A blog to share my thoughts about trading, frugal living, money and the economy. Occasionally I might even throw in a few things about better living, technology, futurism, and science but these are always in some way related to finances or speculation.

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Location: Phoenixville, Pennsylvania, United States

"I have become all things to all men so that by all possible means I might save some."

Tuesday, October 31, 2006

Card Tricks - Making Money from Credit Card Companies

By request I am elaborating on something mentioned earlier - that is, how I make thousands of dollars off of the credit card companies. First let me say that even though I don't think any of this is rocket science, it definitely is not for everyone, so be careful before you just blindly imitate me.

First the obvious - I have a primary card that gets me 5% cash back on gas, groceries, and drug store purchases, 1% cash back on everything else. I put everything I possibly can onto that card to maximize the everyday expense rewards and benefit from one month delay in paying for things (interest benefit). And of course, I always pay this balance off in full every month and use my credit wisely.

The bigger money though, comes from taking advantage of zero percent offers from the credit card companies. READ THE FINE PRINT: You have to play the game on their terms. You must look for caveats like transaction fees (you must have no transaction fee or a CAPPED transaction fee, you must make sure the 0% applies to the type of transfer you are doing (balance transfer or cash advance). You must also determine the EXACT date for which the loans must be repaid in full to avoid massive fees (and they do their best to trick you, so you REALLY have to get the correct date in writing from the company and set up a reliable reminder giving yourself enough time to move the funds around). You must NOT USE the 0% cards for ANYTHING while you have the loan (unless all purchases are also at 0% for the same timeframe). And of course you have to be organized enough to pay the minimum balances every month, I have an electronic reminder system for this Memo To Me - Free Reminder Service and pre-schedule all payments online, so it isn't a real big deal. For the time that I put into it, I am compensated at a rate >$500/hour.

I currently have more than $150,000 in zero percent credit card debt. And you should SEE the looks on people's faces when I tell them I have that much credit card debt! :) There are little tricks for raising your credit lines, managing your credit score, consolidating lines etc. You can find all of the details elsewhere on the net (fatwallet, app-o-rama, creditboards, etc).

SO this borrowed money sits in either money market accounts or CDs with rates of return currently from 5.15% to 6%. I'm making about $7-8k a year doing this, not huge, but enough to pay my property taxes and go on a vacation every year. The offers are probably better now than I have ever seen before, but it is a cyclical thing, I don't expect it to be this good forever, the deals will ebb and flow over time.

There is also the signup bonus cash, which can be considerable, and is yet another way I make money from the credit card companies. These offers seem more permanent. I've gotten anywhere from $50-$100 cash, airline tickets, ipods, and palm pilots (hocked on eBay). You can easily make a thousand or more from signup bonuses alone in any given year.

WARNING - it is important to understand these techniques in full before trying them. You should understand how your credit score will be impacted, and you should have a good idea of how a lower credit score might impact your own life (for example if there is a possibility that you will have to take out a mortgage or car loan over the next year, even job applications these days often pull a credit report).

I really could care less at this point in my life what my credit score is, I don't need credit to buy anything. But to tell you the truth, I haven't really trashed my score THAT much (I have no late or missed payments which is obviously important - but I do have high total utilization and lowish age of accounts which lowers my score). My score is still >700 and paying off the loans would bring it higher very rapidly. The fluctuating score is expected, and the score should generally be brought up significantly before doing mass credit applications.

NOTE: Temporary score "hits" will occur when you apply for credit, which is one reason it is best to apply for as many cards as you can at the same time because these hits take a few days to flow though the system. The score decrease from applications will reverse itself after a couple of months. It is important to understand that just having a lot of unused credit cards does NOT lower your score, in fact it generally makes it higher (because you will have lower total credit utilization) and most experts recommend that you NEVER cancel/close any credit card you own even if you do not use it (you can however move most of its credit line to another card).

Follow the links in this post if you want more information.

Thursday, October 19, 2006

Don't Buy Stuff You Cannot Afford

I keep hearing again and again silly advice like "Buy the biggest home you can get a loan for since homes tend to appreciate over time". But I say stick to something you can afford, a house is not really an investment. Median home appreciation historically over decades, is only about 5-6%. If inflation is 4%, and you are paying 2% in real estate taxes, you are basically braking even (usually losing money after maintenance and improvement costs - not to mention transaction costs and insurance). Don't base your appreciation expectations on what has happened in the last 5 years. To me, investment real-estate is something that is cash flow positive after all expenses, and since your personal residence has no cash flow (unless you have tenants) it isn't an investment. A house is a lifestyle choice. Don't sell your future short because you are sinking everything into a house you cannot afford.

Don't Buy Stuff You Cannot Afford
Scene: a typical American kitchen. A husband (Steve Martin) and wife (Amy Poehler) are puzzling over their finances.

Wife: Oh, I just can’t get these numbers to add up
Husband: Like we’re never going to get out of this hole.
Wife: Credit card debt, does it ever end?
Salesman: [entering from who-knows-where] Maybe I can help.
Husband: We sure could use it.
Wife: We’ve tried debt consolidation companies.
Husband: We’ve even taken out loans to help make payments.
Salesman: Well, you’re not the only one. Did you know that millions of Americans live with debt they can not control? That’s why I developed this unique new program for managing your debt. [Holds up book] It’s called, “Don’t Buy Stuff You Cannot Afford”
Wife: Let me see that. [Reading from book] If you don’t have any money, you should not buy anything. Hmmm … sounds interesting.
Husband: Sounds confusing.
Wife: I don’t know honey, this makes a lot of sense. There’s a whole section here on how to buy expensive things using money you’ve “saved”.
Husband: Give me that. And where do you get this “saved” money?
Salesman: I tell you where and how in Chapter 3.
Wife: OK, what if I want something but I don’t have any money?
Salesman: You don’t buy it.
Husband: Let’s say, I don’t have enough money to buy something. Should I buy it anyway?
Salesman: No.
Husband: Now I’m really confused.
Salesman: It’s a little confusing at first.
Wife: What if you have the money, can you buy something?
Salesman: Yes.
Wife: Now, take the money away. Same story?
Salesman: Nope. You shouldn’t buy stuff when you don’t have the money.
Husband: I think I’ve got it. I buy something I want, then hope that I can pay for it. Right?
Salesman: No. You make sure you have money, then you buy it.
Husband: Oh, then you buy it! But shouldn’t you buy it before you have the money?
Salesman: No.
Wife: Why not?
Salesman: It’s in the book. It’s only one page long. The advice is priceless and the book is free.
Wife: Wow. I like the sound of that.
Husband: Yeah, we can put it on our credit card.
Announcer: So, get out of debt now. Write for your free copy of “Don’t Buy Stuff You Cannot Afford”. And, if you order now, you’ll also receive, “Seriously, If You Don’t Have the Money, Don’t Buy It” along with a twelve month subscription to “Stop Buying Stuff” Magazine. Order today.

There seems to be a whole new generation of people that have not had this timetested advice passed down to them from their parents. The latest incredible example is Casey Serin a 24 year old real estate guru with over $2 million in debt he cannot possibly repay. Greed makes you stupid.

Wednesday, October 11, 2006

Election Cycles and Inverted Yield Curves

From my favorite fund manager and market commentator, Dr. Hussman:

"Since July, we've observed an inverted yield curve, with the 10-year Treasury yield below the 3-month Treasury bill yield. Bill Hester observed last week that whenever the Fed has raised the discount rate by at least 1%, ending in a yield curve inversion for more than a few weeks, the U.S. economy has entered a recession after a median lag of 8 months. We can't rule out the possibility that the current yield curve inversion will be followed by further economic growth, but such an exception would be outside the oval.

"On the valuation front, the current P/E ratio for the S&P 500 is 18 times record earnings (on record profit margins). Historically, the combination of an inverted yield curve and a P/E ratio over 15 has been associated with negative market returns, on average. The current observation, moreover, is even further outside the oval. The only time we've observed an inverted yield curve and a P/E at or above 18 times record earnings was at the 2000 market top. The runner-up (just below 18) was near the heights of the “Go-Go” market leading into the '69-'70 bear market."

" there's a distinction between analysis and superstition. Wall Street is littered with the ruins of people who mined for patterns in the data and invested on them without knowing why they should work. In terms of the 4-year cycle, the typical explanation for the strong seasonal returns is that fiscal and monetary policy often become accommodative during this part of the Presidential term. That was certainly the case in late-2002 and 2003, but isn't quite so likely here.

"Beyond that, there are other factors at work. In 12 of the 15 cases, the S&P 500 had been at least 10% below its prior 52-week high within several weeks (and no more than 6 months) before the seasonally favorable period. At present, the market is strenuously overbought, and long overdue for a 10% correction.

"Of the 11 recessions in the post-war period, 9 were in force a year or less prior to the seasonally favorable period. Evidently, the majority of the strength was linked to post-recession recovery momentum.

"Only 4 of these periods began at P/E ratios above 15 on the S&P 500, and of those, none began with the S&P 500 above its 6-month moving average (as it clearly is at present). Once again, you generally build sustained rallies off of prior losses, not off of overextended advances.

"Of the 9 cycles since 1963 (when Investors Intelligence began publishing its advisory sentiment data), all but one began at a lower level of advisory bullishness than today.

"In short, the favorable 4-year seasonal period has a “snap-back” component to it, where the market was typically recovering from a recession, a substantial market drop, or at least a period of consolidation. Indeed, many of the start-years (e.g. 1970, 1974, 1982, 1990, 2002) are familiar exactly because they represented memorable bear market lows."

Monday, October 09, 2006

The House that Swallowed Don and Shelly Cruz

The House that Swallowed Don and Shelly Cruz

The winners of a TV dream home have seen their giant fantasy house become a financial nightmare.

I really hope this isn’t representative of America right now. The wife is a secretary, the husband stays at home and doesn’t work, the kid is 10 years old they have hired help for housework (what does dad do again while kids at school and wife is working?). They can’t even sleep in the master bedroom because dad needs to be closer to 10 year old son whom he obsessively watches via live video feed? Thousands for electricity every month? Seven cars for two adults? $3k/month for “upkeep”, $7k/year for home insurance? These people are idiots. Took out a million dollar loan to pay $672,000 in taxes. I suspect these guys will blow everything even after moving back to their old house.

But the important part of the article:

“But like the Cruzes, millions of Americans may soon find themselves struggling to pay the bills for a house that's bigger than they really need and suddenly more expensive than they can afford.

Blame the strain of gigantism that has crept into U.S. home design, as well as rising interest rates and the expiration of low-rate introductory periods on popular adjustable-rate loans. estimates that at least 1 million homeowners will see their house payments double in the next two years. A study by First American Corp. suggests that one in seven who have recently taken out adjustable-rate mortgages will have trouble making their payments.”

Thursday, October 05, 2006

Global Warming, PEAK OIL, and Your Portfolio

A friend of mine has a skeptic's interest in global warming. Recently he dragged me along with him to a lecture on this topic. The presentation was, if anything, a sad example of the decline in quality of education in America. The lecturer claimed to be "an educator" but I have no idea what he was educating us about, and his old school slide show was a mix of random "man is bad" photos and personal anecdotes (like I got a bad sunburn on vacation last year - maybe from the hole in the ozone or global warming or something...).

Anyway, I actually am an environmentalist of sorts and have always been concerned about the environment so I don't want anyone to get the wrong idea. I drive economy cars that get nearly 40MPG, I use compact florescent lighting in my house, use heating and cooling sparingly, etc. Even though I'm skeptical about everything including global warming and peak oil scaremongers, I still think its prudent to think about various future scenarios and how you can thrive under any circumstances.

If you read some of the more balanced reviews of "THE INCONVENIENT TRUTH" over at Amazon you will see that it is unbalanced, contains quite a few errors, omissions, inconsistencies, and unsubstantiated opinion. Some scientists today believe the current warming trend has actually peaked, others recognize global warming and man's contribution to it but insist that the empirical data indicates that it is not and will not be a serious problem (for example see Meltdown: The Predictable Distortion of Global Warming by Scientists, Politicians, and the Media (written by Patrick J. Michaels, a professional climatologist with a Ph.D. in Ecological Climatology, who is a professor of environmental science at the University of Virginia). But perhaps one of the stranger aspects of the debate is that the global warming doom and gloomers generally talk about a couple degree temperature change over the next 100 years despite the evidence that we are unlikely to be dumping massive quantities of greenhouse gasses into the atmosphere for another 100 years.

This is one reason I'm not that concerned about global warming (not to mention that its even possible more people would benefit from warming than would be harmed). Peak oil is in my opinion a much bigger potential issue. We have become utterly dependent on cheap, easy oil and we are currently living in the great oil empire era. None of our ancestors had to face a problem like peak oil, so it's just not on the public's radar.

Last night I watched a documentary called The End of Suburbia

It’s all about peak oil. First let me say that the film is full of sensationalism and political nonsense, and the peak oil junkies in the film will probably be wrong about almost everything :) That said, I'd recommend you check it out if for nothing else, just to stimulate thought. Apparently most oil industry experts and geologists agree we will reach global peak oil before 2030 (the consensus range is more like anytime from right now to 2030 with many pointing to the 2015-2025 timeframe). I should also note (and you won't see this in the film) that some experts (like the execs at Exxon and Saudi Arabia's Aramco) believe we have over a 100 years worth of supply at today's consumption rate so the peak oil timeframe is very much in debate. That said, the only way we will stay at the existing consumption rates is if we conserve (improve efficiency or alter usage behavior) or have zero global growth which is extremely unlikely.

Yes, many of the peak oil junkies are similar to the global warming junkies. They correctly identify a trend but badly gauge the “how soon, how severe, and who cares” aspects. Global peak oil will probably happen sometime between 2020 and 2030. The biggest variable is simply what kind of energy demand changes we will see. 3 trillion barrels of reserves (if even accurate) may not be all that much in the grand scheme of things depending on demand. For example India’s automobile sales jumped 18% last year and its truck and bus industry is growing at a 30% pace (China is similar). Over the next 20 years India and China alone could end up with 2, 3, 4 times the energy demands of the United States (why not, they have 10 times our population). Meanwhile the US is currently using more than 25% of global oil production while at the same time oil production is in decline in 33 of the 48 largest oil producing countries.

I think the decline of global oil production after we hit peak oil will probably mirror what we saw in the US when we peaked in the 70’s – a pretty steep decline but obviously not instantaneous. The rapid rise in prices will stall the decline and give us time to move towards viable alternatives. I don’t think it will be the end of the world, just the end of the world as we know it! :) The new world will be even better than the old one; energy will probably end up being cheaper, cleaner, and more abundant than it is now, which will lead to new records in productivity and quality of life.

The time (perhaps a decade or two) we have before peak oil is exceptionally long when it comes to technology and investing, so I’m optimistic that alternatives will become viable before oil supplies become seriously constrained. We will have many years, decades maybe, of post-peak oil (albeit with tight supplies and elevated prices) giving us time to work out and deploy alternatives. Nothing is going to happen over night. There is a lot of promising research going on right now in the fields of battery design, solar and geothermal energy, hydrogen, organic based fuels, and many others. I have even personally made my own biodiesel in 55 gallon drums from waste vegetable oil (acquired from local restaurants) and run it in a friend's Ford truck. Biodiesel is a great renewable alternative, but we are talking about MASSIVE changes that must take place before alternatives can be rolled out and some argue that they CANNOT be rolled out at the required scale (for example due to land constraints or manufacturing capacity constraints, or the cost of deployment, particularly in a post-peak oil world). Many also question the net energy equation of alternative fuels like ethanol, hydrogen, and biodiesel (the energy that must be put into producing and delivering the fuel vs. the energy that the consumer will pull out of it).

There will undoubtedly be some new oil and gas discoveries, some benefit from being able to extract more from existing wells, and some supply from non-traditional sources like the Canadian tar sands and deep offshore drilling. But most experts suggest that these will not be enough to satisfy global demands.

One of the more famous geologists of the 20th century, Hubbert, predicted in 1956 that the US would hit peak oil by 1970 and he was pretty much right on (we peaked in ’71). One of the worlds biggest oil companies, chevron, now has their own discussion web site related to peak oil ( so even big oil players are taking this seriously. Here’s a quote from Chevron's site: “While supplies are currently abundant, they won't last forever. Oil production is in decline in 33 of the 48 largest oil producing countries, yet energy demand is increasing around the globe as economies grow and nations develop.”

When we first hit peak oil, it will be somewhat uneventful. In fact, we won't KNOW we hit peak oil for at least a year after we reach that milestone. Then prices will rise more rapidly. Perhaps slowly at first, then more dramatically. People will first search for explanations, then they will play the blame game. In fact we have already seen this in 2006 - we had a dramatic rise in prices with all sorts of mixed explanations and LOTS AND LOTS of blame game and political posturing - this has led some to suggest we have already hit peak oil. This is unlikely though, in fact oil prices have fallen pretty hard over the last few months, production levels have hit new highs, AND OPEC recently announced production cuts - so by definition we have not hit peak oil). On the other hand Bank Credit Analyst announced last week that “Global oil production growth has been decelerating for almost two years, and is now nil. Moreover, there is a marked divergence between global oil production (decelerating) and total global industrial production (accelerating). The deceleration in oil production is striking given that the number of operating rigs has climbed by almost 50% since 2004.” So a big increase in operating rigs and very little increase in total production - what does that tell you?

Of the three largest oil fields in the world, two have peaked. Mexico announced that its giant Cantarell Field entered depletion in March, 2006, as did the huge Burgan field in Kuwait in November, 2005. Due to past overproduction, Cantarell is now declining rapidly, at a rate of -13% year over year. In April, 2006, a Saudi Aramco spokesman admitted that its mature fields are now declining at a rate of 8% per year, and its composite decline rate of producing fields is about 2%, thus implying that Ghawar, the largest oil field in the world, may have peaked.

Anyway, after the initial price increases, it's only going to get worse. Of course things will move in cycles, as higher prices and shortages reduce demand. Everyone will feel the squeeze at first, then only the "rich" countries will be able to afford substantial supplies. That means we might keep the pumps flowing in the United States for many years after we hit peak oil (assuming the middle east cares more about money than ideology which remains to be seen). But the decline will be terminal.

Only if technology does not save the day (an unlikely scenario): We would be forced to virtually eliminate long commutes and there would be a new build out of mass transit, especially rails. Many would be forced to either live in cities or live in the country and grow their own food - exactly the way it used to be before the great modern oil era. There will be a surge in organic farming (which could be a good thing, although expensive and labor intensive). Domestic manufacturing will have a big resurgence because it will be prohibitively expensive to import goods from low cost of labor countries as we do today. And of course by that point there will be a frenzied focus on alternative energy. More nuclear and coal power plants will be built (for as long as we have coal and radioactive isotopes) and more people will heat their homes with wood, possibly resulting in deforestation.

I can't emphasize enough the fact that any serious consequences from the end of the oil age could be completely avoided given technological advancements so you can't go betting the ranch on a disaster that probably won't materialize. But I can guarantee there will be exceptional investment opportunities as a result of peak oil, disaster or not. There are going to be BIG winners and BIG losers resulting from the inevitable changes that will occur and you should be thinking about how to invest accordingly and what to look for in the future. If and only if no viable solutions emerge, the transition will be very painful for financial markets, with international indexes taking the biggest early hits. The optimists usually triumph, but every investor should be cognizant of long range trends that may impact investments and behavior.

Monday, October 02, 2006

Deceptively Narrow Rally in Bigcaps and Fed Hope

The market has been acting well over the last few months, even the housing sector which was the focus of much doom & gloom has had a big rally. There has been muted excitement about the DOW hitting a new all time high. And yet MANY signs of concern persist.

Lowry's writes: “The rally in big-caps has been deceptively narrow. As of Thursday's close, with the DJ Average within just a few points of a new all-time high, none of the 30 components rose to new all-time highs. Further, 63.3% of the components showed losses of -20% or more from their individual all-time highs, and 43.3% showed losses of -40% or more. As of Thursday's close, 5.7% of domestic common stocks rose to new 52-week highs, while 26.7% already show losses of -20% or more. A concern for the future is that this degree of selectivity has typically been found near major market tops.”

John Hussman further writes: "Of all the hopes that investors have at present, the strongest ones are centered on the Federal Reserve and its probable decisions regarding the Federal Funds rate. This obsession with the Fed comes at the expense of attention that should be focused on profit margins, normalized valuations, market internals, credit spreads, fiscal policy and the U.S. current account. In hopes of refocusing attention on factors that matter, my hope is that the following bit will further explain why the Fed is, in my view, irrelevant.

"I should note at the outset that yes, as long as investors believe the Fed matters, it is important to consider the Fed. The real issue, however, is whether the Fed actually has any impact, and my argument is that it does not. It's an argument that goes against what we're conditioned to take for granted (and even what I once used to teach my own economics students). Nonetheless, the evidence against an effective Fed, when you scrutinize the data, is fairly compelling."

I recommend you read Dr. Hussman's analysis (he publishes every Monday at I remain very cautious and largely out of the market with the exception of some HSGFX (Hussman Strategic Growth Fund), a tiny exposure to international funds (American Funds), and a short on oil and coal (uncovered calls written almost to the day at the recent peak of the oil market).

If you are interested in lower risk internation funds see this article:
3 global funds for uncertain times.