Thursday, September 30, 2010

Here is How to Save Your Family: Part 4

We covered the children. Now let’s talk about you. As I told you before, when I started in the work force, people worked in the same place from 18 years old to 65 years of age. Some of these same jobs are not in demand today. Some jobs have changed while others like the computer industry have evolved from mainframe systems to networks.

Employers do not have to employ people in your city or town. They can employ people in India, China, or Iraq and have them make decisions in your town. All this can be done using a computer network. A doctor can order test on a patient in Harrisburg, Pa. and have a doctor review the results in Bombay, India. The results can be verified in Rome, Italy then your doctor in Harrisburg, Pa. can call you with the results.

In today’s job market, skilled and unskilled labor, is purchased and sold on the open market just like any other commodity. This is done using “Contracting Firms.”

Here is what you must do to get started and compete in this world job market.

1. Know what you want to do at an early age.

The earlier you pick a profession or trade, the better off you will be as a competitor in today’s global job market. You should do what you like but keep in mind; you have to make a living.
When I was 16 years old, I already started learning about Genetics and Computer Science so that I can make a decision about what I wanted to do in my early 20s. I decided that becoming a Genetic Engineer would give me more money in the long run but would take up to much of my time. So I became a Computer Scientist. Here I can start making money even before I start college and I could make enough money to buy a house and start a family.

This is the thought process that you will have to do early. My competition was still on the playground when I started. I got in to the job market early and made the money before the crowed came to my party!

2. Should I go to College?

The more education the better off you are. Having said that, know something about the coming demand and supply of labor. Know something about how long it will take you to become competent in the field of work that you want to be in. It takes over 12 years to become a Doctor but will you make the money back that you put into becoming one? Are you willing to spend the time away from other things that you may want to do in your life?

How about becoming a “Home Specialist?” That is someone who has a license to do plumbing, household wiring, and carpentry. You don’t need college and you spend less time in classes. But the demand to maintain houses is great. The supply of labor is small. So the price for your labor is high.

These are things that you have to consider when thinking about going to college or taking up a trade.

3. Become an Apprentice!

Apprenticeship is a system of training a new generation of practitioners of a skill. Apprentices (or in early modern usage "prentices") or protégés build their careers from apprenticeships. The modern concept of an internship is similar to an apprenticeship. Most of their training is done on the job while working for an employer who helps the apprentices learn their trade, in exchange for their continuing labor for an agreed period after they become skilled. Theoretical education may also be involved, informally via the workplace and/or by attending vocational schools while still being paid by the employer.

Some people in the field of Computer Technology go to college then look for an apprenticeship or internship with some company. It gives the new worker experience and gives the employer a chance to try the new laborer out on the job before hiring that individual. Once you finish your apprenticeship, you will be one step ahead of your competition in getting a full time job. In some fields, an Intern may work for free just to gain experience for a job in later years.

Sunday, September 26, 2010

Here is How to Save Your Family: Part 3

Last time, we talked about giving your children the tools to compete in the New World Order for future employment. The first step is to get them into education and prepare them to be placed at the head of the class as soon as possible.

In this blog, we are going to talk about why they may not get to the head of the class. Again, it is going to be up to the parents and in some cases, the grandparents to follow up on your children’s athletic and scholastic activities.

As your child gets out of the house and thru the grades in school, they are going to start running up against the “Bart Simpson” Types. I am sure you know the type that I am talking about. They do nothing and know nothing. They are angels in the eyes of their parents but are devils at school and on the playground. They start fights just because they can. They will take children’s lunch money. Some stab and kill other children to show how tough they are.

As parents, you want to have your children avoid such people. Your children know who they are. Develop good communications with your children and grandchildren so that they can come to you with any bullying problems. But I am sure you already know that.

What you may not know is that other children and their parents might not like the idea that you have an agenda for your children. They may not like the idea of your children achieving something. After all, their children just sit at home eating their bodies into bad health and never do anything positive, productive, or healthy. You find these parents at school complaining about someone else’s child, getting all the playing time in games or getting attention from the teachers.

In many schools today, a student may do something wrong and because of it; they have to sit out a football, basketball, or another type of game because of it. But people in the band, play, or other school events never get their events taken away from them. Bias among the school administration against athletes has gone on since the 1970s. My oldest daughter was in training for years. She had a body to prove it. Many children from her school made jokes about her and teased her constantly. She was late one day for class and could not play in the next basketball game because of it. One parent told me that my child had natural ability and that is not fair to her children. Her children did nothing but eat and get fat. They were never interested in sports.

Just like my daughter, children who achieve objectives in school get negative treatment from other children. You worked for 10 years to see that your children start and stay at the top of the class. But now you find out that other children at school, who don’t want to be in class at all pick on them and start fights with them because your children want to make something out of themselves.

This is another reason why placing your children in sports outside of school activity is not a bad idea. Steering your children to associate with people who have the same ideas and objectives is also a good idea. You the parents and grandparents are the support system for your children. It is a war between you the parents and the “Bart Simpson’s” for the attention of your children.

Thursday, September 23, 2010

Here is How to Save Your Family: Part 2

In the last part, I showed you how things in this country have been going south since 1970. I can still recall my older brother doing his high school homework. One of his books had an example representing the US gold supply in the mid 1950s then a great reduction in the early 1960s. At that time, the US had very little debt. The debt that we had was owned by the American Public. I asked him what happened to the US gold supply. He told me that we gave the gold away. As a child, that is what it seemed to be like. Now I know that we spent it all.

So how do we protect our family from the economic doom that is getting worse and worse as time marches on? We will look at how people live in our society and take it from there.

Education

Education does not start on the first day of school. It starts when we are still in our mother’s stomachs. If parents wait until the first day of school then your child will already be behind.
I started teaching my children while they were in my wife’s stomach by saying simple words such as “hello” and “hi.” Here is the reason why my oldest daughter said, “Hi” to me at two months old. My oldest daughter just had her second child. Her and her husband did the same thing. Guess what? David, her son said “Hi” to her in his second month of living.

Children pick up things like sponges in their first 7 years of life. At that time, they can learn anything. Take advantage of the time by going over letters, number, and teaching them to read simple words. Toy Stores have note cards that you can buy along with teaching guides to move them along. The objective is to give them a head start when they do enter the classroom.

Remember that your child is competing with other children, not just in your child’s school but in schools around the world.

When I was in Eighth Grade, I went to the West Mifflin School District near Pittsburgh. I had a Seventh Grade girlfriend who got “C” and “D”. I told her that she is going to have to pick up her grades. She told me that she was the smartest Black person in the seventh grade. This statement says a lot about her hopes, background, and her parents.

The West Mifflin School District at the time was only 8% Black and 91% White. Her parents grew up in a society where people applied by jobs based on race. In the 1950s, that was the way the jobs were placed in the newspaper. So being the best Black in the school was all you had to be. She was a girl and girls grew up, had babies, and stayed home. She came from a poor family. To them, finding a place to stay and eating was good times.

Besides, even for Whites of that time, graduating from school and working in the Steel Mill is all they had to look forward too. An employee could make a good living, buy cars, and a house with very little or no education.

But things change. Black as well as Whites had no idea that after graduation, their time in the Steel Mill was already numbered. The Steel Mills went oversees and their standard of living declined.

Because of massive Federal Debt, public school education will have to change. If you want your children to keep a good standard of living, they will have to have an education that can compete with anyone in the world, just not their school or their town. You the parents (mother and father) will have to play a key role in this education development that is a “Work and Progress” for 25 years. You the parents will have to train them before they go into public education as well as while they are in Public Schools. You the parents will also have to start making financial plans for college as early as one month out of child birth. Grandparents and other family member will have to do their part as well.

Sports in Public School

I am sorry to tell you this but in the near future; most public schools around the country are going to disband school athletic programs. With no Federal money, schools cannot afford this expense any longer. Parents will have to take advantage of other youth athletic programs such as USA Athletics.

http://www.usatf.org/events/2005/USAYouthOutdoorTFChampionships/

The people who take the time to help train their children and grandchildren in sports will have the advantage when it comes to giving out sports scholarships. Training should start at age 5 or 6 so that they will have the advantage against others as teenagers. This will get the attention of colleges. The best of the best in college will go on to the professional and worldwide sports programs.

Monday, September 20, 2010

Here is How to Save Your Family

You and your family are in great economic danger. You may not know it but the West is in a decline. We are not just talking about the United States, but Canada as well as the European Counties. The year 2013 maybe the year that all economic and political decisions start coming out of the “Far East” instead of out of Washington DC and the European Union.

The WALL STREET JOURNAL REPORT, TV Show Dated Sept., 19, 2010 had as their guest, Former British Prime Minister Tony Blair. He was seen discussing the shift of power between East and West with MARIA BARTIROMO, on the air. He said that the West is in a decline while the East is rising. But when they placed the interview on their website, they deleted all parts concerning his conversation concerning the West decline.

http://dissidentvoice.org/2010/04/rising-and-declining-economic-powers-the-sino-us-conflict-deepens/

Some people are talking about it but their voices are to discredited to be heard. Others are known worldwide like Toney Blair and Paul Volcker. However, the mainstream media pay them little attention.

http://www.youtube.com/watch?v=-bihL91cf9c&feature=related

Paul Volcker talks about why we are in this crisis situation. But no one yet has the will to fix it. In fact, political leader are now saying that the recession is over.

http://www.youtube.com/watch?v=h-DetR3nDtg&feature=related

This Corporate Welfare Problem has led to massive US borrowing from China.

http://www.youtube.com/watch?v=c8z3eGgXV-w&NR=1

http://www.youtube.com/watch?v=-qcM3Z54uEM&feature=related

The West is drowning in debt. The West owes the debt to the East. That trend will continue.

Our Recent History

I witnessed the increase in the standard of living from 1951 to 1970. We had no such thing as the homeless. The Homeless problem went away at the beginning of World War II. Everyone had good jobs. The Cities were prospering. People were buying homes in the city as well as the suburbs. When employees got a job with a company, they were expected to retire with a good pension, sometimes medical benefits, and you had money in your pocket.

But I noticed in the early 1970’s, things started to slow down. Then I started noticing our Steel Plants leaving the country. They said it was because the wages overseas were a lot lower than in the United States. When I stopped in to see the people on the Cherokee Reservation in North Carolina, I noticed that the Textile Mills in the south were closing and leaving the country. The story was changing; the political and economic leaders told the public that this was for the best. The media did not want to talk about it. Anyone complaining about the NEW WORLD ORDER was called a lunatic and a trouble maker. Most people did not know anything about a New World Order or what that was about.

In the early 1980s, I saw my first homeless person living under some bushes in downtown Pittsburgh. I started paying for the first time for my own medical benefits. Every year my part of the medical bill got more and more expensive. Retirement Programs were replaced by IRAs and 401K Programs. Savings programs were replaced by Lottery and other gambling programs. Why save when you can get what you want today. That was the new policy on saving. People did not realize that they were taking pay cuts. Even Stock Brokers were pushing speculative Options on the public, telling them that they were conservative investments.

In the 1990s, less and less good paying jobs were available. It was no longer a fact that an employee could start at a company and retire at that same business. Many people were hired and they were lucky to stay on the job for more than 5 years. This is when I notice that the Federal Government would do things to keep the public’s mind off of the coming bad times such as getting involved in other counties business and making it very public. They blamed Arabs in the Middle East for US problems but at the same time, they did business with them.

By the turn of the century, the government was allowing banks and other intermediaries to prop up the economy by lending to anyone and everyone regardless of the individual’s ability to pay. Then they would sell the worthless debt to unsuspecting governments, corporations, and individuals around the world. Whole Communities were being foreclosed on. Washington used domestic and international events to keep the public’s interest elsewhere.

By 2010, the reality of the situation came to the public, in the first Great Depression of the 21st Century. No politician or economist was going to fix this mess that took 40 years to make. In fact they say that the recession is over. They don’t admit that we are in a Great Depression.

Now former government overseers like Tony Blair is stepping forward and tell the world, what is really going on and why things will not get better in the West.

Next time, we will see what you must do to protect yourself and your family from the economic decline that we are in today. The government is not going to help you!

Thursday, September 16, 2010

Are Convertibles Available?

For the life of me, I don’t understand why people would by stock in this market when convertible bonds in that same company is available? The only thing that I can think of is that people just don’t know anything about convertible bonds. Some people say that companies only sell convertibles when they are in financial trouble. Well, you don’t want to buy stock in companies that are “flying high.” The only way they can go is down. You want to buy turn around companies if you want to make any money.

According to Investopedia; “A convertible bond is a bond that can be converted into a predetermined amount of the company's equity (stock) at certain times during its life, usually at the discretion of the bondholder.” Convertibles are sometimes called "CVs".

Investopedia goes on to explain;

“Issuing convertible bonds is one way for a company to minimize negative investor interpretation of its corporate actions. For example, if an already public company chooses to issue stock, the market usually interprets this as a sign that the company's share price is somewhat overvalued. To avoid this negative impression, the company may choose to issue convertible bonds, which bondholders will likely convert to equity anyway should the company continue to do well.”“From the investor's perspective, a convertible bond has a value-added component built into it; it is essentially a bond with a stock option hidden inside. Thus, it tends to offer a lower rate of return in exchange for the value of the option to trade the bond into stock.”

If I wanted to buy LIBERTY MEDIA CORP stock for example, why do that when I can buy the LIBERTY MEDIA CORP SR EXCH 3.25% of 2031 Convertible - Callable 10/10@100 instead. The stock gives no dividend. But the convertible bond will give me a “Yield to Maturity” of 6.435%. If I plan to sell the bond because I want to take advantage of the stock appreciation, my current yield would be 5.078%. So I get paid 5.078% while I wait for the stock to go up. The bond sold for $640 on Sept. 3, 2010. If called away from the investor, they get $1,000. It is a Standard and Poor’s BB- bond.

The only risk that I may be taking is bankruptcy or business risk. The risk that inflation will be above 5% for the next 21 years is considerable but I can sell my bonds anytime I like. It already sells at a deep discount to par ($1,000).

You can do a bunch of calculations to see when you should convert your bonds into stock or if you are getting a good value with your Convertible Bond.

Here is a link to a website that teaches you how to do this.
http://thismatter.com/money/bonds/types/convertible_bonds.htm

I am too lazy to do all that work. If I am too lazy to wash my car, why do you think I would want to do a bunch of math? I rather watch CSpan and find out who is going to get what contract or where the money will be spent in the Federal Budget. Then buy the Convertible Bonds in that industry or company.

In the late 1970s, I read that President Carter was putting together a plan to rebuild the US Military. So I started looking for Convertible Bonds to buy in the Aircraft industry. I bought a Convertible Bond Issue on a Monday at $1,000 each giving 8% interest. In the late 1970s, inflation was running around 10% so I really was not making any money off of the Bond Interest. I wanted to make the money off the stock. That Wednesday, the company was awarded a big contract. By Friday afternoon, the bond sold for $2,000 each. That is when I sold. One Hundred Percent Profit in 5 days. Then I went out and paid cash for a new car.

So when your broker asks you if you want to buy stock in a company, ask the broker if they have a convertible bond available?

Monday, September 13, 2010

Working With People Who Follow the Prudent Man Rule!

With banks giving 1% or less per year, Darnell’s friend makes over 1.5% per month on their investments. Darnell’s IRA Investment Portfolio has increased over 3.6% per month in 20 months. You notice that Darnell is more concervative with his friend’s account (See http://bondinvestments.blogspot.com Saturday, September 11, 2010.)

That is because Darnell follows the “prudent man rule.” The Prudent Man Rules is the fundamental principle for professional money management, stated by Judge Samuel Putnum in 1830: "Those with responsibility to invest money for others should act with prudence, discretion, intelligence, and regard for the safety of capital as well as income." Some states which don't have specific legal lists require fiduciaries to uphold the Prudent Investor Act, also called the Prudent Investor Act (Rule).

Read more: http://www.investorwords.com/3927/Prudent_Man_Rule.html#ixzz0z8RC6Q8U

Darnell takes more risk with his investments. So far this extra risk has paid off. Mr. Williams is not willing to take more risk for others including his friends.

Bernie L. Madoff vs. Darnell L. Williams

Bernard Lawrence "Bernie" Madoff (pronounced /ˈmeɪdɒf/;[1] born April 29, 1938) is an incarcerated former American stock broker, investment adviser, non-executive chairman of the NASDAQ stock market, and the admitted operator of what has been described as the largest Ponzi scheme in history. His biggest crime is that he swindled almost $65 billion from the top wealthiest people in the United States.

Since 1991, Madoff and his wife have contributed about $240,000 to federal candidates, parties and committees, including $25,000 a year from 2005 through 2008 to the Democratic Senatorial Campaign Committee. The Committee has returned $100,000 of the Madoffs' contributions to Irving Picard, the bankruptcy trustee who oversees all claims. Senator Charles E. Schumer returned almost $30,000 received from Madoff and his relatives to the trustee, and Senator Christopher J. Dodd donated $1,500 to the Elie Wiesel Foundation for Humanity, a Madoff victim.

While awaiting sentencing, Madoff met with the SEC's Inspector General, H. David Kotz, who is conducting an investigation into how regulators failed to detect the fraud despite numerous red flags.[3] Madoff said he could have been caught in 2003, but bumbling investigators acted like "Lt. Colombo", never asked the right questions.[2]

"I was astonished. They never even looked at my stock records. If investigators had checked with the Depository Trust Company, a central securities depository, it would've been easy for them to see. If you're looking at a Ponzi scheme, it's the first thing you do.", Madoff said in the June 17, 2009 interview. SEC Chairman Mary Schapiro was a "dear friend," and SEC Commissioner Elisse Walter was a "terrific lady" whom he knew "pretty well."[4]

Since Madoff's arrest, the SEC has been criticized for its lack of financial expertise and lack of due diligence, despite having received complaints from Harry Markopolos and others for almost a decade. The SEC's Inspector General, H. David Kotz, found that since 1992, there were six botched investigations of Madoff by the SEC, either through incompetent staff work or neglecting allegations of financial experts and whistle-blowers.[5][6][7]

Mr. Madoff invested the clients money, controlled the clients accounts, and the client had no way of auditing their own accounts. Madoff claimed that he made a percent a month for his clients consistantly with no proof of how this was done. Honest people complained but since he was admired by the leaders of the investment and political communities both Democratic and Republican, no one cared until the rich and powerful lost their money and complained. If these victums were middle or lower class, Madoff would still be one of our financial leaders today.

How does Madoff’s activities compare to Williams?

Except for a few friends like the one in the last blog, (See http://bondinvestments.blogspot.com Saturday, September 11, 2010), Darnell Lamont Williams teaches the middle and lower classes how to handle their own accounts. Like Bernie Maddoff, he claims that his clients made over one percent a month. The difference, Darnell can back it up and tells the world how it is done. The client handles their own accounts and Darnell gets no pay for this advise. We have a lot of Madoff’s in the investment world. So you want to find an advisor that follows the “Prudent Man Rule” and you must know more about what you want to do with your money than the advisor.

The lession here is: The more you know about your investments, the better off you are in keeping your money. The only person with your interest in mind is you!

References:

1. ^ "Voice of America pronunciation guide". Voice of America. http://names.voa.gov/SearchAction.cfm?searchtype=2&Name2=madoff. Retrieved March 18, 2010.

2. ^ Becker, Bernie (March 26, 2009). "Money From Madoff Is Rerouted". The Caucus (New York Times). http://thecaucus.blogs.nytimes.com/2009/03/26/money-from-madoff-is-rerouted. Retrieved March 29, 2009.

3. ^ a b Kouwe, Zachery; Peter Edmonston (June 23, 2009). "Madoff Lawyers Seek Leniency in Sentencing". New York Times. http://dealbook.blogs.nytimes.com/2009/06/23/madoff-lawyers-seek-leniency-in-sentencing/. Retrieved September 12, 2009.

4. ^ Gendar, Alison (October 31, 2009). "Bernie Madoff baffled by SEC blunders; compares agency's bumbling actions to Lt. Colombo". New York: Nydailynews.com. http://www.nydailynews.com/news/ny_crime/2009/10/31/2009-10-31_bernie_baffled_by_sec_blunders.html#ixzz0Vaymp8JU. Retrieved March 16, 2010.

5. ^ a b "Wall Street legend Bernard Madoff arrested over '$50 billion Ponzi scheme'". The Times (London: Times Newspapers Ltd.). December 12, 2008. http://www.timesonline.co.uk/tol/news/world/us_and_americas/article5331997.ece. Retrieved December 13, 2008.

6. ^ "Report of Investigation Executive Summary" (PDF). http://www.sec.gov/spotlight/secpostmadoffreforms/oig-509-exec-summary.pdf. Retrieved March 16, 2010.

7. ^ House Committee Financial Services, Investigations of Madoff Fraud Allegations, Part 1 C-Span

Saturday, September 11, 2010

Planning Her Bond Portfolio

A good friend lost her job in the most recent down sizing of Corporate America. She came to me because she did not know what to do with her 401k. So I rolled her $40,000 into an IRA back in September 2009. As of Sept. 2, 2010, her account was worth $48,265.83. On Sept. 11, 2010, it was worth $48,602.50. My friend’s return is 1.05% per month or YTD 9.41%. For a year her return is 21.5% or over 1.79% per month. She would had more in her account but she had to make a withdraw of $10,000 to cover some personal expenses. One fact remains! Very few investments are giving this type of return.

By this time next year, her account should be worth at least $51,762.59. She will have at least an increase in her account of 7.245%, providing no bankruptcies of the companies that I placed in her account occurs.

Bankruptcy of her companies would be her only negative that can happen to her account. When a company files for bankruptcy, interest and principal is tide up for months, even years. The investor may get stock and bonds in a newly formed company, bonds with a lower interest rate, stock only in the new company, or cash. Very rarely will the bond holder walk away with nothing. Stockholders usually walk away with nothing. This is why when it comes to Business Risk, bond holders are in a better position than stockholders.

Since this woman will be at retirement age in less than 10 years, I invest her money in a conservative junk bond portfolio. The discounted bonds that I place her account into only go out (matures) no more than 7 years. Bonds are rated B- to BBB. I buy only bonds that give interest monthly, quarterly, or semiannually. And I only buy bonds that have a “Yield to Maturity” of 8% or greater.

Look at the data chart below.

With the online Brokerage firms that we discussed before, it is easy for me to find out how much interest and dividends I can expect from her income stocks and bonds. This information allows me to plan her purchases of bonds in her account. As of September 2, 2010, she already had $717.43 in her account. At the end of December, 2010 she will have enough to buy another bond which will give interest in the future. Another bond will be purchased at the end of February. Then major bond purchases will take place in June, July, and August because bonds purchased in 2009 will mature.

This is why her net worth will increase more than the 7.245% projected if nothing at all happens in her account for a year.

Estimated Income for Her Account

Date___________Amt______________Running Totals

Balance in Acct _________________ $717.43

OCT 2010___ $8.75____________726.18
NOV 2010___ 66.38________ _____792.56
DEC 2010___ 671.25___________ 1464.31
At the end of December 2010, 1 new bond will be purchased
JAN 2011___ 165.75
FEB 2011___ 827.50
I estimate 1 new bond will be purchased
MAR 2011___ 8.75
APR 2011____ 8.75
MAY 2011____ 66.38
JUN 2011___ 671.25
A major bond purchase will take place.
JUL 2011____ 165.75
A major bond purchase will take place.
AUG 2011____ 827.50
A major bond purchase will take place.
SEP 2011______ 8.75

I use ZionsDirect Online Brokerage to look at the dates that her interest is due then I plan my future purchases accordingly. Below is the ZionsDirect website that I use.

https://www.zionsdirect.com/

The directions to get to the Income Summary is as follows;
1. logon with your ID and password
2. Go to Account info.; Portfolio; Summary Tab
3. Click on Estimated Income.

At the bottom of the Page should be your income summarized by month. From this, you can add up the money that will hit your account. When it adds up to over $1,000, you will know that you have enough money to buy at least one discounted non-investment grade B- to BBB bond.

This is what I do for my friend and I might spend up to 2 hours per year on it. Very little time spent to make big returns.

If you open an account, please tell them that you heard about this firm from me.

Sunday, September 5, 2010

Are You Investing or Are You Chasing Fads?

We looked at GNP, GDP, CPI, inflation, deflation, and stagflation. I think we are ready to use this information to understand how the many markets around the world, labor, and business work.

Fortune Magazine had an article recently called "5 investing bubbles." Real Estate had a long run from the 1940s to the beginning of this century. The Tech Stock fad ran "off and on" from the 1960s to just a few years ago. We had the Japanese stock fad that ran from the late 1970s to 1990. These bubbles usually end in crashes. With the growth of IRAs and 401K programs, people allowed themselves to get into the greatest bubble since the 1920s. The last people to get into these bubbles are the people who lose the most.

This is why I do not like bond funds. I see that newspapers and brokers recently are talking about them. Big name “broker dealers” are making their way around the "talk shows," promoting Bond Funds since the big run in bonds are at its peak. Remember, bond funds do not mature. Bonds have a maturity date. When that comes, my principal is returned to me. Bonds mature so I do not have to deal with a bubble. That is why I am in bonds not funds. Funds do not mature which means that they go up and down with the businesses in the fund portfolio, inflation, deflation, and interest rates. Any investment falls in and out of favor with speculators and investors. People who deal in Funds will see a bubble when the bond fad is over.

Investors have lived through catastrophic crashed in the past. You'd think we would have learned to avoid the sort of group enthusiasm that causes an investing category or group to see its value inflate beyond all logic. But being human, we have not. Professor Didier Sornette, of the Swiss Federal Institute of Technology studies bubbles. Sornette says low-interest-rate, low-return environments, where everyone is looking for safe havens, are perfect for new investment fads. Didier told Fortune Magazine that, "This is a fantastic time for bubbles. Right now there is not one bubble, but many, in our analysis." Fortune Magazine has identified 5 bubbles to look out for.

Bubble Number 1, the Chinese Bubble.
A decade-long boom has lifted many of China's 1.3 billion citizens out of poverty and now the Chinese people are great consumers and builders. As a result, China's stock market has risen nearly 300% over the past 15 years. Doesn't this sound like the Japanese stock market of the 1980s? Much of the Chinese building and spending has been funded by debt, according to Fortune. Last year Chinese banks made twice as many loans as they did in 2008, boosting lending by the equivalent of 29% of GDP. Housing prices continue to rise despite reports that 65 million dwellings in China are vacant, Fortune says. Doesn't this sound like the United States in 2006?

Fortune's analysis -- Cracks appear to be slowly forming. China's stock market is down this year, and in July its manufacturing expanded at the slowest pace in 17 months. China's central bank has tightened its policies in an effort to rein in risky lending. Some savvy investors, including short-seller Jim Chanos, have turned bearish. Chanos said in April that China "is on a treadmill to hell." Looks a lot like the US Stock Market in 2007.

Bubble Number 2, the Interest Rate Bubble.
At a time of economic uncertainty, investors want safety. U.S. Treasuries still inspire more confidence than, say, Greek or Spanish government bonds. Senior Portfolio Manager, Doug Noland of Federated Prudent Bear Fund said, "Bubbles happen because there is no restraint on borrowing, and that's exactly the situation we have now for the federal government."

U.S. bonds have risen 14% in 2010, even as the government has issued $3.3 trillion in debt over the past two years. The supply of US bonds should have brought down bond prices but it has not! The national debt is still a manageable 40% of GDP. Economists warn that growth will slow when it reaches 90% of GDP. The Congressional Budget Office projects it will take nine years to get to that level, and that's if Washington, which is debating the deficit, does nothing. This is why Doug says that this is "the big one!"

Bubble Number 3, Shale Stock Bubble.
Fortune Magazine says, shale massive rock formations deep below ground, may hold enough natural gas to satisfy U.S. needs for the next 45 years. Pure-play shale companies such as Range Resources and Southwestern Energy have seen their stocks rise 72% and 160%, respectively, over the past five years. With gas prices already low -- $4.30 per million BTU -- these discoveries will add supply and further depress prices. The problem is that the political climate may not be right. Environmental fears are fueling opposition to shale drilling. New York, where the massive Marcellus shale is partially located, is considering a temporary ban.

Yet Range (a large Marcellus leaseholder) has a price/earnings ratio of 65 based on 2010 earnings, a huge premium to such diversified gas companies as Chesapeake and Devon, which have P/Es of 7 and 11, respectively. "Everyone is betting gas prices will go up," says Oppenheimer analyst Fadel Gheit. "But I don't see it.", as published by Fortune.

Bubble Number 4, the Cotton Bubble.
I like my cotton underwear but now is the time to sell everything I have made of cotton. At this moment they are worth something. According to Fortune, cotton prices have nearly doubled in the past year to 80¢ a pound. The world has been using more but producing less. Last year's U.S. cotton production dropped to 12.2 million bales, the smallest crop in 20 years. And rising populations are causing nations like China and India to devote more land to foodstuffs and less to cotton.

The two-year run has given farmers plenty of time to ramp up production, which means more cotton will soon be on the market and lower prices will follow. The USDA estimates that U.S. production will hit 18.6 million bales this year, up 50% from a year ago. Analyst Sharon Johnson of First Capital Group says cotton has traded around 50¢ a pound for much of the past decade. When cotton has spiked above 80¢, it hasn't stayed there for long. She claims, at that point, "Prices are overvalued."

Bubble Number 5, Gold Price Bubble.
I would be a seller of gold today. Not a buyer of gold. Fortune says, gold was rising even before the recession. But panic over world markets and the health of European and U.S. economies propelled it into the stratosphere. Prices have risen 150% in the past five years, repeatedly setting new records.

Meanwhile, small investors have stormed in. Some fear that stimulus spending could lead to massive inflation; they believe a tangible material like gold will hold its value better than other assets. I agree with Fortune that inflation isn't rising. It's falling and likely to be restrained for some time by a very weak economy. Gold has already started slipping. It declined 6% in July to a recent $1,160 an ounce. Some economists are warning that continued weakness could lead to deflation. If that happens, expect gold prices to collapse.

So like Fortune Magazine says, watch out for market bubbles. They can be hazardous to your financial health!

Friday, September 3, 2010

What is the Velocity of Money and should I care?

The Velocity of Money is a term used to describe the rate at which money is exchanged from one transaction to another.

Investopedia explains Velocity of Money this way! Velocity is important for measuring the rate at which money in circulation is used for purchasing goods and services. This helps investors gauge how robust the economy is. It is usually measured as a ratio of GNP to a country's total supply of money. We talked about GNP in the last Blog.

Let’s talk about this on a microeconomic scale first so that you can understand what I am talking about. Just to give you an example; the Velocity of Money is higher for Ford Motor Company Car Division than it is for the Tank Division that builds tanks for the US Army.

Most of the time, the Army does not do anything productive. They buy equipment like tanks and the tanks do nothing at all. Very few times are they sold to another Army compared to cars. The army uses them in mass when we are at war. That is the time when they may need a great deal of maintenance.

Most of the time, Ford Motor Company makes cars. These cars are sold to the public. The public uses the cars to make money for the family. Then the car breaks down and must be fixed at a maintenance shop. The maintenance shop needs mechanics. Also the car maintenance shop needs suppliers. The Suppliers need raw material and labor. To make the raw materials that go into parts, they need another supplier that can make these sub-assemblies such as light bulbs and door handles. Then you need a light bulb company that makes the light bulbs. These light bulbs are broken down into parts and someone must make them.

Ford may sell tanks to the US Army but the orders are limited. The parts orders are limited. When Ford makes cars, they make cars all the time. The supplier makes parts all the time. The cars are used in production of other goods and services all the time.

So the Velocity of Money is higher making cars than making tanks because the activity around cars when it comes to production is higher than with tanks. Money changes hands more with cars than with tanks.

On a Macroeconomic scale, the more companies that a nation has that has high Money Velocity, the higher the employment of that country will be. The higher the Money Velocity, the higher the stocks of these companies will be. This is what we had in the 1960s. Our factories were making things and these factories where selling things to the nation and around the world. This is what kept us employed.

The reason why we have been moving toward a Great Depression for the past 30 to 40 years is because our political leaders allowed our factories to leave the United States. In its place we have service companies making hamburgers. We have service companies that push gambling, insurance, talking on the cell phone, and computer games. The Velocity of Money is not there. We buy products and services but the factories that make the parts and the full product are in other countries. So the Velocity of Money is very low and getting lower in the United States.

Couple that with a rise in the age of the national populations. With an older population, your Velocity of Money will be lower because more of your people in this country do not need as many goods and services. The children born in the 1920s, 1930s, and 1940s are dying at a faster and faster rate. They are leaving behind a large supply of houses, cars, furniture, and etc. Why buy them when grandmother will just give them to you?

Look back between 1920 and 1940 and you will see that the US population was older. Few children were born in the 1930s. This helped maintain the Great Depression of the 1930s. The baby boom did not come until 1946. That accounts for the prosperity years between 1960 and 1980. These baby boomers had to buy home, cars, clothing, and other goods to make life more comfortable. Now these same people are retiring and starting to die out.

This is why the Velocity of Money will remain low for years to come. The Depression will remain with us for some time. Inflation will continue to be low. Cash will continue to be “king.” Stock prices in the United States will remain stagnant but the Bond Market will continue to be bullish.

Next time we will talk about bubbles brought about because of market fads. As of Friday, Sept. 3, 2010, my bond portfolio is up 21.64% for the year, 72.09% since January 2009 while the Dow is down for the year. Some people say that I am in a bubble. We will talk about bubbles next time.

Wednesday, September 1, 2010

What is Gross Domestic Product and Why should I Care?

This is how investors compare national economies around the world. They use the Gross National Product (GNP). If a GNP of a country is rising far faster than the United States then you may want to look at buying investments that represent companies in that country. The basic formula for domestic output combines all the different areas in which money is spent within that country, and then combining them to find the total output. The expenditure approach is basically an output accounting method with a calculation that looks like this;

GDP = C + I + G + (X - M)

Where:C = household consumption expenditures / personal consumption expenditures
I = gross private domestic investment
G = government consumption and gross investment expenditures
X = gross exports of goods and services
M = gross imports of goods and services

Note: (X - M) is often written as XN, which stands for "net exports"

The Gross National Product of the United States is five times greater than China. But China’s GNP is growing greater than 10% per year recently while the United State is growing at 2% per year.

But China is showing signs of slowing. That means that investors just getting onboard in China may be looking at a Chinese Stock Market Crash at worst or a Stock Market Decline at best soon. The same thing happened about 90 years ago when the United States GNP showed signs of slowing just before the Stock Market Crash of 1929 and the Great Depression started.

This is how you can tell if your foreign stocks or mutual funds are about to prosper or crash. Next we will look further into this depression and how it is related to the Depression of the 1930s.