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Dave Ramsey's Investment Advice

November 17th, 2009 at 07:08 pm

I was thinking about Dave Ramsey and specifically his investment advice. He recommends investing in good quality mutual funds (5+ year track record). He also talks about A shares and paying the front end load.

The reason I believe he deals with front end loads is because he advises using a mutual fund broker to help comb through your investments and use as a teacher when questions arise.

By talking about good quality mutual funds, he is talking about actively managed funds as opposed to index or passively managed funds. In the actively managed case, the manager will look at the S&P 500 (or some other index) and make bets (this will be a good year for consumer products but not banks). The passively managed fun will just buy all the stocks in the S&P 500 and keep the same weight of the securities in the S&P 500.

There are pros and cons of each. People say a good manager should be able to out perform their benchmarks but yet only 25% seem to do that in any one year. But there are some who do seem to do it year over year. There is also reason to believe that good manager leave firms to start their own hedge funds or investment firms.

But Dave's basic advice seems to be actively managed portfolios with experienced managers outperforming the market and using a good mutual fund broker to help navigate and educate you on the market and what you are buying.

He goes on to talk about 4 types of funds: growth, growth and income, aggressive growth and international. He says all should be equally weighted. He also mentions on his web site that if this is too risky, you can substitute a balanced fund for part or all of the aggressive growth fund.

So he is recommending a 75/25 US/foreign portfolio that has small, large and medium sized companies. Seems like a pretty well diversified portfolio from the stock side, but you will notice he doesn't have a fixed income piece.

I believe the second part of his investment strategy takes care of that. The second part of his strategy that he talks about is buying paid for investment real estate. You buy the investment property for cash and you have an income stream that should be fairly well adjusted for inflation. As inflation goes up, the rent you charge should also go up.

I will agree that there is probably more risk then in a government bond fund or investment grade bond fund. However, I believe that by investing in the real estate you can have a third party manage it and set up a nice inflation adjusted stable cash stream, and the cash stream would be more stable then a mutual fund's cash stream.

On the surface, everything Dave Ramsey talks about seems to be rather simplistic and overly simplified. When I start peeling back the layers, I generally feel that the advice he gives is pretty solid and well thought out.

I could argue in getting an annuity instead of real estate or dividing international investing into international and emerging markets. I could also argue that passive index is the way to go. You could also argue that his allocation is aggressive, and I would tend to agree, but replacing the fixed income portion with a real estate portfolio is an interesting spin.

But if you feel uncomfortable about investing or don't know where to start, I believe his advice at the end of the day is pretty solid and a good place to start. As you become more educated and confident, you can then tweak as you want.

Thank Everyone

January 20th, 2009 at 06:57 pm

I want to thank everyone for the kind words the other day. The purpose of the blog entry was for me to just kind of look back in the road and revisit where I was and where I am going. The second part was maybe to offer people who are traveling down the same path the opportunity to catch a glimpse of what’s ahead and maybe just reaffirm the decisions they made.

As a whole, I don't think my story is very different then a lot of people. I do think that today's society values the individual so much that the concept of marriage, sacrifice, and true teamwork are left by the wayside.

By forming a team with our spouse and treating them as equals with valid ideas and working through compromises, I believe that a marriage is truly greater then the sum of there parts. My wife balances my risk taking and offers me strength in times of weakness.

Did this happen overnight? No, trust is something that has to be earned through constant action. And I do trust that my wife has the family's interest at heart.

My Tale Over the Last Year

January 16th, 2009 at 07:17 pm

So I went back and starting reading some of my old entries. I like to think of where I was and how I got to where I am now. That got me to thinking about how my attitude and general outlook has changed on things.

October 2007 – The breaking point.

Prior to October of 2007, I was keeping my head above water, living paycheck to paycheck. I had some credit card debt, 2 car loans, and a mortgage. I was spending more then I made but was making payments on everything. We were going out to dinner a lot and blowing money on who knows what.

In August, my second son was born. A few days after we took him home, he started to have seizures. We took him to the emergency room and he spent the next 10 days in the NICU. They ran every test (blood, chromosome, ekg, etc.) and had specialist from Boston drive out. I turned out be a gland issue that corrected itself in the following few weeks.

I had insurance so I was thinking maybe a small bill but nothing too bad. Well August comes, the charges start coming in – over $30,000. I fight with the insurance company, I fight with the wife. The wife says we need the Cadillac of insurance. Cost - $1,250 a month. The hospital says I need to start paying them at least $1,500 a month. Christmas is around the corner.

Feelings of despair start to creep in. I'm in a hole and I don't know if I can get out. Every time I hit bottom, there seems further to go.

December 2007 – Starting to gain control

Late November, I created my first budget for December with the wife. It was a chore. There was bickering back and forth. We both made sacrifices and agreed to lifestyle changes.

The furnace broke in December, but I had money in the budget for it.

Over the next few months, unexpected expenses popped up but the budget was starting to get easier. I also paid off a big chunk of the medical and had a payment plan of $500 a month for the rest of the balance.

I was feeling control. Something that hadn't happened in a long time. I knew what was coming in and where it was going. Also, the bickering with my wife became less. I was still standing in a big hole, but I was now confident I was at the bottom or very close.

March 2008 – All pistons firing

When March rolled a round, the budget was easy. I had kept tightening it up. I actually trusted the budget and my funding plan. My two big expenses were health insurance and mortgage. They combined to $4,000 a month. If I could put $1,000 a week away, I would have all the money I would need for these. The funding plan was really the key. What part of which paycheck funded which expense.

I was also able to start looking at my goals and start projecting what I could get accomplished in 2008. I revamped my goals going from getting rid of one or two debts to getting rid of all my debt (but the mortgage).

I hadn't really noticed, but the hole was starting to fill up. Not a lot, but very slowly. I started to feel hope. In six months, I went from despair to hope.

June 2008 – Sucker punch.

By June, things were going so well I started planning a big birthday party for the wife. We had been sacrificing for 8 months and it was time let loose just a little and then buckle down and finish off the debt.

Well , no journey is smooth sailing. In June out of the blue, I received a medical bill from August of 2007 for $4,400. It was like someone sucker punched me. All my momentum form the previous months was gone. This threw off all my goals!!!

Sometimes you just have to look at yourself in the mirror and push through. That's what I did. It wasn't fun. I had goals that needed to be re-projected.

December 2008 – Big sigh of relief

In December, I paid off the last of my debt (except the mortgage), fully funded my 401 (k), got a will, and got term life insurance. Not only did I breathe a huge sigh of relief but I felt all this stress just disappear.

There is still a long way for me to go in my journey, but the turnaround in my attitude and outlook is remarkable. For those of you out there, I have been there when there is no hope and no control in your financial life. I have been just holding on. You can get through this. You will be tested and Murphy will show up. It's not easy and requires honesty, communication, and extreme sacrifices to your lifestyle.

The only thing I can tell you is that it's worth it.

Wonder Land bailout

December 16th, 2008 at 06:12 pm

With the government on the brink of rescuing the U.S. auto industry, we have learned that the Treasury Department is drawing up plans to bail out Christmas. "We have reason to believe," said a person close to the matter, "that without an immediate capital injection, Santa Claus will fail before December 24." Mr. Claus could not be reached for comment.

Government officials are said to be concerned at the risk that the collapse of Santa Claus could pose to the nation's intricately related system of holiday happiness. Though a failure by Santa Claus poses the largest systemic risk, the government is also prepared to step in to bail out Christmas trees, caroling parties and mistletoe producers.

President-elect Barack Obama has been briefed on the initiative, and through a spokesman was quoted as saying, "I'm OK with bailing out Christmas."

Inside Treasury, some officials privately worry that such a precedent could result in the nationalization of Santa Claus, leading to similar calls for help next year from the Easter Bunny and even Valentine's Day. Treasury Secretary Henry Paulson personally concluded, however, that "Santa Claus is too big to fail."

Indeed, the situation was considered sufficiently dire that Mr. Paulson agreed to travel to the North Pole to speak to Mr. Claus. A Treasury official with knowledge of the situation agreed to provide this reporter with an account of the meeting. "Secretary Paulson," this person said, "has had a lifetime belief in Santa Claus and firmly supports what he represents."

Last Saturday morning, Mr. Paulson flew by government plane to meet with Santa, though a spokesman would not disclose the exact location of the famed toymaker's North Pole workshop. Mr. Paulson's plane landed on the polar ice cap, and then the Secretary was taken the final 300 miles in a sleigh pulled by Santa's fleet of reindeer. In deference to Mr. Paulson's unfamiliarity with sleigh-riding at altitude, Mr. Claus ordered his assistants to bring the Treasury department party overland.

The picture of Christmas painted for Mr. Paulson by his rosy-cheeked host was bleak.

Apparently Santa's difficulties in "producing product," as Mr. Paulson described it, originated in a poorly understood aspect of the jolly elf's current operations known as "Christmas list swaps," or CLIPS.

Mr. Claus said that going back as far as anyone can remember, Christmas lists had been handled in the traditional manner. Children would draw up lists, which were left out in the evening with a glass of milk for collection by Santa's elves; other lists would be exchanged with siblings, cousins and loved ones.

Several years ago, according to a participant who requested anonymity, some of Santa's elves were contacted by representatives from Bear Stearns and Lehman Brothers, who persuaded the elves of the benefits of an elaborate scheme of Christmas-list securitization.

As outlined to the elves, the idea worked like this. Brokers would break each item on the Christmas lists into separate pieces and repackage the requests as securities, using a formula known as a "benevolence diffusion algorithm." This would guarantee happiness for everybody in the world on Christmas morning. No one would lose.

At first Santa was doubtful of the plan. Mrs. Claus was especially skeptical, pointing out that in her experience with baking Christmas cookies, a seemingly foolproof enterprise, a failure rate of 5% was not uncommon. "There is simply no historical data to suggest the whole world can be long Christmas," Mrs. Claus said. "No scheme will ever rid the world of bad little girls and boys."

According to a person with knowledge of the North Pole couple's affairs, Santa received a call from a Franklin Raines, who identified himself as the president of a "government sponsored enterprise" known as Happie Mac. Santa apparently became convinced that Happie Mac sounded similar to his own business of free giving, and so agreed to the proposed system of Christmas list swaps.

Difficulties emerged when a CLIPS salesman from AIG called a senior elf to say that a large number of the Christmas list swaps had ended up in the hands of Russian billionaires with links to former Russian president Vladimir Putin. "These plutocrats don't even believe in me," Santa was heard to say as Mr. Paulson's sleigh rode out of sight.

On returning to Washington, Mr. Paulson's plan to bail out Christmas immediately ran into problems. Fed Chairman Ben Bernanke, whose great-great uncle is rumored to have been an elf, pointed out that Santa Claus might not qualify for a TARP loan. According the Fed's analysis: "Santa Claus belongs to the people. Any bailout must pass through the appropriate committees of the House."

House Speaker Nancy Pelosi, notwithstanding that she is the mother of five children, has reportedly told Mr. Paulson that Congress will bail out Christmas only in return for a promise from Santa Claus to "go green." Speaker Pelosi said the Environmental Defense Fund has long complained about Santa's eight tiny reindeer and that Mr. Claus would be asked to appear this Tuesday before Rep. Barney Frank's committee with a plan to reduce the sleigh's carbon footprint.

With only 13 days remaining for a Santa rescue, Mr. Paulson and Speaker Pelosi are said to be discussing the appointment of a Christmas czar. The leading candidate is Oprah Winfrey


For Baselle: Treasury Bills Trade at Negative Rates

December 9th, 2008 at 09:45 pm

Looks like you can stop searching for change and still outpace treasuries


Dec. 9 (Bloomberg) -- Treasuries rose, pushing rates on the three-month bill negative for the first time, as investors gravitate toward the safety of U.S. government debt amid the worst financial crisis since the Great Depression.

The Treasury sold $27 billion of three-month bills yesterday at a discount rate of 0.005 percent, the lowest since it starting auctioning the securities in 1929. The U.S. also sold $30 billion of four-week bills today at zero percent for the first time since it began selling the debt in 2001.

“It’s the year-end factor,” said Chris Ahrens, an interest-rate strategist in Greenwich, Connecticut, at UBS Securities LLC, one of the 17 primary dealers that trade directly with the Federal Reserve. “Everyone wants to be in bills going into year-end. Buy now while the opportunity is still there.”

The benchmark 10-year note’s yield dropped seven basis points, or 0.07 percentage point, to 2.67 percent at 3:10 p.m. in New York, according to BGCantor Market Data. The 3.75 percent security due in November 2018 gained 21/32, or $6.56 per $1,000 face amount, to 109 12/32. The yield touched 2.505 percent on Dec. 5, the lowest level since at least 1962, when the Fed’s daily records began.

The two-year note’s yield fell nine basis points to 0.85 percent. It dropped to a record low of 0.77 percent on Dec. 5.

If you invested $1,000 in three-month bills today at a negative discount rate of 0.01 percent, for a price of 100.002556. At maturity you would receive the par value for a loss of $25.56.

‘Horrible Year’

Indirect bidders, a group that includes foreign central banks, bought 47.2 percent of the four-week bills, compared with 31.7 percent in the prior auction. Primary dealers bought 52.1 percent, while direct bidders such as individual investors purchased 0.7 percent.

“It’s been such a horrible year people want to show they have the good stuff on their balance sheets, not the bad stuff, but with yields already so low it pushes these even lower,” said Theodore Ake, the head of Treasury trading in New York at Mizuho Securities USA Inc., another primary dealer.

The rate on four-week bills peaked at 5.175 percent on Jan. 29, 2007. The government began issuing the four-week bills in July 2001, according to Stephen Meyerhardt, a spokesman for the Bureau of Public Debt in Washington. The bills are intended to reduce the government’s reliance on irregularly issued cash management bills.

Meyerhardt wasn’t aware of the three-month bill ever trading at a negative rate before.

Housing Slump

Treasuries of all maturities have returned 11.4 percent this year, the best gains since all of 2000, according to Merrill Lynch & Co.’s U.S. Treasury Master Index. That compares with a 39 percent loss in the Standard & Poor’s 500 index, including reinvested dividends.

Bonds have surged as the U.S. housing slump pushed up the cost of credit globally, causing equity markets to tumble. The world’s biggest financial companies incurred almost $1 trillion in writedowns and losses since the start of last year, helping push the major economies into recession.

The National Association of Realtors’ index of signed purchase agreements, or pending home resales, fell a less-than- forecast 0.7 percent to 88.9 from a revised 89.5 in September, according to a report from the group today in Washington. The median forecast in a Bloomberg News survey of 35 economists was for a 3 percent decline.

Futures contracts on the Chicago Board of Trade show odds of 98 percent the Fed will lower its 1 percent target rate on overnight loans between banks to 0.25 percent on Dec. 16. The probability was 38 percent a week ago. Rate predictions based on the futures are not considered as accurate as once were because the Fed hasn’t sought to bring the daily effect rate to the level of its target.

Mutual Funds

Money-market mutual funds that buy mostly Treasuries are starting to turn away new investors as the record low yields pull down returns for shareholders and squeeze managers’ fees.

At least three Treasury money-market funds run by JPMorgan Chase & Co., Evergreen Investments and Allegiant Asset Management recently stopped taking outside cash, according to Web site notices and regulatory filings. Barring new customers protects returns for investors already in the funds because managers don’t have to buy as many new Treasuries with yields lower than current holdings. Higher fund yields also prop up management fees.

The record low borrowing costs for the Treasury may turn out to benefit President-elect Barack Obama as he faces a widening budget deficit while pledging to embark on the biggest U.S. public works plan since the 1950s to stimulate the economy.

The U.S. is headed toward $1.5 trillion in debt sales as the budget deficit approaches $1 trillion in the 2009 fiscal year according to Bank of America Corp. The deficit this year was $455 billion.

The Treasury will sell $28 billion of three-year notes tomorrow and $16 billion of 10-year notes the following day. The $44 billion total is about $3 billion more than expected by Wrightson ICAP LLC.

To contact the reporters on this story: Daniel Kruger in New York at; Cordell Eddings in New York at


Debt in General and then a little Dave Ramsey

December 8th, 2008 at 06:15 pm

I thought I would just comment on debt in general and then Dave Ramsey and his steps.

Debt is neither inherently evil nor good. It is just a financial tool, but it is a double edged sword and can cut both ways. Many people view a student loan as good debt.

In some cases, it is not. If I borrow $60k for college and come out making $30k a year was it worth it? This is the risk aspect. In essence, when you are taking on student loan debt, you are betting that your future earnings will greatly exceed the debt.

If you were laid off or unemployed, you would still need to service your debt. This is where the risk really becomes evident. You took a loan that must be repaid for a better job that you are unable to get. (With hardship deferrals, this might not be the greatest example but I think you get my general point.)

With debt, you also need a larger emergency fund. You need enough to pay the minimums and your other expenses. In my case, last year, I was paying about $1,700 a month to service debt on medical, cars, and braces. For a six month emergency fund, I would need to have an additional $10k just to stay current on the debt. If I were to add in my mortgage of $2,042, the emergency fund goes up another $12,252. So, my example, over $22k of my 6 month emergency fund is just to service debt.

What do I truly need to survive? Food, utilities, transportation, insurance (health at least) – total cost might be $2,500. Or a $15,000 emergency fund. Or about 60% of my emergency fund is used towards servicing debt.

The interest on the above debt ranged from 0% - 4%. In fact, the highest interest rate I paid this year was 5.5% on my mortgage. Some people would say well you could invest that and beat what you are paying on the interest.

Also, this year might be a good example where it would have been hard to beat 4%. Sure, this year might be an anomaly, but my point is that you can't guarantee that you can beat the interest on your debt.

More importantly, I didn't have the money at that time. And that is the real reason for the debt, and I suspect this is the reason that most people go into debt in the first place. In my opinion, the whole investing and taking out debt argument is a way for most people to rationalize the debt.

Switching gears and looking at Dave Ramsey. I believe his true goal is to free up your cash flow as quickly as possible and use that towards wealth building. With that in mind, the issue I have with Dave Ramsey is that he is short on investment advice. His goal, I believe, is to bring you to a spot where you can start building wealth.

If you look at his first three goals, they are really to set up an emergency fund and pay off all your "small debts" (everything but the big mortgage or big second mortgage). His argument is that in the long run, it doesn't matter if you miss a year or 2 of saving for retirement or college for the kids.

His other point is that when we are first starting this journey, most of us don't have enough extra at the end of the month to do everything – save for an EF, pay of debt, save for retirement, save for college, invest. So, his method is a path that helps people focus their resources and quickly move to free up cash flow.

Personally, I have been paying debt and maxing my 401(k) contribution. In retrospect, I would have been debt free at the end of September and had an additional 3 month of EF saved. In hindsight, I probably would have been better off following Dave Ramsey's advice. I definitely would have had less stress.

And next year, I will be attacking 3 goals at the same time – EF, 15% to retirement, and college funding. I will be doing these all at the same time as well. By the end of 2009, I'll be in the same please regardless of which way I went, but I do think following Dave Ramsey's plan would have reduced my stress further.

Dave Ramsey also makes some exceptions to his rules that I think are good. If you are in danger of being laid off or your wife is expecting, stop paying off debt and start saving everything. Once these events past, throw everything saved at debt and then proceed.

So to sum up this rambling, debt is neither bad nor good. It is merely a tool. The real issue is how we use it. In the example of student loans, is it a way to increase our earnings at a reasonable cost?

Do we really do an analysis on how we use debt? Do we look at risk and added stress, opportunity costs, and the future payoffs of our decisions now?

For most of us, we use debt to fund a want we want now. We buy cars by looking at the monthly payment without thinking about what we are giving up by making this choice. We fund things on credit cards and carry balances month to month, wasting money on fees and high interest rates.

As for houses and student loans, the issue is that you don't want these debts to be a burden and you need to look carefully at these debts.

As for Dave Ramsey, I think that his steps of budgeting, eliminating debt, and savings for college and retirement are pretty solid. He gives you a step by step approach on how to focus and gives you tool that help you see quick progress.

Some people say to pay off the highest interest rate first. Mathematically, it does make sense. In truth though, you might save a few months. If you look at your credit cards which probably have the smallest balances and the highest rates, you might have a difference of 5% per card which is about 0.4% monthly difference. If you have zero percent and 30%, the interest difference per month would be 2.5%, which I think would be the most extreme case.

But you need to also take into account what your goals are. Are you welling to give up your life in the short term to pay off debt or would you rather slowly pay off your debt and enjoy more of your life?

For the first, Dave Ramsey's plan works. For the later, you are better off saving a little for retirement and building an EF.

The real issue and the end of the day is: What are your goals?

Veteran's Day

November 11th, 2008 at 02:05 pm

To all the vets, thank you for your service. Not only those who made it back but also those that gave the ultimate sacrifice for this country.

Also, a thank you for military families whose sacrifices sometimes go unnoticed.

My Take On The Markets

September 25th, 2008 at 06:00 pm

Where do I even start? Ok, first let me say that I don't hold presidents responsible for economic issues. So, I won't be bashing Bush, Clinton or Bush.

Was it caused by real estate speculators, the mortgage brokers writing loans with out proof of income and employment and 100% + loans, was it caused by credit agencies rating all the paper off of SIVs and CDOs AAA and Aaa?

I believe the underlying problem started after the S&L crisis. Coming out of the S&L we hit a little recession where the unemployment rate hit 7.5% and middle management was being squeezed. From 1991-1992, the fed lowered the fed fund rate 375 basis points in less then 2 years. This made credit very easy to get, whether it was buying stocks, loans for companies, and yes even mortgages.

When everything is clicking, this added leverage in the economy causes the economy to expand. Jobs are easy to find, labor pay increases … life is good. But leverage can also cut the other way too.

You could even go further back in time. The S&L crisis caused a recession which caused the fed to loosen the economy. The deregulation of the 1980's caused the S&L crisis. The inflation of the early 1980's caused the deregulation as a last ditch attempt for the S&Ls to save themselves. In the 1970's, S&Ls didn't realize that their business models were fundamentally changing and didn't have a plan when inflation hit.

I could probably go on and on. One thing feeding of another. If I had to choose one thing, it would be the fed aggressively open up credit to everyone in the 1990s, and this has evident in all industries, corporations,

So here we are today. We have underlying assets devalueing or correcting (which ever term you want to use). When these assets started to devalue, firms went out and raised capital (in other words debt). Some of the headlines were Baclays raises 4.5 billion, Fifth Third raise 2 billion, Lehman posts 3 billion loss and sets 6 billion stock sale.

But recently something happened in the markets. The write downs of the assets didn't stop and investors stopped loaning money and buying preferred stock.

So now we are in September, AIG's assets deterred to a point where they had to keep putting up more capital and just couldn't do it any more. Lehman was basically shut out of the capital markets. Write downs are still occurring and financial ratios are still deteriorating.

So what has the government done? First is to save AIG. AIG is basically the insurance provider for the financial industry. If they went under, it would have caused a ripple affect of failures as hedged positions became unhedged.

The second issue was the common citizen losing confidence in the financial system. This was seen when there was a run on money market accounts. Money Market accounts invest in safe short term paper (except the cash enhanced which invest in CP on SIV and CDOs. Black Rock wrote about this last December). In any case, if everyone sells out of a money market fund, the portfolio manager must liquidate the fund. This causes them not to get full value and liquidate for less then a dollar. We say State Street lose 35% of its value in one day because of this.

So the government has now set up $400 billion to guarantee that money markets will have a dollar price. This has had the effect of stopping the run on the mutual fund industry and chances are the none of the $400 billion will be used. If the market works with out panic, the portfolio managers can unwind there positions without forcing to liquidate at a fire sale.

The next piece is to free up capital and let the credit markets work again. This is the $700 billion. Right now, the institutions carrying this debt bad assets keeps writing them down and doesn't have capital to lend and people with capital to lend don't want to lend it because these write off just keep continuing.

Some the $700 billion is there to buy this debt from the financial institutions. The consensus is that the price will be above the fire sale price currently out there put below the maturity value of the debt. The government will then hold the securities until the market recovers or keep them to maturity. There is talk of starting with the MBS (mortgage backed securities) and moving to others.

So a MBS is security that represents a pool of mortgages. So they take a bunch the 30 year fixed at 5.5% and sell a slice to the bond fund. Most people pay there mortgages so most of the mortgages in the pool will be fine. It's just this small percent that will default and no one knows how much it is. So there is now a supply of MBS and not a lot of buyers. The yield on these are 15%-20%, so the are already steeply discounted.

Now the government is going to come in and basically buy the securities so the yield might be 10% - 15% and hold until the market recovers or the pools mature.

Personally, I expect the government to make money on the AIG deal and the MBS deal and maybe loss less then a billion on the money market thing. Also the terms are that the money will be available if needed. This usually means that the government will sell treasury if the money is needed, they don't have it on hand.

There is an urgency to this. You don't want the credit markets to sieze.

So that's my take. Hope it may sense.