THE IMPORTANT THINGS.

The Goal of Life is Living In Agreement With Nature."
Zeno, written in ~335BC


I Love This Place. I know most of my readers check this blog to find out about financial topics. I agree this is my main function and I spend a considerable amount of time studying the financial markets. On the other hand, I don't want to overlook the really important things in life. We bought this place in 1995, not because it was a spectacular house but because it puts us in closer contact with nature. It is an acre in the woods and, although that is a "micro spread" by Texas standards, it's affordable and about all I can take care of.


What's In Store For Your Retirement? In my last post, I discussed the importance of the ability to earn income. I hope no one took that to mean that it was important to live out your life in a job you hate. My first career as a chemist was fascinating to me....for the first 10 years. Things change and domestic chemical companies began to put less and less emphasis on research. My favorite job was at Marathon Oil Company on 7400 S. Broadway. If you drive by today, you'll see what was once a beautiful research campus turned into a vacant field which will probably someday be turned into a luxury housing development. When I ended up in management at a production facility, the job was no longer fulfilling. In a sense, I retired at age 41 when I entered a profession for which I had little in the way of formal training. At age 71, I still enjoy my second career, although I can hardly call it work.


The Important Thing Is Freedom. For me, the important thing is to be able to do the things I find fulfilling. That's why I was happy doing research and why I enjoy my life so much now. In my life, that's the purpose of money. Assets mean little. What is important is the ability to generate cash flow from those assets. It is that cash flow that allows me the freedom to study, read, write, play music, and do the things I want. Hence the name of this blog. Despite the problems I've encountered in the markets of late, I still want to concentrate on building income streams rather than increasing the value of my assets. This might not be the right objective for you. I highly recommend that everyone spend considerable time developing goals for their "retirement" before attempting to develop an investment strategy.


Still Working On My Reverse Mortgage. My biggest problem was finding someone interested. The only institution with appropriate follow up was Bank of America. I would guess that I'm 60% through with the process. I still recommend that clients interested in cash flow consider a reverse mortgage as a vehicle. While they might not be right for you, they can be used in a variety of ways to increase your cash flow including providing an lifetime guaranteed income, cash to invest, or eliminating current mortgage payments. For those worried about heirs, ask yourself which your heirs would prefer: A free and clear house or other assets that you have preserved because you got extra income from your house.


Looking Forward To Seeing You In Colorado. I will be there from April 14-22. Call Susan or send me an email if you want an appointment. Susan can be reached at 720-449-0200. If you have an ARM or sub-prime mortgage and you want to take advantage of the current low rate environment, this would be a good time to discuss it.

POLITICAL SOLUTIONS vs ECONOMIC TRADE OFFS

“The question on the minds of many in Congress and the White House is this: What they should be doing to keep the economy on track? The right answer: absolutely nothing.” Gregory Mankiw, Harvard professor and former chairman of the Counsel of Economic Advisors.

How About Those AIG Executive Bonuses! These bonuses were given out with taxpayer money to people who did little to deserve them. The bonuses are disgraceful but who was responsible? The answer is Congress. The bill that they passed contained specific language that allowed bonuses for which the company was contractually liable. The problem was that the bill was over 1000 pages and few, if any who voted on it were able to read all of it prior to the vote. This is a perfect example of stage one thinking which considers only the immediate consequences of a proposed solution. What happens in subsequent stages in which the company executives continue to take unrealistic compensation and further attempts by Congress to rectify the situation interfere with the operations of what should be a private enterprise? What about the next proposed Congressional solution which involves using the IRS to confiscate these executive bonuses? Will they be coming after your “excessive compensation” next. In his book Applied Economics, Thomas Sowell writes that politics proposes attractive solutions but economics permits only trade offs.

Did You Lose Patience and Get out of the Market Two Weeks Ago. If you did you missed out on a rally of 18.76%. Some of the stocks that I follow increased even more. Bank of America was up 148% and AT&T was up 23.9%. As I mentioned before, it is appears to be too late to sell but too early to by aggressively. For the most part, I am limiting my investment activity to stocks with attractive option premiums that can give me a bit of an edge. While this doesn’t always work, I believe it does provide me with some downside protection and interim cash flow. I don’t know in which direction the market will move next but I believe the upside potential is greater than the downside. My objectives are little different now than it was before the market dropped: Preserve my capital and do what I can to coax current income from my portfolio.

What is Your Most Important Asset? A recent article in Time says that it is your job. I tend to agree, especially if you are younger than 70. I have always said that the best investment you can make is in your ability to earn income. Despite being a year past 70, I still consider my knowledge of personal finance and my ability to generate income as the most important financial asset I have.

Looking At Another Trip To Colorado. I have reservations for a trip to Colorado in mid April. If you want to schedule a meeting give Susan a call at 720-449-0200.

SIGNALS FROM THE MARKET.

"Finance is art of passing money fromhand to hand until it finally disappears."--Robert Sarnoff

Signs Of Stability Or A Sucker Rally. As of today (Thursday, March 12) the Dow Jones Industrial average has increased 576 points or 8.7% from a week ago. While it is likely too early to tell if this represents a real reversal or a major rally within a bear market, there are some signals that indicate that the market is potentially nearing a bottom. Obviously, no one knows; however, there are some interesting signals.

1. Mark to Market. This is an accounting rule that has played havoc with financial services companies that invest in relatively illiquid assets. These companies include, but are not limited to some banks, business development companies, and real estate investment trusts (REITs). The rule states that assets owned by corporations must be carried on the books at the fair market value as if sold in the open market. While this sounds logical, at times markets for these illiquid assets are limited (that's why they're called illiquid assets). Marking these assets down to the price available in a non-existant market makes it necessary for banks to add massive amounts of capital. It also makes it difficult for REITs to use leverage to finance their real estate purchases. There is now a congressional committee meeting to evaluate the possibility of relaxing these rules for some assets. This would be a tremendous benefit to the markets and make it unnecessary for banks to keep asking for government money.

2. Return to Profitablity for Some Banks. Both Citigroup and Bank of America have stated that they have been profitable for the first two months of the year. We will have to wait awhile to find out just how profitable these institutions may be but even a small profit would be a shot in the arm for the market.

3. Less Fear In The Market. This is measured quantitatively by the Vix, a statistic published by the Chicago Board Options Exchange (CBOE). Although it is not a totally reliable index, that value has dropped from a previously unheard of maximum of 80+ to just above 40. This is at the upper end of the historic range but it does signal a reduction in volatility which is usually associated with fear.

So What Does It All mean? I definitely believe there is more upside than downside in the market right now, particularly in financial institutions. If Citicorp and Bank of America return to profitability and if realistic changes are made in the mark to market rules, we can expect a major rally in bank stocks, although not nearly to previous highs. Caution is definitely the watchword and, while it is definitely too late to sell, it may also be too early to buy aggressively. A small bet in the financial and energy sectors could be appropriate; however, a larger than normal allocation to cash is probably still prudent.

What About Real Estate. Single family home prices in the Denver Metro area dropped 10% or more from last year and unsold inventory is still too high to predict a rally. Rental rates are also dropping. One sign that predicts a recovery is the reduction in housing permits issued. These have gradually dropped from 38,000+ in 2006 to 30,000+ in 2007 and just over 19,000 in 2008. If this trend continues, it is only a matter of time until the surplus in inventory turns to a shortage as it did in 1991. Unless you are in an area in which prices have held relatively steady, you probably don't want to sell unless you are forced to. If you have to sell, remember that the market pays for houses that are clean and well staged. If you just throw it on the market, remember you are competing with foreclosures and short sales which usually have to be sold at a discount to market value.

President Obama and the New, New Deal.

Failure is part of the natural cycle of business. Companies are are born, companies die, capitalism moves forward.--Fortune Magazine.

Now is A Good Time To Read About the Great Depression. I recently read a book by Amity Shlaes entitled, The Forgotten man. She wrote in detail about Hoover and Roosevelt and how they attempted to deal with sudden deflation, high unemployment, and a drastically reduced standard of living for the average lower and middle income family. Her description of that time shows some strong similarities to the economic environment today. As an example, consider the resentment of the working class and the high salaries and bonuses of company executives. In 1931, congress debated legislation barring government loans to companies where the CEO made in excess of $15,000 per year. Recently, there have been similar debates over barring government assistance to companies where the CEO earned more than $500,000 a year. These numbers are equivalent if we allow for increases of 4.7% per year in CEO salaries.

The House Has Passed a Bill Allowing Judges To Reduce The Balance On A Loan.
This bill hasn't passed the senate yet however, there is widespread support among middle class Americans who want to allow many families facing foreclosure to keep their homes. This is similar to the Frazier-Lemke Act of the 1930's which limited the ability of banks to repossess properties. In 1935, the Supreme Court overturned that act saying, "even a contract between a starving farmer and a nasty bank has to be honored, and the government does not have the right to intervene."

Central Planning vs Free Markets. One of the biggest political controversies right now is whether the government should utilize a total "hands off" policies towards business or whether they should utilize a more "heavy handed" approach. Those who favor a total free market approach tend to believe that supply/demand and pricing mechanisms will regulate the markets far better than government attempts to use central planning as a means of providing stability. Free market advocates tend to believe that there are so many complex interactions in the marketplace that it would be impossible for governments to do an adequate job. Those who prefer a central planning approach point to recent abuses by wall street and industry as an example of why we cannot trust the markets to regulate themselves. Both sides have a point; however, I tend to believe we should err on the side of minimal government intervention. Taken to the extreme, either approach can prove disastrous. Even during the great depression, there were numerous examples of government intervention that went too far. Right after a famous case in which the Supreme Court found against the government's intervention attempt to control the operation of a small chicken slaughtering operation, Justice Brandeis warned government lawyers that "This is the end of this business of centralization, and I want you to go back and tell the president that we're not going to let this government centralize everything."

Now is a Time To Be Wary of Both Business and Government. Somehow we have to strike a balance between regulating everything or allowing business to continue with the excesses of the past. The free market has allowed corporations to be run for the benefit of executives in some cases and union employees in others. This has been at the expense of shareholders in some cases but may end up at the expense of tax payers in the future. As difficult as it may be to let some large corporations (banks and car companies) fail. It may be the least painful in the long run.

POLITICS AND ECONOMICS

"If you want a non-political solution to a problem, don't ask 535 politicians to provide it."--Barney Frank

Comments On The Stimulus Package. Just about all the time, Barney Frank and I disagree on just about everything but the statement above is one of the most honest and insightful statements I have heard from a politician. I must admit that I distrust the government to make critical decisions about our future. Too many just want to assure their re-election regardless of what is good for the rest of us. Yet, the previous few months have seen virtually unlimited government intervention in the private sector. Not that they weren't asked. One thing I have learned about some of conservatives is that they claim to dislike big government, yet they are right there to ask for help when the chips are down. The huge stimulus bill passed by congress is a perfect example of "a little something for everyone (and let's get it from the rich.)" I can't help but believe that a truly bi-partisan package with a stronger emphasis on job creation would have been a better approach. Whatever your opinion of this package, it will have a profound effect on the economy for years to come. We are still studying what's involved and hoping to have some better recommendations for managing your finances in the future.

For Now, Concentrate On Improving Your Cash Flow. Guard your cash reserves closely, you may need them in the future. Look for ways to reduce expenses. Cutting 500 a month from your expenses is equivalent to adding $100,000 to your capital. I have started the process for a reverse mortgage. More on that later. Lower gasoline prices will help for now, although that will probably not last long. If you have a chance to stash some cash for later, now is a good time to do so.

What About Investing? I can't over-emphasize the fact that it's all about risk. Many financial writers are telling you to look for companies that pay dividends, preferably a growing dividend stream. Make your choices from among those who are unlikely to reduce dividends in the future. I wish I had thought of this. Of course, you know I have thought of this. Even during times when companies that paid dividends were much less popular than fast growing companies or even stock repurchase plans, I endorsed buying stocks for dividends. I even said that you could ignore share prices if the dividend was secure. The trouble with that approach in these times is that it is extremely difficult to predict those dividends which have a high probability of continuing. Dow, Pfizer, General Electric, and virtually all the big banks have severely cut their dividends, even though they had paid them for years.

Option Strategies Can Lower Risk. Most conservative investors will tell you to stay away from options because they are too risky. Your brokerage firm will tell you that you have to be approved by the firm's option principal to be approved for option investing. Option investing can be extremely risky, depending on how you do it and I would recommend that anyone considering entering this arena spend a considerable amount of time becoming familiar with the various strategies. My covered call strategies have helped me develop extra cash flow during good times and limit my losses during bad times. Here is a simple example.

Suppose you believe (as I do) that oil prices are at unrealistically low levels. There are a number of ways to invest in this area but here is one that I use: US Oil Fund invests in crude oil contracts and other instruments shown to correlate with oil prices. Today's closing price was 27.05. If you own this stock, you can sell a contract that gives someone the option to buy the stock any time between now and mid April. For that contract, you will receive $2.50. This sets maximum profit you can receive on the transaction of $2.45 per share, almost 10%. It also means that the stock can drop to $25.45 before you lose money thus providing a partial hedge against future losses. If the stock closes below $27 a share, you can rewrite the contract for a later date and collect another premium.

Tax The Rich. In difficult times such as these, low and middle income tax payers have considerable resentment against the so-called rich. This was especially true in the great depression when the lower classes stood in line for soup while the wealthy spent their money on fine art and jewelry collections. One fallacy of the "tax the wealthy" argument is that taxes are levied on income and not wealth. These don't always go together. In a recent study of the 400 top earners in the country, researchers found out that 75% of these top earners were not among the top 400 a year later. When they went out two years, they found that 87% were no longer there. I can remember one year in which my income was much higher than normal. Under the IRS code I lost all my personal exemptions and a considerable amount of my schedule A deductions. I paid the government more money than I had earned in most of the previous years. I had to lay off employees that I could have kept under a more realistic tax code. I am all in favor of high income tax payers paying higher rates. I just don't want them to be so high as to put a damper on growth in our economy.

INVENTORY YOUR ASSETS.

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

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

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

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

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

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

COPING WITH NEW REALITIES.

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

Wildwood by Moonlight.

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

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

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

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

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

UPDATE ON PROLOGIS AND US OIL.

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

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

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

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

MISCELLANEOUS COMMENTARY

I was saddened to read of a 93 year old man who froze to death in Michigan because the utility company shut off the power to his house. Like 87% of those who answered the AOL poll, I believe that the utility company was wrong in taking this action. The next thing that comes to mind is why didn’t the neighbors do something. In another AOL poll, 63% said they check on others in their neighborhood that might be in need of occasional assistance.

This tragedy can be viewed from another angle. Did the deceased have any responsibility? It seems likely that he did. There are numerous options available for those who can’t pay their utilities. Utility companies have entire departments devoted to setting up payment plans for those who are unable to pay. There are social service agencies available to help and they would surely have provided assistance in this case. It is likely that the deceased was trying to maintain his independence when he was no longer capable of doing so. I have seen numerous examples of this. It is unrealistic to expect neighbors and family members who may live considerable distances away to take responsibility for our care. I have had two circumstances when I was able to get elderly family members moved to more convenient locations in the nick of time.

I understand the desire to maintain our freedom and as a 70+ year old, I shudder at the prospect of losing mine. If that time comes, I only hope I have the presence of mind to do the right thing and not prevail on others to do what I no longer can do for myself.

A Different Sort of Post. I am trying something different. Sure, there are financial things to discuss, some of which could be construed as more political than financial (the so-called stimulus package). Unfortunately, it is sometimes difficult to separate the two since each one has a profound interest on the other. In my next post, I will get back to finance and such topics as managing your mortgage, paying off your house, and reverse mortgages.

Returning To Colorado For a few days in February. Not sure of the exact schedule but I will post it here as soon as I have made reservations. Send me an e-mail, call me in Texas, or call Susan if you would like to schedule an appointment.

.MEET MY NEIGHBORS.

These Are Stressful Times. Oil prices falling and gasoline prices rising. Markets are up 200 points one day and down 400 points the next. Solid companies like Pfizer cut dividends in half; and the new president warns us that it will get worse before it gets better. With all this going on, it's hard to keep my blood pressure out of the stratosphere. I need to remind myself to go down to my happy place and talk to my neighbors. May we all have a happy place.

REBUILDING YOUR WEALTH.

Steps You Can Take. Looking at a year ago, who could have predicted the chaos which 2008 brought? I reviewed some of my older posts and as early as May of 2007, I wrote "Beware The Receding Tide." In that post, I warned that some of our previous investment success was more likely related to the strong markets than our ability to predict the future. While I am glad that I had some inkling as to the difficulties that we were likely to face, I have to admit that these difficulties were far in excess of anything I could have foreseen. I am now reminded of an old adage that I have tried to live by: "The ability to bounce back from unforeseen events is of much more value than trying to predict these events. So what steps should we take to protect and rebuild our wealth in the future?

1. Take Responsibility. A lot of people made mistakes that created the current chaos in the markets. Realize that much of the blame lies with those of us who insisted on buying more than we could afford, even if we had to borrow in excess to do it. Realize that you may be part of the problem and resolve to do something about it instead of waiting for others who "broke it" to get around to fixing it.

2, Look At Ways To Reduce Your Expenses. This is the safest way to build wealth. I have known several individuals who left the workforce way before their peers. Most of them will tell you that financial freedom is more about what you spend than what you earn. Cutting $300 a month from your living expenses is equivalent to having an additional $90,000 to invest at a safe rate of 4%.

3. Manage Your Debt. All debt adds risk to your life. Look at mortgage payments, car payments, credit cards, and consumer debt. A car loan at 6% seems to make sense but if you realize that you have to earn $840 before taxes to make a non-deductible $600 car payment, it makes less sense. Look at your mortgage loan. Now is probably the best time to convert adjustable loans to fixed rates. Regarding making extra payments on your mortgage loan, this is only a good strategy if you have no non-deductible debt.

4. Look at Every Investment Asset In Your Portfolio. What was your goal when you bought it? Has this goal changed? Is the investment still likely to help you accomplish that goal? If it has dropped in value, how likely is it to rebound in the future? Are you holding it just because selling it would be to admit that you were wrong when you bought it? Can you best recover your loss by selling it buying something else?

5. If You Are Retired Consider Part-Time or Temporary Work. A little extra earned income never hurt anyone. Our grandparents often retired because they were physically unable to work. Most of us are in much better health than our grandparents were at this age. We will certainly live longer than they did; therefore, we require more capital to fund our retirement than they did. Going back to work may sound like an extreme measure; however, these are difficult times and may require us to do some things that we haven't considered in the past.

5. Be Patient. Just as we didn't know how fast the value of some of our assets would drop, we don't know how fast they will recover. We are operating in an environment that we have not seen for decades and there is no sure-fire way to protect yourself.

LOOKING FOR OPPORTUNITY?

A Quote From Dan Reeves. "We take what the defense gives us." While I must apologize to those who have less than fond memories of Dan's tenure as coach of the Broncos, this statement has stuck in my head for the past 20 years. I'm not much of a football fan but it definitely applies to the financial markets. Where are the opportunities in this market? Although there may be some in both the stock market and the real estate market, these uncertain economic times make investments in this area anything but a certainty. There is one opportunity out there where investment success is a sure thing: The opportunity to lower your borrowing costs.
Now I know I've been counseling readers to pay down or eliminate debt but this mainly applies to consumer debt. Because of the lower cost and tax deductibility of mortgage debt, the decision to retire the debt on your home mortgage should be made only after careful planning and analysis (perhaps that should be the subject of another post down the road). For most of my clients paying off the mortgage on the family home is not an option due to lack of funds. Everyone else needs to take a careful look to evaluate their current mortgage against others that are available out there.

Many Will Miss Out On This Opportunity. Here are some reasons why. 1. The hassle factor. The press of other business keeps many borrowers from taking the time to deal with this issue. It's not like placing an order online to acquire a listed stock; however, the process is much less cumbersome than it was five years ago. While credit standards and income requirements have tightened in recent months, it is still relatively easy for a qualified borrower to re-do a mortgage. 2. Greed. Everyone wants the lowest possible rate in the marketplace. The first question we are always asked is how low we think rates will go. Anyone who has followed this blog knows that we don't really know; however, I can tell you right now that I believe the current low rate environment can's last. With record deficits and huge government borrowing almost a certainty, it appears logical that interest rates will only go higher from here. Waiting for 4.75% instead of five carries a high risk that you will miss out on the opportunity altogether. 3. Reluctance to pay closing costs. Most everyone believes that closing costs are a rip off. Some mortgage lenders help perpetuate this myth by advertising no closing cost loans as an advantage they offer over other lenders. Virtually any lender can advertise zero closing costs just as any lender can offer very low rates. Both are available, just not in the same loan. The trick is to choose the right combination for you. 4. High Expectations. Many borrowers turn up their nose at an opportunity to save a relatively small amount of money like $120 a month. I might remind them that a low risk investment that produces $1440 per year at a return of 6% is worth $24,000. Even worse, there are no low risk investments that produce a 6% return in this market. Since 1980, my main business activity has been counseling borrowers in managing their largest liability. I have been well paid for this advice. I am offering my readers, at no charge, an analysis of their mortgage situation and recommendations as to the best course of action for managing this liability. Simply send me an e-mail or call my office (720)449-0200 and ask for Susan. She will tell you how to contact me by phone.

Gasoline Prices Up Again Already. A week ago, I warned that this would happen. Russia has cut off natural gas supplies for many homes in Europe and Iran and Venezuela are jaw boning for lower oil output in response to the renewed hostilities between Israel and Hamas . Keep your powder dry (stay liquid) and keep your eye out for opportunities. I will try to keep you informed as to prudent strategies.

PREDICTING THE PRICE OF OIL.

What Factors Influence The Price Of Oil. Bill O'Reilly thinks it's "those greedy oil company executives." He also figures speculators drive prices up and he thinks we should control those markets. If you are waiting for me to give you a definitive answer, you might as well stop reading now. Oil prices are set daily via a complex set of factors including relative valuations of currencies, the futures markets, money flows into hedge funds, geological factors, expectations for conflicts in the middle east, inventory numbers, consumer spending patterns, and dozens of other things I no-doubt missed. Many of the so-called experts use the simple technique of estimating that the current trend will continue. This is probably the reason that you hear talks of $25 per barrel oil. While price maximums and minimums are usually higher than I anticipate, I can not envision oil at prices much lower than the current levels. In fact, I would go so far as to call the current price in the high 30's is as unsustainable on the low end as 147 was on the high end.

Why Prices Will Rise. 1. At these prices, many conservation efforts are not economically viable. For example, one of the more efficient hybrids could be expected to recover the extra cost in three years at $4.00 per gallon gasoline. With the current prices, it would take around 8 years. There was a waiting list for a new Prius last spring and dealers were selling them for a premium over the sticker price. Now dealers have lots full of them. 2. Drilling plans to exploit new deep reservoirs are on hold. As I mentioned countless times before, low-cost producers can undercut the price of new, more difficult to access, production. We need $65+ prices for this production to be profitable. 3. Alternative energy sources are way too expensive to compete. While we love to talk about a wide variety of alternative sources as a solution to this problem, they are even more economically out of line with petroleum than before. Some venture capital firms are still willing to fund new alternative energy technology projects but these are becoming more scarce in the current environment. Even the old windmill man, T Boone Pickens has put his wind/natural gas projects on hold.

How Do We Protect Ourselves Against Future Price Increases. There are a number of ways and I'll tell you about two that I am currently using. 1. US Oil (USO) This is a fund that is constructed to follow the price of west Texas intermediate crude. It is an exchange traded fund that uses futures contracts and other instruments to accomplish its objective. It is a pure oil play and has nothing to do with the performance of any company. I bought it at $29.80 per share. As usual, I hedged my bet by selling an option to buy me out at $30 per share between now and the mid January expiration date. I received $2.24 per share for these options making my net buy in price at $27.56 per share. If the price goes up by a modest $.20 per share, I make almost 9% return for a two week investment. If not, I sell another call for the next month. As with PLD, I pledge to tell you what happens to this investment at the conclusion. Another way to profit from an increase in oil shares is to purchase an oil company with ample reserves. I bought Marathon Oil at $28.69 last October. That was before the recent major drop in oil prices. The stock is currently selling at 26.61. This may not sound like a great deal; however, I have collected $5.85 in option premiums lowering my break even price to $22.84. There are numerous other oil companies that may be worth buying at current prices. The currently high option premiums provide a decent means of downside protection and higher returns in the current market. As usual, I hasten to add that these examples are for illustrative purposes only. Do not consider them as recommended strategies for your own portfolio.

My Last Post Of 2008. A new year starts day after tomorrow. I have no particular plans to change my money management strategies for next year. I do anticipate a much better market and will begin the long process of rebuilding my own and my client's portfolios. Many of you will be getting statements that show some pretty hefty losses. We harvested these losses in taxable accounts only in order to provide deductions for current and future years. Our strategy was to replace these depreciated shares with similar companies at depressed prices. Also, we can wait 30 days and replace these same shares with new shares of the same company. Here's hoping that next year brings more prosperity to us all.

"ALWAYS A BULL MARKET SOMEWHERE."

I stole The Above Title From Jim Cramer. Although I am not a huge fan of Cramer, I occasionally watch him in hopes of gaining some fresh insights into the markets. I must admit, I have a difficult time finding the bull market in this environment. I always thought "bail out" was two words; however, it is used so often these past few months that it is, more often than not, written as one word. Banks, insurance companies, car companies, and investment bankers are looking for a helping hand from the government. The latest plea has come from real estate developers who will almost always produce more developed real estate than the markets need if they are given the money to do so. Home builders, are also crying the blues and trying to get the government to provide mortgage money to allow buyers to buy more real estate than they can afford. I am confused. I thought easy money was what caused the problem in the first place. The funny part of all this is that the government has no money. Their main source of funds has been the taxpayers, who are also tapped out, and the Asians who are always willing to loan money so that we will keep buying their stuff. The problem is that the consumers are trying to become more discriminating in their spending habits and the Asian economies are feeling the pinch all around.



Here is An Idea. This advertisement appeared in The Economist: "Our lives are full of things. Disposable distractions, stuff you buy but do not cherish, own yet never love. Thrown away in weeks rather than passed down for generations." I read that with considerable interest because I am amazed at the amount of stuff we own that is virtually worthless. The second paragraph was also interesting: "Perhaps things will be different now. Wiser choices made with greater care. After all, if the fewer things you own always excite you, would you miss the things that never could." What a thought provoking series of statements until you look at the bottom of the ad that says "A diamond is forever." I guess I'm not excited much by diamonds either. In my real estate activity, I am often called upon to be among the first to enter a house where the occupants died only a short time before. I am always amazed at the mountain of stuff that has no value to those who remain. I don't intend to throw all my stuff away, but I am determined to devote less time, energy, and money to acquiring stuff that those who survive me will consider worthy only of giving to the homeless or depositing into a landfill.



Enough Philosophy. I'm sure that most of you read this to get some idea of where opportunities may lie in this marketplace. On November 7th, I wrote of my purchase of Pro Logis (PLD), an industrial real estate firm owning industrial properties worldwide. My purchase price was $9.85 a share and I sold an option which allows the purchaser of the option to buy the stock from me, on or before December 19, at $10 per share. Since I received $1.75 per share for the option, my net out-of-pocket price for the stock was $8.1 ($9.75 purchase price less $1.75 received for the option.) Since I didn't want to convey the impression that I was only going to tell you about my winners, I promised to let you know what happened with this investment, win or lose. What happened almost right away was that the stock dropped to $2.50 a share. Not a great result for an investment professional risking his own funds. Fortunately, things turned around and the stock price rose to $9.00 at the time the option expired. I could have sold at that point for a profit of 11% in a month but, still holding a belief that PLD has a bright future somewhere down the line. I sold another call option to allow the option purchaser to buy the stock in January at a purchase price of $10.00 I received $1.20 for that option. At this point I am out $6.90 for the stock (9.75 less my original 1.75 option premium less my recent $1.30 premium). If the stock reaches $10 in January, I make a profit of 32% in two months. If not, I can sell the stock or write another call and receive another premium. This illustrates the potential of writing covered calls. There are some pitfalls but but this is a lower risk option strategy that offers an additional strategy for increasing gains from your portfolio.

Holidays are Coming. Christmas and New Year are rapidly approaching. These holidays have had religious significance in my family for hundreds of years. Here's wishing those of you who feel likewise a very Merry Christmas. For those of you who feel differently, I intend no disrespect. As always, your friendship has meant much more to me than all the "stuff" have managed to accumulate over the past 70 years.

SOME RANDOM THOUGHTS.

What A Deal. I filled my truck for $21 bucks today. Granted, it wasn't empty, but it would have cost me $52 just a few weeks ago. Perhaps its worth the recession and huge drop in the stock market just to keep all that money from going to countries who hate us. Russia and Venezuela are already feeling the pinch. Couldn't happen to a nicer bunch of folks. Perhaps these reduced prices will help end the recession. I am an optimist. I believe it will but not right away.

Some Bad News On Energy. Just what I told you a month or so. Its hard for us to develop new energy at prices that are competitive with fossil fuels when low cost producers in the middle east can undercut your price when they get good and ready. The technology isn't quite there for renewable energy resources and you don't have to be too old to remember what happened in the 70's. Just to refresh your memory, the Department of Energy poured $174 million into Solar One, a plant created to make steam from solar energy. It opened in 1982 and was shut down in 1999 because it wasn't commercially viable. Then there was the giant coal gasification project in Beulah in 1985. It still operates but is not expected to recover its cost (much less a return on investment) until 2010. Billions have been poured into projects to develop fuel from shale and we still don't have a viable process to compete with middle eastern oil. Much of the recent increases in crude oil prices were due to speculation about "peak oil" which says that current production has peaked and will begin to decline. Tell that to the Saudis who claim that, within 20 years they will increase their proven reserves from the current 260 billion barrels to 450 billion. In case you think its just in the middle east, just about all US oil companies are replacing their reserves faster than they are depleting them.

I Don't Want to Sound Too Pessimistic. Alternative fuels can replace fossil fuels but I also don't want to make it sound too easy. We cannot depend on companies or the government to continue pouring money into alternative energy as long as we can buy it cheaper than we can replace it. I don't look for many of the current projects to bear fruit until we burn up a larger proportion of cheap imported oil.

The Government Will Save Us. They're now talking about pouring billions into the auto industry. Although I hate to see those companies fail, I wonder if we are capable of preventing it. There is talk that the loan will allow Detroit to "retool" so that they can make more hybrids and other efficient cars. If the current drop in oil prices holds, hybrids will be the last thing our consumers want to buy. The government wants to put more money into the hands of consumers with the hope that they will spend more money. That just prolongs the agony. Consumers spend more than they can afford already and they've done it with borrowed money that they can't pay back. While I agree that putting more money into the hands of consumers is not a bad idea from a fairness point of view, I don't believe it will help if the consumers do what they should do which is save, invest, and pay down debt.

COLD AFTERNOON IN TEXAS.

Quotes From Market Watchers.. I'm sitting by my computer trying to think of something positive to say about these markets. I am reminded of a quote from a well-known financial planner who says that this market reminds him of a "forest fire where all the animals are running in all directions looking for a safe place'. Needless to say, there doesn't seem to be one. Another quote says "the market bottom is reached when investors stop looking for the bottom and start looking for the exits". Given what I've heard from a number of clients lately, that occur ed some time ago.

Measuring Fear. A few posts ago, I talked about the VIX which is a measure of volatility and, ultimately, fear in the market. I talked about a level above 40 being the maximum fear level observed since the CBOE began measuring it almost 30 years ago. During this time, that level has been reached only three times and each time the market was higher six months later. We have now learned that a VIX of 40 is no where the maximum level of fear potential in the market. As of today it stands just above 75, and it has been as high as 80. This is a quantitative measure of just how difficult things are. I could never have imagined that it could have reached this point.

Are You Looking For a Reason for Optimism? Here's one. Although my IRA has been decimated, I can still buy the same number of barrels of oil with today's value as I could have at the high point. I filled my truck gas tank with only $25 yesterday. We are no longer having to send massive amounts of money to countries who would like to kill us. I can't help but believe that oil prices have reached the bottom of the current cycle. Hopefully, we can take heed from the warning we have received. Although the increases of the past few months have failed to hold, the threat still hangs heavy over our heads. They did it once, they can do it again.

The End of the Year is Rapidly Approaching. I can't say I am sorry to see 2008 leave us behind. As I look out the window, I see the beautiful East Texas woods (what Rita and Ike left us) and I never cease to be amazed at the miracle that surrounds me. Speaking of miracles, I have been taking a DVD course on the brain. One thing I have learned is that the vast majority of the images collected by the eye, fail to reach the brain but we continue to think we see everything around us. As I continue to try to develop a vision of the future, I am reminded of a quote from Steve Goodier, publisher of a newsletter entitled Life Support. "Vision is never about seeing the obvious. It's about looking ahead; about seeing what is not there -- YET. It's often about seeing the potential behind the obvious".

Heading To Denver. I'll be there in a couple of weeks and hope to see many of you while I am there. For now, I'll go take a walk in the woods and try to see as much as I can of the obvious.

THE DREADED D WORDS.

Deflation. I have heard numerous comments about the current "loose money" policies of the Federal Reserve. Most say, we are going to have to face the consequences and the most likely result is hyper inflation. I know that money creation is always linked to inflation; however, it seems unlikely in view of some of the obvious deflationary pressures we are seeing. The most obvious to the casual observer is energy prices. Since July, crude oil has dropped 60%, unleaded gasoline has dropped 62%, and natural gas is down 52%. These are huge drops and it could be expected that these drops would filter down to other commodities. In just three weeks, steel, a basic building block of industry, is down 20 % with China and other countries exporting mega tons of the stuff into the US at cut rate prices. Aluminum is down by 29% and plants are closing in places like Booneville, Indiana where 770 jobs have been lost. Copper prices are no exception, having dropped by 31% in the past three months. Finally consider molybdenum, a hardening agent for steel. Prices are down by 60% since mid-October. That huge drop caused a the loss of several hundred jobs in the Colorado mountains as the long-anticipated re-opening of the Climax mine was put on hold indefinitely.

Since I have been following markets, I don't remember anything like this. Deflation is dangerous since it can cause massive job loses and lowering of wages as the newly unemployed workers tend to work for less than those currently employed. From what I have read about the great depression, this is what happened then. Hopefully, the central bank can manage monetary policy in such a way as to prevent it from happening again. To the extent that we can change our over- consumption habits to eliminate the excess consumption of the past, an adjustment could be healthy.

De-Leveraging. Acquiring leverage is fun. You can buy stuff without using your own money. Using leverage to buy income producing assets is often highly profitable while using it to buy consumption assets is almost always unprofitable. People who loan you money are very unreasonable. They want it back. They also want interest. When they are in trouble, they want it back faster. In the past, they were willing to roll it over when it became due. Now they are much less willing to do so. Most everyone (except the federal government) is in the process of de-leveraging. Real estate investment trusts, mortgage lenders, mutual funds, and hedge funds, are selling assets into a market where there is little demand, in order to repay loans that are being called due. Even prior to the due date, some loan documents give the lender the right to call the loan due if certain conditions are not met. There are also government regulations that keep some types of businesses, such as business development companies, from having too much leverage. When the value of assets fall, these rules can come into play. As much fun as acquiring leverage can be, the pain of de-leveraging is even greater. Companies previously considered as healthy can be forced into bankruptcy in extreme circumstances. Unfortunately, the market is concerned about some of the companies in our portfolio. An example is Prologis, a company I talked about in my last post. Even though the value of real estate in the portfolio is worth $30 per share, the share price is close to $6.00. When I bought shares of this for my own portfolio, I made a bet that they would be able to manage these assets during this period of deflation and de-leveraging, and emerge in a much healthier position. Hopefully, they can. As with anything you buy in today's market the risk that they can't is almost always there.

Back To Colorado In December. I will be available from December 5 to 14. Be glad to talk to any of you then. Please call Susan at 720-449-0200 and let her know you want me to call to schedule a meeting.

OIL PRICES THROUGH THE FLOOR

Gas Prices Soon Below $2.00 a Gallon. Happy days are here again. With gas prices down, consumers will soon be driving to the mall again and spending their money. The stock market will soon go back to 14,000 and we can stop worrying. NOT!! The reason oil has dropped more than 50% is a massive world-wide recession, the depth of which we still don't know. While the rise in oil prices didn't cause this recession by itself, it was a major contributor. It scared the dickens out of a lot of us who figured we would have to cut back in other areas in order to afford to continue to afford sufficient fuel to take us to places we need to go. Even with gas prices below $2.00 a gallon, the memory of $65.00 fill ups are fresh in every one's mind. Even the most optimistic among us believe prices will rise when, and if, the economy starts to grow again. Every one told me that prices wouldn't drop this time like they did in the late 80's because it was different this time. I agreed that it was different this time but guess what? It's different every time. Petroleum exporting countries need to sell a lot of oil and anything that causes a reduction in sales will result in a drop in prices so they can keep the revenue coming in but prices will rebound as soon as they believe the market will allow it.

Renewable Energy Will Save us. If you believe that, we should talk about this condo I have to sell. We have 250 million cars in this country that run on gasoline. There is no way we can cut our dependence on fossil fuels overnight. Tuning up our cars and putting more air in our tires won't save us either. I believe T. Boone Pickens statement that "we can't drill our way out of this". President-elect Obama grabbed onto that one in a hurry but he didn't give us the full benefit of Mr. Pickens statement that we still need to "drill, drill, drill" while we are developing renewable energy technology. I don't believe that "The Answer is Blowing In The Wind" either.
Mr. Pickens wants to put up a whole host of windmills to power our utility plants. Then he wants to use natural gas to power our cars. I believe we should work on this; however, the problems of establishing a nationwide system of outlets to fill our tanks with natural gas is immense. The cost of modifying our cars to use this fuel is also expensive, if not economically prohibitive. High pressure natural gas lines will be difficult for consumers to handle and their are safety issues with putting our cars on the highway with pressurized gas tanks.

I Sound Like A Pessimist, But I'm Not. I believe answers to our energy crisis are available. I just don't know what they are and I have no confidence that anyone else does either. One thing I do know is that we can't sit around and do nothing. We have to try several things at once. I still don't know whether or not climate change is a legitimate issue but I believe it will eventually take a back seat to the more serious issue of how we can maintain a reasonable standard of living in the wake of a shortage of affordable energy.

There are Opportunities Out There. Look at Colorado residential real estate. Prices are down but sales are up and inventories are shrinking. A recent piece in the Denver Business Journal states that October single-family sales are up over 14% from a year or so ago. The rental market is still strong and you can get a break-even before tax cash flow. While it takes considerable skill to enter the "fix and flip" market, you should be able to get excellent returns on a long-term basis. It is possible to buy lower-end properties for less than $150K that would have sold in the $190's two years ago. If you sold out of the stock market, this might be a good place to deploy some capital. With inventories shrinking and builder activity at a minimum, the seeds of a recovery are well in place.

Stocks Are On Sale Also. Because our asset management clients are so risk averse right now, we are not aggressively pursuing stock market investments in those accounts. I am however, being somewhat more aggressive in my own accounts. My last investment was in an industrial REIT called Prologis. I bought in at $9.85 a share. That is about half of the value of the underlying real estate they own. The dividend is in excess of 21%. While I suspect that this will eventually need to be cut, I think that is already priced into the shares. Just to hedge my bet, I sold the option to buy it from me at $10 a share in December. I got $1.75 for this which makes my acquisition price $8.1 a share. I like this so well that I also bought the preferred stock that yields 11+%. I plan to hold the preferred as a long-term investment. If the price of the common rises above $10 a share, I will have to sell it but a profit of 23% for a little less than 2 months is good enough for me. Win or lose I will let you know how this investment performs.

Back In Texas. I made it back here about a week or so and have been busy cleaning up after hurricane Ike. I'm pretty sure a tornado came with it and blew down some 100 year old Magnolia trees. Oh well, I still have 16 left and the reduced shade will make my hibiscus bloom better.

BUY LOW, SELL HIGH.

Have You Been Doing the Opposite? Warren Buffet says, "Now is the time to buy American." He is referring to the stock market and I suspect that quote has something to do with the market rally we're having today. Am I going to rush out and do just that? Not me. On the other hand, I didn't sell everything and I have raised a few dollars in cash by selling anticipated losers and accumulating, rather than reinvesting, dividends. As I mentioned in my last post, I did buy some more Anthracite Capital at around three bucks a share. It wasn't because I thought the company was going to turn around next week but because I thought the upside was infinitely higher than the downside.

We Should Listen To Mr. Buffet. When an investor as successful as Mr. Buffet speaks, you have to listen. Do you have to do what he says? No, its just another data point that you can use in conjunction with other data points to make sound financial decisions. When we have a crisis as serious as the one we're currently in, the key word is caution. I have been cautious in managing my portfolios and recommending that you do the same. If you have read my posts carefully during the past few weeks, you may have noted that I am becoming a bit more bullish in my approach. While I am not ready to "bet the farm" I find it difficult to resist some of the opportunities in this market.

What's Wrong With Marathon Oil? I've been watching this company for quite a while. Over the past few months, it has dropped from the mid $40's to to $28.5 per share. Why the drop? There are several possible reasons and anticipation of falling energy prices may be one of them. If you look at the share price trends vs the price of oil, it doesn't quite add up. While the price of oil has dropped to the 70's, it has simply returned to the levels of October, 2007. At that time, Marathon was $58.04. Obviously, Marathon share prices have dropped 50% from this level. So what were oil prices, the last time Marathon was in the current price range. In June of 2005, Marathon sold for $25.08 and the price of oil was $49.8 a barrel. Using that data point, you might conclude that investors predict a drop in oil prices to that level. If the current recession deepens, that is not impossible.

There Are Other Factors Influencing Share Prices. We certainly don't know them all but here are some reasons why Marathon appears to be a very good buy. 1. The dividend is 3.6%. This may not seem like a screaming return; however, you do get something close to a CD return while you wait for prices to get back to "normal." 2. It doesn't appear likely that the dividend will be cut in the future since they are only paying out 21% of their earnings. 3. The share price is slightly below book value. Although book value isn't an entirely accurate measure of intrinsic value, it is another data point. Historically, Marathon has sold for almost twice book value. Other oil companies are also priced at a higher multiple to book value. 3. Marathon is actively exploiting new energy sources. They have a stake in the Bakken field, one of the most promising new areas of domestic production and they are also participating in a new discovery of the coast of Angola. Given these factors, I have decided to invest some of my cash in Marathon oil at $28.7 per share. With a sufficient time frame, I think this investment will prove to be a good one, there is one more factor that allows me to hedge my bet.

Option Prices Are At Record Levels. When I made this investment on Tuesday, investors were willing to pay a dollar per share for the option to buy my stock at $30 three days later. This means that I would make $2.30 or 8% over a three day period. If the stock didn't rise to $30 per share, I could keep the dollar. That option expires today and Marathon is selling for around $27 per share and the dollar is mine to keep. What's my next move. Since I still think Marathon is a good company to own, Ill keep the stock and sell another call $30 call option, This option expires in November and can be sold for around two dollars a share. I'll continue to own this stock until I change my mind about the prospect for Marathon, or until I sell an option that is called. There is still plenty of risk involved in this investment but I am committed to keeping most of my funds in the market. If you are afraid to invest when the market is down, you will be stuck in a "buy high, sell low" strategy.

Don't Try This At Home. While this is an actual example of an investment I made, it is not a recommendation for you. In many cases, an investment like this one is totally inappropriate for a given financial situation. Never make an investment unless you have studied the risks involved and determined that you are willing to tolerate them.

OPTIMIST OR PESSIMIST?

Which Are You? A pessimist might argue that our current economic situation is permanent because we have lost our position as the number one nation in the world. An optimist might argue that American work ethic and ingenuity will keep us at the forefront and an eventual rebound is inevitable. Both optimists and pessimists can be stupid at times but the optimist will be happier and more successful most of the time. I have been reading a book by Martin Seligman called Learned Optimism. Dr. Seligman is a prominent psychologist who discovered that individuals learn to be helpless when they reach the conclusion that, whatever their behavior patterns, they cannot improve their situation. If they persist in this state, they are prone to long bouts of depression, poor health, and a reduced life expectancy. Much of the book goes on to describe how we can reverse our helplessness and restore our optimism. I have argued that, since no one can predict, with any degree of accuracy, the future investment environment, the next best quality you can have is resilience, the ability to keep going after a setback. The more optimistic we are, the more likely we are to persist.

We Have Undoubtedly Had A Setback. We no longer have money we thought we had. Now what we have to decide is what to do with the assets we still have. Here are a few strategies that come to mind. 1. Get out of the financial markets and stay out. This strategy works for a number of my friends and family. The key here is to have an adequate income to meet your needs without having to rely on investment income. 2. Get out of the financial markets and get back in when the environment improves. If this is your strategy, I'm afraid I can't help you. Knowing when to get back in is critical. Past recoveries show that a third of what has been lost is recovered within 40 days of the turnaround. Like I've said before, I've known several market timing specialists over the years. None are still practicing. 3. Change to a less aggressive strategy emphasizing safety. This is what I've attempted to do in most cases; however, it has been only moderately successful. An investment with perceived safety can drop in price right along with those considered more aggressive. The best you can hope for is that it won't drop as much. I will continue to utilize this strategy while looking for opportunities that may arise. One area of interest is some of the beaten down financial stocks. As an example, I recently added shares of a stock that is selling for only $2.75. It currently pays a dividend of $1.24 per year or a yield of 45.09%. The book value of the company is more than $10 per share. What are the odds of that dividend continuing? I don't have a clue but if I can buy $10 in book value and get back 11.27% of my investment in three months, there has to be more upside than downside. The most I can lose is $2.75 per share. Bank of America can drop that much in a flash. If the market decides the company is worth its book value, I stand to make 7.25 a share. Worth taking a flyer? It is to me.

Notice How Few People Are Talking Energy Prices These Days. The price of a barrel of oil has dropped 51.02% since June of this year when I told you prices had to come down for the right reasons or the wrong ones. Remember, the wrong reason was a worldwide recession? Here it is folks. It is likely the price will drop further unless some miracle occurs to erase the pending recession. Hopefully, we won't ignore our long term need to find new energy both from renewable and non-renewable resources. We also need to conserve, which I suppose we will do automatically because we have less money to spend.

It's Getting Chilly Here In Colorado. I suppose that means this old snowbird needs to get ready to fly. Don't hesitate to call if you need to get in touch before I leave. I anticipate spending more time here in 2009. Hope to continue working with you whether I am here or in Texas.