Archive for June, 2008

So you’ve been clipping coupons, you bought that 35 mpg Ford Focus, you’ve lived frugally and now you’re faced with $7/gallon for gas. What next? What’s your game plan for $7/gallon gas?

How much more time and energy will you spend trying to cut corners so you can buy a gallon of gas?

I’ve been having some rather interesting and disturbing discussions with associates, family members and friends and most of them are hurting or know of people who are hurting. I was driving over an overpass recently overlooking a CarMax lot and was shocked to see the lot full of SUVs: Suburbans, Expeditions, etc were parked in the grass because the paved lot was full!

I bring this up because I’ve been catching up on some analysts reports that project oil to be around $200/barrel within a couple of years. There are solid analysts who’ve been in the industry for decades and not your typical CNBC jar-heads that haven’t done their homework.

The obvious antidote to the poison of high fuel prices is greater income and NOW is the time to position yourself to handle the increase.

I’d suggest:

Refresh your education – get that certification, go back for that professional training, finish that degree or get another one.

Prepare your employer for the upcoming pay increase you’re expecting because of high energy prices. Don’t wait till late 2009 to tell your employer you need a raise, start telling him/her NOW that you’re worried about $7/gallon gas and you’ll need a big raise to compensate you. Giving your boss more time NOW will allow him/her to work with the executive management group to start preparing for dramatic increase in salary requests.

Prepare yourself to potentially move to a new employer near your home. At $7/gallon gas, it becomes difficult to justify driving 40 miles for a job that pays $20/hour on that gas guzzling 10 mpg SUV. Selling your old home might be a problem in today’s real estate market which is why you should start NOW.

Adjust your portfolio. As ironic as this sounds, high gas/oil will lead to a lower stock market and this is the time to INCREASE your savings and contributions to the stock market when things turn sour, you’ll be getting in at a big discount. Unfortunately, high gas prices will likely mean you’ll have less cash on hand and that’s the irony.

Have a second stream of income. Whether you start blogging about your belly aching high gas prices or you start selling tamales on the side, you’ll need a second income stream.

Hedge your expenses. If gas hits $7/gallon then it might be worth it to invest in UGA as a hedge.

Years ago, I worked in an office building that had one unique feature that I’ve never encountered again in any other office building. This building featured a lady that would stop by every Friday and sell tamales by the dozen.

Like clock work, every Friday, many people would head down to the lobby and buy a dozen tamales to have for breakfast or lunch that day. She became to be affectionately known as “the tamale lady” and she’d make at least $100 during every visit but that incident got me thinking about why there isn’t as much entrepreneurship as their used to be.

I wonder how many miles the lady used to drive to get to that office building and sell her wares. With gas over $4.00 a gallon, it might not be as cost effective as it used to be.All of this lead me to wonder why there isn’t an enterprising young person on airplanes these days.

If airlines are going to charge $5 for cold crappy meals then perhaps someone can stop by the local food court, buy a dozen juicy burgers and sell them on the plane to compete with the crappy meals. Ideally, what each airline needs is a tamale-like lady selling tamales (good food) on the flight. The airlines could spare a row to install a mini-Subway, or Burger King, or other fast food shop on their plane and people would gladly pay for a hot meal.

Panic! Desperation!  Premiums on Puts!  It’s always hard to catch a falling knife so I like to wear a glove when catching one so I’ve moved my strategy into selling ETF Naked Puts.

How and why would you want to sell naked puts?

When the market drops like it is doing now, people tend to panic and start selling their equities which drives equity prices down.  Some choose to buy insurance on their stocks to limit their losses so they buy Puts (the right to sell at a certain price) which means that put premiums go up on those puts and they become much more profitable.

So here’s a real example from one of my accounts I did earlier this week.   SSO (leveraged 2x S&P 500) was trading at $66.30 so I bought 200 shares and sold $67 Calls for about $2.00 to make $400.   This was a simple buy/write but I’d like to own more SSO just not at the $66.30 price so I moved to naked puts and…..

I sold 2 contracts on SSOSM (July $65 strikes) for $1.65 to rake in $320 on this trade.  If SSO stays below $65 then I’ll be forced to buy SSO at $65.00 no matter how low SSO goes.   If SSO stays above $65, then I get to keep the premium and preserve my cash.

Let’s look at this trade more closely, if I received $1.65 for SSOSM  AND I’m assigned (SSO < $65 on July 19th) then I’m really getting SSO at $63.35 ($65-$1.65 = $63.35).   So if SSO drops more, I’ll be owning 200 shares at a pre-determined price of $63.35 and I’ll be able to sell Calls at some point in the future (e.g. August,  September, December).

As of this post, SSO closed at $61.11 and if it stays here I’ll be forced to buy at $65 so why would I want to do this?   If SSO stays at $61.11 then I’ll own shares and be able to sell calls for August at $65 strikes which are currently trading at $2.70 and flip the direction.  I’ll be making money on the way down and on the way back up.

So the bottom line here is this:

  1. We’re using 2x leveraged ETF for the extra volatility
  2. We’re selling naked puts and covered calls to earn additional premiums and leverage dollar cost averaging by 2x.
  3. We’re looking for exceptional returns.

What are the risks?   The S&P can crash and SSO can drop to $20 in which case we’re all screwed no matter how or what you’re invested in during this time frame.

Rumor mill says plunge protection team is out of cash and is now looking for private equity to keeps the banks afloat but who knows; it’s crazy out there!  Gloom and doom!

With a 350+ point drop in the Dow it’s getting really ugly and no one has any real answers.    I’m selling naked puts here and there trying to rake in some profits.    More tomorrow!

I’ve been experimenting with my mini account exclusively applying my ETF Covered Call strategy with a single ETF, the leveraged Dow 30, DDM, and the returns have been fairly exceptional even in a down market.

Take a look at the graph below.


The graph compares the Dow Jones Industrial Average returns with buy/writes on DDM and there’s really no comparison. When the Dow drops, the premiums offset some of the losses and as the Dow raises, a lockable profit gets produced on the upswing.

I’ll continue to the rest of the year using this strategy on this one ETF to find out how well it does over a 12 month period. If successful, I’ll continue with it on through year two.

With airlines charging $15 for first bag checked and some charging $25 to $50 for second bag checked, it’s become obvious that a new era of disposable clothes is needed.

I’ve been doing a great deal of international travel and here’s what I figured I need to help myself and the airlines out:

Disposable underwear  – Preferably cotton and pre-washed (to make them comfy).

Disposable socks – Wear once, throw away.

Disposable undershirts – Preferably cotton and pre-washed (to make them comfy).

Disposable pajamas/night clothes – Preferably cotton but easy to clean by soaking in soapy water to use twice then dispose.

If I could have these items become purchasable at the airports when I land there, I’d pick them up, wear them and dispose of them daily then I’d only have to pack slacks and dress shirts.

With a looming presidential election, more and more people are focusing on the differing strategies between the lead candidates in this years election and other political races but I honestly think that politics is wholly irrelevant to personal finance.

“But candidate X wants to raise taxes and candidate Y wants to cut taxes, it makes a difference!”, you shout.

I’ve lived through both democratic and republican administrations both through economic peaks and troughs to know that policies are mostly irrelevant.

Of course, this philosophy only depends on your personal attitude.  If you’re a capitalist, you will seek and find opportunity no matter who’s in office, no matter what taxation system is in place and no matter what economic conditions exist because of or lack of presidential decisions.

In countries like communist China and former Soviet Union there were many wealthy people (capitalists) that thrived despite the environments they found themselves in.  I’ll go further and say that if the ONLY way to achieve a comfortable/wealthy life in these communist countries were to become a member of the government then those people that sought out those offices were nothing more than ambitious capitalist working within the constraints of the communist political system to achieve their goals.

I can guarantee you that right now, there are wealthy people in places like Venezuela, Vietnam, and Middle East, to name a few, with uncomfortable and unfavorable capitalist environments but many thrive nonetheless.

So over the next few months we’ll see more and more economic and tax plans that favor one group or another; they’ll be endless debate and air time wasted on who’s right and who’s wrong.  We’ll see bloggers debate pros and cons and some will spend hours crafting arguments in favor of one policy or candidate rather than another but at the end of the day, they’ll be irrelevant to a capitalist who’ll earn profits no matter the environment.

I won’t be focusing on the politics, policies or taxation, I’ll be focusing on my profits and when a decision is finally made, I’ll take a look at how I need to adjust my strategies to profit accordingly.Why Politics is Irrelevant to Personal Finance

Many electricity generating entities rely on a variety of fuels to create electricity:  natural gas, coal, nuclear or hydro.   I can’t speak too much of hydro but as far as the other three, there has been a significant increase in the prices of all these commodities and many consumers will feel the pinch this summer as heat waves bake most of America and electric bills sky rocket.

I got a taste of the coming bitterness this past week when I got my electric bill.   My May bill was $327 when it had been traditionally about $150.00.   When I digged a little deeper, I realized that my electric rates when up from $0.10/kw to $0.185/kw.   That’s a significant increase and based on the new rate, my August electric bill will likely hit $500 to $600 this summer if we utilize the same amount of electricity as we did last year.

Thank goodness we purchased a new more energy efficient A/C unit last year otherwise I’d be facing a $700 bill this August.  I can’t see how $4/gal gas and $400 electric bills are going to bode well for the economy this summer but we’ll see what happens.  Perhaps Congress can initiate a “cool summer cash” rebate to pay for A/C this summer.   Thank goodness the Fed is fighting inflation or we’d all be in real trouble ;)   .

My son is at an interesting age as he now comes home from school and asks all sorts of interesting questions.   The latest one was whether or not we were wealthy?   I asked him why he asked but he didn’t answer.  I then explained to him that we weren’t wealthy and that some people would definitely consider me wealthy.

I explained that all the bank account statements, brokerage statements, stock options and other things that are identified as “wealth” are all in my name and not in anyone else’s name so “we” weren’t wealthy but I was in the context of the question answered.

He laughed and got a big kick out of it.

With airlines all struggling to pay for fuel, increasing fees, raising prices ridiculously and on the verge of bankruptcy, I have to ask, where are all the maglev trains? This country’s infrastructure was built on cheap oil and those days are gone and there is no alternative infrastructure in place to turn to after years of heavy lobbying by Airlines to kill any opportunity to build magnetic train infrastructure throughout the country.

Of course, China hasn’t made that mistake as they Shanghai Maglev Train is the fastest in the world. Europe has mass transit systems in place based on fast rail as well. It seems the only country left behind is the United States when it comes to alternative transport systems. All we have is the antiquated Amtrak system along with some of Warren Buffet’s diesel based rail road system.

It’s all very sad really. People will understand the need for alternative when a flight from New York to Dallas cost $3000.00 in economy class!

And I wrote about potential distribution problems with food and medicine if a hurricane barrels through the gulf of mexico and sends fuel soaring to $5/gallon or more and you’ll be seeing riots like the ones in Europe here over fuel.