It Wasn’t As Bad As It Sounds. I have always enjoyed road trips, and Texas to Colorado to Arizona and back to Texas is one of my favorites. Trips like this give me time to think, listen to audio books, and enjoy some scenery that’s totally different from what I have every day in the piney woods of East Texas.
A Lot Of Risk In The Markets. On my trip, I usually stopped shortly before dark. This gave me an opportunity to catch up on my reading and study market trends. I am appalled at the way the markets keep increasing in the face of what I consider to be a very scary situation. Our government and the FED keep encouraging consumers to continue their borrow and spend habits in spite of the slow job market, expensive stock market, high mortgage delinquency rates, and artificially low interest rates. When we stop pouring borrowed money into the economy, the adjustment could be even more painful than it has been up until now.
The Bond Market Is A Dangerous Place. If you are tired of low interest income available on short-term instruments, a dangerous strategy would be to try to increase your return by extending your maturity. If (more like when) long-term rates increase, you will either have to sell long-term bonds at a loss or hold on at below market rates. Better to accept low yields and be ready to take advantage of the opportunity to get higher rates when the FED stops doing crazy things like buying mortgage backed securities. Although the municipal bond market offers higher after-tax yields to high bracket borrowers, this market offers more risk than reward. Not only do you still have the risk of increasing interest rates, but there may well be some credit risk as state and local governments find it increasingly difficult to meet their obligations in the face of decreased tax revenues.
Stocks Are Also Highly Valued. Although corporate earnings have been higher than expected, the shares of many companies have increased to unrealistic levels. The volatility index (VIX), commonly watched as a measure of fear in the marketplace, has fallen to below 18, the lowest level of the past 3 years. Contrast this with a level of almost 90 at the height of the recent scare. While this sounds good, it also points to the possibility of over-confidence among investors. I am still in the market but I am keeping higher levels of cash and writing options against my positions as a hedge. I still believe in dividends to provide an income stream in the event the underlying issues fall. The difference between the next anticipated correction and last is that I am being even more careful to evaluate the ability of the company to keep paying those dividends.
Beware The Tax Man. The government has spent poured trillions of dollars of borrowed money into the economy in an attempt to allow us to keep living beyond our means. Even the most aggressive borrowers among us are becoming worried that those who are funding our deficit will decide to stop. Since the consequences of this could be devastating, the federal deficit is becoming a more serious concern. Rather than decrease government spending, the pressure is being applied to the revenue side. The last tax cut was labeled a “tax cut for the rich” and there are a number of new rules and proposed new rules to gain new revenue from high income tax payers (although middle incomes won’t be exempt). I’ve never claimed to be a tax expert so the best thing that high income taxpayers can do is consult a CPA or Enrolled Agent to help lower the impact of tax increases. A few ideas are: 1. If you have your company stock in your IRA don’t neglect the opportunity to withdraw it and pay at capital gains rates instead of ordinary income. 2. If you have been delaying the sale of assets in which you have a gain, now might be a good time to sell since there will undoubtedly be higher rates in the future in addition to the new rules that will add a 3+% medicare tax to your gains. 3. Consider rolling your IRA’s into a Roth. This will allow you to leave these assets to your heirs tax free and eliminate the need to start withdrawal at 70.5. The feasibility of this approach is dependent on a number of factors so don’t forget to do your calculations first. 4. Accelerate deductions. President Obama wants to limit the value of your deductions to 28%. If you are going to be in the 36 or 39.6 bracket, the value of your deductions will be limited to a 28% rate.
It’s Nice To Be Home. I am enjoying being back at the lake, although I am spending a lot of time catching up on work. I anticipate being in Colorado more next year than last because of client needs. If you have a project that needs my attention, call Susan or send me an e-mail. I am considering a trip in mid April. Be sure to let me know if you want to schedule a meeting.
Friday, March 26, 2010
Friday, February 26, 2010
MUSINGS ON A RAINY AFTERNOON
Famous People I’ve Met. Perhaps the most famous person I have met is Dan Quayle, former vice president under George Bush. At least he is probably the one that most of you would recognize. There was another that I would suspect that 99% of you have never heard of. I met him when I was a freshman at Wheat Ridge High School. It seemed that we had a lot in common. He was a skinny, pimply-faced kid with a flat top and I was a homely kid with coke-bottle thick glasses and unruly hair. We were both on the freshman basketball team and neither of us got to do much more than suit up. The most common thread was that we both loved music. Both of us had cheap guitars but we could play relatively well. We were also horrible singers. The major difference was that I knew it and seldom did I allow anyone to hear my attempts. In contrast, he played and sang at assemblies and other school functions and, as his voice shifted back and forth between an uncomfortable tenor and a screechy soprano, the audience did their best to keep their fingers out of their ears. I guess what he lacked in musical talent, he made up with guts.
Fast-Forward Three Years. I gradually came to the conclusion that, although I loved music, I could never make a decent living as a performer. I graduated from college with a degree in Chemistry. He dropped out of college and started hitchhiking to Hollywood in search of a musical career. On the way, Don and Phil Everly (The Everly Brothers) drove past him and, because he was carrying a guitar, decided to give him a ride. He rode all the way with them and, when he got there they introduced him to their agent. You can imagine my surprise when I woke up one morning in the late 50’s there he was on the radio singing his new hit, “Our Summer Romance.” Gone was the screechy soprano and the tenor was amazingly smooth. I don’t know what happened to him out there but it appeared that someone had managed to teach him to sing. I heard he was on “American Bandstand” and several local disk jockeys predicted he would become a huge success. Despite all those predictions of success, it appeared that he just dropped out of sight. We both in our early 20’s and I was not to hear of him again until we were almost 50.
Fast Forward 25 Years. I had married my third wife and was struggling to get my financial service business started when I heard he was back in Denver to promote a film: Portrait of An American Rebel. He had been interviewed on a local radio station and almost provoked the host into a fist fight. It was at that time I learned that he had spent the past 25 years in South America, East Germany, and the Soviet Union. He was a superstar by almost any definition, having played to huge sold out crowds where ever he went, selling out huge auditoriums and soccer stadiums. He had also starred in several westerns in Italy. (Remember Spaghetti Westerns)? He also had recently married his third wife.
While he was in Denver, one of our high school classmates arranged for us to spend an evening with him. We all got together while he played his guitar and sang several songs. As you might expect, he exuded charisma. The dorky kid was replaced by a handsome, self confident man but there was an air of sadness about him that was evident in some of our more private conversations. One thing he said has stood out in my mind to this very day. “It is so hard for me to think about growing old in a country that is not my own.” Although he never quite brought himself to say it, it was obvious to me that he wanted to return. But it wasn’t that easy. Although he had been extremely popular in communist countries, that popularity did not carry the financial rewards that it does in this country. He didn’t have the wealth to survive without earning income and he probably didn’t have the talent to compete as an entertainer in the US. He also had a reputation as an Anti-American Marxist. That was the last time I saw him. His name was Dean Reed.
Fast Forward Six Months. They found his body in a lake not far from his East Berlin home. An autopsy showed he had an undigested sleeping pill in his stomach. His death was ruled an accident but many East Germans theorized that it was suicide or the CIA. Americans thought it was probably the KGB. It remains a mystery. One way or another he died just past the peak of his popularity. As the popularity of Marxism declined in the Eastern Bloc countries, so did Dean’s popularity. To many Americans he was a traitor but to me he was just a dumb kid who would do anything for a musical career.
Fast Forward 24 years. The life and death of Dean Reed can teach us something. 1. You can accomplish a lot more than most people think you can. None of us who knew Dean in high school thought he had a chance of becoming an international superstar but we were obviously unaware of his tremendous drive that outweighed his lack of talent. 2. There are those along the way who can help you. Someone taught Dean to control his screechy voice, introduced him to the right people and gave him the opportunity he needed. 3. Be careful of those you bargain with to attain success. A famous American blues man, Robert Johnson was said to have sold his soul to the devil in exchange for the ability to play the blues. He became quite popular and recorded songs that are still played 70 years after he died from poisoning at age 26. It has been written that he crawled on all fours and barked like a dog before he died. Dean Reed made a deal with those who were enemies of his country. At the end he was not popular behind the iron curtain, nor welcome in the country he left.
You Have To See What I've been Writing About. This post would not be complete with out a link to his performance. If nothing else it might bring back memories. Most of his popular songs are recorded in German, Russian or Spanish. The following is in English. My lack of computer savvy keeps me from making a link but you can copy this one and paste it in your browser to see my old friend on stage. In addition to the performance I have included a second that is part of a documentary done on his life.
http://www.youtube.com/watch?v=gVgkePXZSk0&feature=related
http://www.youtube.com/watch?v=R0WF-sLPzBw&feature=related
Fast-Forward Three Years. I gradually came to the conclusion that, although I loved music, I could never make a decent living as a performer. I graduated from college with a degree in Chemistry. He dropped out of college and started hitchhiking to Hollywood in search of a musical career. On the way, Don and Phil Everly (The Everly Brothers) drove past him and, because he was carrying a guitar, decided to give him a ride. He rode all the way with them and, when he got there they introduced him to their agent. You can imagine my surprise when I woke up one morning in the late 50’s there he was on the radio singing his new hit, “Our Summer Romance.” Gone was the screechy soprano and the tenor was amazingly smooth. I don’t know what happened to him out there but it appeared that someone had managed to teach him to sing. I heard he was on “American Bandstand” and several local disk jockeys predicted he would become a huge success. Despite all those predictions of success, it appeared that he just dropped out of sight. We both in our early 20’s and I was not to hear of him again until we were almost 50.
Fast Forward 25 Years. I had married my third wife and was struggling to get my financial service business started when I heard he was back in Denver to promote a film: Portrait of An American Rebel. He had been interviewed on a local radio station and almost provoked the host into a fist fight. It was at that time I learned that he had spent the past 25 years in South America, East Germany, and the Soviet Union. He was a superstar by almost any definition, having played to huge sold out crowds where ever he went, selling out huge auditoriums and soccer stadiums. He had also starred in several westerns in Italy. (Remember Spaghetti Westerns)? He also had recently married his third wife.
While he was in Denver, one of our high school classmates arranged for us to spend an evening with him. We all got together while he played his guitar and sang several songs. As you might expect, he exuded charisma. The dorky kid was replaced by a handsome, self confident man but there was an air of sadness about him that was evident in some of our more private conversations. One thing he said has stood out in my mind to this very day. “It is so hard for me to think about growing old in a country that is not my own.” Although he never quite brought himself to say it, it was obvious to me that he wanted to return. But it wasn’t that easy. Although he had been extremely popular in communist countries, that popularity did not carry the financial rewards that it does in this country. He didn’t have the wealth to survive without earning income and he probably didn’t have the talent to compete as an entertainer in the US. He also had a reputation as an Anti-American Marxist. That was the last time I saw him. His name was Dean Reed.
Fast Forward Six Months. They found his body in a lake not far from his East Berlin home. An autopsy showed he had an undigested sleeping pill in his stomach. His death was ruled an accident but many East Germans theorized that it was suicide or the CIA. Americans thought it was probably the KGB. It remains a mystery. One way or another he died just past the peak of his popularity. As the popularity of Marxism declined in the Eastern Bloc countries, so did Dean’s popularity. To many Americans he was a traitor but to me he was just a dumb kid who would do anything for a musical career.
Fast Forward 24 years. The life and death of Dean Reed can teach us something. 1. You can accomplish a lot more than most people think you can. None of us who knew Dean in high school thought he had a chance of becoming an international superstar but we were obviously unaware of his tremendous drive that outweighed his lack of talent. 2. There are those along the way who can help you. Someone taught Dean to control his screechy voice, introduced him to the right people and gave him the opportunity he needed. 3. Be careful of those you bargain with to attain success. A famous American blues man, Robert Johnson was said to have sold his soul to the devil in exchange for the ability to play the blues. He became quite popular and recorded songs that are still played 70 years after he died from poisoning at age 26. It has been written that he crawled on all fours and barked like a dog before he died. Dean Reed made a deal with those who were enemies of his country. At the end he was not popular behind the iron curtain, nor welcome in the country he left.
You Have To See What I've been Writing About. This post would not be complete with out a link to his performance. If nothing else it might bring back memories. Most of his popular songs are recorded in German, Russian or Spanish. The following is in English. My lack of computer savvy keeps me from making a link but you can copy this one and paste it in your browser to see my old friend on stage. In addition to the performance I have included a second that is part of a documentary done on his life.
http://www.youtube.com/watch?v=gVgkePXZSk0&feature=related
http://www.youtube.com/watch?v=R0WF-sLPzBw&feature=related
Thursday, February 25, 2010
OUR ENERGY FUTURE
Alternative Energy Sources.........Not As Easy As It Looks. What is the fastest growing energy source for utilities? Despite all the talk about "clean" energy sources, the fastest growing source is coal. Granted, this is not the case in the U. S. but expansion in China and India is almost exclusively based on coal. We have yet to come close to exploiting all the coal available in this country and it doesn't look like we will considering it's reputation as a pollutant. Perhaps it's better that way, particularly in view of the "discovery" of huge natural gas deposits. Not only is natural gas cleaner than coal it is also more efficient; therefore, less carbon dioxide is produced per unit of energy delivered.
Oil Price Stability. There is little reason to believe that petroleum prices will rise this year, provided we don't pass some sort of carbon tax. The supply/demand balance has changed drastically over the last 18 months. Countries like Russia and Venezuela are already feeling the pinch from lower oil prices and may continue to make up for these low prices by producing more. The predominant opinion is that oil prices will be in the $70-80 range for most of this year. This is probably the optimum range for economic recovery. High enough to encourage conservation and exploration but not so high as to put a damper on expansion.
Working on Nuclear. Although it is likely to take some time before we see a lot of nuclear power in this country, the fact that no carbon emissions are produced makes it much more attractive to environmentalists. There appears to be some attractive new technology that lowers the risk of overheating in nuclear reactors and uses the radioactive material more efficiently. It involves encapsulating the nuclear fuel with beryllium oxide, thus more efficiently dissipating the heat.
Renewable Energy. Those of you who follow my writing will recall that I am not nearly so bullish on renewable energy sources as some who believe it is just a matter of pushing the right buttons. It's not that I wouldn't like to see some progress in this area, its just that I don't believe the technology is anywhere near available to make a dent in our energy needs. Much of the research currently being done is of dubious value. For example,a project at Ohio University to produce hydrogen, a carbon free energy source, they have discovered that the urine from one cow can be electrolyzed to produce enough hydrogen to provide hot water for 19 houses. I hope that doesn't bring the same mental picture to your mind as it does mine. In a recent article in The Economist, they predict that renewable sources will provide 10% of world energy needs by 2030. This is only a bit higher than the 7% which existed in 2006. Hardly enough to allow the world to get off fossil fuels any time soon.
Almost Mobile Again. I walked a couple miles today which leads me to believe I am able to make a trip to Colorado next week. If you need an appointment call Susan at 720-449-0200. She will know how to find me so we can schedule something.
Oil Price Stability. There is little reason to believe that petroleum prices will rise this year, provided we don't pass some sort of carbon tax. The supply/demand balance has changed drastically over the last 18 months. Countries like Russia and Venezuela are already feeling the pinch from lower oil prices and may continue to make up for these low prices by producing more. The predominant opinion is that oil prices will be in the $70-80 range for most of this year. This is probably the optimum range for economic recovery. High enough to encourage conservation and exploration but not so high as to put a damper on expansion.
Working on Nuclear. Although it is likely to take some time before we see a lot of nuclear power in this country, the fact that no carbon emissions are produced makes it much more attractive to environmentalists. There appears to be some attractive new technology that lowers the risk of overheating in nuclear reactors and uses the radioactive material more efficiently. It involves encapsulating the nuclear fuel with beryllium oxide, thus more efficiently dissipating the heat.
Renewable Energy. Those of you who follow my writing will recall that I am not nearly so bullish on renewable energy sources as some who believe it is just a matter of pushing the right buttons. It's not that I wouldn't like to see some progress in this area, its just that I don't believe the technology is anywhere near available to make a dent in our energy needs. Much of the research currently being done is of dubious value. For example,a project at Ohio University to produce hydrogen, a carbon free energy source, they have discovered that the urine from one cow can be electrolyzed to produce enough hydrogen to provide hot water for 19 houses. I hope that doesn't bring the same mental picture to your mind as it does mine. In a recent article in The Economist, they predict that renewable sources will provide 10% of world energy needs by 2030. This is only a bit higher than the 7% which existed in 2006. Hardly enough to allow the world to get off fossil fuels any time soon.
Almost Mobile Again. I walked a couple miles today which leads me to believe I am able to make a trip to Colorado next week. If you need an appointment call Susan at 720-449-0200. She will know how to find me so we can schedule something.
Thursday, February 04, 2010
SLOW IMPROVEMENT
It's Been a Long Improvement Process. A month ago I could barely walk upright. Although I am not totally pain free, It's great to be more mobile at this point. My memory may be less than stellar but I can hardly remember being laid up for so long at any other period of my life. I am just waiting to reach a level where I can maneuver a suitcase through the airport and fly to Denver.
The Market Continues to Decline. In my last post I questioned whether or not we have reached the point where the market corrects from the raging bull market we had last year. I anticipated it for several months while the market continued to go stronger. If nothing else, I expected a seasonal correction when the market tends to drop during September and October. While history shows that is most often correct, it is definitely not that simple. I had other reasons to expect a correction to include high unemployment, low consumer spending levels, and high foreclosure rates. At this point, the bottom line is that the market has dropped around 5% from its high and my guess is that it will go lower.
You Can't Separate Politics From The Economy. A lot of folks think I want to blame the Democrats for our difficulty. I have been highly critical of the administration and their economic policies; however, I am equally critical of the other party when they attempt to expand the government role in managing our economy. It isn't that I think the government deliberately de-rails the economy. The problem is that governments over-estimate their ability to be a positive influence. For example, consider their attempts to re-structure mortgage debt to allow more homeowners to avoid foreclosure. So far, they have restructured just over 1000 loans in the state of Colorado. If that is the best they can do that would be better off to quit trying and use the money elsewhere. Ask Realtors, mortgage brokers, and appraisers about how well they are regulating those industries. They have done far more harm than good with their attempts. Each party has their own constituency that they want to help. The Republicans are accused of favoring corporations and the democrats are accused of favoring unions. There is some truth in both these accusations. A more level playing field would probably help us all.
Hopefully, I Will See My Colorado Clients Soon. In the meantime, I will do my best to keep an eye on our investments.
The Market Continues to Decline. In my last post I questioned whether or not we have reached the point where the market corrects from the raging bull market we had last year. I anticipated it for several months while the market continued to go stronger. If nothing else, I expected a seasonal correction when the market tends to drop during September and October. While history shows that is most often correct, it is definitely not that simple. I had other reasons to expect a correction to include high unemployment, low consumer spending levels, and high foreclosure rates. At this point, the bottom line is that the market has dropped around 5% from its high and my guess is that it will go lower.
You Can't Separate Politics From The Economy. A lot of folks think I want to blame the Democrats for our difficulty. I have been highly critical of the administration and their economic policies; however, I am equally critical of the other party when they attempt to expand the government role in managing our economy. It isn't that I think the government deliberately de-rails the economy. The problem is that governments over-estimate their ability to be a positive influence. For example, consider their attempts to re-structure mortgage debt to allow more homeowners to avoid foreclosure. So far, they have restructured just over 1000 loans in the state of Colorado. If that is the best they can do that would be better off to quit trying and use the money elsewhere. Ask Realtors, mortgage brokers, and appraisers about how well they are regulating those industries. They have done far more harm than good with their attempts. Each party has their own constituency that they want to help. The Republicans are accused of favoring corporations and the democrats are accused of favoring unions. There is some truth in both these accusations. A more level playing field would probably help us all.
Hopefully, I Will See My Colorado Clients Soon. In the meantime, I will do my best to keep an eye on our investments.
Sunday, January 24, 2010
TIMING THE MARKET.
Is The Long-Anticipated Correction Finally Here? The market lost about 5% last week; however, I have little faith in my ability to get in and out of the market at the appropriate time. As a result, I may make a few adustments but I will always be allotting some of my investment capital to the stock market. There are numerous examples that show most investors "shoot themselves in the foot" when they try to get out of the market to avoid a downward correction. As an example, consider a recent article in the AAII Journal where they published a list of 15 mutual funds that returned from 10.1 to 19.2% per year over the past ten years. When they looked at the average returns received by the average investor in these funds, none of these produced a positive return for their investors. The problem is that most folks make investments around market peaks and get discouraged and pull their money out after a downward correction. We observed this same behavior from some clients during the recent severe market sell-off of the past 2 years.
One investment principle I always follow is never to buy a stock just because the price went up and never sell just because the price went down. There are many reasons to buy or sell a stock but reacting to price fluctuations never seems to work for me. In a sentence, my philosophy can be summarized as: Buy good companies that offer me an opportunity to start receiving a return on my investment right away. For example, over the past18 months I have accumulated 2000 shares of AT&T at an average price of 30.77. Today, the stock sells for around $25.39. If I sold the stock today, I would have a loss of more than $10,000. While there is no way to put a positive spin on this, one bright spot is that I have generated $6,500 in option premiums and $2,440 in dividends during this holding period. This cash flow, coupled with the fact that I still own 2000 shares of a good company, allows me to sleep at night.
Still Not Getting Around Too Well. Although my back is considerably improved, I still am limited in my mobility. I can get around the house and yard; however, I don't have the courage to navigate the airport and fly to Denver. I will keep you informed as to what my travel plans are.
One investment principle I always follow is never to buy a stock just because the price went up and never sell just because the price went down. There are many reasons to buy or sell a stock but reacting to price fluctuations never seems to work for me. In a sentence, my philosophy can be summarized as: Buy good companies that offer me an opportunity to start receiving a return on my investment right away. For example, over the past18 months I have accumulated 2000 shares of AT&T at an average price of 30.77. Today, the stock sells for around $25.39. If I sold the stock today, I would have a loss of more than $10,000. While there is no way to put a positive spin on this, one bright spot is that I have generated $6,500 in option premiums and $2,440 in dividends during this holding period. This cash flow, coupled with the fact that I still own 2000 shares of a good company, allows me to sleep at night.
Still Not Getting Around Too Well. Although my back is considerably improved, I still am limited in my mobility. I can get around the house and yard; however, I don't have the courage to navigate the airport and fly to Denver. I will keep you informed as to what my travel plans are.
Saturday, January 02, 2010
A FEW INVESTING TIPS FOR THE NEW DECADE.
This Year Finds Me A Bit Immobile. I am not sure what is causing this back problem but, as of today, I can barely walk. As soon as the weekend is over, I'll seek medical attention. I am tired of doing nothing so I thought I would put down a few thoughts on what we might expect for next year. As most of you know, I have always believed that you have to have a set of assumptions about the future in order to make sound investment decisions. Although, you can probably never plan for occurrences like those of the past two years, you have to play attention to what's going on and plan accordingly. Here are a few ideas.
Interest Rates Will Go Up Across The Board. Duh! You have probably heard this from a hundred sources. While all of these sources can be wrong, I don't think so. The real question is what are the implications. Some of the obvious ones are: Don't hang in there with an adjustable rate mortgage unless you have a firm exit strategy in place. Possible exit strategies are, 1. Pay off the loan. 2. Sell the property. 3. Refinance now before rates go up.
Don't tie up your cash in long-term, fixed- rate investments. You don't want to increase your yield by buying a 5 year CD instead of a 1-year. If you buy a 10-year bond, you will either have to stick with a low yield for 10 years or sell early at a substantial loss. If you insist on staying in so called safe investments, keep your investments short term for now.
There are a number of other implications from increased rates, but those are a couple of the major ones.
The Stock Market Will Become More Volatile. This is a prediction you may not hear elsewhere. Volatility is a measure of fear in the markets. Right now it is at a major low. If we have a correction, (as many analysts, including me have predicted) volatility should increase. Again, we need to decide the implications of this increase. My major strategy involves options.
Options prices go up with increased volatility. Although there are a number of factors that influence option prices, if all these are constant, option prices are directly correlated with volatility. In periods of low volatility, buying a long-term option is sometimes better than buying the stock. For example, suppose you believe the long-term prospects for Johnson and Johnson are favorable. If you want to buy 1000 shares, it will cost you $64,000. A better move might be to buy an option to purchase Johnson at $60 per share anytime between now and January 2012. You can buy this at $8,150 for 1000 shares. This strategy is not without risk; however, your maximum risk is limited to the price of the option as opposed to 64,000 with the stock. If the market becomes more volatile the option price will increase even of stock prices stay the same. Long-term options also increase with increasing interest rates. I am certainly going to emphasize this strategy in my own portfolio.
This does not mean I recommend it for do-it-yourself investors. I do recommend that you spend some time learning about the details of option investing. In order to do this, you need to spend time studying McMillan's book Options a a Strategic Investment. I've been studying this book for 1o years and I still find new things to help me invest in this area.
I Have Left Out A Lot. This post is just a few ideas to help you with your financial management during the next year. Stay tuned for others.
Thursday, December 24, 2009
WHO WANTS TO TALK ABOUT MONEY
Money Is Important. I’m sure that most of you read this column with the hope of gaining some insight as to how to manage your finances. For the most part, that’s what I try to convey. There are a lot of important things to talk about at this point like how to manage your cash flow in light of future tax increases, the soft real estate market, and potential estate tax changes. These things will have a profound effect on our financial future, but frankly, I am bored with talking about money. You can read a myriad of discussions about these topics in previous posts which started in 2006 but I would ask you to grant this old coot an opportunity to talk about something else.
We Took A Walk In The Woods. The woods next to our house bear little resemblance to the way they were when we bought the land in 1995. Two major hurricanes swept through here and ruined almost 75 trees, some of which had been here for more than a century. One very large pine tree gave way to a lightening strike and pine beetles are slowly chewing on several more. If there is a benefit to any of this it’s that we can more easily see what’s going on here. For example, in the early morning, there is a doe and fawn that often come through on their way to wherever deer go in daylight. You can also stand in awe of the trees that are left, including a majestic pine tree that the beetles haven’t found yet. Another is the holly tree that is shown in the picture above. That poor tree is about 15 feet tall and has been battered by wind and larger trees that knocked off its branches as they fell. Still, it had the energy to cover itself with beautiful red berries for this, the Christmas season. Twenty years ago I might not have seen this tree. I might have walked by it with my brain too consumed with day-to-day problems to bother converting the sensory input to the scene that I enjoyed so much on that sunny morning.
It is Christmas Eve. I have been thinking about miracles. I have read the Christmas story in Bible and watched several visual versions on TV. It is a beautiful story whether or not you believe in miracles. I recently watched a U-tube version of a good-bye speech made by a middle-aged lady dying of cancer. Much of her speech discussed the impossibility of the miracles reported in the Bible, including the virgin birth. While I respected the courage she exhibited mere days before her death, I must disagree with her statement that these miracles were impossible. As I look at the holly tree with its red berries, I am incapable of understanding the theory that this beautiful specimen originated from random collisions of molecules and subsequently evolved to its present state. That simple example is no more far-fetched than the Christmas miracle. Both the creation theory and the random collision theory may be possible and I am capable of fully understanding neither.
I Don’t Have To Understand To Appreciate It. Perhaps turning 70 has changed me but the beauty of this Earth leaves me in awe. I apologize to my friends who are of different faiths and those who are atheists. I am in no way attempting to influence the beliefs of others. For my Christian friends I say Merry Christmas and for the rest, I say Happy Holidays. I value relationships with friends and family more than any measure of wealth I could attain now or in the future.
We Took A Walk In The Woods. The woods next to our house bear little resemblance to the way they were when we bought the land in 1995. Two major hurricanes swept through here and ruined almost 75 trees, some of which had been here for more than a century. One very large pine tree gave way to a lightening strike and pine beetles are slowly chewing on several more. If there is a benefit to any of this it’s that we can more easily see what’s going on here. For example, in the early morning, there is a doe and fawn that often come through on their way to wherever deer go in daylight. You can also stand in awe of the trees that are left, including a majestic pine tree that the beetles haven’t found yet. Another is the holly tree that is shown in the picture above. That poor tree is about 15 feet tall and has been battered by wind and larger trees that knocked off its branches as they fell. Still, it had the energy to cover itself with beautiful red berries for this, the Christmas season. Twenty years ago I might not have seen this tree. I might have walked by it with my brain too consumed with day-to-day problems to bother converting the sensory input to the scene that I enjoyed so much on that sunny morning.
It is Christmas Eve. I have been thinking about miracles. I have read the Christmas story in Bible and watched several visual versions on TV. It is a beautiful story whether or not you believe in miracles. I recently watched a U-tube version of a good-bye speech made by a middle-aged lady dying of cancer. Much of her speech discussed the impossibility of the miracles reported in the Bible, including the virgin birth. While I respected the courage she exhibited mere days before her death, I must disagree with her statement that these miracles were impossible. As I look at the holly tree with its red berries, I am incapable of understanding the theory that this beautiful specimen originated from random collisions of molecules and subsequently evolved to its present state. That simple example is no more far-fetched than the Christmas miracle. Both the creation theory and the random collision theory may be possible and I am capable of fully understanding neither.
I Don’t Have To Understand To Appreciate It. Perhaps turning 70 has changed me but the beauty of this Earth leaves me in awe. I apologize to my friends who are of different faiths and those who are atheists. I am in no way attempting to influence the beliefs of others. For my Christian friends I say Merry Christmas and for the rest, I say Happy Holidays. I value relationships with friends and family more than any measure of wealth I could attain now or in the future.
Thursday, December 03, 2009
Time To Learn To Dance
“Life Is Not About avoiding the storms. It’s about learning to dance in the rain." Quote of Unknown Origin.
Are You Ready To Dance? I stole this quote from a friend who doesn’t really recall where he heard it. The beauty of the quote is that it can apply to a variety of life situations. I have been thinking a lot about investment risk lately and I wanted to share some of these thoughts with you.
Let’s Just Not Take Any Investment Risk. I have heard that statement a lot lately. Do you think you can avoid risk by putting all your investment capital in one year, certificates of deposit? In the early 80’s, you could get 11% on a one year CD. A million dollar nest egg, spread around in $100,000 increments would give you an income of $110,000 per year and be totally insured against loss by an agency of the federal government. If you stayed with that philosophy for the next 30 years you would find that your income dropping $30-40,000 per year at current rates of 3-4%. Of course, you would still have your million dollar principal but you could find your lifestyle significantly curtailed by the reduction in income. This type of risk is called
reinvestment risk.
How About a 30-year Government Bond? You could have been guaranteed an income of about $120,000 a year for the next 30 years and you could always get your principal back by selling the bond on the secondary market. Sounds good doesn’t it? But what if rates had increased to 16% instead of dropping? In 2 years your 30-year bond would be worth only $753,000. This type of risk is called “interest rate risk.” Even if you could have afforded to leave the money invested for the full 30 years, inflation would reduce the purchasing power of that million dollars to $308,000 (assuming an average inflation rate of 4%). This type of risk is called purchasing power risk.
Let’s Just Put It All In Gold. While that may sound like a ridiculous statement, let me assure you that I have had clients who made that very suggestion. Given the hype you hear on radio commercials today, you would be tempted. For example, if you had put a million dollars in gold at the average prices 9 years ago, you would have just over 4.1 million, a hefty return of almost 18% per year. These radio commercials tell you that and try to alleviate your fears of risk by saying “Gold has never been worth zero.” What a comforting statement that is. What they don’t tell you is that if you had bought gold in 1980, almost 30 years ago, your million dollar investment would be worth just $2 million, a return of 2.4%. Even worse, if you had panicked and sold your gold 20 years later at the average price of $279 per ounce, your million dollars would have been just over 455,000, a compounded negative 4% per year. I call this type of risk, timing risk. The worst thing about this type of risk is that, in times of high prices, you will be bombarded by radio commercials and sales calls telling you about the high returns available and by the time they say “past performance is no guarantee of future results” you are hooked When prices are lower, these sales people go back to their regular jobs at convenience stores or driving taxis. These market forces direct you to buy high and sell low, and many investors fall into this trap. For example, mutual funds have to tell you their average return over a long period of time. Unfortunately, most individual investors fail to get close to that return because of the natural tendency to buy when prices are high and sell when prices are low.
Let’s Take A Look At the Stock Market. Pretty scary isn’t it. Most of us have suffered substantial losses in the past 2-3 years. Again, it’s a matter of timing. If you would have bought stocks in 1980 and received the average return of the S&P500 average. Your million dollars would have received a compounded return of 7.87%. Added to this would be an approximate dividend yield of 3% (Average of 53 years, best number I could find). If you had invested a million in 1980, you could sell out now for around 9.7 mil. In addition, you would have received approximately $30,000 in dividends that you could reinvest or spend each year. Just like in the gold investment, you would have timing risk along with market risk and some purchasing power risk.
What About Real Estate? Unlike the stock market, there is little in the way of statistical data on real estate returns. The nearest thing I could find was the Case-Shiller Indices that show the nationwide average returns on investment in single family housing was 9.31% from 1998 through 2007. This compares with 5.91 for the stock market. It should be emphasized that this was a very favorable period for housing. It should also be noted that Case-Shiller doesn’t give much detail on whether these returns are leveraged or whether they include rents and professional management costs. For the purposes of this review let’s just say that real estate offers an alternative and could part of any investment portfolio. Risks are market risk, timing risk, and some management risk.
None of These Investments are “Bad,” The main purpose of this column was to let you know that there are real risks involved with any investment vehicle; however, each one of these investments are appropriate for certain purposes. The trick is to pick the ones that are right for your risk tolerance and unique needs. Like the quote at the beginning implies, no one can predict the future. What we have to do is design a strategy, monitor that strategy, and make changes when necessary.
Are You Ready To Dance? I stole this quote from a friend who doesn’t really recall where he heard it. The beauty of the quote is that it can apply to a variety of life situations. I have been thinking a lot about investment risk lately and I wanted to share some of these thoughts with you.
Let’s Just Not Take Any Investment Risk. I have heard that statement a lot lately. Do you think you can avoid risk by putting all your investment capital in one year, certificates of deposit? In the early 80’s, you could get 11% on a one year CD. A million dollar nest egg, spread around in $100,000 increments would give you an income of $110,000 per year and be totally insured against loss by an agency of the federal government. If you stayed with that philosophy for the next 30 years you would find that your income dropping $30-40,000 per year at current rates of 3-4%. Of course, you would still have your million dollar principal but you could find your lifestyle significantly curtailed by the reduction in income. This type of risk is called
reinvestment risk.
How About a 30-year Government Bond? You could have been guaranteed an income of about $120,000 a year for the next 30 years and you could always get your principal back by selling the bond on the secondary market. Sounds good doesn’t it? But what if rates had increased to 16% instead of dropping? In 2 years your 30-year bond would be worth only $753,000. This type of risk is called “interest rate risk.” Even if you could have afforded to leave the money invested for the full 30 years, inflation would reduce the purchasing power of that million dollars to $308,000 (assuming an average inflation rate of 4%). This type of risk is called purchasing power risk.
Let’s Just Put It All In Gold. While that may sound like a ridiculous statement, let me assure you that I have had clients who made that very suggestion. Given the hype you hear on radio commercials today, you would be tempted. For example, if you had put a million dollars in gold at the average prices 9 years ago, you would have just over 4.1 million, a hefty return of almost 18% per year. These radio commercials tell you that and try to alleviate your fears of risk by saying “Gold has never been worth zero.” What a comforting statement that is. What they don’t tell you is that if you had bought gold in 1980, almost 30 years ago, your million dollar investment would be worth just $2 million, a return of 2.4%. Even worse, if you had panicked and sold your gold 20 years later at the average price of $279 per ounce, your million dollars would have been just over 455,000, a compounded negative 4% per year. I call this type of risk, timing risk. The worst thing about this type of risk is that, in times of high prices, you will be bombarded by radio commercials and sales calls telling you about the high returns available and by the time they say “past performance is no guarantee of future results” you are hooked When prices are lower, these sales people go back to their regular jobs at convenience stores or driving taxis. These market forces direct you to buy high and sell low, and many investors fall into this trap. For example, mutual funds have to tell you their average return over a long period of time. Unfortunately, most individual investors fail to get close to that return because of the natural tendency to buy when prices are high and sell when prices are low.
Let’s Take A Look At the Stock Market. Pretty scary isn’t it. Most of us have suffered substantial losses in the past 2-3 years. Again, it’s a matter of timing. If you would have bought stocks in 1980 and received the average return of the S&P500 average. Your million dollars would have received a compounded return of 7.87%. Added to this would be an approximate dividend yield of 3% (Average of 53 years, best number I could find). If you had invested a million in 1980, you could sell out now for around 9.7 mil. In addition, you would have received approximately $30,000 in dividends that you could reinvest or spend each year. Just like in the gold investment, you would have timing risk along with market risk and some purchasing power risk.
What About Real Estate? Unlike the stock market, there is little in the way of statistical data on real estate returns. The nearest thing I could find was the Case-Shiller Indices that show the nationwide average returns on investment in single family housing was 9.31% from 1998 through 2007. This compares with 5.91 for the stock market. It should be emphasized that this was a very favorable period for housing. It should also be noted that Case-Shiller doesn’t give much detail on whether these returns are leveraged or whether they include rents and professional management costs. For the purposes of this review let’s just say that real estate offers an alternative and could part of any investment portfolio. Risks are market risk, timing risk, and some management risk.
None of These Investments are “Bad,” The main purpose of this column was to let you know that there are real risks involved with any investment vehicle; however, each one of these investments are appropriate for certain purposes. The trick is to pick the ones that are right for your risk tolerance and unique needs. Like the quote at the beginning implies, no one can predict the future. What we have to do is design a strategy, monitor that strategy, and make changes when necessary.
Tuesday, November 24, 2009
Reflections on a Fall Day
South Texas Is not Known For Beautiful Fall Foliage. Fall colors have been almost non-existent for two of the past three years, mainly due to hurricanes which blew the leaves off trees while they were still green. In my area, the woods look a bit scruffy because even the trees that were spared were damaged by wind or falling trees. Finally, the past few years have brought a drought which inhibited some of the fall colors. Still, even with limited Autumn colors, there is still ample beauty here if you know how to appreciate it. Sumac trees at the edge of the woods are a bright scarlet and Chinese Tallow, normally considered a trash tree, add some additional red color. Another thing that adds to the beauty of the South Texas fall is the flowers, which have virtually disappeared in cooler areas, are still blooming here. Looking out my front door, I see the Salvia, Knockout Rose, and Geraniums blooming with the red Sumac blooming at the end of the yard. One thing I know is that life is better now that I’ve learned to appreciate nature’s beauty.
Cash Is King??? I don’t know who invented that saying but I have seldom agreed with it. Of course, any financial rule depends on the needs of the individual. For example, if you are stuck in the middle of a small rural area and you want a hot dog from a small rural operator who doesn’t take credit cards, cash may be king at that moment. But if you are an investor, afraid to take risk in the financial or real estate markets, the return available on your cash equivalents are so low that the income you can generate will do little to supplement your cash flow needs. This results in reluctant investors being forced into the markets to keep from spending down assets that are critical to survival in their later years. A number of investors I know are in that very situation, having exited the market and missed a dazzling rally while waiting for a signal that it was safe to re-enter the market again. While I admit to selling some assets and increasing my cash allocation in the past year, I have never been completely in cash. In fact, cash has never been the majority of my investment portfolio.
Is The Long-Awaited Stock Market Correction Finally Here? I think so but I can tell you that I have thought so for some time. My fear has kept me from being as aggressive as I could have been to maximize returns in this situation. Still I have to go with my instincts and continue to move slowly. Part of the reason our markets have been as strong as they are is that those of us who already have all the houses and cars we need are subsidizing those who want to buy in this market. Cash for Clunkers and new home buyer subsidies are providing temporary props for the housing and car markets. This amounts to doing more of what got us in trouble in the first place. What happens when these subsidies are withdrawn? My guess is that things will slow down even more. I believe that the risk in the market exceeds the reward right now. Does that mean we should get out? ABSOLUTELY NOT. For my part, I will continue to emphasize dividend paying stocks and try to increase incremental returns by selling calls against those stocks. Of course, I might raise some cash now and then when I am holding assets that are fully valued or even overvalued, but getting out totally is not an option.
Should You Buy Real Estate? Not with your last dollar. Lack of liquidity can sink you in a hurry. If you are looking to pull some money out of the markets and, if you can put up with the stress of an uneven cash flow and occasional maintenance problem, there are signs of improvement in the local housing markets. In my last post, I talked about the shrinking inventory of resale houses on the market. Obviously that is a positive sign. Another positive sign is the lack of builder activity. So far this year, there have only been 1,787 single-family home permits along with a paltry 471 condo and townhome permits. This is the lowest since 1989 when the population of the metro was fifty percent lower than at present. (See John Rebchook Insiderealestatenews.com). Not all signs are positive. The low rate of job formation, high foreclosure rate, and low sales levels indicate that we may not be at the bottom yet; however, I’ll tell you the same thing I told you when the Dow-Jones average was below 7000. There is more risk than reward in the housing market.
Either Way It’s Not Time To Complain. I have been on this planet for more than 70 years and there is no comparison between how well we live now and how we lived when I was growing up. The typical person has three times the buying power that his parents had in 1960 (The year I got my undergraduate degree). In the 2000 census, less than 1% of our families were without inside plumbing. ( Our family was one of those until I was 10 years old). The average new home is 2349 square feet as opposed to 1100 in 1950. Lest most of you think the 1950’s is ancient history, let me remind you that I graduated from high school in 1956. Don’t think I am complaining about how poor our family was. Most of our friends were in the same boat and I have many happy memories from that era. Rather than complain and expect the government (meaning our friends and neighbors) to take care of us, most of us just need to take responsibility for our own lives and appreciate what we have. Here's to a happy Thanksgiving for all.
Friday, November 13, 2009
The Old Man And The Bass
November 11, 2009. Veterans DayDedicated to My Friend Larry Davis, First Seargent. Retired .
Back In Texas. It’s nice to be back in Texas after a 3-week visit to Colorado. Day before yesterday, I caught the biggest bass I have ever caught. It weighed 8.4 lbs. The first thing I did was call Ms. Betty and tell her to meet me at the dock with a camera. I must admit that my main objective was vanity, which meant getting a picture of me with this creature. My next objective was getting him back in the water. Twenty years ago I would have cut slabs of meat from each side and thrown the remainder in the woods for the buzzards. What a shame that would have been. The most memorable part of the whole incident was watching his tail swish back and forth as he swam near the surface across the lake. Maybe my grandchildren can catch him again.
Waiting For The Elusive Stock Market Correction. Everyone expected the market to correct in September. Didn’t happen then or in October. While we expect some tax loss selling in November and part of December, late December and early January have historically been good months. It all boils down to a quote from my friend, Don Kramer. “The market will do everything it can to prove the maximum number of investors wrong the maximum amount of time.” I’m sure Don would tell us that that quote didn’t originate with him. Indeed, there is a large amount of empirical data that shows this statement to be true. This backs up my contention that it is virtually impossible to time the market with any degree of accuracy. If a number of my clients are any indication, a very large number of investors got out of the market at the very bottom, some of which vowed never to risk money in the market again. They missed the almost 50% rebound that occurred shortly thereafter. Again, there is a large amount of empirical data that shows that very few investors receive the average returns obtained by most mutual funds. Most get in when the markets are hot and out when the markets are down. The problem with exiting the market after a major drop is that no one knows when to get back in. My philosophy is not to be totally in or out of the market at any given time. Although our emphasis on cash flow didn’t totally protect us from the downturn, at least we were paid to hold on. I will continue to manage my own portfolio with an emphasis on current cash flow.
The Real Estate Market Is A Bit More Predictable. If you follow certain market statistics, you can have some idea of when a rebound is almost certain to occur. Perhaps the most reliable statistics are the number of homes on the market and the average number of sales per month in a given year. This is a measure of supply and demand. As an example, in October 2008, the inventory of properties listed for resale was 23,120. A year later there are only 18,945, a drop of 18%. This inventory is the lowest level in the past 8 years. While this is encouraging it must be considered along with sales levels. Through October of 2008, there were 41,683 properties sold or an average of 4168 sales per month. The same period this year saw an average of 3551 sales per month. This means that the current supply would be expected to last for 5.3 months as opposed to 5.6 last year at this time, indicating that we are not significantly better off than we were last year. Our experience indicates that we are near an supply/demand equilibrium when the inventory is less than 6 months. The lack of builder activity along with low interest rates are an indication that the unsold inventory will continue to drop. For those of you who would like to stay more informed about the real estate market, I highly recommend a blog by John Rebchook, with the address insiderealestate.com. That is the site where I obtained these current statistics.
I Haven’t Felt Too Much Like Writing Lately. That doesn’t mean I’m not keeping an eye on the markets and trying to keep you informed of developments in the financial markets. Stay tuned for more frequent posts in the future.
Thursday, October 08, 2009
SOME INTERESTING REAL ESTATE STATISTICS
"The ability to manage the unexpected consequences of our decisions is the real secret of investment success". Peter Bernstein.
The Last Two Years Have Been Difficult. It seems like there are so many unexpected consequences that expected consequences don’t exist any more. We can use the statistical tools, the laws of probability, and our experience but we can’t avoid the events which take us by surprise. Many so-called experts tell us that this is a difficult time to invest. I have news for them. It’s always a difficult time to invest.
I Discovered A New Source of Data. It’s been around for a long time and I don’t know how I missed it. It’s called the Case-Shiller Report and it’s published by Standard and Poor’s. It follows real estate statistics in 20 metropolitan regions. Fortunately, Denver Colorado is one of them. The unique thing about their housing statistics is that they have the most accurate statistics on home appreciation rates that I have seen. In the past, I have used increases in the average sale price for a given area to determine appreciation rates. This leaves a lot to be desired since it doesn’t account for increases in home size or the proportion of homes that sell in a given price range. The Case-Shiller Index employs a technique in which they keep track of the sales of individual houses and derives an index to illustrate the increase or decreases in sale price. Data has been collected for 20 years.
Appreciation Rates Are Highly Variable. As an example, consider the period from 1988-1990. In Denver, the appreciation rate was zero. Contrast that to the period from 1999-2001 when the appreciation rate was approximately 13%. During the next 5 years, the appreciation rate slowed to about 3%. July 2006 was close to the high point in the market as prices began to deteriorate at the rate of about 2.8% per year. That period is the only one during the past 20 years where there has been a substantial depreciation in the area. This is a good example of unexpected consequences. The question is, can we use these and other statistics to predict the future of the housing prices.
What Can We Learn About The Future. From last month’s data, it appears that prices are stabilizing; however, one month doesn’t constitute a trend. Positive factors are a rapidly declining number of new building permits, declining inventory of existing homes for sale, and a slower rate of job loss. Although Case-Shiller does not publish some statistics for individual areas, we can learn something from their national statistics. On a national level, homes in foreclosure have increased by 23% from a similar period last year. Even more troubling is the delinquency rate which has increased by 44% from last year. This indicates that we will be seeing a consistent supply of new inventory via foreclosures. Even though the government brags about the success of their foreclosure avoidance program, they say little about the fact that 50% of the loans that are modified to help the consumer are delinquent again within 6 months.
So Is Now The Time To Invest In a Single Family House in Colorado? You definitely have less competition from other buyers. The $8,000 new home buyer tax credit is expiring soon and I suspect that there will be less competition from other investors and buyers of second homes. In 2007, 21% of buyers were investors and 12% were buyers of second homes. This means that fully one third of buyers were in the market for something other than a primary residence. I suspect that many of these have left the market for lack of confidence. You will also have more renters in the market place as those who lose their homes to foreclosure have to live someplace. You might have heard that it is more difficult to qualify for a mortgage in this market. That’s true; however, lenders are always eager to loan to buyers with good credit and a substantial down payment. It is my opinion that buyers of single-family home investments will do better than other investors in today’s market place.
I Am In Colorado For Awhile. Give me a call on my cell phone at 303-902-3940 if you would like to get together.
The Last Two Years Have Been Difficult. It seems like there are so many unexpected consequences that expected consequences don’t exist any more. We can use the statistical tools, the laws of probability, and our experience but we can’t avoid the events which take us by surprise. Many so-called experts tell us that this is a difficult time to invest. I have news for them. It’s always a difficult time to invest.
I Discovered A New Source of Data. It’s been around for a long time and I don’t know how I missed it. It’s called the Case-Shiller Report and it’s published by Standard and Poor’s. It follows real estate statistics in 20 metropolitan regions. Fortunately, Denver Colorado is one of them. The unique thing about their housing statistics is that they have the most accurate statistics on home appreciation rates that I have seen. In the past, I have used increases in the average sale price for a given area to determine appreciation rates. This leaves a lot to be desired since it doesn’t account for increases in home size or the proportion of homes that sell in a given price range. The Case-Shiller Index employs a technique in which they keep track of the sales of individual houses and derives an index to illustrate the increase or decreases in sale price. Data has been collected for 20 years.
Appreciation Rates Are Highly Variable. As an example, consider the period from 1988-1990. In Denver, the appreciation rate was zero. Contrast that to the period from 1999-2001 when the appreciation rate was approximately 13%. During the next 5 years, the appreciation rate slowed to about 3%. July 2006 was close to the high point in the market as prices began to deteriorate at the rate of about 2.8% per year. That period is the only one during the past 20 years where there has been a substantial depreciation in the area. This is a good example of unexpected consequences. The question is, can we use these and other statistics to predict the future of the housing prices.
What Can We Learn About The Future. From last month’s data, it appears that prices are stabilizing; however, one month doesn’t constitute a trend. Positive factors are a rapidly declining number of new building permits, declining inventory of existing homes for sale, and a slower rate of job loss. Although Case-Shiller does not publish some statistics for individual areas, we can learn something from their national statistics. On a national level, homes in foreclosure have increased by 23% from a similar period last year. Even more troubling is the delinquency rate which has increased by 44% from last year. This indicates that we will be seeing a consistent supply of new inventory via foreclosures. Even though the government brags about the success of their foreclosure avoidance program, they say little about the fact that 50% of the loans that are modified to help the consumer are delinquent again within 6 months.
So Is Now The Time To Invest In a Single Family House in Colorado? You definitely have less competition from other buyers. The $8,000 new home buyer tax credit is expiring soon and I suspect that there will be less competition from other investors and buyers of second homes. In 2007, 21% of buyers were investors and 12% were buyers of second homes. This means that fully one third of buyers were in the market for something other than a primary residence. I suspect that many of these have left the market for lack of confidence. You will also have more renters in the market place as those who lose their homes to foreclosure have to live someplace. You might have heard that it is more difficult to qualify for a mortgage in this market. That’s true; however, lenders are always eager to loan to buyers with good credit and a substantial down payment. It is my opinion that buyers of single-family home investments will do better than other investors in today’s market place.
I Am In Colorado For Awhile. Give me a call on my cell phone at 303-902-3940 if you would like to get together.
Tuesday, September 29, 2009
GLOBAL WARMING. HOW BAD IS IT?
There is No Way I Can Answer That Question. Despite 6 years of scientific education and 20 years of working for energy companies, I can't find the answer to that question. It's hard for me to believe that a divinity school drop out can state with certainty that he knows the answer to the extent that he can declare the debate to be over. Another thing I can't quite figure out is how a scientific issue has almost completely morphed into a political one. Polls show that the vast majority of liberal voters agree that global warming is a serious problem while a vast majority of conservative voters claim that the whole thing is a hoax.
One More Question Needs To Be Answered. To what extent do humans contribute to the problem? Climate cycles have existed since long before we appeared on this planet. Carbon dioxide, the supposed main culprit, has existed since prehistoric times. Without it neither plant nor animal life would exist. Proponents of the man-made nature of the problem state that the concentration of CO2 in the atmosphere has increased by 25% since the use of fossil fuels became prevalent. This sounds significant until you become aware of the fact that, this increase means that there is one more molecule of CO2 out of 10,000 molecules of other gasses in our atmosphere. Is it possible that this low concentration substance could really be the culprit? I am skeptical.
So What Is The Next Step. 1. We could do nothing and take the risk that the problem is real and man made with potential disastrous consequences. 2. We could outlaw the use of fossil fuels and face a certain worldwide economic collapse. Of the two, option 1 is almost certainly preferable. Perhaps, the best option lies somewhere in between, which brings us to the point of this article: The cap and trade legislation passed by the House of Representatives involves an attempt by the government to encourage development of renewable energy resources by taxing fossil fuels and using the proceeds to subsidize development of alternative sources. Of course, in typical government fashion, the bill contains several additions. One of these is requiring energy audits on properties being sold (including single family houses) and requiring properties be brought up to some standard of energy efficiency before closing.
Why the Plan Won't Work. Consider our utility energy as an example. Virtually 90% of our utility energy comes from three sources. coal (48.5%), natural Gas (21.3%), and nuclear (19.6%). None of these is popular with the environmental crowd. The rest comes from renewable sources: hydroelectric (6%), other renewables (2.5%), miscellaneous (.5%). When we take hydroelectric out of the mix (we have virtually exhausted the potential for new dams) we are left with only 3% currently coming from renewable resources. Although some technologies like cellulostic ethanol, wind, geothermal, and solar have promise, they have had promise for 20 years now and still account for only a fraction of our energy production. I could never support a program that taxes 90% of our resources in order to fund research on the other 3%. If you think the government knows how to encourage new technology by subsidies, consider the huge sums of money thrown into the corn ethanol fiasco which added little or nothing to the availability of renewable energy and caused food prices to increase by large amounts. Finally, someone discovered that production of corn and converting it to ethanol burned up almost as much energy as it produced.
I Am In Favor Of Renewable Energy Research. But we must develop products that are economically feasible. Adopting a program to tax 90% of our energy sources will only make us less competitive with OPEC. As the availability of fossil fuels diminishes, renewable resources will become more usable. Until that point, attempts by government will only cost taxpayers money and produce minimal environmental benefits.
One More Question Needs To Be Answered. To what extent do humans contribute to the problem? Climate cycles have existed since long before we appeared on this planet. Carbon dioxide, the supposed main culprit, has existed since prehistoric times. Without it neither plant nor animal life would exist. Proponents of the man-made nature of the problem state that the concentration of CO2 in the atmosphere has increased by 25% since the use of fossil fuels became prevalent. This sounds significant until you become aware of the fact that, this increase means that there is one more molecule of CO2 out of 10,000 molecules of other gasses in our atmosphere. Is it possible that this low concentration substance could really be the culprit? I am skeptical.
So What Is The Next Step. 1. We could do nothing and take the risk that the problem is real and man made with potential disastrous consequences. 2. We could outlaw the use of fossil fuels and face a certain worldwide economic collapse. Of the two, option 1 is almost certainly preferable. Perhaps, the best option lies somewhere in between, which brings us to the point of this article: The cap and trade legislation passed by the House of Representatives involves an attempt by the government to encourage development of renewable energy resources by taxing fossil fuels and using the proceeds to subsidize development of alternative sources. Of course, in typical government fashion, the bill contains several additions. One of these is requiring energy audits on properties being sold (including single family houses) and requiring properties be brought up to some standard of energy efficiency before closing.
Why the Plan Won't Work. Consider our utility energy as an example. Virtually 90% of our utility energy comes from three sources. coal (48.5%), natural Gas (21.3%), and nuclear (19.6%). None of these is popular with the environmental crowd. The rest comes from renewable sources: hydroelectric (6%), other renewables (2.5%), miscellaneous (.5%). When we take hydroelectric out of the mix (we have virtually exhausted the potential for new dams) we are left with only 3% currently coming from renewable resources. Although some technologies like cellulostic ethanol, wind, geothermal, and solar have promise, they have had promise for 20 years now and still account for only a fraction of our energy production. I could never support a program that taxes 90% of our resources in order to fund research on the other 3%. If you think the government knows how to encourage new technology by subsidies, consider the huge sums of money thrown into the corn ethanol fiasco which added little or nothing to the availability of renewable energy and caused food prices to increase by large amounts. Finally, someone discovered that production of corn and converting it to ethanol burned up almost as much energy as it produced.
I Am In Favor Of Renewable Energy Research. But we must develop products that are economically feasible. Adopting a program to tax 90% of our energy sources will only make us less competitive with OPEC. As the availability of fossil fuels diminishes, renewable resources will become more usable. Until that point, attempts by government will only cost taxpayers money and produce minimal environmental benefits.
Tuesday, September 22, 2009
MORE MARKET STRATEGIES
Simple Pleasures. Every once in awhile, life gives you a little bonus. I’m not talking about winning the lottery. I am talking about the simple things that you might even miss if you aren’t paying attention. The picture is of a flower I observed in the woods where I live. I have no idea how it got there. Perhaps it was planted a long time ago by someone or perhaps it has always been there obscured by other plants and I didn’t notice it. Anyway, I discovered three more after that one. I hope they come back next fall and I am here to see them.
The Market Is Up Again Today. It really seems overvalued; however, one explanation I read is that there are large amounts of cash on the sidelines held by investors who are disappointed that they missed the recent rally and have grown tired of getting virtually zero returns on their “safe” bank deposits and money market funds. Another explanation is that when a large majority thinks the direction of the market has to change direction, they are usually wrong. Your guess is as good as mine but I continue to look for new strategies that will do well in a market that is flat or declining.
There Are Reasons To Be Cautious. Perhaps the main reason for caution is consumer behavior. The consumer accounts for 70% of our economic growth they are scared and finally beginning to realize that borrowing to fund a lifestyle they really can’t afford can’t go on forever. Of course, they are also worried about potential job loss, decline home values, and declining investment values.
If You Got Out Of The Market, It May Be Too Late To Get Back In. You might re-enter the market with some of your cash but it certainly isn’t time to jump in with both feet. I may sound like a broken record but I still believe in investing for income. The following is an example of an income portfolio. These stocks survived the debacle and the odds of dividend cuts or devastating price decline are not large.
American Electric Power Price 31.9 Yield 5.21 Utility Company
AT&T Price 26.5 Yield 6.19 Telecom
Bristol Meyers Price 22.2 Yield 5.57 Drug
Kinder Morgan Price 54.42 Yield 7.72 Energy pipeline
Prologis Preferred Price 19.73 Yield 8.74 Real Estate
Apollo Investment Price10.2 Yield 11 Business Development
Prospect Capital Price10.6 Yield 15 Business Development.
By way of disclosure, I own all these companies in my own portfolio except Kinder Morgan and American Electric. Those I don’t own are companies I may buy in the future. I might also add that I bought some of these at a considerably higher price than those listed here. As long as I get the dividend, I am not overly concerned about the current price.
Don’t Bet The Farm. Any or all of these stocks could go in the tank next week. I am not recommending that anyone embark on a venture to purchase this portfolio, just giving you some ideas as to ways to get a bit higher return than on guaranteed investments. If I thought this portfolio would go to zero, I would take my money out. If I thought the value would skyrocket, I would put all my money in. Undoubtedly, this is more risky than insured deposits but some risk is necessary in order to generate sufficient cash flow to fund my living expenses.
The Market Is Up Again Today. It really seems overvalued; however, one explanation I read is that there are large amounts of cash on the sidelines held by investors who are disappointed that they missed the recent rally and have grown tired of getting virtually zero returns on their “safe” bank deposits and money market funds. Another explanation is that when a large majority thinks the direction of the market has to change direction, they are usually wrong. Your guess is as good as mine but I continue to look for new strategies that will do well in a market that is flat or declining.
There Are Reasons To Be Cautious. Perhaps the main reason for caution is consumer behavior. The consumer accounts for 70% of our economic growth they are scared and finally beginning to realize that borrowing to fund a lifestyle they really can’t afford can’t go on forever. Of course, they are also worried about potential job loss, decline home values, and declining investment values.
If You Got Out Of The Market, It May Be Too Late To Get Back In. You might re-enter the market with some of your cash but it certainly isn’t time to jump in with both feet. I may sound like a broken record but I still believe in investing for income. The following is an example of an income portfolio. These stocks survived the debacle and the odds of dividend cuts or devastating price decline are not large.
American Electric Power Price 31.9 Yield 5.21 Utility Company
AT&T Price 26.5 Yield 6.19 Telecom
Bristol Meyers Price 22.2 Yield 5.57 Drug
Kinder Morgan Price 54.42 Yield 7.72 Energy pipeline
Prologis Preferred Price 19.73 Yield 8.74 Real Estate
Apollo Investment Price10.2 Yield 11 Business Development
Prospect Capital Price10.6 Yield 15 Business Development.
By way of disclosure, I own all these companies in my own portfolio except Kinder Morgan and American Electric. Those I don’t own are companies I may buy in the future. I might also add that I bought some of these at a considerably higher price than those listed here. As long as I get the dividend, I am not overly concerned about the current price.
Don’t Bet The Farm. Any or all of these stocks could go in the tank next week. I am not recommending that anyone embark on a venture to purchase this portfolio, just giving you some ideas as to ways to get a bit higher return than on guaranteed investments. If I thought this portfolio would go to zero, I would take my money out. If I thought the value would skyrocket, I would put all my money in. Undoubtedly, this is more risky than insured deposits but some risk is necessary in order to generate sufficient cash flow to fund my living expenses.
Friday, September 18, 2009
MORE STRATEGY CHANGES
A Forecast Tells You A Lot About The Forecaster But Nothing About The Future…
Warren Buffet.
With All Due Respect To Mister Buffet…It is impossible to plan your financial future without making some assumptions about what you anticipate will happen in the future. These assumptions constitute a forecast. As the future unfolds it is advisable to think about those assumptions in order to determine if those you made when you put your financial plan in place are still valid. If not, does your present strategy still fit in the current environment/ In my case, the strategies I developed 30-years ago when I first got serious about the planning process, have changed numerous times. Some of the changes were in response to changes in the environment while others were because of changes in my investment philosophy. In one of my August posts, I listed assumptions about changes that might chang to compensate for the over-use of leverage by the government, business, and consumers. These changes have caused me to challenge one strategy that I have held of several years. Perhaps you might want to consider a similar change.
Earlier Withdrawal From Qualified Plans Might Be Advisable. One commonly accepted principal is that retirees should first withdraw funds from non-qualified plans in order to allow tax-deferred funds to accumulate in qualified plans. For those of you who may not know, qualified plans are contributions made with funds which were not taxed. An example is a 401-k or IRA account. While the assumption that it is best to withdraw non-qualified funds first may still be appropriate for some retirees, others might want to begin withdrawals earlier. The reason for this is the potential for much higher taxes later. The huge federal deficit along with deficiencies in the social security system are almost certain to cause tax increases in the future. Just as social security became taxable for higher income beneficiaries in 1984, other increases will probably be necessary in the future. In fact, a recent change in Medicare part B premiums has been enacted for retirees earning more than $160K per year. This increase can constitute a major reduction in net social security income those affected taxpayers. Another reason that this year might be a good year for withdrawal, is that many of us had lower overall incomes in 2009 compared to what we hope to have in the future. Finally, an early withdrawal can benefit your heirs who might find themselves subject to estate taxes as well as income taxes on inherited benefits.
When Will The Anticipated Correction Occur. The market is approaching 10,000, a level that most of us were not expecting until next year. Most analysts are anticipating a correction because they believe the market has moved too far too fast. In addition, statistical analyses indicate that returns are much lower during the last four months of the year. My strategy is to raise some cash by selling stocks that appear fully valued and those in which we have deductible losses in the current year. I am not recommending carrying this strategy to the extreme and selling everything but a slight increase in cash allocation appears prudent at this time. As usual, I favor retaining or making new investments in companies that pay higher dividends or offer attractive option opportunities.
Coming Back To Colorado. Betty and I will probably come back to Colorado in early October. I regret that I didn’t get to visit with everyone on my recent trip and look forward to meeting with others later.
Warren Buffet.
With All Due Respect To Mister Buffet…It is impossible to plan your financial future without making some assumptions about what you anticipate will happen in the future. These assumptions constitute a forecast. As the future unfolds it is advisable to think about those assumptions in order to determine if those you made when you put your financial plan in place are still valid. If not, does your present strategy still fit in the current environment/ In my case, the strategies I developed 30-years ago when I first got serious about the planning process, have changed numerous times. Some of the changes were in response to changes in the environment while others were because of changes in my investment philosophy. In one of my August posts, I listed assumptions about changes that might chang to compensate for the over-use of leverage by the government, business, and consumers. These changes have caused me to challenge one strategy that I have held of several years. Perhaps you might want to consider a similar change.
Earlier Withdrawal From Qualified Plans Might Be Advisable. One commonly accepted principal is that retirees should first withdraw funds from non-qualified plans in order to allow tax-deferred funds to accumulate in qualified plans. For those of you who may not know, qualified plans are contributions made with funds which were not taxed. An example is a 401-k or IRA account. While the assumption that it is best to withdraw non-qualified funds first may still be appropriate for some retirees, others might want to begin withdrawals earlier. The reason for this is the potential for much higher taxes later. The huge federal deficit along with deficiencies in the social security system are almost certain to cause tax increases in the future. Just as social security became taxable for higher income beneficiaries in 1984, other increases will probably be necessary in the future. In fact, a recent change in Medicare part B premiums has been enacted for retirees earning more than $160K per year. This increase can constitute a major reduction in net social security income those affected taxpayers. Another reason that this year might be a good year for withdrawal, is that many of us had lower overall incomes in 2009 compared to what we hope to have in the future. Finally, an early withdrawal can benefit your heirs who might find themselves subject to estate taxes as well as income taxes on inherited benefits.
When Will The Anticipated Correction Occur. The market is approaching 10,000, a level that most of us were not expecting until next year. Most analysts are anticipating a correction because they believe the market has moved too far too fast. In addition, statistical analyses indicate that returns are much lower during the last four months of the year. My strategy is to raise some cash by selling stocks that appear fully valued and those in which we have deductible losses in the current year. I am not recommending carrying this strategy to the extreme and selling everything but a slight increase in cash allocation appears prudent at this time. As usual, I favor retaining or making new investments in companies that pay higher dividends or offer attractive option opportunities.
Coming Back To Colorado. Betty and I will probably come back to Colorado in early October. I regret that I didn’t get to visit with everyone on my recent trip and look forward to meeting with others later.
Monday, September 07, 2009
LABOR DAY REFLECTIONS.
"In England, a coal miner's son will almost certainly grow up to be a coal miner, In America, he can be anything he wants". Rick Bragg.
In Case You Don't Know..... Rick Bragg is a Pulitzer Prize winning author with several best selling novels to his credit. He writes about growing up poor in Alabama. The reason the quote meant so much to me is that, if you look at my birth certificate, my father's occupation is listed as a coal miner. I am a perfect example of that boy who grew up to be "anything he wants." Unlike some folks who might be ashamed of a blue collar background, I am proud of it.
It's Not That I Claim A Lot Of Credit For Coming Out Of Poverty. Most of that credit belongs to others. I remember my grandparents saying, "That boy is smart. He won't have to work for wages like the rest of us have." I remember my mom saying, "I want my boy to grow up like those self confident college boys I wait on at Paul's Diner". Then there is my dad who didn't say much but made sure I knew what it was like to work six days a week for a pittance. He always let me know that wasn't what he wanted for me. Growing up in a loving family is a better legacy than money any day.
I Can't Leave Out The Privilege Of Living In The Land Of Opportunity. We had great schools. There were 32 of us who graduated from ""Fruitdale School" (Better not laugh). It was a 55-year old building with only two restrooms and no gymnasium. We played basketball on an asphalt court, sometimes covered with packed snow but somehow we managed to beat a number of schools with modern gyms and locker rooms. We had great teachers who sacrificed much to teach a bunch of unruly kids. I still remember much from some of the books we were forced to read and poetry we were forced to memorize.
What About Colleges? In Colorado, state schools were forced to admit anyone who graduated from high school in the top 75% of their class. This year my grandson was not admitted to the University of Texas because he was slightly below the top 10%. He is ten times the student I was. Tuition was dirt cheap, even relative to the lower wages of that day. I'm not sure I could make it as an undergraduate in today's competitive environment.
How Fortunate I am. Yesterday, I spent several hours on the dock in my back yard, watching my grandson catch fish. Sixty years ago, if someone had told me, an 11 year old boy just starting to work summers in Mr. Montgomery's celery field, that I would be living this way in 2009, I would have been filled with joy. There is no reason I shouldn't feel that way today.
Back To Talking About Money. Please excuse the musings of a sentimental old coot. I promise to get back to the subject of personal finance next time.
Monday, August 31, 2009
WHAT GOOD IS A BROKER
Broker: A person who acts as an intermediary…Webster’s New Collegiate Dictionary.
The Above Definition Is Woefully Inadequate. The main problem is that it does little to help the reader understand the value to be expected from a broker in a transaction. Occasionally, articles appear in the financial press that question the value of many types of brokers, including real estate brokers. Most of these articles reveal that the writer has little understanding of what a broker brings to the process. Although there are many kinds of brokers, including those in real estate, insurance, securities, and mortgage transactions, this discussion will be confined to the role of real estate agents
Agents Have Knowledge Of The Marketplace. Unless you are a very experienced, full-time investor, chances are this knowledge is much more extensive than yours. A typical investor may only participate in one or two transactions per year while the agent is out there every day seeking to help their clients accomplish their goals.
Contacts. Agents have relationships with allied professionals including title examiners, lenders, property inspectors, and attorneys. These relationships help agents get things done because these professionals see the agent as a continuing source of business. As a result, the agent has much more influence than a buyer or seller who only brings in a limited amount of business.
Familiarity With Standards and Practices In The Industry. A real estate transaction can be incredibly complex. Unforeseen problems can arise such as title defects, boundary encroachments, and ownership disputes can and do occur. An agent brings problem solving skills that can resolve these problems and allow the transaction to proceed.
Negotiating Skills. Nothing gives you a negotiating edge like information. The more you know about a property, it’s location, the supply and demand of similar properties, and the market value, the more likely you are to be able to structure a transaction that meets your needs. In addition to information the agent already has, the agent should know what additional information might be helpful, and where to find it. The agent may also be in a position to find out about the motivation of the other party and what kinds of offer would be most appealing to that party.
What’s Going On In The Denver Market? Perhaps the most encouraging sign in the Denver housing market is the drastic reduction in the number of building permits being issued. Just about the only builders still producing now homes are those with land inventory who have to build new homes in order to sell the land reduce costs required to hold it. The number of building permits being issued has reduced significantly over the past 4 years and it is difficult to believe they could still be going down but, during the second quarter of this year, total permits fell from a very low level of 2871 in 2008 to 1194 in 2009. That represents a drop of 58%. I expect this low building activity will continue until the foreclosure rate drops. Does this mean that it’s a good time to invest? I believe it is; however, only for those with adequate liquidity to hold out if the recovery takes awhile to materialize. The last time this happened was in the early 90’s. At that time, it took awhile for new building to begin since developed land inventory was low and the lead time to get new projects through the approval process was extensive. This long lead time is likely to continue to exist for some time.
Back To Denver. I’ll be back in town late next week. Those who wish to arrange a meeting should call Susan at 720-449-0200.
The Above Definition Is Woefully Inadequate. The main problem is that it does little to help the reader understand the value to be expected from a broker in a transaction. Occasionally, articles appear in the financial press that question the value of many types of brokers, including real estate brokers. Most of these articles reveal that the writer has little understanding of what a broker brings to the process. Although there are many kinds of brokers, including those in real estate, insurance, securities, and mortgage transactions, this discussion will be confined to the role of real estate agents
Agents Have Knowledge Of The Marketplace. Unless you are a very experienced, full-time investor, chances are this knowledge is much more extensive than yours. A typical investor may only participate in one or two transactions per year while the agent is out there every day seeking to help their clients accomplish their goals.
Contacts. Agents have relationships with allied professionals including title examiners, lenders, property inspectors, and attorneys. These relationships help agents get things done because these professionals see the agent as a continuing source of business. As a result, the agent has much more influence than a buyer or seller who only brings in a limited amount of business.
Familiarity With Standards and Practices In The Industry. A real estate transaction can be incredibly complex. Unforeseen problems can arise such as title defects, boundary encroachments, and ownership disputes can and do occur. An agent brings problem solving skills that can resolve these problems and allow the transaction to proceed.
Negotiating Skills. Nothing gives you a negotiating edge like information. The more you know about a property, it’s location, the supply and demand of similar properties, and the market value, the more likely you are to be able to structure a transaction that meets your needs. In addition to information the agent already has, the agent should know what additional information might be helpful, and where to find it. The agent may also be in a position to find out about the motivation of the other party and what kinds of offer would be most appealing to that party.
What’s Going On In The Denver Market? Perhaps the most encouraging sign in the Denver housing market is the drastic reduction in the number of building permits being issued. Just about the only builders still producing now homes are those with land inventory who have to build new homes in order to sell the land reduce costs required to hold it. The number of building permits being issued has reduced significantly over the past 4 years and it is difficult to believe they could still be going down but, during the second quarter of this year, total permits fell from a very low level of 2871 in 2008 to 1194 in 2009. That represents a drop of 58%. I expect this low building activity will continue until the foreclosure rate drops. Does this mean that it’s a good time to invest? I believe it is; however, only for those with adequate liquidity to hold out if the recovery takes awhile to materialize. The last time this happened was in the early 90’s. At that time, it took awhile for new building to begin since developed land inventory was low and the lead time to get new projects through the approval process was extensive. This long lead time is likely to continue to exist for some time.
Back To Denver. I’ll be back in town late next week. Those who wish to arrange a meeting should call Susan at 720-449-0200.
Monday, August 24, 2009
MORE NEW STRATEGIES.
If inflation continues to soar, you're going to have to work like a dog just to live like one. ~George Gobel.
George Gobel Has Been Gone a Long Time. So has inflation. In the early 80's, if you would have told me that we would have inflation levels below 5% in the new century, I would have laughed in your face. For the year 2009, we will actually have negative inflation. Those on social security have a surprise coming in 2010: There will be no cost of living adjustment. In fact, depending on what happens to Medicare Part B premiums, many may actually see their net social security income go down. Combining this with reduced investment income could make things difficult for many seniors.
Inflation May Not Be Dead After All. The current low inflation environment is not likely to continue if the predicted future federal deficit levels actually occur. The combination of low revenue, due to the slow economy and high spending levels will make it extremely difficult to reduce these deficit levels. If this trend continues the probability for increased inflation is difficult to ignore. For this reason, most investment portfolios need to contain some exposure to assets that do well in a higher inflation environment. Here are some areas to consider.
Energy. Oil prices have rebounded strongly since the low levels earlier. Most oil stocks have rebounded off their earlier lows; however, if the economy rebounds and inflation picks up, the shares of most oil companies will become more valuable. One of my favorites in this area has been Marathon Oil, a 22 billion company selling for around 8 times last year's earnings. Natural gas is selling at historic lows relative to oil and is almost certain to rebound; however, it is difficult to find a company to recommend at this point because the shares of companies producing natural gas have not fallen as much as the basic commodity. Finally, pipeline companies such as Kinder Morgan Partners have an excellent history of increasing dividends and should benefit as more products go through their lines.
Real Estate Securities. Shares of Real Estate Investment Trusts have been beaten down in the market place as investors fear their exposure to the credit markets and potential higher vacancy rates. I have done well in selected companies such as Health Care Properties and Pro Logis Trust. The key to safety in this area is low debt levels or their ability to handle higher levels. While many have loans coming due that will be difficult to refinance, their lenders may find it beneficial to renew these loans on a short-term basis rather than foreclose and find themselves responsible for managing properties, a task for which they have little or no experience.
Direct Ownership Of Real Estate. I have worked with real estate investors for many years and participated in acquisition, development, financing, management and sale transactions. This type of ownership is more complex than investing in listed securities. Successful direct ownership investment requires considerable skill in negotiation and management. Poor performance in either of these areas can keep you from realizing the full potential of your investment. Conversely, you can create a good investment from a mediocre one by superior skills. Small investors will likely do well buying in this environment. The combination of low interest rates, low sale prices, and limited new building bode well for those who buy in this environment. Unless you are a very experienced investor, your interests would be well served by retaining the services of an experienced agent to represent your needs. One additional note, there will probably be less competition for the acquisition of lower end properties after the government's $8,000 tax credit expires at the end of November.
Precious Metals. Although there are several precious metals available for direct purchase, the most widely traded of these is Gold. It is virtually impossible to listen to the radio without hearing commercials touting the ownership of gold as an investment. Most will tell you that if you had bought gold in 2003, the value of your investment would have increased by 203%. This represents a compound return of 20.7% per year, outperforming virtually any alternative investment. What they won't tell you that if you had bought gold at the average price 29 years ago, your investment would have increased by 55%, an anemic 1.53% per year. Another thing I dislike about gold ownership is that it provides no interim cash flow during the holding period. Finally, unless you make sizable investments, much of your potential profits will go to dealers in the form of mark-up from the price at the time of purchase and a discount from the market price at the time of sale. Despite these disadvantages, there is no argument that gold has done very well over the past seven years and it can provide some stability in certain environments. If you decide to devote some of your capital to direct ownership of gold, the best bet is an established product such as Krugerrands or Canadian Maple Leafs. These have very little premium value over the price of the metal and are most easily traded.
These Are Not Recommendations. They are ideas for you to consider. Every person needs an investment portfolio designed to meet his or her needs. Selection of the investment that is right for you will require considerable research and constant monitoring.
Tuesday, August 18, 2009
ITS NOT ALWAYS ABOUT MONEY
To The Memory of J. L. Neeley, An Uncommon Friend
Costs and Benefits of Growing Old. Growing old has its advantages. One benefit is that you have some really good friends you have known for many years. One of the costs is that those old friends are growing old and either you die and leave them or they die and leave you. I knew J. L. Neeley for 42 years and and, although we sometimes went for years between visits, each new visit was just like we had just been together the week before. I know you didn't stop by this site to hear about my grief but I couldn't resist a small tribute to him the day after I learned of his passing. My life was better for having known him.
I Bet You're Tired of Hearing Depressing News on This Site. I'm a little tired of it myself. In my last post, I discussed some of my expectations for the future which also sounds a bit pessimistic but, as a notable TV personality says, "There's always a bull market somewhere." Perhaps its more important to discuss coping strategies for a recessionary environment than wealth maximization strategies for a growth environment. What are some of the things we can do to cope with this environment?
Control Your Expenses. I have spent considerable time with clients discussing the fact that retirement security is really about replacing the cash flow from your employment with cash flow from other sources. Clients are very interested in these discussions as long as we are talking about income opportunities but, when the subject of decreasing expenses is brought up, the atmosphere can become almost hostile. Like the lady who spent $300 a month at an upscale coffee restaurant who informed me that this was her main form of daytime recreation and elimination of this activity was "off the table." She maintained this position even after I informed her that it requires $60,000 in investment capital to generate that kind of income at 6%. In Colorado, I recently changed my phone, cable TV, and internet service, from $160 per month to $40. That reduces the capital I need to generate income to pay those expenses by $24,000 and, considering the small amount of time I spend there, the sacrifice is well worth it. Of course, you might remind me that the best thing to do is sell the Colorado property. I'm working on it.
Analyze Your Mortgage. Having spent many years counseling mortgage clients, this is one area in which I have a lot of confidence the expertise of myself and Susan at Westmont Companies. One of the biggest mistakes I see from retiring clients is over-emphasis on the interest rate of their current mortgage. For example, let's consider a soon-to-be retired client with a $200,000 5% mortgage with 10 years remaining. Payments on this loan are $2,121 per month. In order to generate cash to pay $2121 per month you would have to invest $425,000 at 6%. Granted the loan has an attractive interest rate but the principal payments of approximately 1300 a month is murder on the cash flow. There are a number of strategies for dealing with the situation, from paying off the entire balance with funds from other sources, to a reverse mortgage, to refinancing to a longer term mortgage. As an example consider the possibility of refinancing the entire balance with a 5.5%, 30 year fixed rate and payments of $1,135. Even though the interest rate is increased by .5% per year, the payment drops by almost $1,000 a month. It's about cash flow, not interest rate. Of course, you may have to give up on your idea of a free and clear house in 10 years but is the sacrifice worth $1,000 a month during the most enjoyable years of your retirement? This discussion just scratches the surface of the many things that can be done to improve retirement cash flow by restructuring a mortgage. There is no single answer that fits everyone but there are many opportunities available.
What About An Annuity? A lot of people don't consider fixed annuities because they consider them to be poor investments. While this may be true, an annuity is not really an investment but an insurance product. You are insuring that you will have an income as long as you live. A 66 year old male can purchase a guaranteed income of $1,500 for life with a payment of $250,000. Under this plan, a spouse or other beneficiary is also guaranteed to receive this income for 20 years from the purchase date in the event that you die during this time. Again, this may not be that great from an investment point of view but, in an environment with high investment risk, this may be highly beneficial for risk averse investors. Again, there are a number of different annuity strategies available each with different opportunities.
Investing With Options. I have attempted to discuss options strategies on this site several times but it have given up because they are often too complex to discuss with inexperienced investors. The most important thing to mention here is that, many investors and experts alike consider them to be highly risky. This can be true; however, there are a multitude of different strategies, some of which are considerably less risky than conventional investments. If you want to take the time to learn these strategies, the best place to start is a 1000 page book by Lawerence McMillan entitled, Options as a Strategic Investment. I have been reading and studying this publication for several years and am convinced that I am a better investor because of the knowledge I have gained from this publication.
Coming Back To Denver In September. The main purpose of my visit is to attend a gathering of several friends I have known for almost 60 years. You might guess that the death of my old pal, J. L. Neeley had something to do with that.
Friday, August 07, 2009
NEW TIMES CALL FOR NEW STRATEGIES.
Some Things Never Change, Others Never Stay the Same.
It's tempting to do what you are comfortable with instead of what you need to do.... George Guerin.
It's Been An Interesting two Weeks. I've been here in Colorado for almost two weeks and neither my body nor my mind have slowed down during the whole time. I've had interesting conversations, picked up some new ideas, and have reached some new conclusions, one of which is that we can't continue to do what we've always done. The the picture above shows a scene that Native Americans could have seen hundreds of years ago. It looks pretty much the same today as it did then. As you head down the mountain towards civilization, you can see immense changes that have occurred even in the short time I have occupied this planet. If i had my "druthers," I might prefer fewer changes but times are different and we must adapt.
The Demographics Of Our Society are Changing. Anglos will represent a smaller proportion of voters, consumers, and workers in the future. Even if immigration slows, differences in birth rates will force this change. The anglo section of society is rapidly aging and will place pressure on entitlement programs such as social security and medicare. Continuation of these programs in their present form is highly unlikely.
Growth In The Financial Markets Is No Longer a Foregone Conclusion. As older Americans look to liquidate their investments to fund living expenses, selling pressure may increase making it difficult for markets to grow as much as they did in the past. We are quite fortunate that the recent rally in the markets has allowed us to recoup much of our losses, it is unlikely that this rally will continue for long.
We Will Consume Less In The Future. Americans have rapidly changed their spending habits. Consumers can no longer borrow on their home equity to buy luxuries because many have no equity. Credit cards are being restricted. Despite a perfect payment history, Bank of America recently cut my credit card limit in half. I really didn't need the $33,000 limit they gave me but it illustrates my point. I also no longer receive five or more offers of new pre-approved cards a week. An aging population will also affect this trend since older people have less energy to roam shopping malls looking for things to buy. Since the consumer accounts for 70% of our economic growth, this will continue to put a damper on things.
Tax Rates Will Increase Regardless of Which Party is Elected. Eventually, we will have to support our government instead of vice-versa. Foreign investors will grow weary of buying our treasury debt unless they see that we are serious about reducing our debt levels.
Increased Government Regulation In The Future. Lack of responsibility in corporations and on wall street has resulted in the call for more government regulation. If what they have done in the real estate and lending industry is any example, this won't work. It takes longer to get a mortgage loan because of new regulations which will do little to help the consumer. Changes in the appraisal process will echo through the economy as appraisers will be selected at random rather than being directed towards the more competent practitioners. While I admit that free markets may not work perfectly, these industries are so complex that effective government regulation unlikely.
Stay Tuned For Strategies To Cope With The New Reality. I am leaving Denver to go back to Texas on Tuesday. I will continue to think about these changes and propose new strategies for dealing with them in future posts.
Thursday, July 23, 2009
IGNORANCE AND LEVERAGE.
"When you combine ignorance and leverage you get some pretty interesting results." Warren Buffet.
Happy Days Here Again? Certainly we all feel better now that the Dow Jones average is above 9,000. There is also some good news in the real estate market that shows the precipitous drop in the housing market is slowing. It can't be denied that this is good news; however, I don't share the optimism of those who are predicting 15,000 in the Dow. What I think might be happening is that the markets are starting to recover from the drastic combination of ignorance and leverage and the rush to de-leverage. Earlier this year, hedge funds had to sell into an extremely weak market in order to pay off huge amounts of leverage which had come due. This pushed the price of many solid companies below fair value as sellers far outnumbered buyers in the marketplace. While this may not be over, it has certainly slowed down. Residential real estate has performed similarly as over-leveraged families found themselves with mortgages they could no longer pay.
What Happened to Government Efforts To Help Families Avoid Foreclosure? These efforts simply haven't worked. Despite the emergence of "Loan Modification Companies" and attempts by major lenders to hire extra labor force to handle the huge demand for loan modifications by troubled borrowers, the foreclosure rate remains high. In almost 50% of the cases where loans have been modified to cure default, the borrowers re-default within a year of the modification. Why is this the case? One of the main reasons is that it may be in the borrowers best interest to default if the mortgage far exceeds the property value. Of course, the benefits are often short term, but it appears that we have become a society focused on short-term benefits. A home owner who owes $200,000 on a house worth $150,000 can skip three or four mortgage payments during the foreclosure process and have the money to move and an immediate $50,000 improvement in net worth after the process is complete. The damage to the borrowers credit report and the trauma of moving the family to a rental is often deemed worth it to the borrower with a large negative equity. Again, this illustrates what happens when leverage and ignorance is combined. Of course, the combination s a two way street as lenders exhibited the same ignorance as borrowers when they financed 100% of the value of a property with little consideration given to the borrower's ability to pay.
The Housing Market Will Cure Itself. Builders are producing very little new housing inventory since buyers can buy cheaper than builders can build. Building activity has slowed to a crawl and existing housing inventories are shrinking. This cycle will continue until supply and demand is brought into balance. This is a regional phenomenon and some areas, like Colorado and Texas will rebound quicker than others. Many local governments, eager for revenue, can slow this process by adding more development and water tap fees for builders, making it more expensive to build new houses. The difference between real estate costs in high affordability states (like Texas) and low affordability states (like California) is often largely a result of high governmental fees charged to builders and developers.
Back To Colorado. Next Monday, I will be flying to Denver with the main objective of solving some problems with real estate I own. I am always eager to make time to visit with clients and friends. Call Susan at 720-449-0200 to get on the list.
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