CASHFLOW OR INCOME..THE DIFFERENCE.

My 90+ Year Old Dad.  Working On His Finances.

Do You Really Have To  Know This?  My Dad did a great job based on his instincts and many people can.  I have to know more about how things work because I don't have sufficient instinct.  Whether or not you know how to manage by instinct, a knowledge of cash flow vs income can be valuable.  Many years ago, I helped people plan their retirement by making projections about how to collect sufficient assets and how much you can draw from those assets to assure that you have enough to last for your remaining life span.  In order to do this well, you need complex software and the ability to use it.  You also need to have the ability to explain it to your clients.  While it isn't all that difficult you also need to make certain assumptions as to the rate of inflation, the anticipated return on investment from the different categories and the projected lifespan of the potential retiree.  You might come up with an accurate projection but there is so much potential error in the assumptions that, no matter how good your software, an erroneous assumption can totally invalidate your projection.  I concluded that these were a waste of time.

Retirement is  All About Cash Flow.  It all boils down to a matter of replacing the cash flow you earn from work with cash flow from other sources.  It can also be about reducing your expenses.  A strict definition of cash flow is cash-in-minus cash-out.  You can manage your cash flow by increasing your income or by reducing your expense.  Either way, you are producing cash to fund your life.  Although cash flow can be equivalent to income and vice- versa, it isn't always. 

Cash Flow That Isn't Income.  Suppose you are refinancing your house and considering borrowing $100,000 at 3.75% for fifteen years.  Your payment will be $727. per month.  Instead you can get a 30-year loan at 4.25% for 30 years.  Your payment will be $492.  The 30-year loan improves your cash flow by $235 per month.  That extra $235 per month is yours to spend with no effect on your income for tax purposes.  Which is preferred?  Suppose you are 70 years old with little other retirement cash flow except for social security.  That extra 235 per month may make a huge difference in your life.  You will receive little benefit from the shorter-term loan until it's paid, at which time you are 85 years old.  Many of those I counsel need the cash flow now and not when they are nearing the end of their lifespan.  I am not saying that 30 year loans are better for everyone but choosing the short-term loan just because you are getting the benefit if 0.5% lower interest rate without considering the cash flow implications isn't always the best idea.

Income That Doesn't Produce Cash Flow.  Suppose I own a commercial rental property.  The rent is $4,000 per month and operating expenses are $1,000 per month.  I have a loan of 400,000 at 6% with 20 years remaining.  Payments on this loan are $2,865.  My cash flow is $4,000 minus $2,865 payments minus $1,000 operating expenses or $135 per month.  Because only the interest on this payment is deductible, my taxable income is  higher by $890 per month.  I have a tax obligation with no cash flow to pay it.  

Suppose I can't continue making the payments.  If this property goes into foreclosure, I am relieved of the monthly cash flow drain but I still might have income with no cash flow.  How can that be? 

Suppose I paid $300,000 for the property.  Since foreclosure is considered to be equivalent to a sale at the mortgage balance, I have a gain of $100,000 with no cash flow to pay it. 

This Post Is More Complex Than I Intended.  What I set out to do when making this post was to show  you some differences between income and cash flow.  In doing this, I have committed the biggest sin, b o o o r i n g.  On the other hand, if you slogged through this and came away with only the knowledge that you have to examine both the income and cash flow characteristics those financial decisions you make, I have accomplished my objective.  Perhaps I can make my next post more interesting.   I have written a booklet that discusses a number of financial issues facing those nearing retirement.  It is called "Fifty Tips For A Secure Retirement."  I wrote it almost 10 years ago, but 90% is still useful today.  Send me an e-mail at Pstorms@AOL.com with your address and I will mail you a copy.   

LET'S TAX THOSE EVIL RICH PEOPLE.

Nothing like a Gibson For The Blues.

Little Change From the 50's.  The democrats want the poor people to resent the rich.  I remember growing up in the Clear Creek Valley of Colorado.  Most of the people there were blue collar folks who called the republicans the party of the rich and the democrats the party of the "workin' man."  I am proud of my blue collar roots but not sure the democrats have ever totally represented my views. 

President Obama Exploits This Concept.  He continues to harp on the idea that the rich don't pay enough taxes.  He knows that no matter how high he raised the top bracket it won't help the deficit.  There simply aren't enough rich people to make a dent in it.  He's adopted this strategy because the average person resents the wealthy and how well they live.  What the less wealthy among us fail to recognize and Obama fails to tell us is that there is a huge difference between high income and wealth.  No matter how much he raises the top brackets, he won't be able to have much effect on the wealthy person who doesn't want to pay taxes.  

Look At This Example.  A citizen has just sold his business and has a net of fifty million after taxes.  He's tired of working and tired of having a high level of risk in his life.  He spreads this cash among several demand deposits in several banks.  These funds earn no income and he doesn't care.  He doesn't live cheaply, spending about a million dollars a year.  At the end of two years he has $48 million and has paid no taxes.  At this point he is tired of watching his nest egg decline and he invests 30 million in a portfolio of conservative growth stocks that pay no dividends but grow at the rate of 6% per year.  Since he still has no income, he still pays no taxes.  At the end of ten years, he has spent $10 million from his cash reserve and is down to eight million.  His stock portfolio has grown to almost $54 million.  He's lived very well, created more wealth than he started with and has paid no taxes.  All without finding exotic loopholes that no one else knows about.  If he wants to draw cash from that portfolio he might sell some stock and pay tax at the lower capital gains rate.  As an alternative, he can fund his expenses by borrowing from his portfolio and, although he has to pay interest, he will still owe no taxes and the interest paid will still be less than the tax he would have owed.  How does he get around the eventual tax bill on the growth in the stock he has accumulated?  He dies.  The heirs will inherit the stock at the fair market value at the time of death and there is no capital gains tax.  Estate taxes are another story and if you want to know how to get around those, we can save that for another post.  

What we need to emphasize here is that these aren't loopholes that are only open to rich folks.  They are part of the tax code available to everyone.  If your assets are less, divide by the difference.  If you have only $500,000 or 100 times less than 50 million, divide everything by 100.  You can have $10,000 per year to spend and pay no tax.  Of course, you can have more than this since only 53% of Americans pay tax any more.  A family of four with an income of $50,000 can take advantage of the tax code and pay no taxes. 

Are You Disappointed?  If you were anticipating some deep dark secret that allows the rich to avoid taxes, you may be disappointed.  My dear wife thinks I am wasting my time trying to explain the difference between high income and great wealth.  But its very important.  She says I should try to put together a short five word sound bite that explains what I mean.  I can't explain things in a five word sound bite but its important to remember that taxing the hell out of a high income taxpayer isn't as fair as you think.  I remember one year when everything fell into place and I had a $140,000 tax bill.  I also remember that I had years when I didn't make as much as my lowest paid employee.  Three years after that high tax year, I was struggling to keep the business going.  This is more the rule than the exception.  High income people seldom stay that way for long.  We are much better off with a tax code that encourages savings and investment than one where the government confiscates the money and spends it on wars, welfare, and entitlements.  

    

JANICE SIMONS.  A LIFE WELL LIVED.

Woke Up To Bad News.  I was sorry to find out this morning that my cousin, Janice Simons had died.  Its not that we were very close all these years.  I still remember her as my sweet little cousin, born a few months after my brother.  Being older by seven years, I never paid much attention to her.  She was my Uncle Norman's youngest daughter.

Uncle Norman Was The Oldest Sibling.   Uncle Norman was one of three boys born to my granddad, Hardy Storms.  He was also the least healthy.  They called it "leakage of the heart" in those days and he only lasted until age 37.  He died leaving a wife and three children.  All broken hearted. There were barely enough funds to bury him.  My Aunt Lois, was left with a small, almost broken down house and no income except for social security payments.  I would like to say that the rest of the family jumped in to help but the truth is, none of the rest had more more than enough for a minimal standard of living.  Aunt Lois didn't complain.  She took in ironing for years, raised her children well, and was active in her church.  She was well past 80 when she died.

My Sweet Little Cousin Started High School.  At least, I think she did but I'm pretty sure she didn't finish.  One of her neighbors, Dick Simons took an interest in her when she was around 14 years of age.  Dick wasn't much older, just a couple of years.  He was from a family just a small distance away.  They married when they were teenagers.  None of us expected much from them.  That was our first mistake.  Dick turned out to be a hard worker and a loyal employee of the Coors company in Golden.  He and Jan were married for more than 50 years.  They raised their family well and, although I didn't spend much time with them, I was really proud of the way they pulled together and did what they had to do raise a strong family.  

Uncle Norman's Heart Problem Passed to The Kids.  The oldest, Doris died somewhere around the age of 60.  The next, Duane didn't make it very much past that.  Janice was almost 68.  No one expected her heart to last this long.  I must admit it, I feel guilty that I never spent much time with any of them.  I guess it doesn't really matter a lot because they had ample friends and family.  My sweet little cousin was able to spend her last few days at home, surrounded by those who loved her very much.  I guess none of us can ask for more than that.

UNDERSTANDING ILLOGICAL BEHAVIOR

A Pretty Stupid Thing To DO.  The recent shooting at an Aurora Theatre has to be a stupid act, unless you think suicide is rational.  No doubt, the killer knew he wouldn't survive or he wouldn't have made it virtually impossible to re-enter his apartment.  James Holmes was anything but stupid or he wouldn't have made it through a year as a PhD candidate in neuroscience.  Most of us would never have made it to that point. 

Just an Evil SOB.  I have heard that reaction from several even myself.  It might seem logical that there are a number of evil people in the world.  That's the way my emotions lead me to believe.  My first reaction was to hang him upside down, feed him a pound of laxative and beat the livin' $h.. out of him.  After 24 hours to calm down, I have decided a more fruitful approach might be to find out more about what influenced his behavior so that we might be in a position to predict similar behavior in others. 

First and Foremost, I Consider Myself A Scientist.  With an graduate degree in chemistry and 20 years of research, I remain enamoured with scientific methodology.  I studied behavioral psychology as a part-time graduate student and have read widely on neuroscience.  While I know I am no expert, I find what we have learned about neuroscience to be fascinating.  One of my favorite books, "Incognito" by David Eagleman at Baylor College of Medicine points that, by far, the majority of activity in the human brain is below the level of consciousness.  If we had to be conscious of of things like breathing, blood flow, minor muscle movements, and swallowing we would never accomplish anything else.  Almost all of our behaviors are governed by areas of our brain that are below the level of awareness. 

Moving Right Into Criminal Behavior.  Let's consider an incident that took place around fifty years ago.  A very bright young man killed his mother and his wife and sat down at his typewriter and wrote of his wife, "..... I love her dearly and she has been a fine wife to me............ I cannot rationally pinpoint any specific reason for doing this".  After other writings trying to explain his bizarre behavior he packed a trunk full of weapons, climbed a college campus tower and shot 13 people while wounding 33 more.  They had to kill him in order to stop this killing spree and much of opportunity to learn more about him was lost. 

Incidents Like This Are Not All That Uncommon.  There is a brain disease called frontotemporal dementia.  It is a disease in which normal behavior is characterized by bizarre behavior such as taking off clothes in public, shoplifting, and bizarre sexual behavior.  As the frontal and temporal lobes of the brain deteriorate, the subject tends to exhibit more and more of these behaviors.  Many of you will recall the example cited above as that of Charles Whitman, the sniper that climbed the tower at the University of Texas in August of 1966 and killed random victims.  An autopsy was later performed and a tumor discovered in areas of the brain that influence the fear and survival mechanisms of our behavior.  While that may not have been the reason for his aggressive behavior, there is considerable evidence that it was.  

The Brain Is A Team of Rivals.  Dr Eagleman uses this as the title of one of the chapters in his book.  He cites numerous examples of biological influences on behavior.  One of his examples sites a genetic make up that makes you eight times more likely to commit sexual assaults, ten times more likely to commit murder, thirteen times more likely to commit armed robbery, and forty-four times more likely to commit sexual assault.  Before you suggest that we find all individuals carrying these genes and lock them up, you need to know that we would have to lock up half the world since this set of genes is common to all males.  Indeed, it appears that the the world would be a much more peaceful place if there were no males.  Of what value is this information?  It shows us that there is a biological basis for behavior that outweighs most other factors that we consider.  

What Else Can Neuroscience Teach Us?  When I first read this book, I felt we might be on the edge of a break through in this area.  Indeed, we are finding more and more ways to study the structures within the brain and how these influence behavior.  While this may be true, they also lead me to conclude that there may not be a way to manage this complex collection of information to help eliminate behavior like the recent massacre in Aurora, Colorado.  There appear to be far too many biological and environmental factors for us to do that.  One thing that impressed me in the TV reporting was a young man, laying in the bed with numerous wounds, saying that he really felt sorry for the person who carried out this act, "he must have been an extremely tormented individual."  The interviewer looked surprised and asked the victim if he forgives the criminal.  The victim held back tears and replied, "Yes, I forgive him."  I had to hold back a few tears myself.  What a better world we would have if we all had that kind of love for our fellow man.

Goodbye Old Friend.

                                                      Crepe Myrtle  Blooms All Summer

I Am Saddened Today.  A few days ago, I heard of the death of an old friend.  His name was Griff and we knew each other in high school.  Griff wasn't the valedictorian nor a star athlete.  He was just one of those guys who was always there and I was glad he was.  He didn't drive a fancy car.  I always remember an old Nash, the kind that looked like an upside down bath tub.  It might not have been his, could have belonged to his parents, but Griff knew how to take advantage of its main feature, the ability to hug the road in sharp corners.  That made it perfect for a game we used to play called "Ditch Em".  It was a game where you took turns determining which driver could get away from the other.  I had a little 1940 Mercury club coupe with a flat head V-8, a really fast little car if you could hold it on the road.  Griff knew that, if he could taunt me into a game of ditch-em, he would always win.  He could make sharp turns with little trouble while I was lucky if I didn't swap ends with the Merc and end up going the wrong way.  Before I could get it turned around, Griff and his Nash would be nearing the next corner.  

Griff's Personality Was Anything but Flashy.  But we all liked him.  He had a smile for all he met and was always willing to sit down and have a conversation over a coke.  He didn't participate in any of the petty feuds and you would always know he wasn't going to talk about you when your back was turned.  I never saw much of him during high school or afterwards but I always knew he was there.  What is it about guys like Griff?  Quiet, soft spoken, never said anything bad about anyone but you knew he was there and you felt like you could always depend on him to be your friend if you needed one.  

The Last Time I Saw Him Was At Bandimere Speedway.  This was a get-together hosted by another old high school friend, Johnny Bandimere.  It was two years ago.  He was alone at a table and I sat down to visit with him and catch up with what he had been doing for the last 50 years.  We talked about business, kids, grandkids, and a bit of politics.  He had a really sad look about him and I was somewhat uncomfortable asking about his health.  I did anyway and he told me he was recently diagnosed with Parkinson's disease.  Obviously, this was nothing to take lightly but I knew there were some new drugs that helped a lot of people tremendously.  I asked if these helped and he replied, "not really."  After an awkward silence, he said, "I have Alzheimer's too."  This was the first time I had heard anyone say that they have "Alzheimer's."  Usually by the time it is diagnosed, the patient is too confused to talk about it.  We continued to discuss the issues that concerned us and then got up for lunch.  That was the last time I saw him.  I wanted to give him a hug but men seldom hug, Especially men who grew up in the 50's.  

I Will Miss Knowing He's Here.  I won't say I will miss seeing him because I hardly ever saw him but the world was a better place because of men like Griff.  My life was better for knowing him and I am saddened because of his passing.  RIP Griff Murray 1937-2012.   
 

HEAD INJURIES....THEN AND NOW.

Surrounded by Strange Sounds.  As I lay in a tube with various gadgets restraining my head and with plugs in my ears, I listened to unusual sounds from the MRI that surrounded my upper body.  Strange thoughts entered my head, from where i have no idea.  One thought came from 40+ years ago about a conversation with a kindly old German physician named Otto.  I had visited his office to inquire about dizzy spells I was having after a slight head injury.  "Phil, we know very little about these minor head injuries because it has not been worth it to open the skull and examine the brain to try and determine the cause.  All we know is that they usually go away after while."  Otto was right, the symptoms slowly subsided. 

 Not So Today.  We have tools like Magnetic Resonance Imaging (MRI) and Positron Emission Tomography (PET) scans to allow us to obtain images of brain activity.  Although these are sophisticated instruments made possible by advanced technology, they are still relatively primative when it comes to understanding the complex network of neurons, dendrites, and axions that make up our brain.  It is advanced measuring tools like these that have changed our entire health care system.

Today vs Fifty Years Ago.  We seldom went to the doctor but when we did he took a look at us, made a good guess as to what was wrong, and recommended a course of action to take care of the problem.  More often than not, he was correct and we got better.  Now it seems like the primary care physician is simply a gate keeper to send you for a multitude of tests before deciding on a treatment.  As I lay in the MRI, I thought about the fact that my dizziness symptoms had disappeared on their own a few days before, just like Otto had said.  Years ago, there was no receptionist, no physicians assistant, and no insurance person.  A single nurse generally ran the whole operation.  Instead of worrying about the co-pay, it was simply the you-pay system.  They told you how much it was and you paid it.  There were also no complex diagnostic centers where a huge staff ran various tests to determine what was causing your difficulty.

Some, If Not Most, of What I Criticize is Progress.  I am not suggesting we go back to the old system, at least not totally.  It seems perverse that I spend 99% of my health care expenses on insurance premiums and practically nothing to the provider.  Could we do away with programs that pay everything and that tell the physician how to run the practice?  Perhaps we should pay more of our dollars to the practitioners and less, far less, to the insurance companies.  Should we limit mal-practice claims to gross negligence and do less to penalize honest mistakes.  My guess is that it might result in lower insurance premiums.  There needs to be some way other than more government regulation to promote competition in the insurance industry.   

My MRI is Complete.  Right now I still know nothing except that the symptoms are gone.  I am regretting that I bothered to go through with the test.  After almost 75 years on the planet, there is little doubt that my brain might have a mal-function or two.  I have endured two or three mildly traumatic brain injuries over the years but those could be the subject of another post.  Here's wishing for a happy Independence Day to All.

UPDATE ON DIVIDEND PORTFOLIO

                                    Summertime Birds on Feeder

Improving Your Cash Flow.  In December of 2010, I posted a sample portfolio of stocks that paid decent dividends.  As usual, I informed you that in order to collect these dividends you have to take some risk. Of course, you have to take some risk to get a bad return too.  If you tried to supplement your income with interest from certificates of deposit, you would have to have a huge portfolio to get any return at all or extend the maturity of these deposits.   Either way, in order to live on that most will have to cut their expenses drastically or invade principal.  I didn't intend to update this portfolio because I thought most folks, including myself might find themselves bored hearing about this again.  I couple of weeks ago, I actually became curious about how the portfolio had performed over some market ups and downs. 

The Original Portfolio Was $199,795.  The dividend rate was 5.98% or $11,950 per year.  Nothing earth shattering but considerably more than 0.5% per year on a one year CD.  The question is will the extra yield be worth it or is the risk of loss of principal too great to be justified by the extra cash flow.  The results are as follows: 

1.  Ameron Corporation.  AEE.  The original investment was $17130 with annual dividends of $924.  Current value is $19,380 and the dividend has increased to $960 per year.

2.  Bristol Myers Squibb.  BMY.  The original investment was $18,380 with a dividend of $896 per year.  Current value is $23,370 and the dividend has increased to $952 per year.

3.  Duke Energy.  DUK.  The original investment was $19,300 with a dividend of $1098 per year.  Current value is $24,866 with a dividend of $1100 per year.

4.  Lockheed Martin Company.  LMT.  We invested $20,460 and our dividend was $900 per year.  Current value is $24,246 with a yield of $1,200 per year.

5.  Medical Properties Trust. MPW.  We invested $20,240 and our dividend was $1,600 per year.  Current value is $18,160 and the dividend is still 1,600 per year. 

6.  AT&T.  ATT.  We invested $17,526 and received a dividend of $1032 per year.  Current value is $20,436 and the dividend is $1056 per year. 

7.  Health Care Properties.  HCP.  We invested $19,512 with a payout of $1116 per year.  Current value is $24,048 and the dividend is $1200 per year. 

8.  Kinder Morgan Energy Partners.  KMP.  We invested $20,775 to get a dividend of $1332 per year.  The current value is $22.137 and the dividend is $1380. 

9.  Fidelity National Financial.  FNF.  We invested $19,570 for a dividend of $1008 per year.  Current value is $26,082 and the dividend has been reduced to $784 per year. 

10.  Winstream Partners.   WIN.  We invested $26,860 for dividends of $1900 per year.  Current value is $17,100 and the dividend is still $1900 per year. 

Summary.  I have not monitored this portfolio during the year.  My intention was to construct a dividend portfolio with a relatively stable income stream and stability of principal without requiring constant monitoring by the investor.  In reality, I would recommend checking at least once a week and replacing those investments that do not appear to continue to fit your objective.  The cash flow currently obtained from this investment portfolio is $12132 per year vs the original cash flow of $11950.  This fits our criteria of income stability.  Two companies have decreased their dividend while seven have increased.  Those companies decreasing dividends have made substantial reductions which is common; however, these reductions were more than compensated by increases in the other seven.  The current value of the postfolio is $220,184 or a capital gain of $20,431.  If you liquidated the portfolio at the time this update was performed, you would have a gain of 10.23% plus cash flow of approximately 6% during the holding period.   As I mentioned before, I tend to ignore capital gains unless I intend to sell.  These gains could be here today and gone tomorrow.  Selling just to harvest the gain is not recommended unless you can find a better investment.  Still, a paper gain is more reassuring than a paper loss at this point.  

This Portfolio Is An Example, Not a Recommendation.  For one thing, there is no "one size fits all" portfolio.  We might make changes in portfolio composition to assure that it fits the unique needs of each client.  If you are considering buying any of these stocks for your own portfolio do your own due diligence to determine if the characteristics of the investment meets your needs.

BEING POOR WASN'T THAT BAD.

                                                     1950s Education Planning Tool

In Case You Don't Recognize The Object In The Picture.  It's an education planning tool and it's called a wheelbarrow.  My Dad started using this in 1946 when he got home from WWII.  At the age of 15, when I progressed from farm labor and dishwashing, it was the main planning implement until I graduated from college in 1960.  The wheelbarrow in the picture was given to my dad when the greenhouse where he worked for 34 years closed.  Believe it or not, it is more than 50 years old.  As Grandpa used to say, "They just don't make 'em like that any more".  For 7 years, between the age of 15 until I graduated from college at age 22, I funded my education behind one of these.

It's Different Nowdays.  Certainly most people aren't as poor as I was when I came into the world.  Yet, we didn't expend our energies with futile efforts like gathering in massive protests because we were underprivileged.  They would have laughed at us as they threw us in jail.  I guess you might use a term I learned in graduate school.  It's called relative deprivation.  We didn't know we were poor because in the 40's and 50's there were few, if any rich.  If you will indulge me to relate another story from the 40's, I recall an apple orchard across the street from our place.  It was one of my favorite places.  I would lay in the grass in the fall and eat apples that fell from the trees while I marveled at the magic of trees which provided shade from  the sun and dropped apples far faster than I could eat them.  One day I got a terrific idea.  I ran across the street, into the house, and yelled to my Mom.  "Mom, let's gather up all those apples and take them to poor people."

She got a big  smile on her face as she said, "Son, we are poor people."  I was totally shocked.  I had never found about other folks who weren't as poor as we were.  We didn't worry about a remote control for our TV.  No one had a TV.  We didn't have a snow blower to clean our sidewalk because no one had sidewalks.  We bought used cars but so did just about everyone else.  My Dad's first new car came when I was 16.  It was a 1954 Chevrolet purchased from Jim Flake Motors for $1695.  It had no radio or CD player.  It had a heater for the cold Colorado winters but no air conditioner.  (What's an air conditioner?)  Now days virtually everyone has those and we find out about it because everyone has a TV and sees pictures of the kind of luxury that they can't afford.  Many believe ownership of these things to be a right and should be provided by the government.  The government tries hard to provide those things by taxing the more affluent members of our society (and taking a relatively large portion of those of those taxes to fund operating expenses). 

Most Of Today's Poor Can Afford The Necessities of Life.  But they want more and I don't blame them.  They think the government can, and should, provide them with more.  They think the government can get the money by taxing the rich.  The problem is that no one can give us everything we think we deserve by taxing the rich.  The rich didn't get that way by being stupid.  They will always find ways to avoid taxes, if nothing else, by not working or investing.  Many of the truly rich can live off their assets for the remainder of their lives.  They will not use these assets productively, if the benefits produced are confiscated by the government and given to others who did not earn them.  We cannot build a strong society by trying to make poor people well off with government handouts.  Of all the things I am thankful for in 70+ years on this planet, the opportunity to earn my way out of poverty is the most important.   Let's build a strong economy so that more poor people can do the same thing. 

                                               

SELL IN MAY AND GO AWAY.

                                                 Eureka, TX, Cemetery.  Memorial Day 2012

I Have Been Out of Town.  For most of the month of May, I have not been at home.  I had to go to Phoenix to settle my Dad's estate.  In case you think this blog looks different than the one you are accustomed to seeing, Blogger changed the format of Blogspot, and I am having to re-learn some of the things I thought I already knew.  Anyway, I plan to do better during June and return to my weekly schedule.  For this post, I am reverting to my customary habit of writing about financial matters.

Sell in May and Go Away.  This is a shopworn cliche that reflects the seasonal tendencies of the stock market.  In most years, the summer months beginning with the first of May results in a market down trend.  For my own portfolio, I tend to ignore this rule; however, I am not surprised when the market does drop at this time.  On March 23, my post was mainly a comment on the energy markets; however, it might be appropriate to call your attention to the fact that, since that date,  the Dow has dropped 5% 13080 to a closing price of 12419 today.  According to the "experts," this drop is due to more than just seasonal adjustments.  It reflects the scary situation in Europe in which several governments are on the verge of bankruptcy due to the huge amounts of debt these governments  have built up in order to provide an impressive list of benefits for their citizens.  Those of you who think we should do more to establish a society where the government provides those benefits might be well advised to consider what has happened there as governments attempt to institute austerity measures. These are meeting with increasing resistance from citizens who feel betrayed when the government can't afford to provide the promised benefits.

Enough Politics.  I also want to call your attention to the fact that I pointed out the huge disparity between the price of a unit of energy provided by natural gas and that provided by petroleum.  I predicted that it was absolutely necessary for the price of gas to increase or the price of petroleum to drop.  I am surprised that this has happened so quickly.  Natural gas increased 25% from $2.00 per million BTU on March 23 to $2.50 today.  Crude oil, on the other hand, has decreased 16.7%  from that day's  $105 per barrel to today's price of $87.5 per barrel.  Given an approximate price of gasoline at $3.80 in March, a 16.7% decrease should reflect a current gasoline price of $3.17.  This indicates that there is room for a decrease; however, before we get our hopes up, we should remind ourselves that there are seasonal factors that might tend to keep prices higher until the summer driving season is over. 

Recommended Investment Strategies.  I'm sure my clients aren't surprised to find out that I am standing pat with my investment program of cash flowing investments.   Any stock I will either emphasize dividends or covered call options, or a combination of the two.  If neither opportunity exists, I will pass.  I hope those of you who have followed this blog will give me another chance to re-establish a more regular schedule.  Health permitting, I promise to do better in the future.

A WAR LIKE NO OTHER.

Two Warriors Home From The War.

The Above Picture Shows Josh and Shane. They were two warriors who recently returned  from Afghanistan.  Each in a different way. One suffered injuries that ended his life and left his family to grieve. The other came home with no visible wounds but he is certainly a different person than he was when left home five years ago at the age of 19. The two were devoted friends drawn close by the dangers they faced on an almost daily basis.   They had each other's back until an Afghan bullet ended the life of one and left the other with an unforgettable loss.

I Learned About Both On Facebook. After months of listening to politicians and high ranking politician's comment on the war, I felt I was getting a slanted view. I wanted to talk to some of those who were part of the so-called "boots on the ground" crew.  I called Josh and told him I had some questions that I would like him to answer.  He graciously agreed and we met in a coffee shop in Beaumont, Texas.  He brought his laptop and showed me some movies of actual combat and some still shots of various locations he had experienced.  These gave me an excellent picture of the environment he experienced.

I Asked Josh Numerous Questions.  I knew he had been part of the elite 101st Airborne but I didn't know he had undergone two deployments, one in Iraq and another in Afghanistan.  He believed the biggest danger in Iraq was roadside bombs while they were a fire fight virtually every single day in Afghanistan.  When I asked about our progress in transferring the war to the Afghan troops, he replied that he never trusted any of them.  They stole from the Americans and they had been known to fire on American troops when they traveled behind them.  This resulted in keeping them in front of any troop movements to avoid incidents like that. 

How Is This War Different?  There are no draftees in this war.  All are volunteers with most of those well aware that they would be in combat at one time or another during their term of enlistment.  Most had cell phones and Internet access in order to contact the folks at home.  This can be a major benefit compared to earlier wars when the troops had to hope that they received  letters from home.  This can also be an added stress as conflicts at home can be multiplied by phone calls or other communications that end in powerful arguments and fights over control and power at home.  Research has shown that the majority of suicides in Iraq were the result of a failed relationship at home.  Josh was exposed to this, having undergone a divorce during his enlistment period despite the fact that part of the reason for the enlistment was to provide a better future for his family.  Research has also indicated that the stress of going from deployment to stateside and back to deployment can also contribute to depression and anxiety among the troops.  I doubted the validity of this research until Josh informed me that the boredom of their home base in Ft Campbell, Kentucky caused many soldiers to want to be re-deployed.  The dangers of deployment caused these same soldiers to want to go back stateside. 

What About Living Conditions.  While most of these soldiers have a roof over their heads most nights, living conditions are certainly less than ideal.  Personal hygiene is difficult to attend to.  Showers are often cold and water, especially hot water is in short supply.  Troops are in close quarters with bunk beds.  When soldiers are on patrol, personal hygiene often becomes even more of a problem, especially for females.  While these conditions are better than experienced by soldiers in previous wars, they are still stressful. 

The Future.   I don't have a statistical sample of how our soldiers feel about the future of the war but Josh thinks the Taliban will be back in control within a short time after we leave.  Although the Taliban are an unprincipled group by our standards, it appears that the Afghans feel like the the Taliban better represent their views than the Americans.  The average Afghan wants us to go home.  Josh believes that we are accomplishing little over there.  I tend to agree.  I supported our mission when it started but I think we have stayed too long and put too many men at risk for a longer period than our potential benefits justify.  I am ready to bring everyone home now, leaving with a warning that we will be back to strongly punish those who would attack our country again. 

What About Our Returning Soldiers.  I think we owe these men a lot.  It appears to me that one of the main reasons Josh went into the army was due a lack of opportunity at home.  One of his goals was to "become a better person."  I think he was a good person before he left.  At this point, it appears that there are fewer, not more, opportunities available to him now than there were before he left.  The loss of his friend, Shane still weighs heavily on his heart and there is now another.  The recent suicide of Aaron, another of his fallen brothers in arms.  Not a good indication of how well he adjusted to civilian life.  The skills Josh acquired from his five years as a rifleman in the army have little utility in civilian life.  He recently went to work as a security guard at a relatively low rate of pay.  He lives with his parents in a crowded apartment, has no car, and has said that he is wasting his life as a civilian.  He describes his release from the army.  Once he was outside the base of Ft Campbell he was not allowed back.  He sold his car to finance his trip home.

What Are We Doing For These Men?  It bothers me that we can afford to provide an airplane for a previous speaker of the house and fly her staff on junkets overseas.  The GSA recently completed an outing and spent almost two million on food, lodging, and entertainment.  Still, we can't afford to look out for our troops once we have used their service.  We should at least make sure they get back to their homes.  A friend of mine, a retired first sergeant, well informed on these issues, sent me some statistics that show we have in excess of 897,500 disability claims pending for returning veterans.  There is an error rate of 16% in processing these claims.  The majority of these claims (65%) are more than 125 days old.  If we think things will get better soon, think again.  Pending claims are expected to grow to 1.2 million before the
current year is over and we are projecting 50,000 more after that. 

I learned a lot from the time I spent with Josh.  I should emphasize that he did not complain but it was obvious to me that he was not adjusting well.  He has even considered going back into the Army. I asked him if he thought he had post traumatic stress syndrome.  He said no and I believe him. It is obvious to me that he misses the comraderie of his military friends and I am sure he is not alone in that regard.  I have asked him to call me if he needs my help but he doesn't call.  He is a strong and principled young man and I pray that he will find what he is seeking in what has tuned into a difficult environment for younger Americans.

UNDERSTANDING THE ENERGY MARKETS.

Azaleas Native To Big Thicket.

The Picture Above The picture really doesn't relate to this week's topic. I am including it only because it shows a very unique flower. Azaleas that grow native in the Big Thicket where I live. While they lack the vivid colors of those we plant, their delicate, tropical like appearance increases their appeal.

Inefficiencies In Energy Prices. Everyone is complaining about the cost of driving a car. Gasoline prices are in the high three dollar range in most places. Many complain that the cost is being driven up by speculators rather than by supply/demand imbalances. Some congress persons are talking about legislation/regulation to curtail speculative activity. While there is little doubt that speculators influence the price of energy, calling for limits to our freedom to buy and sell for future delivery is but one more example of a government that is trying to control things they don't understand. Suppose I know I will need to purchase a million gallons of fuel in September, I can either worry or buy a contract for a million gallons for September delivery. If the price stays the same, I can sell my contract or take delivery. If the price drops, I can buy on the spot market and recover my part of my futures investment by selling my contract (at a loss). Of course, there are numerous other options but the point is buying or selling contracts for future delivery involves risk but this activity gives me more tools to manage that risk. If there is considerable uncertainty in the marketplace, like the potential for more political unrest in oil producing nations, the cost of buying futures contracts will increase. If there is a huge discovery of high grade oil in West Texas, the cost of buying futures contracts will decrease. There is little the government can do about that.

Energy Is Energy. We talk about buying natural gas by the cubic foot, coal by the ton, and oil by the barrel. It's hard to compare one energy source to another using this kind of pricing. We usually assume that energy from each substance will be priced efficiently. Not true. Natural gas prices are around two dollars per one million energy units (BTU). Oil is $105 per barrel. Since a barrel of oil contains 5.8 million BTU, a barrel of oil should be around 5.8 times that of a million BTU of natural gas. Traditionally, a barrel of oil has been priced at a bit more than this, ranging from six to nine times the price of gas. In the current market place, with oil at $105 per barrel and natural gas at two dollars per million BTU, the ratio is 52.5. This would point to the conclusion that either oil must come down or natural gas must come up. Knowing this should allow us to spot investment opportunities. There is little doubt that the current ratio of oil prices to gas will return to something closer to the historic average.

What's Going On With Natural Gas. You would have to be in jail without a TV or computer not to have heard about new discoveries of natural gas in shale formations in several areas around the continental United States. Natural gas is being produced at a rate faster than we can use it and we are reaching a point where storage facilities are full. The facilities we have built to import liquefied natural gas from other countries are now being considered for rehabilitation to allow us to liquefy natural gas for export to countries where demand is higher than in the US. Several companies are looking to convert our fleet of trucks to run on natural gas and major car companies are considering switching pickup trucks to run on natural gas. There are numerous political and technical problems to overcome but we can not afford to keep importing petroleum products when we have our own source of energy which is much more affordable than that which we import from other countries. Cheap natural gas also puts a damper on other forms of so-called green energy which is not yet economically feasible.

What Are The Implications of All This. Think about it. For all the talk about battery operated cars, there may not be any net energy savings. Even if they had a battery that had a range equal to a tank of gas, when you plug the car in to recharge the batteries, you are actually, burning the fuel used to generate electricity, right now either natural gas or coal. You will discharge CO2 from these plants just like you do from the tailpipe of your car. The only reason it may be cheaper to operate your car on a battery is that electricity using natural gas or coal that is cheaper than petroleum. My guess is that the price of natural gas will increase as we discover more ways to use it. This will put a lid on oil prices and we are probably not looking at huge increases there either. Of course, all bets are off if there is a major disruption in mid-east oil.

Answers From This Article May Not Be all That Forthcoming. I am not sure that my knowledge of this subject is yet sufficient to be of significant value but I hope I have aroused your curiosity to follow some of the news in this area. Now that I have done some research in this area, I hear more and more news through common sources that give me ideas as to future investment activity.

USING OPTIONS TO YOUR ADVANTAGE

Knockout Roses. A Little Early Spring Color

Managing Your Money. In these difficult times everyone is afraid to take risk. Unfortunately, there is no risk free investment. Choosing only so-called risk free investments can result in certain loss. For example, if you try to buy only short-term CDs, your return is less than 1%. This is less than the rate of inflation which means you can't buy as much with the money you've invested as you could when you made the investment.

The Stock Market Has Manageable Risk. One way to manage your risk in the stock market is through the use of options but you have to understand certain basic principles before you venture out. Most people won't bother to learn these principles because they think they are too complex and too risky. The fact is they are simple to understand and utilize in a safe manner.

An Option Gives You The Right To Buy Or Sell At A Specific Price. For example, suppose your neighbor owns the lot next door to you and is asking $100,000. You don't have the cash right now but are expecting a substantial inheritance within the next year. You don't want someone else to build next door so you approach your neighbor and offer him $5,000 to hold the property until next year at which time you will pay him the full asking price. He accepts your offer because he will net $5,000 more when you make the purchase, or if you don't buy, he gets to keep your $5,000. This is a simple transaction to understand.

There Are Two Components To An Option's Value. 1. Intrinsic value. If the lot in question is worth $102,000 and you have an option to buy at $100,000 you are getting $2,000 more of value than you are paying; therefore, the intrinsic value is $2,000. 2. Extrinsic value or premium. Since you are paying $5,000 for an option that has a value of only $2,000 you are paying $3,000 in premium. This leads us to one of the only sure bets in the market place.

On The Day The Option Matures, The Extrinsic Value is Zero. The buyer of the option naturally hopes the property value will increase more than the amount of premium (extrinsic value). If it hasn't he has overpaid by $3,000. Think about it. It is really a simple concept. Both parties are managing their risk. If the price drops during the holding period, the option seller has an extra $5,000 to help him bear the loss. If the price increases, the option buyer has his price set at $100,000. Of course, he has paid $5,000 for that privilege.

How Do We Use This In The Stock Market. One way is to harvest your gain and keep the potential for growth. As an example suppose you own 1000 shares of 3M for which you paid $50,000 for three years ago. You have an another attractive investment opportunity and you need your cash. You also are concerned that the capital gain tax is going to increase to 28% during the next year. To top it all off, you believe there is considerable growth potential left in the shares. Here is one way to handle that dilemma. 1. Sell your shares at the current market price of $86,000 and purchase an option to buy the shares between now and January 2014 at $80,000 for $13,000. This way you get the lower capital gains rate, you can make your attractive investment and you can participate in any future growth. Will this work for everyone? No. It will depend on your perception of the attractiveness of the alternative investment, how likely it is for the increase in the capital gains tax and how strongly the option buyer believes in the potential for growth of 3M stock. It may be a good or bad deal but its definitely one that the investor should be aware of.

This is but one example of how you can use options to accomplish your investment goals. I have published this material before and I doubt that many took advantage of the opportunities created by options. If you invest in the markets, you owe it to yourself to explore these opportunities.

A UNIQUE TIME OF LIFE.

Betty's Mother, Georgia Pearl Roll Boyd

Born 100 Years Ago Today.

Inside Every Old Person... Is a young person wondering "What the hell happened?" I understand that better each day as I watch the person I used to be disappear before my very eyes. The new person in the mirror is different and the process of adapting to the new identity can be challenging. Despite the fact that I have known it was coming for a number of years and even wrote about it when I was a graduate student in my early 30s, I still find the changes surprising. Not that its all bad. There are a number of pluses to offset the physical decline taking place.

Some Memory Decline Is Inevitable. The other night I unloaded the back of Betty's car and took two armloads of groceries in the house. The next morning, I found the garage door still open along with the back door of the car. I must admit to being somewhat forgetful all my life but events like that are much more common now. One of my friends told me that he has systematized his life's routine that he has little trouble with routine matters such as finding his wallet, cell phone, or car keys. We can all utilize these technique if the short-term memory decline becomes too much of a problem. One way that I offset the effects of short term memory decline is to use the rich set of memories I have about the distant past starting as young as three years of age.

You Can Continue Learning. Forgetting what you have already learned is not pleasant but there are now so many resources available that you can replace that learning with new things that interest you now. I may no longer remember the main mechanisms for chain transfer in low pressure ethylene polymerization but I now know that one of the main ways that the brain aids in the balance mechanisms for the body lie in communication of the muscles with the cerebellum in the brain.

Death May Take Friends and Family. I recently lost my dad. While I am greatly saddened by his death, I still have many friends and family left and the ability to make new ones every day. I have also resurrected many relationships with cousins which have become instantly gratifying. I saw a cartoon the other day that showed a woman with two children standing by a grave stone that said, survived by his spouse, two children, and 650 facebook friends. Several prominent neurologists report that one of the best ways to cope with the aging process is to maintain social contacts. Social networking and some chatroom sites can help us do that.

We Can No Longer Ignore the Inevitability of Our Own Death. For a number of us, the main way to cope with our impending demise is to practice denial. We just don't think about it. As we get older, it is almost impossible to do this. I have spent numerous hours in an effort to get in touch with my spiritual side. I have studied the issues and looked at the evidence. While I have not proven that there is a possibility that we might continue to live after we depart this life, I certainly don't consider it impossible. In fact, I think there is a preponderance of evidence that it is likely. Of one thing I am certain. The best strategy for me is to live each day as if it is my last because it may be.

The Value of Freedom. I have more freedom now than at any other time in my life. It is what i have always longed for. Each day when I wake up, I am thankful that I can do pretty much what I please. If I can maintain as much physical capability as possible, I can enjoy this beautiful planet and the beauty that surrounds me. I can experience the love of friends and family until my time here is finished.

THE TRUTH ABOUT PREDATORY LENDERS.

Forty Years Ago I remember it was like yesterday. I was in a strange town that was to become my new home and I had two hundred bucks which wasn't much even forty years ago. Granted, I had a new job at $1,200 a month (equivalent to $5800 at today rates) but I had to make that money last 15 days until I got a pay check. Fortunately, I found a hole-in-the wall apartment for $75.00 and I had pretty well figured out how to make the remaining $125.00 last until payday.


Murphy's Law Strikes. One aspect of Murphy's law is Whatever can go wrong, will go wrong. About a week from payday things started to go wrong. A series of one flat tire after another told me that I was in desperate need of four new tires. The old tires were without tread and paper thin. To say that they were unsafe, even to drive to work, was an understatement. I had to have new ones at a cost of around $150.00. Even if I could make these last until pay day, I would not have enough money left after this to last another two weeks. I had to borrow enough to buy these tires.


Limited Choices. My irresponsible behavior of the last six months certainly limited my choices. My credit was poor and my employment unstable. Subtracting my liabilities from my limited assets resulted in a negative number. A typical lender wouldn't touch me. I was forced to consult a consumer finance company. They weren't enthusiastic either but they finally offered me a loan with modest payment and 33 months to pay. I had no choice but to accept at a rate in excess of 24%. Frankly, that was the best deal I ever made. It took most of the 33 months to turn my finances around but without that loan, I might not have been able to get back and forth to work in order to stabilize my life.


Not an Uncommon Situation Today. In this environment, interest rates are low but prime lenders are running scared and holding tightly to their money. Borrowers with no collateral and unstable employment are often forced to deal with some of these so-called predatory lenders just to keep food on their table and a roof over their head. Of course the first option is to find ways to meet obligations without borrowing. You can seek extra work or sell assets as a temporary solution. I have seen well-educated professionals who have taken jobs as retail sales clerks or at temporary day-labor. Remember, there is no dishonor in honest work, no matter how well educated you are. If you can't bring in some extra money, here is a list of lenders who take less qualified borrowers. They are listed in order of risk.

1. Loan Sharks. These are often members of organized crime who loan to drug addicts gamblers. Their rates can be 100% or more and their objective is to retain you as a customer for their illicit activity. These are to be avoided at all cost. If you are tempted to deal with these, make sure you have a rock-solid exit strategy. They may resort to violence to collect.


2. Payday Lenders. These loan on an anticipated pay check. Rates are extremely high and, if you become delinquent, they often will increase the loan size to pay off the current loan and interest. Their collection procedures, while non-violent, are aggressive. Again, it is preferable to have a rock-solid exit strategy before dealing with these.


3. Consumer Finance Companies. These are a step above the payday lenders. Their rates are higher than banks and their collection procedures are aggressive, still they can be a reasonable source of funds as long as you can make the payments on time. The first two lenders on this list are important to get out of your life as soon as possible; however, holding these loans to maturity and making the payments on time can be a reasonable strategy.


4. Credit Cards. Many of these are offered by major banks and competition has forced the rates to lower levels but you still need to be careful, especially if you take cash advances or make late payments. Some of these will increase your rates to 20+% if you are delinquent beyond a certain point. The problem with cash advances is that there can be fees up to 2% up-front.


5. Hard-Money Lenders. These are generally mortgage lenders who loan strictly on the value of the collateral with no value placed on the creditworthiness of the borrower. Rates may not be excessive but up-front fees and delinquency charges are substantial. Most don't employ aggressive collection procedures; however, they can be very aggressive in obtaining ownership of the collateral. Most will extend the loan if you can't pay in full at the end of the term; however, be prepared for substantial fees in the process.

This Is A Quick Survey. As you may have guessed, I am not as critical of some predatory lenders as those who would add another layer of government regulation. They do serve a need in the market place and, if the borrower is sufficiently knowledgeable to manage the risk. can be used to solve problems that may arise. The most important point is not to use them to buy things you don't really have to have. If this is the only way you can afford a certain item, it is usually preferable to delay purchase if the item. Ask yourself, if you really have to have it now or even at all. In the long run, utilizing this type of financing will detract, not add, to your standard of living.

TROUBLE IN PARADISE?

Two Septuagenarians Two Thousand Miles From home

Travel Becomes More Difficult as We Grow Older. We tire more easily. It is more difficult to travel at high speeds due to reduced depth projection and reflexes. Are we worse off than our grandparents in that regard? I hardly think so. Our cars are easier to drive. They have cruise control, power everything, and almost all are air conditioned. Why am I bringing this up? To call your attention to the improvement in our living conditions from our parents and grandparents age.

Now vs 60 Years Ago. The average house is 2500 square feet vs 1200 sixty years ago. In 1950, there was one car for every two drivers as opposed to more cars than licensed drivers today. We could look more at material things like televisions and computers with the same result but what about the non-material aspects of how we live.

Women and Minorities have More Freedom. Women are free to seek work outside the home, receive better pay, and hold more political offices by far than they did in 1950. Racism is still present but is not as extensive in a variety of situations where it used to be prevalent. We have better access to music, entertainment, and the written word by far than we did back then. Even education higher education is more available as one of two children participate in post high school education as opposed to one of five in the 60s.

We Must Be Overjoyed with Our Lives. This is hardly the case. When graded on the same happiness scale developed a half century ago, American happiness has failed to keep up with the progress in things we thought should make us happy. The average American is only slightly happier now than in the 1950's. Likewise for the average Japanese and Australian. The British and German citizens are less happy and the average Russian is much more unhappy.

So What Is The Cause? "Sweet are the uses of adversity which like the toad, ugly and venomous, wears yet a precious jewel in his head.." William Shakespeare. This little quote came from a verse in As You Like It." I was forced to memorize that verse in the ninth grade. It has stuck with me all these years although I never had a clue of what it meant. Now I do. It has to do with another quote from Nietzsche that says, "What doesn't destroy me makes me stronger." Have we had it so easy in the past 60 years that we are losing the ability to cope with adversity?

Research Suggests This May Be True. In a study that listed 15 of the worst things that can happen in life, such as the death of a child, torture, rape, or grave illness they located 1700 individuals who had experienced at least one of those events. When given a test they determined that these individuals demonstrated greater strength and more well being than those who had none. Further, those individuals with two such events scored higher than those who had suffered one, and three events scored higher than those who had suffered two. One more piece of research involved testing of a large sample of soldiers captured by the Vietnamese and tortured and abused for a number of years. Of these, 61% said they had benefited from the experience. Among others, they reported a better appreciation of the value of their own lives; a better understanding of spirituality; and a deeper appreciation of their relationships with friends and family.

So Should We Go Out and seek a Traumatic Experience? I certainly don't recommend that but perhaps we should recognize these events for what they are: An opportunity for growth. It also appears to me that the adversity that our ancestors went through might constitute at least part of the reason for the success of our country. They left home with little chance of seeing their family again, came to a place where they were forced to become self reliant, and faced a multitude of dangers. They grew stronger as a result. Perhaps our government underestimates the benefits that our citizens might obtain from doing what is necessary to withdraw from government benefits and become more self reliant.

Most of The Conclusions Drawn Here are Mine. The statistics cited here came from a book by an author who's work I have followed for a long time. The author, "Dr Martin Seligman wrote the book, Flourish along with several others including Authentic Happiness. Whereas much of the mental health research involves the study of mental illness, Dr Seligman has chosen to concentrate on the aspects of well being and how that can be improved in so-called normal people. His research, which has gone on for nearly 50 years has been extremely valuable to me.

THE SUB-PRIME MORTGAGE FIASCO.

Picture of my Mom (Left) when she worked at Paul's Diner.

I Have Posted Several Pictures of My Dad. Mainly because he recently died. Mom has been gone almost 30 years. I have talked a lot about how hard my Dad worked and it seems appropriate that I let you know that Mom was no slouch in this area either. She waited tables about as long as I can remember. I remember how proud she was of her tips as she kept them in a jar on the table. Perhaps that explains why I seem to leave bigger tips than most folks.

A Few Comments About the Mortgage Business. I started originating mortgages in the mid 1980's. The business was very difficult back then, mainly because of the work you had to go through to assemble a package that could be sold on the secondary market. A lot of people think about banks when they think about mortgages. The fact is that, only the large banks can afford to keep long-term mortgages and they often sell much more than they keep.

It Took Awhile. But we slowly gained market share because we added value be helping borrowers decide which type of loan was best for them and by preparing a file that demonstrated to underwriters how qualified the borrowers were to fulfill their obligations under the terms of the note. Our business peaked in 1993 when we made and sold $150 million in loans. We were heavily taxed to the point that, when the business slowed down, we could not keep all the people we hired. It had been my objective to keep these people as long as we could in case the market improved again.

The Government Was Always Involved The Business. They had an implied guarantee that they would stand behind Fannie Mae, Ginnie Mae, and Freddie Mac in case of difficulty arose that made it impossible to repay the bonds they sold to provide the funds to make the loans. This allowed these agencies to sell bonds at lower rates than most private companies. Some time later, numerous non-profit companies came out with statistics that showed that minority borrowers were turned down at a higher rate than non-minorities. This was true even though turned down minorities had the same income as non-minorities that were approved. All of these studies were flawed because they failed to take into account many other crucial aspects of the mortgage approval process. The government imposed a system called the Home Mortgage Disclosure Act (HMDA) that required all lenders to carefully audit each file and report the results to the government proving that no discrimination was taking place. This increased the workload across the board for the mortgage industry. As if that weren't enough, they pushed for relaxed guidelines in most aspects of the business so that less wealthy borrowers could get loans.

Getting a Mortgage Loan Became Easy. It became so easy that it attracted people with very little financial background into the business. They didn't need expertise, just sales skills. Large broker dealers got into the business. They could barely spell mortgage but they could raise money and sell to their vast network of investors. As underwriting guidelines became more and more relaxed, anyone who could fog a mirror could get a loan that they had little ability to repay. Probably the worst culprits in this fiasco were the rating companies that gave these so-called sub-prime loans an A rating, the same given to large companies with a considerable assets and a long term history of meeting their obligations.

This Made Our Services Less Valuable. When borrowers came to me I expended a considerable amount of energy showing them the implications of getting these loans. I made few loans during that time. What makes it even harder to accept is that many of these borrowers went to other companies who told them what they wanted to hear and approved their loans right away. The result of all these irresponsible practices lead to the breakdown that occurred in 2008.

A Concise Summary of Who Is To Blame. Strictly my opinion but here they are.

1. Mortgage Originators. Although a lot of them didn't know the harm they were doing, it was their obligation to find out. The worst players were those who knew but didn't care.

2. The Government. They pushed for more relaxed lending standards so that more people could buy houses. This was a laudable goal but one for which they lacked the vision to understand.

3. The Large Brokerage Houses. They didn't understand what they were encouraging their investors to buy. Again, it has long been their main function to raise money for business through the sale of bonds and securities. Although they should have taken some time to understand the implications of what they were selling, they treated these packages of loans the same as they treated other securities that they had more experience selling. When delinquencies occurred, they had little idea of how to enforce the terms and ultimately recover and market the properties that they acquired.

4. The Rating Agencies. They should have known that these loan packages were risky and undeserving of the high ratings they were getting. The public believes in these ratings as objective opinions of unbiased third parties who understand risk. No longer can we trust their opinions as being objective.

5. The Borrowers. In the final analysis, it is the responsibility of the borrower to understand the implications of the obligation they are undertaking. While lenders need to be able to explain these, and disclose the underlying risks, borrowers should not take their responsibilities lightly. In the absence of outright fraud by the lender, borrowers have little right to expect the government, charities, or lenders to excuse them from the consequences.

This Should Give You A More Comprehensive View of What Went On. Still, it is a vast oversimplification. One thing should be clear. There is plenty of blame to go around. Those who blame the president, congress, or wall street may be partially right but it goes further than that. I am definitely sorry for those who are losing their home to foreclosure but they definitely participated in this fiasco. Hopefully, they will be more prepared next time.

REFLECTIONS ON 74 YEARS..........

Men of The Storms Family, Circa 1937

This Picture Was Taken Around The Year of My Birth. I doubt that it will interest many other than me. My Dad was the man on the left. Followed by my Uncle Norman, who died when only 37. The short guy on the next right was my Uncle Ray, and the last was my Grandfather, Hardiman Franklin Storms. My grandmother, Dora was already dead of smallpox and buried for several years when this picture was taken.

How Could This Possibly Interest You? There is a good chance it may not. I remember when I was a teenager, I used to find visiting with my grandfather a chore since he only talked about things that happened long ago. What a opportunity I missed. I would give anything for an hour's conversation with him today.

I Was Considered The Brightest Member of The Family. I remember them saying, "That boy's smart, he's going to get himself an education so he won't have to work for wages like the rest of us." Grandpa dug graves, Dad and Uncle Ray grew carnations, and Uncle Norman was a sharecropper, growing crops on the land of others and paying them 25% for the privilege.

I Did Get An Education. I spent many years in universities taking courses in chemistry, psychology, math, and communications. In a way, I proved them right but actually one of the main reasons I spent so much time in higher education was to live up to their expectations. During that time, I found out that I was no smarter than the rest. Later, I found out that it's all "workin for wages." In my professional employment, I have earned money as a chemist, plastics engineer, real estate broker, mortgage broker, and financial consultant. It's been an interesting and varied career.

So What am I Proudest Of? I started at the age of 10, pulling weeds, picking strawberries, sacking corn, and cutting asparagus. I also washed dishes in a restaurant after school. This is blue collar work in its most primitive form. The four guys in the picture above spent their lives doing this kind of work. They got up at 5:30AM six days a week and worked until late afternoon. When they got home, they didn't take naps or watch TV (there was none). They built or added on to their houses, fixed anything that was broken, grew huge gardens, and grandpa even made quilts. My blue collar background taught me more than I possibly could have learned in 7+ years of university education. There can never be dishonor in honest work and I was never too well educated or too smart for any of it.

Why Do I Write This Stuff? I could tell you things that you might find more valuable about things like how to invest, how to borrow, and how to manage cash flow. I will do more of this in the future. I write stuff like this, not because I want to, but because I have to. If no one reads it but me, it will have been more than worth the effort.