Archive for February, 2010

This Wall Street Journal article points out what I’ve been suspecting for years: Pre-paid college tuition is a scam!  It’s a scam or rather “ponzi” scheme just like social security, medicare and any other government program with similar characteristics.

This poor woman has contributed $100,000 under the false assumption that her grand kids college education would be taken care of but now the state is struggling to keep up and finding all sorts of loop holes to not fulfill their obligations.  Hmmm…..sound familiar?

Patti Lambert wanted to pay the college tuition for her eight grandchildren. So for the past 16 years, the real-estate agent signed onto the state of Alabama’s prepaid tuition program. She invested more than $100,000—a daunting amount but a good deal because the prepaid plan promises to cover tuition no matter how much it increases.

Or so she thought. Facing a severe funding shortfall, Alabama is trying to renege on its promise to foot the whole bill. Instead, the state wants to pay the average tuition rate, potentially forcing schools and families to make up any difference.

When my wife and I first got married, we went through our finances and my wife showed me some contributions she was making to a similar program for her younger sister.  I immediately told her to quit paying it and request a refund.  She got all of her money back and we put it in savings.   I told my wife that when the time came, we would help her out as much as we could but that ultimately the plan wasn’t going to work.   A few years after the state froze the program and significantly modified the plan, making many people unhappy.    My sister in law graduates this May and my wife’s been helping her along the way with tuition and other items.

I’m still waiting for the day when the exact same thing happens to social security and at the current rate of disintegration that should only be a few years away.

Wow!  For the first time in a very long time, I’m actually getting a REFUND from Uncle Sam to the tune of over $4,000.   And all it took was for me to lose my job for six months and the government to lose about 75k in income tax revenue from me.   I feel like Uncle Sam is saying, “Sorry we gouged you for so long for so much, here’s $4,000!”

Actually this is the first year I didn’t exercise options, cash out stock, or rake in huge bonuses during the past year.   The only “earned income” I had was unemployment insurance from the state.    What really helped were all the freaking tax deductions:  my entire MBA tuition saved me a cool $2200,  student loan interest saved me some money, etc.   The only regret is that I didn’t wait a little longer to buy a car.  I purchased a new car in 2008 and if I had waited another year, I could have saved another a few k in taxes.  Wow, what a great tax return that would have been!   If I had bought a new house that might have been another 8k.  Sometimes, timing is everything!

Oh well, I’m expecting to be back in the higher tax bracket this year so I’m sure I’ll owe Uncle Sam a few thousand this time next year but at least I can buy a new LCD TV finally 😉

Remember the housing boom and the rallying cry, “this time it’s different” and of course smart people knew the bubble was just about to burst because the world via media was saturated with pure real estate mania but a funny thing has happened.  We’ve now reached “doom and gloom” mania all over the place.  Almost every website I visit has some sort of doom and gloom “Survivalist” newsletter, book, article or link to “surviving” the next apocalyptic depression.

Let me be clear about a few things:

1. There are some huge fundamental structural problems with the US economy which still need to be solved.

2. There are huge liabilities that need to be dealt with such as pensions, social security, medicaid/medicare, et al.

As bad as things are, they are going to be obviously worse in Europe, Asia, South America and anywhere in Africa.   Let’s take a look at just a few articles that have come out this week.

First up, this article in the Chicago Sun Times with the headline,

‘Doomsday is here for the state of Illinois’

How does that headline grab you?  Oh no!  Doom and Gloom!  The article reads,

To become solvent, the state must enact the largest tax-increase package in Illinois history, whack another $2 billion from already starved government programs and wrest major financial concessions from the state’s unionized work force, a nonpartisan government watchdog contends.

Next up, we have this article from the UK’s Observer, it starts with this headline,

“Americans stock up to be ready for end of the world”

The article reads,

Tess Pennington, 33, is a mother of three children, and lives in the sprawling outskirts of Houston, Texas. But she is not taking the happy safety of her suburban existence lightly.

Like a growing army of fellow Americans, Pennington is learning how to grow her own food, has stored emergency rations in her home and is taking courses on treating sickness with medicinal herbs.

There are tons of articles pointing out bankruptcies, commercial real estate problems, sovereign defaults and other rigmarole.   Check out this article on the “gloom and doom” in breakfast sales:

Fast-food breakfast sales decline as fewer head to work

The nation’s high unemployment rate has thrown millions of people out of work, scared shoppers away from stores and threatened the economic recovery. Now it’s taking a bite out of breakfast.

Breakfast sales had grown at a ravenous pace during the boom years as busy workers scarfed down sausage biscuits on the way to the office, fueling a $57 billion business and accounting for as much as a quarter of sales at some fast-food chains. Chains opened earlier and expanded their morning menus to accommodate the traffic as lunch and dinner sales flatlined.

Do you remember this classic bubble top?

Bubble Top

2005

Life, like bubbles, is a pendulum that swings BOTH ways.   I’ve been looking for this moment since this post in October 2008 and it’s almost here.   The more the media pumps gloom and doom articles the more I know we’re close to the absolute bottom.   Given the 20% inflation pricing in the energy markets, I’d say we’re gearing up for the roaring teen’s  and roaring twenties (2013 – 2025) and this teenage economy has raging hormones!    Don’t be a fool and jump the gun, cautious optimism is now warranted!

The financial world is a buzz with the Fed raising the discount rate a quarter point stealthily right before options expiry and it is just the start of a very dangerous careening job.

If you’re not familiar with careening, here’s a quick primer:

As is well known, as ships cruise the ocean, their bottoms quickly become covered with barnacles. These barnacles affected the ships speed and mobility. These two characteristics were highly respected among pirate captains, for they knew above everything else that if they were to be pursued in would be speed and mobility that would save them above any amount of firepower they might possess.

Barnacles posed another problem. If they were not removed, periodically, they would also cause irreparable damage to the hull by eating away the wood or weakening the seems between planks. This meant that if the ship were at sea, far from land, it could go down. The threat of barnacles was taken very seriously.

Often ships are dry docked after a long ocean voyage, in order that the hull can be scraped free of barnacles and repaired.

Pirate rarely had the opportunity to dry dock. When a ship could not be dry docked, sailors had to devise other ways to clean the bottom. It was practically impossible to clean the bottom of a ship while in the water. The best alternative was careening.

Careening involved finding a suitable shallow bay where the ship could safely be run aground, thus exposing as much of the hull above the water line as possible. Then the ship would be unloaded as much as possible. The crew would then need to careen or turn the ship over on one side using block and tackle, and manpower.

The crew would try to pull the ship over enough to expose the keel or bottom of the ship. Then they would commence scraping that side of the ship, free of any barnacles. Then any damaged planks would be replaced or repaired. Following this step, if possible the bottom of the ship would be covered with paint, pitch or some kind of proctectant.

Once the one side was done, the crew would careen the ship to the other side and repeat the process.

The task was labor intensive and time consuming. Pirates were sitting ducks while careening their ship. They were often not armed well enough to stand a major ground assault and with their ship run aground they could not take on another ship.

So Barnacle Ben is careening the Federal Reserve (a.k.a Titanic) and this pirate is going to make himself vulnerable on multiple fronts:  the economy, banks, Goldman Sachs traders, grand standing politicians, and perhaps the world.    In the meantime, I’m hoping to cash in on my UUP call options 😉

Aarrrrrr matees!

The market may be back but don’t confuse that for the end of the recession.  I think we may be approaching the bottom of this recession based on what I’m seeing in the energy market and other data coming out.   The Fed announced it was raising the discount rate from 0.50 to 0.75 and that seems to have caused the dollar to rally a bit so we’ll see how those call options pan out next month.

The Federal Reserve on Thursday announced it would raise the discount rate at which commercial banks borrow from the central bank as part of a move to withdraw emergency support to the financial system.

The discount rate will be increased on Friday from 0.5 per cent to 0.75 per cent, moving the spread over the main federal funds rate to a more normal level. The length of loans will also be shortened to a maximum of overnight.

The economy is still a mess and unemployment is still a big problem but in talking with a few people, we all agree that many people that have jobs now are doing the work of two or three people and this can’t be sustained for much longer.   At some point, hiring will need to start climbing back up before the employee lawsuits start flying!

So I decided to do what I thought I would never do and bought 200 shares of SWN and sold the September at-the-money calls to rake in $1,100 (12% return) for 7 months out.  Not too shabby!

I’ve been reluctant to do any heavy trading since the great collapse of 2009 but that all changed since two nights ago.   I went out to dinner with a co-worker at a nice steak restaurant and I was completely shocked to see the restaurant packed on a Tuesday night.   I’ve eaten at this restaurant off and on over the years and it rarely had heavy business on Tuesday but that night was different.    Is it possible these were a bunch of late Valentine Day dinners?  Maybe but most of the people in there were business men and they were all talking business.

So I’ve already took a gander at the energy situation in a previous post and was again surprised to see energy inflation priced in at about 10% per year for the next two years.   A bit more investigating and I got a comfort level to start trading a bit more heavily into energy and went long on energy while simultaneously shorting to rake in some cash yesterday.    Last night I read this article on the possible consolidation and M&A activity in the energy sector which peaked my interest and confirmed my suspicions that energy is going to be “in play” over the next couple of years.

Analysts point to a wide range of companies that are potentially on the market, including EOG Resources, Southwestern Energy, PetroHawk Energy, the Encana Corporation, Chesapeake Energy, Devon Energy and Anadarko Petroleum.

“There will be a shakeout there. It will be eat, or be eaten,” said James Bogues, who leads Accenture’s North America energy mergers and acquisition unit. “Given Exxon’s reputation as a very deliberate, cautious company, the fact they made such a bold move with XTO will no doubt inspire others that a price has been set for shale gas assets and technology.”

I took a look at SWN and was pleasantly surprised to see January 2011 in-the-money options priced in at 16% which means you can earn a 16% return by buying long and selling the $45 call for January 2011.   If the stock drops you’ve pocketed 16% return in a year and if the stock rises you’ve pocketed 16% in a year!    I may buy a couple of hundred shares of SWN and sell the January $45 strikes (in-the-money) to pocket that premium.

Here’s some food for thought, I looked at the USO and UNG call options for January 2012 (in the money) and I was surprised to see over 20% premiums on these two ETFs two years out.   I checked on UGA and this is showing 11% premium just SIX months into the future!  This bothered me quite a bit so I did some further research using my utility company.  I am fortunate enough to live in a state that offers competitive electric utility companies and all of them are pricing in electricity 20% higher than I have today for two years into the future.   My current rate is about $0.10 per kilowatt and signing a two year deal today would cost me $0.12 to $0.13 per kilowatt.

The utility companies are pricing in inflation at 20% two years into the future on electricity rates!   For reference (and control), Microsoft call options TWO years into the future barely show 10% premiums.  Verizon and AT&T are also at 10% or less two years into the future!

This is extremely concerning on one level and extremely profitable potentially if I can figure out what the reason behind this is that people aren’t seeing.  When I check the futures market on WTI Crude it only shows a 10% premium for January 2012.   Somethings out of whack.

Check out the sample charts and calculations.

On one level, I’m tempted to buy UNG or USO or even UGA and sell those options and book my profits for the year.   A 20% return on two years is about 10% per year and way much better than any bank is paying.   The risk?  Who the hell knows what will happen to energy prices two years from now but a 20% return over two years ain’t bad!

Last night was one of those rare events where I decided to purchase fast food for dinner.   In an effort to be quasi-healthy I drove up to KFC and requested the family special.  As usual, the clerk asked if I wanted Original, Crispy or Grilled chicken.  As usual, I responded that I wanted Grilled chicken.    And then the exact same thing happened that happens every time I request Grilled chicken at KFC: “Uhhh….hold on, I gotta check to see if we have any grilled chicken left.”

Sometimes the answer is “yes, we have it” and sometimes it’s “no we’re all out of grilled chicken.”   So how does a business plan to be profitable on not having one of the key products they’re selling during the dinner hour.   I actually drove through at 5 p.m. so it’s not like I came in late into the dinner hour for them to have run out of chicken.   I don’t get it….can someone explain it to me please!

The clerk is always very nice and apologetic when they run out but it’s a 50/50 coin toss if they’re going to have the product I want when I drive there.  Unfortunately for KFC, there are about 5 other chicken places within a 3 mile radius that don’t ever run out of chicken.  Popeye’s, although only fried, seems to only run out on their crazy $4 specials (10 pieces for $4) on Tuesdays.    The other places are ethnic restaurants that grill chicken a variety of ways and most often taste better than KFC.

So I decided to check out the YUM stock chart and see if I could figure anything out and lo and behold, I found something interesting!

(click for larger image)

Anytime I drive by to buy grilled KFC chicken and they have none in stock, I don’t buy anything and drive away thus the stock plunge.   When they do have chicken in stock, I buy some and the stock climbs up!  EUREKA!    Someone give me a $5 million dollar salary and bonus please I’ve solved the sales problem!

Did you see this headline?

US Banks Have $176B Exposure To Weak Euro Countries

That’s a news story from Bloomberg and it discusses the fact that US (Big Banks) have nearly $200 billion dollar exposure to the collapsing economies of the PIIGS (Portugal, Italy, Ireland, Greece and Spain).  I love how they downplay the “it’s only $200 billion” bit.  It’s just one more reason to move your money out of these big banks and into small community banks.  I’ve started the process personally and although time consuming, it is well worth it knowing I’m not dealing with these jokers for much longer.

httpv://www.youtube.com/watch?v=Icqrx0OimSs&feature=player_embedded

If there’s one good thing about the recession and millions of people being unemployed it is the fact that people who do have a job are desperate to keep it and as such are going out of their way to help people out.    I went in to Home Depot this weekend to look at grills since my old one has essentially rusted away after 10 years of use.   I saw a couple of models that I liked and didn’t go there to actually buy one but just to compare models and research prices on the net.

As I looked around, a HD rep came over and asked if I needed any help.   I asked a few questions and ultimately ended up buying the grill that I liked since it was supposedly on “sale” for the Super Bowl weekend.   The HD rep actually help me get the grill down from the shelves and load it into a flat-bed trolley.  He also helped pick out a cover for it by measuring the grill and making sure I had the right one so that I wouldn’t have to return it.

It has been a long while since I got that level of service at Home Depot and it was a pleasant surprise.