a vicious cycle down and it’s a pretty good game, and it can be played for percentative.
Aaron Task: And then do you get long before MacWorld has the expectation of –
Aaron Task: –and then you go back flip the long side?
Jim Cramer: Well, you surely gotta use the other side.
Aaron Task: Interesting.
Jim Cramer: Yeah, and there’s a case where I would say January 80 puts can be justified because after I knock the stock down to 80, I can buy a lot of common and then you play right into MacWorld where they’ll probably introduce the phone and Verizon’s gonna take it.
Aaron Task: Okay. Maybe fundamentals don’t matter, but let’s talk about the Fed a little bit.
Jim Cramer: What Wall Street Confidential is is not giving you the parting line. Oh, here’s a blah, blah, blah. I spoke bad about the phone. I hear the phones are good and Verizon might take it, and as a matter of fact, the Research in Motion sellers, I don’t think they know what they’re talking about.
Aaron Task: But even with the cell phone market, you think is [inaudible] –
Jim Cramer: Well, the problem with the cell phone market, frankly, is that these guys are killing each other. You know, but someone has to take a dive. We all know well enough you have to get in a room and just fix price. They’ve been reluctant to do that because of the various justice departments and they actually –
Aaron Task: And it’s illegal.
Jim Cramer: Well, that hasn’t stopped a lot of other companies.
Aaron Task: This is true.
Jim Cramer: This seems to be a case where they seem to be directly worried about the authorities. It’s almost as if they have a war that matters when they said that Bristol-Myers was, and what eventually happens is the shareholders demand that you get phony orders and you sit in the room. It’ll happen soon.
Aaron Task: Real quick, the Fed, the numbers out today weaker than expected, the PC thing –
Jim Cramer: Oh, so what? The Fed has obviously gotta cut, but you know, again, you call the various guys who cover the bonds and you say, ignore the bond action. What’s really happening is the Fed is very frightened about – and then you gin up the number that they’re really frightened about. The Fed is actually desperate to try to figure out how quickly they have to cut without looking like dopes that they raised the rates.
Aaron Task: No, because they’ve been talking about the rate of inflation and all this –
Jim Cramer: You don’t wanna – you don’t wanna raise in May and then cut in January. That’s like Mexico, for heaven’s sake. These are like a distinguished group of people who went to really good schools.
Aaron Task: Yeah, they’re smart guys. Absolutely.
Jim Cramer: Yeah, they don’t wanna look like dopes.
Aaron Task: When you were talking earlier in the week, you said you think it’ll be some kind of crisis, possibly Ford being the trigger.
Jim Cramer: Well, you know, Ford went and did all that. You know, they pledge all this investment banking to all these guys, so now that they’re very reluctant to say negative things, it makes it much tougher for the Ford story to play out. I mean the amount of business that Ford has to do, Ford would be the big client of 2007. So if I were in the corporate finance room, I would say listen – to the Research guy – I’d say listen, you know, I spoke with him lately. I actually have the inside. The plan works. So then you’re the Research guy and you say, oh man, what do I do? It’s bonus time. I’m not gonna be a total idiot. The Spitzer’s going to Albany. Let’s get back in the game. I think that’s important.
Aaron Task: Is it possible, because a year ago at this time, people were saying GM’s about to go bankrupt and of course, the stock’s up 50 some odd percent? Shouldn’t Ford be that stock [inaudible] –?
Jim Cramer: There in GM – no, the GM – the difference between Ford and GM is that GM’s balance sheet was never – it turns out it wasn’t that bad. Ford’s balance sheet is pathetic and you know that because they’re willing to screw over the common for the bonds. That’s kind of a – if it weren’t Ford, if this were QUALCOMM, we’d be sitting here crying that it’s desperate. Yeah, but no, it’s Ford.
Aaron Task: It’s Ford; it’s an American product, so –
Jim Cramer: Yeah, I drove a Ford. I owned a Ford once.
Aaron Task: And this is our country. And this is Jim Cramer.
Jim Cramer: But again, what I’m trying to go for in the Wall Street Confidential – and I’m not saying you’re [inaudible] – I have to talk about what it’s like at my hedge fund, okay, because – and what other hedge funds do because the difference is that if this isn’t Intra-day Show and you need to know what’s going – what I know is going on.
Aaron Task: Right.
Jim Cramer: Now, we step back. Research in Motion was a real blowout quarter. It was a really good quarter and I was quite surprised how strong the margins were. It looks like the other guys have really dropped out. It’s a terrific story. Should it be up six? Yeah, I think so. But you know, look where we are. It’s Friday. You’ve got five more days to make your quarter. Can you really risk having it run up this much? I don’t think you can.
Aaron Task: Okay. And if I’m correct, you’re off next week as of Tuesday.
Jim Cramer: Yes, I am.
Aaron Task: [Inaudible] we’ll be back in 2007, more of us.
Jim Cramer: I’m hoping that we finish the year at $12.60 because that’s — $12, 460.00 because that’s what I said the beginning of the year was. Now yesterday when we came in, we were 20 points away from where I predicted. I wanna nail it.
Aaron Task: Do you have the forecast for 2007?
Jim Cramer: Yeah, but I’m not –
Aaron Task: Are you gonna save this?
Jim Cramer: It’s over a series of five days so people have to get their money back out.
Aaron Task: Check it out on money.com and Jim, thanks very much for being here. I’m Aaron Task. Stay tuned for more of The Street.com TV.
Jason Hartman: Okay, we’re back. I don’t know if the soundtrack for that video amazed you as much as it did me. I just couldn’t believe it and this is the point, everybody. You’ve gotta maintain control over your investments. As much as possible, be in investments that you directly control and as little as possible, the investments that you don’t control. So be a direct investor.
Okay, a few more headlines after Jim Cramer there. Los Angeles Times, Wednesday, January 16, “Dow Dives on a Barrage of Bad News. Most foreign stock indexes also fare poorly as concern over the course of the U.S. economy spreads.” And then it says, “Slammed: Citigroup Posts Say $10 Billion Loss.” Imagine if you owned stock. I hope you didn’t.
And then you turn to Page 2. It says two ex-owners of Payroll Provider accused in suit. And Page 3, “Home Store, ex-CEO wins appeal. Home Store, Inc.’s former chief executive, Stuart Wolff, won a reversal of his conviction for directing a $67-million fraud at the online home-listings company because of a conflict of interest by the trial judge.”
When you invest in stocks, when you invest in bonds, you are subject to all of this type of stuff. On Page 4, Dow drops on negative news. Citigroup loses nearly $10 billion. That’s just a follow-up from the other story. Page 7, Peregrine, the software company – I believe they’re a software company – “Former president pleads guilty in fraud case.”
I mean, folks, why are we doing this? Why are we investing in things we don’t control? Back to Page 6 in the same paper. “European bank declines from U.S. loans. Shares in HSBC Holdings, Europe’s biggest bank in market value, headed for the biggest two-day loss in six years amid concern that they have to hike in bad loans.”
So look it, you might try to tie this in in your head, right? I say be a borrower, not a lender. As long as these companies are willing to loan money, borrow it. Borrow responsibly, borrow carefully, and you can make it work for you incredibly well. Don’t invest in bonds because when you invest in bonds, you’re essentially a lender. When you deposit money in a bank or a money-market fund, you’re essentially a lender as well. And inflation hurts lenders and bad dealings hurt lenders.
Think about it. When you’re not a direct investor, you leave yourself susceptible to three major problems. No. 1, you might be investing with a crook and you just look at the paper. Any day of the week, the Business section; you look at the Wall Street Journal, and you see how there are so many scams in the financial world. No. 2 problem, assume they’re honest. You might be investing with someone who’s just incompetent and they mess up the deal because of their incompetence. No. 3 problem, assume they’re honest, assume they’re competent; they take a very large management fee off the top for managing the investment or managing the deal.
I saved this one from a while ago. This is Thursday, August 2, front page of the L.A. Times Business section. It’s talking about Broadcom, a very famous local company here in Orange County. Beleaguered billionaire, Henry Nicholas, speaks and it says the former Broadcom Corporation chief executive is talking a lot to lawyers these days as he endures the public spotlight fueled by a federal investigation into stock manipulation at Broadcom. Allegations of drug abuse, acrimony, his divorce, and a claim that he has sought.
I mean, folks, this is ridiculous, okay? And here, this is interesting. “Citing advice from his lawyers, Nicholas declined to address specifics of the stock probe or allegations made in court documents made against him.”
Does this ever happen with you on your real estate deals? You don’t have any of this junk. Just be a direct investor. Look at this one. This is Orange County Register, January 17. Okay, this is just last week. “Ex-Brocade CEO Sentenced. The former chief executive of Brocade Communications was sentenced to 21 months in prison for orchestrating a scheme to tamper with financial records of stock options the company offered.” I mean, what are we doing? Let’s get control over our own financial future by being direct investors and investing in real estate.
Now, you can say a lot of bad things about real estate, but there is no nationwide housing market. I’m looking at an apartment report published by Marcus and Millichap, which is really quite interesting. They don’t cover all the markets, but what’s interesting, one of our markets, “employment growth in 2008 expected in Austin, Texas, expected to be one of the top in the nation at 2.8 percent.” Now, the other one that was very good, which was one of our markets last year, Salt Lake City, which was actually the best – although we’ve seen a pretty big run-up in prices so we’re not recommending that market quite as much as we used to – 3.1 percent projection.
And then you look at some of the other markets. Indianapolis, 1.1 percent employment growth, and then you look at some of the really bad ones – that’s one of our good markets – you look at Orange County where I live, .7 percent; L.A., .6 percent, Phoenix, 2 percent. Not bad, but Phoenix is not a good market right now. Charlotte, North Carolina, one of our old markets, 2.4 percent. Not bad. And just a lot of interesting information here about what’s going on.
So next week, we are going to talk about a lot of interesting stuff. This podcast is getting a little bit long, so I’m going to adjourn now and just leave you with – be a direct investor. Gain control over your own financial life. Invest prudently, follow my Ten Commandments, use other people’s money, but use it carefully and use it with respect. Remember that real estate has very special characteristics that other investments do not have. You can make money in real estate, even when real estate is not going up in value because by borrowing you pay back debt in cheaper dollars, you get tax benefits all along the way; it is America’s most tax-favored asset. If you are a non-American, you make money off of the currency differential by arbitraging your debt, by arbitraging the real estate prices. There are lots of opportunities there.
Then you look at a guy like Jim Rogers, which I think is a very interesting guru who’s into commodities and basically, as a real estate investor, we are, in essence, a commodities investor.
Remember, invest in areas with very low land values and high improvement cost so we get the privilege of the real estate label on our investments, but we are really, in essence, investing in the commodities that build the house, the apartment building, the office building, or whatever it is on that very, very cheap land. We get the good financing, we get the great tax benefits, and all the good stuff that we don’t get by directly investing in commodities, which I do not like or invest in nearly as much as I invest in packaged or assembled commodities.
More on that on a future show. Thank you for joining me today on Creating Wealth and listen to a couple of announcements and we look forward to talking with you next time.
Hey, I just wanted to announce a couple of quick things for you. I’m here with Area Manager, Karam and if you’re looking for positive cash flow – yes, you can actually do that with only 10 percent down. Quite an amazing deal to do in today’s market and remember, the interest rates are getting a lot lower right now, so it’s a good time to be locking them in so that you lock in your cost of borrowing for the next three decades. Karam, tell us about positive cash flow and rent guarantees in Columbus, Ohio.
Karam: Well, Columbus, Ohio, we have a builder who is very, very creative. What he did was he went ahead on all these brand new single-family houses, townhouses, and condos. He’s guaranteeing six-month rent. Not only that, he is going to pay our investors the homeowners association fee and the management fee for two years. And what that does is, with 10 percent down, you get anywhere from $100.00 – $200.00 positive income before even the tax benefit is considered.
Jason Hartman: Wow, that is really phenomenal. That’s gotta be one of our very best markets in terms of cash flow, so excellent. Anything else you wanna say about Columbus, in general?
Karam: Well, the economy is booming there. There are several major corporations headquartered there. University is big, so a smart workforce, low cost of living. That attracts a lot of investors there.
Jason Hartman: Okay, Karam thanks for updating us on Columbus, Ohio. Great market.
Karam: You’re welcome, Jason.
Jason Hartman: If you are interested in a Platinum Properties Investor Network franchise in your area, we are now approved for franchising in 18 states. Please visit www.jasonhartman.com and click on the franchise link and fill out the short application.
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Also want to remind you, listen to our old podcasts. At least go back to podcast No. 13 forward and listen to all the podcasts after that. You’re welcome to listen to all of them. The ones before No. 13 are older, but they’re also good, but the newer ones are No. 13 and forward, which are really good ones to listen to, so please take advantage of that.
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Duration: 51 minutes