ITS NOT ALWAYS ABOUT MONEY

To The Memory of J. L. Neeley, An Uncommon Friend

Costs and Benefits of Growing Old. Growing old has its advantages. One benefit is that you have some really good friends you have known for many years. One of the costs is that those old friends are growing old and either you die and leave them or they die and leave you. I knew J. L. Neeley for 42 years and and, although we sometimes went for years between visits, each new visit was just like we had just been together the week before. I know you didn't stop by this site to hear about my grief but I couldn't resist a small tribute to him the day after I learned of his passing. My life was better for having known him.

I Bet You're Tired of Hearing Depressing News on This Site. I'm a little tired of it myself. In my last post, I discussed some of my expectations for the future which also sounds a bit pessimistic but, as a notable TV personality says, "There's always a bull market somewhere." Perhaps its more important to discuss coping strategies for a recessionary environment than wealth maximization strategies for a growth environment. What are some of the things we can do to cope with this environment?

Control Your Expenses. I have spent considerable time with clients discussing the fact that retirement security is really about replacing the cash flow from your employment with cash flow from other sources. Clients are very interested in these discussions as long as we are talking about income opportunities but, when the subject of decreasing expenses is brought up, the atmosphere can become almost hostile. Like the lady who spent $300 a month at an upscale coffee restaurant who informed me that this was her main form of daytime recreation and elimination of this activity was "off the table." She maintained this position even after I informed her that it requires $60,000 in investment capital to generate that kind of income at 6%. In Colorado, I recently changed my phone, cable TV, and internet service, from $160 per month to $40. That reduces the capital I need to generate income to pay those expenses by $24,000 and, considering the small amount of time I spend there, the sacrifice is well worth it. Of course, you might remind me that the best thing to do is sell the Colorado property. I'm working on it.

Analyze Your Mortgage. Having spent many years counseling mortgage clients, this is one area in which I have a lot of confidence the expertise of myself and Susan at Westmont Companies. One of the biggest mistakes I see from retiring clients is over-emphasis on the interest rate of their current mortgage. For example, let's consider a soon-to-be retired client with a $200,000 5% mortgage with 10 years remaining. Payments on this loan are $2,121 per month. In order to generate cash to pay $2121 per month you would have to invest $425,000 at 6%. Granted the loan has an attractive interest rate but the principal payments of approximately 1300 a month is murder on the cash flow. There are a number of strategies for dealing with the situation, from paying off the entire balance with funds from other sources, to a reverse mortgage, to refinancing to a longer term mortgage. As an example consider the possibility of refinancing the entire balance with a 5.5%, 30 year fixed rate and payments of $1,135. Even though the interest rate is increased by .5% per year, the payment drops by almost $1,000 a month. It's about cash flow, not interest rate. Of course, you may have to give up on your idea of a free and clear house in 10 years but is the sacrifice worth $1,000 a month during the most enjoyable years of your retirement? This discussion just scratches the surface of the many things that can be done to improve retirement cash flow by restructuring a mortgage. There is no single answer that fits everyone but there are many opportunities available.

What About An Annuity? A lot of people don't consider fixed annuities because they consider them to be poor investments. While this may be true, an annuity is not really an investment but an insurance product. You are insuring that you will have an income as long as you live. A 66 year old male can purchase a guaranteed income of $1,500 for life with a payment of $250,000. Under this plan, a spouse or other beneficiary is also guaranteed to receive this income for 20 years from the purchase date in the event that you die during this time. Again, this may not be that great from an investment point of view but, in an environment with high investment risk, this may be highly beneficial for risk averse investors. Again, there are a number of different annuity strategies available each with different opportunities.

Investing With Options. I have attempted to discuss options strategies on this site several times but it have given up because they are often too complex to discuss with inexperienced investors. The most important thing to mention here is that, many investors and experts alike consider them to be highly risky. This can be true; however, there are a multitude of different strategies, some of which are considerably less risky than conventional investments. If you want to take the time to learn these strategies, the best place to start is a 1000 page book by Lawerence McMillan entitled, Options as a Strategic Investment. I have been reading and studying this publication for several years and am convinced that I am a better investor because of the knowledge I have gained from this publication.

Coming Back To Denver In September. The main purpose of my visit is to attend a gathering of several friends I have known for almost 60 years. You might guess that the death of my old pal, J. L. Neeley had something to do with that.

NEW TIMES CALL FOR NEW STRATEGIES.

Some Things Never Change, Others Never Stay the Same.

It's tempting to do what you are comfortable with instead of what you need to do.... George Guerin.

It's Been An Interesting two Weeks. I've been here in Colorado for almost two weeks and neither my body nor my mind have slowed down during the whole time. I've had interesting conversations, picked up some new ideas, and have reached some new conclusions, one of which is that we can't continue to do what we've always done. The the picture above shows a scene that Native Americans could have seen hundreds of years ago. It looks pretty much the same today as it did then. As you head down the mountain towards civilization, you can see immense changes that have occurred even in the short time I have occupied this planet. If i had my "druthers," I might prefer fewer changes but times are different and we must adapt.

The Demographics Of Our Society are Changing. Anglos will represent a smaller proportion of voters, consumers, and workers in the future. Even if immigration slows, differences in birth rates will force this change. The anglo section of society is rapidly aging and will place pressure on entitlement programs such as social security and medicare. Continuation of these programs in their present form is highly unlikely.

Growth In The Financial Markets Is No Longer a Foregone Conclusion. As older Americans look to liquidate their investments to fund living expenses, selling pressure may increase making it difficult for markets to grow as much as they did in the past. We are quite fortunate that the recent rally in the markets has allowed us to recoup much of our losses, it is unlikely that this rally will continue for long.

We Will Consume Less In The Future. Americans have rapidly changed their spending habits. Consumers can no longer borrow on their home equity to buy luxuries because many have no equity. Credit cards are being restricted. Despite a perfect payment history, Bank of America recently cut my credit card limit in half. I really didn't need the $33,000 limit they gave me but it illustrates my point. I also no longer receive five or more offers of new pre-approved cards a week. An aging population will also affect this trend since older people have less energy to roam shopping malls looking for things to buy. Since the consumer accounts for 70% of our economic growth, this will continue to put a damper on things.

Tax Rates Will Increase Regardless of Which Party is Elected. Eventually, we will have to support our government instead of vice-versa. Foreign investors will grow weary of buying our treasury debt unless they see that we are serious about reducing our debt levels.

Increased Government Regulation In The Future. Lack of responsibility in corporations and on wall street has resulted in the call for more government regulation. If what they have done in the real estate and lending industry is any example, this won't work. It takes longer to get a mortgage loan because of new regulations which will do little to help the consumer. Changes in the appraisal process will echo through the economy as appraisers will be selected at random rather than being directed towards the more competent practitioners. While I admit that free markets may not work perfectly, these industries are so complex that effective government regulation unlikely.

Stay Tuned For Strategies To Cope With The New Reality. I am leaving Denver to go back to Texas on Tuesday. I will continue to think about these changes and propose new strategies for dealing with them in future posts.

IGNORANCE AND LEVERAGE.

"When you combine ignorance and leverage you get some pretty interesting results." Warren Buffet.

Happy Days Here Again? Certainly we all feel better now that the Dow Jones average is above 9,000. There is also some good news in the real estate market that shows the precipitous drop in the housing market is slowing. It can't be denied that this is good news; however, I don't share the optimism of those who are predicting 15,000 in the Dow. What I think might be happening is that the markets are starting to recover from the drastic combination of ignorance and leverage and the rush to de-leverage. Earlier this year, hedge funds had to sell into an extremely weak market in order to pay off huge amounts of leverage which had come due. This pushed the price of many solid companies below fair value as sellers far outnumbered buyers in the marketplace. While this may not be over, it has certainly slowed down. Residential real estate has performed similarly as over-leveraged families found themselves with mortgages they could no longer pay.

What Happened to Government Efforts To Help Families Avoid Foreclosure? These efforts simply haven't worked. Despite the emergence of "Loan Modification Companies" and attempts by major lenders to hire extra labor force to handle the huge demand for loan modifications by troubled borrowers, the foreclosure rate remains high. In almost 50% of the cases where loans have been modified to cure default, the borrowers re-default within a year of the modification. Why is this the case? One of the main reasons is that it may be in the borrowers best interest to default if the mortgage far exceeds the property value. Of course, the benefits are often short term, but it appears that we have become a society focused on short-term benefits. A home owner who owes $200,000 on a house worth $150,000 can skip three or four mortgage payments during the foreclosure process and have the money to move and an immediate $50,000 improvement in net worth after the process is complete. The damage to the borrowers credit report and the trauma of moving the family to a rental is often deemed worth it to the borrower with a large negative equity. Again, this illustrates what happens when leverage and ignorance is combined. Of course, the combination s a two way street as lenders exhibited the same ignorance as borrowers when they financed 100% of the value of a property with little consideration given to the borrower's ability to pay.

The Housing Market Will Cure Itself. Builders are producing very little new housing inventory since buyers can buy cheaper than builders can build. Building activity has slowed to a crawl and existing housing inventories are shrinking. This cycle will continue until supply and demand is brought into balance. This is a regional phenomenon and some areas, like Colorado and Texas will rebound quicker than others. Many local governments, eager for revenue, can slow this process by adding more development and water tap fees for builders, making it more expensive to build new houses. The difference between real estate costs in high affordability states (like Texas) and low affordability states (like California) is often largely a result of high governmental fees charged to builders and developers.

Back To Colorado. Next Monday, I will be flying to Denver with the main objective of solving some problems with real estate I own. I am always eager to make time to visit with clients and friends. Call Susan at 720-449-0200 to get on the list.

REAL ESTATE INVESTMENTS: YOU HAVE TO NEGOTIATE

The Financial Markets Are Called Negotiated Markets. That's pretty much a joke. You don't know what negotiation is until you're bought a real estate investment. The trouble is that even experienced investors don't really know how to negotiate. Most employ strictly positional bargaining. The seller prices a property at more than he expects to get and the buyer offers less than he expects to pay and they meet somewhere in the middle. A very experienced high end investor explained that process to me and then told me "it's not rocket science." Given that attitude it certainly isn't "rocket science."

Perhaps We Should Study The Process A Bit More. Here are some things to consider.

1. Know your BATNA and try to project what the other party's BATNA might be. I guess every one doesn't know what BATNA means. It's "Best Alternative To a Negotiated Agreement". You may think you know your BATNA right away but if you spend some time contemplating what it might be, you may come to a different conclusion. When I bought a lake front lot, I started out with some strictly positional bargaining but when I thought about it, I concluded that although lake front property may be somewhat plentiful in East Texas, I wanted to be within a reasonable distance from a town, I wanted a wooded lot, and I wanted an area that might be attractive to potential retirees from an industrial area 50 miles down the road. A little research told me that the sellers were heirs to a sizable estate and could afford to hold the property since there was no loan on it. They could wait for another buyer easier than I could find another lot. With that in mind, I was willing to pay nearer their asking price than I had originally anticipated.

2. Retain your objectivity as much as possible. One of the main points here is to avoid letting your emotions interfere with your logic. I have seen transactions that were in the best interest of both parties fall apart because they made their differences personal rather than financial. One of the best principles I know is to be more rigid on substantive issues than personal issues. Give the other party every possible to save face while you stick to your guns on what's really important to you.

3. Remember there are several aspects to a transaction. A seller might be favorably influenced by a large earnest money deposit which could cost the buyer very little since it is ultimately credited into the transaction. Sellers might also be favorably influenced by a speedy closing date. Buyers can be favorably influenced by attractive seller-carry terms which can also be in the best interests of sellers who might not need all the funds from sale right away.

4. It's not over until its over. Just because you have a signed contract don't think you no longer have to negotiate. There are inspection contingencies and title issues to deal with. In large commercial transactions, there is often a "due diligence period during which a buyer can cancel for any reason. Once a buyer or seller discovers what he considers a critical issue, the negotiation process begins all over.

5. Both parties expect to win in the negotiating process. Most of us have heard of the "win-win" negotiating strategies. While this may sound a bit hokey, it is true that both parties can win in a mutually beneficial transaction. In reality, you can expect that neither party is going to participate in a transaction that is not in their best interest. A broker in a transaction can earn more than his fee by discovering the interests of both parties and facilitating an agreement.

Have You Read The New Financial Publication? It's called Rolling Stone. For all these years, I have considered this mainly an entertainment magazine and not bothered to read it. Ms. Betty bought home the most recent edition which featured an article that concluded that the next big bubble would be the green energy phenomenon brought on by the proposed "Cap and Trade" legislation. The author, Matt Taibbi, provides rhetoric that wall street firm, Goldman Sachs, has been involved in manipulating market bubbles ranging from the great depression to the "tech wreck" of the late 90's to the sub-prime mortgage debacle of 2007. During this time they have made a fortune participating in these markets. The "cap and trade" bubble will allow Wall Street to broker "carbon credits." Again this will make them a fortune by doing what they have always done: taking a very small piece of a multitude of huge transactions. While I don't like this author for a number of reasons, I must admit that it provided me with much food for thought as I endeavour to make investments for myself and my clients.

WHO IS TO BLAME?

"Many an optimist has become rich by buying out a pessimist." Robert Allen

Are You An Optimist? Robert Allen, author of the above quote made a fortune by being an optimist. He wrote a book entitled, Nothing Down in which he outlined how to buy real estate with no out-of-pocket cash. You certainly have to be an optimist to run up large amount of debt with no idea of how you might pay it back. Looking at some statistics I am about to share with you the only conclusion is that we have been a nation of optimists. While I strive to be optimistic, I don't want to carry it to the extreme of being stupid.

Not All Debt Is Bad. I have always believed that debt has a place in many financial strategies. You might say that one of my specialties has been one of helping my clients develop sensible debt strategies. Unfortunately, you can't say that all debt is good since one inevitable consequence of debt is that it adds risk to your life. Although you can utilize debt to create wealth, it can also destroy your wealth. When carried to an extreme, it almost always creates risk that is virtually impossible to manage. As a simple example, consider the purchase of a million dollar property with an operating income of $100,000 a year. If you buy this property with a million dollars worth of debt at 5%, your interest cost is $50,000 a year. If everything works right, you have just created $50,000 in income from thin air (since you have none of your money in the deal). You have also obligated yourself to pay $50,000 a year whether or not your tenant pays the rent. This situation can be managed, provided you have a secondary source to make those payments or liquid assets available to pay the loan. The trouble is that most people don't have a clue as to how they might make those payments without income from the property. The other problem we have is that too many of us used borrowed money to purchase assets that produce no income and lose value rapidly. When this happens we look around to determine who we can blame for our predicament.

We Have Converted The Blame Game To An Art Form. In the current environment, we blame greedy corporations, lax government regulators, the war in Iraq, and huge federal deficits for our situation. I know I sound like a broken record when I call your attention to irresponsible borrowing by consumers so I have found some statistics to illustrate what I mean. Morgan Housel, who writes for The Motley Fool Stock Advisor derived some statistics that show how we have consistently increased our debt levels relative to our income. In 1974, the average household had total debt equal to 63.5% of annual income. This meant that a family making $40,000 a year had total debt of $25,400. By 1988, this had increased to 81.2%. Ten years later in 1998 debt levels were 92.6% of family income. By 2008, we were at 130%. This means a family making $100,000 a year had an average debt level of $130,000. These high debt levels relative to income means that our lives become more risky all the time. Since consumer spending is 70% of our economy, if consumers decide to cut back on spending to lower debt levels, the effect can be highly detrimental to such factors as unemployment, price stability and the government's ability to sustain spending levels.

One Last Point. Our congress is dangerously close to passing something called "Cap and Trade" with the objective of decreasing our reliance on foreign oil and encouraging clean, renewable, energy. Most of us will support those objectives but the real question is the methods they will use to accomplish those goals. There are a number of things I dislike about this legislation but one of the worst is a provision that requires the seller of any piece of real estate to undergo an "energy audit." Those properties that do not meet government standards will have to bring the property up to standard before it can be sold. Many sellers can not afford these costs, especially in an environment where home values are often less than mortgage balances. I wonder how many of us would really support this level of government interference into our lives.

JUST THE BUSINESS CYCLE OR THE END OF AN ERA?

The Noah Rule. It doesn't help to know it's going to rain unless you actually build the ark.

It's More Than The End of The Old Business Cycle. It Could Be The End of An Era. We may never go back to where we were and that may not be such a bad thing. We have concentrated so much of our lives on consumption that we don't slow down and consider what is important. Having been born at the tail end of a huge depression, I can remember what it was like before we became so affluent and it wasn't that bad. It's not that I would like to go back, maybe just slow down a bit and concentrate on what's important. Making and spending money can be fun but so can spending time with friends and family.

It's Time To Start Building Your Ark. I don't say you should stop spending money, just slow down a bit. I recently got an e-mail picture from a long-term client showing him sitting on a tractor-mower. He recently retired from almost 40 years in the airline industry. He now works at a golf course doing what we might call blue collar labor. Rather than feel sorry for him, I admire his willingness to do this type of work when he can certainly afford not to. As an added bonus, he also gets to play golf free. Since that is his real passion, the benefit is probably more important than the money he makes. My hat goes off to him.

Look At Your Investment Portfolio. I still think you have to emphasize cash flow. Dividend paying stocks and high quality corporate bond funds can keep your cash flow up and, while you can't afford to ignore share prices, you can take some comfort when you get those dividend checks. This is particularly important if you need to withdraw from your account to fund your living expenses. Trying to live off capital gains can be dicey since they are several orders of magnitude more difficult to predict than dividends. We also can't afford to ignore the potential for renewed inflation due to the anticipated huge deficits. One of the better hedges against this would be various kinds of real estate investments, especially REITs that are not over-leveraged and have low payout ratios.

Here's To My Favorite Holiday. I've always loved July 4th, especially in Colorado where the weather is usually pretty close to perfect. Before this holiday is over, we will have 15 or 20 family members up here. We will all over-eat, consume large quantities of various beverages, play music, and watch fireworks. I will be in Denver towards the end of this month and hope to see many of you then.

THE TROUBLE WITH REGULATION.

The Regulators Don't Know What They're Doing. Regulators think they know the answer to all our problems but most of them have never worked a day in the industry they're regulating. A good example is their interference in the real estate industry. The mortgage industry has made great strides since I first entered in 1982 but you wouldn't know it from the attempts being made to roll back to those early years. When I first entered the industry, it took months to get a loan approved as we had to send out an average of six verification letters for each file and wait for the results to come back before we could begin assembling a package for the ultimate buyer of the loan. We had to write a detailed explanation for each derogatory item in the credit report. Once the file was sent to the ultimate purchaser, we were often told to go out and get more information. Some of these details were worth pursuing but most were a waste of time. One of the first things I learned was that common sense is out the window and I'll never forget the warning that, "There is a huge difference between a good loan and a saleable loan." It was our job to assemble a saleable loan package with quality out the window. The entire mortgage brokerage industry sprang up because large lenders found it less expensive to buy these loans from smaller companies than assemble the complex files themselves.

Borrowers Were Better Served When the Process Was Abbreviated. The trouble was that the process was abbreviated too much. This could be fixed relatively easily by correcting some of the excesses but government seldom does things the easy way. I could go through a multitude of examples but perhaps a description of the most nonsensical of these new regulations will let you know what I mean.

Huge Changes In The Appraiser Selection Process Lowers Quality. Apparently the government places much of the blame for recent problems on faulty appraisals. Further, they think that the appraisal problem lies with Realtors and mortgage lenders pressuring appraisers to over-value properties. Their solution is that appraisers are not selected by lenders any more. Instead they are assigned to each case by a central clearing house. The result is that the marketplace doesn't discriminate between those appraisers that provide a quality product within a reasonable time frame and those who don't. We can no longer talk to appraisers and point out obvious errors in reports. This problem and other new regulations have increased loan approval times to the point that you can no longer write a contract and expect a quick closing. If this really lowered the risk of foreclosure it might be worthwhile. Unfortunately, this isn't the case in my opinion.

A Mandate For More Regulation? Unfortunately, the government views the recent election as a mandate for more regulation. While I agree that corporate boards of directors have not done their job and corporations have not served shareholders and the general public well, I have no faith in the government to do anything to make it better. I am afraid the next 2-4 years will bring about some major changes in finance, energy, and health care that will be hard to undo once established. Hopefully, I am wrong.

HOT WEATHER COLD MARKETS.

Stopped on My Trip To Pull A Few Weeds Off Blind Lemon's Grave

In Case You Didn't Know. Blind Lemon Jefferson was a blues pioneer. He died in 1929 but had a strong influence over all the old bluesmen. He was relatively successful and had money in the bank when he died, still, they say he froze to death on the streets of Chicago. We just happened to drive by the old cemetery and see the "Blind Lemon Memorial Cemetery" sign. Those who know me very well know I could never miss a chance to stop. Several momentos were left at the grave including an unopened can of beer, an old rusty harmonica, and several guitar picks. The inscription of the grave says: "Lord it's one kind favor I'll ask of you see that my grave is kept clean." Maybe it sounds a bit morose, but I considered it my privilege to pull some weeds and make the place a bit more neat.

Still Watching The Markets. The markets are going close to what I have projected: Nowhere. I am still participating. Selling some stuff, collecting dividends, and writing some options. My assumption is that the market will stay within a trading between 8,000 and 9,000 on the Dow. I am buying only when I can find well-priced dividend stocks and attractive option writing opportunities. My last investment involved buying 1000 shares of Health Care Properties at 20.13 a share. It pays $.46 a share per quarter which amounts to an annual yield of 9.4%. I also hedged my bet by selling calls October 20 calls on the entire investment at 2.13 a share. This immediately reduced my out of pocket investment to 18.00. If the stock stays at the current price, I will have to sell it for 20 in October. That would give me a gain of 11.1% for 3 months (plus dividends). The key to success is sustainability of the dividend. If management finds it necessary to reduce that dividend, my return could go negative, a fact that never escapes me.

The Housing Bubble. There are a lot of folks who would like to blame the lenders for the huge debacle in the housing markets. The prevailing view is that the greedy lenders pushed their risky loans on unsophisticated borrowers while government regulators were "asleep at the switch." The fact is, government regulators contributed a great deal to this mess by trying to regulate lenders to make loans to more risky borrowers. Congress passed the "Community Reinvestment Act" to force lenders to make more loans to minority home buyers. This came about because of some questionable statistics indicating discrimination against minorities by the whole industry group. This was a flawed study as indicated by the fact that foreclosures were not less prevalent among minorities as would be expected if they were held to more strict standards than the rest of the population. The community reinvestment act required detailed reporting by mortgage lenders to prove there was no discrimination. A related Home Mortgage Disclosure Act required even more detailed reporting. As a result of all this, standards were relaxed and less qualified borrowers (minorities and non-minorities alike) entered the market in droves. The federal reserve helped things along by keeping rates on short-term loans at record low levels. The long period of low rates and virtually non-existent underwriting standards pushed housing prices to the stratosphere. So who do we blame? All of the above. Aggressive mortgage lenders, well intentioned legislators and executives who neglected the implications of pushing for relaxed standards, wall street for packaging these loans without really understanding the risk and selling them to investors who didn't understand the risk either, rating agencies who gave these mortgages ratings that didn't reflect the risk. Who suffered the most from mishandling these issues? The very borrowers these measures were designed to help. Why have I gone into this rant? Because I distrust the ability of the government (both parties) to solve our problems through more regulation and that appears to be the direction we are taking.

Waiting For Rain. It's really hot and dry here, in contrast to the rain in Colorado. I should be back in Colorado sometime in early July or late August. Send me an e-mail or call Susan if you want a meeting.

HOME AGAIN. FINALLY

Me and "Uncle Martin" with Lightnin Hopkins

It Was a Long Drive. The main purpose of the past three weeks was to get to Denver to work on some real estate but along the way we made a few important stops. We visited a religious shrine near Amarillo, Texas on the way up and made a stop at a farm established by Ms. Betty's ancestors on the way back. The farm has been designated as a historic family farm, having been in the Boyd family for more than 100 years. Betty's Uncle Robert has lived there for all of his 83 years with the exception of a brief trip to Okinawa during the 1940's. He told me that, at the age of 18, he used to view the sunrise in Okinawa with tremendous gratitude for surviving another day. He now views the sunrise at the Boyd Farm the same way. As I get older, I understand that more and more. The picture above was taken in Crockett, Texas by a statue of Lightnin' Hopkins an old Texas blues man.

Still Watching The Markets. I never missed a day checking the markets once or twice. If you didn't take my advice and lower the interest rate on your mortgage, you have missed an opportunity to lock in a 30-year fixed rate in the 4's. If you are looking for low closing costs, it is likely that you soon won't be able to find rates in the 5's. You might be hearing commercials about rates in the 4% range but, if it isn't totally a bait and switch ad, you will likely find out that there are numerous add ons for loans below $250,000 and credit scores below 725. Cash out loans often involve a premium and paying off a second mortgage can carry similar premiums in some instances. Investor loans are still available but with higher down payments and a substantial premium over owner occupied loans.

Bidding Wars For Lower End Properties. In many instances, we are seeing bidding wars for well-priced properties. If you are looking to pick up a foreclosure at a bargain, you will have plenty of company. We have made offers on behalf of our clients only to find out that we are one of 12 offers on that property. This will probably spread to other parts of the market if rates stay this low. One reason for this is the $8,000 tax credit being offered to buyers who haven't owned a property during the past 3 years. This will be discontinued after the first of next year so buyers are anxious to find a property before expiration date. Another reason is the lack of new inventory being produced by builders. Several builders have been forced to file for bankruptcy due to the high costs of holding inventory. Notable among these are two local builders, McStain and Village Homes. These were well-established companies who did an excellent job of providing quality properties and taking care of their customers. Hopefully, these two excellent companies can re-structure and survive in this difficult market.

What About The Financial Markets. The last few months have brought a strong rebound in the stock market. If you got out at the low point (and we know plenty who did) you missed out on a chance to recover much of what you had lost. Unfortunately there is a strong possibility that all the gains of the current rally can't be maintained and we can no longer say that there is more upside in the market than downside. There are some stocks that have been hit hard and not quite recovered. Among these are established companies like AT&T and Pfizer along with some speculative issues in the REIT and business development sectors. You can't go in and buy those at random but you may be able to tilt the odds in your favor by some careful due diligence. As I mentioned in my last post the stock market continues to have a better risk-return balance than many of the so called lower risk investments.

My Apologies To Regular Readers. I very much appreciate those of you who read this blog on a regular basis. Lately, I have done poor job of keeping you informed. It is my intent to post on a weekly basis and will do my best to re-establish that schedule in the future.

IT'S A NEW MARKET.

The Market Has Changed. For several weeks now, I have been saying that there is more upside potential in the stock market than downside risk. Now that the market has roared past the 8000 level that may be no longer true. If you will recall, when the market dropped to 6400 and reversed itself back to above 7000, I said that we now have weak support at 6400 and resistance at 8000. Once the market broke above 8000 and remained there for several weeks, 8000 again becomes a support level. This indicates there may be a potential for the market to reach 9000, the next resistance level.

How Valid is This Type of Analysis as a Predictive Tool. Perhaps the main reason for the validity of this analysis is that lots of trader/investors follow it. While I don't believe it is highly accurate, neither do I believe we can afford to ignore it. As I have said about other predictive tools, it is just another data point. What I have now concluded is that the market has reached a new level of stability. There is little reason to believe that fluctuations in the Dow of 500 points a day will return anytime soon. A strong indicator in this area is the VIX, a measure of implied volatility in the marketplace. This is also a measure of investor fear. Now that this indicator is in the low 30's, (As opposed to the 70's of a few months ago) it appears that fear has diminished to a large extent. The bottom line is that there may still be some more upside; however, the upside potential is no longer an order of magnitude higher than the downside risk. There are many hurdles in our economy and full recovery may be a considerable distance down the road. I believe a substantial recovery to prior levels will take several months, perhaps even years.

So Why Should We Be In The Market At All? Because there are few other places to invest. Bank CD's and long-term treasuries pay so little that those of us who need to support our retirement with our investment portfolio have little choice but to invest in the market. We can still get dividends that exceed those of fixed income investments from relatively stable companies like AT&T and Bristol Meyers. We can also speculate a bit in REITs and business development companies, some of which still pay dividends in excess of 8%.

What About Real Estate? There are a lot of reasons for housing prices to increase. Mortgage rates are still quite low, the government is giving $8,000 to first time buyers, and the affordability index is at all time lows. If those economists who predict that massive federal deficits will cause runaway inflation are correct, housing offers one of the best inflation hedges around. A word of caution: Don't expect this to be a passive investment. Even with a good management company like Westmont, there will be some hard decisions and difficult times in coping with with rent collections, maintenance, and vacancies. With all this, I believe real estate investment returns will exceed the stock market in coming years.

Coming Back To Denver At The End of May. I will be spending a couple of weeks in Denver at the end of May. Those I never got around to seeing on my last trip could call Susan (She always knows how to find me) to arrange an appointment.

IS THERE A PONZI SCHEME IN YOUR FUTURE?

How Do You Define A Ponzi Scheme? I would doubt I have many readers who aren’t aware of the definition of a Ponzi scheme; however, I will define it briefly for those who aren’t sure. In recent weeks it seems like each week you hear of an investment advisor who confesses to operating one of these schemes. The modus operandi goes like this: The advisor solicits clients by promoting a long track record of successful investments. This solicitation is usually accompanied by a list of satisfied clients who have benefited by this approach. While these satisfied clients have received excellent returns, the returns do not come from a successful strategy but from subsequent clients who’s funds are not invested but diverted to furnish returns to the previous client. This can last for a long time as long as new clients keep investing their money. Eventually, the system has to come to an end, as the current clientele grows so large that not enough new clients can be located to furnish their returns. When the scheme is finally brought to light, losses to clients can be astronomical.

How Do You Avoid Ponzi Schemes? Practitioners of Ponzi schemes include names like, Donahue, Hoover, Madoff, and Stanford. There are undoubtedly others who haven’t been discovered yet. Here are some of the characteristics they have in common. 1. High lifestyle including things like large boats, airplanes, multiple luxurious houses, and lavishly decorated offices. 2. Claims to have a unique insight into the markets. 3. A list of satisfied clients. 3. Consistent above market returns. 4. An intense sales approach that offers you membership in an exclusive “club” that isn’t open to just anyone. 5. They are prone to anger for those who decline to invest or who need time to think about it. Allen Stanford claimed to be a knight, owned a lavish offshore suite of offices and a bank and went by the title of “Sir Allen.” He tried to turn himself in last week but was turned down because the investigation is still incomplete and no warrant has been issued for his arrest. If you run into a prospective advisor who has two or more of these characteristics, back off in a hurry.

How Do Ponzi Schemes Get Started? I have often been amazed that advisors start these schemes despite an almost certainty of eventually getting caught. In a recent article posted on CObizmag.com,, Stephen Mauzy, Chartered Financial Analyst, offered some insight into how seemingly intelligent advisors end up in these quagmires. In the beginning many of them have an idea for a strategy that seems likely to work. It usually does work for a period of time. Unfortunately, virtually any strategy will eventually fail for a period of time, no matter how well it is thought out. When this happens some advisors, driven by ego, greed, or pride, resort to Ponzi schemes with the intent of making the clients whole again. Some may even be successful but the majority end up on an irreversible downhill slide. I recall, one Denver advisor pleaded with the judge for a lenient sentence so he could earn the money to repay all those who were cheated. The judge didn’t fall for this and responded with a 100-year sentence.

Investing Mistakes Are Unavoidable. In the late 90’s, I came to the conclusion that high dividend stocks provided lower volatility and cash flow for reinvestment or use in funding retirement expenses. This approach worked well throughout the late 90’s and early 2000’s. Using this approach, I was able to avoid the “tech wreck” of the early 2000’s and produce relatively consistent above market returns. While I never claimed that this strategy would always be successful, I was surprised when this sector was among the hardest hit in the recent debacle. Although, I still believe this strategy will ultimately outperform the others for clients who must draw income from their portfolio and I have never been tempted to try to placate clients by lying to them, I can certainly see how some might be short sighted enough to resort to these schemes. I will use this humbling experience to strive for more refined strategies that minimize the effects of the inevitable mistakes of the future.

ARE YOU READY FOR SKYROCKETING ENERGY?

Did You Think You Would Benefit From Lower Prices For Fossil Fuels? Think again. In the absence of an uproar from voters, pending legislation will raise the cost of everything from utility bills to driving your automobile. Congress and the President want you to limit your use of fossil fuels and they plan to force you to do it by a variety of ways. One of these is a new ruling recently passed by the EPA stating that emissions from the combustion of fossil fuels represents a hazard to our health. This opens the door for the government to impose restrictions on the burning of fossil fuels in order to protect your health. Pollution from burning fossil fuels can indeed be hazardous. The problem is that, even if these fuels are burned as cleanly as possible, they will still produce CO2, an odorless, colorless gas with out which life on earth would cease. CO2 is now considered to be a "greenhouse gas" and the major cause of global climate change. The only way to severely limit CO2 emissions is to drastically reduce the combustion of fossil fuels. Since every land dwelling animal that breathes produces CO2 with each exhale, it is obvious that life on earth will always produce CO2. When we discovered fire, we began to add CO2 to the atmosphere.

What About Plants? While I am no expert in this arena, I am aware that plants absorb CO2 and produce oxygen. Does this simplify everything? Could we just plant a lot of trees and other green stuff which would remove all the CO2 we produce? I have heard just that as a potential solution; however, this ignores one issue. When plants die, their decay absorbs oxygen and eliminates CO2. Even trees which live for hundreds of years, carry out this process through their leaves which means that every autumn, all those leaves that hit the ground become producers of greenhouse gasses. Granted, there are some trees that don't lose their leaves in the fall but you can tell by all those pine needles on the ground by your pine trees that the process of shedding old needles and growing new ones is continuous. I don't claim to know what the balance is but I do know that the whole process is beyond my comprehension. The bottom line is that I believe controlling global climate change is "above my pay grade" and I suspect it is beyond the pay grade of many of those who think they have the answers.

You Can't Ignore Economics. The old Lone Prairie song that says "the wind blows free" sounds right but it costs 9 cents a kilowatt hour to produce electricity from wind as opposed to 8 cents from coal. You also have to consider that, even in the most windy spot on earth the wind doesn't blow all the time which means that you have to use another form of energy to turn the turbines when the wind is insufficient. I won't say that wind energy will never replace fossil fuels but it appears to be premature to place too much emphasis on this while coal and petroleum are so plentiful.

Lets Just Grow Our Energy. We've demonstrated that you can't depend on growing corn for energy. Looking at recent trends in using vegetable oils as a diesel substitute, this doesn't look highly promising either. Since these oils now cost around $2.70 per gallon, as opposed to diesel at $1.50 wholesale, bio diesel doesn't appear at all competitive without government subsidies. If you don't believe this, look at the $88 million plant in Grays Harbor Washington, currently sitting idle. It's not just economics either. A recent study published in Science concludes that bio diesel is an environmental disaster if you include the effects of plowing under vast amounts of grasslands and forests to free up land for production of crops.

What's My Conclusion. I can't help but conclude that its a bit arrogant for us to hope to control the Earth's climate. While I would like to find renewable energy sources to replace fossil fuel and, although I think it will be possible some day, the technology isn't here yet. Let us not, try to legislate fossil fuels out of existance until we find economically viable substitutes.

THE LONG ROAD BACK

"I Would Rather Be In Jail In America Than Free Anywhere Else". Eldridge Cleaver



An Unlikely Patriot. Some of those who read this may be too young to remember Eldridge Cleaver. No, he was not another offspring of Ward and June. He was the leader of the Black Panther party and he knows whereof he speaks. He grew up during the years before the civil rights act and witnessed heavy discrimination against Black Americans. If anyone had a reason to be bitter about America it was him. He spent years in prison for violent crimes and would have gone back had he not jumped bail left the country for Cuba and other communist countries. After 8 years in exile he came back to face the music. He denounced his former violent ways and embraced the country that he thought had done him wrong. He spent the remainder of his life writing and speaking about the role of Black Americans in society. Patriotism is often frowned on in present society. Certainly we have made many mistakes and some of us have become irresponsible in our quest for wealth and power. Still, we are lucky to have the opportunity to live in this country where we can see our mistakes and take measures to correct them.



Coping With New Realities. Many of us are not sure where to turn in this market. Some have lost faith in the ability of the free markets to function with limited government intervention. Undoubtedly, there are those who have taken advantage of the trust placed in them by the investing public. Executives and labor unions have taken money for themselves which should have gone to the investors or retained in the company for research and product development. This would have made these companies more sound. Wall street has also diverted money as they over paid executives and deal makers huge amounts for placing money with the investing public, many of whom had no idea of the amount of risk they were taking. When huge sums are being placed, a very small percentage may sound fair until you look at the absolute dollar amount being spread among a relatively small number of employees.



Now We Look Towards The Government To Save Us. It is highly unlikely that the government is capable of taking over the huge responsibility of keeping companies on the straight and narrow. Look at the motor vehicle department and the post office if you want an example of how the government runs things. Look at the $10,000 toilets and $500 hammers if you think the government is capable of keeping us out of trouble. Look at the social security system if you want to know how to keep a Ponzi system operating for 100 years. Look at the huge debt they are piling up if you want to know how to live high and pass the debt to our children. Look at the way the two parties demean each other if you want to know how to put together a cohesive organization.



How Do We Cope With All Of This? The only answer is self reliance. Watch how you invest, spend, and save your resources. Plan for worst case scenarios instead of the best case. It's not rocket science. Spend less than you earn, invest the difference, monitor those investments closely, and don't let luxuries become necessities.

Be careful who you trust. There are those who look like geniuses until the bubble bursts. Remember Mike Wise. He was the Chairman of Silverado Savings and barely escaped jail when the bubble burst the first time. He did it again and got caught with a huge con game in Aspen. He spent a short time in prison and last month jumped off a 9 story building in Florida. The Chief Financial Officer of Freddie Mac committed suicide a couple of weeks ago, leaving us to wonder what hey may have done to make him prefer death to staying here to deal with the consequences. We will probably never know.

YOUR BIGGEST OPPORTUNITY

"We ought not to fight them at all unless we determine to fight them forever." John Adams, speaking to President Jefferson regarding the potential invasion of Tripoli in response to their piracy activities.

Before I Talk To You About the Serious Stuff.......I thought you might enjoy seeing the eight pound catfish my friend caught when he came up to visit yesterday. He's been my friend for almost 40 years so I wasn't jealous of his good luck. Besides, I was glad I didn't have to clean the thing.

The More Things Change, The More They Stay The Same. We had to fight for our country 200+ years ago and we have to do it again periodically. Looks like John Adams was correct when he made the statement above. I have recently spent a lot of time reading history, something I should have been more diligent about 50 years ago. One thing that comes to mind is that, whatever we are fighting about, there will always be part of the population who prefers to do whatever is necessary to preserve the peace. In revolutionary times, there were the Tories who didn't want to break from England. In the civil war, there were the "Copperheads" who were willing to leave slavery intact to avoid war. Many of us still remember the "sex, drugs, and rock and roll" crowd who didn't believe in the Viet Nam war. Now there is the Iraq war and the war on terror and the usual group of protesters who think we should back off. I won't say that the protesters are always wrong, but neither are they always right. The one thing that seems obvious is that there will always be wars and there will always be those who don't support them.

Now That I Am Off My Soap Box.......I'll tell you the main reason I am making this post only a few days after the last one. I believe there are tremendous opportunities in the residential real estate market. The combination of low prices and artificially low mortgage rates make home ownership more affordable than it has been for some time. I'm talking about true affordability, not the artificial kind of the past 5 years. This probably presents more of an opportunity for the younger generation but what can be better than the opportunity to buy your own home at a reduced price and finance it at very low interest rates. If you haven't owned a home for three years, there is a $7,500 tax credit which makes the opportunity even more attractive.

There is Something For The Older Generation Too. If your home isn't paid for and you have a rate in excess of 6%, pick up your phone and dial our office to see if it makes sense to refinance your current mortgage at current levels. This is especially true of you have any kind of adjustable mortgage. It is no longer worth the risk to continue these obligations. Those of you who have followed my writing for a number of years know that I am always reluctant to claim exceptional insight into the future direction of the financial markets, including mortgage rates. I will step outside of that box and tell you that I believe there is a strong probability that, because of huge government spending increases, there is a strong probability that rates may reach unheard of high levels in the future. If I am right, the upside of refinancing is that you will be locked in at a very low rate for the remainder of your ownership period. Even if I am wrong, the downside is that you invest a few dollars as an insurance policy against future increases. I believe it is important to make your move now. To procrastinate may mean missing out on an opportunity you won't see again for many years.

Looking Forward To Next Week. I have already scheduled some appointments for next week. Although Susan chastised me for having folks call her without telling her my schedule, it is still better to contact her because she always knows how to find me, something that isn't always easy to do.

THINK WE HAVE IT ROUGH?

"The reflection upon my situation and that of this army produces many an uneasy hour when all around me are wrapped in sleep. Few people know the predicament we are in". George Washington.



Consider What Our Ancestors Went Through. It's all relative isn't it. I worry about the political and economic situation we are in and I also have a few uneasy hours when "those around me are wrapped in sleep." When I read about the American revolution, I realize how much we tend to whine. Stop and think of what these ancestors went through in order to give us the comparatively luxurious lives that even the poorest among us enjoy. Think about feeding and providing weaponry for a ragtag bunch of so-called soldiers who faced the most powerful army in the world. Did you know that they cut down countless trees, dismantled fences, and even demolished old houses and barns in order to have firewood for cooking and warmth. Think about the effect of that on the environment. Did you know that they didn't even have enough gunpowder for every soldier to have a rifle. They even issued spears and asked that "...men who active, bold, and resolute enough use spears in defense of the lines instead of guns." Despite all of these obstacles, George Washington was bold enough that, after the above quote, he made the following statement; "Perseverance and spirit have done wonders in all ages." We may not have leaders of Washington's caliber to inspire us today but we can think about the gifts they gave us and aspire to roll up our sleeves and do what ever is necessary to get ourselves through this man-made crisis.



Be Careful Who You Ask For Help. Particularly if you fly in a private jet to make your request. President Obama asked the CEO of General Motors to resign. I hate to think that the government can do that to the head of a private corporation. On the other hand, you have to expect things like that when you tell the government that you have run into the ground what was once the most successful automobile manufacturer in the world. At that point, the government has not only the right but the obligation to make their bail out contingent on the resignation of an unsuccessful CEO.



Resistance or Support? The Dow Jones Industrial Average is once again hovering around the 8000 level. A friend of mine who is a strong believer in using charts to predict the market told me that once we fell below the 8000 level we could expect it to fall to the 5000 range. Within a few days of dropping below the 8000 "support level" the market dropped to the 6400 range. Not quite 5,000 but no doubt scary. It has since recovered by 25% back to almost the 8000 level. At this point, 8000 is no longer support, it is resistance. This means that it will be difficult to rise above that same level. While, I am not nearly as sold on this approach to predicting the market as my friend, neither do I think we can afford to ignore it.



What Does This "Mumbo Jumbo" Mean? It means that we may have hit bottom at around 6400 and we will have difficulty passing 8000. If you are an individual investor, the best approach is probably to ignore that and cautiously buy good companies here. Items in my own portfolio that I would buy again today are AT&T, Pfizer, Waste management, and Marathon Oil. Stocks that I don't own that I am considering are 3M, Conoco Phillips, and US Natural Gas.

If you want to speculate, try American Capital Strategies, Dow, or Huntsman. All of this last group have been beaten down to the point at which the downside is much lower than the upside. Even if two of the three of these goes bankrupt, the surviving could gain enough to make up for the two that became worthless.



Keep an Eye On the Mortgage Market. With rates in the 5% range it may be time to make a move, especially if you have one of those 5-7 year adjustable products that are adjusting soon. If you have questions, call Susan at 720-449-0200. She can make an appointment for me while I am there next week. Look forward to seeing my Colorado clients then.

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.

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.

INVENTORY YOUR ASSETS.

"I've learned that all a person has in life is family and friends. If you lose those, you have nothing, so friends are to be treasured more than anything else in the world." (Quote from unknown Source)

I Can't Resist a Picture Now and Then. The old guy in the middle is me. Every one of these guys has been my friend for almost 40 years. We have gone through much together from divorces to job losses to market crashes but we have never outgrown our zest for life. Forty years ago we were all relatively poor but we have all done well in the interim. At this point, we have suffered setbacks, but we still have the things we care for most. Our love for the land, the water, the trees, and each other. As long as we stay alive we an rely on these.

My Biggest Investing Mistake. Now that you've permitted me a bit of sentiment, I'll get back to money issues. I devoted a fair amount of space to telling you of three investments that I've made that have done relatively well. Now I'll tell you about one of my assumptions that has not served me well. About 7 years ago, I decided that owning stocks with the sole purpose of selling at a higher price in the future was a poor strategy. I reasoned that none of us know what value the market will place on these assets several years from now. I decided that the important thing was cash flow and reasoned that companies that pay dividends to their shareholders would by far less risky than those that didn't. Further, I figured I could rely on the fact that company executives were extremely reluctant to cut dividends once a policy had been established. I still believe those assumptions were correct.

The problem was that I thought I could virtually ignore the price the market placed on these assets as long as the dividends kept coming. That was a not bad assumption; however, it was far more simple for these companies to cut dividends than I thought. In fact, not cutting dividends would have been totally irresponsible in many cases. Companies like Pfizer, Dow, Bank of America, and Citigroup, all of which have been solid dividend payers in the past have made drastic dividend cuts. The recent cut by Dow spoiled a 75 year record of no dividend cuts.

To cite a specific example of let me tell you of my investment in Bank of America. When I bought it, it was $53.00 a share. I still own it today at $2.84. I had no clue that the second largest bank in the country could do so poorly. I even thought that their purchase of Countrywide and Merril Lynch were good investments and examples of their optimistic view of the future. While Bank of America has been a horrible investment, some of my losses were offset by option premiums and dividends received. These have lowered my costs by $22 per share; however, option premiums and dividends will be harder to come by in the future since dividends are now 4 cents a share annually and option premiums on a 2.8 stock are small. I don't know what I will do with this investment in the future, but for now, I guess I'll just hold on and see what happens.

Politics and Economics. I have been very reluctant to discuss political issues in the past; however, it is becoming more and more obvious that you can never totally separate the two. Over the past few months, I have read large books on American history, economic theory, and the great depression. Some of the political controversies we see now have been around since our country started. While I will try to stay away from strictly partisan issues, I will let you know some of the things I have learned in my reading.

COPING WITH NEW REALITIES.

We have to fight them daily, like fleas, those many small worries about the morrow, for they sap our energies. (Quote from unknown source.)

Wildwood by Moonlight.

This Says It All. It's very difficult to do and I'm no better than most others in dismissing my concerns about the future. Especially, when it appears that the those who run the companies in which we invest have let their greed get in the way of the best interests of the shareholders and the government, which claims to know how to fix things doesn't have a clue as to what really needs to be done. One thing I believe is that doing more of the excessive borrowing and spending that got us here in the first place will not get us out of the mess we find ourselves in. At this point, I can be optimistic in the fact that I can still see the moon shining over the lake in my back yard, the azaleas are starting to bloom like they do every spring, and I can hear the birds singing in my back yard (if I put my hearing aids on).

Self Reliance Is The Key. If we can't depend on industry or the government to bail us out, I guess I have to go back to what got me out of poverty in the first place: My own talent and work ethic, with a little helping of luck. My main focus is to continue to increase my cash flow. Perhaps a few more writing assignments, some more prudent investments, and looking at ways to eliminate unproductive spending. Of all these, the safest way to make sure I can survive is via controlling my living expenses. I would encourage everyone to ignore the government urging us to spend more and do what you need to do to control your expenses.

I'm looking at A Reverse Mortgage. I have always considered these to be a good vehicle for seniors to increase their cash flow. You can get a lump sum to use for any purpose, a monthly income, or a line of credit. The most attractive thing about a reverse mortgage is that you don't have to make payments and, regardless of how much you borrow, you and your spouse can live in the house as long as you live. When you die, your heirs can inherit the house but they have to pay off the current mortgage which increases every month. If they can't find new financing or sell the property for more than the loan balance, it belongs to the lender. The lender cannot make any claim upon the heirs or on other assets in the estate. The worst characteristic of this loan is the high closing costs which are based on the value of the house not the loan balance. If your tenure in the house is short, these costs are significant; however, they are don't amount to near as much over the long term. To summarize, this loan makes sense if you intend to occupy the property for the remainder of your or your spouse's life and if your heirs prefer to inherit other assets instead of the house; however, if this is your family home with significance to your heirs or if you plan to move in less than 3 years, you probably want to pass up this idea. The first problem I have encountered is the poor responsiveness of lenders who don't seem to be all that anxious to call you back.

The Denver Housing Market Shows Signs of Recovery. If you are one of the few investors who still has cash, the housing market is improving. Builders are building less, interest rates are lower, and the current excess inventory is being absorbed. While I don't recommend rushing into the market, it appears that there will be some real opportunities in 2009. If you have to change your residence for good reason, you might want to consider renting it out for a couple of years until the market rebounds. Don't forget that you have to live in it for two of the past 5 years to avoid tax on the gain (If you still have one).

I Am Coming To Denver. I will be there the week of Feb 23 to March 2. If you want to schedule a meeting give Susan a call. Her number is 720-449-0200. I look forward to spending some time with you.

UPDATE ON PROLOGIS AND US OIL.

Closed Out Both Investments. I promised to let you know how I did on these trades whether I won or lost. To refresh your memory, I bought US Oil (USO) at 29.39 on December, 29 2007. I sold 10 January 30 calls at 2.24. On January 20 the stock was at 29.7 and those calls expired worthless so I got to keep the 2.24. I could have written another set of calls and collected another 2.00+ option premiums but I decided I wasn't as sold on the short-term prospect for oil prices so I sold my stock on January 23 when the market opened. I got 30.20 per share. My overall profit was .81 on the stock and 2.24 on the options for a total of 3.05 per share. Not a windfall but 10.4% for a 22 day holding period.

Similar good luck on Prologis (PLD). Bought on November 7, at $9.85 and sold 10 December 10 calls at $1.75. (Each call is for 100 shares. When these calls expired in December, PLD stock was down but I was able to get another 1.20 by selling these same calls for January. During late December and early January, PLD shares dropped as low as $2.2. I could have bought more at that low price or sold and took my losses; however, news about PLD success in re-structuring debt and leasing new space, led me to hold on even though I was unwilling to buy any more. In January, the stock rose to over 12 and I had to sell the stock at 10 on expiration date. My total profit on the deal was $3.10 per share or 31.5% over a 60 day period. The fact that the stock rose and fell rapidly during that period, illustrates how important timing is in this process. Some may call this technique similar to playing the slots in Vegas; however, this the best way I have found to make profits in the market. I started doing this in 2004 in a taxable account and have made consistent profits over this period. I wish I could say the same for my retirement accounts, in which I have employed a much more conservative, long-term strategy.

I'm Not Sure How Valuable These War Stories Are To My Readers. I only included them to illustrate how you can use market volatility and options strategies to coax cash flow out of difficult markets. They aren't very exciting and making a 2 or 3 thousand here and there may not interest most of you. For this reason, I will refrain from publishing these trades and their results in the future unless I hear that you find them valuable.

What Is The Biggest Threat To Our Economic Success. A few months ago, I would have said that it was high energy prices. Now I will tell you it is low energy prices. We can afford very little in the way of new exploration for fossil fuels at these prices. We can also afford very little in the way of seeking alternative sources. We are already starting to see the effects of this. Companies who supply drilling rigs and oil field chemicals to major oil companies have gone from having a huge backlog of orders to laying off personnel to cope with the decline in business. Boone Pickens has put his windmill project on hold and plans for a plant to produce cellulostic ethanol in Grand Junction have been postponed until "stability returns to the energy markets." While we can all enjoy lower gasoline prices, it comes at the cost of becoming more and more dependent on buying fuel from companies who hate us.