Get Rich Slick

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It should be perfectly obvious that this blood red October stock market is going to turn into a political blue November so you should begin planning now for that inevitability.

Depending on your gross income and financial situation, your tax liabilities will probably change in some form or another.  If your tax liabilities change for the worse then it’s time to start altering your expenditures now to adjust.

An Obama Presidency should alter your investment strategy as well and perhaps tilt it toward health care, alternative energy, infrastructure, and insurance.   Oddly enough, I think pharmaceuticals risk exposure if the government regulates pricing on prescriptions to control costs.

Tax free muni’s would also be a great play if you can find a government that doesn’t go under over the next few years.  I can’t offer too much advice here because everyone’s situation is different but the important thing is to have a plan.

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Banks have many super computers currently crunching numbers.   The crunching consists of determining which markets had over inflated housing, job market exposure, and other tough economic conditions.   It makes sense for banks to reduce their exposure in these markets and those people living in these zip codes can expect credit card limits to be reduced or altered somehow.

CNBC has recently posted an article describing the situation fairly well.   I have cautioned my readers to keep an ample supply of cash available because credit card companies can pull credit lines whenever they want.  If Bank A cuts your credit line by $5,000 and this trashes your FICO score then Banks B & C will cut your credit lines and further trash your score until it gets bad enough banks won’t extend any credit to you: A vicious deflationary credit scenario will unfold.  Food, Fuel, and Medical expenses will require CASH if you suddenly find yourself without any credit.

How bad can it get?   If things get desperate, I can see the Feds stepping in and placing “emergency” limits on ATM withdrawals, bank transactions, and such just like it placed a pointless ban on shorting stocks.   I’d advise you to keep a couple of weeks worth of cash to pay for items that you might need should draconian limits be placed on transactions.

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As expected, bloggers, pundits and media keep telling everyone not to panic which begs the question, when is it time to panic?

Dow down nearly 800 points in day, down 3700 points from peak,  multiple major bank failures, investment banks filing for bankruptcy, insurance companies filing for bankruptcy, international banks failing, government interventions,  banks cannibalizing banks,  Federal Reserve gimmicks, FDIC fears, US Mint suspending gold sales and on and on.

So when will the time come to panic?  Is it when the Dow drops down to 7000?  Is it when your credit card stops working? Is it when your bank cuts your credit lines?  Is it when the ATM runs out of cash?   Is it when you go to the bank for cash and they tell you they don’t have any?

Perhaps the pundits plan should be to calmly accept personal bankruptcy in a dignified non-panicked manner so as not to upset the Joneses. Be sure you have a plan before the panic sets in!

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It seems many people are out buying gold lately but too many people seem to be seeking 1 oz coins instead of the more practical 1/10 oz coins.   The key issue here is if you need to resort to bartering with gold, you don’t want to have to “break” a one ounce gold coin or worse trade a one ounce coin for something not necessarily worth one ounce of gold.

Ideally, you should have a mix of both one ounce gold coins, half ounce coins and one tenth ounce coins as part of your inventory.    A while ago I discovered that in some cultures it is customary to buy some gold on your child’s birthday each  year as part of their savings.   I found this quite fascinating and decided to add it as part of my kids wealth building plan and each year, I make a trek to buy some gold for my kids.

Ideally, I try to purchase one ounce each year and in theory, my kids should have 18 oz of gold by the time they reach their 18th birthday.    At the current price of $850/oz that would translate to about $15,000 in value.

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Everyone seems to be making assumptions that a bailout bill will pass, it will cure everything and things will return to normal a few days later.  The prudent investor needs to ask, “What if…..”

What if the bail out bill doesn’t pass?

What if the bail out bill passes but it doesn’t help?

What if the bail out bill passes, but helps in the wrong way?

What if more banks fail after the bail out bill?

What if FDIC goes under?

Note: I’ve heard the following, “in the history of FDIC, not a single depositor has ever lost a single penny” and at the same time every prospectus is required to state, “past performance is no indicator of future performance” but how ironic.

What if the Dow drops to 8,000?

What if the Dow rockets to 15,000?   What should I do?

Unfortunately, I can’t answer these questions for you because the right answers depend on your situation.   If you’re 20 and plan on retiring in 40 years then most of these issues may be mute.   If you’re 60 and plan on retiring on 5 years then you’ve got some questions you need to answer.

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There seem to be too many people that are stuck on ROI and not enough people that understand the fundamental importance of cash flow with regards to investment(s). Wikipedia does a good job at pointing something subtle yet critical about cash flow:

• to evaluate the state or performance of a business or project.
• to determine problems with liquidity. Being profitable does not necessarily mean being liquid. A company can fail because of a shortage of cash, even while profitable.
• to generate project rate of returns. The time of cash flows into and out of projects are used as inputs to financial models such as internal rate of return, and net present value.
• to examine income or growth of a business when it is believed that accrual accounting concepts do not represent economic realities. Alternately, cash flow can be used to ‘validate’ the net income generated by accrual accounting.

Too many investors that advocate index funds eliminate the entire aspect of cash flow in their investment strategy. Let’s take a look at an example.

Rich is an investor with $20,000 to invest and he wants to focus on cash flow. Suzie is an investor with $20,000 and she wants to focus on dollar cost averaging and ROI. Both Rich and Suzie decide to invest in the same investment vehicle, an ETF in Home Builders (XHB). Both have been watching the housing market and both think it’s close to the bottom to buy in.

On April 10, 2008, Rich buys 400 shares of XHB at $19.80 and decides to focus on cash flow generation so he immediately sells calls on the stock he just bought that expire 9 days out. He sells 4 contracts for $0.70 per share to earn $270.00 in cash flow. Nine days later, those contracts Rich sells expire worthless so on April 21, he sees an opportunity to sell 4 more (for May) contracts for $1.23 per share and earns $484 in additional cash flow. In May those same contracts expire worthless. Rich likes the cash his investment is generating so on May 27th, he buys 400 more shares of XHB at $19.80 because the price has dropped. He sells 4 contracts on these new 400 shares for $0.75 per share to earn an additional $280 in cash flow. Those contracts expire worthless. Finally on August 11th, Rich sells 8 contracts four for $1.1 and four for $1.5 to rake in $432 and $592 respectively. Total cash flow earned: $270+$484+$280+$432+$592 = $2058. Total money originally invested $17,017. ROI = 12 pct (cash flow) / 24 pct (adjusted)

Suzie wants to dollar cost average so she buys 200 shares of XHB at $19.80 on April 10th. Each month she’ll buy 200 more shares regardless of the cost. May 9th rolls around (a month later) and Suzie buys 200 more shares of XHB at $21.24. Thirty days later, Suzie buys 200 shares of XHB on June 10th for $18.86 and thirty days later on July 10th, she buys 200 more shares of XHB at $15.27. Suzie has now bought 800 shares of XHB for an average cost of $18.79. Total money invested $15,034. ROI? As of yesterday, XHB closed at $18.93 so her cash flow is $0.14 and ROI = 0.74%

So during this period, who is better off? The person focusing on cash flow and ROI or the person focusing on DCA and ROI?

Dividend investors know the power of cash flow and that’s why you’ll encounter some PF Bloggers that strictly focus on dividend investment and re-investment. Real Estate investors know the power of rental income & cash flow as do bond traders and bond investors.

If you want to learn more about selling contracts on index funds, click on over to ETFCoveredCalls.com to learn more.

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