GIVE ME SOME MORE GLOBAL WARMING.

I'm Tired of Cold Weather. I know my Colorado friends will be tired of hearing me complain about days where it never exceeds 50 degrees but I am anxious to spend more time outdoors and 50 degrees is a bit too cold for that. The funny thing is that the azalea bushes don't quite know its not spring yet. We occasionally see a lonely bright fuchsia blossom among the evergreen bushes. I guess they don't know they're 45 days early.

What About Our Option Trade? Here is another exciting report on our option trade. If you recall, we sold 1000 qualcom put options for 80 cents per contract. As of this point, it has increased in value to $1.00 per contract. Since we are short these contracts, this means we would lose $200 if we bought those contracts back today. If the stock doesn't change in price before expiration date, we will have to buy 1000 shares of qualcom stock at $37.5 per share. Our acquisition price would be $37.5 per share minus the 80 cent premium we received or $36.8 per share. Since the current price is $37.26, that would not be a disaster.

Where Do We Go From Here? There are several things we can do. 1. We can buy our contracts back and lose $200. 2. We can stay where we are and risk that the stock will continue dropping and we will lose considerably more but we will have a chance to make up to $800 if the stock rises above $37.50. Again, there are other possibilities which we can discuss when they become more viable.

How Do We Decide? The first decision point is whether or not we want to own qualcom stock at $36.8. If the answer is absolutely not, we should buy back the contracts and look for the next deal. If we don't think that would be a bad acquisition price, we can consider holding the contract for the 16 days between now and the expiration date. To carry things a bit further, we should consider the intrinsic and extrinsic value of the contracts. As we said last week, the intrinsic value of an option is the strike price minus the market price or 37.5 -37.26 or .24. The extrinsic value of the contracts is the current price of the option minus the intrinsic value. In this case it is 1.00-.26 or .74. In a perfect trade, both the intrinsic value and the extrinsic value will be zero and the option will expire worthless, our ultimate objective. Since the extrinsic value is .74 and we know it will be zero at the expiration date, there is still considerable opportunity for profit. But what if the stock drops to $35 on the expiration date? At that point the intrinsic value would be $2.5 which would be 1.70 more than we received for our contracts and we would own a $35 stock for $36.70, a bad outcome.

Here's Another Definition. One thing we should look at is a term known as delta. The delta of an option is an approximation of the probability that the option will finish in the money. It has other uses but we don't need to go into that for now. As of this writing, the delta of our option is .51 which means that we have 49% probability that our option will expire worthless and we will get to keep the $800 we received. That is our ultimate goal.

So What Is the Bottom Line? My decision is to hold on for at least a few more days before I do anything. I still like Qualcom despite some negative comments by analysts and I believe the long term trend is up. Stay tuned.

Do You Have To Take Money From Your IRA This Year? I have several clients who had to take money from their IRA this year. Many are not all that happy about it. I guess you need to ask yourself why you put the money away in the first place. Was it to provide funds for your retirement? If so, take the money out and enjoy it. If it was to keep until you die so you could leave a legacy for your children, an IRA was the wrong vehicle. Your children will have to pay tax on that money at their tax rate. You could have left a life insurance or a multitude of other assets that they wouldn't have to pay tax on. If you have a large IRA and your income needs have been pretty well met by other means, you might want to consider a withdrawal even if you are less than the age at which you have to take it out. Saving for a rainy day is fine but as we approach the final quarter of our lives, the rainy day may be much be much closer than we think.

GLOBAL WARMING?

Political or Scientific? We've made a political issue out of the global warming phenomenon. It isn't. Its a scientific issue. When I started this blog I resolved to stay away from politics but such an important issue will have long lasting effects on our investment policies and I felt I had to devote at least some space to the myths and realities what's going on.

Is It Real? The scientific community is certainly not unanimous as to whether the temperature increase we're observing is just part of random cycles or whether its a real phenomenon that can be expected to continue if we don't do something about it. Although much of the discussion has occurred within the past 10-15 years, this certainly isn't new. I remember when I was working in the research department of a major oil company in 1964, we had a seminar in which a respected scientist told us of his research that indicated this was happening and that it was at least partially due to "the greenhouse effect". He defined the greenhouse effect as the accumulation of carbon dioxide in the atmosphere which was keeping heat from escaping the environment. Although not all scientists agree, for the purpose of this discussion, we will assume that the temperature changes we are observing are real and not just random fluctuations.

What is Causing Global Warming? If you ask the "man on the street" what is causing global warming, the answer will be pollution. The accuracy of this answer will depend on how you define pollution. The so-called pollution consists almost exclusively of carbon dioxide. Carbon dioxide is a naturally occurring substance in our atmosphere. Without it there would be no life on this planet. The first thing to go would be plant life which breathes in carbon dioxide to produce oxygen. This means no trees, no crops, no animals that eat plants, and no animals that eat the animals that eat plants. There is no carbon containing substance that can be converted to energy without generating carbon dioxide. Not ethanol, not biodiesel, not wood, and not coal. The cleanest burning engine known will produce carbon dioxide exclusively. Carbon dioxide is produced from other sources. We exhale carbon dioxide as do all animals; plant decay produces carbon dioxide; the leaves that fall from your trees produce carbon dioxide. Undoubtedly, without carbon dioxide there are other phenomena that can cause the earth's temperature to rise, not the least of which is is small increases in the temperature of the sun. In fact, some research indicates that this is the main culprit. All this leads me to believe that global warming, if it does exist, is certainly not caused by pollution since I could n ever consider a naturally occurring substance, without which life could not exist, as a pollutant.

Can We Improve the Situation by Reducing The Amount of Carbon Dioxide We Emit? Most people think we can. I have my doubts. We certainly can't stop exhaling, we can't stop the decay of plant materials, we can't control the temperature of the sun. We can burn less gasoline, diesel, and coal. If we assume this will make a substantial improvement, how will we replace that energy without ruining our economy and drastically reducing our standard of living? Perhaps a promising approach is the use of nuclear energy to generate electricity. Before you accuse me of being crazy, consider the fact that nuclear energy produces no emissions and there are already 10 countries that derive at least 40% of their electricity from nuclear power. This includes France which generates 79% of it's electricity from nuclear power. Of course, nuclear energy is not without its environmental hazards; however, even the most staunch environmentalists are becoming of the opinion that this is preferable to burning carbon containing materials. Hydrogen is touted as the fuel of the future since the combustion product is water vapor. Two huge barriers exist: 1. We haven't found an economical way to produce hydrogen for fuel. 2. We don't know the consequences of introducing huge amounts of water vapor into the atmosphere. It could increase global warming as much or more than carbon dioxide. Finally, we can use solar energy, which has been the utopian solution to the problem for decades. Despite the attractiveness of solar and the research that been devoted to developing it, it has yet to become a significant source of energy. Apparently, the technology necessary to develop solar into a significant resource is somewhat elusive.

What Can We Conclude From All This? A quick summary of my opinion is as follows.
1. Global warming most likely exists.
2. Part, but not all, of global warming may be from carbon dioxide.
3. Carbon dioxide is not pollution by my definition.
4. Carbon dioxide is not exclusively man-made.
5. We can reduce carbon dioxide emissions but this may not be enough to have a significant effect.
6. The economic and environmental consequences of reducing carbon dioxide emissions have not yet been
determined.

Hopefully This Post Has Not Been Offensive. I have tried to make it objective and not political. I felt it necessary to address this subject because of the large amount of misconceptions that are prevalent in discussions by politicians, all of whom think they know the answers. The fact is that the answers aren't simple. Those who think they are fully aware of what we need to do are misinformed. That is the trouble with politics. Everyone thinks a simple solution is available and it usually never is.

MONITORING OUR OPTION TRADE.

Days Remaining: 22. If you haven't read my January 20 post, this post will mean little to you. I would suggest you read the January 20 post before proceeding with this one. We are 5 days into the trade I described in my last post. As you recall, I sold a contract that allows the purchaser of that contract to sell me 1,000 shares of Qualcom stock for $37.50 per share. For that privilege, the contract purchaser paid me $800 which was credited to my account right away. Since my maximum loss is far greater than my maximum profit, it is necessary that I monitor this position closely to manage my risk.

As of January 25, Qualcom stock is $38.66. This is a slight drop from the $38.87 price when I purchased the stock. While this is not highly significant, you have to remember that it only requires a drop of $1.20 or so until the option is in the money and I will be forced to buy the stock. Even though the stock has dropped in price, the put option which usually moves in the opposite direction of the stock has dropped to $.60. This means I could buy that contract back to day for $600 and pocket the $200 differential. If I think Qualcom prices are going to continue drop, I should do that. If I think the stock is going to stay even or increase, I can make another $600 over the next 22 days by holding on to the contract. There are other strategies but we will hold off on that discussion until these become more viable. Is this as exciting as watching paint dry? Some of you might think so but it is exciting to me as I monitor several positions at once. To stop the suspense right now, I will say that I am still bullish on Qualcom stock and I plan to hold for now. At this point, it may valuable to introduce two simple components which make up the value of an option.

Intrinsic Value This component is a measure of how much the option is "in the money". It is the strike price (the price at which I have to buy the stock or $37.5) minus the current price of the stock, in this case, $38.66. Since the number is negative, we can assume that the contract has no intrinsic value. If the stock were selling at $36, the intrinsic value would be 37.5-.36 or $1.50.

Extrinsic Value This component is the amount that the price of the option exceeds the intrinsic value. It is the option price minus the intrinsic value. In this case, since the intrinsic value is zero, the option $.60 option value is all extrinsic. While this may not seem like a very important point, it is when you consider one of the few sure things in the financial markets is as follows: On the day following the expiration date, the extrinsic value of any option is zero. This is why I like option strategies so much. Over the next 22 days, I know that the extrinsic value of my Qualcom contract will be zero. If the stock price doesn't fall below the strike price, the value of this contract will be zero and I will be able to keep the entire $800 I got for selling the contract. I guess I'm simple minded because I like sure things.

These are Simple Concepts Which May Not Mean Much at This Point. They will become more significant as we discuss other trading strategies in the future.

You Meet Interesting People in the Strangest Places. Interesting people add much in the way of meaning to your life. A few days ago, I saw a short TV spot about the only sky cap at the Beaumont Airport. He has had the job for 50 years. That may not sound too amazing until you find out that he has had the job since he was 52. Do the math. He is 102. Still drives (has a new pick up). still cuts his own yard, and he doesn't even wear glasses. He says the secret to his success is, "Treat everybody right and do it from your heart." I don't know about you but he sure makes me feel guilty about complaining over the trauma of the aging process.

CONSERVATIVE OPTIONS STRATEGIES.

My Most Successful Investment Strategy Involves the Use of Options. I have avoided talking about options strategies on this blog because I wasn't sure I could explain it adequately. Still, I would be negligent if I didn't share with you something that has worked so well for me. I started this strategy at the end of 2003 and, for the three years ending in 2006, I have earned just under 20% per year. Granted, I spent a fair amount of time monitoring this portfolio but the time spent contributed to my knowledge of the market place. I could probably have done this in less time but I very much enjoyed exploring this strategy. The thing I like the most about my strategy is that I believe that, contrary to popular opinion, it is less risky than buy and hold strategies. So what's not to like? Above market returns and below market risk. Rather than give you a bunch of definitions, I will try to explain the terminology as I go along.

Selling Put Options Is Probably the Most Simple Strategy I Use. When I sell a put option, I give the purchaser of this option the right (but not the obligation) to sell me a certain number of shares of a particular stock at a certain price for a certain time period. Here's an actual example: On Friday, January 19, I sold an option that allows the buyer to sell me 1000 shares of Qual Comm stock for $37.50. As of that date the stock was selling for $38.87. Since the current stock price is above the price at which I have to buy the stock (strike price), this option is an out-the-money (OTM) option. If I had sold a put option with a strike price of $40, that would have been an in-the-money (ITM) option. The purchaser paid me $800 for the privilege of being able to sell me this stock between now and February 16 (27 days from now). If the stock rises or stays the same, I get to keep the $800. If the stock drops to $37.49 or lower, I will have to buy the stock for $37.50. Since I got 80 cents a share in premium, my break even point is $36.70. The buyer is betting that the stock drops below that level and I am betting that it doesn't. The reason that most investors will not make this trade is that I am risking $36,700 for a maximum gain of $800. While this is true, it is an extreme case assuming the stock goes to zero. If I buy the stock at today's price of $38.87, I stand to lose $2,170 more than with the option trade. In addition, I have to have $38.870 in cash to buy the stock. With the option trade, I get $800 in my account right away. Granted, I better have a plan as to how I'm going to get the cash to buy that stock if I have to. In fact, the brokerage house will demand that I have enough cash or borrowing power in my account to perform if necessary.

I AM Bullish On Qual Comm Stock. If I weren't, I wouldn't be making that trade. I view it as putting in an order to buy the stock at $36.70. I am willing to own it at that price. I don't want to pay the going market rate of #38.87. If I don't end up owning the stock, I get to keep the $800 premium I received. This is what happens about 80% of the time. Once you establish a position like this, you don't just walk away and forget it. Managing the position is probably more important than establishing it. There are several things you can do to maximize your gains or minimize your losses in this instance. During the next 27 days, I will make several posts letting you know where I stand on this trade, what my options are and how things turn out. Hopefully, this will be educational and interesting to you.

Do Not Try This At Home. Like the commercials that show the crazy driver doing car stunts, I would caution you not to try this strategy based on what you read here. I have made bad trades that cost me a considerable amount of money. If you implement a similar strategy, I guarantee that you will too. Hopefully my Qual Comm trade won't be one of them causing me considerable embarrassment among my loyal readers.

NEW REGULATIONS FOR MORTGAGE LENDERS

Help is On the Way. Your Colorado State government wants to protect you. In a surprising demonstration of bipartisanship, a democratic state senator and a republican state representative are sponsoring a bill aimed at protecting consumers from fraudulent appraisals. This proposed legislation is the result of Colorado's un-enviable position as a leader in foreclosure rates. The theory is that the main reason for this situation is fraudulent appraisals. The new legislation would make it illegal for anyone involved in a transaction to coerce an appraiser to render a value other than the "true value" of a property. Mortgage brokers and Realtors can face numerous penalties to include loss of license and felony conviction. I am certainly relieved. This new legislation combined with a new law requiring mortgage brokers to undergo criminal background checks and become licensed should go a long way towards reducing the foreclosure rate in Colorado and protect home buyers from experiencing the nightmare of foreclosure.............NOT... Many of the so-called fraudulent appraisals are the result of the inexactness of the appraisal process. In some cases, it is necessary for lenders and real estate brokers to argue with appraisers in order to arrive at a value that is more consistent with a projected sale price than the value the appraiser obtained using the accepted techniques. There can be no exact estimate of what a reasonably informed buyer should be willing to pay for a property. For example, I was willing to pay more for the house I own here in Texas because it was located next to a lot that I already owned. Buying this house gave me a wooded acre with 160 feet of lake frontage. Had I not already owned the lot next door, I wouldn't have bought this house. This brings us to one of the most important rules of real estate. The value of any property will always be relative to the needs of a buyer and the perceived benefits offered by the property. Appraisal will always be an inexact process and the opinion of value of buyers, sellers, mortgage brokers and Realtors is often as reliable, and sometimes more reliable, than that of an appraiser educated in theories of valuation.

Is Regulation of Mortgage Brokers a Good Thing? I seriously doubt it. There are a number of laws on the book that should limit what I consider to be the biggest abuse in mortgage lending: deceptive advertising. Regulation Z of the federal Truth in Lending act would stop virtually all deceptive advertising if it were enforced. It is already illegal to not be truthful in loan applications. They could stop 90% of foreclosures by tightening underwriting guidelines and doing away with limited or zero documentation loans.

Even More Dangerous Than a Crook....is an honest man who doesn't know what he is doing. I think the mortgage industry is full of those. If you want straight answers on your mortgage, send me an e-mail or give me a call.

HAPPY NEW YEAR.

The New year is Well on its Way. And this is my first post of the year. I don't have much of an excuse for not writing more often. Although the weather has been wet here it has been relatively warm and I have spent a fair amount of time walking in the woods.

How is Your Comfort Zone. One thing I have noticed as I age, is that it is easy to settle into a comfort zone. While this isn't necessarily bad, taken to the extreme, it can lead to your isolation. It may be nice to venture out and visit friends or travel but it can gradually become more trouble than it is worth. I see this often in my friends and I occasionally observe these tendencies in myself. The only way to change your life in positive ways is to venture outside your comfort zone. I might also mention that there is a risk that you can change your life in negative ways as well. A good exercise for the new year is to spend time looking at the way you are living your life. Are there things you would like to change? Whether you are 25 or 75, you can change your life. It takes stepping outside your comfort zone and trying something new. It takes resiliency to bounce back if your venture turns negative. It takes courage to stay with the new venture rather than bounce back into your comfort zone before you find if your new venture works. One of my new year's resolutions is to step outside my comfort zone and try new things.

This Applies to Personal Finance As Well. Three years ago I developed a conservative option investment strategy that has provided me with exceptional returns. As part of that strategy, I never purchase options. I write them on stocks that I own or would like to own. At the end of 2005, I stepped outside my comfort zone and made a sizeable option purchase. I don't know if this strategy will work or not but I believe it was worth a try. Even if it doesn't work, it adds an element of adventure to my investment activity and makes my life more interesting.

Think About It. Is your life exactly the way you want it? Are you afraid to step outside your comfort zone to make changes? Can you take small steps and work your way to where you want to be without taking too much risk? I am fortunate to have worked my way to where I want to be by stepping outside my comfort zone many times. I have also been fortunate to work with many clients who have done the same thing. Which do you want? Comfort or adventure. It is a choice that only you can make. Give me a call if you want to discuss how you can create the lifestyle you want.

MERRY CHRISTMAS

Sitting at the Kitchen Table. It's 11:10 on Christmas morning. The packages have been opened and trash bags are full of wrapping paper. Everyone is pooped, yet there is a huge amount of activity as preparation for Christmas dinner is under way. My philosophy is that the real benefit is in getting the family together. I could get by on a hamburger and chips. Perhaps I just feel guilty because of all the work going on while I sit pounding on this laptop and looking out the window.

How is Your Resiliency Muscle? It's a muscle in your heart. It allows you to bounce back after a set back. I saw a program on television in which a four foot tall man with dwarfism was talking to a classroom of 10 year olds. He talked about the trials and tribulations of being a "little person in a big world". His own situation was complicated by the fact that his legs didn't work normally and he had to use crutches everyhere he went. Despite these many handicaps, he was a successful person by almost any measure you could use. He attributed his success to his "resiliency muscle." How many of us could use a little development of this resiliency muscle? I certainly could as I face the aches and pains of the aging process. Far too many of us sell ourselves short and accept defeat too easily because we don't exercise our "resiliency muscle."

Investors Need a Resiliency Muscle. Nowhere is the resiliency muscle more important than in investment. One of the things I work hard to do is develop a vision of the future to use in making investment decisions. As valuable as this vision can be, it is probably less important than the ability to bounce back after I make the inevitable bad decision. So many things can occur to cause an investment to perform poorly, that I know I can never predict the future well enough to do everything right. But I can't afford to stop trying. There are some very challenging economic changes ahead. No one will be immune to the consequences of these changes but those who resolve not to give up will undoubtedly do better than those who fail to persist.

A Visit From the Eagle. I have always been inspired by the pictures of eagles but, before yesterday, I had never seen this majestic bird close up enough to identify it. Yesterday, as I was sitting in my glassed in living room, looking at the lake a huge bird swooped down within 20 feet of me. There could have been no doubt that it was an eagle. Brilliant white head, with wings spread wide, and white tail feathers. Betty saw it too and we both had goosebumps at the sight. What a gift that visit was! While I won't go so far as to ascribe any particular meaning to it, I am thankful I was sitting by the window at that moment for the vision of a lifetime.

CHRISTMAS WEEK END

Beautiful Day at the Lake. It's another beautiful day here at the lake. I got out of Denver just in time to miss the big snow storm. Lucky me. Tomorrow we're headed to town to spend Christmas with the family. Back to living out of a suitcase for a couple of days.

It's Been A Good Year In the Market. I can't complain about how the markets treated us this year. The S&P index increased almost 11% and most of our portfolios did better than that. Predictions are for another good year next year. Who knows. We will continue our philosophy of emphasizing cash flow rather than appreciation for our return on investment. This concept is well understood by my real estate investment colleagues but it sometimes called to question by financial planners. Perhaps now is a good time to discuss the whole concept of total return.

Total Return is a Simple Concept with Huge Implications. Total return is best described by the following simple equation: Total Return = Cash Flow + Appreciation. If you purchase a stock for $10 which pays an annual dividend of $.40 per year and that stock increases in value to $10.50, you have a total return of $.90 ($.40 cash flow plus $.50 appreciation) or 9% for the year. Sounds simple but there are a number of factors to consider. For one thing, you have to pay tax on the 40 cents per share but the 50 cent appreciation is not taxable unless you sell the stock If your objective is to build wealth and you have sufficient income from other sources, you can build more wealth by buying investments with less cash flow and large appreciation potential. If you need income to buy groceries, you buy investments with high current income and less appreciation potential. Can you have both high income and appreciation potential? Maybe, but it requires considerable skill or, better yet, luck to locate those investments. This still sounds relatively simple. Choose high cash flow investments for clients who need income and high appreciation potential investments for clients who want to build long-term wealth. In reality, what we do is construct a portfolio with a mix of cash flow and appreciation investments and tailor that mix to fit the needs of the client.

There are Other Factors to Consider. We can't neglect risk in our investment decisions. In the previous example, the 40 cent dividend is yours to spend or re-invest as you wish but the 50 cents appreciation can disappear. Enron is a notable example of evaporating wealth. Investors who intended to sell a bit of their stock periodically to fund their retirement found that they had no value to sell. Aside from a tax deduction, the only benefits they received from their investment were the quarterly dividends during the holding period. This leads to the conclusion that, as a rule, investments with high cash flow are lower risk than those that depend on appreciation for return on investment. Of course, there are many exceptions to this rule and high cash flow investments can carry considerable risk as well. In constructing your portfolio, you have to pay attention to all these factors. Today's good deal might be tomorrow's trash heap.

PLAY THE GAME HARD....BUT NOT TOO HARD.

Glad To Be Back At The Lake. Its a week from Christmas day and I am finally back at the lake. Since November 30, I have driven for 2,600 miles and flown another 1,700. I have spent a total of four days here. While that might not sound too difficult to some of you travelers, I found it somewhat draining. I am glad to finally be back at my place of refuge. The weather is warm and the water is beautiful..........Now if I could just find an efficient way to deal with all the leaves that keep falling.

I Have Had a Lot of Time to Think Lately. Sitting in a vehicle at 75 miles per hour going down Interstate 10 or waiting at an airport gives you a lot of time to think and reflect. One of the needs that seems to be prevalent among older adults is that of reflecting on the past and trying to make sense out of what it all has meant. Having spent the past 30 years in entrepreneural pursuits, I often wonder about how I could have been more successful. I know, it doesn't reallly matter at this point but maybe I could develop a bit of insight to pass on to my clients who are still in the game. One thing I feel sure about at this point is that we need to be careful who we envy and choose to emulate. One notable example is a local financal planner who had a very high profile. He lived in a high end neighborhood, had his own airplane, and once told me that his clients were all winners, and as such, wanted their advisor to be a winner also. While I found him arrogant and not very likeable, I envied his succes and assumed that he must be doing very well for his clients as well as himself to be so successful. As of this writing he is serving a 100 year sentence for bilking over 10 million dollars from those clients who placed their trust in him. His recent appeal of that severe sentence has been rejected. Lucky I didn't emulate him.

There Have Been Others. When I first started a mortgage company in 1985, I met an ex banker who had been a multimillionaire and chairman of a large bank holding company. A crisis in the banking business caused him to lose millions for himself and his banking clients and he even spent a few months in prison as a result. Still, he was one of the most driven business people I ever met. He started his own mortgage company which always seemed to do better than mine. A few years ago, he sold the company for a reported 18 million. You can imagine how much I envied him, although I will admit I found him arrogant and not very likeable. He didn't quit when he sold his business. He stayed in the game and continued to chase bigger and bigger deals. This week end when I was in Denver, I learned that he took his own life a month ago. We never know what demons chase those successful people we envy. Lucky I didn't emulate him.

We Need To Be Careful. Based on these examples, it would be a mistake to conclude that we didn't attain our success goals because we chose not to be arrogant and unlikeable. Still, it is a strange coincidence that two of the people who's business success I envied the most ultimately turned out to be failures at life. As I look out the window at the tall, glossy-green magnolia trees and the bright red holly berries, I am reminded of all the things I have to be thankful for. Perhaps I could have been more successful at business but I might not have been able to spend as much time with the grandkids or sitting outside in these beautiful woods.

BACK AT THE COMPUTER

It's been a crazy time since my last post. I just drove a 2650 mile round trip to spend two days in Phoenix with my Dad. It was a nice visit but perhaps a bit too much driving, even for an old man who loves road trips. The worst part about this trip was the fact that I received news that my uncle fell and broke his elbow and hip. Since I am the person in charge of making virtually all the financial and personal decisions regarding his care, I sometimes felt like I should be in Colorado dealing with the situation instead of heading down the interstate at almost 80 miles per hour. Anyway, I am flying to Colorado this coming Tuesday to check on him.

Caring for an aging relative can be very stressful in the best of situations, but it is seriously compounded when there is no money. I feel really fortunate that there are funds available for my uncle's care and I can make decisions based on his best interests without worrying about money. While I helped my aunt and uncle with investment and other financial decisions for 20 years prior to my aunt's death and my uncle's alzheimers, they deserve a lot of credit for setting up the proper vehicles to allow me to continue to do so when they were no longer competent. Many of us think that old age and incompetence is something that happens to others but it can happen to anyone. My uncle was a highly decorated WWII veteran and a very competent individual. He was the last person you would expect to become totally incapable of managing his life. Now he can't even remember his last name. As painful as it is to think that we may be like him someday, we have to consider that possibility in our planning. Hardly anyone does. One of my own personal goals for January of next year is to take a hard look at my own situation and make sure that plans for the future are based totally on reality and not wishful thinking. Thinking about the fun things we want to do after we no longer have to spend 40+ hours a week earning a living is the enjoyable part of late life planning but we have to devote at least some energy to thinking about what can go wrong and developing some contingency plans for dealing with those possibilities. The same thing holds true for me in writing about these issues. I would attract more readers by writing about the "fun stuff" but life isn't always about the "fun stuff." Hopefully, I can encourage you to protect your family members by considering these other issues as well.

Dealing with adversity is part of life and we always have to remain as positive as we can in these situations. Remember. When life hands you lemons, buy a bottle of tequila and some salt and give me a call.

GREETINGS FROM APRIL 1989

Every once in awhile I run across an old newsletter that I used to communicate with clients when my practice was at an early stage. The April 1989 issue was directed to Baby Boomers who were between the ages of 25 and 43 at the time. Next year, that same generation will be between 43 and 61. Here are some quotes from almost 18 years ago.

"....The movement of your generation through our economic system has been compared to that of a snake swallowing a rabbit. For example, when you became school age, the educational system was forced to expand rapidly to meet the demand. The result was shortages of teachers, textbooks, and classroom space. ..........The same thing happened as you entered the labor force and competed for a finite number of entry level jobs. Now that you have moved into postitions of increased responsibility, there is a serious shortage of entry level workers and a surplus of managerial and supervisory talent. When you needed housing, the increased demand caused an increase in home prices and interest rates."

".........In some 17 odd years, many of you will be eager to stop working and enjoy the benefit of many years of labor. In the beginning this may not be too dificult; however, as you grow older, the number of workers paying into the retirement system will decrease, making it less likely that you will be able to recoup the funds which you have so faithfully paid into the system."

"......... If baby boomers don't drastically increase their savings habits, they won't have funds available for retirement. If they do, they may drive rates of return down resulting in insufficient retirement assets. What can you do to avoid this competition for high investment returns? The best answer lies in becoming serious about saving and investing before of others of your generation discover the need to do so.........we might also look at the current high interrest rate environment to lock in rates at the current levels. I am about ready to start moving into instruments such as zero coupon treasuries with a 10- year maturity or long-term fixed annuities with a 10-year rate guarantee. ........I believe that there is a 10-20% probability that interest rates in the 90's will return to the low levels of the 60's and I intend to invest accordingly."

These quotations from almost 20 years ago are some examples of what we can do to develop a vision of the future and plan our investment strategies accordingly. Very few people would have beleived that the yield on a 10 year treasury would drop from 9% in 1989 to 4.5% today. During that same time increased investor demand drove the Dow from 2418 to 12,121. It is also an example of statistical information that is "set in stone." We absolutely knew that a large segment of the population would go from the 25-43 range in 1989 to the 43-61 range in 2007. It was only a small step to extrapolate what behavior changes might occur as that change became reality. Following that investment strategy enabled me to enjoy the comfortable lifestyle that I now have..............Now if I could just figure out what to do for the next 18 years. Come to think of it, it is the need to do just that that has prompted me to start this blog in the first place. Give me a call or drop me a quick e-mail if you want to discuss some of these issues and develop a strategy for your own financial independence.

JUST WHAT IS A CASH FLOW GARDEN?

Some of my readers have asked me why I named this blog "Cash Flow Garden." A short answer is because I believe that the central issue in developing financial independence is not assets, it's cash flow. Its about replacing the cash flow derived from work (trading time for dollars) with cash flow from more enjoyable pursuits, like investing.

Over 20 years ago when I enrolled in a program to earn my commercial real estate designation (CCIM), one of the first things the instructor emphasized was that any investment could be evaluated based on a series of cash flows. That message stuck with me as I helped clients plan for their retirement. When I used the financial planning methodology for calculating the funds needed for retirement, I had to make a number of assumptions such as life expectancy, average return on investments, inflation, etc. The final result was dependent on my making those assumptions of which were little more than educated guesses. As an example, consider the fact that a recent article I read calculated that a couple earning $50,000 a year would need $1.75 million for a "comfortable" retirement. Now ask yourself, what couple earning $50,000 a year has a prayer of accumulating $1.75 million? Stated another way, what couple with $1.75 million worth of investment assets will be satisfied with $50,000 a year?

When I read Robert Allen's book on "Multiple Streams of Income", I reached the conclusion that cash flow from a wide variety of sources was the actual key to financial independence. I envisioned that the process was something like planting a garden from which cash flow could be derived. Like a garden, some crops were dependable (almost anyone can grow zucchini but sometimes you can't even give it away). Other crops are more valuable (every one likes home grown tomatos but the yields often vary due to weather, pests, and soil conditions). Still the garden needs a variety of crops to produce a reliable food supply.

I would like to wish all of you a happy Thanksgiving. Of the many things I am thankfol for, I appreciate my clients, past present, and future which are a part of my cash flow garden. As a side benefit, I have been blessed with some very valuable friendships from this group. Think about your financial independence and call or e-mail me if I can help you construct your own cashflow garden.

HAVE YOU EVER HEARD OF A CANROY?

Canroy is short for Canadian Royalty Trust. These are investment vehicles out of Canada which have been very popular with American retirees. An abbreviated definition is that these trusts own interests in natural resources mainly oil and natural gas. In recent years trusts have been formed for iron ore, coal, and synthetic oil. Their popularity with income oriented investors is because they tend to distribute 75% of their income on a monthly basis. Yields have reached as high as 16% on invested capital. One of the reasons for the high yield is that they haven't been subject to Canadian corporate taxes....No longer true. Canada's relatively new minister of finance has announced that in the future, they will be taxed as corporations. This to the dismay of retired investors, many of which sold off their investments for as much as 25-40% lower than pre-announcement prices. One of my colleagues, a very seasoned investor announced that "Canada will never get another dollar from me. Not even a Moosehead."

Most of our clients didn't lose money in this disaster, mainly because we preferred to keep our royalty investments in the US, where we think we are more familiar with the investing environment. Now that prices have dropped, are canroys now attractive? There are a number of reasons to think this may be true. 1. While corporate taxes will definitely mean that there is less to distribute to investors, the new taxation will not be implemented for existing trusts until 2011. The rules may change by then. 2. Plans are under way to reduce Canadian corporate tax brackets which will reduce the effects of the new rule. 3. Depletion allowances are such that much of the income is considered to be a return of capital and not taxed. If 12-14% distributions sound good to you, it might be a good idea to diversify your income stream by adding small amounts of these vehicles to your portfolio. While we probably won't add these to accounts other than those large enough to absorb some risk, I may add some to family accounts.

Getting back to real estate, I was interviewed by a reporter for an article that appeared in the November 20 of Time magazine and quoted as saying something to the effect that "As soon as you have a bunch of empty bedrooms, you should consider downsizing to a smaller house because owning more house than you need is a poor allocation of capital." I qualified that statement that stated that this was from a strictly financial perspective. I don't know if that was clear in the article but I am well aware that it is never a strictly financial issue. Living under the bridge along Cherry Creek gives you the benefit of a good neighborhood at very affordable prices from a "strictly financial perspective." Still, did we really need to go from an average new home size of less than 1000 square feet in the 1950's to almost 2400 today? One of my main concerns is that the economy of the future may not allow us to continue to allocate so much capital for the simple purpose of putting a roof over our head. We should discuss this more in future posts. Send me an e-mail if you have any ideas on this subject.

UNPLEASANT BUT IMPORTANT

Would it be possible for someone to take over your finances this afternoon? Could they locate the required documents? Could your spouse guide them in the right direction? I ask these questions because I am often called on to do just that and find it amazing that it is such a difficult task. Sometimes its an unexpected death; however, in others it is in a situation where dementia has gradually lessened someone's ability to decide what's important and worth keeping. In those cases, there is often so much unorganized, trivial information that it is impossible to sort through it all to locate what's really needed.

If you expect insurance companies to be a big help in this area, you can be sadly mistaken. Mortgage cancellation policies are particularly difficult. I have spent hours on the phone talking to mortgage companies before locating someone who has a clue as to the benefits available under these policies. In one instance, the surviving spouse was told that the policy was an accidental death and dismemberment policy with no benefits available for natural death. Since the premium appeared to be way to high for an AD&D policy I was determined to get more information. After speaking with five or six representatives over the phone, I finally found someone who could give me an insurance company and policy number. The spouse got a $40,000 benefit but it was stress she didn't need at the time.

Living trusts are another example. These are supposed to be devices to avoid probate and simplify distribution of an estate but they are worthless if you don't put any assets in them. Sometimes successor trustees have been appointed and never given a copy of the trust documents. In some cases, they weren't even told that they would have this responsibility. The same is true for durable and medical powers of attorney.

Perhaps the worst instances are those in which one spouse has handled all the finances and the surviving spouse has no idea what to do when left alone. Even if a detailed record of all the assets is available, the surviving spouse may not be able to determine how to derive income from those assets. I have seen cases in which the surviving spouse had to cope with considerable anxiety along with grief until we were able to determine that she would be able to support herself without the deceased pension and private annuity income. The moral of that story is that income planning can be the central issue in estate planning as well as retirement planning.

I could devote several posts to this unpleasant topic but I hope this one gives you the motivation to contemplate what those who depend on you would do without your presence in in handling your affairs. It certainly has me. Stay tuned for my next post on the topic of canroys. If you don't know what those are you are probably in the majority. I've had to do a bit of research myself to become more familiar with this topic.

ANOTHER FANTASTIC MORTGAGE DEAL.

Here it is again folks. A fantastic deal just waiting for you call. I saw this advertisement when I pulled up my e-mail. At the bottom of the screen were several silhouettes showing people dancing around some text that said "$510,000 mortgage for less than $1,698 per month." Being a curious sort of fellow, I got my trusty HP 12C calculator out, put in the numbers and came up with in interest rate of 1.25%. Reminds me of the TV commercial that offers a mortgage that's the "Biggest no-brainer in the history of Earth." I never knew there were lenders out there who would loan home buyers money at a rate less than the US government pays. Some lenders even advertise those as "30-year fixed." How can they do that? The secret is that the payment is fixed for five years...........Well, not exactly fixed but it escalates at a fixed rate of 7.5% per year. Still sound like a good deal? Look at your loan balance. It goes up every month, not down.

Another "fantastic deal" is the 50 year loan. With a half million dollar principal, it saves a borrower $365 per month over a 30 year loan (assuming the same interest rate). The worst thing about those advertisements is that they claim the payments on this loan are even lower than interest only loans. Think about it. How could a loan with any principal payments whatsoever have lower payments than an interest only loan? (Again, assuming the same interest rate). Another mathmatical mystery. Maybe some of my clients with an MBA in finance can send me an e-mail answering this question.

We continue to watch the real estate markets. It appears that most commercial real estate is overpriced relative to the income it produces. We have yet to see much weakness in this area. The housing market is another story. If you look hard enough it is possible to buy houses at lower prices than a year ago. The high foreclosure rate, along with overbuilding, is putting downward pressure on home prices. All this at a time when the rental market is growing stronger. We may be approaching a point in which rental housing is becoming more attractive relative to other investments. We are not quite ready to recommend jumping into the market at this time. When the current excess inventory begins to diminish, we will be ready to scour the markets for buying opportunities.

WE HAVE MET THE ENEMY......

..........AND HE IS US. That old expression came from the comic strip known as Pogo which was a popular satire piece over 30 years ago. Never has it been more appropriate than in our current energy and political environment. Part of the reason for the Middle East crisis is our addiction to foreign oil. In importing so much high cost oil from the middle east, we are providing the funds for our enemies to continue to attack us. Not only do we have to bear the cost of our own military action, we are paying for that of the terrorists as well. What else could we do? We could certainly exploit our own sources of petroleum by drilling in locations presently forbidden. While this will have some environmental consequences, these could be managed. We do things every day that have environmental consequences and total elimination of these is impossible. All of those unsightly windmills supposed to be a clean source of electricity take a huge toll on the bird population. We view the use of nuclear generated electricity with disdain because of the environmental consequences but some European countries derive as much as 40% of their electricity from nuclear power. One of the biggest culprits in the whole picture are speculators who drive up futures prices, increasing the cost of raw material to refiners who pass those costs to the consumer. The bottom line is that we have plenty of options for generating energy that are less ambitious than converting our entire fleet of automobiles to ethanol. If you are upset about the ups and downs of gasoline prices, don't blame those "evil oil companies" or the president. Its much more complex than that and you might just take a look in the bathroom mirror. There are a number of things we can do as consumers and investors to keep energy prices from getting out of hand. By looking to blame others for our plight, we ignore the possibilities that are within our own control.

Its been a busy week for us since our return to Texas for the winter. My "fishin' buddy" from across the lake died, the rain sank my boat and overwhelmed our septic system, and I am inundated with leaves which are just now starting to fall. The one bit of good news is that the defendant in the jury trial I served on received 508 years for molesting 20 boys. That is one less person able to run free and harm our children.

GREETINGS FROM NEW MEXICO

Here we are in Raton New Mexico. I am at the Holiday Inn express, using my laptop on their high speed internet to check the markets, e-mail and make a quick post. I am on my way to Texas but I still am able to manage my money and that of clients. Some people complain that the current generation will be the first to not have a standard of living equal to their parents. I guess I'm part of the parent generation that they don't think they will have a standard of living equal to. When I was 30 something, you couldn't have a computer equal to this one without several rooms of climate control space, a card punching machine, and hundreds of thousands of dollars to purchase the computer and peripheral equipment. You couldn't buy a cell phone because they weren't invented yet. Likewise microwave ovens and GPS devices. Of course, it was easier to figure out how to use a Royal typewriter than this damn thing. At least I knew how to get it to make a new paragraph. I will be in Texas off and on throughout the winter and I will be able to manage our money and communicate with you. Even if I can't figure out how to make a paragraph on this blog.

PET PEEVES

High on my list of pet peeves are mortgage advertisements. Have you noticed the large number of ads telling you its time to refinance your ARM mortgage to a fixed rate? Weren't these the same guys who advised you to get the ARM mortgage in the first place? Granted, we have seen a number of borrowers who probably should refinance their adjustable rate loan but many of them can't afford the higher payments of a fixed rate or the closing costs necessary to obtain the new loan. The fact is, the only way they could get into the home the wanted was with the aid of a higher risk adjustable mortgage. While we did encourage some borrowers to incur adjustable mortgages, we spent a lot of time making sure they were familiar with the risks and had an exit strategy in place in case rates escalated. We never used ARMs to help borrowers purchase homes they couldn't afford. Speaking of closing costs, do you see those ads that offer no closing cost loans and tell borrowers how they are getting ripped off by unethical lenders who charge enormous closing costs. They promote their no-cost loans as "The biggest no-brainer in the history of Earth." Could that statement be a huge exaggeration? What they fail to mention is that their no-cost loans bear interest at 1-2% higher than closing cost loans. Virtually any lender can offer these no cost loans. The key is that borrowers need to be informed of the trade-off between rates and closing costs. This allows them to choose the combination that fits their situation. There is no "one size fits all" mortgage. The bottom line is that the most important factor in the mortgage lending process is choosing the loan that fits your needs. The lowest rate in town could be the wrong deal for you if it is not the right product. Call our office if you have a question in this area.

SNOWBIRD READY TO FLY.

It's turned cold in Colorado. The low temperature overnight was 35. I'm ready to go back to our Texas lake house as soon as I can take care of some real estate details here. We bought our lake house almost 11 years ago and the main question now is how long we should continue our "back and forth" lifestyle. Seems like when you are looking for something it is always at the other house. Betty had to fly back there at the beginning of summer to get our income tax files so we could file our taxes here in Colorado. One thing I can tell anyone not yet retired looking to buy a "vacation home" now before prices increase, is that there is no hurry. In some years we only spent two weeks at the lake house. We could have had two weeks in Maui for what that cost. There is no hurry. Although I thought we got a great deal, my perception of a what a great deal was changed after I became more familiar with the market in that area. Another thing is not to count too much on rental income. After you put your furniture and personal possessions in the property, you lose your appetite for letting strangers come in. We have yet to receive the first dollar in rental income from that house. Obviously, the benefits of owning that second home are not financial. My main benefit is my wife's enjoyment of the woods and waters that surround the property. I couldn't sell it if I wanted to. Will Rogers said, "There are two theories on how to argue with a woman........Neither works!

BUY WHEN THERE IS BLOOD IN THE STREETS

That is a horrible title but a common saying in the investment arena, particularly in real estate. In Colorado, there is a high foreclosure rate and a number of homeowners have become reluctant investors because they can't sell their houses. The supply definitely exceeds the damand. I have become a reluctant investor recently because I had to take over a property, I loaned money on a few months ago. When I inspected my new acquisition I was discouraged. The interior was a mess; however, that is something I can fix. The biggest problem is the exterior and, since it is a condominium, that can only be done by the property owners association which is something I have little control over. The homeowner dues are high, the association insolvent and many, if not most, property owners are delinquent in their dues. There are a whole host of foreclosures in the community. if this isn't blood in the streets, I can't imagine what is. You can buy these units for $50-70 per square foot and it may get worse before it gets better. Its a great location, near shopping and light rail and I am tempted to put together a group to buy more units. The key to success is being able to buy enough units to get control of the homeowner association so you can put money into the exterior. The luxury apartments across the street are renting for $1.50 per square foot per month. These units would provide a good return on investment at much lower rents. The question is: Am I ambitious enough to attack such a major undertaking? I doubt it but I will do some more research before reaching a decision. I'll keep you informed.