Get Rich Slick

I remember a couple of years ago when gold was at $420 telling my co-workers and peers to invest in gold either by purchasing physical coin or bars or investing in ETFs such as GLD or GDX. They all looked at me cross-eyed bewildered why I’d make such a recommendation. I wasn’t blogging back then so there isn’t any historical record of my recommendation.

There is a record of me trading GDX over at ETFCoveredCalls.com for some time now and it’s been very fruitful for me. I never really expected Retail Gold to be trading at $700/oz today nor did I expect the underlying reason (inflation) to be so out of control.

Energy & Food prices continue to climb and this summer WILL be brutal on those two commodities; mark my words (and this post). I expect oil to hover in the $70s if not higher all summer long. As a result of my expectations, I’m carefully positioning my portfolio to profit from this and I’ll post some a follow up over the next couple of weeks.

Here are a couple of hints:

1. I love ETFs because of my ability to trade options on them and reap profit in up OR down markets.

2. I’ve been eying OIH for some time now and this fruit looks ripe for picking and planting a new money tree.

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Did you make money yesterday? I found myself cheering for the market to drop as I held defensive position in DXD (Double Short Dow) but then I found myself cheering for the Dow to recover because I held callable option positions in SMH and was eager to make another $750 in profit. Either way, it was profitable for me. I hope it was profitable day for you.

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I have never heard Dave Ramsey’s radio show nor have I read any of his books. My only knowledge of Mr. Ramsey is the singing praises from a variety of PF Bloggers out there and snippets of the type of advice he doles out.

I finally decided to visit his website and check it out. The first thing that struck me on a visit to his web page was the Financial Reality Check.

Curious, I clicked the Get Started button. I entered my age, monthly net income, asked if I own or rent, number of mortgages, loan amount, term, rate, consumer debt, payments, current savings, then clicked FINISH.

My Total Money Make Over had “YOUR PLAN” and $5 million (and change) under it and “DAVE’S PLAN” at $10 million (and change) under it.

Wow! I’m intrigued. I clicked Learn How! Oh no! In order to make that $10 million I have to send him $89.95 every year! Hmm…If I were a debtor $90/year is pretty steep but as a capitalist that’s some nice incoming cash flow.

The second thing that struck me as I went back to the original website were all the other products and services for sale. There are the “Trusted Services” such as Financial Counseling, Workplace Trainer Certification, and Endorsed Local Providers providing “Investing Advice”, “Real Estate Advice”, “Health Insurance Advice”, “Long Term Care”, and “CPA Tax Services”

Wow. Those services look like a whole lot of cash flow leaving your pocket book and entering someone else’s bank account.

But wait, there’s more!

Dave Recommends
Zander Insurance, Term Life Insurance, ID Theft Protection, Churchill Mortgage, Bsafe Online, Bee-Alive, USLegalForms.com, CLC-Refi Student Loans, Tivo Kidzone, CLEAR Learning System

Wow. Even more services that look like a whole lot more cash flow leaving your pocket book and entering someone else’s bank account.

There is also an Online Store, and many different workshops, training, programs and much more.

I have been truly mistaken about Dave Ramsey. It turns out he is a savvy capitalist and I was under the impression he was some type of frugalist. Dave’s entire website is setup to EARN income from a VARIETY of products and services. The guy is a genius!

I won’t be buying the $89.95 subscriptions, the books or services but I have a much better understanding of Mr. Ramsey and he’s definitely a capitalist which perhaps explains why he’s a millionaire.

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

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

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

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

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

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I periodically read various blogs out there to see what’s on people’s minds.  I like reading comments and questions people post on a blog.  Lately, I’ve been reading a great deal of how debt (all kinds) is bad.

I’ve read articles on how credit card debt is bad….
I’ve read articles on how student loan debt is bad…..
I’ve read articles on how mortgage loan debt is bad….
I’ve read articles on how debt is a bad…bad…thing…

I generally refrain from advising people with “xyz solution” because there are simply too many variables to consider (age, marital status, health, financial goals & objectives, children, housing preferences, educational skills/level, etc) to offer any kind of specific advice but I will offer this piece of advice to everyone:

CHEAP MONEY IS A GOLDMINE OPPORTUNITY!

I wont’ give you specific advice and I’m not telling you to go get a mortgage, student loan and credit cards but I will tell you how I’ve taken advantage of cheap money.

I’ve written about credit card arbitrage earning me $1200 over an 8 month period.
I’ve written about using a 3.25% Interest Only ARM to pocket $14k over a 3 year period.
I’ve advised my wife to borrow as much student loans as possible her last year of school because the rates were so low (3%) and the interest can be written off on fed taxes!!

In all instances above, debt was never a “bad” thing.  I could even argue that all this “bad debt” helped improve my FICO score because it showed responsible repayment of all borrowed money.  Higher FICO score mean lower rates (see 3.25% loan rate above).

In my opinion, one of the key ingredients to building a wealthy portfolio is obtaining, using and leveraging (preferably someone else’s) cheap money.

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As some of you know, I took out a 24k loan from my credit card at 0%.  The zero rate was only for 6 months so I took the money and placed it in a high yield CD earning 8%.  The gross profit on this transaction will be about about $1200.

The 0% rate runs out in December and I was planning on opening a new credit card account and transfer the balance to another 0% card but I recently received my credit card statement and lo and behold there more 0% checks to extend it another 6 months.

I’ll hold off on opening a new account and hold off using the checks until late October or early November but this “generosity” from the credit card bank got me thinking as to why they do it.

The common wisdom is that banks offer 0% as a teaser and simply wait for you to default so they can pop the rate to 25% or more but I’m not convinced this is the whole story.

Banks have sophisticated credit models to know how likely a person is to default on their credit.  With me, personally, I have been doing business with this particular bank for years and have NEVER been late nor will I ever be.  This partially explains why they have given me higher and higher credit limits.

My suspicion is that banks KNOW that a certain number of their customers are doing Arbitrage deals and THEY benefit more from it than we do.  How?

With the advent of “fractional reserve banking” bank can lend out 90-99% of the money in their accounts out as loans.

So let’s take a look at how my particular transaction would work:

Credit Card lends me $25,000 at 0% (they know I’ll pay them back so it’s relatively risk free)

I take $25,000 and deposit it at Emigrant earning 5.15% (I earn ~ $1300)

Emigrant takes $25,000 in as a deposit and can lend out $25,000 at say 10% interest (more credit card loans) and accumulates $25,000 in interest from those loans.

This turns into a win-win for banks.  On the one hand, they have the potential to earn 25%+ interest on a credit card loan of 25k if I default and on the other hand, they have the ability to lend out 10 times the amount it has on deposits courtesy of my deposit.

It seems to me that banks can truly optimize their returns and profit if they can find people like me that will arbitrage their own money back into their accounts.  We’ll see which one does it first.

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I hope everyone enjoyed this weeks book review. I’ll try to do another one in six months time after I read some additional books that have been recommended by readers and other bloggers.

Getting back to Exchange Traded Funds Covered Call transaction, I ran a report to see where the “action” was heading into October 2006. As of Friday, I came up with the following opportunities:

GDX and the 35 Strike (GDXJI symbol) is currently selling at $1.40 which (if bought late today or opening on Monday) at $34.85 and sold the 35 strike October options could return 4% return (sans commissions) on investment in less than 30 days! Do that 12 times a year and you’re looking at 48% return!

Gold, however, has been experiencing quite some volatility so it ultimately depends on where you think gold and gold mining companies will be heading in the future.

FXI (China 25 ETF) comes in returning 2.11% which isn’t too shabby but the price might leave you with some stick shock since FXI is trading at $80.70. This too has been volatile so be careful!

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My current preferred method of investing in equities is to use Exchange Traded Funds (ETFs) and extract call premiums from them. This is a conservative way of investing in a basket of equities similar to mutual funds but with the added benefit of squeezing out extra cash through covered call selling.

My strategy has been two fold. I scan a set of ETFs from various industries/sectors and investigate which ones have the highest premium returns. Over the past three years, there has been some consistency in the top performers. As always, however, past performance is no indication of future returns so be cautious and do your own due diligence.

My favorite ETFs (in no particular order) are:

QQQQ – The Qs or Qubes (a piece of the top 100 Nasdaq companies)

XLE – Energy Spiders (a piece of the top energy companies)

GDX – Gold Miners (a piece of the top gold mining companies)

IBB – Nasdaq Biotech (a piece of the top biotech nasdaq companies)

FXI – China (a piece of Chinese companies)

PBW – Alternative “Clean” Energy (a piece of clean energy companies)

VNQ* – Vanguard Real Estate Investment Trust (Morgan Stanley REIT Index)

*VNQ has been recently added and is fairly new but I like it!

These ETFs all trade options and they are all diversified from precious metals, healthcare, technology, international, real estate and energy.  I currently run my ETF optimizer program against these and a few select stocks to find the best premiums.   I’ll post some sample reports with estimated return in the near future.

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I took a vacation over the Labor Day Holiday and while relaxing at the beach,  I began thinking about financial planning for the upcoming calendar year.  Each year, I contribute the max to my Roth IRA but unfortunately I usually wait till the end of the year (usually April) before I fund the account.  So in April 2007, I’ll likely make a $4000 contribution for the 2006 tax year.   Ideally, however, I would like to double up next year and make a 4k contribution for 2006 and 4k contribution for 2007 at the same time.

I’ve written about my upcoming credit card arbitrage in December 2006 here and considered using credit cards to pay off the remaining balance of my mortgage here but it has occurred to me that I could use my next arbitrage to fund my Roths.  Even better is that I could theoretically earn sufficient return on my investment (about 12%) and use the gains to fund the 2007 Roth.

How would it work?

If I did the transaction today it would work like this:

1. Borrow 26k from credit card at 0%
2. Purchase 600 shares of GDX @$41.73
3. Sell March 07, $42 strike for $4.90  (Gross profit = 600 x $4.90  = $2940)

Earning $2940 gets me most of the way there but I also earned an additional $1280 doing arbitrage into 8% CDs so we’re done!

I can then take 4k and make my contribution; the added benefit is that I can re-invest into other options.

Of course, this is all hypothetical since I won’t be able to make the transaction until December and the profit potential will likely have changed but it’s food for thought.

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After reading in the wall street journal that American Express was changing their rewards programs and fees I decided to take a good look at whether or not I wish to continue to be an Amex customer. I have accumulated about 37,000 points and decided this would be a good time exchange my points for some goods. I spent close to an hour searching through all the “rewards” and was extremely disappointed.

Issues with the reward program:

1. The value of the points varies considerably from reward to reward. As an example, an iPod 4GB nano on Amex site cost 41,000 points. I can buy the same iPod on Amazon for $234.95. On this scale, each point is only worth 0.005 cents/point. Contrast this to a $100 Home Depot gift card on Amex which costs 10,000 points. The value here is 0.01 cents/point. That’s a 100% difference in value!
2. Clearly, Amex plays an “optimization” game with their reward scheme. Popular items are inflated to depreciate the value of their points where unpopular items are deflated to nominal value. Quite frankly, this really annoys me.
3. Cash Back: There is a harsh penalty for cash back redemption. A $100 Amex gift cheque ends up costing 20,000 points. Once again 100% penalty for not choosing a retail gift card (e.g. Home Depot).
4. Amex card charges an annual fee of about $95 for their rewards program on their gold card. Although there are other benefits that come with the card (advanced concert ticket purchase, extended warranty plan), I’m not sure if I’ve ever used these “benefits.”
5. Sadly, after searching for an hour, there really wasn’t anything that I wanted to exchange my points for, even worse when I was ready to settle for an item, I felt bad about paying an inflated price so I’ve opted to wait another month to see if anything better is added to the list at a reasonable price.

Ultimately, I think I may have found a solution. I came across a Costco Amex card which offers cash back incentives at more realistic values so I’ll investigate further and decide to convert from Amex Gold to Amex Costco. Otherwise, I may simply close the account and move on to other reward cards.

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