"I need income, but don’t invade my principal!"

Ever heard that one? We do. All the time. Problem is that in times of lower yields you’ve got to have accumulated a great deal of capital to generate adequate income if you utilize only interest or dividends. 

"I’m Old Now, ML Says Buy Bonds… Maybe!"

For example, if you are in all bonds you might generate $40,000 to $50,000 per year with $1,000,000 invested. If diversified equally between Growth and Income and a more conservative Equity Income fund, you might spin off $27,000 to $28,000 per year and keep the original principal intact. Of course, in the case of the bonds, your bonds will only be good, as far as principal is concerned, as the maturity value. Inflation will partially negate the guaranteed amount.

Taking income strictly from capital presents a bucketful of problems. First, if you have accumulated capital of $1,000,000, you probably need more than $27,000 to $45,000 in income. Second, this capital has to grow if you desire income to you during an extended lifetime for you or your spouse. And again, a long time period of low interest rates would hurt under these conditions. If high interest rates prevailed, inflation follows right along with your money; and your money becomes only as good as what it will buy (more dollars less goods).

"So what is a possible solution?"

We believe that a great way to solve this problem is to use managed account mutual funds and not separate account portfolios, i.e., portfolios of individually managed stocks, and by no means, index funds. In the case of the managed stock portfolio, someone has to make a decision on what stocks to sell each month in order to generate the income needed by the recipient. And in the case of unmanaged index funds such as the S&P 500 or others of that ilk, you’re basing your future strictly on the market continuing to go up consistently without any Bears interfering.

By diversifying into both Growth and Equity Income funds, you have the simplicity of directing us to liquidate shares each month to generate a specific amount of money. As the original shares become fewer and fewer, they are replaced by shares purchased by capital gain distributions and reinvested dividends.

Each year, we monitor the increase or decrease in the total number of shares in the portfolio and look for an increasing number of shares over longer periods of time. Even if the shares stay “even”, and the price per share has not changed we have captured income and still have the original amount with which we started. Naturally, if the share price increases and the shares stay even, or even decrease, we’ve got a chance to be ahead.

"How Can This Be?"

We have many accounts where the client has withdrawn more than originally invested and contain 4 to 5 times the amount of the net capital invested. Naturally, there’s nothing guaranteed here and while we have spent years developing this concept, you could lose money. A lot depends on the cost of managing the money; the ability of the managers to develop profitable capital gains rather than losses; and any number of other things which includes extended down markets, plus the risk threshold of an investor.

However, by changing the percentage of withdrawal each year you can usually control not only your income, but also the capital that is remaining.

If you or your friends are on the brink of retirement, our office should be called. We’ll give you an idea as to how your retirement income can be handled.

"The Changes are Coming. You Can Count on It"

On a recent trip to Baltimore with two of my partners, Tom Hardgrove and John Dickens, I noticed that John was reading a recent bestseller, The Tipping Point. This brought to mind a recent article in a newsletter to which I subscribe, To the Point. Michael Ledeen, an often times contributor to that publication, pointed out some interesting information on China. Luis Ramirez, of Voice of America, noted last fall that China was facing a most unexpected crisis: a shortage of qualified workers and along with this manpower shortage, the brutal demographic consequences of the Communist Party’s strict rule of “one child per couple” are beginning to take hold.

And at the same time, the Chinese populous are thinking other things. They’ve noticed that the regime’s policies are in shambles. They might come to suspect that things could improve if only the people were free to choose their own leaders.

"The Truth Will Set You Free."

Mr. Ledeen points out one of the delicious paradoxes of our time: China threatens Taiwan with huge armies but Taiwan threatens China with freedom.

China is facing the same innovation roadblock that the Soviets did. The Soviet Union could never match western technology innovations because Soviet citizens were never given the freedom to do so. And with more western investment in China, and the Chinese learning more and more from western capitalists as well as western missionaries, the crossroads could be coming soon to a dangerous intersection. The lack of intellectual freedom is an extraordinary waste of resources and has severely handicapped Chinese science.

"Same Old Story, Same Old Song… Same Results."

The problems are rooted in the Communist Party’s monopoly on power and in the Socialist system… Historians have noted that a repressive regime could survive as long as it had the will to crush any opposition. Clever tyrants could deflect hatred of their regime by conjuring up an external enemy (remember George Orwell’s 1984?). There’s still a tendency, particularly among intellectuals, to assume that these principles apply to contemporary dictatorships like those in China, Iran, and North Korea.

According to Ledeen, 500 years ago, Machiavelli insisted that tyranny is the most unstable form of government and he warned that the most dangerous development for any tyrant was contempt of his own people. That dramatic tipping point is now very close in China, Iran, and North Korea. It’s happening quickly in Iraq too.

The destruction of socialist dictatorships and Islamic terrorism can only come by the truth being spread to the world. We’re discovering that in this age of information and thought dispersion that there’s still a chance for the good guys to win.

Information Gleaned While Looking up Other More Important Things in Other People’s Publications….There is more than a 60% chance that a 65 year old retiree or their spouse will reach 90 years old… Inflation, increased taxes, and diminishing purchasing power are the demons we face in the future (‘course, these demons have been around for hundreds of years!). So, having 70% of pre-retirement income is generally not enough anymore at retirement…… The Internal Revenue Service recently announced that 30,000 estimated tax payments from 13 different states fell into San Francisco Bay following a traffic accident! Anyone who mailed a tax payment to the IRS San Francisco post office box between September 1st and September 11th might be affected. The IRS intends to send out notices to taxpayers who previously had sent their estimated payments to the San Francisco post office box…. Don’t even think about using the excuse that “the check is in the Bay”!... How often do we have to repeat it? The top 1% of U.S. taxpayers, who earn a minimum of $300,000 a year, paid more than 1/3 of personal income taxes in 2003. Again, 1% of U.S. taxpayers paid 33 1/3% of all the taxes paid. The top half of all U.S. taxpayers (50%) accounted for 96% of the 2003 individual income tax receipts… the Bush tax cuts which included reducing tax on dividends and long-term capital gains to 15% has greatly increased the revenue to the treasury department. Don’t tell us! Lower tax rates increase the revenue to the government!? It can’t be! … Enonomists Arthur Laffer recently pointed out that President Bush’s proposal for private investment accounts for Social Security is the first time ever that we’ve tried to associate effort with reward in this program. However, lingering war in Iraq and an unsteady Republican party has ushered this important item to the “back burner” along with immigration and tax reform. Add to this the CIA “leak” and the threat of filibuster by the Senate on the recent Supreme Court nominee and you find only a few inside–the-beltway folks standing their ground.

"Speaking of Real Estate…"

Did you know the Federal Government owns somewhere between 600 and 700 million acres of land, or over 30% of all U.S. land? But you see, no one really knows how much land they own. Although private companies are required to produce accurate balance sheets for their stockholders, the U.S. Government does not.

Since we as American citizens and taxpayers are the “stockholders” of our government, we should expect and have the right to receive accurate accounting statements.

Hypocritical public officials are shouting that corporate managers should be punished for deliberate or even accidental accounting mistakes. And the most important legal entity for most Americans – the Government – produces financials so incomplete and inaccurate, it would embarrass even an Enron accountant.

Because of the vast amount of land that is owned by the government, many experts believe that selling 1% or 2% of land the government holds per year over the next 50 years probably would cover the Social Security transition problem (or at least greatly reduce it). At least much of that land could be leased to oil companies, which would generate income for the needs of our country. (Letters from environmentalists are welcome!)

"How do you find bargains without markdowns?"

If “down markets” seem to bother you, consider suits and dresses. When clothes are “marked down” it’s nothing but a work of supply and demand. Same suit 10% to 20% off. They didn’t even take the dress off the rack! They just change the price tag. And if you know material, style, and knowledge of workmanship, you simply buy a bargain. However, if you don’t know value when you see it, you’d better not buy the article of clothing at any price.

"You Know Where I’m Headed!"

If the price of the stock of a well managed, profitable and productive corporation is priced below its real value, you buy. And you only know (usually) if it’s a value buy of a well managed company if you’ve researched, in depth, the company in question. Do I need to say more?

Use the professionals. Don’t be a do-it-yourselfer!

OPINION
Ok, We’re Hearing it Again.

My history book tells me that in the late 19th century, the Chicken Littles were concerned about the Industrial Age grinding to a halt because of the shortages of coal. (Incidentally, we have about 500 years’ supply at the present time.) Now we’re talking about an Oil Bubble which causes the world to stop turning since we won’t have any more energy.

It’s quite interesting how the mainline media sounds dire warnings with loud shouts predicting the sky to fall as the spike in energy prices has resulted in a short term supply shock. It never fails: higher prices bring doomsday claims of energy shortages, which in turn triggers the government to intervene and always ineffectively, into the market place.

A recent Wall Street Journal story reported that in the 1860’s the U.S. Geological Survey forecast that there was “little or no chance” that oil would be found in Texas or California. The story goes on to point out that in 1914, the Interior Department forecast that there was only 10 years of oil supply left; in May 1939 it calculated that there was only a 13 year supply left; and in 1951, Interior warned that by the mid 1960’s the oil wells would certainly run dry.

Why, I even remember in the 70’s when President Jimmy Carter gloomily told the nation that “we could use up all of the proven reserve of oil in the entire world by the end of the next decade”. However, think about this: if the price of gas today was what it was in 1900, relative to income, it would run around $10 a gallon at the pump. In 1860, oil sold for $4 a barrel or the equivalent of about $400 a barrel in today’s wage adjusted prices. And who would have ever believed 50 years ago that we would be drilling for oil at the bottom of the ocean and extracting oil from sand?

Now, we hear members of Congress calling for a “windfall profits tax on gasoline”. We’ll not get into that ridiculous suggestion at this stage, but be aware that a senior environmental analyst at the Competitive Enterprise Institute points out in a recent magazine article that roughly 90% of the oil on the planet rests under government owned land. And these resources are terribly managed. Of course in America, there are many barriers to drilling for new sources of oil. The American Petroleum Institute estimates that there are at least 100 billion barrels that are fairly easily recoverable in Alaska and off shore that oil companies are not permitted to exploit.

If the free market is left to its own devices, and is closely monitored in a realistic way to protect the environment, we will continue to have energy sources into the far distant future.

After the dust settles, the profit motive always brings the crisis to an end.

That’s our take, yours is welcome.

"Here’s Our Starting Lineup!"

It’s been quite a while since we mentioned our staff here at Omega Securities. So here goes:

Sandra Cokenour. She’s Tom Hardgrove’s administrative assistant and acts as a service representative. Sandra has been with us 3 years and is FINRA registered. Tamara Thomas is John Dickens’ assistant and has been here 1 year. She’s a graduate of Texas State University. Tamara is married to Tony, an electrician who is active in bass fishing competition. Amity Martin, a 2 year associate assists Tammy Bryant in the administrative and service departments. Tammy Bryant, a partner in the firm, is Joe Hardgrove’s assistant and serves as Vice President and Secretary-Treasurer of the firm. She also services large case accounts with Amity’s help. Tammy is married and has two children, Katie, an 8th grader and Dillon, an 11th grader who plays football at Aledo High School. She’s been married for 18 years to Monty, who works for TCU. Sunday Woolard is our new receptionist, and she attended Stephen F. Austin. She also backs up the other sales assistants.

Well, that’s our crew. We are very proud of them and believe we have the best associates available. Here are their e-mail addresses:

Tammy Bryant - tb@omegasecurities.com
Sandra Cokenour - sc@omegasecurities.com
Tamara Thomas - tamara@omegasecurities.com
Amity Martin - amity@omegasecurities.com
Sunday Woolard - sunday@omegasecurities.com