Natural Gas - We Got it Half Right

Our energy situation broadly cleaves into two main functions - natural gas, and electricity. Natural gas is used for industry, heating homes and powering stoves, and is taking a greater portion of the electrical generation load. Electricity also overlaps with gas when it comes to home heating and cooling, and is obviously a large component for industrial uses. However, the natural gas and electricity energy industries in the United States have moved in profoundly different directions over the last few decades. The purpose of this post is to describe where we are, as a country, with regards to natural gas. In short - we got it half right.

Natural gas has three main components, broadly speaking - 1) exploration / extraction 2) transportation 3) distribution. In general, natural gas is lightly regulated for exploration / extraction, has general principles for transportation (open access) and is pretty heavily regulated for distribution (local monopolies).

One critical difference between electricity and natural gas is that natural gas can be stored while electricity must be available at the specific time it is needed. Thus users and utilities can store natural gas and have it available for peak times, while the only way to meet peak load demand for electric utilities is to have units on line generating electricity during the hottest parts of the day or to "shed load" by pushing customers off-line to reduce demand.

Both electricity and natural gas are mostly consumed using North American (including Canadian) resources. While OPEC maintains an oil cartel, the fuel used to generate electricity (coal, nuclear fuel, gas) mostly comes from North America. While these resources can be transported across the ocean (for instance Japan imports virtually all of what it needs to fuel electricity) in the USA (and Canada) we have most of what we need for these industries. Until recently there wasn't a practical way to bring in natural gas from regions that weren't connected by pipeline, so we were bound to use North American resources.

Exploration & Extraction

The exploration and extraction of natural gas is a mostly unregulated industry (compared to electrical utilities, at least). The biggest constraint was that vast swathes of the US were placed off-limits for natural gas drilling due to environmental concerns. In the 1970's, a moratorium was placed on new natural gas connections because it appeared that the US would run out of natural gas. However, improvements in extraction capabilities resolved that situation and wildcatters responded to higher prices by finding additional supplies.

Recently it looked as if we were going to run out of natural gas again. Futures prices on natural gas, which were around $2 / unit in the 1990's, spiked to as high as $14 / unit in the winters of 2006-8 (prices are seasonal and typically move with the weather) but now are below $4 / unit due to the fact that massive supplies of natural gas have been located in shale formations as drillers redoubled their efforts in light of these high prices.



The natural gas industry, as we can see above, is able to use market forces to respond to price signals. Drillers used innovation and new technology to find new supplies which in turn brought down the high prices. If the extraction / exploration industries were heavily regulated and monopolized (like power generation), it is likely that they would just have utilized the high prices as an opportunity to reap large profits rather than to expand supply.

Transportation

Regulation of natural gas was profoundly impacted by FERC order 636 in 1992. At that point, the pipelines were forced to open their capacity to multiple bidders, including "end use customers" who were able to buy gas directly (through brokers) and have it transported to them directly. This order is generally credited with de-regulating the pipeline industry, once their "stranded costs" were recovered.

While there are many difficulties in building new pipelines from an environmental and cost perspective, generally the United States natural gas industry has been able to bring new pipeline capacity on line. This is different than the electricity transmission industry, where new capacity additions have been relatively minuscule. One big reason is financing - the pipeline companies can get end users to "subscribe" to pipeline capacity to fund development while there aren't effective ways to "monetize" demand for transmission capacity in the still heavily regulated electricity sector. In short, a new electrical transmission line benefits everyone in terms of access to lower prices and improves reliability (because the grid is interconnected and load needs to be spread) but there isn't an easy way to pay for these benefits.

Another improvement in transport is Liquified Natural Gas, or LNG. Cooling and compressing natural gas allows it to be transported on special tankers which can carry it across the ocean and into new markets. Many nations (such as oil producing nations) are awash in natural gas (sometimes they just burn it off as they extract oil) but they don't have a way to get it to countries that can utilize it (such as the United States). LNG offers a way to do this, assuming you have a pipeline leading to the port and the LNG facility is built (they cost billions to build) and also that the LNG facility at the end country is interconnected with a pipeline that has available capacity. Here is a link to the physical location and capacity for the nine LNG terminals in North America. As you can see, they are concentrated on the gulf coast of the United States. The US has added LNG capacity, which is great because it allows for price competition from overseas producers and also (theoretically) allows US producers to ship their gas overseas, as well.

Alaska has huge amounts of natural gas. For years they have been considering how to get that gas to the "lower 48" where there is high demand. This article from the WSJ titled "Latest Risk to Alaska Gas Pipeline: More Gas" (which is where the shale graphic above also came from) describes the effort to build and finance the pipeline. The two options are 1) build a pipeline to the coast and an LNG terminal which they could be exported, costing $26B 2) build a pipeline through Canada all the way to the lower 48 at a cost of $41B. The pipeline would take a decade to build - meaning that they would need a forecast of natural gas prices in the lower 48 in 2020 to finance this effort.



However, the shale gas boom has blown a huge hole in the economics of this pipeline. It is much harder to justify this giant investment at $4 / unit gas than at $14 / unit gas. Per the article:

"I think we've probably cost ourselves a few years, which allowed the shale plays to come in... we should have build this pipeline four years ago"

This is from the perspective of the State of Alaska - because once the pipeline is built the cost of extraction is low and the Alaskan natural gas would sell at the market price in the lower 48 (whatever that turned out to be) - but with the lower prices, you can't finance this new pipeline at all.

Distribution:

Distribution is the least important element of the natural gas industry. This function is your local pipeline company, that has a monopoly on pipes because it doesn't make sense to have 2 companies digging up streets and having parallel infrastructures (like it does for telecom). The local company pays for gas and passes it on to end customers, and pays the transportation costs (negotiated per FERC rules on open access) as well. They also finance the local pipeline distribution infrastructure. While you may pay a large natural gas bill - take a look at it - only the portion for local distribution and customer service actually goes to the local distribution company; the rest pays other elements of the supply chain (extraction and transportation).

Innovation has been pretty low in this sector of the industry, but really there isn't a lot to do. When natural gas was at $14 / unit these utilities were feeling the brunt of customer anger, but now their situation is much more low-key. At $14 / unit there was a lot of interest in conservation and perhaps fuel-switching or use of other technologies (i.e. solar to heat water instead of natural gas) but this interest has waned lately at $4 / unit. Electrical utilities are spending billions on time-of-use meters but natural gas doesn't have quite the same time-of-use issue because they can store capacities locally and inject them into the system at peak times (up to system capacities). Since the natural gas infrastructure is largely underground it is less subject to storm damage and other sources of outage when compared to the electrical industry, which suffers mightily from these sorts of outages.

Natural Gas and Electricity:

The falling prices of natural gas are having a profound impact on the electrical generation industry. At $4 / unit, natural gas is competitive with less efficient coal units and blows the renewables out of the water (except for hydro, of course, but you can't build any more hydro in the USA due to environmental concerns). Natural gas is cleaner than coal and easy to construct and site, so it becomes the de-facto solution to our looming energy generation capacity crunch, as well. In other blog posts I predicted that new coal and nuclear plants were a figment of the media's imagination for a variety of reasons, but the plentiful supply and low price of natural gas (due to these shale fields) is another stake in the heart (if one was needed) to any designs on new coal or nuclear plants.

The reaction of our non-regulated natural gas industry (exploration) to high prices and how they basically "solved" our energy problems (and will solve our electricity issues, per above) should be a text book example studied in all schools. This is what happens when markets are allowed to work as they should, and innovation responds to high prices as a market opportunity, in turn reducing prices down towards their historical norms. It didn't come through MORE regulation, or jaw-boning rich capitalists, or NY Times op-ed pieces - it came through free markets and the belief in human innovation.

We got it half right, at least. For more info if you are interested go to this site, naturalgas.org, which seemed to have reliable information and links to other useful information.

Cross posted at Chicago Boyz

Leverage, dividends and our insanely low interest rates

Like the famous Seinfeld episode where Kramer struggles to figure out how to profit from the fact that Michigan offers a 10 cent return on recycled bottles, I have been starting at this ad from Interactive Brokers for some time now. This had has been run in myriad financial papers and I have seen it all over the place. It is notable for the fact that it looks like it was drawn "on the back of a napkin" like the fabled dot-com business plans.

The specific elements of the investing plan are as follows:
- Interactive brokers can make margin loans at 1.25% annual interest. This LOW rate of interest is made possible by the country's current super-low rate policy
- Some stocks are offering dividends as high as 5%. In the current low interest rate environment (you are likely to get 2% on CD's & government paper, and almost nothing on your money market and bank deposits), that 5% rate seems very enticing, especially since dividends are taxed more favorably on individuals than interest income (dividends are as low as a 15% rate, while interest income is as high as 35%+)
- Interactive brokers will offer you LEVERAGE. By leverage, this means that they will LOAN you more money than you have in your brokerage account so that you can invest and magnify your returns, either UP or DOWN

Using this method, the specific "napkin" offer is as follows:

- You put up $100,000 of money in a brokerage account
- Using that money as collateral, you borrow $400,000, or 4X leverage
- Now you have $500,000 in your account to invest with
- Pick 5 stocks yielding 5% or more, and invest $100,000 in each stock
- Your stocks should then bring in ($500,000 * 5%) = $25,000 / year in income
- The interest on your $400,000 that you borrowed from Interactive Brokers costs you ($400,000 * 1.25%) = $5000 / year in expenses
- Your net income is $25,000 - $5000 = $20,000 / year
- $20,000 / year in income on an investment of $100,000 is a 20% annual yield, at a time when you can only earn maybe 2% risk free. This is a substantial return

The first thing people would ask is WHY Interactive Brokers would lend out $400,000 on a $100,000 investment at such a low rate? From a margin account perspective, Interactive Brokers doesn't take much risk. Let's say the value of all the stocks fall 10%. In this model, your portfolio value has dropped from $500,000 to $450,000. While your equity (investment) has shrunk from $100,000 to only $50,000, they haven't taken a loss yet, because they can step in and liquidate your portfolio in the open market, take back their $400,000 (including the accrued interest to date plus any fees they want to charge), and hand you back your remaining cash. As long as they "pull the trigger" to liquidate the positions before it reaches the $400,000 mark (or nearby, so that they get their interest and fees), they will be made whole.

This example indicates the "down side" of leverage. When the markets go against you, and your equity component is but a sliver of your total portfolio, even small market moves can kill you. At some level this is what caused the banking crisis in late 2008; the large institutions had little equity capital and super high levels of debt (more than 30X their equity available, depending on what you count as equity capital), meaning that even a small crisis of confidence or repayment risk started to topple the entire structure. You might ask WHY these banks, whose depositors are guaranteed by the US government (FDIC) and who are so central to our financial system that they cannot be allowed to fail could leverage up so much, but that is grist for another post (failed regulation).

One question that I started asking as I stared at the napkin - how many quality companies are there out in the market that pay greater than 5% dividend yields? I am looking for companies with a reasonably strong share price and a history of paying high dividends, not companies that paid a modest dividend but whose stock price has fallen so far that it SEEMS like they offer a high dividend (these are unstable dividend payers who likely will lower their dividend at some point in the future).

Using the cool Google Finance stock screener, I put in a criteria of stocks with a greater than 5% yield, more than $1B in market cap, and that they couldn't have had a 52 week return of worse than -20% (to screen out ones that have a big dividend yield because their price has been plummeting). I was surprised that there were a number of major companies offering such high yields, including:

- AT&T (T) at 6.62%
- Altria (MO) at 6.9%
- Southern Company (SO) at 5.38%
- Bristol Myers Squibb (BMY) at 5.2%

So at least there were a number of reasonable candidates for this sort of analysis. You can see how the value of a company paying out dividends this high would rise in our current minuscule interest rate environment. On a personal note, when an ETF specializing in dividend paying stocks, DVY, came out about 5 years ago - I jumped in right away, figuring that it would be a good play with the reduction in taxes on dividend payments to 15%. However, this fund essentially loaded up on financial firms, which were viewed as reliable dividend payers, and was socked during the financial meltdown when many of the components either vanished or were severely punished.

So far the "back of the napkin" has checked out - the real issue, however, is that we are mixing "apples and oranges" by seeking yield with a volatile assets. The 5 stocks (in this example) could easily drop by 10% in a narrow range of time, essentially making Interactive Brokers enact a margin call (they aren't going to wait until you have zero equity in your account, at that point you'd be levered up 9 to 1). What you are betting on is that you can hold these assets and that they'll trade in a narrow range (or up, a situation that we'll get to next) for a reasonable amount of time, in fact at least a year or so in order to obtain that yield.

The flip side is that if stock prices go UP, you will have a bonanza on your hands. In addition to the 20% yield that you'd earn if you were able to hold for a year, you'd get gains on both your money and the money you borrowed. If stocks went up 10%, your gain would be ($550,000 - $400,000 borrowed money - $100,000 original investment) = $50,000 on a $100,000 investment, or a return of 50% (on top of the 20% yield you'd receive). This is the "magic" of leverage - I saw an analysis one time that compared the S&P 500 return against hedge funds and if you levered up the S&P 500 with this sort of margin you'd receive returns that would give the hedge funds a run for their money (they almost all use leverage, too).

The odds that this basket of stocks will decline by 10% or more, causing IB to liquidate your holdings to pay off the margin call, is pretty high. The yield play is really secondary to how long that you can avoid that sort of a down turn. On the other side, gains are very beneficial in this model. It probably doesn't make sense to mix yield with leverage to this degree, unless you are a professional investor and this is only a small part of your broader portfolio.

The low interest rates that we have today encourage risk taking because the government has set the rates so low. With low rates, virtually any business model with any sort of return looks at least feasible on a napkin.

Personally, I was pretty impressed by the number of solid-looking companies paying such high dividends. Even with zero leverage, a 5% return is great, especially since the effective tax rate is 15% on these dividends (for now, at least, until the tax cuts are rescinded which is likely in 2011). The issue is that even a small market downturn will make that 5% return moot, if these stocks fall harder than a general corporate issue.

This ad certainly did make me think about a lot of things; the power of leverage; the ability of a low interest rate environment to make almost any business idea sound good; and what is driving these companies to such a high dividend payout ratio.

Cross posted at Chicago Boyz and Trust Funds for Kids

Annual CTA Proposed Reductions

I knew it must be time for the annual "dance" regarding the Chicago Transit Authority budgets when I saw this sign up on a bus stop near the Merchandise Mart. The sign detailed the threatened cuts to bus routes if 1) the CTA doesn't get more money 2) the unions don't give back their recently negotiated pay raises.

This is no way to run a state. This article in the Chicago Tribune describes the annual ritual:

The CTA made an offer today that its labor unions could refuse, and they quickly did: Give back a 3.5 percent pay raise this year in return for reducing employee layoffs and major cuts in bus and rail service that are set to begin Feb. 7.

The standoff threatens to cost 1,067 union and 100 nonunion employees their jobs as the CTA whittles away at a $300 million budget deficit that is caused mainly by tax-revenue declines linked to the recession.

But the public stands to feel much of the pain in less than three weeks when there will be longer waits between buses on 119 routes, 41 bus routes will have shorter hours and nine express bus routes will be eliminated.

Note - the unions aren't being asked for cuts - they are being asked to give up scheduled pay raises. But of course they are balking at this; after all, why concede anything, when the politicians back down every time and just issue debt or raise taxes to cover it anyways?

No one knows how this will end; in the past the state always stepped in to throw more money at it, or come up with some sort of accounting or borrowing gimmick as a temporary fix, but our financial situation is getting more and more dire by the day.

For a while I was thinking of setting up a site dedicated to Illinois' fiscal woes, but someone beat me to it.

IllinoisIsBroke.com describes the state of our state, which is of course very bad. This site puts most of the blame on our broken and underfunded pension system, which is a prime culprit.

It will be interesting to see how the game of chicken plays out this year since our funding options are drying up; some day this game has to end with the draconian cuts being implemented to wake people up to the situation.

Cross posted at Chicago Boyz

Bears Tailgating

Dan and I have been tailgating at Bears games for years. Recently Gerry began joining us for the home opener, bringing his awesome cooking skills to bear (Dan is no slouch, but Gerry and his brother are "off the hook").



So I was amused to find this article about Tim Shanley in the Chicago Tribune where he describes his weekend tailgate preparation. Shanley apparently has a bus, featured in the attached Tribune article, that he customized for tailgating. We have never seen his bus because he doesn't tailgate in the official lots - he goes to the McCormick place lots south of the stadium.

This guy's preparation for the game is intense. First of all, he doesn't even LIVE in Chicago - he flies up every weekend for the game (Dan drives down from Madison, which is nuts, but this guy takes it to another level). Here is the menu, from the article:

One day's menu: 20 pounds of Buffalo wings, 40 pounds of chicken thighs, 15 pounds of pork loin, 7 pounds of beef roast, 6 pounds of bacon, 20 pounds of pork chops and 3 beer can chickens, along with potato chips, a giant chocolate chip cookie and three pre-made sub sandwiches.

WOW. It doesn't say how he funds all of this in the article, but presumably people are chipping in or paying him as a business, because purchasing all of this must cost hundreds of dollars every game.

The CRAZIEST part, however, is this part of the article:

While about 50 people dig in, Shanley doesn't. In fact, he barely eats anything... about half the time, I end up eating a turkey sandwich inside Soldier Field.

I hope that he is bringing in that turkey sandwich (don't know if that is allowed or not, but it never occurred to me to try to bring food IN to Soldier Field, because I usually am so stuffed from eating in the parking lot) and not eating something prepared in Soldier Field, because the concessions at Bears' games are vile.

A funny part of the article describes how he cleans up after his bus in the McCormick lots because he doesn't want the park district to ban tailgating there.

Shanley is concerned that if the parking lot isn't left clean, McCormick will stop allowing tailgating, which would mean he and the other tailgaters would have to move to the Adler Planetarium lot. "And no one wants that" he said. "It's the hellhole tailgate spot in the NFL".

I had to laugh at this. In 2009 Dan and I were moved over to the Adler lot for the first time. On the one hand, snaking your way there across the stadium sucks, but it certainly has a nice view and isn't bad overall (easier to get out afterwords, too). I guess he means that the area where the buses are (see photo below) isn't so great, but it isn't a "hellhole" by any means. Old Soldier Field before renovation qualifies as a "hellhole", but not the Adler lot.

Are You REDdy For Some Football?

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I must be turning into Andy Rooney.

Have you seen that artificial blue football stadium turf? This football turf color thing is catching on, sorry to say. Now Eastern Washington has announced it is installing red turf.


I have briefly seen that blue turf on televised highlight reports and it makes me nauseous. It’s bad enough that climates (money) dictate the use of artificial surfaces in stadiums but screwing with the color is going too far.

NCAA football has been a bit more daring then the NFL in uniform colors, mascot nonsense and licensed products so it’s not surprising another small school is out there crying to be heard. Marketing terms for this would be “reinventing a brand” or “breaking the mold” and my favorite, “being edgy”.

I say “shove it”, “no thank you”.

Color in life should be fun. But some color traditions should not be fvcked with, know what I mean? When I want football I want it on green. Shooting pool on any felt other than green annoys me. Green leaves change colors but only for a short time. In Chicago they dye their river green on St. Pat Day but only a few shades lighter than it already is. It doesn’t last long.

Tomatoes and apples can be red or green. I Iike eating green apples but have no use for green tomatoes.

A few years ago Heinz experimented with marketing green ketchup. Seen any lately?


Well that's my latest rant. Excuse me while I pour another Bloody Mary.
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Self Absorbed Jerk

We don't do politics here, right? Right? Well, I can't help myself on this one.


0bama takes a gratuitous shot at the Supremes, who are typically not allowed to show any emotion at the proceedings. Alito you can see here is pretty pissed off and seems to mouth "not true". There is an interesting comment thread about this at Ann Althouse's place.

You just have to be a self absorbed jerk to take a shot at the Supreme's when you are doing the SOTU. He KNEW that the justices would just have to sit there and take it. This is akin to me sparring a ten year old in Muay Thai. Better yet, it makes more sense to compare this to sparring someone who is not allowed to punch or kick you back. I mean, what the hell?

Outside of that, I have the utmost respect for the Supreme Court justices. All of them are extremely brilliant individuals. If you take the time to read any of the Court's opinions, it isn't like they are guessing about the law - they have very good reasons for making the decisions that they do. They know history, Constitutional Law, and other things - and know them in excruciating detail as you can tell if you ever listen to any of the showdowns between the justices and the attorneys arguing cases.

For our anointed one to take a poke at the Supremes is just horrible imho. Who are his strategists that thought that this was a good idea? Yikes.

I don't see Scalia there - too bad. I bet he wouldn't have muttered "not true". It would have been (and should have been) something much more colorful. Stevens wasn't there either, I have heard that he isn't doing so well.

Break Time?

I think I am going to have a sit down with my Muay Thai instructor. No, I am not quitting.

Over the last few months my running, biking and circuit strength training has really started to become very interesting to me. My average running and biking times are spiking since I have ratcheted up my training. My body is showing the results of the circuit training more and more.

I am considering taking a break from Muay Thai in the summer months, so I can not only focus harder on my other things, but to just be outside. Every day that I can be outside is precious in the warm months. The last few weekends it has been between 25 and 30 degrees here and I have gone for some pretty long runs and I found it wonderful. Now the high is going to be 10 and that will be a "no go". I don't think I would enjoy those winter runs if it were windy either.

But I am going to talk to my instructor first. If he doesn't think that a break would benefit me I probably won't. He isn't the type of guy that would say that I shouldn't take a break to keep his pocket lined so I trust him and his opinion.

I have a test at the end of May and that will put me over the halfway mark to a black sash. Three years of Muay Thai and I can't recall missing one class due to being lazy. On top of that I have been holding pads for fighters seriously for a year and a half now. Some nights I leave the gym pretty spent. All good though.

Nothing has happened at the gym to cause any of this to come to a head, just that I am really enjoying running and biking as well as the circuits. We will see.

Monday Morning Blues

An Eco-Friendly Super Bowl Party?

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This morning after browsing through the very thin Sunday morning paper over a bacon, egg and hash brown breakfast one story really caught my eye. My local paper carries Parade and USA Today Weekend sections, two more inserts tucked inside that serve as yet another advertising vehicle.

These faux mini-newspapers also carry celebrity gossip, self-help tips and lifestyle suggestions. Like this little gem…


Click to enlarge for a good laugh. The first thing of note is the photograph. Hopelessly posed wouldn't you say?

If anyone has been to a party that looked like this that wasn’t held in a church social room or a staged democrat fundraiser please let me know.

My idea of a Super Bowl party is a warm, lively open fire in the fireplace blasting my carbon enriching micro-ash into the sacred atmosphere and eating delicious homemade greasy junk food.

The Super Bowl is not an occasion to express your eco-nanny-ness unless all your friends are trendy urban libs and I no longer have any of those. To me watching football is celebrating a violent competitive All-American game that provides live action, drama and mayhem. It's not some peace demonstration or political rally.

And I aim to keep it that way. Go Vikings.
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Louis Andria, DDS

Well, the talk is that my oldest will be getting braces soon. She needs them. Her mother and father both went through it so it was pretty much expected. She also has an overbite which will need to be corrected. Back to this in a minute or two.

Have you ever had a person in your life that seemed to drop out of the blue, but affected you in an interesting way? Henry Rollins did. In his essay Iron, he speaks of Mr. Pepperman, who took pity on a scrawny, dorky kid, and taught Rollins how to lift weights. This gave Rollins a sense of accomplishment. It is a great essay and very motivational. I carry a copy of Iron in my briefcase and read it when I need a swift kick in the pants. Whenever I am sore or tired and don't feel like going to the gym or running or biking or whatever training I need, I read Iron, strap it on, and get to work.

My orthodontist when I was a kid was Louis Andria. I went for a total of around four years or so before he could get my mouth full of mush corrected. It was quite a project. I told some interesting stories about Dr. Andria at the dinner table last night. As I did, I realized that there will probably never be another one like him.

I grew up in Rockford, Illinois. At the time, Dr. Andria was considered to be one of the top ten orthodontists in the US. Pretty impressive for being in a po-dunk town an hour and a half west of the big city of Chicago. But you could tell from his office that he was in very high demand.

He had approximately ten chairs and would glide from chair to chair and do his work on the kids. I should say almost all kids - even my mom got her teeth corrected by him later in her life. Not many adults in there, though.

When you came into the office you had to check in at the front, where his wife usually worked. Then you would have to try to pry yourself into the waiting room, which was typically packed with the rest of the family members of the kid getting worked on. Many times people had to sit on the floor, it was so packed. I guess the picture I am trying to paint is that this guy had a HUGE business, probably had the biggest market share of any orthodontist in the history of the world. Who knows how far people would drive to see him.

There were always cat posters and pictures on the wall. My favorite was a drawing of a cat with this poem underneath:

Love to eat them mousies,
Mousies what I love to eat.
Bite they little heads off.
Nibble on they tiny feet.

The pace in the patient area was fast and furious. Andria expected the best out of everyone in his place and his assistants NEEDED to have their stuff together at all times.

To round out the atmosphere, he played the heaviest metal station of the time in Rockford, Y95, on the radio. At least it seemed heavy to me back then.

Dr. Andria always, always, always expected the best out of you. If you had braces you were expected NOT to ruin his work. NO gum, caramels, hard candy; anything that would destroy the work was strictly verboten. Here is the best part - if you came into the office with gum in your braces he would FINE YOU. That's right, I believe it was $25 per infraction right on to your bill that your parents had to pay. Better yet, he would yell it right from the chair to his wife all the way up front so the entire office could hear it - "JOHNNY EVANS NEEDS TO HAVE AN EXTRA $25 PUT ON HIS BILL FOR CHEWING GUM! THANK YOU!" It was classic. I highly doubt that this would ever happen today in our all too correct PC world of coddling everyone.

It sort of reminds me of the way that judges used to be. Well, Billy, you can go to prison or join the army. Up to you. This country is hurting because there aren't more people who will simply stand their ground and not accept nor coddle failure.

I assume the technique of the fine was to try to get the parents to extract this money from their kids, or at least realize that their kid screwing up was making them go to the office more often. Needless to say I never even thought about messing up my work by chewing gum or using any of the other offending substances.

At times it was really torture in there - my teeth were seriously messed up and I dreaded the appointments where I would have my archways adjusted. The archway was a wire that connected all the braces together. When Dr. Andria tightened that thing it seemed like murder. I wouldn't cry, but tears would come down my cheeks. I remember one time I could actually feel my teeth move in my skull. Ouch. I usually couldn't eat too much solid food for a few days after that. But if Dr. Andria saw a tear, he would just punch me in the gut and tell me what a tough guy I was. He always did stuff like that to the kids - punching the guys, tickling the girls and such to make them feel like they had done a good job. I think that the techniques he used were psychological as well as physical to get his deal done. On the other hand, he just could have been a nice guy.

In the end, when I read the Rollins essay about Mr. Pepperman, I was reminded of Dr. Andria. A very unique guy - there will probably never be another one like him. I fully expect that when I go to appointments with my daughter that the environment will be much different than the one I dealt with 30 years ago.

When I was done with the braces and they came off, I really felt a sense of accomplishment, believe it or not. Four years of pain will do that for you. Dr. Andria had done his job, just like Mr. Pepperman had.

I googled Dr. Andria, assuming he may be dead, but am happy to report that he retired from private practice in 1997 and is now a professor of Pediatric Dentistry and Orthodontics at the University of South Carolina. If you are sending your kid to an orthodontist that he trained and/or educated, that kid will be in good hands.

If you ever read this, Dr. Andria, consider me a satisfied patient.

Cross posted at Chicago Boyz.

Poll Reminder

The poll you see on the sidebar about Gerry's beer labels closes tomorrow, so get your vote in today!

Recoil Sucks

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L O L ! : )
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More Hypocrisy on Gambling

In the same way that I write a lot of posts about investing and power, Dan is our resident expert on gambling and sports. The thesis of his argument is clear - gambling is happening everywhere across the USA, yet we only legalize it in Nevada (and a couple of other places, to the sports' leagues chagrin each time it occurs), and have a completely hypocritical attitude towards where we allow gambling to occur, and we prohibit it (legally, at least).

While the states frown upon gambling, they make their lotteries (with odds worse than virtually any other form of gambling) the centerpieces of their budget. Illinois is famous for claiming that the lottery proceeds would be used for education, and then just inserting lottery revenue in for education and reducing their contribution accordingly (and then some).

While we can't gamble online and can't legally bet on sporting events, for some reason horse racing is OK for betting. There are off track betting parlors so you don't even have to go to the track. Why? Hmmm.... it couldn't be that horse racing is politically connected, I won't go there.

But now, the state is letting people bet ONLINE on horse racing events. Huh? I guess it makes sense when you use the line of reasoning that it is only an extension of OTB into an online space, but why is it OK to gamble on this relatively obscure sport (relative to the NFL, the NCAA, and everything else) when all else is prohibited? I can't follow the broader logic.



Someday when Dan gets a free minute or two he hopefully can go through the Twin Spires site and let us know how it all works relative to other online gambling outfits.

NBA vs. Little Girls

Last Sunday I went to a basketball game. The featured combatants were girls in elementary school. I enjoyed it much more than the last professional basketball game I watched on TV. Why? Pure joy.

The girls on that court were actually having fun. There were no arguments with the referee. The official's word was absolute. The coaches let every single girl play. The fans were nice. The team my girl is on lost 24-1 but nobody cared.

I used to say that there is nothing more miserable than watching little girls play basketball. I have to say that I was very, very wrong. And it isn't because my girl was on the court. It is because I had no frame of reference.

I have a long history of playing (average) basketball. I played from elementary school all the way through high school and was on intramural teams in collej. At times I would get to play with some guys from the Illini basketball team in pick up games. My most famous memory was when Deon Thomas was bearing down on me on a fast break one on one. I set up to take the charge and he dunked over me, the wind from his size 13 Air Jordan's causing a slight breeze past my ear. He literally jumped over me and I am around six feet tall. I had to laugh - actually I gave him a high five. Good times. Oddly, my best basketball was played in college in pickup games where nobody would ever have a record of it. Even though I was shorter than a lot of guys I was very good at boxing out and got tons of rebounds.

As an aside, reading Deon's wiki, I see he is one of the most successful American pros of all time in the European leagues. Good for him.

After we got home from the game last Sunday, I started teaching my daughter some of the basics of basketball. How to defend, box out, rebound, shoot, set pics - the simple stuff. It was a lot for her to absorb but she liked it. Not to brag, but I saw some talent out there, albeit in the roughest of states. She reminded me a lot of me on the court. Not exactly blessed with the natrual talent but making up for that with her brain. She will come along fine.

I have read many places that the purest form of basketball is high school girls hoops and I believe it. There is no dunking, and typically no dominant player so the teams must master fundamentals like dribbling with your head up, passing, setting good pics, good shooting, etc.

Speaking of dribbling, when I played all those years ago, we would have never gotten away with all the carrying they do now. I don't know you can play defense with guys dribbling like that. Watch any college or pro game and you will see what I mean.

So here you have the NBA, full of gun totin', 'roid pumpin' thugs, causing mayhem, cursing out the refs and acting like jerks. The refs are fixing games. The players don't even run up and down the court.

And on the other hand I see a court full of 9 and 10 year old girls getting great exercise, running up and down the court having a good time and enjoying themselves. I will take the girls game any day. I think that is what Naismith had in mind when he set up that peach basket all those years ago.

Monday Morning Blues

A request from Gerry:

We are Wrong on Rate of Return

In this article titled "Why Many Investors Keep Fooling Themselves" by Jason Zweig from the Wall Street Journal, Mr. Zweig does an excellent job of explaining why individuals assume that they will receive a rate of return that is too high, which means that either they are not saving enough to meet their goals or that they are taking too much risk of running out of money.

This post describes what the rate of return means in practical terms, and why it is important.

One of the core elements of investing is the assumed "rate of return". Along with your base investment (or amount that you are periodically adding, say annually), your time frame (number of years out you want to go), the "rate of return" is the percentage variable used to determine whether you will have enough to retire and / or meet your needs for a specific goal (such as will you have enough funded to send your child to college).

What is Rate of Return?

The rate of return is what you EXPECT to earn, in gains, each year. Typically this rate of return is highest for stocks, in the middle for bonds, and lowest for cash or cash-equivalents (short term money market, CD's, etc...). A sample plan might have stocks at 10%, bonds for 6%, and cash-equivalents at 2%.

A rate of return utilizes compound growth; thus $1000 for 10 years at a 10% rate of return does not give you $1000 + ($1000 * 10% * 10 years) or $2000 at the end of the period (ignoring taxes and transaction costs, which I will get to next), it gives you
about $2850, because you earn a return on your gains each year, so the gains compound. If you go out even further, to 20 years, you don't go from $1000 to $3000 ($1000 * 10% * 20 years), you get $7400. Thus the part of earnings due to "compounding" (not just the base payment times the rate, for the time period) is $850 over 10 years ($1850 - $1000 = 850 / 1000) or 85% higher. The part due to compounding over 20 years ($6400 - $2000 = 4400 / 2000) or 220% higher.

Basically, ignoring the math, in general, the higher your "assumed" rate of return, the greater your assumptions on your ending value. It isn't "linear" - it is "geometric" - so a 2-5% difference in assumptions makes a GIANT impact if you are looking out 20-30 or so years.

When I started out investing about 20 years ago in my first 401(k) plan, people thought 10% / year was a reasonable assumption for equity returns. I don't know what the assumption on bonds / cash investments were, but let's say that it was 6% or so. Under these plans, if you set aside a decent amount towards your 401(k) and your company made a decent "match", you could easily see your amount available for retirement grow to a seemingly large and acceptable number, assuming that you put most of your money in stocks (since you were just starting out in investing).

Problem One - Losses

The first giant, gaping hole in the rate of return model is how to handle losses. Losses have a very significant impact on your portfolio, because your rate of return has to be MUCH higher to "dig" out of the hole. For example, if your portfolio loses 40% in one year (which happened to most of us in 2008), and goes from $100,000 to $60,000 ($100,000 * -40%), you just took a big hit. But then, your future growth has to be much higher in order to reclaim the ground you just lost. If you lose 40% one year, and then have 10.75% growth for 4 years, you just break even. However, you lost FIVE YEARS of future compounding (the year when you went down 40%, and the 4 years you earned 10.75%) just to get back to ZERO (where you started). Thus if you wanted to earn 10% a year for 5 years when you started (which takes you from $100,000 to $175,000), and you still want to get to $175,000 at the end of 5 years, then after your first "big hit" of 40% losses, you have to earn at a 23% for the next 4 years to 1) make up the loss in year one 2) to earn enough in all other years for them to get their "base" return, too.

So let's go back to this (semi-real world) example again, in just dollars. You have $100,000 on 1/1/00. You are using what seems reasonable to you or me when I started investing (a 10% return assumption), which would have my balance at about $175,000 on 12/31/05, over 5 years.

In year one, ending 12/31/00, the market goes down 40%, leaving you with $60,000. Gulp. If the market goes up a bit more than 10% / year over the next 4 years (your original rate of return assumption), then you basically end up back near your ORIGINAL $100,000 balance, after 5 years are done. This isn't good, you could have left your money in a guaranteed account and done about that well. You just made NO progress towards retirement or towards a college education account.

Thus in order for your portfolio to be able to afford some occasional large losses (such as we received in 2002 with the dot-com crash and in 2008 as the credit markets seized up), you will need to make FAR more than 10% the OTHER years in order to reach a target as high as 10%. In fact, you will probably need to earn something like 20% every OTHER year in order to make up the lost ground of years that have big losses.

Basically if you aren't seeing a return of something like 20% / year in MOST years on equities, you aren't going to make anywhere close to 10% when you factor in our frequent years when the markets take big hits. Not only do you lose DOLLARS (your balance declines 20% - 40% those years), you also lose TIME for future compounding and your rate of return is much smaller than it appears.

If you go back to 1990 and ran the S&P 500 for 20 years, you'd get an appreciation of around 6% / year. If you just run the last 10 years, you get negative appreciation (no growth). I realize that stocks have a longer term horizon than this but these are the relevant milestones within my life. The "net" of these two, in very simplistic terms - around 3%, given that you are putting money in "in increments" and didn't just have a lump of money at the start of 1990 and watch it compound all those years.

Problem Two - Transaction Costs

I had a friend who used to live in Las Vegas. He always said that the fact that they had lavish facilities and gave out subsidized meals and drinks meant that the house had a big edge, and that they always won in the end. While this is common knowledge, actually seeing the scale of their vast casinos put this "edge" in perspective.

The same thing applies to the big bonuses and huge financial services industry that exists in the United States; to a large degree, these institutions exist and can pay bonuses because of transaction costs that they put on customers such as yourself that invest in the markets.

Since the time I started investing in the 1990's transaction costs have fallen a lot. It was common to pay a 5% "load" up front when joining a mutual fund, on top of annual expenses in the 1% - 2% range. Nowadays mutual funds with a load have become much scarcer and transaction costs have fallen into the 0.5% range if you shop around a bit. ETF's, which also have big tax advantages, have risen in power and they also offer low transaction costs since the cost to trade a share of stock has fallen over the years (for mutual funds you typically don't pay a transaction fee to invest, but you do for ETF's). It depends where you shop and what other fees to take into account but nowadays an electronic brokerage like TD Ameritrade allows stock trading for $9.99, a significant drop from the $30+ dollars it cost "net" back when you had to call a broker by phone in the early 90's. This reduction is even bigger in "real" terms when you factor inflation into account.

While transaction costs have fallen, they still add up, and they eat into your return. Your return now has to "make up" for the "loss" years (and time), as I noted above, but also at least 1% / year in transaction costs for equities (all in). You probably could do it for less depending on how you structure your portfolio, or it could be higher if you trade a lot.

Problem Three - Taxes:

Taxes also impact your earned rate of return. There are many kinds of taxes that hurt investors' returns.

1) capital gains - when you sell something that has appreciated in value, you pay capital gain taxes, which vary depending on how long you held the asset. Currently, the US has favorable tax rates for assets held > 1 year, it is 15% - this would rise potentially to 20% when these rates expire in 2010 assuming this is not renewed. Assets held less than 1 year are treated as ordinary income, which is as high as 35%
2) taxes on dividends - each year dividends are paid out from many corporations; since dividends are subject to "double taxation" (the corporation pays dividends after tax has been applied), the US has a favorable rate for investors who receive taxes of only 15% on US corporations. This is scheduled to expire and may or may not be renewed; if not they will be treated as ordinary income, assume 35% or so
3) taxes on interest - if you receive interest income, it is taxed as ordinary income, assume 35% or so. There are exceptions to this, but they also cut into your return - municipal bonds are (generally) exempt from Federal taxes, but they make up for this by offering a lower rate (a municipal bond might offer 3% when a corporation would offer 4.5% for the same credit quality bond)

While you can defer taxes by using various plans 401(k) and defer gains on other plans (IRA), and also completely avoid taxes by using funds for designated purposes (529 college plans), in general as the saying goes, you can't escape taxes. You can structure your portfolio in a manner to minimize tax impacts (i.e. put interest income in IRA funds, and low dividend ETF's in your after-tax brokerage), but you need to factor in taxes into your implied return. They generally take off at least 1-2% of your return, but like all else, it depends. But it isn't zero and needs to be taken into account.

Problem Four - Investor Behavior

In order to "earn" the returns listed above, investors need to act rationally. Investors, historically, have NOT acted rationally. Investors tend to buy after a stock has risen (chasing returns) and they don't re-balance their portfolio after gains. They need to HOLD on to stocks after big losses have occurred, rather than selling at the trough, so that they can be there when the stocks "roar back" and go past the losses incurred.

Investors also tend to minimize their re-investments in stocks when they go down; this is human nature - when something has bitten you (stocks for losses), it takes an iron stomach to invest MORE money in stocks again. But in order to earn the rate of return that stocks (theoretically) can offer, you need to buy low and sell high (through re-balancing, effectively).

While research on the impact of investor behavior is all over the map, in general the "average" investor does much worse than his "rational" or "theoretical" counterpart. This probably drops 1-2% (or more) off the return.

Conclusion:

In the article by Jason Zweig, he uses the term rate of return "net-net-net". This means the REAL rate of return after transaction costs and taxes. Typically irrational investor behavior needs to be taken into account, too.

With all of this, that 10% rate of return is likely to be far lower; perhaps 5%, perhaps less. If you put those numbers into your model you won't be retiring for a long, long time.

Cross posted at Trust Funds for Kids and Chicago Boyz

Hunting And Technology

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The odds still favor the game.

Not long ago my next door neighbor stuck a trophy buck a few miles south of town. The local deer in Porter county are healthy and thriving. I wrote about his trophy here and a photo of the beast is there as well.

This morning he emailed me with photos attached. They were taken by his friend who hunts property across the county road. If this big buck looks familiar it's because it is the same deer.


These came from a motion sensor camera mounted to a tree on the adjacent property. The friend recognized the photos of my neighbor and the dead buck I took so his friend made these available to him.


It appears the friend has been patterning this buck for a few years. My neighbor spends days in the trees and claims he never saw this one before it entered the scope of his crossbow.

Note the pile of corn and a rabbit in this photo.


Electronic technology has been oozing into the outdoor world for years. No way would I fish out of a boat without a depth finder. My remote dog collar is indispensable. But where does one draw the line?

When bird hunting I have encountered guys so wired up with technology it makes me wonder why they ever left the office. Some use collars that beep every five seconds and that drives me absolutely nuts. The same collar has the obedience zapper and may now contain a GPS device so your dog is never “lost”. Just use your handheld display and follow your poorly-trained pup.

One thing for sure. If and when I decide to deer hunt again I will be buying some of these cameras.
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New Poll

Here at LITGM we only put up polls on the most important subjects. Please take a look at our new poll on the left sidebar and vote. You can only pick one and I will leave the poll up for a week. Thanks!

Beer Labels

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When I published my recent home brewing results, frequent commenter Mark asked, “Does the label change from year to year or is this your brand? If so it would be fun to see collage of Stub Tail through the years”.

Stub Tail Pale Ale is the brand I use for client gifts at Christmas time. And yes, I try to freshen up the look each year. One thing that doesn’t change is Stubby the Bulldog. Here are a few Stubbie labels from the past.



While I have brewed many times I do not stick labels on each and every bottle. Soaking used bottles and scraping off labels with a razor blade before sanitizing each bottle takes way too much time, if I glue a label to a bottle I never want to see it again. Cheers!

Serious home brewers I know keg their brew in five gallon stainless steel soft drink casks stored in an old refrigerator charged by a CO2 tank, hoses and a tap head(s) sticking out of the side. This saves a lot of work bottling. With a set-up like that I would weigh 500 lbs. within weeks.

My preference in bottles is the 32 oz. E-Z Cap but they are hard to find locally and online sales are restricted to a one pallet purchase minimum. Not very E-Z. 12 oz. bottles are a huge waste of time so I have settled on the easily obtainable 22 oz bottle.




Last year I went to the high gloss design style. Portraying beer as wine in order to raise the perceived value worked well. Changing the name was a nice departure as well. I was pleased with it and the feedback was good.


If I am going to sit down and enjoy one beer a 32 oz. bottle is perfect. The pee to beer ratio for me is about 3-1 so that saves a few trips to the fridge but just as many to the pot.

Here is a reject label design. I thought it would be fun to create a mythical company named Big Wood Brewery.


Borrowing the interest of retro pulp mag cover art provides miles of creativity. Like this design for "REDHEADED LUSH".


I try to stay away from designing traditional beer labels, the kind with production tricks using foil and exotic substrates. Design elements such as engraved looking hops, barley are a no go for me. But I couldn’t help myself to give traditional style a simplified try with these three.






Brewing beer is a hobby. It’s much more fun drinking your own. When poured into a clean glass homebrew has a creamy head that will not quit. When it’s warm it’s clear, chill it and it gets cloudy. I prefer partly cloudy.


That’s called a “chill haze”. It tastes better than most bottled stuff you will find in even the largest liquor store selections.

Enjoy your weekend. I sure will. Here's George, riding a Sportster 1200. Trying to be a badass. Rock on.



That is all.
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No Politics... But

We don't talk about politics here at the blog.

However... I just went and donated to this cause and I suggest you do the same.

Such a Deal!

I gotta admit, the NFL is trying their damdest to figure out ways to separate hardcore fans from their hard earned money.

For the low, low price of $5749 (and up) you can get a package that includes the following for the Super Bowl in Miami:

• hotel room
• party admission
• parking
• souveneirs
• one ticket to the game
• access to the field after the game for thirty minutes (I believe this begins 30 minutes after the game)

I looked in our LITGM kitty and since it is still (and probably always) at zero, this may not be an option for our writing staff here.

But I would imagine that some NFL fans with unlimited money will go for this unbelievably bad deal.

Frankly, it is my opinion that if you don't earn the right to be on the field you shouldn't be there. With one exception - celebration. This is one of the quickest "storming of the fields" that I have ever seen:



Of course, this is how several people almost lost their lives here in Madison several years ago. Buyer beware. After that they removed the guard railings that caused part of the mayhem, and now gladly allow the revelers to rush the field after big games rather than trying to stop the human wave.

Monday Chicago Handgun Murder of the Week

As Dan has his "Monday Morning Blues" we will have the Chicago "Monday morning handgun murder of the week". The point of this depressing column is to show how ineffective the city of Chicago's handgun ban is at keeping guns out of the hands of criminals, while making sure that law-abiding citizens can't defend themselves.

According to this article:

A 42-year-old parolee with a long rap sheet was charged with fatally shooting a 16-year-old boy outside of a Far South Side convenience store last week... His accused killer -- currently out on parole -- also has numerous arrests and felony convictions, including a 2007 conviction for weapon possession by a felon.

This sad event has it all - even when the city of Chicago attempts to use the handgun law to keep a violent felon off the street, he gets released and commits a murder.

Running Man

I had an interesting session with a running coach last Saturday. It took about an hour. The coach came over to my house and we analyzed my running form on the treadmill. She took some videos and then we sat down and talked about some things. The above video is what you are supposed to look like - and I don't. I guess that is like comparing an average golfers swing to the swing of T1ger W00dz (boy we REALLY don't want that traffic).

In general, we found that my running technique is wrong, but not drastically. There are things that I will need to work on this winter.

I heel strike too much. In other words, as compared to the runners above, my heel hits first, rather than the flat of my foot. Also I have very little arm swing. I was told that your arms help you drive forward.

The running coach gave me several drills to do in my basement, which will help me I am sure. Now I just need to do them, and when I do my long dreadmill runs I need to work on my new form. I was also told to not try to fix everything at once, or I will blow up. Apparently the brain can only work on one thing at a time, and outside of the major things of the foot strike and arm swing, I also have a bunch of little things that I need to work on as well. So this should be a fun project for me on the treadmill - one day I will work on arms, one day the foot strike, etc. etc. Eventually I will form muscle memory and (hopefully) do these things naturally.

The session with the coach was one hour and cost $60. Well worth it if I can shave 30 seconds per mile off of my times, which should be a piece of cake.

I recommend if you ever get serious about a sport that you take a private lesson once in a while from a professional. They really open your eyes up to a lot of things that you would never know or see and they also help you to train properly so you don't hurt yourself. This goes for everything, not just athletics.

Monday Morning Blues

Buying CD's Through A Brokerage Account

Recently I covered iBonds, which are a government bond that you can purchase online that provides assurance against increases in inflation and other tax benefits. The amount you can purchase is limited, however, to $5000 / year, and you can't redeem them for 12 months, which makes them unsuitable as a short-term cash vehicle.

Certificates of Deposit (CD's) Through a Brokerage:

If you are looking for a practical way to earn interest income with the minimum risk possible than certificates of deposit are a good alternative. When I was growing up you had to physically go to a bank and set up a CD, and then you had to retain paperwork for each instrument. In addition, you wanted to disburse your funds among a number of banks to get around FDIC limits, as well. Finally, the CD's were not easily redeemed, although you could redeem them in some circumstances depending on the issue with a penalty on interest.

Today - all of above disadvantages and inconveniences with certificates of deposits have been eliminated. You can buy CD's online (I used to go through a voice broker, but last time the guy showed me how to do it myself, online, so now I will just purchase them that way), they are integrated with your brokerage statement so there is no additional paperwork (on issuance, or at year end for taxes) beyond what you already receive, and also there is a "secondary" market when you can re-sell your CD if you need the proceeds sooner. There is no "guarantee" that you will be able to sell your CD at the price you want, but since a CD is a simple commodity with a rate, timing payment frequency, and a duration, I'd expect that you'd be able to sell it for something very close to the market price and receive not only your cash back but essentially be made whole on your interest. However, the overall interest rate market may have changed which would mean that your CD would be worth "more" or "less" if you had to sell it - longer dated CD's that I purchased a couple of years ago are now selling for more than 100 cents on the dollar (say 102) but that would only come into play if I decided to sell them prior to their redemption date, which I don't plan to do.

Creating a "Ladder":

The typical way to invest in bonds or CD's to earn interest is to create a "ladder". You purchase equal lots spaced out over equal intervals (in this case it is 5 "lots" with 1 year intervals), and as the current CD matures, you re-invest that money as the longest purchase in your range (the 5th year). Let's look at my current ladder:

The older CD's I have are as follows:

3.9% through Jan 2011
3.9% through Jan 2012
4.1% through Jan 2013

I had to fill in some gaps in my "ladder" recently. One of my CD's (yielding over 5%) hit its redemption date and the proceeds showed up in my brokerage account. Then another CD was from a bank that failed and the Federal government seized the bank and liquidated my CD and then the proceeds also showed up in my brokerage account (plus accrued interest). Without meaning to do so I "tested" the FDIC guarantee process and it worked very smoothly, in my case, at least.

The new CD's I purchased were as follows:

2.75% through January 2014
2% through January 2012

So in looking at this my ladder is a bit bent. I essentially am doubled up on the same maturity, January 2012, which is the 2 year point (from today). The "standard" item would have been to purchase a January 2015 CD, which would be essentially a 5 year maturity. Those CD's were offering around 3%, and I did not want to lock myself into a 5 year CD at such a low rate. Here is my current ladder:

3.95% Jan 2011
2.00% Jan 2012 (new purchase)
3.90% Jan 2012
4.10% Jan 2013
2.80% Jan 2014 (new purchase)

You can see how interest rates have declined over the last year or so. CD's that offered almost 4% are now down to about 2% for the same duration. This is a big drop for savers. Remember, too, that these are pre-tax rates - the after tax rates for these amounts are probably around 25% - 30% lower (maybe around 1.4% or so). The average interest rate across this portfolio is 3.35%, with my older purchases bringing up the total.

The interest rates paid by banks are impacted by our overall interest rate policy. The current interest rate policy is near zero. I am not smart enough to predict when US interest rates will begin rising but it doesn't seem feasible that our current almost zero interest rate policy can continue indefinitely. This is why I am "doubling" my ladder at about the 2 year mark; I'll re-assess the situation then and if rates are higher I will be in a position to take advantage of them. They can't get much worse (from an interest-seeking investor perspective, that is).

In summary, purchasing CD's through a brokerage is a way to put your cash to work in an extremely low risk, easy, and liquid manner, especially if you just hold them through to maturity. This would not be the sole item in your portfolio, obviously, but everyone needs a secure component of their portfolio and CD's, along with iBonds and savings, can make up this "leg" of your financial plan.

We will continue to cover other savings and investing outlets in future posts.

Cross posted at Chicago Boyz and Trust Funds for Kids.

In-N-Out Burger and Logistics

In Chicago we don't have In-N-Out Burger franchises. Thus recently when I was in Arizona I saw a big sign for one and then when I was returning back from the airport I got off the highway and drove around until we located the franchise (which turned out to be right by an exit, but I had already passed it, so next time it would be done in a flash).

I generally didn't know much about the franchise except that 1) the menu was very simple 2) the place was always packed. We got there a bit after 11 in the morning so the lunch hour rush hadn't started yet. By the time we were done eating, the line was starting to get very long.



The food was great. To some extent they turn the "fast food" label on its head - the food is cooked while you wait and seemed very fresh. People have expectations of long lines, waiting for their food, and they are OK with it taking longer. There is obviously a trade-off here when compared against the other fast food chains, since I wouldn't stand in a long line and wait to eat the typical fare. This is the "double double" with fries, and they had a nice catalog because apparently a lot of people like to show their In-N-Out price by wearing shirts and picking up other paraphernalia.



The menu at In-N-Out is very simple - burgers, fries, and shakes. In reading up (researching?) for this post on wikipedia I found that there was a "secret" menu, which mostly is a variation on items above, although there did seem to be some entirely different items (like a grilled cheese sandwich or fried onions).



Having a simple menu and focused presentation allows the company to focus on the quality of their hamburgers and fries rather than myriad other menu items. To contrast it with a McDonalds, they have chicken, whatever a McRib is made out of, breakfast food, etc... which must make up a much larger logistical challenge than those faced by In-N-Out.

As you can see from the photo above I noted the "worst" form of logistical failure, being flat-out of a product that consumers expect to see. It is odd to me that Eggos had a supply chain breakdown of this magnitude but it wasn't just at my local grocery store - they even mentioned it on their web site and formally apologized for this occurrence.

Another element that makes In-N-Out burger unique is that they don't franchise. Virtually every other large chain offers franchises, and then attempts to control the behavior of franchises through rules, supply chains, and various other measures. While this has limited the expansion of the chain, it must be a significant contributor to the success of the individual stores within the chain.

Hope to get one in Illinois one of these days, but that is a lot of states away from California (they are expanding into nearby states including Nevada, Arizona and Utah).

Cross Posted at Chicago Boyz

Lake Effect Global Warming…The Sequel

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We have been living here on the edge of Valpo for seventeen years. Lake effect snow is one of the quirky climate features of this geographic location. Last year we really got whacked. It was the worst ever with snow falling more days than not. At one time there was three feet on the ground due to accumulation. This year we are experiencing more of the same. It's called permaflurries.


My Ariens snow blower is over twenty five years old and finally crapped out on me this year so I went out and bought a new one. The new Troy-Built is far better. It’s lighter, quieter and much more powerful even though it has less horsepower. The opening is huge and the auger has more surface area. Merry Christmas to me.


During winter months I like a good hot breakfast. The bro gave me some yeasted waffle mix and real maple surple. Most store bought syrup is maple flavored corn sweetener. Authentic maple syrup is nowhere near as thick as commercial grade. It’s sweeter and the maple flavor much stronger. It's costly but much less is needed to flavor a stack of waffles or pancakes.


We occasionally make pancakes and waffles too, especially when both kids are home. I prefer waffles. I have used malt waffle mix but never heard of yeasted waffles. The mix gets eggs and cream added, and then yeast. The mix sits in a covered bowl for an hour allowing the yeast to get cranked up. The results were spectacular.


I look forward to watching the NFL playoffs for another three weeks. Then there’s the Super Bowl, which has turned into nothing more than an entertainment extravaganza with a football game sandwiched in.


After that the really dark days set in. It's good to have a big, dry seasoned woodpile ready to help warm my soul.
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Insane Travel Times

We are getting snow here today in Chicago and the roads are absolutely insane in terms of traffic. This is just one screen shot of the hours and hours people are going to spend each direction in traffic. Note that it takes over an hour to go 8 miles. I think Dan the runner could do 8 miles in an hour himself (hey I could do 6).

It is also pothole season I hit my first boulder-sized right-in-the-middle-of-the-lane pothole going north on Halsted and it was totally unavoidable.

iBonds revisited

I have written about iBonds on this site in the past and wanted to re-visit them.

IBonds are US government bonds and thus they are the "benchmark" for low risk debt instruments. IBonds have the following characteristics (which are well-summarized at the US Government web site here):

- a "fixed" interest payment that is set when you buy the bond. This component is set at the time that you make the original purchase and is constant throughout the 30 year life of the bond (or until you redeem it). This component has ranged from a high of 3.6% back in 2000 (before the government basically went with a zero-rate policy to prop up the markets) down to ZERO in the middle of 2008. It currently has a rate of 0.3%
- every 6 months you get a return equal to the inflation rate. This rate (for comparison purposes I am multiplying it by two to get an annual rate, although it is a tiny bit more if you are into statistical details due to compounding) has ranged from 5.7% (2.85% * 2) back in 2005 to NEGATIVE 5.56% in mid 2009 (which meant that EVERYONE who owned an existing iBond was getting NO interest for 6 months, because even if you bought one of those "golden" 3.6% ibonds back in 2000 that annual rate was less than this negative inflation component
- If you buy an iBond now, you get an annual rate for the next 6 months of 3.36%, which is basically the 0.3% "fixed" rate plus a bit more than 2 times the current inflation rate of 1.53%
- Your existing iBonds take the "fixed" rate from the year that you bought them plus 2 times 1.53% to determine the current yield; so if your rate was 1.55% (mid 2006 vintage) then you are currently earning about 4.6% / year
- There are also some tax advantages. You don't need to pay state or local taxes on the iBond interest that you earn until you redeem the bond (you have the OPTION of reporting interest annually, which could be a good idea if you are buying them for a child and they are in a low interest rate bracket, but this is beyond the pale for the current discussion)
- One disadvantage is that you can't get access to your funds for 12 months after you buy a bond issue. If you redeem them within 5 years, you lose the last 3 months of interest. After 5 years, there are no penalties

I wrote about iBonds most recently when their interest rate paid on ALL iBonds regardless of fixed rate component went to ZERO. I was interested in following up with them to see the current fixed rate being offered as well as the interest component.

Basically, iBonds are a GREAT deal right now. They provide inflation protection for when interest rates increase (which will drive inflation), they are the lowest risk class bond available (when the Federal government can't float debt any longer we are all in big trouble), and they provide deferral opportunities for taxes.

In reviewing other debt alternatives (something I will come back to in additional posts), right now a 2-3 year CD is yielding 1.5% to 2% / year. This is less than the iBond is yielding now (although it is guaranteed, while the iBond can fluctuate and go down if there is deflation, although not below zero). Other government securities are in the 2% range (or less) and then you need to go up the risk ladder a bit to get even 3% or 4%.

The Federal government knows this and they want to keep the iBond program relatively small, I guess, because they are limiting the purchase of iBonds to $5000 / year. You can go online to treasurydirect.gov to purchase them (it is very easy to do) and they will sweep the $ out of your bank account. If you really put your thinking cap on you can buy some for you and some for your spouse but in general for most the $5000 cap will apply unless you have a comprehensive estate plan in place. For a while you used to be able to buy $30,000 / year of iBonds which in hindsight was a great purchase plan but they cut it back accordingly.

All in, iBonds should be considered by anyone looking for an effectively zero risk component of their savings. Right now banks and CD's are offering almost nothing so this is a very viable alternative. You can't get at your money for 12 months but since your purchases are only limited to $5000 / year this likely isn't a significant deterrent.

Cross posted at Chicago Boyz and Trust Funds for Kids

The Web Amuses... And Terrifies

From time to time I recommend this site as one of the coolest web applications. Finally, someone who listens to you... I especially like "come closer" and "turn around". Very funny.

But then today I found this link at the Chicago Tribune web site. It is called

"Mugs in the News"

Basically you can see the mug shot and then just click through to the news article that summarizes the crimes. You have many, many murders and the murderers are often quite young. It is terrifying to go through name after name and face after face of individuals who quite clearly don't care about the consequences of their actions and have no place in civilized society.

As far as the handgun ban, check this one out. 2 guys, one from Burr Ridge (an upscale suburb) get in a fight, and then the guys from Chicago follow him, pull him out of the car on Webster (not far from where we used to live in Bucktown), and shoot him 3 times, killing him.

You can see incident after incident of the non-effectiveness of the Chicago handgun ban. Pretty much everyone is armed and utilizing a gun for their criminal acts. It isn't deterring anyone.

I'll just have to stick to the first site.