LIVING OFF DIVIDENDS & PASSIVE INCOME

This is an interesting rant on the equality of paying taxes by newsletter editor Porter Stansberry:

According to the federales themselves, the top 1% of wage earners in the United States earned more than $388,806 in 2006.

There were 1.65 million citizens in this category. As a group, they paid $488 billion in income taxes. That was 40% of all income taxes. But they only earned 22% of all wages. In short, the marginal tax rates on America’s top earners were almost 100% more than average. OBAMA! will increase the top rate these people pay – because paying 100% more than average just isn’t quite “fair” enough.

We might argue about whether or not we ought to charge some citizens different rates of income tax. But if you’ll take the time to read the U.S. Constitution, it’s clear that progressive taxation is unconstitutional. Just read the 14th Amendment. It says the government “may not deny to any person within its jurisdiction the equal protection of the laws.” That means the law can’t treat one citizen differently from another – white or black, rich or poor.

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In case you haven’t heard, Congress will soon implement a “Cash For Clunkers” program. If you trade in your old car, you’ll get $3,500 towards the lease or purchase of a new one. If you have an old SUV you’ll get $4,500. Seems like a good plan doesn’t it?

Yesterday I had a short phone call with Bob Meigan, VP of TurboTax and we discussed the short-comings of this program. First of all, your car has to be a clunker. That is it shouldn’t be worth more than $3,500 since you won’t get anything extra if it is worth more.  By law, the dealer will have to scrap the car so even if its worth $5,000 he’s not going to give you a dime more than the $3,500 he’s getting from the goverment.

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While the debate between inflation and deflation keeps on going, I’m firmly in the camp of inflation. And so is Warren Buffett, as are many other investment advisors. So how do you protect yourself and your investments from the effects of inflation?

Investment newsletter editor, Keith Fitz-Gerald, recently had a post on his blog regarding the 4 ways to protect your investments against inflation. Here’s an excerpt:

What’s interesting is that many investors holding large cash positions view their money as an asset, when, ironically, it’s really more of a liability at this stage of the game.
Some might take issue with that statement. After all, even we at Money Morning have counseled readers that cash – correctly deployed – can allow an investor to sidestep the worst stretches of a financial crisis, like the one from which we’re currently attempting to extricate ourselves.

At periodic intervals, I post my passive income revenue and other articles about creating passive income. One method I’ve heard about was creating articles on HubPages.com. If you have decent writing skills but no technical expertise it offers a way for you to make some online income.

I was able to ask the CEO of HubPages.com and YieldBuild.com, Paul Edmonson some questions about his entrepreneurial experience and passive income.

How did you begin in online marketing?

I started in online marketing back in 1999 when I first started working on the search engine optimization strategy for MongoMusic. Since then I’ve started numerous sites that range from lead generation to niche content, been an SEO consultant and am now the CEO of HubPages.com and YieldBuild.  Both technologies are geared toward helping publishers optimize their online ad revenues.

According to a recent report from Bloomberg, Northwestern Mutual Life Insurance Co., the third-largest U.S. life insurer, has been buying gold. This is the first time in its 152-year history that Northwestern has purchased gold.

According to Northwestern CEO Edward Zore, “Gold just seems to make sense; it’s a store of value. In the Depression, gold did very, very well.”

According to Bloomberg, Northwestern has accumulated about $400 million in gold. CEO Zore believes that the price of gold could double “or even rise fivefold” if the economy continues to weaken. “The downside risk is limited, but the upside is large,” Zore said. “We have stocks in our portfolio that lost 95%.” But gold “is not going down to $90.”

Despite the rise in “cash for gold” TV ads and billboards, people are still generally skeptical about buying gold as an investment or hedge against inflation. As I’ve said before, I think gold will be the next bubble as people eventually lose confidence in the dollar and US governments ability to repay its debt.

Over the past few weeks, several of friends have asked me if its a good time to buy a house now that real estate prices have bottomed. Encouraged by the media, everyone seems to think that home prices have bottomed out and the recovery is about to begin.

Even Jim Cramer jumped on the housing recovery bandwagon and declared that June 30th would be the bottom! As I mentioned before in Are Jim Cramer’s picks worthless?, you shouldn’t be taking your investment advice from him. I don’t know what sort of crystal ball he has, but his track record isn’t very good. Besides, people who can predict the future (like David Einhorn) tend to invest for themselves and not make broad public statements.

Home prices may be fairly valued, but whenever you have a bubble of huge proportions, valuations do not simply revert to the mean, they overshoot it and become grossly undervalued.

Regular readers know that I’m a full-time MBA student. I haven’t had much time to post mainly because I was spending a lot of time looking for a summer job. With the economy being as bad as it is, it’s been quite hard to get a paid job this summer. Unpaid internships are a dime a dozen and I was able to procure a few of those, which I turned down.  Eventually, I was able to find three paid gigs. One was in the IT department of a large cruise line company which didn’t really excite me.  Another was an online marketing analytics job that was very tempting. However, I turned that down in order to research distressed commercial real estate at Marcus & Millichap. Finding any sort of paid real estate job is tough in this environment and I figured that spending 3 months over the summer was a good way to gain some experience in the field of commercial real estate.

Stanford professor John Taylor had an alarming op-ed piece in the Financial Times on the Trillion Dollar deficits

“I believe the risk posed by this debt is systemic and could do more damage to the economy than the recent financial crisis. To understand the size of the risk, take a look at the numbers that Standard and Poor’s considers. The deficit in 2019 is expected by the CBO [congressional Budget Office] to be $1,200bn (€859bn, £754bn). Income tax revenues are expected to be about $2,000bn that year, so a permanent 60 per cent across-the-board tax increase would be required to balance the budget. Clearly this will not and should not happen. So how else can debt service payments be brought down as a share of GDP?

I’m a fan of Jim Rogers. He wrote a book ten years predicting a run in commodities. He also wrote one of my favorite books, Adventure Capitalist, a fascinating story of his journey around the world where he talks about the macro-economy of each place he visits.

Here’s a recent video on Bloomberg. He thinks US stocks suck and the US Bond market is the last bubble left and mentions TBT. Here’s my post on my short bond trade. There may even be a currency crisis in the US and other countries. I still think its a good time to buy gold!

You must have read the recent post about the New York Times economics reporter who is facing foreclosure himself. Edmund Andrews covered the US economy and Alan Greenspan for over six years, but despite his financial accumen still got suckered into a loan he couldn’t really afford. He hasn’t made a mortgage payment in 8 months and is wondering when the bank is going to throw him out of his house. Instead of making his payments, he has been busy spending money on a beach rental, clothes, gifts and other necessary expenses. At some point, I think foreclosure is inevitable.

But could he have avoided foreclosure?

I think so. Let’s review some of the financial mistakes he made. The real ones, not the excessive spending that set in once he stopped making house payments!

1. He divorced his wife of 21 years

There’s in interesting quote in the New York Times today:
“Banking should not be exciting. If banking is exciting there is something wrong with it.”
- Clay Ewing, President of German American Bancorp.

Had dinner last night with an old family friend at a fancy restaurant. One of the topics that came up for discussion was the stock market and whether the recent rally was sustainable. While I didn’t have any concrete information about the numbers, I felt that the rally in the face of declining quarterly revenues, growing unemployment, increased savings and what could be a permanent drop in consumption didn’t make any sense to me.

But today I read an email from Joan Mauldin.  He always provides great information and sure enough, he had the very data I was looking for. I’ve omitted some of the information for the sake of brevity (and its still pretty long!).

Rising Unemployment and Inflation

When the employment numbers come out, my usual routine is to go the Bureau of Labor Statistics website and peruse the actual tables (www.bls.gov). I was rather surprised to see that the actual number of people employed in the US rose by 120,000. That has certainly not been the trend for a rather long time.

I just read this interesting article in the Financial Times. Seems like China has tired of US dollars and is looking to get rid of them.

Beijing Bets on Bullion

 By Patti Waldmeir in Shanghai , Financial Times, 6 May 2009

China is expected to keep buying gold to diversify its vast foreign reserves after it recently revealed it had been secretively buying bullion.

Beijing and Shanghai-based gold industry analysts said the country had almost doubled its bullion holdings. But they said China was likely to make as many purchases as possible within its borders, rather than turn to international markets where it could push up gold prices.

Beijing’s exact gold purchasing intentions are a state secret, but industry analysts are betting on more purchases as Beijing has been clear about its desire to diversify its foreign reserves away from the US dollar. Although gold is quoted in dollars, its price usually rises when the dollar weakens.

Last week, an 1804 Adams-Carter Silver dollar sold at auction for a whopping $2.3 million.  That’s a pretty good amount for  1 ounce of silver worth about $12! There are only 15 such coins known to exist and they’re quite popular.

The buyer was New Jersey dealer John Albanese, who said that the price was “basically a half-million down from last year because of the recession. It was a good opportunity. These don’t come around all the time.” The coin, the finest Class III 1804 dollar outside museums and available to collectors, had been expected to fetch $2 million.

The varieties of 1804 silver dollars are known as Class I, Class II, and Class III. The Class I pieces are sometimes called Originals, although that name is inaccurate, since they were struck in 1834 rather than 1804. The Class II and Class III pieces are sometimes called Restrikes, also an inaccurate name since there were technically no Originals.

As I’ve mentioned in how to make money on ebay, I’ve set up several Ebay affiliate sites to generate passive income. Typically you make a percentage of the sales price which ends up in the 4-8% range. However, when buying cars, you only get a fixed price which is currently about $100-$130. But if you can sell a few cars through your site every month, it soon adds up.

Well, someone finally bought a whole car (as opposed to spare parts or accessories) through one of my sites. And not just any car – an antique 1972 Rolls Royce Silver Shadow!

Of course, $130 in affiliate commissions isn’t exactly earth-shattering, but it’s the largest sales commission I’ve received from Ebay so far!  And coupled with the sale of an antique seiko watch, a few designer bags and cheap ipods, it almost pays the rent!

Several of my long time readers have asked me to post my online income. I didn’t realize that I haven’t posted the passive income and online revenue numbers since December. A few reader are just starting to make money online and are particularly curious!

So here’s a quarterly breakdown for online income only. I haven’t had time to calculate the dividend income.

Quarterly Online Income:$6,760.85

• Ebay Publisher Network: $1,874.99
  
• Linkworth: $466.72
• TLA: $1,432.38
• Adsense: $543.6
• Kontera: $61.03
• Direct Ads: $1,696.8
• RevResponse: $12
• Amazon: $129.23
• Other/Affiliate: $228

Dividend Income: No Clue

• ING Savings Account: No Clue
  
• Direct Oil Drilling Investment: No Clue
  
• Other Dividends: No Clue
  

With mortgage rates at historic lows, you might think first time buyers will be falling over themselves to buy entry level homes. In California, condos count as entry level homes.  But starting April 1st, Fannie Mae and Freddie Mac have just changed their guidelines for mortgages when it comes to condos.

It may now cost borrowers between 3 and 5% more to finance a condo versus a single family home!

Fannie Mae now has a mandatory fee of 3/4th of a percentage point on all condominium loans, no matter how high the applicant’s credit score. For a once-popular interest-only condo loan with a 20% down payment and a borrower credit score of 690, Fannie imposes the following ratcheted sequence of add-ons:

• 0.25% as an “adverse market” fee
• 1.5% for the below-optimal credit score
• 0.75% for the interest-only payment feature
• 0.75% fee since the property is a condo

Today’s guest post is by MoneyEnergy.

John Mauldin is an investment adviser and president of Millennium Wave Investments. He sends out an interesting weekly newsletter, which most recently focusedon the current real estate market.  It seems like the bottom isn’t in sight yet:

Analyst contend that much of the bad news in the subprime-loan and housing market has been written off. And one would have to admit that a lot has been; and with the relaxation of mark-to-market, there may indeed be some truth to that suggestion. But there are still some issues that remain for housing. Take a look at the graph below. (Not sure where it is from, as it was sent to me, but I have seen the same data elsewhere.) Notice that monthly mortgage-rate resets declined markedly in 2009 from 2008, but are expected to rise again in 2010 and 2011. There is still some heartburn in the mortgage market.

Here’s a reprint from an article that appeared in the Financial Times today by one of my favorite author’s Nassim Nicholas Taleb. I first mentioned Taleb in the post Its Official: Hell Freezes Over. If you are unfamiliar with his work, definitely check out Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets. It’s one of those life-enriching books (in a geeky sort of way).

Ten principles for a Black Swan-proof world

By Nassim Nicholas Taleb

Published: April 7 2009 20:02

1. What is fragile should break early while it is still small. Nothing should ever become too big to fail. Evolution in economic life helps those with the maximum amount of hidden risks – and hence the most fragile – become the biggest.