Your Family Jewels!

This is not a post about diamonds and gold, or anything other "family jewels" you might have in mind. It is about something more important, the source of your real wealth, your talents, your skill set. Your REAL family jewels. Frankly the most valuable investable asset you will ever own.

As our nation began the largest source of wealth was the ownership of land. Land allowed you to provide for your family and grow crops to sell to provide income and accumulation of wealth. The more land, the more wealth. Even now in the South there is a romantic notion of holding land and passing it on to your heirs. But unless this land is in a great location all you are doing is passing on a declining source of real income and expanding source of taxation. Even if your land is in a great location the only way to become wealthy from it is to sell it and save the capital to provide income. But that is only a one time transaction, not a continuing source of accumulating wealth.

As we moved into the mid 1800's land became less important as the industrial revolution began and the ownership of factories that could make things replaced land as the largest source of income and wealth. Now I am using the word "factories" as all inclusive for companies that make things. If you owned a steel mill, a cotton gin, a textile mill, or maybe an oil well etc. you could produce income and could accumulate wealth. Also as opposed to land ownership, factory ownership offered income that could be expanded with the building of more factories Retail stores, such as Sears, Montgomery Ward, and others took the factory model a step further and brought merchandising to the masses. This not only helped factory owners, but retail stores owners joined the industrial revolution with added wealth accumulation. This model of wealth lasted into the late 1970's and early 1980's.

As we moved into the mid 1980's land had all but faded as a source of real wealth and factories began to fade as well due to the cost of making goods. Not the cost of the materials, but the cost of labor. So many factory models that come of age in the industrial revolution either got creative with efficiency or moved overseas where the cost of unskilled labor was cheap. Retail models learned that location of stores and inexpensive goods were more important than just having merchandise in stock. The sources of wealth were changing.

We come to the present and one can find the roots of wealth today in the seeds of companies born in the mid 1980's. It was then that the information revolution began. It was then that the skill set a person brought to the job became more important than ownership of land or factories. Today employers who own growing businesses hire you for your skills not your work time. Having a law or medical degree, having managerial skills, being able to sell something, technical skills. engineering skills, and the list goes on is how real income and wealth accumulation begin. Basically the employee brings to work everyday their talents and skills and takes them home at night. The best paid people are the ones who have skill sets more in demand or the ability to get things done. Think about it this way, Steve Jobs who runs Apple Computer, can locate his great skill set anywhere he wants . If he decided to pick up and move to another location, he could move anywhere he wanted to in the world just by bringing his brain. Apple Computer goes home every night with Mr. Jobs and comes to work each day when he goes to a location with other people who associate with him due to skill sets they bring with them to that location.

Now this can be expanded to most anyone who is accumulating great wealth now, Bill Gates, Warren Buffett, Larry Ellison, Larry Page, George Soros, and the list goes on. There are some people who still have wealth who accumulated it in the past, but just like any other time in history they have past accumulated wealth that can only provide a income, not current income and wealth accumulating now. All the people today accumulating real wealth have family jewels that make them wealthy, their skill set which is the knowledge and information in their brain.

Here is where your family jewels come in. If you are selling your time, not a skill set, to an employer and nothing else your income potential is limited. There are only so many hours you have to sell in a day, 8, and in a week., 40. Most employers who now buy a person's time are taking their jobs overseas where time cost if considerably less. Unless you are selling a skill set, you will never have any wealth since there are many other people like you out there selling their hours to an employer. You are limited by how much you can charge for your hours and frankly lack of skills. So the only way to rise above this situation is to go to school and learn a skill, even better a rare skill in demand, or be able to learn selling skills or managerial skills on the job. Add to this is the essential need for Life Long Learning or constantly improving and updating your skill set.

You are blessed to live in a country today where in my opinion we have universal opportunity. Unless you are truly disabled mentally or physically there is no reason you can not acquire a skill. With community colleges in almost every county in every state and all of them free or cheap you can go to school and learn a skill that is immediately employable. Hospitals, schools, tech companies, sales organizations, foreign language providers, healthcare providers of all kinds, and engineering firms, etc. are looking skilled employees. You can attend a 4 year university and get even more advanced degrees and yes there is tons of financial options out there to get you through school. Even those without degrees who are willing to learn skills on the job can find employment it you are willing to begin with lower pay and then move up.

In today's information revolution the ability to learn and use information and apply your skills are the path to income and wealth. So if you do not have some family jewels, go get some. When you do get your family jewels do not be afraid to insist to your employer that if those jewels are valuable to their workplace and should be amply rewarded. If you are not being compensated as you believe your should be for your family jewels,, do as Steve Jobs can do, and take them somewhere they are appreciated and compensated correctly. For the first time in history no one needs land or a factory to be wealthy, you need a skill set to sell. You live at a great time in a great place to achieve your dreams.

STI Hedge Fund 2011 First Quarter Report

Since I am now doing a financial blog I have decided to keep readers updated on my personal STI hedge fund results. I have no credibility if you do not know if my recommendations and approach are netting positive results.

For the first quarter to end March 31. 2011, quarter result gain of 3.77% or .15.08% annualized net expenses. Expenses annualized 1.3%. Good quarter, but below my 17.2% annual gain of 2010 and likely generational high of 32.2% of 2009. Excellent gains in oil and copper trades, good results in utility, real estate, and telecom trades. No net losses for quarter. I am carrying a couple of losses forward in WIN and FTR. Two telecom stocks that have sold off recently. I do expect recovery there so I am holding them and continuing to sell options on them and net nice almost double digit dividends.

My outlook for the second quarter 2011 is muted. If the Fed carries through with their plan to end quantitative easing June 30 it is certainly possible that the day they confirm this action the market will sell off significantly. Risk might will need to be pared back as we end the last month of the quarter. That could limit profits for the quarter.

I am feeling smug this morning with the report that the average hedge fund made .03% first quarter. With that said I know 15% sounds good to most people, but frankly I am not happy with the first quarter results. My goal is 18% plus annually. But I suppose in this environment this is about as good as can be done.

AT&T and T-Mobile USA Merger

For years I have avoided certain segments of the stock market. Wireless telecom has been one of them, because wireless requires so much capital to set up and operate. Capital to pay for cell towers, updating technology, and lots of people to operate the system. In addition the competition was fierce, margins thin, and no one really knew which companies would survive.

Other areas I avoid are steel, car manufacturing, airlines and aircraft manufacturing, and retail. Steel, car and aircraft manufacturing takes immense capital to bring a product to market and the chance of failure is high. Airlines have been a horrible investment for day one. Lastly retail depends on a very fickle customer who can change shopping habits with no expense making retail stores a significant risk for investment.

Those of us old enough to remember AT&T when it was for all intents and purposes the only phone service in the country know in the early 1980's it was broke up into several Bell operating companies. The present AT&T is actually Southwestern Bell and several other Bell operating companies merged back together. During the 1960's and 1970's almost everyone who owned stock had some shares of AT&T due to the nice dividend and the sleep at night knowledge of the company being the only phone play. The difference is the current company is much more of a wireless play than a land line consumer and business service plan company. In the past decade AT&T has sold off much of the land line business and concentrated on wireless build-out. The current company has a large debt load, but a good bit of the infrastructure has been built now, so the future of this company is looking brighter. AT&T has a large cash flow, which it uses to pay expenses snd debt, continue technology improvements, and pay a nice 6.2% dividend, which it raises almost annually.

Verizon is the main competitor to AT&T. Verizon is the old Bell Atlantic. Verizon has also concentrated on wireless and currently has the largest subscriber base of customers . Verizon Wireless has a partner Vodafone, a large telephone company in Europe, that placed an investment years ago with Verizon by buying a 45% stake in the wireless part of Verizon. Now Vodafone is wanting to get paid back that investment, and frankly that is a rock hanging over Verizon's balance sheet as it moves forward. Some analysts do not think so, but I differ.

The other major national players in wireless are T-Mobile USA, US Cellular, and Sprint. With T-Mobile USA now planned merger with AT&T, there are only two major players left. Sprint, despite a 50 million subscriber base, has never been able to grow much past it's present size and technology and is considered the ugly ducking here due to it's weak data coverage and dealing with 3 networks in it's system. . US Cellular has about 6 million subscribers, so unless something changes they are in trouble of losing their market to larger more competitive players.

As AT&T wireless gets bigger, about 130 subscribers when it merges with T-Mobile, and Verizon with just under 100 million subscribers complete their build-puts of technology they will have the ability to cut prices and offer deals. They will also be able to demand better contract agreements from customers. I expect we will soon be back to the future having basically two systems of phones and networks. Smart phone makers and system switch makers will then be making no more than two sets of wireless technology.

Currently I believe AT&T has a leg up on Verizon, due to the soon to be larger size and the fact they have no partner which wants to payoff from it's investment. So if you are looking to take a position in the wireless market I believe now is the time and AT&T is your choice. But there are many analysts who think Verizon is the better play.

Some additional facts to plug into your assessment. Neither of the largest wireless players in the USA is in the top ten largest wireless providers in the world. China telecom has over 500 million subscribers. Europe's Vodafone and T-Mobile are both larger as well. GSM technology is used by about 80% of the world and the other about 20% is CDMA, with scattered other technologies much smaller share. AT&T is generally considered to have the best phone selection and Verizon the best coverage for now.

I currently own options on AT&T, symbol T stock.

Insider Trading hits me this time.

Last week I opined in the posting "Being in Business with the US Government" about the curious trading going on in Lorillard (LO) stock. I noted that a government panel had released a report that changed the direction of the stock completely. Below I will finish that story with additional information that has come to light over the last four trading days.

When the FDA panel released their report on menthol in cigarettes Friday March 18 frankly it caught me by surprise. The reason being that the panel in a news release several weeks earlier said that the report would be released March 23. Everyone trading in Lorrilard stock knew the report would move the stock significantly either up or down depending on which way the report leaned. Obviously if the report implied no banning of menthol Lorrilard would move upward. Just to refresh your memory Lorrilard's chief product is menthol cigarettes. Other tobacco companies make them too, but Lorrilard's main profit center is menthol products.

Immediately after the report was released LO moved upward and continued upward to finish around $87 per share by the end of Friday trading. Over the next three trading days the stock continued to move upward finishing right at $95 per share ;ast night. At 4:11 PM yesterday shortly after the market closed a 2.6 million cumulative share sale occurred at an average price of around $94.58. That is a huge sale, even for a stock with this size of share float. To put it another way that is the total amount of shares that generally trade in one whole day of LO trading.

What happened here? One would be a fool not to see that a $247,000,000 trade is someone who has enough either cash or margin in their account to be a big trader. One would also be a fool not to see if you got in last Friday at $80 or less this would be a 4 day $40 million plus profit. Folks this is why I sometimes get worried about our system.

The following scenario is what I guess happened here. Someone in the governement with the info about the news release alledegly told someone with serious assets what the report was going to say before the market opened last Friday. If true we would be talking insider trading here. It was alledgely done purposely on an options expiration day so as to get maximum value for the inside trader. I fully expect that a smart trader would not purchase the stock, but buy options on Thursday so as to basically have to little cost in their transaction.

I also expect whoever alledgely did this likely knows the enforcers over at the SEC are too busy to mess with a single trade investigation either. This kind of alledged trading is what makes the individual investor believe they have no chance in this market.. And trust me it goes on no matter who is in the White House. Fortunately it is not rampant or I would see it myself more regularly as a trader. But even one time is too much.

I have owned LO both long and options in the past, but do not currrently own either. I personally gained about $3300 in this trade due to the manipulation in the stock and will be donating that profit shortly since I consider it tainted money. I would wish any insider trader would feel the same and do likewise, but expect it not to happen.

A Local (Raleigh) Stock to Like

Triangle Capital Corp (TCAP) is a business development company headquartered in Raleigh NC. Business development companies invest capital, either borrowed or from it's investors in start up or first generation privately owned companies that management believes have opportunity to grow. Basically venture capital investments. There are a couple dozen of these BDC's in America, most of which invest in medium to larger cap companies. TCAP however invests in smaller to medium sized business sectors with an emphasis on the Southeast US. TCAP has done very well operating in areas it knows best and has rewarded it's shareholders with a nice stream of dividends and capital gains as well.

The current dividend of 42 cents per quarter nets the investor about a 9.5% return. Add in the fact that even during the recent economic downturn TCAP did not reduce their dividend, but actually raised each year and kept right on paying. As I said these people know what they are doing. The team who runs TCAP is good, but the key here is the CEO Garland Tucker III who really knows how to pick good investments. I have followed this company ever since it's founding in the early 2000's and have admired their work ever since.

One note. If you decide to purchase their stock and want cash dividends you will need to opt out of their automatic dividend reinvestment plan. BDC investments are an excellent vehicle for dividends and capital gains in early economic recoveries and TACP stock, despite having moved up recently is still likely a good buy at this point. Note that TCAP is not a qualified dividend for US tax purposes.

I do not own and have never owned TCAP. As a trader TCAP offers no options and therefore is the reason I have not invested here. However for the long hold investor this looks like a good purchase.

Atlantic Power (AT) is an unknown stock that just recently moved it's headquarters to Boston from Canada, but still is considered a Canadian domiciled company for tax purposes. . It also only in the past year began trading on the NYSE. This is another stock I have followed for over 5 years and think it is an excellent investment opportunity. AT does business in power generation. Generally smaller operations such as biomass, natural gas, hydro, and pulverized coal. They do this under long term purchase contracts with larger utilities. Note one of these is a biomass project under development in Sanford NC. AT has been doing this business for awhile and knows what they are doing. I would expect their business to continue to grow since many states in this country are requiring "renewable" energy as part of regulated utility power generation.

Here is the sweet part, AT pays currently just over a 7.0% dividend annually and pays it in monthly installments. The opportunity for capital gains is limited, but how can you go wrong with such a nice payout.

I do not own and have never owned AT. Again as a trader AT never had options up until the past year and due to the small volume of trading does not offer suitable trading for me. However I recommend one take a look at this stock for sustained dividend payout. Note that as a Canadian corp. you are subject to a 15% immediate withholding tax which can be recovered when you file US returns.

Finally let me revisit Cenovus Energy, which I recommended back on February 3. CVE has moved up to from then around $32 to now around $38. Depending on oil prices it might back off some here, or later in the fall. But I again highly recommend this stock for those looking for an excellent buy long term. McDep, an oil valuation company, has again recommended the purchase with a 2020 price of around $150. Anyway you see it that is a great return if so and I concur.

I do not own CVE, but plan on purchasing options sometime after this posting.

Master Limited Partnerships

If you are looking for dividend income that is tax favored, higher than most stocks, with annual increases Master Limited Partnerships are for you. There are a large number of these stocks and they can be an excellent vehicle for those interested in companies which will allow you to sleep soundly at night and still enjoy 5% plus dividends. MLP dividends are about as safe as it gets and most MLP's raise their payouts annually.

The catch for many people is that all these stocks are tax favored because in effect you generally own something, in most cases pipelines, that produce K-1's at tax time. K-1's generally do not come out until March and unless you are a whiz at tax returns will likely require a paid tax accountant to handle the complexity of the document.

The reason for this is many years ago the US government wanted to help the pipeline, commodities, and coal industry, that is highly capital intensive, to be able to build and grow. So the made the tax law to favor investments but allowing companies who decide to go with this structure to pass on expenses and depreciation to the holders of these securities. So when you get a "distribution" from a MLP you in essence are for tax purposes getting your capital returned in a sometimes tax free for the moment payout. When you sell your stock, the distributions that you were paid, are deducted from your investment, and the gain is taxed at capital gains rate.

Companies who use these MLP structures sign long term contracts that virtually guarantee your dividend. In the case of pipelines it is like having a toll road where there is no other way to distribute your goods and you have to pay to get it delivered. Nice. Personally I tend to favor pipelines when considering MLP's. But lately have been warming up to the coal MLP's since China has been buying tons of American coal.

There are various segments of the MLP industry where one can own pipelines who take a percentage of the cost of the product or just charge a flat fee. You can own pipelines where the oil or gas comes out of the ground, mid stream where it is being delivered to the refinery or storage, or where it is being delivered to the final customer. All have there advantages and all can be good buys. One other note here is that you can own the General Partner stock or the Limited Partner stock. With the GP shares you get a chance at some extra payout when the MLP has a really good year. With the LP shares you get a higher initial dividend with most times no chance of additional payout's in a good year. In return the LP gets good steady dividends that help you sleep at night with usually nice annual increases.

I have only a few times have owned a MLP and likely will not in the future because of the K-1 filings, even though I will admit the task is getting easier with the new tax reporting done by stock brokers and the ease of getting your forms right off the MLP web sites.

I will not recommend specific issues here only to say if you decide to invest here look for the big ones. Remember you are literally signing up to be a partner in a pipeline business. If you would like to consider a MLP e-mail and I will pass on some suggestions.

Being in Business with the US Government.

As most of you know I have been doing this for almost three decades and as I have learned you can never be sure of anything. My largest long and option position is (LO) Lorrilard Inc. Lorrilard is a tobacco company that has as it's largest product menthol cigarettes. Lorrilard is a highly profitable company because it makes a highly additive legal product and it has a defacto government monopoly with a government guaranteed profit. All this due to the Master Settlement with the states and trial lawyers several years ago. The trial lawyers, federal and state governments are frankly addicited to the money tobacco companies generate as well. Do not let anyone fool you all the parties involved do not want smoking to go away with the money being made here. That is the reason it is my largest holding, I like being in business with a government monopoly.

Today a FDA government panel suggested that menthol be banned from cigarettes. Now the panel does not have final say, but they do have influence. The panel was stacked with the anti-smoking zealots as expected, but most people assumed they would use good judgement here. Understand if menthol cigarettes are banned menthol cigarettes will not go away. Upon banning a strong black market in menthol cigarettes will commence. If you do not believe so, think about the fact despite illegal how easy it is to get marijuana.

Add in the fact that the vast majority of menthol smokers are black females and young people. Now here is where it gets interesting. Obama banning a product blacks and young people enjoy? Go figure? No race implied here, just wonderment about the political thinking of others. The odds here for an outright ban in a final decision by the FDA are not as high as it might seem and the stock has bounced around all morning from a low of around $75 to almost $83. Frankly no one knows what to think here. Add in the little fact that the government panel released this report on a Friday morning, precisely on the day known as "triple witching" to traders. Triple Witching is the day of the quarter where all options expire and you got a volitle ride. (Note here: Do not tell me that the panel did not know today was triple witching day.)

As I write this the stock is at $82. This is why I enjoy doing this so much, nothing is for certain, and I get to satisfy my competitive nature constantly competing against the best minds.

Is the 30 Year Home Loan a dinosaur?

Posting note: I had been working on this post for several days as I normally do. Today I am posting this column earlier than planned because it seems I am not the only one seeing this change coming since at least 2 other columns have opinion pieces on this concept today.
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If you have a 30 year mortgage in a few years you will likely have something new home owners at that time who get a mortgage can not obtain. . Yes, you read that right 30 year mortgages are likely a dinosaur soon to be extinct.

There is general agreement now that the government backed mortgage insurers, Fannie Mae and Freddie Mac, are soon to be gone.
Even the Obama administration see this experiment in mortgage securities as a disaster. These agencies were created many years ago to push home ownership in America and did so by basically insuring the risky mortgages lending institutions made. As time went on they added more and more types mortgages until almost every mortgage in the country was insured by the government. In the past couple of decades that included the now famous subprime market.

I joined President Clinton and President Bush in the belief that it more people participated in home ownership then more people would have reason to be civic and own part of the American Dream. Well we all were wrong. The simple fact is some people need to be renters. Some people just frankly can not handle the responsibility of home ownership. Yes, there were some people pushed into mortgages by lenders, but even then it showed that those people should not have even been in the position to discuss a mortgage. When the housing industry got overbuilt due to the government's desire to push home ownership to the max number of people the housing industry finally collapsed due mainly to overbuilding. Add in the undertow of people defaulting on loans and you have a burst bubble.

When the housing industry crashed a couple years ago the government was left holding billions and billions of now defunct and foreclosed homes. It has become clear to even the most jaded person that the government's melding in the housing market has been a failure. So now it looks like Obama and Congress are headed towards ending much of this relationship with housing. No one know exactly how this will happen and who will do the insuring when the agencies end, if anyone. But one thing is for sure lending institutions will be holding and servicing more mortgages they originate now and that is a good thing. Let the banks and lending institutions hold the risk not the government or in truth the taxpayers.

One thing that will likely happen with this changing of the mortgage landscape will be the demise of 30 year mortgages. I do not know this for certain, but I believe I have read that the 30 year variety was not the norm many decades ago and only came to past due to the government insurance programs. Now with lending institutions holding the risk and basically self insuring I would expect they do not want to be on the hook for 30 years. Maybe 20 years, or more likely 15 years. Many home buyers have learned that with lower interest rates and shorter payoffs the monthly payment for a 15 year loan is not that much higher anyway. Also, with much stricter lending practices and requirements for real down payments if will not be higher anyway. Just less mortgages and home owners. Of course once this comes to past and borrowers get used to 15 year loans as the norm, people will adjust and have down payments and monthly budgets to accommodate the changes. Truth be know America, home buyers, lending institutions, and the government will be better off in the long term

Full disclosure, I am in the market for a home loan, a 15 year loan to be precise.

Are things getting worse or just seem that way?

One of the traders I follow closely is Doug Kass, he called the crash as well as nailed the recovery from March 2009 in the stock market. Note I said stock market recovery, not economic recovery. I remain unconvinced we are in a economic recovery. I am more inclined to believe the stock market recovery is real, since profits are up, but understand the revenue base for most companies is not higher than several years ago. Basically a new normal at a lower level. Doug is a bear and true pessimist and being a optimist I need his leveling in my thinking.

He uses what he calls "Black Swan" events to describe unforeseen events such as the situation in Japan. Egypt, or Libya. You frankly never know what is going to happen so be careful. That frankly is true. But in a different sense we as a generation in America have been blessed to live in a time when things were abnormal. Since the end of World War Two we have known up until the start of the 2000's a time of calm with few really bad things happening. A Pax Americana if you will. Now yes, I know there have been problems and world wide events that were bad, but Americans have been generally shielded from the effects. We can thank the Generation that fought and won the 1940's war and following Cold War for that. They were the ultimate administrators and frankly "real" men and women who knew how to get things done. Their overwhelming power and personal presence brought peace and stability to the world.

Actually we are now in more normal times and that means lots of crisis and problems. Budget deficits and unsustainable national debt, foreign problems such as Libya, Japan, China, and Iraq. Not enough oil and food. It goes on and on. The current generation in charge is just not up to the task to solving such problems. Not to blame Obama or any other president, but none since George HW Bush have the gut check talent and skill to make problems go away. It is a generational thing in my opinion, today's adults just did not have the hardship the WW two generation had and has not developed the personal toughness.

Investing in an atmosphere were things can be unsure and full of "Black Swan" events make for difficult investing if you are looking calm waters. But if you can hold the panic and be calm in this time it can be the best of times for investing. For instance during this Japan crisis I have numerous options that are netting me some real nice buys in stocks right now, which will pay off a couple of months down the line if I can be patient. How can the average person take advantage? You have to be patient and move some cash to mutual funds or beaten down stocks. How about moving some of your money market holdings in your 401-k into stock funds. Again, as stated earlier go buy a home in you are in the market and can afford one. Better yet, buy some Uranium stocks or nuclear power utilities. Duke Power or Southern Company are getting to be better buys by the day. If you are a risk taker, URA, a ETF full of uranium stocks. Lastly, if you are wanting to play the political angle, try SHAW, an engineering company that works on nuclear facilities with deep ties to the Democratic Party.

The smart investor is the one who remains calm when everyone else is selling.

One other note and I know I am not going with the prevailing thought here, but avoid investing in Japan. If you are a agile trader right now that might be ok to catch the bounce, but long term it is not a good idea. In my opinion Japan will not recover well from this disaster. There will be lots of buildings and infrastructure that will never be rebuilt. Why? Because Japan, like many nations in Europe is a dying society. Japan is about a decade ahead of the European countries in regards to aging population. As with many highly advanced nations on earth right now Japan is not replacing itself population wise. There are few children and almost no immigration there. I can not see how Japan will have the workforce to man the factories and shops there two decades hence. There is frankly no need for new schools and more roads. I would expect that Japan now the thrid largest economy on earth will be down several notches a decade from now. Toyota, not a dumb company, is moving many of their factories off shore. Not only because of the currency trade, but because they can see this as well i would expect.

Full disclosure, I own either long or as an option DUK/Duke Power, and SO/Southern Company.

Japan Nuclear Crisis?

I find the fever over the ongoing nuclear crisis in Japan not surprising. The TV networks and cable operations are frankly using this situation to push viewership levels up. I long ago learned that cable tv and many in the news media will blow stories up time and and again for their own purposes. If you are an investor you learn to ignore the main media and dig to find facts. One note here, my brethern in most of the print media has shown retraint here, including my local large daily The News and Observer.

From everything I can gather this morning from people who really know the nuclear plants the ones in Japan are working almost perfectly as planned, except for some diesel generators that broke down and are not pumping water as planned. The people in charge instead are using seawater to cool down the reactors. This unforunately corrodes pipes and metal which will make it likely unusable in the future. There has been no nuclear explosions, only steam explosions. The reactor chain reactions were stopped days ago. The problem now is cooling off the residual heat built up when they were producing chain reactions and electricity. Also note any radiation released presently is not long lived radiation and quickly disapates. Yes, Japanese officials are being extra cautious, but to keep panic down there they have to. If only we could stop the panic in the news media here.

Now who prospers from this situation? Anyone who does not want nuclear power plants built and traders who short stocks. If you want to make money on this situation short the uranium stocks or wait until the stocks get killed and buy them. CCJ, Cameco Corp in Canada, is the main player here. Now George Soros is trying to make money here too, by planting news stories in the media that everyone could die from radiation poisoning due to this crisis and we need to stop immediately building or even operationg nuclear plants. He owns gas and oil facilities in Nigeria and Brazil. So if you want to make money that way join him by buying some PBR Pertobras, the main oil company in Brazil.

Also note there are numerous advocacy groups who want us to stop using nuclear power and go totally green fuels. Frankly that is not possible since there is no way modern society can produce enough energy to run with green fuels. The point here is the old rule if there is an advocacy group there must have a problem to solve. Amazingly if you remove the group most times the problem goes away by itself. The news media noted above generally goes to these groups for their quotes and guests during times like this. Do not be taken in here and go out and buy some solar or wind power companies.

Are You Making any Interest on Your Savings?

If you have a CD on deposit or just a savings account at a bank you likely have noticed you are not getting much in earned interest lately. I have a small CD at a credit union for a HSA I own and I am getting .90% for a five figure sum. Just a few years ago that was 4% plus. Frankly you are earning a negative interest rate, in that you are not getting paid enough savings interest to pay you a profit and keep up with the erosion of inflation to your principal. (Yes, I hold a CD, but only because I own a HSA that will only allow me to hold that in a savings vehicle without some serious fees.) What has happened to make savings rates so low?

Well what first happened is that the economy took a downturn and as loan demand fell off the cliff so did banks willingness to pay higher interest on money they can not lend. Many financial institutions now use their funds on account for buying short term treasury bonds, safe and secure, but also not much in return there either. The spread is thin, but at least it is some profit.

You are also seeing The Federal Reserve Bank at work here too. Bernanke and his friends on the Fed board are determined to keep rates low to keep the economy from going even lower and to keep interest on government borrowing to a minimum.

There is also another game afoot here as well. The Fed simply wants you to deploy your assets elsewhere, such as real estate, stocks, and business ventures. This in a effort to reinflate assets values in these lean times. The drop in values has caused serious problems in the economy. The drop in real estate values has hurt local governments who depend on property taxes for income. Real estate values has also made people who own homes think they have less money now with a home that is valued less than it was just a few years ago. The drop in stock values a couple of years ago did the same thing for people who own stocks. All these thoughts of being poorer made people less willing to spend money and consumer spending is the big driver of our economy.

Now to some extent The Fed has succeeded in their efforts. The Quantitative Easing model has pushed stock prices up a good bit since the March 2009 lows. The low rates on home loans has kept some people in the market buying. All this I suppose is good. But for me there is a problem here. Sooner or later The Fed has to stop using their massive power to hold down rates and allow the market to take over. There has to be some natural supply and demand here eventually. There really is a limit to how much The Fed itself can deploy in the exercise to control interest rates.

When that time comes I frankly have no idea what will happen. What I do see as most likely to happen is some uptick in rates. It simply can go no lower than it is now. So how do you take advantage of this situation right now? One, buy some real estate and grab these low rates for an extended loan. You will look back in just a few years and brag to others about your low home loan rate. I would also look into some good mutual funds that hold higher dividend stocks. You can also invest some of that extra money by adding to your 401-k plan at work. Stocks from companies that can raise prices when The Fed stops manipulating rates. Telecom companies like AT&T, Verizon, BCE. Real estate such as Healthcare REIT, Realty Income, National Retail Properties, and maybe an energy stock like Enerplus. Vanguard has some excellent mutual funds for just such investments. If choosing mutual funds consider adding to or starting a Roth IRA.

Full disclosure I own either as an option of long each stock and mutual funds listed above. Also am in the market for a home loan.

Down Home, Down the Street.

"Down Home, Down the Street" is an advertising slogan used by Piggly Wiggly stores in North Carolina. For those of us who are native North Carolinians it hits home and reminds me of a song by a singer Buddy Jewel "Sweet Southern Comfort". There is a comfort for those of us who have lived here a long time about the rural culture and being around friends who graduated high school with you and now living in your hometown. You have a history with these people which transcends everything else. Despite the fact I now live in Smithfield NC and have only lived here about 18 years I feel it here since I am from "Down Home" eastern North Carolina, and see it in people who lived here since birth.

Now one is likely asking what does this have to do with Small Town Investing. Well actually a good bit. If you have bought real estate, have a business, or own land, in one of these small eastern North Carolina towns, and here I am in particular speaking of Smithfield and eastern Johnston County you know there are not a lot of people moving into the area. That was confirmed this week with the release of census figures that noted Smithfield and many other towns in eastern Johnston County are either not growing, growing very little, or actually losing population. So if you have investment interest in such places you are not likely happy with current economic trends.

Why are these towns which are so close to the Triangle growth machine, not picking up the growth from being well, so close. A recent story in The Herald, a newspaper based in Smithfield went looking for clues. They came up with some good ones, aging housing stock, higher utility rates, lack of amenities, and bad image for area schools. All of these likely have some bearing on lack of population growth, but frankly I believe the Mayor of Smithfield might have hit on the real reason when he mentioned "we do not have a lifestyle conductive to young people". Go back up to the first paragraph of this posting and you will notice that most people who live in eastern North Carolina's small town live there because they have a connection to the place. Newcomers, especially those from up north, have no such connection.

However I believe there are two more important reasons people are not moving to the area.

One, there simply are no employment choices in the area. Sure there are some openings, but most of them are retail or limited county seat government openings. Retail is normally not a higher wage area and local government tends to not have much promotional prospects. Once you get past the few healthcare openings there are few knowledge based or skilled positions available. Compare that to Raleigh/Durham where there are technology firms, many hospitals, state government positions, legal firms, and such and you can see why people moving to this area are attracted to that area. People normally move close to jobs and when there are no jobs, there is no need for new housing or even nice amenities. Frankly Smithfield might have the best opportunities in the country per resident for recreation centers, having two very nice venues. But that is not what attracts. So Mr. Mayor more effort spent trying to get high skill, knowledge based jobs would help significantly to add residents and new housing to the area.

Two, the other reason is "lifestyle choice". Whether you like this or not, today's young people view things through how it fits their "lifestyle". Define that anyway you would like, but what it comes down to is today's young people do not want to be hemmed in by a "Down Home, Down the Street" rural culture and Smithfield and eastern North Carolina drips with that feel.

Look at the areas that are growing in North Carolina, Mecklenburg, Wake, Guilford, Forsyth, Durham,Union, Cabarrus, New Hanover, and western Johnston County. What you get there is either lots of job opportunities nearby and/or "lifestyle" choices.

Do I like the rural culture here, you bet. Do the many people raised here like it as well, you bet. But it just hurts when it comes to attracting young people and when it comes to where to live Raleigh, Durham, Chapel Hill, Apex, Cary, and such fits the bill. How do you overcome that problem I frankly do not know. I do know that even if the area attracts some jobs, if the "lifestyle" choice situation is not addressed some of those new hires will find places closer to Raleigh to live.

Full disclosure I once was employed at The Herald, also a member of the visitors bureau for the county, and presently have a home for sale in Smithfield.

Those Dastardly Oil Speculators!

I do not write this post to defend oil speculators, but to at least explain in layman terms just what they are doing. I just got through reading a couple of columns on if we could rein in those oil speculators we could bring down oil prices. Hey, even Bill O'reilly is on this bandwagon. If they are so bad , why does not someone just outlaw their trading.

Oil traders, speculators if you will, actually have a stabilizing influence on oil prices. Yeah, they bid oil up in situations like today, but trust me if not for oil traders oil would be even higher.

Oil traders use options to basically guarantee a price for future delivery of oil products, usually gasoline or jet fuel. What they do makes it possible for you to buy a airline ticket a month or more in advance. Here is how that works. An airline company's main cost is jet fuel, so as they plan flights they need to know how much jet fuel will cost so to know how to price a ticket so as to make a profit. And believe me here airline profits are thin. Little fact here, if you were present when the Wright brothers performed their first flight you would had wanted to get in on the future investment prospects there I bet. Well if you had you would have likely never made any money. Airlines since created have yet to make a profit long term, credit bad management and lots of competition, as well as government regulation. Anyway I digress. So airlines needing to make sure what price they will pay for future jet fuel purchase options on jet fuel from traders who say we will guarantee the future price of jet fuel, for a insurance/option premium now. In essence the trader takes the risk for future price. They survey the market and political considerations and decide on what they believe will be the future price. They do this by depositing securities and cash into an account that says they can buy and sell options using leverage. Leverage being they can buy more jet fuel deliveries with possible borrowings than they could buy with the total in the account. Ditto this for gasoline future deliveries, cotton, wheat, all kinds of commodities.

Take a wheat farmer in the midwest. The farmer goes out to plant wheat for fall harvest, he has a choice, plant the crop, pay the expenses, and hope the fall price will be enough to make a profit. Some do that. Other farmers, buy the seed and fertilizer, add up all other costs, and go buy options at a profit for fall delivery of wheat. Thereby guaranteeing a profit. Maybe a smaller profit than if they did not sell their delivery to traders already, but guaranteed nonetheless. If the farmer did not buy options and the price of wheat goes down they could post a loss on that year's crop. Generally not a good thing to do. Most large farmers take the option route.

Now with oil or wheat at noted above, traders actually keep the prices from going too high. First off there is competition among traders to get the deal. There is also the fact traders look ahead and survey the market and decide what price would net them a profit as well. Sometimes they lose, sometimes they win, but once a future delivery price is set they have to make it so. Secondly they price in the future, not knowing what might happen in between the date of the trade and the actual delivery. For instance for every trader who is especting to make money with future delivery of oil, there are many who are losing big right now since a few months ago no one expected Libya to blow up and oil price to be $100 plus per barrel. How would you like to have to be required to deliver oil for $105 a barrel, when you bought it for $75 per barrel. Not nice huh?

If you were a trader presently in oil, would you be willing to not price in a serious premium in your option bid if you were the one taking the risk. I know I would. So let's give commodity traders a little better reputation than the news media and others are doing right now.

Full disclosure, some elements of my trading technigue involves options and speculation.

Credit Cards that pay You.

This next post might not be an investor specific post, but as my father used to tell me if you watch your pennies, your dollars will take care of themselves.

My wife tells me that I am always looking for a way to cut expenses or make money, and I expect she is correct. But one of the ways I make money is one she does not complain too much about and that is the her use of credit cards. Yes, you read that right I encourage my wife to use her credit card.

The reason is simple for everything we buy using credit cards we make a minimum of 1%. Does not sound like much but last year we got paid over $800 for using credit cards. The reason my wife likes this so much is we use any cash back from credit cards to Christmas budget. Frankly if you are not taking advantage of this deal then you missing out on a sweet deal.

We have three credit cards that pay us back.

One card pays back a minimum of 1% on every purchase with bonus points on various categories each quarter. This quarter it is 5% on healthcare spending, drug store spending, and fitness center spending. At 5% it adds up even faster and we target our purchases to take advantage of just that.

Our gas card pays you 5% on all gasoline and BP convenience store purchases. Now I rarely go inside the store, but at 5% I get paid back about 16 cents per gallon purchased at current prices. The BP card also pays back 2% on all dining and lodging purchases.

Another card pays back 3% on grocery purchases, and 2% on fast food. This quarter Chase has upped the grocery purchases to 5%.

Note that all three of these cards also offer percentages back for certain retailers, Even more for online purchases, sometimes up to 10%.

Believe me I use my cards for every purchase possible, and regular billing such as water and sewer, telephone, contributions, and last year property taxes. If I go to Bojangles for a $4 purchase I use my credit card.

Many of you use your debit card for purchases and that is ok, but using a debit card can have liability consequences debit card generally are not covered by a max liability amount if someone steals and uses your card. A credit card does have that feature. Banks love for you to use debit cards since it comes right out of your account and pays them a nice fee. That is why they have made them so easy to use. Now I know it is a lot easier to not get in trouble by overusing a debit card and have a big bill to pay. But if you can control your spending to needs and such using a cash back credit card is a real deal.

If you would like to know which specific cards I have e-mail me and I will pass them on to you.

Is this an Economic Recovery?

Do you question the how strong this "economic recovery" is, or even if it is a "economic recovery". I question it everyday because the answer has significant effects on when and where I place investments and doing trading.

During my lifetime of work and investing I have been through about 5 downturns and recoveries. Some of them were weak recoveries, such as the mid 1970's, some quite strong, such as the 1982 one. But with them all one sector of business led the way out of a recession. Housing.

Downturns generally occur when interest rates get high, demand gets strong, and unemployment at a low rate. Almost always what makes a downturn start is some economic bubble bursting. That was the case in 2000 and 2008. This column is not on what causes downturns, but how do we get out of them.

The reason housing leads out of recessions is that interest rates have fallen due to recession and lack of demand and they have been lowered in an attempt to stimulate new loans. Once an existing home or new home is sold, you generally get all kinds of economic activity to customize or fix up the home. New flooring, new landscaping, new appliances, painting, and such that hires people and makes factories run to produce the goods. Essentially people who are still working begin to spend money and put other people to work. Once the existing and over-built from the past upturn housing get bought up, you get new construction started as well. This of course leads to new hires in that industry that tends to employ large numbers of people. Housing activity starts the cycle and the economy generally booms for several quarters or a few years. It is not unheard of to see 6% plus growth for several quarters at this point.

Now it is difficult for other industries to kick start a economic upturn, since only housing hires so many un-skilled and younger employees, who can begin work almost immediately and be productive. Only housing touches so many related industries and gets factories humming. In fact usually automotive sales kick in shortly after housing as people find employment buy cars enticed by low interest rates as well. Automotive sales also tend to touch many industries and get factories humming as well.

As we survey today's economic environment we frankly see little if any housing recovery. There is still plenty of housing inventory from the past upturn not sold and construction sees no need to make construction loans and begin building homes they likely can not sell. Speculative homes are just well too speculative. All this is because the last upturn produced a bubble, that unfortunately was in housing. I remember back in the mid-2000's looking a subprime lending housing stocks and trying to understand just how they made so much money and paid such handsome dividends. I asked stock analysts who could not answer the question either. But these stocks kept right on paying big dividends and stock prices going up. As we now know the whole thing was a bubble and the house of card finally collapsed in 2008, when the mortgage security business got too leveraged.

We come to the present and what is obviously an anemic economic recovery. Government has done all it can, some say more than it should, to alleviate this situation with mountains of spending. The Fed has done the same with keeping interest rates at a several generation low. Normally in this kind of economy houses would be selling and being built with accompanying economic activity noted above. Frankly I have no idea where this current economy is going, as the overbuilt housing supply is at least two years or more from being bought up. I do suspect we will need to see a 10% to 15% or more drop in house prices before the cash buyers move in and buy up the excess. I also do not see interest rates rising as noted in my last posting as The Fed is going to have a difficult time existing the scene

Despite what the current administration in Washington DC tries to tell you this recovery is tepid and not likely to get better soon. We can play games with unemployment rates and cut a billion here and billion there, but until we decide to quit trying to manipulate the economy nothing is likely to make a difference. So The Fed just keeps printing money to keep us from an depression and the government keeps spending and piling up debt that will stifle any economic recovery. Sorta caught between a rock and a hard place.

In the end if we are to continue this capitalist economy we must face the fact we can not continue to try and artifically manipulate markets in an attempt to alleviate economic pain for bad business decisions, such as the housing situation we are dealing with presently. All that does is create some artifical bubble or worse. It is time to accept the pain for past mistakes and cut government spending significantly and allow interest rates to float to whatever level demand dictates. Having a freedom based economy we must accept the up and downs associated with free enterprise. With freedom of choice comes the associated consequences and advantages of inovation and generally higher standards of living.

Or we can continue with a economy that is continually manipulated by The Fed and government spending with the accompaning higher unemployment, very little if any growth and lack of free choice, and a lower standard of living, but in return we get lots of stability. This choice is for the citizens and voters of the USA.

Do you need to fear June 30, 2011?

There have been several articles this week on Quantitative Easing ending June 30, 2011. The Federal Reserve has announced that on that date they will end buying US Treasuries. Why would this be a concern for you?

Back in December Meredith Whitney made some comments about how she believed and would predict that there would be hundreds of billions of dollars of municipal bond defaults during 2011. The muni market immediately sold off 10% or more and people who hold munis began to worry about the safety of their bonds. Note that the majority of munis are held by individuals and not institutions. Since then cooler heads have prevailed and munis have bounced back some. Ms. Whitney was made famous by calling beforehand the big bank problems back in 2008. Big predictions made good make you a celebrity and sometimes leads one to get to thinking you know more than you do. So those people liking the limelight back on them tend to do some more big predicting. I have seen this time and time again since I started investing over three decades ago. Ms. Whitney is a smart person and knows banks likely better than anyone. If she sticks to her knitting she would likely continue to do well.

All that is to say the latest big prediction comes from Bill Gross. Mr. Gross opined this week that we need to be concerned about who will buy US Treasuries when the fed stops buying June 30, 2011. As I mentioned above I tend to ignore big predictions, but when Mr. Gross opined my ears perked up. That is because Mr. Gross is predicting in his field of expertise. He runs PIMCO funds the largest buyer of bonds on earth. He has been doing this for a long time as well.

His concerns revolve around the fact The Fed, which has been buying 70% of all borrowing buying the US Government will no longer be doing so. I know most of hear that China is buying up all these bonds and they are buying a lot, but The Fed is doing the heavy lifting. Basically what that means is that the nations banker is printing lots of money to balance the government's books. Now if we are running a 125 billion dollar deficit monthly and The Fed is buying 75 billion of that and they stop the hole is a big one to fill.

Frankly no one knows. More Chinese buying? More foreigners buying? Maybe just some Americans buying? Fact is the deficit is not going down soon and someone has the buy these bonds. Could be The Fed has to step back in. The real concern here is not necessarily buying up the bonds, but what will happen with interest rates. If the government, which auctions these bonds, has to raise rates to give incentive to get others to make bond purchases that would hurt the already weak economy. It could spill over into consumer loans rates and likely mortgage rates. The next question to ask is how high these rates could go if needed, and how much The Fed will tolerate before sensing the need to step up and begin buying again. The truth is The Fed can keep printing money forever, but sooner or later this devalues your currency and even the Chinese will step back then.

The greatest inheritance we got from the generation that fought, died in, and won World War Two, was that we got the world's reserve currency. That means we can print money and people willingly take in return for products. That is the reason oil is priced in dollars. However if we continue to print money we are going to spend all our inheritance and not only ruin our economy, but can not pass this gift on to our children. The Fed is up against a wall as they know this too. Of course all this comes about because the politicians we vote in and send to Washington DC just keep on spending more than they take in, so ultimately we/they are to blame for this situation.

So as we approach June 30, 2011 I will be keeping an eye on what will happen. If I was you and needed a loan I would go ahead and cash in on the current low rates, because one thing is for sure rates after June 30 are not going down.

Tobacco Dividend Increases

In the last couple of weeks two tobacco companies raised their dividends significantly. Reynolds American and Lorillard raised their dividends 8.2% and 16.0% respectively. I take this as meaning both these companies are confident of their business prospects. In the case of Lorillard they were doing some pre-damage control just in case the FDA decided to put some restrictions on menthol usage in cigs.

In any case these actions continue to make the point that investing in tobacco is a good approach for those looking for stocks that pay excellent dividends. Also noteworthy is the fact despite some weakness of late in the market, tobacco stocks have held up well.

I continue to recommend MO, RAI, and for those who are willing for some more risk LO.

I am either long or hold options in all three securities above.

For those of you who are my readers and are newspaper employee friends I am working on a posting for later this week that will likely rattle some cages.