G. W. BUSH: THE MAN AND THE MYTH

I’ve Tried To Stay Away From Politics. Politics is an integral part of our lives. Perhaps it shouldn’t be but it is. I know there are many readers who will disagree with my view point on a lot of things and what I am about to write about will be the most controversial post I have made. I am no great fan of any government official and George W. Bush made his share of mistakes while he was in office. Despite the fact that he won two elections, he ended up being one of our most unpopular presidents. I can agree with many of those who criticized some of his policy decisions but there is little doubt in my mind that many of these critics carried things too far, to the detriment of our country. Here are some of the criticisms I disagree with.

George Bush Is An Intellectual Lightweight. I wonder how many intellectual lightweights got an undergraduate degree from Yale with a Harvard MBA. Granted, family connections could have got him in to these institutions but, once admitted, he had to face liberal professors who probably resented his family connections. Many of these would have been more than happy to give him failing grades and end his academic career. He also learned to fly jet airplanes. Most people on the low end of the intelligence scale would probably have washed out as a pilot. People often mistake poor communication skills for lack of intelligence. I believe this was the case with George Bush. The bottom line is that it takes considerable effort and data analysis to assess the intelligence of an individual. None of us has sufficient data to judge the intelligence of the President.

George Bush Stole The First Election. Take your choice. Is he stupid or is he smart enough to engineer the greatest election fraud in the nation’s history? There is no creditable evidence that the Florida recounts would have resulted in a victory for his opponent. I agree that there were many errors in the Florida voting process. Some would have given him more votes and others would have given him less, but if his detractors had their way, they would still be holding ballots up to the light looking for hanging chads. One of the most important factors here is the fact that several media sources paid for more thorough recounts and Bush won all of them. Others make much of his loss in the popular vote. That is a dead issue. For the past 200 years we have used electoral votes to select our presidents. Until the constitution is amended, the popular vote means very little in the election process.

George Bush Turned Bill Clinton’s Surplus Into A Deficit. Certainly, the surplus we enjoyed when Clinton was president turned into a deficit. When you give Clinton all the credit for the surplus and Bush all the blame for a deficit, you are giving both men responsibility for economic factors that were beyond their control. Clinton benefited from reduced tensions that resulted in dissolution of the Soviet bloc. He also benefited from Alan Greenspan’s keeping interest rates at unrealistic levels. Consumers went on a spending spree and the resulting boom brought huge revenues for the government. There was also the “wealth effect” that was a result of an optimistic investor population driving the price of tech stocks to levels totally unjustified by the ability of these companies to produce revenue. This bubble burst shortly before Bush took office and consumers who lost their shirts in the market became less active. Regarding George Bush, he was much too willing to spend borrowed money and he followed the spending practices of previous administrations who spent money whether the revenue was there or not. He also had to deal with the 9/11 disaster and was forced to increase defense budgets to protect us from further attacks. He accomplished this very well. While all of our elected officials are guilty of huge spending indiscretions, the president is but a small factor in whether we have budget deficits or surpluses.

Bush Lied. Thousands Died. This is a clever rhyme useful in campaign ads but it is not necessarily a fact. Much depends on your definition of a lie. I believe a lie is a statement that the speaker knows is contrary to the facts. I don’t believe that George Bush knew there were few WMDs in Iraq. Saddam Hussien had agreed to destroy all WMDs, provide evidence that he had done so, and allow inspectors to verify this compliance. He failed to do this and made himself subject to the consequences. The Bush Team aggressively sold reasons to justify the invasion and convinced a large majority of congress to agree with them. Colin Powell’s speech to the UN was a great example of a well constructed argument designed to convince other nations to join in the fight. It was not necessary to lie and the Bush Team was justified in using good salesmanship to convince others that their approach was valid. You can argue that the invasion of Iraq was a mistake and I might agree with you. You can also argue that the salesmanship of the Bush team caused congress to reinforce this decision. But the hate speech that accuses Bush of lying is not supported by the facts.

These are The Main Reasons Why I Disagree With the Bush Haters. There are others; however, this post is too long already. The Bush haters have convinced me of one thing: I will criticize the practices of those who hold powerful government positions but I will not engage in personal attacks. Those who disagree with the points made in this post can feel free to contact me by fax, phone, or e-mail. I will post well constructed arguments on this site.

TODAY'S WORST INVESTMENT STRATEGY

I've Been Warning About This For Some Time. A common strategy for today's older investors is reaching for yield. Given the risk in the equity markets and less than 1% money market yields it is not surprising that older investors are trying to squeeze higher yields from their fixed income investments than is prudent in this market. Perhaps the worst strategy involves your friendly banker. In addition to the standard mix of certificates of deposits of varying maturities, your banker often has access to other products that offer higher yields. These are often inappropriate for older clients who don't want to take any risk and who might need access to the funds for future health care or other emergency needs. Here are a few strategies I have observed lately along with their implications.

1. Long Term Certificates of Deposit. I recently consulted with a client who bought a $150,000 certificate of deposit with a 2.5% yield. The maturity was five years. Although he has already received one year of benefits, he has four years to go at this yield. If he holds the CD to maturity, he may do considerably better than 1-year certificates or money market accounts; however, if rates go to 4% this year or next, he is stuck with 2.5% for the next 4 years. This isn't the worst case. This client is now faced with very high costs to provide health care for a spouse who has a chronic illness and requires round-the-clock care. Although the income from this and other investments was more than sufficient to fund ordinary income needs, it won't fund health care needs of the spouse. If it becomes necessary to terminate this CD prematurely, the penalty will undoubtedly exceed the interest collected. FDIC insurance provides piece of mind but it won't protect you if you need the money for catastrophic illness.

2. Special Structured CD's. This same client had a type of CD that I had never seen before. It came through a brokerage company owned by the same bank. At first glance, it appeared to be a standared $100,000, federally-insured 3 year CD with a rate of 4%. Doesn't sound too bad; however, there was another feature of which the investor was not aware. The second and third year interest rate of 4% would only be paid if the S&P 500 index was the same or higher than on the day of purchase. If lower, the interest rate for that particular year was zero. That's right the maximum rate was 4% but the minimum rate was zero. The penalty for early withdrawal was higher than a normal bank CD. This investment was entirely inappropriate for the client. Not only that, but the client had no recollection of being thoroughly advised of this adjustment feature.

3. Annuity Products. Although there is a use for annuity products in certain situations, many clients purchased these because of higher initial interest rates without regard to the other terms. For most clients over 70, annuities are inappropriate due to high surrender charges and low liquidity. The client in this example also had a$100,000 annuity. The terms of the annuity allowed it to be surrendered at no fee if the client or spouse went into a long-term care facility; however, since the client preferred home health care for the spouse, this didn't apply. Annuities are often popular with banks because of the high commissions involved but you need to make sure you know what you are aiming at before you pull the trigger.

Beware Your Friendly Banker. Bankers enjoy a higher degree of trust than other financial services personnel; however, they have conflicts of interest just like stockbrokers and some investment advisors. If your banker is recommending a financial product, look closely at whether he is making this recommendation for his benefit or yours.

MORE ON ENERGY

Double Hit For Gulf States. President Obama has been pressured to do something for the gulf states that have been devastated by the oil spill. Certainly, there is reason to believe that more could have been done by both BP and the Government. Obama is ever on the alert to find who's ass to kick and Secretary Salazar has has promised to "keep a boot on the neck" of BP to assure that they live up to their responsibility for clean up. In the meantime the administration has been reluctant to waive The Jones Act which forbids foreign governments from putting boats in the gulf to clean up the spill. The Saudis have developed technology which allows the oil on the surface to be vacuumed into boats and the water which accompanies the oil to be drained off the bottom and returned to the gulf. It's not complicated. As an old chemist I remember a laboratory apparatus called a separatory funnel which applies the same principal to separate water from organic liquids. While it would be difficult to use this method clean up all the oil from the spill, it could provide one more way to reduce the amount of oil that invades our shores. It is difficult to understand why we have not allowed foreign governments to assist us in this matter.

So what has the President done to help the environment? It's simple. He has banned all drilling in the gulf for six months and it is likely that this ban will be extended. The result is another hit for the economy of the gulf states. This will certainly prevent any environmental damage to the gulf but it will also eliminate thousands of jobs and deal another economic blow to the region. The next thing we know they will decide to eliminate auto fatalities by shutting down the nations highways.

It's Not As Easy As It Sounds. The President promised to shut down Guantanamo by January of last year. Its still open and its easy to understand why. One thing I disagree with the administration is their propensity to announce the elimination of something without a clear strategy for a replacement. Its the same way with their strategy to replace fossil fuels with "clean" energy despite the lack of an economically feasible replacement. In addition to the lack of economic feasibility, the environmental effects of many replacement strategies have not yet been fully evaluated. A recent article in Bloomberg discussed the merits of using diesel fuel from algae. Even though this works well from a carbon standpoint, it would take a network of ponds the size of the state of New Jersey to make enough diesel fuel to provide 6% of the world's needs. Consider the effect of that many stagnant ponds and the insect life that could breed there. I am all in favor of research in this area but we simply can't afford to stop producing conventional fuels until we have a viable substitute ready to go.

Natural Gas Is A Fossil Fuel. It burns cleaner than oil, is more efficient and produces less carbon dioxide per unit of energy obtained. We have a lot of it, particularly with the recent developments in ways to produce it from shale formations that stretch from Texas to New York. This could go a long way to produce enough low-cost energy, drastically reduce carbon dioxide emissions and lessen our dependence on foreign oil. Still, we have to develop ways to expand its use in transportation. One thing we can't forget is that the current production methods involve injecting 80,000 lbs of chemicals and copious quantities of water to "frack" the rock and get it to release the gas trapped within. In areas where they have begun recovering this gas there is much concern about contaminating the underground water supply. In some areas, water produced for domestic use has shown signs of methane and benzene contamination. Again, this points out the potential for environmental damage we haven't yet considered.

The Point To Emphasize. There is always the potential for environmental damage when we produce sufficient amounts of energy to run our economy. Our understanding of the risks of offshore drilling is probably greater than our understanding of the risks of some of the alternative energy production. I am all for stepping up our efforts to obtain renewable energy but it is insanity to stop production of conventional sources before viable alternatives are available.

Texas To Arizona And Back. I just completed a round trip via air. Now I know why I would often prefer to spend the two days driving each way. It has become increasingly difficult to get to the airport, navigate your way through security, find your gate, and get herded onto the airplane with a hundred other passengers. I spent $108 in parking and airport shuttle services just getting to the airport. I endured the indignity of a carry-on search because an operator saw something she didn't like in the x-ray of my bag. When the search was conducted there was another surprise, Omigawd, I was busted. A half used tube of toothpaste. You would have thought I was trying to smuggle an AK47 into the flight. When I mentioned to the lady searching my bag that I thought Arizona was the worst airport around in getting through security, she informed me that she was glad to hear that because it meant that they were more diligent in enforcing the rules. I knew the best policy at that point was to shut up and get outta there as soon as I could. I hope someday they catch someone trying to sneak through with a toothpaste tube filled with C-4 explosive. Then maybe all this hassle would have been worth it.

GENERATING RETIREMENT INCOME.

Are You Afraid of The Stock Market? If you are like most folks I know, you are afraid of the stock market. I must admit that those fears are well founded. Many retirees have lost a considerable portion of their nest egg despite having a diversified portfolio of stocks. It hasn't been easy for me either even though I have spent a considerable amount of time evaluating conservative investment strategies. As I have said many times before, the key to a successful retirement is cash flow. How much money is coming into your household as opposed to how much you have to spend to fund your lifestyle. I started this blog four years ago to emphasize that point. While I have periodically drifted to other subjects during that time, cash flow remains the central point of my investment strategy. One thing I have learned for certain: If I rely on bank insured deposits to provide my retirement income I will either be forced to severely curtail my lifestyle or go back to full time employment at the age of 72. In recent months I have extolled the virtues of cutting back to a more simple lifestyle; however, if I relied on insured deposits, my life would be much more simple than I would like.



How Do You Generate Income In This Environment? How about a "simulated CD?" If you have never heard of that one, don't feel alone. I know very few investors who use it and it isn't very well publicized. Here is how it works. Step one. Buy a portfolio of dividend producing stocks. Step 2. Sell a long term covered call against that position. By utilizing this strategy you can take advantage of the fact that once a company establishes a dividend policy, they take pride in maintaining that dividend. While this isn't a sure thing, it is usually much more dependable than trying to depend on buying low and selling high to fund your retirement. Step two. Sell a long-term, in the money call against that position. One sure thing in the market is that the premium portion of a call option will be zero at the time the option expires. Here is an example: AT&T is currently selling for $25.40 per share. The market will pay me $3.15 for an option to buy the stock from me at $22.5 on or before January 2011. The $3.15 is mine to keep as of the day I sell it, therefore, my net investment is $25.4 minus the $3.15 I received for the option or $22.25. If the market stays flat, I will sell for $22.5 for a return of 1.12%. I will also receive two dividends during that period of a total of $.84. This gives me a total return of 5.09% for 7 months or an annualized yield of 8.73%. What does this accomplish? It gives me a yield of 8 times what I could get on a CD of comparable maturity and downside protection of 12.73%. While this isn't a huge return, as stock market investments go, it competes very well with a CD on a risk adjusted basis.



You Don't Have To Use Dividend Paying Stocks. As of today's date, I could buy Devon Energy at $69.9 per share. If I sell the $60 January 2011 call I could put $13.35 in my pocket leaving me a net cost of $56.55 per share. Assuming the stock is above $60 in January, my return is 6.1% for 7 months or an annualized yield of 10.46%. Again, I receive a return of 10 times the CD rate and $13.55 downside protection or 19.6%. On a risk adjusted basis, this is very attractive. To tell the truth, I am not all that sure the government can stand by their insurance on those FDIC guarantees either. Do I think you should employ a strategy like this exclusively? Of course not but its not a bad strategy for some of that spare cash you have laying around in your investment account.

Politics Rears Its Ugly Head. When George W. was president, I grew tired of hearing people criticize him. Not that some of it wasn't valid. It was the personal attacks I didn't like. At that time I made up my mind that I was not going to do the same thing when the new president came into office; however, this doesn't mean I can't be critical of the policies endorsed by the party in power. So far, I find it difficult to find much good to say about the polices of this administration. The most difficult to accept are energy policies. The cold hard facts tell me that we can't afford to move away from fossil fuels at this time. We simply can't afford the "Cap and Trade" fiasco that congress is trying to pass. One of the least acceptable provisions would require that potential home sellers to obtain an "energy audit" that assures the home will meet certain efficiency standards at the time of sale. Those who don't meet those standards will have to remedy the situation before the home can be sold. With the current malaise in the housing market this will place an additional burden on already overburdened sellers. Our freedoms continue to disappear as the government decides they know more about how to run our lives than we do. It's time to put a stop to it.

DISASTER IN THE GULF

Can We Quit Drilling Off Shore? Many so-called environmentalists think we can and should. Those pictures of oil-soaked birds and dead sea turtles bother me as much as the next person; however, my answer is that we can't and we shouldn't. As much as I love the gulf coast (after all, I live here), I am a practical man and I know we have to use offshore oil to keep from giving everything we earn to OPEC. To those who want to drastically cut back on domestic oil production my comment is: "You start walking first."



Can We Learn Anything From The Disaster? I think we can. Perhaps the most important is the fact that, we can't expect the government to fix everything. Government agencies had the authority to monitor BP very closely. Still, they couldn't keep the rig from exploding. Just a few days prior to the explosion, it was announced that BP was one of three finalists for the Dept of Interior's safety award. If BP could have prevented the public relations disaster that was this explosion, they surely would have. Despite the fact that the EPA, OSHA, DOE, and DOI with their multitudes of employees had the authority to make inspections and halt production, production proceeded and we have a major problem. Both BP and the government have an arsenal of resources to deal with all the oil washing up on shore but the cleanup has barely begun. Hurricanes, tornadoes, earthquakes, and oil rig explosions will happen from time to time and, if you wait for someone, like the government or the big corporations to save you, you are bound to be disappointed. Our founding fathers came here 400 years or so ago and there was no one to save them. We need to follow their example and provide for ourselves.



What Does This Mean For Our Economy? Lots of fish, shrimp, and birds will die in the gulf. Tourists will stay away from the beaches in droves. Its going to hurt the economy in this region for some time. Its a problem we didn't need at a time when we are discovering that many of us have been living beyond our means and can no longer afford to continue. Companies that produce drilling rigs and have concentrated exploration and production efforts in the gulf will have to stop work or develop more elaborate techniques to manage the risk of offshore production. Still, we will be drilling offshore again because we can't afford not to. Nature produces bacteria that will destroy the spilled oil that escapes man's efforts to remove it.

How Can We Protect Ourselves? Live frugally, invest conservatively, and keep a cash reserve for emergencies and to take advantage of opportunities that will undoubtedly arise in the future. If life hands you lemons, get some tequila and salt and give me a call.

Pssst. HEY BUDDY, WANNA BUT SOME GOLD??

One Sales Pitch After Another. If you watch financial stations on TV now days, You are sure to be bombarded with countless pitches to get you to buy gold. You might see Glen Beck or Gordon Liddy, each telling you that the best move they have made in recent years is adding gold to their portfolio. "Gold is easy to buy, easy to sell, and has never been worth zero." Look online and they will amplify these pitches with additional detail. While they may tell you the spot price of gold, they will never quote the price for which you can buy an ounce of gold on your own. To be fair, some web sites will tell you that they make their money via a spread between the bid price and the ask price (The price at which you can buy and the price at which you can sell). There are some who tell you that the spread is between 5 and 30%. In order to find where it is between those levels you have to call and talk to their account representatives (read salesmen). Suppose gold is $1,200 an ounce and you want to buy 20 ounces. At a 15% spread, it will cost you approximately $25,800. If you decide you need the money two weeks later, it you can sell it for $22,200, which means you need an increase to about $27,900 in order to cover the spread and get your money back. This means the $24,000 worth of gold you bought would have to be worth $27,900 for you to get your $25,800 back. Thus you are buying gold at $1290 per ounce that you can only sell for $1,110 per ounce.

In all fairness to Glen Beck, he tells you that you shouldn't buy gold for a return on investment, instead it is in insurance policy that will preserve your capital in the event of a catastrophic event in which the dollar looses much, of its value. Such an event seems more likely in view of the recent financial melt down which caused the Fed to flood the market with dollars. What you need to keep in mind is that several scenarios are possible and don't put all your eggs in one basket. Just be aware that you can't flood the airways with expensive commercials unless there is a huge profit potential in the sale of the commodity you are pushing.

Black Gold Seems a Safer Bet. Gold doesn't have a lot of uses. On the other hand, we have to have oil and, despite the fact that there are alternative sources of energy, we are unlikely to find a sufficient supply of these alternative sources to keep us in transportation and heat. As a replacement for gold, it would appear that one strategy is investment in companies that would benefit from a supply demand imbalance in oil. My most recent investment was in a company called Northern Oil and Gas, a company that owns several leases in the Bakken Fields of North Dakota. Please don't run out and buy these shares. There are several factors to consider before deciding that this is a suitable investment for your situation. I like the shares of many companies that own oil reserves in inland locations.

Some Problems Lie Ahead. Look at what's happening in Greece. The bottom line is that their government has promised more benefits to the population than they can afford to pay. The citizens, having relied on those are highly agitated and are protesting in the streets. Our government has done something similar. They promised increasingly large retirement and disability benefits in return for a contribution from its younger citizens and their employers, They added medical care and drug benefits in return for another contribution. Add this to unemployment benefits, insurance on your bank deposits (FDIC) and investment in the mortgage industry (Fannie and Gennie may). Another insurance policy is in place on your private pension accounts (PBGC) and your deposit in brokerage accounts (SIPC). Can your government pay these benefits, if necessary? Not without excessive taxation, inflation of the money supply, or borrowing. Excessive taxaction can slow the economy to a crawl, expanding the money supply can cause inflation, and excessive borrowing can result in lenders deciding to loan their money elsewhere and/or require higher interest rates. The safest way, economically, is to reduce the promised benefits, resulting in the same kind of unrest they are seeing in Greece. We must use our voting rights to get our government to stop promising more than it can deliver and to stop using Ponzi schemes to finance those promises. It will be uncomfortable, but we need to become more self reliant and stop depending on our government to supply what we need to live our lives.

SELL IN MAY AND GO AWAY.

Is The Old Cliche Correct? Obviously, not always, but like most cliches there is a grain of truth. In fact, on a statistical basis, it is more often right than not. I have been predicting a correction in the market for 6 or more months. Finally, I am right which reminds me of another cliche that says, "Even a stopped clock is right twice a day." I guess the bottom line is that, if you expect you or your investment advisor to get you in and out of the market at the right time, prepare to be disappointed.



There is Often No Rhyme or Reason To Market Behavior. While this statement may not be totally true, oil prices are a prime example of how difficult it can be to anticipate the results of a given event. On April 23, 2010, oil was at $85 per barrel. Three days later a major explosion on an off shore drilling platform resulted in the death of 11 men and a major discharge of petroleum into the Gulf of Mexico. The President called for a suspension of new off shore drilling and environmentalists, never favorable to fossil fuel production, called for a permanent ban. As of today, attempts to eliminate the flow of oil into the gulf have met with little success. What would you have predicted for oil prices after the explosion, up 10%, possibly 20%? As of today, prices are barely above $70 per barrel, a drop of almost 18%. I'm sure I could look around the internet and find an explanation for this behavior but I wouldn't believe it if I did.

Another Reason To Emphasize Current Cash Flow. I have always promoted an emphasis on developing cash flow from your investment portfolio. Whether you are buying real estate or stocks. a portfolio that emphasizes cash flow over growth is best for most investors, particularly those at, or nearing, retirement. Right now this strategy is more important than ever. My reasoning is as follows: 1. It appears that we may be headed for a "range bound" market. This will make it increasingly difficult to withdraw cash for living expenses based on growth in the portfolio value. 2. Fixed income investments, especially those emphasizing safety, are offering very low yields. With one year bank CDs paying less than 1%, it may be tempting to extend the maturity date ( the 10 year treasury is paying 3.88%) but there is risk in deterioration of purchasing power if the predictions of higher rates in the future are correct.
3. Baby boomers will be more likely to favor high dividends as demand for income they can spend increases.

Quit Worrying About Market Prices By Investing In High Dividend Companies. A diversified portfolio of companies like AT&T, Verizon, Pitney Bowes And Kinder Morgan Partners can give you a yield of more than 5%. While these are not without risk, they should give you a better total return than you can get with fixed income investments.

Small Blessings. After three or four months of back problems, it is a real blessing to be able to walk across the room without pain. Hopefully, this improvement will continue and I can take a trip to Colorado later this summer.

POLITICS AND ECONOMICS

How Do You Separate Politics From Economics? The answer is, it's difficult and it gets more difficult all the time. I started publishing this blog in 2006, about the same time I was beginning to slow down my financial planning practice. At that time, I promised myself I would not let my political preferences affect my objectivity when it came to commenting on the financial scene. I think I have done this relatively well; however, these are unusual times. Here are some recent events which we need to follow in order to make informed investment decisions.



The Financial Chaos In Greece. Volatility has increased dramatically in our markets and many financial observers have blamed this on the increased risk that Greece will not be able to live up to its obligation to service the government debt. While this debt is indeed excessive, it might be more manageable if their citizens could accept the fact that they may have to give up some of their huge government entitlements, pay higher taxes, and reduce other government expenditures. Sound familiar? If we don't do a better job of controlling our own expenditures we might be facing a similar fate in the future. You can only depend on government borrowing to fund citizen benefits for so long before it becomes almost impossible for your government to borrow enough to pay those benefits. I don't know when, but I anticipate we will find it increasingly difficult to borrow money in the future. One result of this is bound to be increased interest rates throughout our economy.



Energy Prices. Accidents in the coal mines and off shore drilling rigs have upset the energy market. The funny thing is that the price of oil has dropped rather than increase as I would expect. These accidents have caused many environmentalists to call for increased government scrutiny of domestic energy companies and the President has announced a moratorium on new offshore drilling in the Gulf of Mexico. Terrorist activity has also increased in recent months and, although none of the attempts have been successful, increased anxiety could put further pressure on domestic energy production. My bet is on increased oil prices in the future.



Increased Cost of National Security. Although we have announced plans to remove combat troops in Iran, we have a ways to go in Afghanistan. My main concern is Iran and it appears that there is little we can do to avoid a major crisis there. If we continue to do nothing, Israel has promised to bomb the Iranian nuclear facilities. The result is almost certain to result in a major military conflict in that area. Even if I am overly pessimistic, it appears that we will have to devote more and more resources to national security. The cost of remaining diligent is getting more and more significant. Just today, there was a major disruption in Times Square because of a cooler containing bottles of water in front of a hotel. Whether or not we achieve major spending cuts. a tax increase of major proportions is inevitable. Look for these to be levied against higher income taxpayers. The rest of us won't get away unharmed either. The fact that 47% of Americans pay no tax can't be overlooked. This is a situation we simply can't afford.

How Do We Cope With these Realities? I know we would all like to anticipate getting higher returns on our investments. I believe we can do this; however, just like the Federal Government, we might not be in a position to do this with increased revenue alone. The safest way to assure your survival is to reduce your living expenses. For every $100 a month in reduced expenses, the amount of capital you need to fund your lifestyle is reduced by $20,000. It is likely that many of us will be forced to cut expenses before this is over. The more you can do this in an orderly manner, the easier it will be to accomplish. In the meantime, I believe the best way to increase your investment returns is to concentrate on companies in the technology, energy, or commodity sectors. The increased volatility in recent weeks will make it more profitable to write calls against our existing positions.

Its Been Awhile Since My Last Post. I have had a recurrence of back problems and Betty has had surgery to remove 12 inches of her colon. Both of us are much improved and I am thankful for the support we have received from friends and family.

KEEPING AN EYE ON THE ECONOMY

Before I Forget It. I try to carefully check most of what I post on this blog but I have to admit that an error slipped by me on my last post. In the section concerning taxes, I suggested that you check with an Enrolled Agent or CPA before taking any of my recommendations. My good friend, Ray Benton, who is an Enrolled Agent, did it for you. He called my attention to the fact that withdrawal of company stock from a company sponsored retirement plan allows you to pay tax at the capital gains rate rather than ordinary income. My post implied that you could do this with an IRA plan; however, this is wrong and the favorable tax treatment applies only to company sponsored retirement plans. While I knew better, the error got past me.

What the FED Says. Most of the time I warn people to forget what the FED says about interest rates since they only control short-term rates. Long-term rates are more strongly influenced by inflation and inflationary expectations. As part of the recent stimulus package, the FED started a program of buying long-term mortgage backed securities. During the last year, the FED purchased $1.25 worth of mortgages. This has kept a ceiling on mortgage rates and provided a stimulus to the housing market. Low interest rates, combined with tax credits to home buyers has resulted in keeping housing prices at higher levels than they would be without government intervention. This intervention is set to expire as the FED has announced that they would no longer be buying mortgage backed securities and the tax credit program is set to expire at the end of this month.

What Do We Expect For Home Prices? Do changes at the FED and IRS lead us to believe that we can expect another large drop in home prices. You can't say for sure since improvement in the economy and lack of new housing starts will provide some stimulus to replace the government withdrawal. One thing for certain is that the markets are not uniform across the country. and some areas will perform better than others. The Denver area has done better than others. After a 5.1% drop in 2008-2009 (one of the largest on record), prices increased 2.6% in 2009-2010. Out of the 20 largest markets in the area, less than half showed a gain during the past year. The average loss in these 20 top markets was 0.7%. While this is not outlandish, it is quite a bit in view of the large amount of government stimulus provided. My guess is that we will see little change in the Denver housing market unless the government comes up with more stimulus. While this isn't unlikely it would almost certainly be a mistake. It is my belief that the sooner prices are allowed to reach a level compatible with supply and demand, the better off we will be.

Should We Be Investing? I have been out of the housing investment market for some time but I believe we are finally to the point at which housing is a good investment. I believe we will be bouncing around this level for a year or so before starting to rebound. We have a relatively strong rental market and you can probably get more cash flow from a prudently structured real estate investment than you can get in either the stock or bond market. If you have an interest in this area you should probably talk to Jim Gerhart or Susan Storms at Westmont. Give me a call if I can help.

BACK AFTER 3100 MILES ON THE ROAD.

It Wasn’t As Bad As It Sounds. I have always enjoyed road trips, and Texas to Colorado to Arizona and back to Texas is one of my favorites. Trips like this give me time to think, listen to audio books, and enjoy some scenery that’s totally different from what I have every day in the piney woods of East Texas.

A Lot Of Risk In The Markets. On my trip, I usually stopped shortly before dark. This gave me an opportunity to catch up on my reading and study market trends. I am appalled at the way the markets keep increasing in the face of what I consider to be a very scary situation. Our government and the FED keep encouraging consumers to continue their borrow and spend habits in spite of the slow job market, expensive stock market, high mortgage delinquency rates, and artificially low interest rates. When we stop pouring borrowed money into the economy, the adjustment could be even more painful than it has been up until now.

The Bond Market Is A Dangerous Place. If you are tired of low interest income available on short-term instruments, a dangerous strategy would be to try to increase your return by extending your maturity. If (more like when) long-term rates increase, you will either have to sell long-term bonds at a loss or hold on at below market rates. Better to accept low yields and be ready to take advantage of the opportunity to get higher rates when the FED stops doing crazy things like buying mortgage backed securities. Although the municipal bond market offers higher after-tax yields to high bracket borrowers, this market offers more risk than reward. Not only do you still have the risk of increasing interest rates, but there may well be some credit risk as state and local governments find it increasingly difficult to meet their obligations in the face of decreased tax revenues.

Stocks Are Also Highly Valued. Although corporate earnings have been higher than expected, the shares of many companies have increased to unrealistic levels. The volatility index (VIX), commonly watched as a measure of fear in the marketplace, has fallen to below 18, the lowest level of the past 3 years. Contrast this with a level of almost 90 at the height of the recent scare. While this sounds good, it also points to the possibility of over-confidence among investors. I am still in the market but I am keeping higher levels of cash and writing options against my positions as a hedge. I still believe in dividends to provide an income stream in the event the underlying issues fall. The difference between the next anticipated correction and last is that I am being even more careful to evaluate the ability of the company to keep paying those dividends.

Beware The Tax Man. The government has spent poured trillions of dollars of borrowed money into the economy in an attempt to allow us to keep living beyond our means. Even the most aggressive borrowers among us are becoming worried that those who are funding our deficit will decide to stop. Since the consequences of this could be devastating, the federal deficit is becoming a more serious concern. Rather than decrease government spending, the pressure is being applied to the revenue side. The last tax cut was labeled a “tax cut for the rich” and there are a number of new rules and proposed new rules to gain new revenue from high income tax payers (although middle incomes won’t be exempt). I’ve never claimed to be a tax expert so the best thing that high income taxpayers can do is consult a CPA or Enrolled Agent to help lower the impact of tax increases. A few ideas are: 1. If you have your company stock in your IRA don’t neglect the opportunity to withdraw it and pay at capital gains rates instead of ordinary income. 2. If you have been delaying the sale of assets in which you have a gain, now might be a good time to sell since there will undoubtedly be higher rates in the future in addition to the new rules that will add a 3+% medicare tax to your gains. 3. Consider rolling your IRA’s into a Roth. This will allow you to leave these assets to your heirs tax free and eliminate the need to start withdrawal at 70.5. The feasibility of this approach is dependent on a number of factors so don’t forget to do your calculations first. 4. Accelerate deductions. President Obama wants to limit the value of your deductions to 28%. If you are going to be in the 36 or 39.6 bracket, the value of your deductions will be limited to a 28% rate.

It’s Nice To Be Home. I am enjoying being back at the lake, although I am spending a lot of time catching up on work. I anticipate being in Colorado more next year than last because of client needs. If you have a project that needs my attention, call Susan or send me an e-mail. I am considering a trip in mid April. Be sure to let me know if you want to schedule a meeting.

MUSINGS ON A RAINY AFTERNOON

Famous People I’ve Met. Perhaps the most famous person I have met is Dan Quayle, former vice president under George Bush. At least he is probably the one that most of you would recognize. There was another that I would suspect that 99% of you have never heard of. I met him when I was a freshman at Wheat Ridge High School. It seemed that we had a lot in common. He was a skinny, pimply-faced kid with a flat top and I was a homely kid with coke-bottle thick glasses and unruly hair. We were both on the freshman basketball team and neither of us got to do much more than suit up. The most common thread was that we both loved music. Both of us had cheap guitars but we could play relatively well. We were also horrible singers. The major difference was that I knew it and seldom did I allow anyone to hear my attempts. In contrast, he played and sang at assemblies and other school functions and, as his voice shifted back and forth between an uncomfortable tenor and a screechy soprano, the audience did their best to keep their fingers out of their ears. I guess what he lacked in musical talent, he made up with guts.

Fast-Forward Three Years. I gradually came to the conclusion that, although I loved music, I could never make a decent living as a performer. I graduated from college with a degree in Chemistry. He dropped out of college and started hitchhiking to Hollywood in search of a musical career. On the way, Don and Phil Everly (The Everly Brothers) drove past him and, because he was carrying a guitar, decided to give him a ride. He rode all the way with them and, when he got there they introduced him to their agent. You can imagine my surprise when I woke up one morning in the late 50’s there he was on the radio singing his new hit, “Our Summer Romance.” Gone was the screechy soprano and the tenor was amazingly smooth. I don’t know what happened to him out there but it appeared that someone had managed to teach him to sing. I heard he was on “American Bandstand” and several local disk jockeys predicted he would become a huge success. Despite all those predictions of success, it appeared that he just dropped out of sight. We both in our early 20’s and I was not to hear of him again until we were almost 50.

Fast Forward 25 Years. I had married my third wife and was struggling to get my financial service business started when I heard he was back in Denver to promote a film: Portrait of An American Rebel. He had been interviewed on a local radio station and almost provoked the host into a fist fight. It was at that time I learned that he had spent the past 25 years in South America, East Germany, and the Soviet Union. He was a superstar by almost any definition, having played to huge sold out crowds where ever he went, selling out huge auditoriums and soccer stadiums. He had also starred in several westerns in Italy. (Remember Spaghetti Westerns)? He also had recently married his third wife.

While he was in Denver, one of our high school classmates arranged for us to spend an evening with him. We all got together while he played his guitar and sang several songs. As you might expect, he exuded charisma. The dorky kid was replaced by a handsome, self confident man but there was an air of sadness about him that was evident in some of our more private conversations. One thing he said has stood out in my mind to this very day. “It is so hard for me to think about growing old in a country that is not my own.” Although he never quite brought himself to say it, it was obvious to me that he wanted to return. But it wasn’t that easy. Although he had been extremely popular in communist countries, that popularity did not carry the financial rewards that it does in this country. He didn’t have the wealth to survive without earning income and he probably didn’t have the talent to compete as an entertainer in the US. He also had a reputation as an Anti-American Marxist. That was the last time I saw him. His name was Dean Reed.

Fast Forward Six Months. They found his body in a lake not far from his East Berlin home. An autopsy showed he had an undigested sleeping pill in his stomach. His death was ruled an accident but many East Germans theorized that it was suicide or the CIA. Americans thought it was probably the KGB. It remains a mystery. One way or another he died just past the peak of his popularity. As the popularity of Marxism declined in the Eastern Bloc countries, so did Dean’s popularity. To many Americans he was a traitor but to me he was just a dumb kid who would do anything for a musical career.

Fast Forward 24 years. The life and death of Dean Reed can teach us something. 1. You can accomplish a lot more than most people think you can. None of us who knew Dean in high school thought he had a chance of becoming an international superstar but we were obviously unaware of his tremendous drive that outweighed his lack of talent. 2. There are those along the way who can help you. Someone taught Dean to control his screechy voice, introduced him to the right people and gave him the opportunity he needed. 3. Be careful of those you bargain with to attain success. A famous American blues man, Robert Johnson was said to have sold his soul to the devil in exchange for the ability to play the blues. He became quite popular and recorded songs that are still played 70 years after he died from poisoning at age 26. It has been written that he crawled on all fours and barked like a dog before he died. Dean Reed made a deal with those who were enemies of his country. At the end he was not popular behind the iron curtain, nor welcome in the country he left.

You Have To See What I've been Writing About. This post would not be complete with out a link to his performance. If nothing else it might bring back memories. Most of his popular songs are recorded in German, Russian or Spanish. The following is in English. My lack of computer savvy keeps me from making a link but you can copy this one and paste it in your browser to see my old friend on stage. In addition to the performance I have included a second that is part of a documentary done on his life.

http://www.youtube.com/watch?v=gVgkePXZSk0&feature=related
http://www.youtube.com/watch?v=R0WF-sLPzBw&feature=related

OUR ENERGY FUTURE

Alternative Energy Sources.........Not As Easy As It Looks. What is the fastest growing energy source for utilities? Despite all the talk about "clean" energy sources, the fastest growing source is coal. Granted, this is not the case in the U. S. but expansion in China and India is almost exclusively based on coal. We have yet to come close to exploiting all the coal available in this country and it doesn't look like we will considering it's reputation as a pollutant. Perhaps it's better that way, particularly in view of the "discovery" of huge natural gas deposits. Not only is natural gas cleaner than coal it is also more efficient; therefore, less carbon dioxide is produced per unit of energy delivered.


Oil Price Stability. There is little reason to believe that petroleum prices will rise this year, provided we don't pass some sort of carbon tax. The supply/demand balance has changed drastically over the last 18 months. Countries like Russia and Venezuela are already feeling the pinch from lower oil prices and may continue to make up for these low prices by producing more. The predominant opinion is that oil prices will be in the $70-80 range for most of this year. This is probably the optimum range for economic recovery. High enough to encourage conservation and exploration but not so high as to put a damper on expansion.


Working on Nuclear. Although it is likely to take some time before we see a lot of nuclear power in this country, the fact that no carbon emissions are produced makes it much more attractive to environmentalists. There appears to be some attractive new technology that lowers the risk of overheating in nuclear reactors and uses the radioactive material more efficiently. It involves encapsulating the nuclear fuel with beryllium oxide, thus more efficiently dissipating the heat.

Renewable Energy. Those of you who follow my writing will recall that I am not nearly so bullish on renewable energy sources as some who believe it is just a matter of pushing the right buttons. It's not that I wouldn't like to see some progress in this area, its just that I don't believe the technology is anywhere near available to make a dent in our energy needs. Much of the research currently being done is of dubious value. For example,a project at Ohio University to produce hydrogen, a carbon free energy source, they have discovered that the urine from one cow can be electrolyzed to produce enough hydrogen to provide hot water for 19 houses. I hope that doesn't bring the same mental picture to your mind as it does mine. In a recent article in The Economist, they predict that renewable sources will provide 10% of world energy needs by 2030. This is only a bit higher than the 7% which existed in 2006. Hardly enough to allow the world to get off fossil fuels any time soon.

Almost Mobile Again. I walked a couple miles today which leads me to believe I am able to make a trip to Colorado next week. If you need an appointment call Susan at 720-449-0200. She will know how to find me so we can schedule something.

SLOW IMPROVEMENT

It's Been a Long Improvement Process. A month ago I could barely walk upright. Although I am not totally pain free, It's great to be more mobile at this point. My memory may be less than stellar but I can hardly remember being laid up for so long at any other period of my life. I am just waiting to reach a level where I can maneuver a suitcase through the airport and fly to Denver.

The Market Continues to Decline. In my last post I questioned whether or not we have reached the point where the market corrects from the raging bull market we had last year. I anticipated it for several months while the market continued to go stronger. If nothing else, I expected a seasonal correction when the market tends to drop during September and October. While history shows that is most often correct, it is definitely not that simple. I had other reasons to expect a correction to include high unemployment, low consumer spending levels, and high foreclosure rates. At this point, the bottom line is that the market has dropped around 5% from its high and my guess is that it will go lower.

You Can't Separate Politics From The Economy. A lot of folks think I want to blame the Democrats for our difficulty. I have been highly critical of the administration and their economic policies; however, I am equally critical of the other party when they attempt to expand the government role in managing our economy. It isn't that I think the government deliberately de-rails the economy. The problem is that governments over-estimate their ability to be a positive influence. For example, consider their attempts to re-structure mortgage debt to allow more homeowners to avoid foreclosure. So far, they have restructured just over 1000 loans in the state of Colorado. If that is the best they can do that would be better off to quit trying and use the money elsewhere. Ask Realtors, mortgage brokers, and appraisers about how well they are regulating those industries. They have done far more harm than good with their attempts. Each party has their own constituency that they want to help. The Republicans are accused of favoring corporations and the democrats are accused of favoring unions. There is some truth in both these accusations. A more level playing field would probably help us all.

Hopefully, I Will See My Colorado Clients Soon. In the meantime, I will do my best to keep an eye on our investments.

TIMING THE MARKET.

Is The Long-Anticipated Correction Finally Here? The market lost about 5% last week; however, I have little faith in my ability to get in and out of the market at the appropriate time. As a result, I may make a few adustments but I will always be allotting some of my investment capital to the stock market. There are numerous examples that show most investors "shoot themselves in the foot" when they try to get out of the market to avoid a downward correction. As an example, consider a recent article in the AAII Journal where they published a list of 15 mutual funds that returned from 10.1 to 19.2% per year over the past ten years. When they looked at the average returns received by the average investor in these funds, none of these produced a positive return for their investors. The problem is that most folks make investments around market peaks and get discouraged and pull their money out after a downward correction. We observed this same behavior from some clients during the recent severe market sell-off of the past 2 years.



One investment principle I always follow is never to buy a stock just because the price went up and never sell just because the price went down. There are many reasons to buy or sell a stock but reacting to price fluctuations never seems to work for me. In a sentence, my philosophy can be summarized as: Buy good companies that offer me an opportunity to start receiving a return on my investment right away. For example, over the past18 months I have accumulated 2000 shares of AT&T at an average price of 30.77. Today, the stock sells for around $25.39. If I sold the stock today, I would have a loss of more than $10,000. While there is no way to put a positive spin on this, one bright spot is that I have generated $6,500 in option premiums and $2,440 in dividends during this holding period. This cash flow, coupled with the fact that I still own 2000 shares of a good company, allows me to sleep at night.

Still Not Getting Around Too Well. Although my back is considerably improved, I still am limited in my mobility. I can get around the house and yard; however, I don't have the courage to navigate the airport and fly to Denver. I will keep you informed as to what my travel plans are.

A FEW INVESTING TIPS FOR THE NEW DECADE.

This Year Finds Me A Bit Immobile. I am not sure what is causing this back problem but, as of today, I can barely walk. As soon as the weekend is over, I'll seek medical attention. I am tired of doing nothing so I thought I would put down a few thoughts on what we might expect for next year. As most of you know, I have always believed that you have to have a set of assumptions about the future in order to make sound investment decisions. Although, you can probably never plan for occurrences like those of the past two years, you have to play attention to what's going on and plan accordingly. Here are a few ideas.

Interest Rates Will Go Up Across The Board. Duh! You have probably heard this from a hundred sources. While all of these sources can be wrong, I don't think so. The real question is what are the implications. Some of the obvious ones are: Don't hang in there with an adjustable rate mortgage unless you have a firm exit strategy in place. Possible exit strategies are, 1. Pay off the loan. 2. Sell the property. 3. Refinance now before rates go up.

Don't tie up your cash in long-term, fixed- rate investments. You don't want to increase your yield by buying a 5 year CD instead of a 1-year. If you buy a 10-year bond, you will either have to stick with a low yield for 10 years or sell early at a substantial loss. If you insist on staying in so called safe investments, keep your investments short term for now.

There are a number of other implications from increased rates, but those are a couple of the major ones.

The Stock Market Will Become More Volatile. This is a prediction you may not hear elsewhere. Volatility is a measure of fear in the markets. Right now it is at a major low. If we have a correction, (as many analysts, including me have predicted) volatility should increase. Again, we need to decide the implications of this increase. My major strategy involves options.

Options prices go up with increased volatility. Although there are a number of factors that influence option prices, if all these are constant, option prices are directly correlated with volatility. In periods of low volatility, buying a long-term option is sometimes better than buying the stock. For example, suppose you believe the long-term prospects for Johnson and Johnson are favorable. If you want to buy 1000 shares, it will cost you $64,000. A better move might be to buy an option to purchase Johnson at $60 per share anytime between now and January 2012. You can buy this at $8,150 for 1000 shares. This strategy is not without risk; however, your maximum risk is limited to the price of the option as opposed to 64,000 with the stock. If the market becomes more volatile the option price will increase even of stock prices stay the same. Long-term options also increase with increasing interest rates. I am certainly going to emphasize this strategy in my own portfolio.

This does not mean I recommend it for do-it-yourself investors. I do recommend that you spend some time learning about the details of option investing. In order to do this, you need to spend time studying McMillan's book Options a a Strategic Investment. I've been studying this book for 1o years and I still find new things to help me invest in this area.

I Have Left Out A Lot. This post is just a few ideas to help you with your financial management during the next year. Stay tuned for others.

WHO WANTS TO TALK ABOUT MONEY

Money Is Important. I’m sure that most of you read this column with the hope of gaining some insight as to how to manage your finances. For the most part, that’s what I try to convey. There are a lot of important things to talk about at this point like how to manage your cash flow in light of future tax increases, the soft real estate market, and potential estate tax changes. These things will have a profound effect on our financial future, but frankly, I am bored with talking about money. You can read a myriad of discussions about these topics in previous posts which started in 2006 but I would ask you to grant this old coot an opportunity to talk about something else.

We Took A Walk In The Woods. The woods next to our house bear little resemblance to the way they were when we bought the land in 1995. Two major hurricanes swept through here and ruined almost 75 trees, some of which had been here for more than a century. One very large pine tree gave way to a lightening strike and pine beetles are slowly chewing on several more. If there is a benefit to any of this it’s that we can more easily see what’s going on here. For example, in the early morning, there is a doe and fawn that often come through on their way to wherever deer go in daylight. You can also stand in awe of the trees that are left, including a majestic pine tree that the beetles haven’t found yet. Another is the holly tree that is shown in the picture above. That poor tree is about 15 feet tall and has been battered by wind and larger trees that knocked off its branches as they fell. Still, it had the energy to cover itself with beautiful red berries for this, the Christmas season. Twenty years ago I might not have seen this tree. I might have walked by it with my brain too consumed with day-to-day problems to bother converting the sensory input to the scene that I enjoyed so much on that sunny morning.

It is Christmas Eve. I have been thinking about miracles. I have read the Christmas story in Bible and watched several visual versions on TV. It is a beautiful story whether or not you believe in miracles. I recently watched a U-tube version of a good-bye speech made by a middle-aged lady dying of cancer. Much of her speech discussed the impossibility of the miracles reported in the Bible, including the virgin birth. While I respected the courage she exhibited mere days before her death, I must disagree with her statement that these miracles were impossible. As I look at the holly tree with its red berries, I am incapable of understanding the theory that this beautiful specimen originated from random collisions of molecules and subsequently evolved to its present state. That simple example is no more far-fetched than the Christmas miracle. Both the creation theory and the random collision theory may be possible and I am capable of fully understanding neither.

I Don’t Have To Understand To Appreciate It. Perhaps turning 70 has changed me but the beauty of this Earth leaves me in awe. I apologize to my friends who are of different faiths and those who are atheists. I am in no way attempting to influence the beliefs of others. For my Christian friends I say Merry Christmas and for the rest, I say Happy Holidays. I value relationships with friends and family more than any measure of wealth I could attain now or in the future.

Time To Learn To Dance

“Life Is Not About avoiding the storms. It’s about learning to dance in the rain." Quote of Unknown Origin.

Are You Ready To Dance? I stole this quote from a friend who doesn’t really recall where he heard it. The beauty of the quote is that it can apply to a variety of life situations. I have been thinking a lot about investment risk lately and I wanted to share some of these thoughts with you.

Let’s Just Not Take Any Investment Risk. I have heard that statement a lot lately. Do you think you can avoid risk by putting all your investment capital in one year, certificates of deposit? In the early 80’s, you could get 11% on a one year CD. A million dollar nest egg, spread around in $100,000 increments would give you an income of $110,000 per year and be totally insured against loss by an agency of the federal government. If you stayed with that philosophy for the next 30 years you would find that your income dropping $30-40,000 per year at current rates of 3-4%. Of course, you would still have your million dollar principal but you could find your lifestyle significantly curtailed by the reduction in income. This type of risk is called
reinvestment risk.

How About a 30-year Government Bond? You could have been guaranteed an income of about $120,000 a year for the next 30 years and you could always get your principal back by selling the bond on the secondary market. Sounds good doesn’t it? But what if rates had increased to 16% instead of dropping? In 2 years your 30-year bond would be worth only $753,000. This type of risk is called “interest rate risk.” Even if you could have afforded to leave the money invested for the full 30 years, inflation would reduce the purchasing power of that million dollars to $308,000 (assuming an average inflation rate of 4%). This type of risk is called purchasing power risk.
Let’s Just Put It All In Gold. While that may sound like a ridiculous statement, let me assure you that I have had clients who made that very suggestion. Given the hype you hear on radio commercials today, you would be tempted. For example, if you had put a million dollars in gold at the average prices 9 years ago, you would have just over 4.1 million, a hefty return of almost 18% per year. These radio commercials tell you that and try to alleviate your fears of risk by saying “Gold has never been worth zero.” What a comforting statement that is. What they don’t tell you is that if you had bought gold in 1980, almost 30 years ago, your million dollar investment would be worth just $2 million, a return of 2.4%. Even worse, if you had panicked and sold your gold 20 years later at the average price of $279 per ounce, your million dollars would have been just over 455,000, a compounded negative 4% per year. I call this type of risk, timing risk. The worst thing about this type of risk is that, in times of high prices, you will be bombarded by radio commercials and sales calls telling you about the high returns available and by the time they say “past performance is no guarantee of future results” you are hooked When prices are lower, these sales people go back to their regular jobs at convenience stores or driving taxis. These market forces direct you to buy high and sell low, and many investors fall into this trap. For example, mutual funds have to tell you their average return over a long period of time. Unfortunately, most individual investors fail to get close to that return because of the natural tendency to buy when prices are high and sell when prices are low.

Let’s Take A Look At the Stock Market. Pretty scary isn’t it. Most of us have suffered substantial losses in the past 2-3 years. Again, it’s a matter of timing. If you would have bought stocks in 1980 and received the average return of the S&P500 average. Your million dollars would have received a compounded return of 7.87%. Added to this would be an approximate dividend yield of 3% (Average of 53 years, best number I could find). If you had invested a million in 1980, you could sell out now for around 9.7 mil. In addition, you would have received approximately $30,000 in dividends that you could reinvest or spend each year. Just like in the gold investment, you would have timing risk along with market risk and some purchasing power risk.

What About Real Estate? Unlike the stock market, there is little in the way of statistical data on real estate returns. The nearest thing I could find was the Case-Shiller Indices that show the nationwide average returns on investment in single family housing was 9.31% from 1998 through 2007. This compares with 5.91 for the stock market. It should be emphasized that this was a very favorable period for housing. It should also be noted that Case-Shiller doesn’t give much detail on whether these returns are leveraged or whether they include rents and professional management costs. For the purposes of this review let’s just say that real estate offers an alternative and could part of any investment portfolio. Risks are market risk, timing risk, and some management risk.

None of These Investments are “Bad,” The main purpose of this column was to let you know that there are real risks involved with any investment vehicle; however, each one of these investments are appropriate for certain purposes. The trick is to pick the ones that are right for your risk tolerance and unique needs. Like the quote at the beginning implies, no one can predict the future. What we have to do is design a strategy, monitor that strategy, and make changes when necessary.

Reflections on a Fall Day

South Texas Is not Known For Beautiful Fall Foliage. Fall colors have been almost non-existent for two of the past three years, mainly due to hurricanes which blew the leaves off trees while they were still green. In my area, the woods look a bit scruffy because even the trees that were spared were damaged by wind or falling trees. Finally, the past few years have brought a drought which inhibited some of the fall colors. Still, even with limited Autumn colors, there is still ample beauty here if you know how to appreciate it. Sumac trees at the edge of the woods are a bright scarlet and Chinese Tallow, normally considered a trash tree, add some additional red color. Another thing that adds to the beauty of the South Texas fall is the flowers, which have virtually disappeared in cooler areas, are still blooming here. Looking out my front door, I see the Salvia, Knockout Rose, and Geraniums blooming with the red Sumac blooming at the end of the yard. One thing I know is that life is better now that I’ve learned to appreciate nature’s beauty.

Cash Is King??? I don’t know who invented that saying but I have seldom agreed with it. Of course, any financial rule depends on the needs of the individual. For example, if you are stuck in the middle of a small rural area and you want a hot dog from a small rural operator who doesn’t take credit cards, cash may be king at that moment. But if you are an investor, afraid to take risk in the financial or real estate markets, the return available on your cash equivalents are so low that the income you can generate will do little to supplement your cash flow needs. This results in reluctant investors being forced into the markets to keep from spending down assets that are critical to survival in their later years. A number of investors I know are in that very situation, having exited the market and missed a dazzling rally while waiting for a signal that it was safe to re-enter the market again. While I admit to selling some assets and increasing my cash allocation in the past year, I have never been completely in cash. In fact, cash has never been the majority of my investment portfolio.

Is The Long-Awaited Stock Market Correction Finally Here? I think so but I can tell you that I have thought so for some time. My fear has kept me from being as aggressive as I could have been to maximize returns in this situation. Still I have to go with my instincts and continue to move slowly. Part of the reason our markets have been as strong as they are is that those of us who already have all the houses and cars we need are subsidizing those who want to buy in this market. Cash for Clunkers and new home buyer subsidies are providing temporary props for the housing and car markets. This amounts to doing more of what got us in trouble in the first place. What happens when these subsidies are withdrawn? My guess is that things will slow down even more. I believe that the risk in the market exceeds the reward right now. Does that mean we should get out? ABSOLUTELY NOT. For my part, I will continue to emphasize dividend paying stocks and try to increase incremental returns by selling calls against those stocks. Of course, I might raise some cash now and then when I am holding assets that are fully valued or even overvalued, but getting out totally is not an option.

Should You Buy Real Estate? Not with your last dollar. Lack of liquidity can sink you in a hurry. If you are looking to pull some money out of the markets and, if you can put up with the stress of an uneven cash flow and occasional maintenance problem, there are signs of improvement in the local housing markets. In my last post, I talked about the shrinking inventory of resale houses on the market. Obviously that is a positive sign. Another positive sign is the lack of builder activity. So far this year, there have only been 1,787 single-family home permits along with a paltry 471 condo and townhome permits. This is the lowest since 1989 when the population of the metro was fifty percent lower than at present. (See John Rebchook Insiderealestatenews.com). Not all signs are positive. The low rate of job formation, high foreclosure rate, and low sales levels indicate that we may not be at the bottom yet; however, I’ll tell you the same thing I told you when the Dow-Jones average was below 7000. There is more risk than reward in the housing market.

Either Way It’s Not Time To Complain. I have been on this planet for more than 70 years and there is no comparison between how well we live now and how we lived when I was growing up. The typical person has three times the buying power that his parents had in 1960 (The year I got my undergraduate degree). In the 2000 census, less than 1% of our families were without inside plumbing. ( Our family was one of those until I was 10 years old). The average new home is 2349 square feet as opposed to 1100 in 1950. Lest most of you think the 1950’s is ancient history, let me remind you that I graduated from high school in 1956. Don’t think I am complaining about how poor our family was. Most of our friends were in the same boat and I have many happy memories from that era. Rather than complain and expect the government (meaning our friends and neighbors) to take care of us, most of us just need to take responsibility for our own lives and appreciate what we have. Here's to a happy Thanksgiving for all.

The Old Man And The Bass

November 11, 2009. Veterans Day

Dedicated to My Friend Larry Davis, First Seargent. Retired .

Back In Texas. It’s nice to be back in Texas after a 3-week visit to Colorado. Day before yesterday, I caught the biggest bass I have ever caught. It weighed 8.4 lbs. The first thing I did was call Ms. Betty and tell her to meet me at the dock with a camera. I must admit that my main objective was vanity, which meant getting a picture of me with this creature. My next objective was getting him back in the water. Twenty years ago I would have cut slabs of meat from each side and thrown the remainder in the woods for the buzzards. What a shame that would have been. The most memorable part of the whole incident was watching his tail swish back and forth as he swam near the surface across the lake. Maybe my grandchildren can catch him again.

Waiting For The Elusive Stock Market Correction. Everyone expected the market to correct in September. Didn’t happen then or in October. While we expect some tax loss selling in November and part of December, late December and early January have historically been good months. It all boils down to a quote from my friend, Don Kramer. “The market will do everything it can to prove the maximum number of investors wrong the maximum amount of time.” I’m sure Don would tell us that that quote didn’t originate with him. Indeed, there is a large amount of empirical data that shows this statement to be true. This backs up my contention that it is virtually impossible to time the market with any degree of accuracy. If a number of my clients are any indication, a very large number of investors got out of the market at the very bottom, some of which vowed never to risk money in the market again. They missed the almost 50% rebound that occurred shortly thereafter. Again, there is a large amount of empirical data that shows that very few investors receive the average returns obtained by most mutual funds. Most get in when the markets are hot and out when the markets are down. The problem with exiting the market after a major drop is that no one knows when to get back in. My philosophy is not to be totally in or out of the market at any given time. Although our emphasis on cash flow didn’t totally protect us from the downturn, at least we were paid to hold on. I will continue to manage my own portfolio with an emphasis on current cash flow.

The Real Estate Market Is A Bit More Predictable. If you follow certain market statistics, you can have some idea of when a rebound is almost certain to occur. Perhaps the most reliable statistics are the number of homes on the market and the average number of sales per month in a given year. This is a measure of supply and demand. As an example, in October 2008, the inventory of properties listed for resale was 23,120. A year later there are only 18,945, a drop of 18%. This inventory is the lowest level in the past 8 years. While this is encouraging it must be considered along with sales levels. Through October of 2008, there were 41,683 properties sold or an average of 4168 sales per month. The same period this year saw an average of 3551 sales per month. This means that the current supply would be expected to last for 5.3 months as opposed to 5.6 last year at this time, indicating that we are not significantly better off than we were last year. Our experience indicates that we are near an supply/demand equilibrium when the inventory is less than 6 months. The lack of builder activity along with low interest rates are an indication that the unsold inventory will continue to drop. For those of you who would like to stay more informed about the real estate market, I highly recommend a blog by John Rebchook, with the address insiderealestate.com. That is the site where I obtained these current statistics.

I Haven’t Felt Too Much Like Writing Lately. That doesn’t mean I’m not keeping an eye on the markets and trying to keep you informed of developments in the financial markets. Stay tuned for more frequent posts in the future.

SOME INTERESTING REAL ESTATE STATISTICS

"The ability to manage the unexpected consequences of our decisions is the real secret of investment success". Peter Bernstein.

The Last Two Years Have Been Difficult. It seems like there are so many unexpected consequences that expected consequences don’t exist any more. We can use the statistical tools, the laws of probability, and our experience but we can’t avoid the events which take us by surprise. Many so-called experts tell us that this is a difficult time to invest. I have news for them. It’s always a difficult time to invest.

I Discovered A New Source of Data. It’s been around for a long time and I don’t know how I missed it. It’s called the Case-Shiller Report and it’s published by Standard and Poor’s. It follows real estate statistics in 20 metropolitan regions. Fortunately, Denver Colorado is one of them. The unique thing about their housing statistics is that they have the most accurate statistics on home appreciation rates that I have seen. In the past, I have used increases in the average sale price for a given area to determine appreciation rates. This leaves a lot to be desired since it doesn’t account for increases in home size or the proportion of homes that sell in a given price range. The Case-Shiller Index employs a technique in which they keep track of the sales of individual houses and derives an index to illustrate the increase or decreases in sale price. Data has been collected for 20 years.

Appreciation Rates Are Highly Variable. As an example, consider the period from 1988-1990. In Denver, the appreciation rate was zero. Contrast that to the period from 1999-2001 when the appreciation rate was approximately 13%. During the next 5 years, the appreciation rate slowed to about 3%. July 2006 was close to the high point in the market as prices began to deteriorate at the rate of about 2.8% per year. That period is the only one during the past 20 years where there has been a substantial depreciation in the area. This is a good example of unexpected consequences. The question is, can we use these and other statistics to predict the future of the housing prices.

What Can We Learn About The Future. From last month’s data, it appears that prices are stabilizing; however, one month doesn’t constitute a trend. Positive factors are a rapidly declining number of new building permits, declining inventory of existing homes for sale, and a slower rate of job loss. Although Case-Shiller does not publish some statistics for individual areas, we can learn something from their national statistics. On a national level, homes in foreclosure have increased by 23% from a similar period last year. Even more troubling is the delinquency rate which has increased by 44% from last year. This indicates that we will be seeing a consistent supply of new inventory via foreclosures. Even though the government brags about the success of their foreclosure avoidance program, they say little about the fact that 50% of the loans that are modified to help the consumer are delinquent again within 6 months.

So Is Now The Time To Invest In a Single Family House in Colorado? You definitely have less competition from other buyers. The $8,000 new home buyer tax credit is expiring soon and I suspect that there will be less competition from other investors and buyers of second homes. In 2007, 21% of buyers were investors and 12% were buyers of second homes. This means that fully one third of buyers were in the market for something other than a primary residence. I suspect that many of these have left the market for lack of confidence. You will also have more renters in the market place as those who lose their homes to foreclosure have to live someplace. You might have heard that it is more difficult to qualify for a mortgage in this market. That’s true; however, lenders are always eager to loan to buyers with good credit and a substantial down payment. It is my opinion that buyers of single-family home investments will do better than other investors in today’s market place.

I Am In Colorado For Awhile. Give me a call on my cell phone at 303-902-3940 if you would like to get together.