GLOBAL WARMING. HOW BAD IS IT?

There is No Way I Can Answer That Question. Despite 6 years of scientific education and 20 years of working for energy companies, I can't find the answer to that question. It's hard for me to believe that a divinity school drop out can state with certainty that he knows the answer to the extent that he can declare the debate to be over. Another thing I can't quite figure out is how a scientific issue has almost completely morphed into a political one. Polls show that the vast majority of liberal voters agree that global warming is a serious problem while a vast majority of conservative voters claim that the whole thing is a hoax.


One More Question Needs To Be Answered. To what extent do humans contribute to the problem? Climate cycles have existed since long before we appeared on this planet. Carbon dioxide, the supposed main culprit, has existed since prehistoric times. Without it neither plant nor animal life would exist. Proponents of the man-made nature of the problem state that the concentration of CO2 in the atmosphere has increased by 25% since the use of fossil fuels became prevalent. This sounds significant until you become aware of the fact that, this increase means that there is one more molecule of CO2 out of 10,000 molecules of other gasses in our atmosphere. Is it possible that this low concentration substance could really be the culprit? I am skeptical.


So What Is The Next Step. 1. We could do nothing and take the risk that the problem is real and man made with potential disastrous consequences. 2. We could outlaw the use of fossil fuels and face a certain worldwide economic collapse. Of the two, option 1 is almost certainly preferable. Perhaps, the best option lies somewhere in between, which brings us to the point of this article: The cap and trade legislation passed by the House of Representatives involves an attempt by the government to encourage development of renewable energy resources by taxing fossil fuels and using the proceeds to subsidize development of alternative sources. Of course, in typical government fashion, the bill contains several additions. One of these is requiring energy audits on properties being sold (including single family houses) and requiring properties be brought up to some standard of energy efficiency before closing.

Why the Plan Won't Work. Consider our utility energy as an example. Virtually 90% of our utility energy comes from three sources. coal (48.5%), natural Gas (21.3%), and nuclear (19.6%). None of these is popular with the environmental crowd. The rest comes from renewable sources: hydroelectric (6%), other renewables (2.5%), miscellaneous (.5%). When we take hydroelectric out of the mix (we have virtually exhausted the potential for new dams) we are left with only 3% currently coming from renewable resources. Although some technologies like cellulostic ethanol, wind, geothermal, and solar have promise, they have had promise for 20 years now and still account for only a fraction of our energy production. I could never support a program that taxes 90% of our resources in order to fund research on the other 3%. If you think the government knows how to encourage new technology by subsidies, consider the huge sums of money thrown into the corn ethanol fiasco which added little or nothing to the availability of renewable energy and caused food prices to increase by large amounts. Finally, someone discovered that production of corn and converting it to ethanol burned up almost as much energy as it produced.

I Am In Favor Of Renewable Energy Research. But we must develop products that are economically feasible. Adopting a program to tax 90% of our energy sources will only make us less competitive with OPEC. As the availability of fossil fuels diminishes, renewable resources will become more usable. Until that point, attempts by government will only cost taxpayers money and produce minimal environmental benefits.

MORE MARKET STRATEGIES

Simple Pleasures. Every once in awhile, life gives you a little bonus. I’m not talking about winning the lottery. I am talking about the simple things that you might even miss if you aren’t paying attention. The picture is of a flower I observed in the woods where I live. I have no idea how it got there. Perhaps it was planted a long time ago by someone or perhaps it has always been there obscured by other plants and I didn’t notice it. Anyway, I discovered three more after that one. I hope they come back next fall and I am here to see them.

The Market Is Up Again Today. It really seems overvalued; however, one explanation I read is that there are large amounts of cash on the sidelines held by investors who are disappointed that they missed the recent rally and have grown tired of getting virtually zero returns on their “safe” bank deposits and money market funds. Another explanation is that when a large majority thinks the direction of the market has to change direction, they are usually wrong. Your guess is as good as mine but I continue to look for new strategies that will do well in a market that is flat or declining.

There Are Reasons To Be Cautious. Perhaps the main reason for caution is consumer behavior. The consumer accounts for 70% of our economic growth they are scared and finally beginning to realize that borrowing to fund a lifestyle they really can’t afford can’t go on forever. Of course, they are also worried about potential job loss, decline home values, and declining investment values.

If You Got Out Of The Market, It May Be Too Late To Get Back In. You might re-enter the market with some of your cash but it certainly isn’t time to jump in with both feet. I may sound like a broken record but I still believe in investing for income. The following is an example of an income portfolio. These stocks survived the debacle and the odds of dividend cuts or devastating price decline are not large.

American Electric Power Price 31.9 Yield 5.21 Utility Company

AT&T Price 26.5 Yield 6.19 Telecom

Bristol Meyers Price 22.2 Yield 5.57 Drug

Kinder Morgan Price 54.42 Yield 7.72 Energy pipeline

Prologis Preferred Price 19.73 Yield 8.74 Real Estate

Apollo Investment Price10.2 Yield 11 Business Development

Prospect Capital Price10.6 Yield 15 Business Development.

By way of disclosure, I own all these companies in my own portfolio except Kinder Morgan and American Electric. Those I don’t own are companies I may buy in the future. I might also add that I bought some of these at a considerably higher price than those listed here. As long as I get the dividend, I am not overly concerned about the current price.

Don’t Bet The Farm. Any or all of these stocks could go in the tank next week. I am not recommending that anyone embark on a venture to purchase this portfolio, just giving you some ideas as to ways to get a bit higher return than on guaranteed investments. If I thought this portfolio would go to zero, I would take my money out. If I thought the value would skyrocket, I would put all my money in. Undoubtedly, this is more risky than insured deposits but some risk is necessary in order to generate sufficient cash flow to fund my living expenses.

MORE STRATEGY CHANGES

A Forecast Tells You A Lot About The Forecaster But Nothing About The Future…
Warren Buffet.

With All Due Respect To Mister Buffet…It is impossible to plan your financial future without making some assumptions about what you anticipate will happen in the future. These assumptions constitute a forecast. As the future unfolds it is advisable to think about those assumptions in order to determine if those you made when you put your financial plan in place are still valid. If not, does your present strategy still fit in the current environment/ In my case, the strategies I developed 30-years ago when I first got serious about the planning process, have changed numerous times. Some of the changes were in response to changes in the environment while others were because of changes in my investment philosophy. In one of my August posts, I listed assumptions about changes that might chang to compensate for the over-use of leverage by the government, business, and consumers. These changes have caused me to challenge one strategy that I have held of several years. Perhaps you might want to consider a similar change.

Earlier Withdrawal From Qualified Plans Might Be Advisable. One commonly accepted principal is that retirees should first withdraw funds from non-qualified plans in order to allow tax-deferred funds to accumulate in qualified plans. For those of you who may not know, qualified plans are contributions made with funds which were not taxed. An example is a 401-k or IRA account. While the assumption that it is best to withdraw non-qualified funds first may still be appropriate for some retirees, others might want to begin withdrawals earlier. The reason for this is the potential for much higher taxes later. The huge federal deficit along with deficiencies in the social security system are almost certain to cause tax increases in the future. Just as social security became taxable for higher income beneficiaries in 1984, other increases will probably be necessary in the future. In fact, a recent change in Medicare part B premiums has been enacted for retirees earning more than $160K per year. This increase can constitute a major reduction in net social security income those affected taxpayers. Another reason that this year might be a good year for withdrawal, is that many of us had lower overall incomes in 2009 compared to what we hope to have in the future. Finally, an early withdrawal can benefit your heirs who might find themselves subject to estate taxes as well as income taxes on inherited benefits.

When Will The Anticipated Correction Occur. The market is approaching 10,000, a level that most of us were not expecting until next year. Most analysts are anticipating a correction because they believe the market has moved too far too fast. In addition, statistical analyses indicate that returns are much lower during the last four months of the year. My strategy is to raise some cash by selling stocks that appear fully valued and those in which we have deductible losses in the current year. I am not recommending carrying this strategy to the extreme and selling everything but a slight increase in cash allocation appears prudent at this time. As usual, I favor retaining or making new investments in companies that pay higher dividends or offer attractive option opportunities.

Coming Back To Colorado. Betty and I will probably come back to Colorado in early October. I regret that I didn’t get to visit with everyone on my recent trip and look forward to meeting with others later.

LABOR DAY REFLECTIONS.

"In England, a coal miner's son will almost certainly grow up to be a coal miner, In America, he can be anything he wants". Rick Bragg.

In Case You Don't Know..... Rick Bragg is a Pulitzer Prize winning author with several best selling novels to his credit. He writes about growing up poor in Alabama. The reason the quote meant so much to me is that, if you look at my birth certificate, my father's occupation is listed as a coal miner. I am a perfect example of that boy who grew up to be "anything he wants." Unlike some folks who might be ashamed of a blue collar background, I am proud of it.

It's Not That I Claim A Lot Of Credit For Coming Out Of Poverty. Most of that credit belongs to others. I remember my grandparents saying, "That boy is smart. He won't have to work for wages like the rest of us have." I remember my mom saying, "I want my boy to grow up like those self confident college boys I wait on at Paul's Diner". Then there is my dad who didn't say much but made sure I knew what it was like to work six days a week for a pittance. He always let me know that wasn't what he wanted for me. Growing up in a loving family is a better legacy than money any day.

I Can't Leave Out The Privilege Of Living In The Land Of Opportunity. We had great schools. There were 32 of us who graduated from ""Fruitdale School" (Better not laugh). It was a 55-year old building with only two restrooms and no gymnasium. We played basketball on an asphalt court, sometimes covered with packed snow but somehow we managed to beat a number of schools with modern gyms and locker rooms. We had great teachers who sacrificed much to teach a bunch of unruly kids. I still remember much from some of the books we were forced to read and poetry we were forced to memorize.

What About Colleges? In Colorado, state schools were forced to admit anyone who graduated from high school in the top 75% of their class. This year my grandson was not admitted to the University of Texas because he was slightly below the top 10%. He is ten times the student I was. Tuition was dirt cheap, even relative to the lower wages of that day. I'm not sure I could make it as an undergraduate in today's competitive environment.

How Fortunate I am. Yesterday, I spent several hours on the dock in my back yard, watching my grandson catch fish. Sixty years ago, if someone had told me, an 11 year old boy just starting to work summers in Mr. Montgomery's celery field, that I would be living this way in 2009, I would have been filled with joy. There is no reason I shouldn't feel that way today.

Back To Talking About Money. Please excuse the musings of a sentimental old coot. I promise to get back to the subject of personal finance next time.