Boom Economy to Come?

Hardly a day passes that we do not talk with a small business person who tells me some version of this next sentence.  "Once the election is over and I see that Obama will no longer be President I will begin to invest capital in future business projects and hire people."    There are even real estate speculators who are holding off spending in this already lower than low interest rate environment expressing similar comments.  It all boils down to one point Romney will need to do little to get the economy going forward in a more positive growth phase other than winning next week.  We frankly expect by December it will be obvious to most that business is improving. Once he is President, if he wins, and makes some policy moves we fully expect a full economic boom to commence in less than two years. 

Fear of government is not what our founders had in mind when they wrote the constitution.  Actually they wanted the government to fear the people.  With Obama in charge the people, and more importantly investors, will not invest hard earned and saved capital due to concern that either it will be taken away, regulated away, or just plain stolen in some way.  Americans have a choice next week, either change the investing environment to one more friendly to small investors who do create most of the new jobs in this country or continue to live a life of lower expectations and lower quality of life.  Only fools can not see the obvious and with the current government education system in the US we have graduated a number of fools. 

Personally we have withheld significant investments and invested capital since at least last year due to this fear of Obama.  We are sad because there is so much more we can do to provide capital in ways to help investors, small business, and frankly consultation work.  We would be thrilled to begin investing, but fools we are not.  The last two years have not been kind to our trading platform since Obama makes so many rules and changes so often it is simply impossible to provide the 'stock insurance" we like to sell.  We have tried  to do business albeit in a smaller capital structure making sure not to lose money while still trying to make money. Caution has been the way we have done business since the odds are against us when having Obama as President. 

The choice for us next week will be simple.  Expand our horizons and look to make some money and for the first time in awhile make taxable income with a Romney win.  The other option is to pull in our resources in further, continue to stay off the tax rolls,  discontinue most if not all of our important volunteer work and civic boards, and lastly head to the beach for the next couple of decades.  The later one is if Obama wins.  Understand there are many like us just waiting to decide weather to re-engage in this economy and country or leave it to you who have re-elected Obama.  That last point is important because if many of us with capital and volunteer time leave the public environment you younger people will be forced to fill in where we left.  Your lifestyles will change more than you know.  Your choice.

                 

Death and Taxes..Only one concerns us.

This posting is one we wanted to do back over a year ago when we did our series on mentors, but decided not to because of personal reasons. Today those personal reasons are gone so we thought it was time to give credit to someone who was our other financial mentor.  

Death and taxes are said to be the only things certain in life, but in our case only the former concerns us and not the later. The reason is simple our early financial life was directed with annual visits to a CPA in our hometown.  When we first began work life our father told us to go to the local CPA to do our taxes and maybe he would take us as a client.   The CPA likely could have told us no since he had lots of high profile business, but for some reason he took us as a client and we have prospered for almost four decades due to his guidance those early years we used him as our tax accountant. 

H. Donald Scott we suppose saw us as someone who might have a future and maybe could be a good long term business prospect. You see Mr. Scott was frankly one of the smartest and most ingenious people we ever met concerning financial and tax matters. Fortunately we also were a quick learner and good listener and as he dispensed tax, financial, and investing advice we took it in like a sponge.  One thing he told us was that making lots of money was nice, but if you were going to turn around and give lots of it back to the Federal and State Governments why bother to make it in the first place.  It would be like giving up to 50% of your labor away.  The way to change this was to use, take advantage, and manipulate legally the tax code. Treat it almost as a friend and not an enemy. So we did and whenever our CPA suggested a tax free, tax deferred, and tax avoidance strategy we not only listened we applied the technique and used it going forward. 

Mr. Scott on almost every annual visit gave us a piece of investing advice that would help us make money. An example of which was investing in a small Mississippi firm that was making a big push into telecommunications after the deregulation in the 1980's.  We promptly went out and bought 1000 shares of the pink listed stock LDDS that would one day turn into World Comm.  Now yes World Comm and Bernie Ellhers would one day make news from being a company run afoul of the law, but we had long before that period made some very nice profits in the early run-up in the stock price and exited the position.  All that tidy profit in our tax deferred IRA of course. 

Through the years we have used the early training we got from this CPA to move with the prevailing tax laws and rules to maximize our cash flow and minimize our tax bill. Honestly we expect for someone who has been blessed with our income we have likely paid less tax legally than anyone alive. We were audited some years ago when one year we sent in a tax return owing almost no taxes on a sizable income.  The tax auditor told us he thought we were quite clever with our use of the tax code but did tell us that there was a mistake in our return. The mistake was we had forgotten to take a tax credit owed us and we were actually due a refund check for taxes not paid.  All legal and legit of course. 

Now this next statement generally drives liberals and democrats we know ballistic.  Since we retired in 2008 we have yet to pay a single dime of income tax. Better yet if we so desire we can live out this life and never pay a single dime ever.   The reasons are quite simple the years of planning and using the tax code to our benefit as taught us by Mr. Scott has led us to the point of being off the income tax rolls both state and federal permanently if we so desire. 

Yes, anyone can do this, but most people are not willing to do the planning or take the time to make their finances form to being non taxed.  Not paying tax means you get to use the full measure of your income and actually need less than those paying taxes to do live the same standard of life.  Here is the kicker if we were actually looking after ourselves we would prefer that Obama get re-elected because his policy is to continue the current tax code. Only Republicans want to change the code to make everyone pay more by taking out all the huge cornucopia of tax avoidance techniques that are all legal in today's code.  With Romney we would be forced to pay tax, with Obama none. Try that little piece of info on for size liberals. 

Not to get into specifics here because much of this tax free existence is gained from hard learned experience and maximizing the tax code to our advantage but here are a few pointers.  Using tax deferred vehicles to take as much of your earned income off the tax rolls is almost sacrosanct. Roth and regular IRA's, 401-k's, and HSA's should be used to their very max allowed.  There are many small business angles on these retirement vehicles as well.  When spending money always consider how the expenditure can be used as a deduction or credit against any tax one might owe. Consider if there is a business use attached to the expense and spend accordingly.  Investing in individual tax free municipal bonds from your home state are slam dunks that most people either avoid due to the research involved or just not willing to take the time to learn. Once you have tapped out retirement vehicles noted above do not avoid tax deferred annuities as well since they can allow you to add punch to retirement income and take almost tax free withdrawals.   Charitable giving is a easy way to take money that might be taxed and used by the government but instead used by you for social purposes you prefer.   When all else fails buy something that throws off lots of tax benefits like real estate as again I would rather spend my money in some form of private use than government use. Finally and most importantly keep very good and very precise records.  I keep a file in my desk where I write down anything that might save taxes and update it quarterly just to make sure I do not miss anything.   Yes,  all this can be time consuming, but if you treat if like a work to be done where you literally make tax money back then you get paid to do it. 

Our current CPA has continued many of those early techniques and added a few of their own, but without the good start we would not be in position today. 

Anyway all this goes back to our mentor of our early financial life and for the training and smarts we say thank you. 

Third Quarter Report

For those wondering where our monthly reports went to they are gone.  We have decided why spend time doing those when quarterly will do and besides we prefer time ON the beach as opposed to time AT the beach doing reports. 

So with that noted we finished the third quarter with a 7.39% annualized yield.  Our year to date performance has been not very good in our opinion and it is mainly due to the losses we have booked from bad investment decisions this year.  By far the largest mistake was our early year loss in ERF with amounts to about half of all of losses for 2012.  GG was our second largest, but only about 20% of the ERF loss.  We have also included in the third quarter report a pending loss in LO, which unless there is a huge move we will take a year end.  We currently see no other security where we have a loss to take. 

Our trading fees this year are well within our desired parameter and margin costs have been contained nicely.  

Option premiums are producing expected cash flow and dividends are double margin costs which meet expectations as well.  The key to doing any hedge activity is to keep losses to a minimum and premium cash flow maxed.  This year only one part of that has been on track. 

With three months to go we still have the possibility of a double digit percentage gain for the year.  We frankly will be glad when the election is settled and there is some degree of certainly as to tax policy for the next year.

             

CTL. at the right price.

Who knows why stocks sell off sometimes, but they surely do.  CTL has sold off since late Sept. from around $43 per share to now around $39 per share.  The stock went ex-dividend Sept. 7 so that is not the reason and we have scanned the message boards, news releases, as well as the pundit crowd and can find no reason there for the sell off either.  

So with that said CTL is now yielding right at 7.5% and this is a solid dependable yield, not one just pushed up due to the downward move in stock price.  For those who have not deployed assets in CTL now might be the time.  We have no idea if this stock is going to go down some more, but here at just uner $39 per share you get a good company at a good price and a yield that makes anyone owning US Treasuries view with envy. 

So even if CTL reports a weaker than expected earnings this quarter we still like CTL and believe now is a good time to buy.   

We own CTL options.

                

Fourth quarter portfolio

This posting includes our fourth quarter portfolio. Again this portfolio is our TRADING portfolio and does not necessarily mean it is an investing portfolio. 

AGNC...Agency reit that has taken a dip in recent days due to some fed action. We continue to believe it is a good buy and even better at the lower price. Great dividend. 

ARCC...Business development company has become one of our mainstays.  ARCC has gotten so good and so big in it's segment we for all intents and purposes consider it a blue chip. High single digit dividend. 

BCE.. Even at our current trading price of $45 it is overvalued we continue to own and trade it.  This Canadian communications giant makes for sound sleeping away from Obama's economy and missteps. 

CLF... We consider this stock a bargain at the current pricing and with a nice 5% plus dividend like it even more. If the economy moves upward CLF will prosper from it's positions in lots of iron ore and basic minerals. 

CTL...We have owned this security in some form or another for practically forever and will continue to do so.  A very nice and secure 7% or so dividend, growing business, and excellent management. 

ERF... This company has stabilized itself after the dividend cut of the first half of 2012.  The cash flow is there and the oil patches they own good places to do business.  Canadian company too which means none of the silliness in the USA. 

EXC... Owning this one will require patience due to the company having to clean up some issues with financial's. However it is a utility, it is a 5% dividend payer, and it if Obama is re-elected they are in the sweet spot for crony capitalism.  Get in bed with Obama. 

FTR.. We own FTR via long term options that pay very sweet premiums. Roll over and roll over options is what we do.  We feel like Alabama Roll Tide Roll. 

JNK... Junk bond ETF that has given up some sleepless nights of late due to the sell off in this sector. We continue to believe the monthly dividend is safe, but the value might be fleeing. Careful here. 

LO... We have taken a beating in value here, but continue to enjoy the high 5% dividend and monthly option premiums.  We advise careful investing here as well. If Obama is re-elected he could put the hammer down on menthol cigs. 

NCT...We opined on this company at $7.50 and bellied up to the bar and bought a boatload of options. Either we will be right and they are in the best situation regarding servicing foreclosure mortgages or we will lose our shirt.  We believe this stock remains a good buy. 

NNN.. Blue chip triple net leaser.  Buy, collect the 5% dividend, and sleep like a baby. 

O.. Pretty close to the quality of NNN.  But offers a monthly dividend and more risk taking in real estate portfolios. 

WIN... This company has yet to get it's financial house and PR house in order.  So we ride the ups and downs via option premiums believing they will get both in order and become a smooth operator. 

             

Agency Reits get pounded.

If you read our blog you know by now we love agency reits.  These are real estate investment trusts that buy nothing but government guaranteed paper and make money on the spread between the current interest rate from which they borrow money and the higher longer term mortgage rates.  These stocks have been taking a pounding in the last few days since Mr. Bernanke introduced QE 3 saying it was going to be exclusively a buying of mortgage securities in an effort to push low mortgage rates even lower. 

The Fed chief is now blowing his horn as loud as his can saying GO BUY A HOUSE!!  Well with mortgage rates for 30 year loans now approaching 3% anyone with decent credit needing a home needs to step up to the plate.  Heck if you can go with a 20 year loan the rates are approaching 2.75%. This folks is essentially free money for the long term and if rates were the only issue people would be buying like never before. Unfortunately bad credit, uncertainty in future home prices, and lastly employment concerns are keeping this market from a outright boom.  The Chairman has no more bullets at this point. 

Back to the agency reits.  Most of the stocks are down from $2 to $4 and this is due to the concern that the spread for prior purchases of government paper is going to be a loser for the holders now. Yes that very well might be, but the difference between current paper and soon to be issued paper is quite small here and we believe the reits will be able to handle it just fine with a few quarters of reorganizing their mortgage portfolios and moving forward. The real risk always with agency reits is not lower rates, but HIGHER rates. That kills all profits when you are holding paper where the new borrowing rate is higher than what are lending money at currently.  

Well maybe fools rush in where angels fear to tread but we see panic here. 

So to us this sell off which is a panic moment and at some point buyers will see the value and step in is an opportune time to do some buying ourselves.  So for those headed to the door we offer our resources to take these agency reits at lower prices with still great double digit dividends and guaranteed mortgage paper from you.  We suggest you do the same.  Picking from any of these reits is likely a winner, but we prefer AGNC and HTS.  

We currently hold AGNC as an option.

               

 

The NEW Gettysburg Address.

Eleven score and sixteen years ago our forefathers brought forth on this continent, a new nation, conceived in Liberty, and dedicated to the proposition that all men and women are created equal. 

Now we are engaged in a great election, testing whether that nation, or any nation so conceived and so dedicated, can long endure. We have endured four years of great loss of liberty since the last election. This after many former years of losing liberty in prior such elections. We have coming to a point in time where we will decide if  those who here gave their lives and sacred honor for years in wars and elections so that this nation of liberty might live might have died or sacrificed in vain. It is altogether fitting and proper that we the current generations should have this opportunity to decide the future of this once great republic.  

But, in a larger sense, we cannot improve upon, but we can destroy and hallow out liberty. The brave men and women, some still living and many dead, who struggled here for generations before us, who have saved it, and passed it on to us to pass it on to future generations have sacrificed far more than us so that we may vote to decide our future liberty. The country will note, and long remember how we vote here, it can never forget if we saved liberty for future generations here.  It is for us the living and soon to be voting, rather, to be dedicated here to the unfinished work for which they who fought and lived here before us have thus far so nobly advanced. It is rather for us to be here dedicated to the great task remaining before us—that from these honored generations we take increased devotion to that cause for which they gave much devotion and sacrifice—that we here highly resolve that these generations shall not have died or passed on to us liberty in vain—that this nation, under God, shall have a new birth of freedom on November 6, 2012— and that government of the people, by the people, for the people, shall not perish from the earth.

             

Meet the new boss, same as the old boss.

Many years ago when we began to invest in stocks and bonds we spent lots of time looking for stocks that would give us the lottery win by running up 10 or 20 fold.   This type of approach is similar to today's buying of a lottery ticket in a effort to hit a home run.  Frankly the chances of either of these approaches working is so remote the only thing one is doing throwing away your hard earned seed corn money.  Yes, one of 300 million hit the lottery, but if you are dumb enough to put your one precious life span on those odds then you need to stop reading now. 

Sometime in the early 1980's a lady stock broker who was the mother of a friend of ours at the time saw we were starting our  journey in stock investing and asked us which stocks were getting our money.  We gave her a list of some of them and she then noted  ALL of them were not blue chip type selections.  We noted we were looking for a stock that would give us a nice profit quickly.  At this point she looked at us and said that she had been investing her money and others money for over three decades and the only way she had found to make enough to get the big win was to invest in high quality companies over the long haul and let them do the heavy lifting.  We changed our approach and have been most happy with the result.  That is not to say some portion of your assets should be in more speculative issues, but your odds are much better with larger cap companies growing and reinvesting profits. 

Many in today's investing world are doing the same thing with their insistence on placing assets in the so called BRIC's.  That is Brazil, Russia, India, and China.   They are wrong now and if they continue will be wrong three decades from now as well.  Brazil is having issues regarding over heating land prices since much of the land for economic growth is right at the coast and nothing much past about 30 miles inland. Add in some continuing political issues and you got a weakening economy. India can not get past the corruption that has been rampant there for ages and the real killer the cast system that keeps many from moving upward in a true free market system.  Russia is so dependent on oil income that the latest gains in natural gas and the slow lessening on dependence on foreign oil is causing oil income to slip there.  Russia also has killer demographics as the country is actually losing people quickly and that is a sure sign of a dying economy.  China has hit upon the brick wall of economic freedom versus personal freedom and despite liberals in this country pointing to China as the perfect solution to governmental approaches China is finding people really do value personal freedom.  China also has a demographic issue as well and in less than 20 years will be losing population itself due to the one child policy in acted many years ago.  For a final look check out Japan as to how an economy can stagnate when government gets too much in the way. 

Let's throw in that Europe is a basket case and will be until they unravel the social spending issues there that are killing long term investing by people wanting to make a buck. Makes one wonder why people in the US want to follow Obama over that cliff with Europe. 

The only economies in expansion now are the lower Asian economies where young people and capital is still in the start up phase of free markets.  They will grow, but if freedom and free markets are not fully expanded there and  many of the same issues noted above will stop their economies in less than a decade. 

The opportunities for investing for real future gains in wealth and prosperity are mostly right here in the old USA but only if we make decisions now to secure that wealth for us and our children. 

It all comes down to the old boss, being the same as the new boss.  That is IF we in the US decide we still want to be boss.  This is not a political posting, but it is to the extent that IF we want to be the economic superpower again all the ingredients are here to make it happen, lots of free and standing by economic capital, lots of domestic energy, lots of willing small business wanting to expand,  and lots of unemployed workers to put to work.  Allow the free market to work and  presto you will get growth and expansion that will be the envy of the world in less than 5 years.  We opined on this earlier in a posting about how lean and mean companies have got in this country from feasting on things such as cheap long term capital and cheap energy from natural gas fracking.  Now it is up to you re-elect Obama and you get Europe. Elect Romney and some help in the US Senate and you will find jobs and newly minted wealth that will again wow the world.  Having lived most of our life in a world of plenty and economic freedom we know the difference having lived just a few years in the alternative of a command and control economy from Washington and we know what we prefer.  However it is now your choice and your future. We got ours in the 1980's and 1990's when economic liberty and personal liberty were in vogue it is now time to decide if you will get yours or if you prefer this stagnation of debt and decline.