Here’s the issue as we see it: security or prosperity?  Not so fast; prosperity gives future security while security means planning for prosperity.  Let me explain.  Almost everyone can understand how millions of jobs come from businesses that receive revenue directly or indirectly from the auto industry.  Most people understand that there are millions of people who either work for the manufacturers, supply product to them, provide a service to either them or their employees.  The industry affects many from advertising to  mom and pop diners and deli’sserving lunches to employees of those companies.  That said, almost everyone can also understand how having people in Washington give money, which is not theirs to begin with, to the auto industry means taking future money out of their own pocket.  Many people don’t think it is appropriate to have others tell them that they have to repay a debt for a problem that they feel others created.

Don’t feel bad if you have difficulty placing 100% of you thoughts truly on one side of the issue or the other.  If you can truly make that call that quickly, than you are probably a person who would also walk off of a cliff to prove yourself right.  The issue is too profound and complex to be able to make a competent decision that quickly.  This is because of the distance of the ramifications.  A loan means fighting free market forces and the potential lost of future advancements that are achieved by creative survival/destruction.  This could mean the lost of future productivity gains due to the reduction of cometitive forces.  No loan means millions of people potentially out of work.  This could cause a huge economic contraction, reducing the country’s ability to provide its citizens the standard of living so many have grown accustom too.  It most likely would also create a national security issue.  Like it our not, our democracy is protected by our ability to manufacture the defense that prevents it from being taken away.

Complex?  Surely is.  If it wasn’t, then the financial crisis would have been solved before we the people ever acknowledge it.

It is our opinion that the powers-to-be have been attempting engineer a way to allow for a slow and soft adjustment to the creative forces of free markets while trying to fuel short term GDP growth to sustain tax revenue and maintain the standard of living of the middle class.  This slow adjustment would minimize the pain population felt while allowing the nation to remain competitive and prosper from productivity and technological advances.

The truth is that nobody knows the correct answer to the question of whether to lend public funds to private corporations.  Mathematically, it can compute to the same result regardless of the answer chosen.  The true results depend on the actions taken in the future, and maybe not the actions taken at this particular point in time.  Economic strain today may mean adjustments for long term prosperity.  Economic relief today may mean long term strains on prosperity.  And the lack of relief today may mean long term consequences.  Regardless of the decision made, only our desire to work towards a better tomorrow after the decision will make the true difference of our tomorrow.

http:www.financialswami.com  

Today we wanted to walk down a little different path: Government financial policies.   With the end of the Presidential election we thought the topic of Governmental economic policies probably could use some NON-PARTISAN explanation.  It is very difficult to learn the difference between Free Market Policies and Nationalization Policies (typically called socialistic policies) without personal agendas or emotions influencing the data.  That is why we figured the best way to learn about the policies is to share a Public Broadcasting Documentary website with everyone.  The documentary uses many countries to illistrate the economic rise and collapse of governments using economic politics.  It shows how most policies in countries change when there is social unrest and a party convinces the masses that change is required.  The documentary starts with the global free trade markets that existed before World War I (most people these days don't know that a hundred years ago the World operated under free trade).  It then show the transition to the nationalization of industries and protectionism for the betterment of society.  This was the effect of World War I and II.  The PBS documentary then explains how governmental policies of the Soviet Union, Poland, Latin America and the US shifted from regulation to free markets again in the 1980's.

Over the past 100 years the works of 2 economists have been the main influence in governmental financial policies: John Maynard Keynes and Friedrich August von Hayek (Milton Friedman theories reflect Hayek's works).  The problem with trying to learn about the differences comes from the fact that many governmental economical policies begin using one theory and then other issues overshadow the public opinion of the administrations or government and cloud the issue on economics.  We can use the US as an example; the current president Geoge W. Bush preaches Hayek theories on free markets but then spends like a Keynesian to maintain congressional support for his other agendas.  The previous president, Willaim Jefferson Clinton, preached Keynesian theories but then used free trade market theories to boost growth and tax revenue.

If you really want to understand the differences, then go to: http://www.pbs.org/wgbh/commandingheights/lo/story/index.html

Click on “see the chapter menus” and the video links on the right.  There are 3 episodes to the documentary and each has approximately 20 video clips.

We would love to here your thoughts, please post you comments by clicking on the comment link below.

Happy viewing,

The Financial Swami

www.financialswami.com

We’ve written before about how people might need to purchase a vehicle to replace their expiring leases (see 10/21/2008 blog).  That thought made us think more.  We wondered how many people actually know how car payments are calculated: purchases or leases.   

All payments start with knowing the TRUE TOTAL cost.  This is a portion most people miss.  The true total cost is the cost of the car + options + destination fee times the state’s sales tax, plus title and license fees.  Destination fees typically range between $300 to $600.  Title and license fees typically range between 1 to 1.5% of the purchase price.

For example, let's say that the car is $22,500 and the options total $550.  To protect us from surprises we will use the higher number for destination fees of $600 and 1.5% for Title and licensing.  For our example we will use 6% as our State Sales Tax.

Purchase price is: $22,500 + $550 + $600 = $23,650

Sales Tax is: $23,650 x .06 = $1,419

Title and licensing: $23,650 x .015 = $354.75 so say $350.

Total Cost: $23,650 + $1,419 + $350 = $25,419.

Our example of a $22,500 vehicle is actually going to cost us $25,419.

Calculating the monthly payment depends on whether you purchase or lease.  We have created an entire page on the financial swami walking you through the methods of calculating both methods.  The examples are too large for the blog so please check them out under the Car payment section of the site.

The Financial Swami.www.financialswami.com

Today my wife and I started to review our life insurance amounts.  When we first purchased life insurance we had only one child.  Today we have three.  Everyone’s position changes throughout their life.  You should, every couple of years or so, re-evaluate your situation and make sure that you are protected for today’s environment.  Upon review we needed more.  The two extra kids mean two extra college payments.  On top of that, my income has increased. Which means, like most, our bills have also increased.  We currently have $500,00 Term Life for 20 years.  Upon review we have decided to keep that first policy and purchase an additional policy for an additional million dollars over a 30 year term.  The cost will be an extra $90 per month; and I know my family will be protected if something should happen to me.  So why did we choose our policies this way?  As we have written in our life insurance section of the website, coverage need is greater while children are young.  Our youngest is 3.  Our current 20 year term policies cover our oldest child through 6 years of college.  We have two other children.  An additional $1 million will cover them and cover our increased cost of living.  We decided to go 30 years on the new policy to extend the protection of our standard of living, since we think we will have to work longer to generate enough savings to retire.

On note:  I logged into the financialswami to use the downloadable Life Insurance Calculator and to my surprise, I did not have the text linked.  I had the text highlighted and underlined, but it was not linked.  I have corrected that.  The model has been on the website for about 3 weeks, but nobody contacted me to inform me of the broken link.  Please contact us if you come across any additional issues on the financialswami.

Also, while we were using our downloadable calculator we decide that we should post the capital model approach for insurance calculation.  Look for it in the future.  The model will map college and other expenses into the calculation.

Thank you,

www.financialswami.com

Yesterday we touched on the fact that financial planning is more than just investing; it is about taking the appropriate steps to protect, or minimize the damage if possible scenarios develop.  Today we want to talk more about planning; in particular, planning on how possible future down swing in the stock market may affect your goals. 

On October 13, 2008 GMAC Financial Services released a statement that it would no longer finance purchases or leases to individuals who have credit scores below 700 (http://media.gmacfs.com/index.php?s=43&item=280).  So, what affect might this have in the future?  Well, if enough other financing services follow suite, people may need to withdraw from their 401Ks or IRAs to obtain the capital needed to purchase a vehicle. 

How large of an impact might this be?  In 2007 there were roughly 16 million new vehicles sold in the US (projections for 2008 are between 13 and 14 million).  Approximately 98% of those transactions were financed.  Now we don’t know the credit ratings of this 98%, but you can bet that quite a few are below 700.  So when a person who has a 690 returns his or her lease, they will have difficultly obtaining financing.  If you can not finance your replacement vehicle, what options do you have?  Well, one option is to pull money out of your 401K or IRA and purchase a new or used vehicle.  Sure these people will be paying an early withdraw penalty, but that’s a small price to pay compared to the cost of not having a vehicle to get to work.  If enough people pull money from their retirement accounts to purchase replacement vehicles, supply and demand kicks in and prices drop.

While we don’t know if this will happen, our goal is to present scenarios.  Your objective should be to plan to protect yourself in the event a scenario occurs, while maintaining an acceptable return on your investments to meet your goals.

The Financial Swami

www.financialswami.com

Today we decided to write about something other than the stock market.  Financial planners do more than just invest money for their clients; they present scenarios and then plan on how the client may handle the scenarios.  Investing is just a method of reaching some of the client’s goals: i.e. raise enough capital (big word for money) for retirement, funding children’s’ college, ECT.

Today we are going to write about planning for somebody to make medical decisions for you when you are unable to make them for yourself.  Better yet, how about: who will make medical decisions for your 18 year old child if an accident occurs while they are at college?  The Health Insurance Portability and Accountability Act of 1996 (known simply as HIPAA), prevents doctors from discussing any medical related information without the consent of the adult or the guardian.

Do you remember what happened at Virginia Tech University on April 16th 2007?  A person on campus killed 32 people and wounded many more.  Parents flooded to Virginia to see if their child was safe.  Imagine your child was one of the individuals the gunman attacked.  You enter the hospital only to find out that by law, they cannot tell you anything.  Many of the victims at Virginia Tech were in surgery or heavily sedated.  These individuals were unable to inform the doctors that it was alright to release medical information to their parents.  The doctors had to make medical decisions and the parents were not informed.

You should consider having a conversation with your child about drafting a Medical Power of Attorney before they go off to college.  A medical power of attorney gives a person the power to make medical decision on your behalf.   Ask your child who they would want to make decisions for them, in the unfortunate event that they were unable to tell the doctors their wishes.   Accidents happen; a slip and fall could cause unconsciousness.  Having the conversation and drafting a Medical Power of Attorney is planning to handle the situation in the event something happens.

Visit the Medical Power of Attorney section under our Estate Planning section to read about the different types: Springing and Durable.  You can also read why spouses don’t always get to make decisions for their other half.

The Financial Swami,

www.financialswami.com

www.financialswami.com

Our opinion is that the Dow’s equilibrium is probably around 9000 not 14,000.  Looking at the book value of the companies, the market was a bubble.  A good bubble, but a bubble.  We think that it was a good bubble because people were putting a portion of their income into their 401K: unfortunately, the stock prices for the companies they were buying were way above the fundamentals: earnings, growth strategy and basic balance sheet healthiness.  Credit was cheap, so leverage was used.  But just as with individuals, businesses were selling their future cash flows for today’s operations or growth potential.  The future cash flows were based on things continuing to grow.  Global growth over the past decade has been hyper-linear.  Inflation has been growing fast in every economy.  Debt had been growing in every economy to feed the growth.  It was only a matter of time until borrowing would have to be cut-off.  It just took a small contraction in the US economy to bring the debt problem to the surface; it surfaced the global issue.  The US citizen had been using their home as an ATM for 10 years.  When the market contracted, they could now longer refinance to payoff what they had spent.  Even the subprime lending would have continued without issue if the home value would have continued to appreciate.  The contraction surfaced it all.  The world has been copying the US (the largest economy) strategy: spend now and work hard to pay it off.  Friday’s Wall Street Journal had a great article about how much Venezuela, Iran & Saudi Arabia need per barrel of oil to pay the debt that have issued on the world markets to build water filtration systems and other infrastructure to support their economies http://online.wsj.com/article/SB122357560511419739.html.  The world has been building their growth by copying the American’s credit philosophy.  Unfortunate, the US is the largest economy in the world, so when it slows a little it hurts.  Normally, it slows and with a little hard time it recovers and the next boom creates wealth.  This time, the contraction affected all the countries that copied the debt model and we have an issue that does not have a quick recovery.

Time will tell,

The Financial Swami

www.financialswami.com

We try to keep to sharing information that helps individuals.  We don’t like to give advise on buying and selling stocks.  However, we have received many investing questions from people who are watching the stock market jump all over the place.  Since we want to educate the masses on financial information not typically known, we felt we would write about a Straddle Trade in hopes that it answers some the questions we have received. 

Timing the market rarely works.  In today’s market, the indexes are swinging all over the place; Down 700 points, then up 500 then back down and so on.  The straddle trade is an investing technique that doesn’t care if the market goes up or down; it only cares that it does one or the other.  The technique is used when an investor doesn’t know which way the market will go; but thinks something will happen.  Volatility in the market is the key to the technique, and that’s what we seem to have today.

A Straddle trade is an option trading technique that uses both a Call (a contract giving you the right to buy, but not the obligation to buy) and a Put (a contract giving you the right to sell, but not the obligation to sell).  Here is how it works:

In the illustration above, a company has a current stock price of $25.  You as an investor do not know if the stock will go up or down, but you think something will happen.  You go to the options market and purchase both a call and a put contract for the stock with the same strike price of $25 thirty days from now.  The time period is when the contracts expire; so you have to either execute them or let them expire.  Each contract cost you $1.25.  To make money with this technique, the stock price needs to move $2.50.  This is the amount you have already spent ($1.25 call option plus $1.25 put option).  If the stock price falls, like the illustration shows, to say $20 before the 30 days, you execute your put contracts and let your call contracts expire.  Exercising the put contract give you the right to buy the stock at the current $20 and sell it at your contracted price of $25.  You make $2.50 per share ($5.00 minus the $2.50 in contract cost).  If the stock went up instead of falling, you would have exercised the call option and let the put option expire.

One note, option contracts are packages, meaning you by 100 shares in the contract ($2.50 gain times 100 = $250 total gain).

The risk in the technique is if the stock price says flat.  If the stock price doesn’t move by the contract prices, you would let both contracts expire and loose the amount you spent on the contracts.

Happy investing

www.financialswami.com 

We appreciate the questions we received via the “Contact Us” page.  To reduce redundancy, please use the Blog and put your question in as comments.

Thank you.

www.financialswami.com