One Sales Pitch After Another. If you watch financial stations on TV now days, You are sure to be bombarded with countless pitches to get you to buy gold. You might see Glen Beck or Gordon Liddy, each telling you that the best move they have made in recent years is adding gold to their portfolio. "Gold is easy to buy, easy to sell, and has never been worth zero." Look online and they will amplify these pitches with additional detail. While they may tell you the spot price of gold, they will never quote the price for which you can buy an ounce of gold on your own. To be fair, some web sites will tell you that they make their money via a spread between the bid price and the ask price (The price at which you can buy and the price at which you can sell). There are some who tell you that the spread is between 5 and 30%. In order to find where it is between those levels you have to call and talk to their account representatives (read salesmen). Suppose gold is $1,200 an ounce and you want to buy 20 ounces. At a 15% spread, it will cost you approximately $25,800. If you decide you need the money two weeks later, it you can sell it for $22,200, which means you need an increase to about $27,900 in order to cover the spread and get your money back. This means the $24,000 worth of gold you bought would have to be worth $27,900 for you to get your $25,800 back. Thus you are buying gold at $1290 per ounce that you can only sell for $1,110 per ounce.
In all fairness to Glen Beck, he tells you that you shouldn't buy gold for a return on investment, instead it is in insurance policy that will preserve your capital in the event of a catastrophic event in which the dollar looses much, of its value. Such an event seems more likely in view of the recent financial melt down which caused the Fed to flood the market with dollars. What you need to keep in mind is that several scenarios are possible and don't put all your eggs in one basket. Just be aware that you can't flood the airways with expensive commercials unless there is a huge profit potential in the sale of the commodity you are pushing.
Black Gold Seems a Safer Bet. Gold doesn't have a lot of uses. On the other hand, we have to have oil and, despite the fact that there are alternative sources of energy, we are unlikely to find a sufficient supply of these alternative sources to keep us in transportation and heat. As a replacement for gold, it would appear that one strategy is investment in companies that would benefit from a supply demand imbalance in oil. My most recent investment was in a company called Northern Oil and Gas, a company that owns several leases in the Bakken Fields of North Dakota. Please don't run out and buy these shares. There are several factors to consider before deciding that this is a suitable investment for your situation. I like the shares of many companies that own oil reserves in inland locations.
Some Problems Lie Ahead. Look at what's happening in Greece. The bottom line is that their government has promised more benefits to the population than they can afford to pay. The citizens, having relied on those are highly agitated and are protesting in the streets. Our government has done something similar. They promised increasingly large retirement and disability benefits in return for a contribution from its younger citizens and their employers, They added medical care and drug benefits in return for another contribution. Add this to unemployment benefits, insurance on your bank deposits (FDIC) and investment in the mortgage industry (Fannie and Gennie may). Another insurance policy is in place on your private pension accounts (PBGC) and your deposit in brokerage accounts (SIPC). Can your government pay these benefits, if necessary? Not without excessive taxation, inflation of the money supply, or borrowing. Excessive taxaction can slow the economy to a crawl, expanding the money supply can cause inflation, and excessive borrowing can result in lenders deciding to loan their money elsewhere and/or require higher interest rates. The safest way, economically, is to reduce the promised benefits, resulting in the same kind of unrest they are seeing in Greece. We must use our voting rights to get our government to stop promising more than it can deliver and to stop using Ponzi schemes to finance those promises. It will be uncomfortable, but we need to become more self reliant and stop depending on our government to supply what we need to live our lives.
Sunday, May 30, 2010
Monday, May 17, 2010
SELL IN MAY AND GO AWAY.
Is The Old Cliche Correct? Obviously, not always, but like most cliches there is a grain of truth. In fact, on a statistical basis, it is more often right than not. I have been predicting a correction in the market for 6 or more months. Finally, I am right which reminds me of another cliche that says, "Even a stopped clock is right twice a day." I guess the bottom line is that, if you expect you or your investment advisor to get you in and out of the market at the right time, prepare to be disappointed.
There is Often No Rhyme or Reason To Market Behavior. While this statement may not be totally true, oil prices are a prime example of how difficult it can be to anticipate the results of a given event. On April 23, 2010, oil was at $85 per barrel. Three days later a major explosion on an off shore drilling platform resulted in the death of 11 men and a major discharge of petroleum into the Gulf of Mexico. The President called for a suspension of new off shore drilling and environmentalists, never favorable to fossil fuel production, called for a permanent ban. As of today, attempts to eliminate the flow of oil into the gulf have met with little success. What would you have predicted for oil prices after the explosion, up 10%, possibly 20%? As of today, prices are barely above $70 per barrel, a drop of almost 18%. I'm sure I could look around the internet and find an explanation for this behavior but I wouldn't believe it if I did.
Another Reason To Emphasize Current Cash Flow. I have always promoted an emphasis on developing cash flow from your investment portfolio. Whether you are buying real estate or stocks. a portfolio that emphasizes cash flow over growth is best for most investors, particularly those at, or nearing, retirement. Right now this strategy is more important than ever. My reasoning is as follows: 1. It appears that we may be headed for a "range bound" market. This will make it increasingly difficult to withdraw cash for living expenses based on growth in the portfolio value. 2. Fixed income investments, especially those emphasizing safety, are offering very low yields. With one year bank CDs paying less than 1%, it may be tempting to extend the maturity date ( the 10 year treasury is paying 3.88%) but there is risk in deterioration of purchasing power if the predictions of higher rates in the future are correct.
3. Baby boomers will be more likely to favor high dividends as demand for income they can spend increases.
Quit Worrying About Market Prices By Investing In High Dividend Companies. A diversified portfolio of companies like AT&T, Verizon, Pitney Bowes And Kinder Morgan Partners can give you a yield of more than 5%. While these are not without risk, they should give you a better total return than you can get with fixed income investments.
Small Blessings. After three or four months of back problems, it is a real blessing to be able to walk across the room without pain. Hopefully, this improvement will continue and I can take a trip to Colorado later this summer.
There is Often No Rhyme or Reason To Market Behavior. While this statement may not be totally true, oil prices are a prime example of how difficult it can be to anticipate the results of a given event. On April 23, 2010, oil was at $85 per barrel. Three days later a major explosion on an off shore drilling platform resulted in the death of 11 men and a major discharge of petroleum into the Gulf of Mexico. The President called for a suspension of new off shore drilling and environmentalists, never favorable to fossil fuel production, called for a permanent ban. As of today, attempts to eliminate the flow of oil into the gulf have met with little success. What would you have predicted for oil prices after the explosion, up 10%, possibly 20%? As of today, prices are barely above $70 per barrel, a drop of almost 18%. I'm sure I could look around the internet and find an explanation for this behavior but I wouldn't believe it if I did.
Another Reason To Emphasize Current Cash Flow. I have always promoted an emphasis on developing cash flow from your investment portfolio. Whether you are buying real estate or stocks. a portfolio that emphasizes cash flow over growth is best for most investors, particularly those at, or nearing, retirement. Right now this strategy is more important than ever. My reasoning is as follows: 1. It appears that we may be headed for a "range bound" market. This will make it increasingly difficult to withdraw cash for living expenses based on growth in the portfolio value. 2. Fixed income investments, especially those emphasizing safety, are offering very low yields. With one year bank CDs paying less than 1%, it may be tempting to extend the maturity date ( the 10 year treasury is paying 3.88%) but there is risk in deterioration of purchasing power if the predictions of higher rates in the future are correct.
3. Baby boomers will be more likely to favor high dividends as demand for income they can spend increases.
Quit Worrying About Market Prices By Investing In High Dividend Companies. A diversified portfolio of companies like AT&T, Verizon, Pitney Bowes And Kinder Morgan Partners can give you a yield of more than 5%. While these are not without risk, they should give you a better total return than you can get with fixed income investments.
Small Blessings. After three or four months of back problems, it is a real blessing to be able to walk across the room without pain. Hopefully, this improvement will continue and I can take a trip to Colorado later this summer.
Wednesday, May 05, 2010
POLITICS AND ECONOMICS
How Do You Separate Politics From Economics? The answer is, it's difficult and it gets more difficult all the time. I started publishing this blog in 2006, about the same time I was beginning to slow down my financial planning practice. At that time, I promised myself I would not let my political preferences affect my objectivity when it came to commenting on the financial scene. I think I have done this relatively well; however, these are unusual times. Here are some recent events which we need to follow in order to make informed investment decisions.
The Financial Chaos In Greece. Volatility has increased dramatically in our markets and many financial observers have blamed this on the increased risk that Greece will not be able to live up to its obligation to service the government debt. While this debt is indeed excessive, it might be more manageable if their citizens could accept the fact that they may have to give up some of their huge government entitlements, pay higher taxes, and reduce other government expenditures. Sound familiar? If we don't do a better job of controlling our own expenditures we might be facing a similar fate in the future. You can only depend on government borrowing to fund citizen benefits for so long before it becomes almost impossible for your government to borrow enough to pay those benefits. I don't know when, but I anticipate we will find it increasingly difficult to borrow money in the future. One result of this is bound to be increased interest rates throughout our economy.
Energy Prices. Accidents in the coal mines and off shore drilling rigs have upset the energy market. The funny thing is that the price of oil has dropped rather than increase as I would expect. These accidents have caused many environmentalists to call for increased government scrutiny of domestic energy companies and the President has announced a moratorium on new offshore drilling in the Gulf of Mexico. Terrorist activity has also increased in recent months and, although none of the attempts have been successful, increased anxiety could put further pressure on domestic energy production. My bet is on increased oil prices in the future.
Increased Cost of National Security. Although we have announced plans to remove combat troops in Iran, we have a ways to go in Afghanistan. My main concern is Iran and it appears that there is little we can do to avoid a major crisis there. If we continue to do nothing, Israel has promised to bomb the Iranian nuclear facilities. The result is almost certain to result in a major military conflict in that area. Even if I am overly pessimistic, it appears that we will have to devote more and more resources to national security. The cost of remaining diligent is getting more and more significant. Just today, there was a major disruption in Times Square because of a cooler containing bottles of water in front of a hotel. Whether or not we achieve major spending cuts. a tax increase of major proportions is inevitable. Look for these to be levied against higher income taxpayers. The rest of us won't get away unharmed either. The fact that 47% of Americans pay no tax can't be overlooked. This is a situation we simply can't afford.
How Do We Cope With these Realities? I know we would all like to anticipate getting higher returns on our investments. I believe we can do this; however, just like the Federal Government, we might not be in a position to do this with increased revenue alone. The safest way to assure your survival is to reduce your living expenses. For every $100 a month in reduced expenses, the amount of capital you need to fund your lifestyle is reduced by $20,000. It is likely that many of us will be forced to cut expenses before this is over. The more you can do this in an orderly manner, the easier it will be to accomplish. In the meantime, I believe the best way to increase your investment returns is to concentrate on companies in the technology, energy, or commodity sectors. The increased volatility in recent weeks will make it more profitable to write calls against our existing positions.
Its Been Awhile Since My Last Post. I have had a recurrence of back problems and Betty has had surgery to remove 12 inches of her colon. Both of us are much improved and I am thankful for the support we have received from friends and family.
The Financial Chaos In Greece. Volatility has increased dramatically in our markets and many financial observers have blamed this on the increased risk that Greece will not be able to live up to its obligation to service the government debt. While this debt is indeed excessive, it might be more manageable if their citizens could accept the fact that they may have to give up some of their huge government entitlements, pay higher taxes, and reduce other government expenditures. Sound familiar? If we don't do a better job of controlling our own expenditures we might be facing a similar fate in the future. You can only depend on government borrowing to fund citizen benefits for so long before it becomes almost impossible for your government to borrow enough to pay those benefits. I don't know when, but I anticipate we will find it increasingly difficult to borrow money in the future. One result of this is bound to be increased interest rates throughout our economy.
Energy Prices. Accidents in the coal mines and off shore drilling rigs have upset the energy market. The funny thing is that the price of oil has dropped rather than increase as I would expect. These accidents have caused many environmentalists to call for increased government scrutiny of domestic energy companies and the President has announced a moratorium on new offshore drilling in the Gulf of Mexico. Terrorist activity has also increased in recent months and, although none of the attempts have been successful, increased anxiety could put further pressure on domestic energy production. My bet is on increased oil prices in the future.
Increased Cost of National Security. Although we have announced plans to remove combat troops in Iran, we have a ways to go in Afghanistan. My main concern is Iran and it appears that there is little we can do to avoid a major crisis there. If we continue to do nothing, Israel has promised to bomb the Iranian nuclear facilities. The result is almost certain to result in a major military conflict in that area. Even if I am overly pessimistic, it appears that we will have to devote more and more resources to national security. The cost of remaining diligent is getting more and more significant. Just today, there was a major disruption in Times Square because of a cooler containing bottles of water in front of a hotel. Whether or not we achieve major spending cuts. a tax increase of major proportions is inevitable. Look for these to be levied against higher income taxpayers. The rest of us won't get away unharmed either. The fact that 47% of Americans pay no tax can't be overlooked. This is a situation we simply can't afford.
How Do We Cope With these Realities? I know we would all like to anticipate getting higher returns on our investments. I believe we can do this; however, just like the Federal Government, we might not be in a position to do this with increased revenue alone. The safest way to assure your survival is to reduce your living expenses. For every $100 a month in reduced expenses, the amount of capital you need to fund your lifestyle is reduced by $20,000. It is likely that many of us will be forced to cut expenses before this is over. The more you can do this in an orderly manner, the easier it will be to accomplish. In the meantime, I believe the best way to increase your investment returns is to concentrate on companies in the technology, energy, or commodity sectors. The increased volatility in recent weeks will make it more profitable to write calls against our existing positions.
Its Been Awhile Since My Last Post. I have had a recurrence of back problems and Betty has had surgery to remove 12 inches of her colon. Both of us are much improved and I am thankful for the support we have received from friends and family.
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