THE IMPORTANT THINGS.

The Goal of Life is Living In Agreement With Nature."
Zeno, written in ~335BC


I Love This Place. I know most of my readers check this blog to find out about financial topics. I agree this is my main function and I spend a considerable amount of time studying the financial markets. On the other hand, I don't want to overlook the really important things in life. We bought this place in 1995, not because it was a spectacular house but because it puts us in closer contact with nature. It is an acre in the woods and, although that is a "micro spread" by Texas standards, it's affordable and about all I can take care of.


What's In Store For Your Retirement? In my last post, I discussed the importance of the ability to earn income. I hope no one took that to mean that it was important to live out your life in a job you hate. My first career as a chemist was fascinating to me....for the first 10 years. Things change and domestic chemical companies began to put less and less emphasis on research. My favorite job was at Marathon Oil Company on 7400 S. Broadway. If you drive by today, you'll see what was once a beautiful research campus turned into a vacant field which will probably someday be turned into a luxury housing development. When I ended up in management at a production facility, the job was no longer fulfilling. In a sense, I retired at age 41 when I entered a profession for which I had little in the way of formal training. At age 71, I still enjoy my second career, although I can hardly call it work.


The Important Thing Is Freedom. For me, the important thing is to be able to do the things I find fulfilling. That's why I was happy doing research and why I enjoy my life so much now. In my life, that's the purpose of money. Assets mean little. What is important is the ability to generate cash flow from those assets. It is that cash flow that allows me the freedom to study, read, write, play music, and do the things I want. Hence the name of this blog. Despite the problems I've encountered in the markets of late, I still want to concentrate on building income streams rather than increasing the value of my assets. This might not be the right objective for you. I highly recommend that everyone spend considerable time developing goals for their "retirement" before attempting to develop an investment strategy.


Still Working On My Reverse Mortgage. My biggest problem was finding someone interested. The only institution with appropriate follow up was Bank of America. I would guess that I'm 60% through with the process. I still recommend that clients interested in cash flow consider a reverse mortgage as a vehicle. While they might not be right for you, they can be used in a variety of ways to increase your cash flow including providing an lifetime guaranteed income, cash to invest, or eliminating current mortgage payments. For those worried about heirs, ask yourself which your heirs would prefer: A free and clear house or other assets that you have preserved because you got extra income from your house.


Looking Forward To Seeing You In Colorado. I will be there from April 14-22. Call Susan or send me an email if you want an appointment. Susan can be reached at 720-449-0200. If you have an ARM or sub-prime mortgage and you want to take advantage of the current low rate environment, this would be a good time to discuss it.

POLITICAL SOLUTIONS vs ECONOMIC TRADE OFFS

“The question on the minds of many in Congress and the White House is this: What they should be doing to keep the economy on track? The right answer: absolutely nothing.” Gregory Mankiw, Harvard professor and former chairman of the Counsel of Economic Advisors.

How About Those AIG Executive Bonuses! These bonuses were given out with taxpayer money to people who did little to deserve them. The bonuses are disgraceful but who was responsible? The answer is Congress. The bill that they passed contained specific language that allowed bonuses for which the company was contractually liable. The problem was that the bill was over 1000 pages and few, if any who voted on it were able to read all of it prior to the vote. This is a perfect example of stage one thinking which considers only the immediate consequences of a proposed solution. What happens in subsequent stages in which the company executives continue to take unrealistic compensation and further attempts by Congress to rectify the situation interfere with the operations of what should be a private enterprise? What about the next proposed Congressional solution which involves using the IRS to confiscate these executive bonuses? Will they be coming after your “excessive compensation” next. In his book Applied Economics, Thomas Sowell writes that politics proposes attractive solutions but economics permits only trade offs.

Did You Lose Patience and Get out of the Market Two Weeks Ago. If you did you missed out on a rally of 18.76%. Some of the stocks that I follow increased even more. Bank of America was up 148% and AT&T was up 23.9%. As I mentioned before, it is appears to be too late to sell but too early to by aggressively. For the most part, I am limiting my investment activity to stocks with attractive option premiums that can give me a bit of an edge. While this doesn’t always work, I believe it does provide me with some downside protection and interim cash flow. I don’t know in which direction the market will move next but I believe the upside potential is greater than the downside. My objectives are little different now than it was before the market dropped: Preserve my capital and do what I can to coax current income from my portfolio.

What is Your Most Important Asset? A recent article in Time says that it is your job. I tend to agree, especially if you are younger than 70. I have always said that the best investment you can make is in your ability to earn income. Despite being a year past 70, I still consider my knowledge of personal finance and my ability to generate income as the most important financial asset I have.

Looking At Another Trip To Colorado. I have reservations for a trip to Colorado in mid April. If you want to schedule a meeting give Susan a call at 720-449-0200.

SIGNALS FROM THE MARKET.

"Finance is art of passing money fromhand to hand until it finally disappears."--Robert Sarnoff

Signs Of Stability Or A Sucker Rally. As of today (Thursday, March 12) the Dow Jones Industrial average has increased 576 points or 8.7% from a week ago. While it is likely too early to tell if this represents a real reversal or a major rally within a bear market, there are some signals that indicate that the market is potentially nearing a bottom. Obviously, no one knows; however, there are some interesting signals.

1. Mark to Market. This is an accounting rule that has played havoc with financial services companies that invest in relatively illiquid assets. These companies include, but are not limited to some banks, business development companies, and real estate investment trusts (REITs). The rule states that assets owned by corporations must be carried on the books at the fair market value as if sold in the open market. While this sounds logical, at times markets for these illiquid assets are limited (that's why they're called illiquid assets). Marking these assets down to the price available in a non-existant market makes it necessary for banks to add massive amounts of capital. It also makes it difficult for REITs to use leverage to finance their real estate purchases. There is now a congressional committee meeting to evaluate the possibility of relaxing these rules for some assets. This would be a tremendous benefit to the markets and make it unnecessary for banks to keep asking for government money.

2. Return to Profitablity for Some Banks. Both Citigroup and Bank of America have stated that they have been profitable for the first two months of the year. We will have to wait awhile to find out just how profitable these institutions may be but even a small profit would be a shot in the arm for the market.

3. Less Fear In The Market. This is measured quantitatively by the Vix, a statistic published by the Chicago Board Options Exchange (CBOE). Although it is not a totally reliable index, that value has dropped from a previously unheard of maximum of 80+ to just above 40. This is at the upper end of the historic range but it does signal a reduction in volatility which is usually associated with fear.

So What Does It All mean? I definitely believe there is more upside than downside in the market right now, particularly in financial institutions. If Citicorp and Bank of America return to profitability and if realistic changes are made in the mark to market rules, we can expect a major rally in bank stocks, although not nearly to previous highs. Caution is definitely the watchword and, while it is definitely too late to sell, it may also be too early to buy aggressively. A small bet in the financial and energy sectors could be appropriate; however, a larger than normal allocation to cash is probably still prudent.

What About Real Estate. Single family home prices in the Denver Metro area dropped 10% or more from last year and unsold inventory is still too high to predict a rally. Rental rates are also dropping. One sign that predicts a recovery is the reduction in housing permits issued. These have gradually dropped from 38,000+ in 2006 to 30,000+ in 2007 and just over 19,000 in 2008. If this trend continues, it is only a matter of time until the surplus in inventory turns to a shortage as it did in 1991. Unless you are in an area in which prices have held relatively steady, you probably don't want to sell unless you are forced to. If you have to sell, remember that the market pays for houses that are clean and well staged. If you just throw it on the market, remember you are competing with foreclosures and short sales which usually have to be sold at a discount to market value.

President Obama and the New, New Deal.

Failure is part of the natural cycle of business. Companies are are born, companies die, capitalism moves forward.--Fortune Magazine.

Now is A Good Time To Read About the Great Depression. I recently read a book by Amity Shlaes entitled, The Forgotten man. She wrote in detail about Hoover and Roosevelt and how they attempted to deal with sudden deflation, high unemployment, and a drastically reduced standard of living for the average lower and middle income family. Her description of that time shows some strong similarities to the economic environment today. As an example, consider the resentment of the working class and the high salaries and bonuses of company executives. In 1931, congress debated legislation barring government loans to companies where the CEO made in excess of $15,000 per year. Recently, there have been similar debates over barring government assistance to companies where the CEO earned more than $500,000 a year. These numbers are equivalent if we allow for increases of 4.7% per year in CEO salaries.

The House Has Passed a Bill Allowing Judges To Reduce The Balance On A Loan.
This bill hasn't passed the senate yet however, there is widespread support among middle class Americans who want to allow many families facing foreclosure to keep their homes. This is similar to the Frazier-Lemke Act of the 1930's which limited the ability of banks to repossess properties. In 1935, the Supreme Court overturned that act saying, "even a contract between a starving farmer and a nasty bank has to be honored, and the government does not have the right to intervene."

Central Planning vs Free Markets. One of the biggest political controversies right now is whether the government should utilize a total "hands off" policies towards business or whether they should utilize a more "heavy handed" approach. Those who favor a total free market approach tend to believe that supply/demand and pricing mechanisms will regulate the markets far better than government attempts to use central planning as a means of providing stability. Free market advocates tend to believe that there are so many complex interactions in the marketplace that it would be impossible for governments to do an adequate job. Those who prefer a central planning approach point to recent abuses by wall street and industry as an example of why we cannot trust the markets to regulate themselves. Both sides have a point; however, I tend to believe we should err on the side of minimal government intervention. Taken to the extreme, either approach can prove disastrous. Even during the great depression, there were numerous examples of government intervention that went too far. Right after a famous case in which the Supreme Court found against the government's intervention attempt to control the operation of a small chicken slaughtering operation, Justice Brandeis warned government lawyers that "This is the end of this business of centralization, and I want you to go back and tell the president that we're not going to let this government centralize everything."

Now is a Time To Be Wary of Both Business and Government. Somehow we have to strike a balance between regulating everything or allowing business to continue with the excesses of the past. The free market has allowed corporations to be run for the benefit of executives in some cases and union employees in others. This has been at the expense of shareholders in some cases but may end up at the expense of tax payers in the future. As difficult as it may be to let some large corporations (banks and car companies) fail. It may be the least painful in the long run.