Just a Note to Inform You That I will be in Denver for two weeks starting tomorrow. I look forward to meeting with several of my clients. Writing on this blog has been somewhat sparse lately. I have had numerous visits from friends and family. My writing has been secondary to enjoying those visits. Those who wish to meet during the next two weeks can call Susan to arrange a time. The number is 720 449-0200. One other thing I would like to call your attention to is that I will be filling in on Real Money, a radio show with my old friend and colleague, Ray Benton. The time is 12 noon this coming Saturday at 1600 on your radio dial. Listen if you can and feel free to call with questions if you have any.
The Tide Has Been Rising. Remember the old adage that "A rising tide lifts all boats." This has been true of our stock market lately. It has been hard not to make money in this market. Even if you did a poor job of stock selection, chances are the rising market made you look good. I must say the same thing goes for our money management clients. I would like to claim it is our brilliance that produced this result but I call your attention to another adage: "It is only when the tide goes out that we find out who has been swimming naked." In other words, we may not be as brilliant as we think we are when the inevitable correction takes place. Its time to ask ourselves whether our gains are real or illusionary. The answer is we don't really know. When we buy a stock, we buy into a business. If the price doubles the next day, has the value of that business really doubled? I say that it hasn't. It is the investors' perception of the value that has doubled. That perception could change tomorrow and all those gains could disappear. In other words, you don't reap the benefits of the market's perception of the value increase unless you sell. Before you run out and liquidate all your investments, remember that the market perception of value could, and often does, continue to increase. This is why we usually recommend that our clients construct investment portfolios that emphasize cash flow. It is only that cash that we find in our hands which we can use for funding our lifestyle. I almost never recommend selling a company just because the price has gone up or down. It is only when my perception of the company's prospects has changed that I recommend selling and I fully admit that my perception could be incorrect. The best recommendation I can offer at this time is to look at stocks in your portfolio and ask yourself if your opinion of the company's prospects have changed. If so it may be time to take some or all of your money from that investment.
The Tide Has Gone Out In The Real Estate Market. Some folks have been caught swimming naked and face foreclosure or even bankruptcy. This Saturday, I will be talking about the Denver real estate market on the radio show. I am analyzing some of the market statistics in order to decide whether or not this is a good time to re-inter that market. My next post will contain some of these observations and our conclusions.
Tuesday, May 15, 2007
Tuesday, May 01, 2007
THINGS I'VE LEARNED
About Borrowing Money. There are a lot of misconceptions where borrowing money is concerned. Common sense wisdom may not apply in all cases. Here are some of the things I've learned in almost 50 years of borrowing money and 25 years of helping others acquire financing.
1. There Is No Such Thing As A Bad Loan. I can imagine the majority of my readers will disagree with this statement but it is never the loan that is bad, its the way its used. Bet you still disagree. Think about it. How can a 36% interest rate ever be a good loan? The answer is when you have to have the money and there is no other loan available. I recall getting such a loan many years ago to buy two new tires. One of the old tires was totally ruined and the other not far behind. I drove 20 miles to work each day and had to have those tires. No one else wanted to loan me the money so I got it from a consumer finance company at 36%. Best deal I ever made. If you are considering that same loan to buy a new couch, you are probably better off getting a used one from goodwill and waiting until you can save enough money to pay cash for a new one.
2. Borrowing Will Not Provide More Discretionary Income. If you have five thousand in discretionary income per year, borrowing another five thousand will give you additional income for the year you borrow the funds but it will cut your income for subsequent years when you are paying it back. If you have to pay interest on the money, the reduction in discretionary funds will be permanent by the amount of interest paid.
3. The Interest Rate Isn't Always Of Paramount Importance. Too often people shop hard to find the lowest interest rate when other loan terms may be more important. For example, if you are borrowing to buy a $100,000 property that offers a 20% return, you are better off passing up a $50,000 loan at 4% interest in favor of a $75,000 loan at 8% interest if you can buy two of these properties with your $50,000 in equity. This assumes that the rest of the terms are similar. It also assumes that you have adequate tools to manage the risk of the higher leverage.
4, All Borrowing Adds Risk to Your Life. In case you didn't quite understand the meaning of that last statement, I would emphasize that even though buying two investments with a 15% return with 8% money will give you a higher return than buying one 15% return with 4% money, the risk is higher with the larger loan. This is because you have to make those loan payments whether or not the investment performs as anticipated. If one of those properties becomes worthless (possible but not probable), you will owe $150,000 and only own one property worth $100,000. If the result is foreclosure, your dream of success using OPM (other people's money) turns into a nightmare.
5. There is No Free Lunch. Some people advertise zero closing cost loans. Other's advertise rock bottom interest rates. In the absence of outright fraud, there is no way they can offer both in the same loan. When you do business with a mortgage company they have to make a profit. In order to do so, they can charge you fees or a higher interest rate that can be sold for a premium in the market place. In most cases, they get their profits with a combination of the two. In my opinion, the most ethical companies explain the trade offs and allow the borrower to choose the financing that fits his or her needs the best.
6. Be Careful What You Ask For. I recently counseled a real estate investor who was about to lose a property to foreclosure. She told her loan officer that she wanted the lowest payment available. The loan officer got her a loan with an interest rate of 1.5%.........for the first month. At the end of this time the rate escalated but her payment stayed the same. How did that occur? They simply added the unpaid interest to the loan amount. Over the time that she owned the property, her entire equity was consumed. While this loan may be a good one for some circumstances, it was not a good one for her, mainly because she didn't understand how to use it. In this case, I doubt the loan officer did either or he would have explained it more thoroughly.
It Is Not Only Dishonest Men Who Are The Most Dangerous. It can be the honest man who doesn't know what he is doing. Unfortunately, there are a lot of those in the mortgage business. If you need advice on a mortgage loan call Susan at Westmont (720-449-0200). She can arrange a telephone or personal appointment with me. Again, I want to remind everyone that I will be available for appointments in Colorado from May 16-31.
Tuesday, April 24, 2007
SAVING TOO MUCH MONEY?
Are We Saving Too Much Money for Retirement? This topic has been the subject of several magazine articles and internet sites recently. Some of these have been downright hostile to the financial community. The premise is that brokerage houses, insurance companies, and financial planners have shown that the average person will need assets of one to two million to retire comfortably. As I have said before, the calculations are mathematically correct and are based on the average inflation rate, life expectancy, and average returns from various asset classes. The devil is in the details. Small changes in assumptions we make can have a huge effect on the final sum needed for a comfortable retirement. The final result can be off by large amounts and are usually biased on the high side because many clients instruct those making the calculations to use somewhat pessimistic assumptions. So why is the financial services industry telling us that we need to save too much. Their detractors say that it's so we can make more money selling financial products. I don't agree with this hypothesis. Many of those who make these calculations actually believe the results. I don't.
Maybe We Aren't Saving Too Much, Just Worrying Too Much. Several years ago, a financial planner made a big issue out of saying that the College For Financial Planning taught students to use a method for calculating retirement needs that under estimated the amount of assets needed by $15,000. If we could come that close every time I would be forever thankful. In my opinion, these calculations are an exercise in futility. In the future, our retirement will be a much more dynamic situation with frequent adjustments necessary to stay on track. We may need to work periodically, change our residence, use reverse mortgages, and change our spending habits.
Our Health is Probably The Most Critical Variables. The high cost of health care can deplete a good sized retirement nest egg in a hurry. We can use long-term care insurance to offset some of this risk but the most reliable risk management tool is to stay healthy. If you are retiring, you will need to budget some of your time and money for maintaining a healthy lifestyle. I don't claim to be an expert in this area but you had better become one regarding your own health. Not only can poor health deplete your finances, it can also damage your ability to enjoy life regardless of how much money you have.
My Posts Have Been Less Frequent Lately. I have been busy with the business of life. Enjoying beautiful spring weather, planting flowers, and catching and releasing numerous bass. I particularly enjoyed a visit from my old friends and business partners, Larry and Helga Davis. Maybe some of you other folks would like to come by. Give me a call and lets make some plans.
Maybe We Aren't Saving Too Much, Just Worrying Too Much. Several years ago, a financial planner made a big issue out of saying that the College For Financial Planning taught students to use a method for calculating retirement needs that under estimated the amount of assets needed by $15,000. If we could come that close every time I would be forever thankful. In my opinion, these calculations are an exercise in futility. In the future, our retirement will be a much more dynamic situation with frequent adjustments necessary to stay on track. We may need to work periodically, change our residence, use reverse mortgages, and change our spending habits.
Our Health is Probably The Most Critical Variables. The high cost of health care can deplete a good sized retirement nest egg in a hurry. We can use long-term care insurance to offset some of this risk but the most reliable risk management tool is to stay healthy. If you are retiring, you will need to budget some of your time and money for maintaining a healthy lifestyle. I don't claim to be an expert in this area but you had better become one regarding your own health. Not only can poor health deplete your finances, it can also damage your ability to enjoy life regardless of how much money you have.
My Posts Have Been Less Frequent Lately. I have been busy with the business of life. Enjoying beautiful spring weather, planting flowers, and catching and releasing numerous bass. I particularly enjoyed a visit from my old friends and business partners, Larry and Helga Davis. Maybe some of you other folks would like to come by. Give me a call and lets make some plans.
Tuesday, April 10, 2007
A FEW MORE FACTS ABOUT GLOBAL WARMING
If We Are Going To Comment About Global Warming We Need To Be Informed. News people love to talk about global warming. Many don't know what they are talking about.I have researched a few facts that I think we should be aware of before we get too deeply into supporting one side or another.
1. The rise in the Earth's temperature is correlated with the increase in carbon dioxide levels in the atmosphere. While this is a true statement, even an amateur statistician will tell you that the fact that two things are correlated only means that an increase in one variable is usually followed by in change in the other. This does not mean that one change caused the other. In many cases both are related to a third variable which causes both to change.
2. Carbon dioxide is an unavoidable consequence of burning virtually everything we use for energy. With a few exceptions like nuclear and hydrogen, everything burned for energy produces carbon dioxide. Man first began to produce carbon dioxide when he discovered fire. Even if we learn to produce totally efficient clean burning fuels, as long as we are burning carbon containing materials we will produce carbon dioxide. The bottom line here is that, the only way to produce less carbon dioxide is to burn less carbon containing fuel. Ethanol produces less carbon dioxide than gasoline; however, the processes by which ethanol is produced at this time (fermentation), produces carbon dioxide before the end product produces the first unit of energy. In the final analysis, smaller cars and houses along with less consumption of manufactured products is the only thing we can do to burn less fuel. I wonder how many of us are willing to take that step. Before we get too anxious to blame the oil companies manufacturing industries, and the government, we need to look in the mirror to see the real culprits.
3. We should also ask ourselves if we are sure that carbon dioxide is the real culprit. It is undoubtedly true that carbon dioxide levels are currently 26% higher than the average of the past several hundred years. In absolute terms, the best estimate of this average is 280 parts per million. To get an idea of how much this is, consider that if you took $100 to the bank and converted it to pennies, you would have 10,000 pennies. If all were Lincoln pennies except three indian heads, this would be the same as the historic level of carbon dioxide. If we added a fourth penny, this would be equal to the increase of CO2 levels produced by recent history. This doesn't mean that CO2 isn't responsible for at least some global warming but it does cast some doubt on the issue. It also gives you an idea of how much we are going to have to sacrifice to have some effect on the situation. As the biggest consumer of petroleum based fuels in the world, the US has been criticised for refusing to sign the Kyoto accords. We must remember that China and India are exempt from these and their rapidly growing economies are slated to produce one coal fired energy plant per week over the next few years. If we do elect to participate in this treaty, we had all better be ready for a totally different economy and the transfer of wealth from our economy to those countries that are exempt.
4. We may discover that decreasing our consumption of petroleum products won't be a choice in the future. While it is true that there are ample reserves of petroleum, natural gas, and coal, it is also true that the cheaply accessed reserves are rapidly being depleted. We can get more oil by shale, Canadian tar sands, and deep water drilling; however it will be increasingly more expensive. In the future, it may well be that our concern may turn from how can we burn less to how can we find more at a price we can afford to pay.
5. I predict that learning to cope with climate change will replace trying to figure out how to stop it. In my opinion, regardless of the treaties we sign, rants from environmentalists, and efforts to manage these climate changes, we won't be able to stop the current trends. Learning to cope may well be the only viable strategy.
The next generation will face multiple challenges from the aging of the population to the huge obligations of the federal government. Undoubtedly, we will have to manage our finances, protect our environment, and find ways to manage global conflicts. We may well have to choose our battles more wisely and select those which we have higher probabilities of winning and learn to cope with those where the probabilities of success are lower.
1. The rise in the Earth's temperature is correlated with the increase in carbon dioxide levels in the atmosphere. While this is a true statement, even an amateur statistician will tell you that the fact that two things are correlated only means that an increase in one variable is usually followed by in change in the other. This does not mean that one change caused the other. In many cases both are related to a third variable which causes both to change.
2. Carbon dioxide is an unavoidable consequence of burning virtually everything we use for energy. With a few exceptions like nuclear and hydrogen, everything burned for energy produces carbon dioxide. Man first began to produce carbon dioxide when he discovered fire. Even if we learn to produce totally efficient clean burning fuels, as long as we are burning carbon containing materials we will produce carbon dioxide. The bottom line here is that, the only way to produce less carbon dioxide is to burn less carbon containing fuel. Ethanol produces less carbon dioxide than gasoline; however, the processes by which ethanol is produced at this time (fermentation), produces carbon dioxide before the end product produces the first unit of energy. In the final analysis, smaller cars and houses along with less consumption of manufactured products is the only thing we can do to burn less fuel. I wonder how many of us are willing to take that step. Before we get too anxious to blame the oil companies manufacturing industries, and the government, we need to look in the mirror to see the real culprits.
3. We should also ask ourselves if we are sure that carbon dioxide is the real culprit. It is undoubtedly true that carbon dioxide levels are currently 26% higher than the average of the past several hundred years. In absolute terms, the best estimate of this average is 280 parts per million. To get an idea of how much this is, consider that if you took $100 to the bank and converted it to pennies, you would have 10,000 pennies. If all were Lincoln pennies except three indian heads, this would be the same as the historic level of carbon dioxide. If we added a fourth penny, this would be equal to the increase of CO2 levels produced by recent history. This doesn't mean that CO2 isn't responsible for at least some global warming but it does cast some doubt on the issue. It also gives you an idea of how much we are going to have to sacrifice to have some effect on the situation. As the biggest consumer of petroleum based fuels in the world, the US has been criticised for refusing to sign the Kyoto accords. We must remember that China and India are exempt from these and their rapidly growing economies are slated to produce one coal fired energy plant per week over the next few years. If we do elect to participate in this treaty, we had all better be ready for a totally different economy and the transfer of wealth from our economy to those countries that are exempt.
4. We may discover that decreasing our consumption of petroleum products won't be a choice in the future. While it is true that there are ample reserves of petroleum, natural gas, and coal, it is also true that the cheaply accessed reserves are rapidly being depleted. We can get more oil by shale, Canadian tar sands, and deep water drilling; however it will be increasingly more expensive. In the future, it may well be that our concern may turn from how can we burn less to how can we find more at a price we can afford to pay.
5. I predict that learning to cope with climate change will replace trying to figure out how to stop it. In my opinion, regardless of the treaties we sign, rants from environmentalists, and efforts to manage these climate changes, we won't be able to stop the current trends. Learning to cope may well be the only viable strategy.
The next generation will face multiple challenges from the aging of the population to the huge obligations of the federal government. Undoubtedly, we will have to manage our finances, protect our environment, and find ways to manage global conflicts. We may well have to choose our battles more wisely and select those which we have higher probabilities of winning and learn to cope with those where the probabilities of success are lower.
Wednesday, April 04, 2007
PRE-RETIREMENT CHECKLIST.
Everyone Needs a "To Do" List. My wife and sister-in-law are the two most compulsive list makers I have ever seen. I would be seriously worried if I ever saw either of them without a list. I tease them about their compulsiveness but I secretly admire how much they accomplish by staying focused on a list.
I Don't Live By A List. But I freely admit that I might get more of the right things done if I did. One place where a list is particularly valuable is before you retire or decide to devote less energy to the world of work. Ideally, the list should be started at least a year before the event. The following list may not be totally comprehensive but it contains a number of things that you need to think about before you leave your job.
1. How Much Income Do You Need? It's surprising but a lot of people hate the exercise of putting together a budget or spending plan. Still, it's very important that you determine how much income you need to replace the income you are earning from work. I have clients tell me they need $5,000 a month only to find that the average from the past six months is $8,000. If they need only $5,000 a month what happened to the extra $3,000 they brought home every month. Now is the time to be realistic in estimating expenses. Of course, this is not to say that you can't identify areas where expenses can be cut but you might also add expenses for travel, recreation, etc. While I don't want to belabor the issue, the more through you are in this step, the more secure your retirement will be.
2. How Much Income Will You Have? In this exercise consider only those sources of income that you will have that are relatively secure such as a company pension, social security, or income from high grade government or corporate bonds. If the result of this step is equal to or greater than from step 1, you should have a relatively worry free retirement. If not, you are going to have to figure out how to make up for the shortfall.
3. The Most Secure Means of Meeting the Shortfall is Cutting Expense. Many retirees just accept the fact that they will always have a car payment and that a few dollars in credit card payments are acceptable. In fact, they usually aren't. Automotive and credit card interest is not deductible and it is quite difficult to achieve an after-tax return on investment equal to the interest paid on cars and consumer debt. Becoming debt free, with the possible exception of mortgage debt is a worthwhile objective.
4. Pay Particular Attention to Your Mortgage. Often, the best means of improving your post retirement cash flow situation is retiring or re-structuring mortgage debt. In order to do this, you sometimes have to think "outside the box". If you think your low interest mortgage with 10 years remaining is worth holding, think again. Often, it is the high principal payment, not interest, that is hurting your cash flow. Sacrificing cash flow today for a paid for house when you are 75 is a poor choice for many retirees. Of course, you can pay it off if you have funds available to do so but be very careful making these choices. A wrong decision here can have a profound effect on your retirement security for years to come.
5. Pay Attention to Social Security. In the 70's and early 80's the standard advice was to take your social security at age 62 because you will draw more than enough during the next three years to make up for the difference between the benefit now and that of age 65. Now that interest rates are lower and life expectancies are higher, this might not be the case. The most important factor is whether or not you might work part or full time after retirement. If you retire at age 62 and are forced to return to work because of boredom or financial pressures, you will be severely penalized for every dollar you earn over a set limit. (Somewhere around $12,000). You might be forced to pass up an attractive employment opportunity or pay that penalty if you receive your benefits early.
6. Don't Neglect Your Health Care. Many retirees have become accustomed employer- provided health care benefits at little or no cost while they were working. They are often shocked at how much they will have to spend to take over this responsibility themselves. The most critical time is the gap between retirement and medicare eligibility. Even after medicare takes over there can be problems such as the shrinking number of physicians accepting medicare or the high cost of drug benefits. You have six month after becoming eligible for medicare and electing to pay for medicare part B which covers doctor benefits. You have the same six months to decide a on supplemental policy. After the six month period you will pay a penalty for medicare part B and you may not be able to get a supplemental policy if you are in poor health. Medicare also has a drug benefit for little cost but you may still have to pay more than you are accustomed for prescriptions.
I didn't expect to devote so much space to this post. Obviously, I am leaving a lot out. I will cover some more in subsequent posts.
I Don't Live By A List. But I freely admit that I might get more of the right things done if I did. One place where a list is particularly valuable is before you retire or decide to devote less energy to the world of work. Ideally, the list should be started at least a year before the event. The following list may not be totally comprehensive but it contains a number of things that you need to think about before you leave your job.
1. How Much Income Do You Need? It's surprising but a lot of people hate the exercise of putting together a budget or spending plan. Still, it's very important that you determine how much income you need to replace the income you are earning from work. I have clients tell me they need $5,000 a month only to find that the average from the past six months is $8,000. If they need only $5,000 a month what happened to the extra $3,000 they brought home every month. Now is the time to be realistic in estimating expenses. Of course, this is not to say that you can't identify areas where expenses can be cut but you might also add expenses for travel, recreation, etc. While I don't want to belabor the issue, the more through you are in this step, the more secure your retirement will be.
2. How Much Income Will You Have? In this exercise consider only those sources of income that you will have that are relatively secure such as a company pension, social security, or income from high grade government or corporate bonds. If the result of this step is equal to or greater than from step 1, you should have a relatively worry free retirement. If not, you are going to have to figure out how to make up for the shortfall.
3. The Most Secure Means of Meeting the Shortfall is Cutting Expense. Many retirees just accept the fact that they will always have a car payment and that a few dollars in credit card payments are acceptable. In fact, they usually aren't. Automotive and credit card interest is not deductible and it is quite difficult to achieve an after-tax return on investment equal to the interest paid on cars and consumer debt. Becoming debt free, with the possible exception of mortgage debt is a worthwhile objective.
4. Pay Particular Attention to Your Mortgage. Often, the best means of improving your post retirement cash flow situation is retiring or re-structuring mortgage debt. In order to do this, you sometimes have to think "outside the box". If you think your low interest mortgage with 10 years remaining is worth holding, think again. Often, it is the high principal payment, not interest, that is hurting your cash flow. Sacrificing cash flow today for a paid for house when you are 75 is a poor choice for many retirees. Of course, you can pay it off if you have funds available to do so but be very careful making these choices. A wrong decision here can have a profound effect on your retirement security for years to come.
5. Pay Attention to Social Security. In the 70's and early 80's the standard advice was to take your social security at age 62 because you will draw more than enough during the next three years to make up for the difference between the benefit now and that of age 65. Now that interest rates are lower and life expectancies are higher, this might not be the case. The most important factor is whether or not you might work part or full time after retirement. If you retire at age 62 and are forced to return to work because of boredom or financial pressures, you will be severely penalized for every dollar you earn over a set limit. (Somewhere around $12,000). You might be forced to pass up an attractive employment opportunity or pay that penalty if you receive your benefits early.
6. Don't Neglect Your Health Care. Many retirees have become accustomed employer- provided health care benefits at little or no cost while they were working. They are often shocked at how much they will have to spend to take over this responsibility themselves. The most critical time is the gap between retirement and medicare eligibility. Even after medicare takes over there can be problems such as the shrinking number of physicians accepting medicare or the high cost of drug benefits. You have six month after becoming eligible for medicare and electing to pay for medicare part B which covers doctor benefits. You have the same six months to decide a on supplemental policy. After the six month period you will pay a penalty for medicare part B and you may not be able to get a supplemental policy if you are in poor health. Medicare also has a drug benefit for little cost but you may still have to pay more than you are accustomed for prescriptions.
I didn't expect to devote so much space to this post. Obviously, I am leaving a lot out. I will cover some more in subsequent posts.
Tuesday, March 27, 2007
MARKET IN THE DOLDRUMS
What Can We Say About This Stock Market? Going no where fast comes to mind. As of today's date, March 26, the market is less than 1% above where it began on the first trading day of 2007. It looked like we were in for a good year for awhile. The market was up 3% by February 20, only to fall back to the current level, over the next month. None of us really know the reason why the market reversed course but the current hot topic is the sub-prime mortgage market.
The Sub-Prime Mortgage Market Is a Great Example of Stupid Lenders and Stupid Consumers. Years ago, a number of lenders decided that it was more profitable to make loans to non-creditworthy borrowers at high rates, construct a diversified loan portfolio, and be willing to accept a higher foreclosure rate than it was to compete for borrowers with good credit histories who had numerous sources for rock-bottom interest rates. This worked well for awhile as suppliers of sub-prime mortgages were protected by higher down payments and rising home prices. Life was good. There were plenty of home buyers with credit problems anxious to be homeowners and plenty of investors hungry for higher yields willing to buy sub-prime paper. Real estate prices escalated as more people were able to buy homes now that they had the financing to do so. It even reached the point where increasing numbers of families were no longer satisfied with one residence, they had to own two. They weren't happy with 900 square foot homes like the average 1950's home, they had to own houses two and a half times that size, the average house size today. So where did it all go wrong.
Success Breeds Competition. There is an old economic axiom that says when one provider of goods and services begins to do very well, others will enter the marketplace and provide similar products which compete with the original provider. As more lenders entered the marketplace to compete for the existing borrowers, it became harder to originate enough loans to satisfy the investors, eager for higher yields. In other words, too much money chasing too few deals. To keep from lowering rates to attract more borrowers, lenders lowered their standards to the point that, instead of offering sub-prime loans, they were offering sub-sub-sub prime loans to borrowers who couldn't possibly afford the home they were buying. As home prices leveled off, these borrowers were trapped in homes they could no longer afford and couldn't sell. Delinquencies rose and the resulting increase in foreclosures were the natural consequence.
You Hate To Say That They Deserved It. Some lenders certainly did. Many borrowers, have the excuse of being financially unsophisticated. Lenders may not be all that sophisticated either since many loan officers entered the business with no experience in personal finance and no ability to advise borrowers of the risks of these loans. No one trained these loan officers to explain risk because their job was to sell loans not counsel borrowers. If they didn't sell loans they didn't get paid. In a sense, the entire industry was one in which there was a lack of business ethics and the consequences they are experiencing today were entirely predictable. A number of medium and relatively large sized sub-prime lenders are no longer economically viable and bankruptcy is only a matter of time. Shareholders in public companies have already seen most of their investment evaporate and the rest will soon follow.
It Will Take Awhile to Work Our Way Out of This Mess. A lot of homeowners are hanging onto homes hoping for some miracle to allow them to continue. Most will fail. This will keep a lid on prices, especially in areas where markets overheated. Areas like Denver, while not all that healthy, may not do as badly because they began to deal with these problems several months ago. Overall, the markets will probably weather these effects; however, tax increases being considered the newly elected majority in congress could add to the problems created in the housing market.
I am Reminded of How Little All This Matters. This week-end a local real estate investor accidentally killed himself while trying to fix a jammed firearm. No longer will he be bothered by leaky faucets, complaining tenants, and fluctuating real estate prices and mortgage rates. He was only 41. As I attempted to find words to console his grieving family members, I was again reminded of similar situations where I spent hours trying to help clients solve what we thought were serious problems only to find out they weren't serious at all compared to what happened next. Each day is a gift. Appreciate it.
The Sub-Prime Mortgage Market Is a Great Example of Stupid Lenders and Stupid Consumers. Years ago, a number of lenders decided that it was more profitable to make loans to non-creditworthy borrowers at high rates, construct a diversified loan portfolio, and be willing to accept a higher foreclosure rate than it was to compete for borrowers with good credit histories who had numerous sources for rock-bottom interest rates. This worked well for awhile as suppliers of sub-prime mortgages were protected by higher down payments and rising home prices. Life was good. There were plenty of home buyers with credit problems anxious to be homeowners and plenty of investors hungry for higher yields willing to buy sub-prime paper. Real estate prices escalated as more people were able to buy homes now that they had the financing to do so. It even reached the point where increasing numbers of families were no longer satisfied with one residence, they had to own two. They weren't happy with 900 square foot homes like the average 1950's home, they had to own houses two and a half times that size, the average house size today. So where did it all go wrong.
Success Breeds Competition. There is an old economic axiom that says when one provider of goods and services begins to do very well, others will enter the marketplace and provide similar products which compete with the original provider. As more lenders entered the marketplace to compete for the existing borrowers, it became harder to originate enough loans to satisfy the investors, eager for higher yields. In other words, too much money chasing too few deals. To keep from lowering rates to attract more borrowers, lenders lowered their standards to the point that, instead of offering sub-prime loans, they were offering sub-sub-sub prime loans to borrowers who couldn't possibly afford the home they were buying. As home prices leveled off, these borrowers were trapped in homes they could no longer afford and couldn't sell. Delinquencies rose and the resulting increase in foreclosures were the natural consequence.
You Hate To Say That They Deserved It. Some lenders certainly did. Many borrowers, have the excuse of being financially unsophisticated. Lenders may not be all that sophisticated either since many loan officers entered the business with no experience in personal finance and no ability to advise borrowers of the risks of these loans. No one trained these loan officers to explain risk because their job was to sell loans not counsel borrowers. If they didn't sell loans they didn't get paid. In a sense, the entire industry was one in which there was a lack of business ethics and the consequences they are experiencing today were entirely predictable. A number of medium and relatively large sized sub-prime lenders are no longer economically viable and bankruptcy is only a matter of time. Shareholders in public companies have already seen most of their investment evaporate and the rest will soon follow.
It Will Take Awhile to Work Our Way Out of This Mess. A lot of homeowners are hanging onto homes hoping for some miracle to allow them to continue. Most will fail. This will keep a lid on prices, especially in areas where markets overheated. Areas like Denver, while not all that healthy, may not do as badly because they began to deal with these problems several months ago. Overall, the markets will probably weather these effects; however, tax increases being considered the newly elected majority in congress could add to the problems created in the housing market.
I am Reminded of How Little All This Matters. This week-end a local real estate investor accidentally killed himself while trying to fix a jammed firearm. No longer will he be bothered by leaky faucets, complaining tenants, and fluctuating real estate prices and mortgage rates. He was only 41. As I attempted to find words to console his grieving family members, I was again reminded of similar situations where I spent hours trying to help clients solve what we thought were serious problems only to find out they weren't serious at all compared to what happened next. Each day is a gift. Appreciate it.
Saturday, March 17, 2007
THINGS I'VE LEARNED.
About Long Term Care. Like most people, I had an outmoded opinion about nursing homes. I have met few, if any seniors who would choose to live in one. Over the past few years, I have had a number of experiences that have taught me a great deal about modern long care options.
1. Sometimes It Is The Only Choice. I have even had clients who have a clause in their will to dis-inherit any of the heirs who "put them in a nursing home". I have also observed situations where there is no family member capable of providing a satisfactory level of care and the lifestyle of the elderly relative becomes intolorable.
2. Even If Lonf Term Care Is Necessary, Not all Facilities Are The Same. Fifty years ago, the choices were very limited and it seemed as if none were places you would want to live in. Now there are several different levels of care from almost independent living facilities to skilled nursing care with several options in between. If you want to have influence on where you might live, don't wait until its too late and you are incapable of making a decision on your own.
3. Most Long-Term Care Policies Cover Little Of the Cost of A First Class Facility. People who think they can buy a $4,000 per month benefit and have little to worry about may be in for a big surprise First-class care is expensive. The bill for my Uncle's care for the past two months was $23,000. Granted, there were some extra costs because of a fall he incurred but these things happen more than you might want to think and the magnitude of the excess cost is surprising. In very few months have I paid the amount quoted when we signed up.
4. Goverment Paid Care Comes at a Huge Sacrifice in Quality. Medicaid will pay for nursing home care but many of the nicer facilities won't take medicare. If at all possible, you need to avoid having to depend on medicaid.
5. Staff is More Important Than Furnishings. We often feel like we have done our job when we walk through a facility and see fancy dining areas, hot tubs, swimming pools, exercise facilities, and well-tended gardens. These amenities may be more for our benefit more than for the patient. They assuage our guilt while the patient may lack the awareness to appreciate these benefits. Ask questions about personnel selection policies, average turnover, and employee satisfaction levels. If possible, talk to some of the lower level employees to get an idea of how they like their jobs.
6. Visit, Visit, Visit. This is very important. If your relative has dementia, he or she may not recognize you, but your visits will let staff know know it is important for you to make sure you care that your relative is being cared for. Show your appreciation by an occasional card or small gift for staff members. Often pay is at the low end of the scale and recognition that some one appreciates their dedication is important. Of course, you have to make sure that they can accept small tokens of appreciation without violating company policy.
Back in Texas. I spent a week in Denver and didn't have enough time to visit everyone I wanted. I also got home with a lung infection that has kept me down for a few days. This emphasizes my point that taking care of yourself is of increasing importance as we get older.
1. Sometimes It Is The Only Choice. I have even had clients who have a clause in their will to dis-inherit any of the heirs who "put them in a nursing home". I have also observed situations where there is no family member capable of providing a satisfactory level of care and the lifestyle of the elderly relative becomes intolorable.
2. Even If Lonf Term Care Is Necessary, Not all Facilities Are The Same. Fifty years ago, the choices were very limited and it seemed as if none were places you would want to live in. Now there are several different levels of care from almost independent living facilities to skilled nursing care with several options in between. If you want to have influence on where you might live, don't wait until its too late and you are incapable of making a decision on your own.
3. Most Long-Term Care Policies Cover Little Of the Cost of A First Class Facility. People who think they can buy a $4,000 per month benefit and have little to worry about may be in for a big surprise First-class care is expensive. The bill for my Uncle's care for the past two months was $23,000. Granted, there were some extra costs because of a fall he incurred but these things happen more than you might want to think and the magnitude of the excess cost is surprising. In very few months have I paid the amount quoted when we signed up.
4. Goverment Paid Care Comes at a Huge Sacrifice in Quality. Medicaid will pay for nursing home care but many of the nicer facilities won't take medicare. If at all possible, you need to avoid having to depend on medicaid.
5. Staff is More Important Than Furnishings. We often feel like we have done our job when we walk through a facility and see fancy dining areas, hot tubs, swimming pools, exercise facilities, and well-tended gardens. These amenities may be more for our benefit more than for the patient. They assuage our guilt while the patient may lack the awareness to appreciate these benefits. Ask questions about personnel selection policies, average turnover, and employee satisfaction levels. If possible, talk to some of the lower level employees to get an idea of how they like their jobs.
6. Visit, Visit, Visit. This is very important. If your relative has dementia, he or she may not recognize you, but your visits will let staff know know it is important for you to make sure you care that your relative is being cared for. Show your appreciation by an occasional card or small gift for staff members. Often pay is at the low end of the scale and recognition that some one appreciates their dedication is important. Of course, you have to make sure that they can accept small tokens of appreciation without violating company policy.
Back in Texas. I spent a week in Denver and didn't have enough time to visit everyone I wanted. I also got home with a lung infection that has kept me down for a few days. This emphasizes my point that taking care of yourself is of increasing importance as we get older.
Wednesday, February 28, 2007
MARKET MELTDOWN, WHY IT HAPPENED
What a Brutal Day in the Market! Virtually all our accounts took a hit. Including mine. Fortunately, I know exactly why the market went down. Because it went up. This answer may seem a bit trite but its as good as any of the very complex theories I have heard about China, the deficit, or the stand off in Iraq. Fact 1. Markets are cyclical. 2. Fact 2. Timing those cycles are impossible. Fact 3. There is no foolproof strategy. The good news is that you still own the same companies now that you owned before the correction and the changes in what the markets think they are worth have little or nothing to do with the viability of those enterprises.
My Philosophy For Most Clients Remains The Same. Construct portfolios from which the major component of our expected return on investment is cash flow. Most of these will be dividend paying stocks. Even though the value of most of the stocks went down along with the rest of the market, the cash flow produced from those portfolios showed no change. This morning, I received several e-mails from the brokerage firm I use telling me that I can expect numerous dividend checks in the next 30 days. This gives me money to fund living expenses if I need it or, more importantly, money to reinvest in new opportunities that may arise. One thing I noticed about the so-called "tech wreck" early this decade, was that those who took a huge hit on those non-dividend paying stocks, had no money to re-invest in the bargains that emerged.
Common Stocks Are The Majority of Our Investment Portfolios. Since stocks historically show I higher returns than bonds and other financial assets, most of our portfolios are in common stocks. This means that the cash flow produced is in the form of dividends. Besides providing income to fund living expenses, there are several other advantages to dividend-paying stocks. 1. History shows that dividend paying stocks are not as vulnerable to market downturns. 2. Most dividends are favorably taxed. 3. Our aging population favors stocks that produce income. The bottom line is that, instead of worrying about this market correction, we are looking forward to our next dividend check.
I Am Looking Forward To A Trip To Denver. I made reservations to fly to Denver on March 7. I will only be there a week but if you need to contact me, call our office and speak to Susan about an appointment. Please put in an order for some decent weather. An old snow bird has a tough time with the cold.
My Philosophy For Most Clients Remains The Same. Construct portfolios from which the major component of our expected return on investment is cash flow. Most of these will be dividend paying stocks. Even though the value of most of the stocks went down along with the rest of the market, the cash flow produced from those portfolios showed no change. This morning, I received several e-mails from the brokerage firm I use telling me that I can expect numerous dividend checks in the next 30 days. This gives me money to fund living expenses if I need it or, more importantly, money to reinvest in new opportunities that may arise. One thing I noticed about the so-called "tech wreck" early this decade, was that those who took a huge hit on those non-dividend paying stocks, had no money to re-invest in the bargains that emerged.
Common Stocks Are The Majority of Our Investment Portfolios. Since stocks historically show I higher returns than bonds and other financial assets, most of our portfolios are in common stocks. This means that the cash flow produced is in the form of dividends. Besides providing income to fund living expenses, there are several other advantages to dividend-paying stocks. 1. History shows that dividend paying stocks are not as vulnerable to market downturns. 2. Most dividends are favorably taxed. 3. Our aging population favors stocks that produce income. The bottom line is that, instead of worrying about this market correction, we are looking forward to our next dividend check.
I Am Looking Forward To A Trip To Denver. I made reservations to fly to Denver on March 7. I will only be there a week but if you need to contact me, call our office and speak to Susan about an appointment. Please put in an order for some decent weather. An old snow bird has a tough time with the cold.
Sunday, February 18, 2007
SHOULD YOU PAY OFF YOUR MORTGAGE?
The Answer to This Question is just Like Virtually All Others in Financial Planning. It depends. I have heard individuals say, "absolutely not! It's the only write off still available to the average person. This is probably the worst argument for keeping a mortgage since, even if you are in a high bracket, you are are spending a dollar to save 35 or so cents. I have heard others say, "Pay it off. You will always be able to keep your house no matter what happens." Sounds good, but probably not true in all cases since there are other expenses such as property tax, insurance and maintenance that can make a home unaffordable even if paid for.
The Right Decision Will Depend on the Answer to Several Questions.
1. Do You Have Sufficient Liquid Assets To Pay Off The Mortgage? By liquid assets, I mean assets that you can conveniently convert to cash. Bank Deposits and CD's come to mind. Selling stocks, bonds, or mutual funds, is another possibility providing you don't incur huge tax obligations. If your tax bracket is around 30%, you will have to withdraw $285,000 from your IRA to get enough funds to repay a $200,000 mortgage. probably not a good deal.
2. Will you Have Sufficient Liquidity After Paying off Your Mortgage? Even if you are only earning a pittance on your savings, it is best not to draw it down too low in order to pay off your mortgage. This may leave you with no funds for major purchases such as car repair, etc. Cars can be a major expense and it makes no sense to pay off your deductible interest home mortgage only to run up additional non-deductible debt to repair or purchase an automobile. I have recommended home equity lines of credit for liquidity purposes when paying off a mortgage. These sometimes work well; however, the major drawback is that these lines are often over used. Again, it does no good to repay your fixed-rate first mortgage debt and then replace it with variable rate home equity lines.
3. What Are You Earning On Your Savings/Investments? One of the most important questions to ask yourself is what you are earning on your investment accounts. If you are confining your investments to insured savings instruments, then it is highly unlikely that you will ever earn enough on those to justify holding a mortgage. After all, one of the major arguments for having a mortgage is that you can earn more on your investments than you pay on your mortgage. There are market conditions in which it is possible to earn more on your investments than the interest on home mortgages but it is rarely, if ever possible, to do so with anything approaching the same risk.
4. Storms Rule: Pay off Soon After Retirement or Not at All. What I mean by this is that, even if your loan has a short time left, you get little benefit from high principal payments towards the end of your life. Look at the following example: A 65 year old couple has a $95,000 mortgage with 14 years remaining. The Interest rate is a reasonable 6% and payments are $837 per month. Paying off the loan now will have big benefits in that it adds an additional $847 per month. If you can repay it now, that's fine but if you can't, it makes no sense to hold it, or even worse, add $150 per month in extra principal. The extra principal payment cuts the loan down to 11 years from 14. Big deal, you will be 76 years old when your home is paid off and you have sacrificed $987 per month during the most enjoyable years of your retirement to do so. You may think this recommendation is crazy but, if you can't get the benefit of the extra cash flow by paying it off soon, a better option is to refinance the mortgage to a 30-year term even if you have to pay 6.25% on your new loan compared to 6% on the old one. Payments on the new loan are $584 per month, a savings of $252 over the old loan. Over a years time, the extra $3000 will pay for a nice vacation at a time when you are young enough to enjoy it.
Mortgage Decisions are Complex. Too often, people make decisions based on rules of thumb or "common sense". Making the wrong decision can have huge implications on your retirement comfort and security. Make sure you understand all the implications before you make a major move. Your best friend in making these decisions is a financial calculator, not some rule of thumb offered by a financial writer who knows nothing about your particular situation.
The Right Decision Will Depend on the Answer to Several Questions.
1. Do You Have Sufficient Liquid Assets To Pay Off The Mortgage? By liquid assets, I mean assets that you can conveniently convert to cash. Bank Deposits and CD's come to mind. Selling stocks, bonds, or mutual funds, is another possibility providing you don't incur huge tax obligations. If your tax bracket is around 30%, you will have to withdraw $285,000 from your IRA to get enough funds to repay a $200,000 mortgage. probably not a good deal.
2. Will you Have Sufficient Liquidity After Paying off Your Mortgage? Even if you are only earning a pittance on your savings, it is best not to draw it down too low in order to pay off your mortgage. This may leave you with no funds for major purchases such as car repair, etc. Cars can be a major expense and it makes no sense to pay off your deductible interest home mortgage only to run up additional non-deductible debt to repair or purchase an automobile. I have recommended home equity lines of credit for liquidity purposes when paying off a mortgage. These sometimes work well; however, the major drawback is that these lines are often over used. Again, it does no good to repay your fixed-rate first mortgage debt and then replace it with variable rate home equity lines.
3. What Are You Earning On Your Savings/Investments? One of the most important questions to ask yourself is what you are earning on your investment accounts. If you are confining your investments to insured savings instruments, then it is highly unlikely that you will ever earn enough on those to justify holding a mortgage. After all, one of the major arguments for having a mortgage is that you can earn more on your investments than you pay on your mortgage. There are market conditions in which it is possible to earn more on your investments than the interest on home mortgages but it is rarely, if ever possible, to do so with anything approaching the same risk.
4. Storms Rule: Pay off Soon After Retirement or Not at All. What I mean by this is that, even if your loan has a short time left, you get little benefit from high principal payments towards the end of your life. Look at the following example: A 65 year old couple has a $95,000 mortgage with 14 years remaining. The Interest rate is a reasonable 6% and payments are $837 per month. Paying off the loan now will have big benefits in that it adds an additional $847 per month. If you can repay it now, that's fine but if you can't, it makes no sense to hold it, or even worse, add $150 per month in extra principal. The extra principal payment cuts the loan down to 11 years from 14. Big deal, you will be 76 years old when your home is paid off and you have sacrificed $987 per month during the most enjoyable years of your retirement to do so. You may think this recommendation is crazy but, if you can't get the benefit of the extra cash flow by paying it off soon, a better option is to refinance the mortgage to a 30-year term even if you have to pay 6.25% on your new loan compared to 6% on the old one. Payments on the new loan are $584 per month, a savings of $252 over the old loan. Over a years time, the extra $3000 will pay for a nice vacation at a time when you are young enough to enjoy it.
Mortgage Decisions are Complex. Too often, people make decisions based on rules of thumb or "common sense". Making the wrong decision can have huge implications on your retirement comfort and security. Make sure you understand all the implications before you make a major move. Your best friend in making these decisions is a financial calculator, not some rule of thumb offered by a financial writer who knows nothing about your particular situation.
Tuesday, February 13, 2007
REVERSE MORTGAGES ENHANCE YOUR CASH FLOW
Reverse Mortgages Are An Under-Utilized Resource. What is the best kind of loan to get? One that you don't have to repay until you die. Perhaps that is not totally true of reverse mortgages but it comes close if your plan is to live out the rest of your life in your present home. Of course plans can change. In the event of the death of a spouse, you can stay in your home if you desire; however, if you decide to move the loan is due and payable. If you are forced to move to a skilled nursing facility for health reasons, the loan is due and payable when you or your spouse no longer occupy the home as your primary residence.
Use your Home Equity for Income. If an income stream is what you want, your home must be free, or nearly free, of encumbrances. You can get an idea of how the income option works at www.maarp.com/estimates.asp. As an example, suppose you own a free and clear $200,000 home in my Texas zip code of 77663. Suppose your date of birth is January of 1938 and your spouse birth date is August of 1941. Using the above website, I determined that my spouse and I could get an income stream of $617 per month for life, or as long one of us lives, or until we decide to move out of the house. When this occurs, the mortgage must be repaid from other assets or sale of the property. You don't give up the benefits of ownership and any appreciation in value belongs to you or your heirs, providing there is sufficient equity to repay the mortgage. In the unlikely event that the mortgage is more than the value of the house, the loss belongs to the mortgage lender and not your estate. Since this income is borrowed money, you don't have to pay income tax on the funds received.
Use A Reverse Mortgage to Repay your Standard Mortgage. Many of the next generation of retirees will go into retirement with a mortgage on their residence. If you are one of these, you can use the reverse mortgage to repay that mortgage and you no longer have to make monthly payments. Suppose the couple in the previous example, owe $90,000 on their home. Suppose the loan is $90,000 with an interest rate of 6.5% and 10 years remaining. Payments on that loan are approximately $1022 per month. You can use a reverse mortgage to pay the loan and have an extra $1,022 to spend each month. Is this advisable? Each case is different depending on your life situation. If you took out a mortgage at a low interest rate with interest only payments for 5 years and you are facing huge increase in payments, the reverse mortgage can be a viable alternative. If the mortgage is too large to be repaid by the reverse mortgage, you might want to add cash. The freedom of no payments for as long as you live in the home may well be worth the cash expenditure.
Use A Reverse Mortgage When You Buy Your Home. Suppose you sold a free and clear $150,000 home and you have your heart set on a townhouse in a retirement community with considerable amenities. The only problem is that this home is $240,000. You can't tolerate the idea of making payments again and you can't get your hands on another $90,000 without having to access your IRA with considerable tax consequences or sell stock and incur huge capital gains. Further, suppose you have less than perfect credit and are not sure you can qualify for a conventional mortgage. You can borrow $90,000 on a reverse mortgage and move into your desired home with no payments. Poor credit is not a barrier to obtaining a reverse mortgage.
Reverse Mortgage Amounts Vary. A reverse mortgage is a complex product. The amount of money you can get depends on your age, the appraised value of your home, and the interest rate at the time of funding. In the current environment with higher short-term rates and falling appraisals, you may not be able to receive the benefits you could have obtained a couple of years ago. In general, the higher your appraisal and the lower the rates on one year treasuries, the more benefits you can obtain. Another barrier to the viability of reverse mortgages is the presence of a large first mortgage on the property. Since a lot of home owners pulled cash out of their residences during the recent low mortgage rate environment, many future retirees may be carrying larger mortgages into retirement. If the maximum reverse mortgage amount isn't sufficient to retire the current mortgage and the home owner doesn't have cash required to pay down the mortgage, a reverse mortgage won't be a viable option. If you are planning retirement in the near future, it may be to your advantage to look at your reverse mortgage options now and making a plan as to how you might use this option.
Disadvantages of Reverse Mortgages. There are many benefits to reverse mortgages however, there are some disadvantages. One of these is relatively high closing costs. Since these are paid with borrowed money, they become less significant over longer time frames; however, if you plan to move within two or three years, you probably don't want to incur a reverse mortgage. If your home has considerable sentimental value to family members, you may not want to incur a reverse mortgage, especially if there are few other assets in the estate to repay the mortgage should your family members want to keep it. One caveat is that there are occasional abuses of these mortgages. Some of these allow a lender to share in the appreciation of the property at the time of repayment. These are often accompanied by artificially low appraisals which make it appear as the home has appreciated more than it really has. Be extremely careful of who you do business with. You can obtain a lot of information from the web link cited above. Better yet, have a well informed advisor to help guide you through the process. Call or e-mail me if you would like me to be that advisor.
Use your Home Equity for Income. If an income stream is what you want, your home must be free, or nearly free, of encumbrances. You can get an idea of how the income option works at www.maarp.com/estimates.asp. As an example, suppose you own a free and clear $200,000 home in my Texas zip code of 77663. Suppose your date of birth is January of 1938 and your spouse birth date is August of 1941. Using the above website, I determined that my spouse and I could get an income stream of $617 per month for life, or as long one of us lives, or until we decide to move out of the house. When this occurs, the mortgage must be repaid from other assets or sale of the property. You don't give up the benefits of ownership and any appreciation in value belongs to you or your heirs, providing there is sufficient equity to repay the mortgage. In the unlikely event that the mortgage is more than the value of the house, the loss belongs to the mortgage lender and not your estate. Since this income is borrowed money, you don't have to pay income tax on the funds received.
Use A Reverse Mortgage to Repay your Standard Mortgage. Many of the next generation of retirees will go into retirement with a mortgage on their residence. If you are one of these, you can use the reverse mortgage to repay that mortgage and you no longer have to make monthly payments. Suppose the couple in the previous example, owe $90,000 on their home. Suppose the loan is $90,000 with an interest rate of 6.5% and 10 years remaining. Payments on that loan are approximately $1022 per month. You can use a reverse mortgage to pay the loan and have an extra $1,022 to spend each month. Is this advisable? Each case is different depending on your life situation. If you took out a mortgage at a low interest rate with interest only payments for 5 years and you are facing huge increase in payments, the reverse mortgage can be a viable alternative. If the mortgage is too large to be repaid by the reverse mortgage, you might want to add cash. The freedom of no payments for as long as you live in the home may well be worth the cash expenditure.
Use A Reverse Mortgage When You Buy Your Home. Suppose you sold a free and clear $150,000 home and you have your heart set on a townhouse in a retirement community with considerable amenities. The only problem is that this home is $240,000. You can't tolerate the idea of making payments again and you can't get your hands on another $90,000 without having to access your IRA with considerable tax consequences or sell stock and incur huge capital gains. Further, suppose you have less than perfect credit and are not sure you can qualify for a conventional mortgage. You can borrow $90,000 on a reverse mortgage and move into your desired home with no payments. Poor credit is not a barrier to obtaining a reverse mortgage.
Reverse Mortgage Amounts Vary. A reverse mortgage is a complex product. The amount of money you can get depends on your age, the appraised value of your home, and the interest rate at the time of funding. In the current environment with higher short-term rates and falling appraisals, you may not be able to receive the benefits you could have obtained a couple of years ago. In general, the higher your appraisal and the lower the rates on one year treasuries, the more benefits you can obtain. Another barrier to the viability of reverse mortgages is the presence of a large first mortgage on the property. Since a lot of home owners pulled cash out of their residences during the recent low mortgage rate environment, many future retirees may be carrying larger mortgages into retirement. If the maximum reverse mortgage amount isn't sufficient to retire the current mortgage and the home owner doesn't have cash required to pay down the mortgage, a reverse mortgage won't be a viable option. If you are planning retirement in the near future, it may be to your advantage to look at your reverse mortgage options now and making a plan as to how you might use this option.
Disadvantages of Reverse Mortgages. There are many benefits to reverse mortgages however, there are some disadvantages. One of these is relatively high closing costs. Since these are paid with borrowed money, they become less significant over longer time frames; however, if you plan to move within two or three years, you probably don't want to incur a reverse mortgage. If your home has considerable sentimental value to family members, you may not want to incur a reverse mortgage, especially if there are few other assets in the estate to repay the mortgage should your family members want to keep it. One caveat is that there are occasional abuses of these mortgages. Some of these allow a lender to share in the appreciation of the property at the time of repayment. These are often accompanied by artificially low appraisals which make it appear as the home has appreciated more than it really has. Be extremely careful of who you do business with. You can obtain a lot of information from the web link cited above. Better yet, have a well informed advisor to help guide you through the process. Call or e-mail me if you would like me to be that advisor.
Thursday, February 08, 2007
SO LONG QUALCOM
I Should Have Picked A Different Example. It turns out that Qualcom wasn't a good example to use to illustrate the process of selling naked put options. In the best case scenario, the price of the stock holds steady or increases slightly. In the worst case, it drops like a rock and you have to either buy the option back or resign yourself to owning a stock at considerably below the current market price. In this case, it did neither. The stock gradually dropped from the original $38.87 to yesterday's price of $37.55.
The Price of the Put Option Also Dropped Slightly. As of yesterday, the price of a put option was $.50. Remember, we want the price of the option to drop since this gives us a chance to buy it back for less than we sold it for. I had a number of alternatives at that point. I could have held on and hoped that the price of the stock would either hold steady or increase slightly. I could have also bought back the option and either written a new one for March and pocketed another $600 as either a profit or a hedge for when I eventually had to buy the stock at $37.50. There were other alternatives which I won't discuss at this point.
I Got Boring Of It. That bit of unusual grammar came from my grandson when he was four years old and decided to abandon a book he was reading. For several reasons, I made the decision to exit the position. I didn't like the fact that the stock didn't appear to be following increasing market trends and I didn't want to own another 1000 shares. (I didn't mention that I own 1000 shares of qualcom in another account.) So I bought back the stock for a measly $300 profit. While this is a long way from a home run, 300 bucks will buy my next airplane ticket to Denver and it was created with virtually no capital expenditure. In case you think that brokerage commissions will take all my profit, let me explain that I use a low cost on-line brokerage and I paid $15 when I sold the option and another $15 when I bought it back so my overall gain is $270 and I am off to make another trade.
I Am Not Sure This Exercise Was Valuable to My Readers. I'm not sure I dd a good job of explaining the dynamics of this type of trading strategy. It is easy to become bored with so much rhetoric to explain a process that sounds so simple but contains a number of decision points. Perhaps this is a better topic for a seminar with charts, etc than it is for a written description. I will think about this before offering additional examples.
The Weather Here is Beautiful. Temperatures are in the 70's and I can see numerous premature azalea blossoms out my office window. The camellias are in full bloom outside the living room window. Its far too beautiful to spend a lot of time inside trading options. I'll try to dream up something more interesting for my next post.
The Price of the Put Option Also Dropped Slightly. As of yesterday, the price of a put option was $.50. Remember, we want the price of the option to drop since this gives us a chance to buy it back for less than we sold it for. I had a number of alternatives at that point. I could have held on and hoped that the price of the stock would either hold steady or increase slightly. I could have also bought back the option and either written a new one for March and pocketed another $600 as either a profit or a hedge for when I eventually had to buy the stock at $37.50. There were other alternatives which I won't discuss at this point.
I Got Boring Of It. That bit of unusual grammar came from my grandson when he was four years old and decided to abandon a book he was reading. For several reasons, I made the decision to exit the position. I didn't like the fact that the stock didn't appear to be following increasing market trends and I didn't want to own another 1000 shares. (I didn't mention that I own 1000 shares of qualcom in another account.) So I bought back the stock for a measly $300 profit. While this is a long way from a home run, 300 bucks will buy my next airplane ticket to Denver and it was created with virtually no capital expenditure. In case you think that brokerage commissions will take all my profit, let me explain that I use a low cost on-line brokerage and I paid $15 when I sold the option and another $15 when I bought it back so my overall gain is $270 and I am off to make another trade.
I Am Not Sure This Exercise Was Valuable to My Readers. I'm not sure I dd a good job of explaining the dynamics of this type of trading strategy. It is easy to become bored with so much rhetoric to explain a process that sounds so simple but contains a number of decision points. Perhaps this is a better topic for a seminar with charts, etc than it is for a written description. I will think about this before offering additional examples.
The Weather Here is Beautiful. Temperatures are in the 70's and I can see numerous premature azalea blossoms out my office window. The camellias are in full bloom outside the living room window. Its far too beautiful to spend a lot of time inside trading options. I'll try to dream up something more interesting for my next post.
Wednesday, February 07, 2007
ME AND MR NOLAN.
Is 69 Years Old Too Old To Need a Mentor? At this age, you would think I would be a mentor instead of needing one. I do serve in that role for a number of family members and some clients but every now and then I need someone to show me the way as well. I am reminded of a movie that I saw a number of years ago about a man who went "middle age crazy" after the death of his father. One statement from that movie sticks in my mind: "I don't wanna be the daddy." Being the "daddy" carries numerous responsibilities that occasionally seem burdensome. Not that I am complaining. I enjoy my role but sometimes I just feel like sneaking away from it and doing something stupid now and then. Fortunately, I still have my dad who is 88 years old, immensely successful, and full of good old common sense wisdom. He is indeed my mentor. But I still miss another mentor who passed away in July of 2000. He was my wife's father, Mr. Nolan Boyd. Another outstanding individual.
Mr. Nolan Was Born On A Farm In Texas in 1913. He was no stranger to manual labor. There was cotton to be picked, grain to be harvested, and stock to be tended. As a teenager, he worked hard in school, read virtually all the books in the small, local library and had aspirations of achieving a college education. Despite his father's objections, he left Texas at 16 and went to Kansas to pursue his dream. He later transferred to North Texas State University in Denton and completed his education. He was obviously a rarity at that time when very few individuals were able to obtain a college degree in the middle of a depression. He taught school at the age of 19. He left teaching and went to work as a retail manager shortly before the start of WWII. He returned to the same job after the war, stayed there the rest of his career, worked hard every day, and raised three children, all of whom were well educated.
The Outstanding Thing About Mr. Nolan was his devotion To His Community. He did everything from selling brooms for the Lions Club to serving on the local school board. He was an elder in his church and taught Sunday School for virtually his entire adult life. At a time when racism was rampant in the south, he was adamant that no one in his family could make derogatory remarks about any ethnic group. He had a very strong set of values and he lived them every day.
I Spent a Lot of Time With Mr. Nolan. He loved the fact that I was his opposite politically and could discuss issues with him for hours without ever getting mad. We spent hours fishing on the dock in back of my house. He taught me a lot by his example. When he died almost 7 years ago, I missed him right away. Over the past few years, I have often wished I could have his counsel on a number of matters.
Ten Years of Journals Have Been Helpful. Mr. Nolan did leave a legacy that has been invaluable to me. He kept a daily journal for almost 10 years. He was a good writer and wrote faithfully almost every day. Last spring, I decided I would read all those journals from beginning to end. I felt I owed it to him but but the main beneficiary turned out to be me. I learned a lot from that first hand account of how he lived his life, made decisions, and decided what was important and what was not. Those journals turned out to be an amazing legacy which can benefit future generations who take the time to read them.
Anna Quindlen Wrote A Recent Newsweek Article About Journals. "Wouldn't all of us love to have a journal , a memoir, a letter, from those we have loved and lost? Shouldn't all of us leave a bit of that behind?" Following Mr. Nolan's example, I started keeping a journal in 1995. I have volumes of dusty old journals in my Colorado townhouse. They have helped me manage my life and make decisions as I decide what's worth writing about each day. They also help me by providing a resource to check back years ago to see what my life was like and how I felt about important issues a long time ago. I hope they will be of value to future family members as they wonder how things were before they were born.
Most Of Us Want to Leave a Legacy For Our Family. All too often we think only of the physical and financial legacy we will leave. Perhaps we should think of the intangibles that often prove to be more valuable than anything else we could leave behind.
Mr. Nolan Was Born On A Farm In Texas in 1913. He was no stranger to manual labor. There was cotton to be picked, grain to be harvested, and stock to be tended. As a teenager, he worked hard in school, read virtually all the books in the small, local library and had aspirations of achieving a college education. Despite his father's objections, he left Texas at 16 and went to Kansas to pursue his dream. He later transferred to North Texas State University in Denton and completed his education. He was obviously a rarity at that time when very few individuals were able to obtain a college degree in the middle of a depression. He taught school at the age of 19. He left teaching and went to work as a retail manager shortly before the start of WWII. He returned to the same job after the war, stayed there the rest of his career, worked hard every day, and raised three children, all of whom were well educated.
The Outstanding Thing About Mr. Nolan was his devotion To His Community. He did everything from selling brooms for the Lions Club to serving on the local school board. He was an elder in his church and taught Sunday School for virtually his entire adult life. At a time when racism was rampant in the south, he was adamant that no one in his family could make derogatory remarks about any ethnic group. He had a very strong set of values and he lived them every day.
I Spent a Lot of Time With Mr. Nolan. He loved the fact that I was his opposite politically and could discuss issues with him for hours without ever getting mad. We spent hours fishing on the dock in back of my house. He taught me a lot by his example. When he died almost 7 years ago, I missed him right away. Over the past few years, I have often wished I could have his counsel on a number of matters.
Ten Years of Journals Have Been Helpful. Mr. Nolan did leave a legacy that has been invaluable to me. He kept a daily journal for almost 10 years. He was a good writer and wrote faithfully almost every day. Last spring, I decided I would read all those journals from beginning to end. I felt I owed it to him but but the main beneficiary turned out to be me. I learned a lot from that first hand account of how he lived his life, made decisions, and decided what was important and what was not. Those journals turned out to be an amazing legacy which can benefit future generations who take the time to read them.
Anna Quindlen Wrote A Recent Newsweek Article About Journals. "Wouldn't all of us love to have a journal , a memoir, a letter, from those we have loved and lost? Shouldn't all of us leave a bit of that behind?" Following Mr. Nolan's example, I started keeping a journal in 1995. I have volumes of dusty old journals in my Colorado townhouse. They have helped me manage my life and make decisions as I decide what's worth writing about each day. They also help me by providing a resource to check back years ago to see what my life was like and how I felt about important issues a long time ago. I hope they will be of value to future family members as they wonder how things were before they were born.
Most Of Us Want to Leave a Legacy For Our Family. All too often we think only of the physical and financial legacy we will leave. Perhaps we should think of the intangibles that often prove to be more valuable than anything else we could leave behind.
Friday, February 02, 2007
Vision and Action.
Want A Different Life In The Future, Start With A Vision. Four years ago I decided it was time to change my life. I had just turned 65 and I wanted more freedom. A life less tied to going into my office every day. A life with less stress. So what was my first step. I bought a spiral notebook. On the first page, I started a little exercise in which I imagined it was five years in the future. Then I wrote a little more than a page describing what my life was like. Where I lived, what my daily activities were, what my hobbies were, how I was deriving the income necessary to fund my lifestyle, and what I was doing to help my family. I put the notebook down and picked it up a few days later. I re-read it carefully several times, made a few changes and re-wrote the final version. I call the process I just described as developing a vision statement. The more you develop a detailed and comprehensive vision statement, the more likely you are to get to where you want to be.
Why aren't you living that life now? Ask yourself what is keep you from living that vision right now. Take an inventory. What are your strengths and weaknesses? What needs to be changed to get you to where you want to be? Do you need more investment assets? Do you need to improve your relationships with your family and friends? Do you need to change your spending habits? Abandon an addiction? Improve your Health? These are but a few things that come to mind. Everyone's questions and answers will be different. Write all this down in your spiral notebook and refer to it from time to time as you work towards achieving your vision.
What Steps Can You Take To Remove Obstacles? Write down some steps you can take right now. Keep writing, revising, and re-writing until you have a clear plan to get where you want to be.
Put Your Plan Into Action. Start working on the steps you have identified. Refer to your notebook at least once a week and make notes as to your progress, obstacles removed, and obstacles remaining. You might even uncover some new obstacles you have to deal with. One thing is clear to me after 4 years of working with my spiral notebook. It works. Much of what I learned in my financial planning training is of little use here. I can remember putting together long computer print outs projecting a client's financial situation far into the future. It was boring and it did little more than collect dust. A five dollar spiral notebook and a few hours thinking an reflecting have proven much more valuable to me than 200 pages of computer printouts.
A Few Final Words. A wise man once said, "Vision without action is merely a dream. Action without vision just passes the time. Vision with action can change the world." I've never wanted to change the world. Just my little corner of it.
Why aren't you living that life now? Ask yourself what is keep you from living that vision right now. Take an inventory. What are your strengths and weaknesses? What needs to be changed to get you to where you want to be? Do you need more investment assets? Do you need to improve your relationships with your family and friends? Do you need to change your spending habits? Abandon an addiction? Improve your Health? These are but a few things that come to mind. Everyone's questions and answers will be different. Write all this down in your spiral notebook and refer to it from time to time as you work towards achieving your vision.
What Steps Can You Take To Remove Obstacles? Write down some steps you can take right now. Keep writing, revising, and re-writing until you have a clear plan to get where you want to be.
Put Your Plan Into Action. Start working on the steps you have identified. Refer to your notebook at least once a week and make notes as to your progress, obstacles removed, and obstacles remaining. You might even uncover some new obstacles you have to deal with. One thing is clear to me after 4 years of working with my spiral notebook. It works. Much of what I learned in my financial planning training is of little use here. I can remember putting together long computer print outs projecting a client's financial situation far into the future. It was boring and it did little more than collect dust. A five dollar spiral notebook and a few hours thinking an reflecting have proven much more valuable to me than 200 pages of computer printouts.
A Few Final Words. A wise man once said, "Vision without action is merely a dream. Action without vision just passes the time. Vision with action can change the world." I've never wanted to change the world. Just my little corner of it.
Wednesday, January 31, 2007
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.
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.
Monday, January 29, 2007
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.
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.
Thursday, January 25, 2007
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.
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.
Saturday, January 20, 2007
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.
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.
Monday, January 15, 2007
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.
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.
Friday, January 05, 2007
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.
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.
Monday, December 25, 2006
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.
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.
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