Fiscal irresponsibility: 2007 U.S. Budget

Quick question for you. How much more did the U.S. spend in 2007 than it “earned”? According to Wikipedia, the government will rake in $2.4 Trillion from 2007 taxes. The 2007 “budget” calls for $2.8 Trillion in expenditures, but this does not count supplemental “war on terror” funding of at least $70 Billion. So, last year our government spent $470 Billion more than it took in. That means the answer is: $470 B/$2,400 B = approx 20%. TWENTY PERCENT!

Let me say that again – in 2007 the U.S. government spent 20% more than it received.

What kind of example does this provide for us? No wonder the U.S. has a negative savings rate, and the dollar isn’t what it used to be. And, there’s no end in sight. According to early reports, the ‘08 budget calls for $410 B of deficit spending (and this is with war spending $120 B lower than 2007 levels. If you believe it’ll remain that low, I have a nice package of subprime mortgages I’d like to sell you…)

It gets worse. Due to many years of such atrocious “budgeting”, our government owes itself (social security and medicare “surpluses” that have already been spent), other countries, corporations, and individual bondholders $9.2 Trillion dollars – or in more real terms – $60,100 per working citizen (or $30,400 per man, woman, and child). And this is going up at a steady rate (over $1M/minute due to interest alone).

Ask yourself a question – how long would you be able to survive if you had $60,100 in additional debt and you spent 20% more than you made? I’m guessing bankruptcy would soon be calling for most of us (considering that the average working U.S citizen earns $32,140). This picture only gets worse once we consider that the U.S. population is aging, and soon there will be no social security and medicare “surpluses” for the government to spend. 

Isn’t this something we should care about? Not just care about – be horrified by! I think it’s our civic duty to implore the people authorizing the spending to change their ways. It’s why I voted for Ron Paul in the primary. I’m fairly certain he has no chance of winning (maybe he’ll get enough votes to make the other candidates nervious and inspire change) but at least I’m trying.

Are you?

Even more important – will you?

If you don’t want to vote for Ron Paul, how about writing your congressional representatives? I pledge to write my congressional representatives within 30 days. Anyone want to join me?

Volatility, thy name is stock market

Sheesh! It’s been a trying few weeks to have $ in the stock market. There have been several days where I have “lost” thousands of dollars. Lost in quotes because the losses, like the preceding gains, were on paper. Or at least that’s what I keep telling myself as I try to remain level headed and calm. I’ve taken a keen interest in money management and the stock market for years. I’ve been reading the occasional book by Robert Kiyosaki (of Rich Dad, Poor Dad fame), Peter Lynch (One Up on Wall Street), Benjamin Graham (The Intelligent Investor) and reading Motley Fool web articles for years now. They all discuss the need to remain calm in the midst of market implosions and view it as a time of opportunity, rather than panicking at your losses and quitting. They stress the importance of having a long term view and patience. In one of Kiyosaki’s books, he mentioned that when acquiring a new skill, he gives himself five YEARS before he expects to be good at it. That was a mind boggling revelation. Especially since I had been a legal adult for less than five years at the time. So, by now, I ought to be getting somewhat decent at managing money. And, by in large, I am. But the last month has certainly been a trying time. It is hard not to be paralyzed by fear. I watched as stocks (including Indymac referenced below) lost half their value. I knew that several great stocks were at amazing values (Chipotle, for one), but did not act because the irrational drop and my fear made me worry that they would keep on plummeting. However, in spite of all the losses, I did have one milestone. Chipotle had another excellent earnings report, rebounded, and is now at more than double what I paid for it. My first 100+% gain! I feel somewhat chagrined that I didn’t buy more of it along the way. I’m starting to think that there is something to Mr. Warren Buffet’s quote: “I prefer to keep all my eggs in one basket and watch that basket closely”. At least until you’ve made your first few hundred million and putting all your money in one place becomes impractical because it would sway the overall value of the company. Sigh. That would be one problem I’d be okay having.

Another lesson I’ve learned – selling options is awesome! The common advice regarding options is to stay away because they are too risky. And, by in large, this is probably good advice (If you aren’t familiar with the option concept wikipedia has a basic explanation) because it is impossible to take a truly long term approach. However, you can use this to your advantage if you sell covered calls. This is particularly true when a stock has been beaten down “unfairly” (in quotes because you could very well be wrong). Stocks in this category usually have a high premium because other people are probably optimistic about the stock’s future chances, yet are afraid to jump in completely for fear that the stock will plummet. The combination ought to push the amount they are willing to pay for an option on the stock up. Two current examples.

Immerson Corp (IMMR) Currently trades at $16.22 (and was recently above $20.00). A November contract with a strike price of $17.50 last sold for $2.00. So, if IMMR is worth more than $17.50 in late November, you would earn the $2.00 for the option, plus the $1.28 difference in stock price. That’s a 20% gain in 3 1/2 months! Plus the stock would have to go below $14.22 for you to lose $. Granted, covered calls will not result in a doubling of your money, but with careful selection they ought to help you outperform the market.

Indymac (IMB) is in a similar position. It last traded at $21.39 (and recently was as high as $37.00) and an October contract with a $22.50 strike price last sold for $3.60. Maximum profit would be $4.71 a share, and again over 20%, and this time only 2 1/2 months, with an even bigger cushion prior to loss. Behold, the wonders of volatility!

In the interests of full disclosure, I’ve sold the covered call options for IMMR and own shares in Indymac (‘though I’m still smarting from the sudden drop from $37.00 and haven’t yet convinced myself to sell the options at a lowly $22.50). I think they are both good deals.

Moolah

“Money frees you from doing things you dislike. Since I dislike doing nearly everything, money is handy.” ~Groucho Marx

 Although I’m not as grouchy as Mr. Marx, his quote is apt.  I look at $ as freedom.  The more of it I have, the more options I have.  Hence, I try to be thoughtful about how I spend it, save a good deal, and try to shepherd those savings into a larger, Scrooge McDuck style pile of moolah.  Historically speaking, stocks are a good way for the lazy man (I’m not willing to start my own business) to do so, and I’ve been investing in them for a while now.  I don’t know how much my loyal fan base (ha!) invests, but I’d love to strike up a dialogue with those of you that are interested.

While I like Groucho’s quote, Mr. Jonathan Swift does it even better: “a wise man should have money in his head, but not in his heart.”  So, in an attempt to come up with some wisdom, here are a few ideas from my head (and “portfolio”) for you to ruminate upon:

Chipotle Mexican Group (CMG, CMG-B)
Tasty, tasty, CMG!  How I love to eat thee!  Despite the recent gains (and potential for short term decrease in price), I like Chipotle’s chances to keep appreciating.  They have no debt to speak of, a large cash reserve, are expanding very very very quickly (yet responsibly – paying for new stores out of existing profits), and have a product with mass appeal.  Major metropolitan areas won’t be saturated for several years yet, so I’m betting that the tremendous growth continues.  The B shares look to offer more value as they trade at a substantial discount, yet have the same share of Chipotle’s profits.

Indymac Bankcorp Inc. (IMB)
Indymac is in the beleaguered mortgage industry.  They do a lot of “Alt-A” loans.  The low documentation kind where banks don’t have to verify how much money people make before they get a loan (designed for people who don’t have regular paychecks – small business owners, people on commission, etc.).  You tell them: “I make $250,000.”  They say: “Great! Here’s your loan.”)  Shockingly, these loans are riskier than other loans with the same credit quality.  But, they aren’t as scary as sub-prime mortgages.  IMB’s price has gone down over 1/3 due to the sub-prime scare.  They probably will have decreased profits and write downs due the Alt-A quality, but I don’t see it being 1/3 of the company’s value.  The people who work there evidently agree as “insiders” have been buying their company’s stock.  Add in a 6% dividend, and it seems like it’s time to follow Warren Buffet’s advice: “try to be fearful when others are greedy and greedy only when others are fearful”.
 
YM Biosciences Inc.  (YMI)
I view YMI as a “swing for the fences” stock.  Definitely volatile, speculative, risky, etc.  They have no profits, no proven drugs, and could very well “stike out”.  However, they do have a pile of cash (equal to about 70% of the stock’s value) and, according to the “experts”, several promising drugs in the pipeline.  If any one of them has a positive press release (doesn’t even have to be approved, just good news) the stock ought to jump up quite a bit.  Having a decent cash cushion should give the company a lengthy timeline to continue to develop the drugs without a dramatic decrease in price.

Fair warning – I own shares in all of the companies and am probably a biased reviewer.  But, according to a fun stock picking website (http://caps.fool.com/Index.aspx), I’m an all star.  (For the time being…)