Get Rich Slick

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

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

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

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

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

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

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

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

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

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

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

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

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

Check out the sample charts and calculations.

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

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Which currency will be the first to bust?  I honestly don’t know but it’s becoming clear to me that a big bust in currencies is coming.   I know several doom and gloomers have been predicting the demise of the USD for a while but we’ll need to see a few smaller currencies bust first before we ever got to that point.  Ironically, the biggest threat right now might be the Chinese currency.   There is no doubt you’ve either seen or read of how China has huge swaths of buildings sitting empty and idle.   The central planning economy is sucking in resources and not really producing anything of value.   At some point, the cash runs out and all that’s left is a hollow center.

It’s amazing how quick the Euro is falling apart with the sovereign debt problems of Portugal, Ireland, Italy, Greece and Spain and the UK isn’t exactly in the best health either.    I had a draft of this post written in July 2009 and I’m just now getting around to publishing it because the problem is being exacerbated by debt problems all over the world and the clock is ticking.    I have no doubt that a major default somewhere around the world will lead to a domino effect and the world will likely rally to the US dollar.  I’m just hoping it happens by March 2010 because that’s when my call options on USD expire!

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Google recently released something called Google Goggles that effectively allow you to use your mobile phone (equipped with camera) to take a snapshot of something (like a bar code, business card, etc) and then have it reveal additional information about it.   You can read a little bit about it here.

While it is relatively new, the immediate thing I considered was someone attaching their iphone (or similar device) to their grocery cart as they walk through the store to “capture” the prices of all the items in a grocery store.   Rinse & repeat for competitors and you suddenly have a real-time price list of items at your favorite grocery store.   It’s a combination of Google Street View and Google Goggles with price match!

To take it one step further, I’d love to compile a list of items I generally buy and have google (or some app) tell me where the cheapest place is to get those items.  The big plus is getting rid of all those flyers and circulars regarding what’s on sale where and when – it would be all instant!

Come on Google, give the public what it wants!

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Wow, I was taking a look at the March 2010 call options for UUP (USD bullish) and I was amazed to see 155,000+ contracts interest at the $24 strike level.   The December 2009 $23 call options are trading 176,000+ contract interest and that’s just AMAZING!

I am seriously tempted at buying 50 or so contracts just to gamble with and see how that pans out.   Since the world over is now bashing the USD, then it must be naturally the time to invest in it.   Of course, it is possible that the USD descends into the abyss but the more deeply I think about it the less likely I think it is to happen.

I’ll wait till the end of October and make a decision next week to see what I’m gonna do but it is interesting the volume is so high.

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The US Post office seems to be in perpetual red ink and I’ve been wondering how to fix this institution.  I came up with a three step process to fix the postal service.

Step 1. Outsource/contract all package delivery to UPS or Fed-Ex.   These two companies already do a better faster way of delivering packages than the post office and a volume agreement can lower the price of shipping costs for consumers.

Step 2. Eliminate all mail routes.   How will mail be delivered you ask?   Setup a central (or two) processing site whereby ALL mail is delivered, scanned into electronic format then customers have three options for delivery:

1. Have electronic mail delivered to your current e-mail address of your choice.
2. If you don’t own a computer, the post office can provide you with a Kindle like device to deliver your electronic mail or your cell phone of choice.
3. The third choice is to have your e-mail delivered to your TV (a partnership with cable/tv/internet service companies would need to be worked out some how to allow the delivery via this method).

Step 3.  Sit back, relax and enjoy the profits.

Continuing to rely on gas-consuming combustion vehicles and men/women paid $15/hr  to deliver mail is as practical as using horses to deliver packages  in today’s modern age.   Obviously, there would be some issues to resolve such as authentication and security but I think this process moves us forward to the future.     Asking for government bailouts, postage increases, cut back in service isn’t really the answer.   Getting less for paying more is never a good thing and it’s time to start thinking radically different.

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With the stock market down you’d think it would be the perfect time to invest in the stock market but many companies are cutting their 401k match, changing plan options to save money and in some instances, eliminating the hassle altogether.    Many people are also taking pay cuts so in order to make up the difference in take home pay, many will cut back or eliminate the 401k plan contributions.  Isn’t a buy and hold strategy predicated on continuously buying into the market?  How’s that happening now?  Let me guess, companies will re-instate matches when the Dow soars past 14,000 right?

My thesis has been that as soon as the market pops to say 11,000 there’ll be a huge sell off as baby boomers opt to eject from the market to preserve whatever is left of their wealth before they retire and I’ll standby that thesis until I see anything different.

Given the tumultuous returns of the stock market the past 15 years and the mediocre performance of the 401k, I’m going to go ahead and call the 401k terminally ill and near death.   If you want to look at one alternative, take a look at www.ETFCoveredCalls.com because it’s almost time to get back in the market.

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It’s been a long while since I’ve read anything about Prosper.com and since the recession and economy have taken their toll on many people now is the perfect time to find out how well loans hold up during this period but I can’t find any information. I know Prosper is still in their “quite period” but what’s happening with the loans?

I jumped over to LendingStats.com and the data seems strange. Back in October 2008, I wrote this post which showed something I coined “dead money” as 4+ months late and defaulted loans of the top tier group approached 40% but LendingStats only shows defaulted loans at about 20% and that doesn’t make any sense unless every 4+ month late loan suddenly decided to pay and stay current which would be miraculous in today’s economy. The last data upload was in April 2009.

Can anyone out there shed some light? Have the old gang of Prosper aficionados (Mapgirl, Mike, Brandon, and Lazy Man) all written Prosper off?

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Harry Dent popularized the Age Wave Theory which posits that the stock market would peak between 2007 and 2009 because of the age demographic of the baby boomer generation.   Perhaps it was coincidental that we had the housing credit mess coincide with baby boomer theory or perhaps they are related but the one question that I’ve been asking boomers is when they plan on cashing out.

Let me give you the scenario I’ve been giving the boomers:  You’re 55 years old today and you’ve managed to save 10% of your income  over the past 30 years of your working life and built a nest egg of $500,000.   This money was primarily in mutual funds that has taken a big hit lately and the Dow is starting to climb back up from the abysmal 6000 and you plan on cashing out.   The question:   When do you cash out?

Do you cash out at Dow 9000?  Dow 10000?  Dow 12000?

Although I’m 20+ years away from this scenario I’ve been considering it a great deal because there is no guarantee that we won’t hit a bad cycle in 20 years and there’s no guarantee that this market won’t be dead for another “lost decade” over the next 10 years.    I know the simply answer is to “re-balance” your portfolio but if the Dow stays flat for the next 10 years how much does re-balancing really do for you?   Worse yet, what if the market declines and you keep re-balancing into a worse and worse position?

I predict we’re going to have a large rally at some point and many people (e.g. boomers) are going to jump at the opportunity to cash out but the real question is at what point does this demographic cash out?

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