POLITICS AND ECONOMICS

"If you want a non-political solution to a problem, don't ask 535 politicians to provide it."--Barney Frank

Comments On The Stimulus Package. Just about all the time, Barney Frank and I disagree on just about everything but the statement above is one of the most honest and insightful statements I have heard from a politician. I must admit that I distrust the government to make critical decisions about our future. Too many just want to assure their re-election regardless of what is good for the rest of us. Yet, the previous few months have seen virtually unlimited government intervention in the private sector. Not that they weren't asked. One thing I have learned about some of conservatives is that they claim to dislike big government, yet they are right there to ask for help when the chips are down. The huge stimulus bill passed by congress is a perfect example of "a little something for everyone (and let's get it from the rich.)" I can't help but believe that a truly bi-partisan package with a stronger emphasis on job creation would have been a better approach. Whatever your opinion of this package, it will have a profound effect on the economy for years to come. We are still studying what's involved and hoping to have some better recommendations for managing your finances in the future.

For Now, Concentrate On Improving Your Cash Flow. Guard your cash reserves closely, you may need them in the future. Look for ways to reduce expenses. Cutting 500 a month from your expenses is equivalent to adding $100,000 to your capital. I have started the process for a reverse mortgage. More on that later. Lower gasoline prices will help for now, although that will probably not last long. If you have a chance to stash some cash for later, now is a good time to do so.

What About Investing? I can't over-emphasize the fact that it's all about risk. Many financial writers are telling you to look for companies that pay dividends, preferably a growing dividend stream. Make your choices from among those who are unlikely to reduce dividends in the future. I wish I had thought of this. Of course, you know I have thought of this. Even during times when companies that paid dividends were much less popular than fast growing companies or even stock repurchase plans, I endorsed buying stocks for dividends. I even said that you could ignore share prices if the dividend was secure. The trouble with that approach in these times is that it is extremely difficult to predict those dividends which have a high probability of continuing. Dow, Pfizer, General Electric, and virtually all the big banks have severely cut their dividends, even though they had paid them for years.

Option Strategies Can Lower Risk. Most conservative investors will tell you to stay away from options because they are too risky. Your brokerage firm will tell you that you have to be approved by the firm's option principal to be approved for option investing. Option investing can be extremely risky, depending on how you do it and I would recommend that anyone considering entering this arena spend a considerable amount of time becoming familiar with the various strategies. My covered call strategies have helped me develop extra cash flow during good times and limit my losses during bad times. Here is a simple example.

Suppose you believe (as I do) that oil prices are at unrealistically low levels. There are a number of ways to invest in this area but here is one that I use: US Oil Fund invests in crude oil contracts and other instruments shown to correlate with oil prices. Today's closing price was 27.05. If you own this stock, you can sell a contract that gives someone the option to buy the stock any time between now and mid April. For that contract, you will receive $2.50. This sets maximum profit you can receive on the transaction of $2.45 per share, almost 10%. It also means that the stock can drop to $25.45 before you lose money thus providing a partial hedge against future losses. If the stock closes below $27 a share, you can rewrite the contract for a later date and collect another premium.

Tax The Rich. In difficult times such as these, low and middle income tax payers have considerable resentment against the so-called rich. This was especially true in the great depression when the lower classes stood in line for soup while the wealthy spent their money on fine art and jewelry collections. One fallacy of the "tax the wealthy" argument is that taxes are levied on income and not wealth. These don't always go together. In a recent study of the 400 top earners in the country, researchers found out that 75% of these top earners were not among the top 400 a year later. When they went out two years, they found that 87% were no longer there. I can remember one year in which my income was much higher than normal. Under the IRS code I lost all my personal exemptions and a considerable amount of my schedule A deductions. I paid the government more money than I had earned in most of the previous years. I had to lay off employees that I could have kept under a more realistic tax code. I am all in favor of high income tax payers paying higher rates. I just don't want them to be so high as to put a damper on growth in our economy.

INVENTORY YOUR ASSETS.

"I've learned that all a person has in life is family and friends. If you lose those, you have nothing, so friends are to be treasured more than anything else in the world." (Quote from unknown Source)

I Can't Resist a Picture Now and Then. The old guy in the middle is me. Every one of these guys has been my friend for almost 40 years. We have gone through much together from divorces to job losses to market crashes but we have never outgrown our zest for life. Forty years ago we were all relatively poor but we have all done well in the interim. At this point, we have suffered setbacks, but we still have the things we care for most. Our love for the land, the water, the trees, and each other. As long as we stay alive we an rely on these.

My Biggest Investing Mistake. Now that you've permitted me a bit of sentiment, I'll get back to money issues. I devoted a fair amount of space to telling you of three investments that I've made that have done relatively well. Now I'll tell you about one of my assumptions that has not served me well. About 7 years ago, I decided that owning stocks with the sole purpose of selling at a higher price in the future was a poor strategy. I reasoned that none of us know what value the market will place on these assets several years from now. I decided that the important thing was cash flow and reasoned that companies that pay dividends to their shareholders would by far less risky than those that didn't. Further, I figured I could rely on the fact that company executives were extremely reluctant to cut dividends once a policy had been established. I still believe those assumptions were correct.

The problem was that I thought I could virtually ignore the price the market placed on these assets as long as the dividends kept coming. That was a not bad assumption; however, it was far more simple for these companies to cut dividends than I thought. In fact, not cutting dividends would have been totally irresponsible in many cases. Companies like Pfizer, Dow, Bank of America, and Citigroup, all of which have been solid dividend payers in the past have made drastic dividend cuts. The recent cut by Dow spoiled a 75 year record of no dividend cuts.

To cite a specific example of let me tell you of my investment in Bank of America. When I bought it, it was $53.00 a share. I still own it today at $2.84. I had no clue that the second largest bank in the country could do so poorly. I even thought that their purchase of Countrywide and Merril Lynch were good investments and examples of their optimistic view of the future. While Bank of America has been a horrible investment, some of my losses were offset by option premiums and dividends received. These have lowered my costs by $22 per share; however, option premiums and dividends will be harder to come by in the future since dividends are now 4 cents a share annually and option premiums on a 2.8 stock are small. I don't know what I will do with this investment in the future, but for now, I guess I'll just hold on and see what happens.

Politics and Economics. I have been very reluctant to discuss political issues in the past; however, it is becoming more and more obvious that you can never totally separate the two. Over the past few months, I have read large books on American history, economic theory, and the great depression. Some of the political controversies we see now have been around since our country started. While I will try to stay away from strictly partisan issues, I will let you know some of the things I have learned in my reading.

COPING WITH NEW REALITIES.

We have to fight them daily, like fleas, those many small worries about the morrow, for they sap our energies. (Quote from unknown source.)

Wildwood by Moonlight.

This Says It All. It's very difficult to do and I'm no better than most others in dismissing my concerns about the future. Especially, when it appears that the those who run the companies in which we invest have let their greed get in the way of the best interests of the shareholders and the government, which claims to know how to fix things doesn't have a clue as to what really needs to be done. One thing I believe is that doing more of the excessive borrowing and spending that got us here in the first place will not get us out of the mess we find ourselves in. At this point, I can be optimistic in the fact that I can still see the moon shining over the lake in my back yard, the azaleas are starting to bloom like they do every spring, and I can hear the birds singing in my back yard (if I put my hearing aids on).

Self Reliance Is The Key. If we can't depend on industry or the government to bail us out, I guess I have to go back to what got me out of poverty in the first place: My own talent and work ethic, with a little helping of luck. My main focus is to continue to increase my cash flow. Perhaps a few more writing assignments, some more prudent investments, and looking at ways to eliminate unproductive spending. Of all these, the safest way to make sure I can survive is via controlling my living expenses. I would encourage everyone to ignore the government urging us to spend more and do what you need to do to control your expenses.

I'm looking at A Reverse Mortgage. I have always considered these to be a good vehicle for seniors to increase their cash flow. You can get a lump sum to use for any purpose, a monthly income, or a line of credit. The most attractive thing about a reverse mortgage is that you don't have to make payments and, regardless of how much you borrow, you and your spouse can live in the house as long as you live. When you die, your heirs can inherit the house but they have to pay off the current mortgage which increases every month. If they can't find new financing or sell the property for more than the loan balance, it belongs to the lender. The lender cannot make any claim upon the heirs or on other assets in the estate. The worst characteristic of this loan is the high closing costs which are based on the value of the house not the loan balance. If your tenure in the house is short, these costs are significant; however, they are don't amount to near as much over the long term. To summarize, this loan makes sense if you intend to occupy the property for the remainder of your or your spouse's life and if your heirs prefer to inherit other assets instead of the house; however, if this is your family home with significance to your heirs or if you plan to move in less than 3 years, you probably want to pass up this idea. The first problem I have encountered is the poor responsiveness of lenders who don't seem to be all that anxious to call you back.

The Denver Housing Market Shows Signs of Recovery. If you are one of the few investors who still has cash, the housing market is improving. Builders are building less, interest rates are lower, and the current excess inventory is being absorbed. While I don't recommend rushing into the market, it appears that there will be some real opportunities in 2009. If you have to change your residence for good reason, you might want to consider renting it out for a couple of years until the market rebounds. Don't forget that you have to live in it for two of the past 5 years to avoid tax on the gain (If you still have one).

I Am Coming To Denver. I will be there the week of Feb 23 to March 2. If you want to schedule a meeting give Susan a call. Her number is 720-449-0200. I look forward to spending some time with you.

UPDATE ON PROLOGIS AND US OIL.

Closed Out Both Investments. I promised to let you know how I did on these trades whether I won or lost. To refresh your memory, I bought US Oil (USO) at 29.39 on December, 29 2007. I sold 10 January 30 calls at 2.24. On January 20 the stock was at 29.7 and those calls expired worthless so I got to keep the 2.24. I could have written another set of calls and collected another 2.00+ option premiums but I decided I wasn't as sold on the short-term prospect for oil prices so I sold my stock on January 23 when the market opened. I got 30.20 per share. My overall profit was .81 on the stock and 2.24 on the options for a total of 3.05 per share. Not a windfall but 10.4% for a 22 day holding period.

Similar good luck on Prologis (PLD). Bought on November 7, at $9.85 and sold 10 December 10 calls at $1.75. (Each call is for 100 shares. When these calls expired in December, PLD stock was down but I was able to get another 1.20 by selling these same calls for January. During late December and early January, PLD shares dropped as low as $2.2. I could have bought more at that low price or sold and took my losses; however, news about PLD success in re-structuring debt and leasing new space, led me to hold on even though I was unwilling to buy any more. In January, the stock rose to over 12 and I had to sell the stock at 10 on expiration date. My total profit on the deal was $3.10 per share or 31.5% over a 60 day period. The fact that the stock rose and fell rapidly during that period, illustrates how important timing is in this process. Some may call this technique similar to playing the slots in Vegas; however, this the best way I have found to make profits in the market. I started doing this in 2004 in a taxable account and have made consistent profits over this period. I wish I could say the same for my retirement accounts, in which I have employed a much more conservative, long-term strategy.

I'm Not Sure How Valuable These War Stories Are To My Readers. I only included them to illustrate how you can use market volatility and options strategies to coax cash flow out of difficult markets. They aren't very exciting and making a 2 or 3 thousand here and there may not interest most of you. For this reason, I will refrain from publishing these trades and their results in the future unless I hear that you find them valuable.

What Is The Biggest Threat To Our Economic Success. A few months ago, I would have said that it was high energy prices. Now I will tell you it is low energy prices. We can afford very little in the way of new exploration for fossil fuels at these prices. We can also afford very little in the way of seeking alternative sources. We are already starting to see the effects of this. Companies who supply drilling rigs and oil field chemicals to major oil companies have gone from having a huge backlog of orders to laying off personnel to cope with the decline in business. Boone Pickens has put his windmill project on hold and plans for a plant to produce cellulostic ethanol in Grand Junction have been postponed until "stability returns to the energy markets." While we can all enjoy lower gasoline prices, it comes at the cost of becoming more and more dependent on buying fuel from companies who hate us.