Archive for October, 2006

As the company I work for prepares to roll out our new health insurance plan (and premiums) it hit me like a ton of bricks -Health Insurance as we know it today will collapse within the next 10 years.

I’ve written about Synthetic Financial Disasters before and I wrote six key things that would happen when Boomers retire from the workforce:

  1. A retired person no longer draws a salary nor does he/she pay as high a level of taxes as during their work year. (The major negative here is the elimination of payroll tax contribution, lower income tax contribution)
  2. A retired non-working person no longer contributes money to his/her 401k and thus subsequently does not support/inflate the various financial markets
  3. A retired non-working person no longer adds to Growth Domestic Product. There is LESS productivity in America because of the shrinkage in workers. Yes, they will continue to consume and spend money but this is NOT PRODUCTIVE contribution
  4. A retired non-working person begins to WITHDRAW money from their investments. Imagine 4.3 million people each year withdrawing $2500/month each year –that’s $10,750,000,000! That is only the first year 2011; add an additional 4.3 million or 10 billion each year after than until 2024 when the bleeding slows down
  5. A retired non-working person begins to take social security benefits. Many will be in for a shock when their paltry checks aren’t enough to feed them, clothe them, medicate them or pay for living expenses. What will happen? They will vote for more tax increases to pay for increases in social security.
  6. A retired non-working person will begin to heavily utilize Medicare/Medicaid. Let’s face it, growing up during “boomer” times many people acted very unhealthily; Boomers smoked in their teens, they lived thru the 60’s drug revolution, sexed themselves through the 70’s, fattened themselves through the 80’s, and indebted themselves through the 90’s. The boomer population doesn’t have the healthiest lungs, livers, bones, or hearts so they WILL tax the healthcare system heavily. Who’s going to pay for all that medical help?

It didn’t occur to me to include the most blatant and obvious problem with boomers leaving the workforce!

Once retired, Boomers won’t pay company health insurance premiums!  Boomers will switch over to medicaid/medicare and possibly pay those premiums but employers will be left with a depleting pool of workers to pay into the health insurance system!

If 4 million people retire each year beginning in 2010 and the average monthly health plan cost $300/month then you’re looking at a loss of $1.2 billion dollars in monthly premiums.  Keep in mind that currently 40 million people don’t have health insurance and I suspect that the majority of those that do are the more senior seasoned workers that have families to support so there is no real offset in these statistics.

I have been fairly disappointed with the finance blogging world. My main concern is that no one seems to be offering any real advice on how to earn some extra cash with investments. No one seems to want to stick their neck out and publish how well or bad their investments are doing and the most often advice doled out is “invest in mutual funds” and “spend less than you earn.” While that advice is reasonable for people that are “finance challenged” it doesn’t really help the rest of us.

I’ve created a new website that will chronicle my adventures in money making through one simple strategy that is easy to understand and follow: Buying ETF securities and shaking money out of them via covered calls. I will state that I will likely make some money and I will likely LOSE some money but the whole point of the program is to help educate people interested in learning.

Disclaimer: Investing in securities can potentially lead to loss of funds, including principle, all information provided here is for entertainment and educational purposes and in no way is intended to be taken as financial advice. Consult your financial adviser and perform your own due diligence before investing in any kind of security.

And now, Rich Slick proudly presents http://www.etfcoveredcalls.com

A post by mm over at http://www.pfblog.com got me thinking about my credit card arbitrage deals and the “universal default” clause most credit cards have these days.

I began to wonder what would happen if some deadbeat’s credit file got merged or added to my pristine credit file.  Will credit card companies assume those bad loans/debts/missed payments were mine then declare “universal default” and hike my rate up to 30 percent?

It’s pretty scary since I’m currently floating nearly $40,000 at zero percent on various cards.  Of course, if push came to shove I would quickly pay off the debt by unwinding the arbitrage deals but it’s definitely something to consider when doing these deals.

The problem would easily be solved if consumers were allowed to LOCK THEIR CREDIT FILE but recent legislation has muted that option and politicians aren’t eager to help out consumers any time soon so it’s a potential pitfall.

I’ve got another 30 days of interest free money on my first posted arbitrage deal so I’m looking for the next big deal.

I am truly amazed at how the internet is transforming the business world on so many levels. A few weeks ago I posted a review of a book that changed my whole outlook on investment strategy Covered Calls & Naked Puts and a couple of weeks ago I was contacted by the author of the book via comments to my blog here and here.

Needless to say, I was grateful to Ron Groenke and Keller Publishing for writing and publishing the book and I encourage any serious investor to check out his website and order his book. http://www.rongroenke.com/

I can give you an assurance that you will learn something new about investing if you read the book. I have not asked nor do I receive any compensation from Ron Groenke. I am simply happy to provide a recommendation for a book (and investing strategy) I strongly believe in to my readers.

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Disclosure: The author has sent me an updated version of the book now named Cash for Life for review. While I haven’t yet officially received the book, a friend of mine has informed me that it has arrived at his home (was out travelling so I had it sent there). I’ll post a review sometime in the near future of the new book along with some others recommended by readers.

The Federal Reserve Corporation left rates unchanged yesterday so we chug along at 5.25% despite rising inflation everywhere. MSNBC had a story about college costs rising 6% a few days ago while health insurance costs are up 7.7% over the past year.

I wrote about my grocery shock last week when a gallon of milk, loaf of bread and a dozen eggs cost me an eye popping $9.87 and yet the Federal Reserve Corporation is stuck in a quagmire.

It must keep raising rates to fight off inflation but at the same time that will likely stunt economic growth. What’s a private bank corporation to do? I don’t have the answer only that it should be perfectly obvious to everyone that inflation is spiraling higher and higher and there is little activity to do anything about it.  They seem to be following a “stay the course” campaign and we’ve all seen how successful that philosophy has been over the past few years 😉

I’ve written about how I use holding accounts to separate money from my paycheck automatically along with other creative uses of these holding accounts.   As we come close to ending the 2006 calendar year I’ve made some changes to my paycheck distribution that I’d like to share with you and why I did them.

My pay will now be broken down into four different banks.
Bank A will receive $166.67.
Bank B will receive $126.75.
Bank C will receive the remainder of my pay.
Bank D will receive FSA/HSA account withholdings reimbursement

What’s up with these numbers?

Over the course of the year, Bank A will turn into $4000.   This will eventually become a Roth contribution for 2007.  In the meantime, it will earn 5 pct in a high yield account.

Over the course of the year, Bank B will turn into $3042.  This will eventually become my personal “do whatever I want” money.  I might use it for a quick vacation trip, a new laptop, or something totally frivolous but it’s my money to spend as I please.

Bank C will have the remainder of my paycheck which will be used to pay for normal living expenses: insurance, food, mortgage, clothing, etc.

Bank D will receive the money that is deducted from my paycheck for Flexible Savings Account and Health Savings account.  I’m not sure what the final total will be but this past year it was around $7500.00. This ultimately goes into three components (emergency savings, long term savings and cash investment reserves).

While many investors look to the Department of Labor job statistics, the Federal Reserve FOMC meeting minutes or company earnings to get indicators as to how the stock market will perform in the near future I like to look at some more creative and alternative economic indicators for investing insight and predictions.

One such alternative indicator is the gambling statistics at www.tradesports.com.  While I don’t buy contracts or “gamble” on outcomes, I do like to see how gamblers out there are perceiving the world.  Recently, I took a look at “action” on the Dow year end contracts and the results are interesting.

For year end 2006, many are betting that the Dow will close above 11250 but below 12000.

For year end Fed interest rate, many are betting that the Fed rate will be above 5.25% but not much higher than 5.50%

For year end the Euro/USD rate, many are betting that the Euro will be above $1.25 USD but not much higher than $1.2750.

For year end, GOLD betting is that it ill stay above $520/oz but not much higher than $600/oz

Light sweet crude for Feb 07 is strong above $50/bb but not much more than $60/bb.

I like to look at this data because it represents the extremes of speculation so it provides crude end points for some statistical “Bollinger-like Bands” for each data set.

This helps reconfirm my feelings about GDX as a potential covered call yielding 8% from now till December 07.  I’ll keep you posted….

As I wrote about last Wednesday, I finally got called out on XLE at 54. Here is a quick recap of the money I made on this ETF from March through October 2006.

Date Activity Symbol Share Price Cost
3/27/2006 Bought100 Shares XLE $54.14 -$5419
3/27/2006 Sold 1 Contract XBTIB $4 $385
7/31/2006 Dividend XLE Dividend $19.75 $19.75
9/18/2006 XBTIB EXPIRED XBTJB EXPIRED
9/19/2006 Sold 1 Contract XBTJB $1.30 $115.00
10/3/2006 Dividend XLE Dividend $17.67 $17.67

There’ll likely be a fee for the call but overall I still earned close to 10% from March through October. Not bad. What will I invest in next? GDX and PBW are looking hot right now. I could potentially make close to 8% selling the December 06 Calls near or in the money on these ETFs. I’ll keep everyone updated on my next ETF Covered Call adventure. Stay tuned!

The year was 1990 and the Berlin Wall had just come down.  The future was so bright you nearly had to wear shades.  Everyone was predicting East & West German re-unification.  At the time I think most people considered a six figure salary as the panacea that would be the key to the lifestyle that they really wanted to experience.  Sixteen years later the median household salary (two income earners) across the nation is around $60,000 which is way short of the $100,000 goal.  Unfortunately for many, even if they achieved a 100k salary today, after factoring in inflation (3% annually), 100k today is really only worth $61,915.41 in purchasing power.

What would you need to earn today to be at that 100k panacea?  $161,510

We frequently talk about inflation and the ravaging effect it can have on the purchasing power of your dollar but I’ve begun to understand that there is also something which I’ll call “techflation” in which subsequent generations find themselves needing more technology based items in order to get by.

What are some examples?

My grandparents lived rather modestly.  While they owned a TV in the latter part of their lives they didn’t own a VCR until the last decade of their life.

Here is a list of things my grandparents didn’t have in their life and how those things impact the cost of getting by today.

Computers – $800+  – didn’t really go into mass production until late 80’s early 90’s
Cell Phone- $100+  – didn’t really go into mass production until late 80’s early 90’s
DVD Player- $100+  – a rather recent invention available in the mid 90’s on large scale
PS2/XBox  – $300+  – another recent invention available in the mid 90’s on large scale
Cable/SAT – $100+  – while availble since early 80’s, became a “necessity” in the late 90’s
iPods/MP3 – $250+  – a recent invention of the late 90’s early 00’s
HDTV      – $1000+ – recent invention of the 00’s
ISP       – $40+   – high speed internet is a must
Camcorder – $300+  – record those precious memory on video
DVR       – $100+  – record those TV shows

If I add up the base cost of these things it comes to about $3100.  This doesn’t include the cost of the cascading expenses that arise as a result of owning these items.  A PS2 for example will need to havve controllers replaced $30 and games purchased $30+/each to enjoy.

I know many will say that you don’t “need” cable or satellite TV or some of these other items but in today’s globalized world you do. I think of every thing that I purchase as an investment tool.  The SAT TV brings me news from around the world.  A bad harvest of wheat in Australia will impact inflation in the US.  An HD show on the phenomenal growth in China will lead me look into an exchange traded fund (FXI) as an investment opportunity.

My iPod allows me to listen to radio broadcasts (Ray Lucia, the Money Man) that I would otherwise have missed.

Of course, it’s hard to justify a PS2 as an investment expense but there must be a litte fun in our lives.

I can only wonder what “techflation” will do to my grandkids.  Instead of leasing a high speed internet connection will they be buying “cycles” on a gigantic grid computer?  Instead of mp3 portable player will they have holographic projectors?  Instead of a real life human financial advisor will they lease a virtual financial advisor that trades for them automatically based on their financial goals?

Only time will tell but techflation is here to stay.