Get Rich Slick

Whether you want to call it a recovery or just exuberant optimism about the economy improving, the one question that’s been begging in my mind is what’s going to happen with oil if and when the economy booms?  If oil is currently at $85 during a recession then what will it be during a real recovery?   The more I run through the scenarios the more I don’t like the outcome:

Scenario 1:  Assume the economy picks up steam, oil rises from $85 to $120 which quickly begins to take the steam out of any recovery and plunges us back into recession.

Scenario 2: Assume the economy remains stagnant, oil rises from $85 to $110 because of the Fed’s $2 trillion dollar inflationary pumping into the economy.

Scenario 3: Assume the economy dips back into recession, oil rises from $85 to $115 because the US will incur more deficit spending and the US dollar loses value against other currencies thus raising the price of oil.

Scenario 4: Assume Greece defaults and sends cascading domino shocks across Europe, oil rises from $85 to $100 because Opec cuts production in their October 2010 meeting.

There are more scenarios but you get the picture and I find very little scenarios in which oil will drop but ironically the biggest scenario that will drop oil is the mass adaptation of electric vehicles like the Nissan Leaf or Chevy Volt and the push toward natural gas for power generation.

I’ve positioned myself with natural gas ETFs and energy ETF plays because its the only thing that makes sense in this current economic climate.  I hope my bets pay off!

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So the new health care bill has some student loan reform thrown in and there are three notable items to review.  First, student loans will now be handled by the government.  Secondly, student loans will be forgiven after 10 years if you work in the public sector and 20 years if you live in the private sector.  Third, student loan repayment is capped at 10% of your income.  I’m not sure about the exact details but at first run it started me thinking into whether I should maximize my student loans and how to time them just right.

First, the student loans I have now are on a ridiculous low rate of 4% or 5% (don’t know exact number at the moment).   The new law caps maximum payment at 10% of your income so crunching some numbers……leads me to believe that it may be advantageous to borrow as much as possible, quit my job (retire early) and live like a king (free health care) working as a low level employee for some government agency.

Please note that this system only works if you have already paid off your mortgage and have a nice safety net (i.e. large amounts of cash reserves).   Here’s a scenario.

Let’s say I make 200k per year.  According to what I read, the maximum payback  on the student loans at this salary level would be 20k per year.   If the loan won’t be forgiven for 20  years then 20 x 20k = 400k.    That’s a whole lot of student loan money to borrow and not very feasible or realistic.   I imagine that I could probably borrow 120k comfortably so…..

But if I make 40k per year then the annual payback is 4k per year!   If the student loan will be forgiven after 20 years then 4k x 20 years = 80k.   In theory, the last 40k is free!

But wait there’s more!   Don’t assume that I would spend the entire 120k on actual education expenses.    I think I can bank about half of the 120k but to be conservative let’s say I can bank 50k.   I take 50k and invest it (preferably tax free or tax deferred bonds) and hopefully earn a rate of 7% or 8% (not impossible if we enter a period of government defaults or bond panic).  Presumably, I’ll lock in the loans at a consolidated low interest rate.

So 50k invested for 20 years at 7% in tax free/tax deferred bonds should yield 202k.   Student loan 80k @ 4% for 20 years = 177k.   The profit = 25k  plus a free 40k and a degree as a bonus.

Keep in mind that the incentive is now there for people to make as little money as possible.   If I make next to nothing then I’ll get free health care and various tax credits….I’m so giddy with excitement that I’m making it a point to study this further in detail as soon as I get more details!

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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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