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.