UNDERSTANDING THE ENERGY MARKETS.

Azaleas Native To Big Thicket.

The Picture Above The picture really doesn't relate to this week's topic. I am including it only because it shows a very unique flower. Azaleas that grow native in the Big Thicket where I live. While they lack the vivid colors of those we plant, their delicate, tropical like appearance increases their appeal.

Inefficiencies In Energy Prices. Everyone is complaining about the cost of driving a car. Gasoline prices are in the high three dollar range in most places. Many complain that the cost is being driven up by speculators rather than by supply/demand imbalances. Some congress persons are talking about legislation/regulation to curtail speculative activity. While there is little doubt that speculators influence the price of energy, calling for limits to our freedom to buy and sell for future delivery is but one more example of a government that is trying to control things they don't understand. Suppose I know I will need to purchase a million gallons of fuel in September, I can either worry or buy a contract for a million gallons for September delivery. If the price stays the same, I can sell my contract or take delivery. If the price drops, I can buy on the spot market and recover my part of my futures investment by selling my contract (at a loss). Of course, there are numerous other options but the point is buying or selling contracts for future delivery involves risk but this activity gives me more tools to manage that risk. If there is considerable uncertainty in the marketplace, like the potential for more political unrest in oil producing nations, the cost of buying futures contracts will increase. If there is a huge discovery of high grade oil in West Texas, the cost of buying futures contracts will decrease. There is little the government can do about that.

Energy Is Energy. We talk about buying natural gas by the cubic foot, coal by the ton, and oil by the barrel. It's hard to compare one energy source to another using this kind of pricing. We usually assume that energy from each substance will be priced efficiently. Not true. Natural gas prices are around two dollars per one million energy units (BTU). Oil is $105 per barrel. Since a barrel of oil contains 5.8 million BTU, a barrel of oil should be around 5.8 times that of a million BTU of natural gas. Traditionally, a barrel of oil has been priced at a bit more than this, ranging from six to nine times the price of gas. In the current market place, with oil at $105 per barrel and natural gas at two dollars per million BTU, the ratio is 52.5. This would point to the conclusion that either oil must come down or natural gas must come up. Knowing this should allow us to spot investment opportunities. There is little doubt that the current ratio of oil prices to gas will return to something closer to the historic average.

What's Going On With Natural Gas. You would have to be in jail without a TV or computer not to have heard about new discoveries of natural gas in shale formations in several areas around the continental United States. Natural gas is being produced at a rate faster than we can use it and we are reaching a point where storage facilities are full. The facilities we have built to import liquefied natural gas from other countries are now being considered for rehabilitation to allow us to liquefy natural gas for export to countries where demand is higher than in the US. Several companies are looking to convert our fleet of trucks to run on natural gas and major car companies are considering switching pickup trucks to run on natural gas. There are numerous political and technical problems to overcome but we can not afford to keep importing petroleum products when we have our own source of energy which is much more affordable than that which we import from other countries. Cheap natural gas also puts a damper on other forms of so-called green energy which is not yet economically feasible.

What Are The Implications of All This. Think about it. For all the talk about battery operated cars, there may not be any net energy savings. Even if they had a battery that had a range equal to a tank of gas, when you plug the car in to recharge the batteries, you are actually, burning the fuel used to generate electricity, right now either natural gas or coal. You will discharge CO2 from these plants just like you do from the tailpipe of your car. The only reason it may be cheaper to operate your car on a battery is that electricity using natural gas or coal that is cheaper than petroleum. My guess is that the price of natural gas will increase as we discover more ways to use it. This will put a lid on oil prices and we are probably not looking at huge increases there either. Of course, all bets are off if there is a major disruption in mid-east oil.

Answers From This Article May Not Be all That Forthcoming. I am not sure that my knowledge of this subject is yet sufficient to be of significant value but I hope I have aroused your curiosity to follow some of the news in this area. Now that I have done some research in this area, I hear more and more news through common sources that give me ideas as to future investment activity.

USING OPTIONS TO YOUR ADVANTAGE

Knockout Roses. A Little Early Spring Color

Managing Your Money. In these difficult times everyone is afraid to take risk. Unfortunately, there is no risk free investment. Choosing only so-called risk free investments can result in certain loss. For example, if you try to buy only short-term CDs, your return is less than 1%. This is less than the rate of inflation which means you can't buy as much with the money you've invested as you could when you made the investment.

The Stock Market Has Manageable Risk. One way to manage your risk in the stock market is through the use of options but you have to understand certain basic principles before you venture out. Most people won't bother to learn these principles because they think they are too complex and too risky. The fact is they are simple to understand and utilize in a safe manner.

An Option Gives You The Right To Buy Or Sell At A Specific Price. For example, suppose your neighbor owns the lot next door to you and is asking $100,000. You don't have the cash right now but are expecting a substantial inheritance within the next year. You don't want someone else to build next door so you approach your neighbor and offer him $5,000 to hold the property until next year at which time you will pay him the full asking price. He accepts your offer because he will net $5,000 more when you make the purchase, or if you don't buy, he gets to keep your $5,000. This is a simple transaction to understand.

There Are Two Components To An Option's Value. 1. Intrinsic value. If the lot in question is worth $102,000 and you have an option to buy at $100,000 you are getting $2,000 more of value than you are paying; therefore, the intrinsic value is $2,000. 2. Extrinsic value or premium. Since you are paying $5,000 for an option that has a value of only $2,000 you are paying $3,000 in premium. This leads us to one of the only sure bets in the market place.

On The Day The Option Matures, The Extrinsic Value is Zero. The buyer of the option naturally hopes the property value will increase more than the amount of premium (extrinsic value). If it hasn't he has overpaid by $3,000. Think about it. It is really a simple concept. Both parties are managing their risk. If the price drops during the holding period, the option seller has an extra $5,000 to help him bear the loss. If the price increases, the option buyer has his price set at $100,000. Of course, he has paid $5,000 for that privilege.

How Do We Use This In The Stock Market. One way is to harvest your gain and keep the potential for growth. As an example suppose you own 1000 shares of 3M for which you paid $50,000 for three years ago. You have an another attractive investment opportunity and you need your cash. You also are concerned that the capital gain tax is going to increase to 28% during the next year. To top it all off, you believe there is considerable growth potential left in the shares. Here is one way to handle that dilemma. 1. Sell your shares at the current market price of $86,000 and purchase an option to buy the shares between now and January 2014 at $80,000 for $13,000. This way you get the lower capital gains rate, you can make your attractive investment and you can participate in any future growth. Will this work for everyone? No. It will depend on your perception of the attractiveness of the alternative investment, how likely it is for the increase in the capital gains tax and how strongly the option buyer believes in the potential for growth of 3M stock. It may be a good or bad deal but its definitely one that the investor should be aware of.

This is but one example of how you can use options to accomplish your investment goals. I have published this material before and I doubt that many took advantage of the opportunities created by options. If you invest in the markets, you owe it to yourself to explore these opportunities.

A UNIQUE TIME OF LIFE.

Betty's Mother, Georgia Pearl Roll Boyd

Born 100 Years Ago Today.

Inside Every Old Person... Is a young person wondering "What the hell happened?" I understand that better each day as I watch the person I used to be disappear before my very eyes. The new person in the mirror is different and the process of adapting to the new identity can be challenging. Despite the fact that I have known it was coming for a number of years and even wrote about it when I was a graduate student in my early 30s, I still find the changes surprising. Not that its all bad. There are a number of pluses to offset the physical decline taking place.

Some Memory Decline Is Inevitable. The other night I unloaded the back of Betty's car and took two armloads of groceries in the house. The next morning, I found the garage door still open along with the back door of the car. I must admit to being somewhat forgetful all my life but events like that are much more common now. One of my friends told me that he has systematized his life's routine that he has little trouble with routine matters such as finding his wallet, cell phone, or car keys. We can all utilize these technique if the short-term memory decline becomes too much of a problem. One way that I offset the effects of short term memory decline is to use the rich set of memories I have about the distant past starting as young as three years of age.

You Can Continue Learning. Forgetting what you have already learned is not pleasant but there are now so many resources available that you can replace that learning with new things that interest you now. I may no longer remember the main mechanisms for chain transfer in low pressure ethylene polymerization but I now know that one of the main ways that the brain aids in the balance mechanisms for the body lie in communication of the muscles with the cerebellum in the brain.

Death May Take Friends and Family. I recently lost my dad. While I am greatly saddened by his death, I still have many friends and family left and the ability to make new ones every day. I have also resurrected many relationships with cousins which have become instantly gratifying. I saw a cartoon the other day that showed a woman with two children standing by a grave stone that said, survived by his spouse, two children, and 650 facebook friends. Several prominent neurologists report that one of the best ways to cope with the aging process is to maintain social contacts. Social networking and some chatroom sites can help us do that.

We Can No Longer Ignore the Inevitability of Our Own Death. For a number of us, the main way to cope with our impending demise is to practice denial. We just don't think about it. As we get older, it is almost impossible to do this. I have spent numerous hours in an effort to get in touch with my spiritual side. I have studied the issues and looked at the evidence. While I have not proven that there is a possibility that we might continue to live after we depart this life, I certainly don't consider it impossible. In fact, I think there is a preponderance of evidence that it is likely. Of one thing I am certain. The best strategy for me is to live each day as if it is my last because it may be.

The Value of Freedom. I have more freedom now than at any other time in my life. It is what i have always longed for. Each day when I wake up, I am thankful that I can do pretty much what I please. If I can maintain as much physical capability as possible, I can enjoy this beautiful planet and the beauty that surrounds me. I can experience the love of friends and family until my time here is finished.