The Capitalist Maven

Well with the Memorial Day weekend, the heating season in New England is officially over. Personally I would have declared it over April 1st and turned off the furnace, but I was vetoed by my fiancee whose thermoregulation abilities are not quite as adept as mine.

So now is time to look back over the heating bill for the season. From 10/12/07 - 5/15/08 we used 1138 CCF. That total also includes gas for hot water, cooking, and clothes drying, which I estimate at 12 CCF per month. So 1138 CCF total - 84 CCF non-heating = 1054 CCF heating. We are actually billed in therms (not sure why they can’t just bill in the unit that the meter measures) so multiply by 1.031 to get therms: 1054 x 1.0337 = 1087 therms. During the period the total heating degree days were 5951. Giving a therms per degree day of 1087/5951 = 0.1827.

Considering that this winter was the coldest of the last 3 years that I’ve been tracking I’d say I did alright. The same periods in the ‘05- ‘06 and ‘06-’07 heating seasons were 5799 and 5653 degree days respectively. Don’t blame the leap year because February 29th, 2008 only accounts for 52 degree days… Unfortunately I have not lived in the same place the past 3 heating seasons, so next year when I actually plan to stay put, I’ll get a real basis for comparison. I used weatherunderground.com to obtain my data.

Recently I’ve been increasing annoyed by all the people complaining about their oil heat bills. I grew up in a region without the crazy oil heat infrastructure that exists in New England. Where I lived in western Pennsylvania, your choices for heating were gas or electric. I think there may have also been some propane infrastructure in place but it was unusual. It was clear for most people gas was the cheapest alternative, although heat pump electric was highly competitive. Resistive electric heat was a clear loser. So I showed up in New England and experienced my first winter.

It seemed so crazy all these oil trucks driving all over the place, in fact it seemed highly inefficient. Have a bunch of guys drive a bunch of trucks, manually filling a bunch of tanks, many of which were filled even before they were empty. Then there were the advertisements, offering specials on delivery, locking in your price, fixed monthly prices, etc. Oil much like gas is a commodity: its prices are really determined by futures traders in Chicago and New York, not that screwball townie who owns the heating oil delivery company. So all these crazy offers that he gives you are nothing more than creative mixes of futures contracts and marketing, to obscure the fact that all you are really paying him for is moving some oil from his tank to your tank.

Natural gas companies are far more forthcoming with their pricing, they clearly delineate delivery charges from gas charges. While gas is a commodity and its price is determined by the market, delivery charges are not. You pay them for safely delivering a constant gas pressure to your house. It’s somewhat unfortunate that there is only one set of pipes in the ground because it gives gas companies a monopoly. It’s tough to say competition would work either, how could companies differentiate their services? My pipes are better than yours? Unlikely. I’d be curious what Milton Friedman’s opinion on this apparent natural monopoly would be. Nonetheless, I’m still going to guess that gas costs far less to deliver than oil even without competition.

What’s given heating oil an advantage for so long is the low price of oil. If it takes 1000 therms to heat my house for the winter, thats equivalent to 721 gallons of heating oil. Check out the calculator here. With gas, those 1000 therms cost me ~$1800. So my breakeven price vs. oil is $2.49 a gallon delivered. It’s clear that until recently oil had a price advantage. To get an accurate measure of true oil costs I found http://www.codoil.com/. Here you can just put in your zip code and get a spot price for an oil delivery without any fancy futures contracts or marketing gimmicks. A truck will show up at your house and fill you up for the price quoted. Want price stability? Hedge it yourself. Buy UHN, the US heating oil ETF. Say you think you will spend $2000 on heating oil, instead of paying a company for a contract, buy $2000 of UHN. When you need an oil delivery, sell shares to pay for the fill up. If you estimated your usage correctly when you bought the shares, you’ll find that the shares of UHN will exactly pay for all your oil. If the price is up when you buy your heating oil, your shares will be worth more. If the price is down when you buy your heating oil the shares will be worth less. In the end the shares should exactly track the price of your heating oil. Pretty neat huh? No calling around and deciphering marketing gimmicks, just a quick and easy deal provided to you by Wall Street not that monkey in an oil truck.

I’d love to buy a natural gas ETF and do the same thing for my heat, but unfortunately due to state regulations the utility is not allowed to offer market based pricing for gas and we are stuck paying a fully hedged rate that while it results in stable prices, does not always get us the best deal…

Jon Budget, Economy, Investments

It’s now clear that anyone who has been taking the realtor’s snake oil, “It’s a great time to buy”, is horribly disappointed. If you’ve been reading this blog for a while you might remember my post disputing the commercials that the National Association of Realtors have been running. Again it looks like my assessment of the situation is spot on: Gov’t home price index posts largest drop in 17-year history. Many experts are predicting this mess will take another 2 years to work itself out. That doesn’t leave much time in the Realtor’s 10 year timeframe for your house to “double.” Good luck with that.

Jon Economy, Investments

I’ve been investing in ETFs for quite a number of years now.  My first purchase was the S&P 500 spider (SPY), which I bought back in 2002.  I’m up 46% purely in capital gains in 6 years on this one and it has been one of my best investments.  Add in the dividends payed over time and I’m easily up over 50%,  and that even includes the recent the stock market downtown.  I initially bought this with the intent to time the market, buying and selling during what I felt were the peaks and troughs of the market.  Needless to say I just ended up holding it.

In 2005 I decided I wanted to get in on the boom in energy prices but I wasn’t sure of any one company to pick.  I found the Vanguard Energy Vipers (VDE) which I figured would allow me to take advantage of any big moves in energy.  2 weeks after I bought Katrina hit.  I sold 11 months later for a 30% gain, when I sensed that another big hurricane season was unlikely.  A big hurricane season had already been priced into the energy stocks I believed., so I sold.  I was right initially, after the weak hurricane season VDE did very little until the middle of 2007 when oil started its current run…

Recently I’ve seen alot of potential in mining and minerals but I know little about this sector so I picked up some S&P Mining and Minerals Spider (XME).  It’s done very little since I purchased but we’ll see where it goes.

Exchange traded funds are a great way to pick an industry or sector without worrying about which specific company to invest in.  They have low expense ratios and when you invest large enough amounts even the broker fees are small on a percentage basis.  I happen to know alot of the technology sector so I feel fairly confident picking stocks there, with mining and minerals though, I haven’t a clue.  So I let the S&P index pick a bunch of stocks for me.

I tend to favor Vanguard Vipers because of their known efficient style of investing so I usually check if they offer an ETF in the particular area I am looking for first.   Yahoo! Finance has an entire section dedicated to ETFs where it’s easy to find an ETF that fits whatever category you are looking for.

Jon Investments energy, ETFs, investing, mining, S&P 500

I-Bonds seems to be one of the favorite searches to land on this blog, so I thought I’d write another entry on them. There are some important strategies to remember when buying or selling them to maximize your gain. I’ll try and highlight some of the strategies I have discovered.

Savings bonds always start earning interest on the 1st of the month in which they are issued

If you buy bonds on the 30th, you effectively get 29 days of interest for free. On TreasuryDirect they don’t offer any specific guarantees about the issue date of your bonds, so I always schedule purchases for the day before the last day of the month to prevent any issues. Better to give up 1 day of interest than potentially 30 days if my bond actually gets issued on the 1st of the following month.

For the first 5 years of a savings bond, there is a redemption penalty

If you redeem a bond within the first 5 years, you will pay a penalty equal to the latest 3 months of interest. The redemption values included on TreasuryDirect or in their Savings Bond Wizard tool always account for the penalty, this is why it shows your bond as just its face value until the 4th month. Here’s how I take advantage of this: always redeem them when the latest 3 months is at a very low rate. For I-bonds, the variable part of the rate depends on inflation and it only resets every 6 months. If you have a bond that was issued in June, its rate will reset every June 1st and every December 1st. Then if the new rate it reset on June 1 was low, wait until August 1st to cash it in.

Example:

Right now I-Bonds are yielding 4.28% with a 3.06% rate of inflation, if on May 1 the inflation number comes in at 1% resulting in a 2.2% yield, your June purchased bonds will reset on June 1st, if you sell on August 1 you will only sacrifice 3 months at the crappy rate of 2.2%.

Cash in bonds in years that you pay education expenses

You can avoid paying federal income tax on bond earnings (in addition to their state and local tax exemption) if you pay for qualified education expenses in the same year and your MAGI is below a certain threshold. See chapter 10 in IRS Publication 970.

If you have any other strategies you use that you would like to share with blog readers, post them in comments or send me an email through the contact form.

Jon Investments i-bonds, Investments, treasurydirect

I just noticed that the interest rate on my E*Trade Bank Complete Savings Account has been reduced to 3.45%. This was the one high yield savings account that had been holding up nicely after the Fed rate cuts. I visited my parents over the weekend and for whatever reason my mother was talking about savings bonds again.

I went to TreasuryDirect to check out the current situation. The days of high yields on T-Bills appear to be over. The 6 month T-Bill went for 1.481% last week, a pretty sad showing. I-Bonds on the other hand are suddenly looking respectable again with the current rate at 4.28%. EE-bonds continue their tradition of sucking with a lowly 3.00% through the end of April. It’s a virtual certainty that rate will come down when new rates are announced as the 5 year treasury is currently yielding 2.75%.

It seems the Treasury is doing it best to try and kill the savings bond. Recently they instituted a limit of $5000 per person per year per type (paper or electronic). This makes it much more difficult to leverage the I-Bond in situations like the current low interest rate environment. It’s alot of work to shuffle funds to gain a 1% better interest rate on just $5000.

My other beef is with the TreasuryDirect website. It takes forever and is quite a hassle to log on to it. First you have to input your account number (not an easy to remember username, etc). Then you search for keys on scrambled on-screen keyboard with your mouse to enter your password. Then you have to get out your “Little Orphan Annie Secret Decoder Ring” and decipher a secret code and enter the secret code. Then you are finally allowed to manage your account but don’t get too excited and click back in your browser by accident while navigating the site as you’ll be instantly kicked off and have to start the whole procedure over. While I can understand they might want to maintain security, plenty of institutions manage to be secure using only a username and password. If I were a hacker, the last place I’d try to hack is the Treasury… Just like you don’t want to mess with a postal inspector… All-in-all the website is an exercise in frustration and is just not worth it to me. I emailed them to complain and they responded with a typical “anything for security”style response that seems to be all to common in this world of 3 oz bottles inside plastic baggies.

Looks like for now I’ll be staying put with the E*Trade Complete Savings account there just is no compelling reason to take another look at treasuries/savings bonds.

Jon Investments