AssetPreserver News

Energy usage in the United States from Jan to Apr 2009

The numbers are approximate so they do not exactly add up.

The U.S. produced 5.3 million barrels of oil per day.

The U.S. consumed 18.6 million barrels per day.

This information is from the Dept. of Energy.

What is a short sale?

First, a short sale is when stock is borrowed from a broker and paid back at a later date. The hope is the stock is at a lower price at the later date.

Fred wants to sell short 100 shares of ABC. He tells his broker and the broker borrows 100 shares from someone who owns ABC promising to pay them back. Fred immediately sells the 100 shares of ABC at current market price, say $1000 total. In 5 weeks, ABC drops to $8/share. Fred buys 100 shares at $800 and repays the broker. He pockets the difference, $200, minus commissions.

What is a naked short sale?

A naked short sale is where you simply sell the stock short without owning it. The speculator sells the stock, which he does not have, hoping to cover by the settlement date. If the stock is not delivered within 3 days, it is known as fail-to-deliver. Naked short selling can generate countless sell orders, overwhelm buyers, thus driving the price down. Failing to deliver is like issuing new stock in a company without its permission. You increase the number of shares circulating in the market, which devalues a stock.

How has this been a problem?

Remember the fall of Lehman Brothers or Bear Stearns? During that debacle, 38 millions shares of Lehman were sold as naked short sales, driving the price of Lehman shares to practically zero. The shares were not delivered to the buyers on time. Bear Stearns was done in by naked short sales, too.

What has been done?

On July 27, 2009 the SEC banned naked short selling. Now before a trader sells a security short, he or she must first borrow the security, usually from a brokerage house (traditional short selling). Now there is no fail-to-deliver since the stock is “owned”. The SEC made permanent a temporary rule requiring brokerage firms to make good on failed deliveries on T+4 — the day after a fail.

How does this help me?

The hope is banning naked short selling will reduce the volatility of the market and deep drops in company’s stock with no basis.

The Ryan Labs 3 year GIC index is the benchmark comparison index for stable value funds. You can see how the average stable fund performed on the average since 1993.

Annual Performance at Year End

Passive income is the ultimate: regular income with little effort.

What is Passive Income?

From the IRS point of view passive income is any income that you get without having to materially participate in. Passive income is money obtained on a regular basis with little effort. Examples include:

• Rental income
• Renewal income – income from subscription renewals
• Royalties – from book publishing, patents, etc.
• Advertising income – from online ads such as Adsense
• Business income – from nondirect involvement in a business such as limited partnerships
• Dividends and interest income
• Pensions

Tax Benefits

Unlike earned income, passive income has great tax benefits. Earned income is subject to self-employment tax which is just over 15.5% (if you’re a W2 employee, your employer pays half of this). Passive income isn’t subject to this tax. If you own rental property, you also claim depreciation. Depreciation is the replacement cost of equipment used in a business and is spread out over its useful life. For residential real estate, the IRS deems the useful life to be 27.5 years. However, the useful life of a house could well exceed 60 years. This results in you being able to claim a tax loss which doesn’t really result in any loss to you. Because of this, depreciation losses are sometimes termed as phantom losses.

Rental Income Example

Let me give an example. Suppose you buy a rental property for $325,000. The tax bill says the land is worth $50,000 and the improvements (everything else that’s built on the land) are worth the remaining $275,000. Based on the IRS’s straight-line depreciation method of deducting the cost of the improvements over 27.5 years, you get to claim $10,000 a year in depreciation. Assuming you have a mortgage of $275,000 at 5%, you’ll pay about $13,750 in mortgage interest payments. Assuming the property tax rate is 1.5% and the insurance and miscellaneous expenses are another 0.5%, you’ll be paying another $6000/year. You have total actual expenses worth $19,750 per year plus depreciation loss of $10,000 bringing your grand total to $29,750. If you’re getting $1750 per month in rent, that works out to $21,000 worth of rental income. Since your actual costs are $19,750, you’re making a profit of $1,250. However, according to IRS passive income rules, you’re technically making a $8,750 loss!

Not only do you not pay taxes on your $1,250 worth of rental income, but you also get to deduct the $8,750 phantom loss from your regular earned income! In a 30% tax bracket, that is a $3,000 tax saving! You can deduct up to $25,000 worth of passive income losses on your taxes every year! If you have more losses, you can carry these forward until you can offset them against passive gains (like the sale of the property).

The flip side to this rule is the depreciation recapture rule which means you need to add back in the depreciation losses when you sell the property. However, this can be somewhat avoided by the use of a 1031 property exchange (also called a Starker exchange).

Stock Dividends

Qualified stock dividends are also another form of passive income that attract favorable tax rates. Instead of being taxed as ordinary income, the maximum tax rate is now 15% for most people. In fact, if your tax rate is 10% or less, you’ll pay only 5% income tax on your qualified dividends! There are certain restrictions that come with these lower taxations. The corporation issuing the dividends must be a domestic US corporation or a qualified foreign company. There is also a holding period of 60 days before the ex-dividend date and 59 days after the ex-dividend date.

Partnerships

Partnership income, from master limited partnerships (MLP) for example, generally has depreciation or depletion credits that lower the cost basis of your purchase.

The IRS definitely gives a lot of tax benefits to passively earned income. If you get paid as a W2 employee, you have the least number of tax breaks and will usually pay the highest taxes.

Please consult your tax adviser before you make any financial decisions. If you’re subject to exemption phase-outs or AMT this advice may not apply to you.

The Federal government has been rolling over its loans for a long time. The last time the federal debt was paid off was in 1835 under Andrew Jackson.

Tired of housing prices going down? Happy when they go up? Investors can now bet for or against a recovery in the residential real estate market with new exchange-listed securities designed to mimic the movement of U.S. home prices.

Investment manager MacroMarkets on Tuesday launched exchange-traded products on the NYSE Arca (Archipelago Securities Exchange) designed to track housing values.

MacroShares Major Metro Housing Up and MacroShares Major Metro Housing Down are benchmarked to the S&P/Case-Shiller Composite-10 Home Price Index. The paired securities will feature a 300% leverage factor.

“For the first time, the market will have available exchange-traded benchmarks as an indication of where investors believe U.S home prices are headed,” said Robert Shiller, MacroShares chief economist.

“Our current financial crisis is largely due to a failure to manage housing risk,” Shiller added. “At approximately $20 trillion, U.S. housing is a large and important asset class that has suffered from the lack of liquid, transparent markets.”

The MacroShares Major Metro Housing Up is designed to rise when U.S. housing prices climb. Its counterpart, MacroShares Major Metro Housing Down, profits when real estate values fall.

MacroShares exchange-traded products (ETP) don’t invest directly in an underlying asset such as stocks, bonds or commodities futures. Instead, MacroShares are issued in pairs, and an equal number of shares for each fund are created. The funds invest in short-term Treasury securities and overnight repurchase agreements.

The paired trusts have a binding agreement to pledge assets to one another over time, based on the movement of housing prices. This transfer of Treasury securities back and forth between the funds changes their values and gives investors exposure to the direction of U.S. home prices. The structure resembles a see-saw as the assets are shuffled between the paired trusts. The arrangement has also been compared to total-return swaps.

Because of the leverage factor, the MacroShares will experience changes of three times, or 300%, of the S&P/Case-Shiller Composite-10 Home Price Index.

The MacroShares, which can be traded intraday, have key differences from traditional ETFs. MacroMarkets warns that the prices of the funds may diverge from underlying value.

“Premium or discounted prices for these securities reflect a variety of market factors and expectations,” the firm says. “For example, the market price of MacroShares Major Metro Housing Down will reflect supply, demand, and investor expectations regarding the future path of home prices over the remaining term of the security.”

The funds will make quarterly distributions of net income, if any, on the Treasury securities.

MacroMarkets had tried to launch the home-price products through a public auction, but no bids were accepted because there was insufficient demand for an equal number of Down and Up MacroShares at the prices at which such shares were offered in the auction.

Last year, MacroMarkets liquidated a pair of funds linked to crude oil prices when the “down” version ran out of assets when prices spiked. The oil funds saw premiums and discounts to net asset value. The company followed up with MacroShares $100 Oil Up Trust and MacroShares $100 Oil Down Trust, but the funds were recently shut down due to lack of assets.

The new MacroShares tied to home prices will be followed closely by ETF observers. The products’ backers say the structure can give investors exposure to inaccessible asset classes or economic indicators.

Note the shares are a in a trust and mature in November, 2014.

Summary

UMM – MacroShares Metro Housing up. 300% leverage. 1.25% expense ratio (expensive).

DMM – MacroShares Metro Housing down. 300% leverage. 1.25% expense ratio (expensive).

According to MacroShares website, they are a publicly-traded partnership which means all income will be reported on a K-1 form (rather than a 1099 form).

Pipeline master limited partnerships (MLP) are such boring investments because not much can go wrong. They are the most conservative of the natural resource MLPs and provide stable cash flow and slow growth.
In the short-term, the winter could be too warm or the summer too cool, reducing transported volumes below expectations. But pipelines don’t go out of fashion. They are not in danger of being made obsolete by new products. And, since pipelines usually don’t duplicate each others’ routes, they don’t have competition.

Increasing energy-price exposure

MLP pipelines come in two types: petroleum pipelines carrying crude oil or refined petroleum products, and natural-gas pipelines.

Petroleum-pipeline operators base their fees on the volume of product transported. They’re not affected much by the price of oil.

By contrast, natural-gas pipeline operators frequently also run gas-gathering systems, which connect wells to public pipelines as well as processing plants. Typically, gathering and processing contracts expose pipeline operators to changes in the price of natural gas and its byproducts. So natural-gas pipeline operators profit margins can vary with the price of the commodity. Some operators employ hedging strategies to reduce their susceptibility to price swings. But not all do because that limits their upside potential.

While several pipeline MLPs focus on natural gas exclusively, some petroleum-pipeline operators have recently acquired natural-gas assets and others are planning to do so. It appears that eventually, most pipeline MLPs will have at least some natural-gas pipelines, and thus, at least moderate susceptibility to price swings.

Pipelines are fee-for-service businesses. There are long-term contracts and long-lived assets. Commodity risk is minimal. Kinder Morgan, for example, gets $1.35 to move a barrel of gasoline to Phoenix from Los Angeles regardless of whether oil prices are $25 or $50.

Common Problems in Gas Pipeline Transmission

Midstream transport of natural gas is a key part of the energy commodity chain. The transport stack consists of 3 key components: gathering, transmission, and distribution. Each component faces a common set of problems when it comes to significant safety incidents. However, the causes vary by percentage for each.

Gathering Problems

The gathering system of pipelines is the key to transporting natural gas from the wellhead to plants where it can be processed for transmission (aka “sweetened”). Typically, this gas is extremely corrosive and can be dangerous, often requiring special pipelines to transport it. As a result, most safety incidents in this system of pipelines are caused by corrosion (49%). Further, approximately 20% of total gathering incidents are caused by internal corrosion.

Common Problems in Gas Pipeline Transmission

Transmission, or the shipping of gas via interstate pipelines, also suffers from a similar set of problems. Unlike pipes used for gathering, corrosion accounts for about 22% of incidents (with only about 5% due to internal corrosion). However, excavation damage accounts for approximately 23% of all safety incidents (vs. 15% in gathering) . Further, material failure such as malfunction of control equipment, faulty pipe seam welds, ruptured seals, and broken couplings are the root cause of about 18% of incidents. Finally, 11% of problems are caused by natural forces such as movement of the earth, flooding, high winds, and even lightning. The balance is due to human error and other damages.