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New EIUL from Minnesota Life August 14, 2014

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On Monday, Minnesota Life will introduce a new EIUL product, the Omega Builder. At first, I did not think it was going to be something my clients would benefit from. But, after an in-service this week, it is clear that for many of my clients this will be a great product.

It functions the same way as the existing Eclipse EIUL, with one difference. There is an income protection agreement. The agreement locks in a death settlement that is not simply a pay-out of the death benefit to beneficiaries. Instead the client chooses what percentage of the death benefit is paid out upon the death and the remaining amount is paid out over time [between 10 and 30 years]. There is a fixed interest rate paid on the un-paid out amount which adds to the overall total payment. Now, when I first saw this, I was not impressed that my clients would benefit as most of them are planning to use the cash value for living benefits in their retirement years.

But here is the kicker. Because the death benefit is not paid out entirely at death, the insurance costs that run in the policy are radically reduced [up to 50%]. This reduced insurance expense means that more of your premium is put into the savings side of the policy annually. And with more money getting interest credits every year, your cash value increases and the amount of cash you can pull out increases. The best part of this is that nothing changes on the top end. In other words, I can still minimize the death benefit down the same amount and stay within IRS regulations. The end result is up to 30% more distributable cash.

Minnesota Life has again placed itself on top of the EIUL ratings with this product. While, the Eclipse still remains one of the top performing products, a couple of other companies had products that had just as good of performance over the last couple years. With the Omega Builder, ML has created a space between it and the rest of the EIULs again.

More on Energy; Should you invest in NA Tight Oil? July 15, 2014

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I have received some inquiries about my contrarian views on the North American Tight Oil industry. I think this easily found white paper is a good primer to my views: http://www.oxfordenergy.org/wpcms/wp-content/uploads/2014/03/US-shale-gas-and-tight-oil-industry-performance-challenges-and-opportunities.pdf

Here are a couple of key points from the paper:

The evidence so far suggests that the industry has been able to create new opportunities, manage and innovate around the operational aspects (i.e., drill more wells per pad, longer laterals, faster drilling, more hydraulic fracturing/wells, micro seismic, synchronized logistics, etc.) and deal with or address the environmental challenges, despite a rough start and evolving government policies and public acceptance issues. What is not clear from higher-level company data is: if the industry (both large players and independents) can run a cash flow -positive business in both top-quality and in more marginal plays and whether the positive cash flow could be maintained when the industry scales up its operations.
Among all the data and evidence at hand, this comment focuses around the following pieces of industry data that capture a vast amount of relevant context (technical and commercial) and decision- making: (1) recent announcements by large and small industry players, such as write-downs, and (2) financial performance analysis of select US shale gas and tight oil independents.

With regard to the financial performance of companies in this sector, a recent analysis covering 35 independent shale gas- and tight oil-focused companies active across the major US plays and accounting for 3 million barrels of oil equivalent (mboe) per day of production (40% of the total unconventional production in the US at 3Q2013), shows that over the past six years their financial performance has progressively worsened.11 This is despite showing production growth and shifting a large portion of their activity to oil since 2010, presumably to chase a higher margin business.
The analysis shows that capex nearly matches total revenues every year, and net cash flow is becoming negative while debt keeps rising. There are other factors, such as the close link between rising debt and production, the rising cost of debt to total revenues and negative cash flow, which add to concerns about the sustainability of the business. Company data also shows that the cash flow per share of US independents, many of which are investing in shale and tight oil prospects, is negative and has been trending more negative with time.
However, although the market (and some industrial investors) may be wrong, or unable to distinguish profitable from unprofitable opportunities, there remain a large number of investors who have made substantial investment as well as many that believe that these companies will eventually make money, especially from M&A activity.

A key finding of a broader US E&P benchmark study carried out by Ernst & Young in 2013 was that both exploration and development costs are increasing rapidly – by more than 20 per cent in 2012 alone. The oil and gas industry has experienced falling net income margins over the past few years, and shale gas has played a significant part in this trend. It is a complex system, and not the subject of this paper, but it is important to note that, returns and cash flow are all under pressure even at these current high prices and a significant capex and cost reduction is needed. Additionally, production and revenue increases are needed to rebalance the industry’s financial and strategic model. The impact of shale gas and tight oil business activity on these trends is a subject of much debate.

No doubt the industry is bringing more oil to the market. But as an investor the real question is if they are making a profit doing this? As of now, the question has no definitive answer. So for now, investing in these companies is really more about speculating than about purchasing an asset that is creating significant cash flow and income to its owners. Perhaps in the future, but for now it is an open question about profits.

The 401K Scam July 14, 2014

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Most people prefer to play it safe in life. And that makes sense, in the past there were enough real risks to just living to 30, that our brains become hard wired to avoid risk. However, there have always been a small select group that could ignore that. They were the risk takers, the entrepreneurs in modern parlance. From a political perspective, you want to enable the risk takers to do their thing, at the same time allow for the vast majority to live their lives in safety.

Let’s bring these thoughts into the field of investing and retirement income. After WW II we established a nice mix of rewarding entrepreneurship and having a safety net for the majority. But, beginning in the 1980s and accelerating of late, we have gone off into a different direction. Most concerning to this conversation is the death of the pension, and the replacement of pensions with 401ks/IRAs, etc. Why is this concerning? Clearly, when you are forcing people who have no acumen and are hardwired to avoid risk to invest on their own to provide for their old age, that is a recipe for disaster. That would be fine, if the consequences for our society weren’t so devastating. In 1 generation, we will have over 80% of retirees totally dependent upon social security and their own investing acumen.

What we know from the studies is that the average investor in these 401K/IRA schemes are getting almost no return on investment. They are falling behind our inflation rate. We also know that the vast majority of folks aren’t saving enough in real dollars to retire even if they were receiving decent returns on their savings.

So that means in 1 generation our society is going to be dealing with some really poor senior citizens. And that is a problem for our whole society.

Right now we see a stock market going up every year. And we see more and more people putting their savings back into the stock market. This is consistent with how people are hardwired. Fear of not being on the gravy train has trumped fear of the stock market. So they are buying now. When we have our next stock market swoon, they will panic and sell. This is a sure thing. And that will drive down the market even more. And if you are holding stock into this, you better not need to use that value, because if you need it for retirement or emergencies, then you will never be able to make up for those losses. Your retirement will be damaged severely.

Now that you know this, what are you going to do about it? You have two choices, learn to be a very good investor taking advantage of opportunities as they come along, or find a way to passively invest without the risk of huge negative variability. For most folks, that just don’t have the ability to be an investing entrepreneur. They should be putting their savings into vehicles like an EIUL or if in their 50s or 60s an indexed annuity. These vehicles will give you solid overall returns without the risk of huge negative movements. Some of the annuities even guarantee you a 7-8% annual return until you take out guaranteed income for life.

It simply doesn’t make sense for folks who have no experience or acumen in the investment world to try to become an investor as a hobby. It rarely works, yet the vast majority of folks out there don’t understand this basic point [admittedly Wall Street has spent $Billions hiding this basic point]. Don’t fall for this 401K scam. Mutual funds don’t make sense in investing for retirement income. Delaying taxes until your family is out of the home and you have little legitimate tax write offs doesn’t make sense. Believe the research that indicates the poor returns from individuals following the Wall Street advice on investing.

Energy, Oil and other musings July 11, 2014

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I have made big investments in energy stocks. Just thought I would put my thoughts down, based on the research I have done over the last year.

1. Demand for oil continues to go up. This is a fact.
2. Existing wells are producing less oil. This is going on whether it is old-school land based [Middle East] wells, underwater wells, or tight oil [so called shale oil]. The depletion rate has been increasing for quite a few years, yet gets little analysis. This is a fact.
3. The tight oil drilling that is going on in North America is great for the US. But it has no chance of making us independent of imported oil. Great for jobs in Texas and the Dakota’s, but it clearly faces some issues, not the least the rapid depletion rates. Technology has made it all possible, but this technology took 3 to 4 decades to come on board. Can we really expect new technology to make drilling more efficient and profitable to come on in the next few years?
4. Most of the shale oil drillers are not profitable. They have burned up much Wall Street capital. But at least 2 of the CEOs of the major integrated oil and gas companies have withdrawn their companies from shale oil plays because it does not provide the IRRs they felt their companies required.
5. The major oil and gas companies are reeling from decreasing profit margins from their now highly depleted resources. The cost of getting a barrel of oil is increasing.

So, in short what we have is increasing demand, decreasing ability to meet that demand, and a tight oil market that apparently is not very profitable.

In 2013 the majors took a break from their massive investing in new resources to get their balance sheet more to their liking. However, eventually, and by eventually I mean by next year, they will need to produce more oil to feed their system of production and distribution. So how do they do that?

Tight oil helps, but it is never going to cover the depleting existing wells, let alone the increased demand. So where will this new oil come from? The vast majority of the known reserves exist under the water around the globe. The Arctic, the North Sea, GOM, off of South America [Brazil, Argentina, etc.] Africa, off of Nova Scotia and even the eastern Mediterranean all have proven deposits of oil.

Even if Russia and other countries start to drill for tight oil on land, there still is much unmet demand. The existing land wells are not going to miraculously start to produce more oil. That leaves drilling under the water as the only viable place to get the oil. There pretty much has to be a significant UW drilling program invested in by the major oil producers.

Wall Street interests would have you believe that the tight oil phenomenon will solve our oil demand problem. It won’t. They would have you believe that all this oil being taken out of shale deposits is going to make you rich if you invest in all these drillers. I doubt that. The big money has already been made. And if I have an accurate picture of how Wall Street and its interests work, then currently there is a movement going on to pull Wall Street investments out [with a great profit] and get retail investors in. Time will tell on this one.

Above is what led me to the underwater drillers like Seadrill [SDRL].

There is much misinformation about energy, investing in energy, our country’s position in energy, etc. Much of it can be characterized by political or Wall Street propaganda. But it doesn’t take long to dig through that and find out what is really going on. So use Google and take a look for yourself.

Here is an interesting article: http://oilprice.com/Energy/Energy-General/Orwellian-Newspeak-And-The-Oil-Industrys-Fake-Abundance-Story.html

Dividend Update June 30, 2014

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As regular readers know, I have been pursuing a dividend growth strategy for a little over 4 years at this point. When I started, I had 80% of my portfolio in a non-dividend payer, Berkshire Hathaway. Now I have about 50% in Berkshire. I collect annual dividends that are 25% of my expected need at retirement at this time. My yield on cost for the dividend growth part of my portfolio is over 13% at this point. Current yield is 11%.

Some people will look at that 11% number and think I am investing in extremely risky stocks. Nothing can be further from the truth. Of the stocks I invest in, only 1 has had a dividend decrease. That was during 2008 and the height of the recession. One thing that I do point out that with most of these stocks, I expect a dividend decrease when profits are bad. They are set up to maximize dividend payments, and therefore like any business owner, if things go bad I expect to get less money. This is troublesome for American’s who have been trained to think of dividend decreases as a declaration of failure. Therefore most American companies keep their payouts low to avoid this. In retirement this could be a problem, but for accumulation, I see no problem with this.

As I go forward I will judiciously sell my Berkshire when it is fairly valued or over valued and buy more dividend payers. I think my goal over the next 5 years is probably to get down to 20-25% in Berkshire, but I am not stuck on that percentage if the environment changes.

We are all going to live forever, right? June 12, 2014

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I will keep this short. Very few people really consider that they will die early rather than later. But here is the truth. 17% of men and 11% of women die between the ages of 55 and 70. By age 70 over 25% of men have died. Those are not insignificant numbers. This hidden fact, is perhaps scary, but should be addressed in financial planning. The age cohort of 55 to 70 is also significant for the lack of life insurance owned.

Just another reason to save in an EIUL, with a death benefit, as oppose to a 401K without one.

Health Care REIT- HCN- sells $1Billion of stock overnight June 6, 2014

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Regular readers know that I have a long standing ownership of HCN [Health Care REIT] that I have been slowly disposing of. I currently have sold 3/4 of my shares and remain at the level of my original investment. But, someone or more likely some institution really likes the company. Overnight HCN sold $1 Billion of stock at $62.35 [currently priced at $64.05]. It was the largest block of stock sold overnight ever.

I’m not sure what to make of this, because the dividend increases has averaged less than 3% over the last 5 years. That is not acceptable dividend growth in my portfolio, but some people must be thinking that it will accelerate soon. And it could as the last quarter saw a 10% increase in FFO.

Will be interesting to watch how this company and its excellent management perform over the next couple years.

Buffett’s Investment Advice: Avoid Losing Money June 4, 2014

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Investment strategies that don’t take Warren Buffett’s advice almost always end up bad for people. Now, that does not mean you will never lose money in an investment, but that your strategy should be one that minimizes that possibility. That is why Buffett’s Berkshire Hathaway will underperform in a strong positive market, but out perform in a negative market. He attempts to avoid losing money. The final result is overall over performance because as mentioned many times, negative numbers hurt more than positive numbers help.

This is pure mathematics. But there is a psychological reason that Buffett, as an investor for others understands. People can’t handle seeing the value of their investments go down. The data for this is pretty succinct and telling. When the market goes down, people sell in mass. That is a fact. [Of course, the opposite is true in that when the market goes up, people don't want to miss out, and buy]

Understanding this I have structured my investments to minimize loss.

1. I own an EIUL, where the cash value does not go down. No matter what the market does, all gains are locked in from year to year.
2. I invest in dividend growth stocks. The dividends come in no matter what the stock value is that particularly quarter. But, just as important, I only buy when I think the price is fair. And I sell when the price has gotten so high as to be able to replace the dividends with an equally well managed business that pays higher dividends. My attention is on the dividends being produced not the market value of the company on any particular day. This changes the whole emotional component of owning stocks.
3. I own farm land that is cash positive and really have only a general idea of how much I could sell it for.
4. I have about half my stock portfolio in Berkshire Hathaway which as mentioned earlier tends to fall less than the market in bad years. [Note, that percentage is going down as when Berkshire springs up I sell some and move it over to the dividend growth section of my portfolio]

My clients that have followed similar strategies sleep well at night confident that the coming stock market correction will not devastate them either financially or emotionally. I know it has worked for me.

Uncommon Financial Wisdom or just Wisdom Drowned out by Wall Street? June 2, 2014

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When I started on my path away from mutual fund investing, I was surprised to find how easy it was to discover alternative strategies. Of course the trick is to figure out which ones work! But it was never hard to uncover the truth if you were able to put the research in. Since then I have had many clients who have come to understand investing in similar ways as I. But, the reality is that 95% of the folks are headed down the common path of mutual fund ownership that, in my opinion, is like being on the Titanic. They do this because Wall Street has created an eco-system that supports it at all levels. They have gotten the government to create an illusion of tax efficiency with 401Ks, IRAs, Roth’s, etc. And then gotten businesses to buy into using only mutual funds as a funding mechanism for these government created accounts. Initially, Wall Street was able to collect obscene fees, but now that Vanguard et al. have made a big point about fees, they have moderated some. Still lots of profits in the mutual fund business, especially with the government encouraging workers to buy into the Wall Street oriented strategy.

The financial planning industry grew up around the idea that common investors should diversify, do exactly what they are told to as far as purchasing mutual funds, and never should have issues like losing a job, health issues, or “god forbid” panic when the market turns ugly. All those concepts are, of course, just plain crazy if you know anything about how people live their lives and the psychology of individuals. But, amazingly so, the financial planning industry is still plying the same “snake oil” as has shown to be failed advice over the last 2 decades.

When I get asked by folks, Why don’t more people know about EIULs?, I am at a loss to explain all this above in a short manner. How can you say that Wall Street has created a system that benefits themselves and no one else, yet not come off as having sour grapes?

I have now been over 15 years off the grid of what Wall Street insists is the prudent course. My personal rate of return for my investments is off the charts compared to mutual fund returns during that time. I have been blogging about my moves since 2007, putting it out there for all to see. Also have been describing my intellectual growth on all matters financial. Here are some things that I have found out:
1. Putting your money into an EIUL will beat the pants off of putting your money into your companies 401K.
2. Real Estate investing done intelligently along with dividend growth stock investing over time will produce superior retirement income.
3. Using average intelligence one can beat the financial planners when it comes to producing retirement income.
4. It doesn’t take that long educating yourself to accomplish the above.
5. Uncommon financial wisdom is really traditional wisdom that has been drowned by the megaphones of Wall Street.
6. The real risk of investing in mutual funds inside your 401K is simply not be able to produce income for your retirement. It is not the risk of investing, just investing wrongly.

Good Luck with your investing and remember to call me when you are ready to throw off the blanket that Wall Street has thrown over us to keep us from investing wisely.

1st Quarter Results Energy Portfolio May 29, 2014

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I have 3 energy stocks that reported 1st quarter results. Here is a brief synopsis of what they reported and did with their dividends:

AWILCO [AWLCF]: This company owns two drilling rigs producing in the North Sea. They have a backlog of $680M stretching into 2016. In December of 2015 one of the rigs will go to the yard for maintenance, specifically an updated blow-out protector. In February of 2016 the other rig will do the same thing. Some analyst think that the dividend will go down for a quarter or two because of this. Other’s point out that the company is accumulating cash to cover the dividend over this period. The last quarter saw good operational uptime at 99%, but has some weather oriented down-time. Revenue efficiency was 97% with $62.7M of revenue, 18% above 1st quarter 2013. Dividend was raised to $1.15 for the quarter, a rise of 5% from the quarter before. They also mentioned that they were evaluating growth potential on a case-to-case basis. Current stock price is $22.17, which is 11% over my basis [total cost]. Current yield on cost is 23%. Pretty happy so far with this one!

Ship Finance International [SFL]: Ship Finance is a lessor of ocean vessels. They purchase ships and lease them out long term to other companies. Currently they have a good mix of ships including drill ships. They recently purchased 9 used container vessels, which are leased out long term. They signed long term leases on 4 8700 TEU new-builds expected to be delivered at the end of 2014 and the beginning of 2015. It bought two 82,000 DWT dry bulk carriers leased out to a state owned Chinese operator to be delivered this summer. The West Linus drill ship was delivered and is now on lease to Conoco Phillips drilling in the North Sea. After several delays they canceled two new-builds being built in China. They currently have a $5.1B charter backlog. Last 12 months EBIDTA of $487M, with $176M after interest payment and amortization. EBIDTA of $129.7M for the quarter, 13% above last quarter. It increased the dividend to $.41 per share from $.40. I expect it to rise faster than that for the rest of the year as the new vessels start producing cash flow. The current stock price is $18.37. My yield on cost is 12%. My basis is $13.92, a return of 32%.

SeaDrill [SDRL]: SeaDrill is the top offshore drilling company in the world. It owns 41 drill ships and manages another 12. It also has 19 drill ships ordered for delivery in the next 3 years. There has been sustained negative reports from analyst over the last 4 months for the whole offshore drilling sector. SDRL has taken the brunt of this negativity because of its financing of the aggressive new-builds coming on board. The stock was well below my basis [over 15% at one time], but I took advantage of the low stock price to add on to my position at two different times when the price fell into the low 30s. I have also received 2 dividends and will receive a third in a couple of weeks. Despite these negative analyst reports the last quarter was good. It is hard to compare financials to the quarter before because they have deconsolidated a MMP from the books. However, it looks like the quarter’s income was only slightly lower than the quarter before because of operational downtime on mainly 1 rig. This lowered the overall floater efficiency rate to 88%. The jack-up efficiency rate remained at 97%. Basically, there is some near term weakness in the market, which the analyst have made a huge deal about. But the back-log remains over $18.8B, a strong number. SDRL made some changes to its loans, moving into different loan markets, lowering its interest costs going forward. This should help lower future expenses.

Despite the critics saying the dividend was in question, it raised the dividend rate to $1.00 for the quarter, 2% higher than the quarter before and 4% higher than when the critics said it was in trouble. There is also a slush fund of $.28 for an additional dividend distribution. Overall, debt lowered around 5%.

Finally, a big deal with Russian owned Rosneft was announced without details for a subsidiary [NADL] for at least 9 drill ships in Russia. This can’t be seen as anything but positive. The deal with Mexico with 4 jack-ups drilling in the GOM is starting this summer.

Current stock price is $38.23. My yield on cost is 11%. My basis is $36.27. So I am positive 6%! A real relief after being negative over 15%. Patience and confidence in my analysis allowed me to weather the storm of the last couple months!

It should be noted, that I invest for dividend growth, not just for capital appreciation. That strategy has done me well over the last couple years for my non-Berkshire portion of my portfolio [now 50% of my overall portfolio].


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