Where Goes The Economy From Here

The Official Geezer Guide - Your guide to supplementing your retirement income, saving money and protecting and growing your investments.

Volume 2, Issue 1, June 2010

This month's articles:

Off the Cuff

1. Where Goes The Economy From Here
2. Is eBay's New Fixed Price Selling Format Working
3. The IRS Wants a Cut of Your Online Sales

======================================

Off the Cuff

It has been a while since we sent out a newsletter. When we started this site we got off to a good start and then the economy turned south. When that happened, my main site at SkipMcGrath.com and our eBay business both took a hit along with most online selling venues. So it became a question of where we wanted to put our efforts. We decided at that time to back off from the Official Geezer Guides until our business recovered. So during the past year I have been blogging, but we haven't been putting out newsletters or new products. However, our business has recovered so I hope to put more time into OGG and we will be coming out with some new products soon.

You will notice that in addition to writing about ways to supplement your income, we are also writing about economic issues. We decided to expand the content because what happens in the economy and the markets is so important to people who are living on a fixed income and/or depending on their IRAs for retirement income.

Is the economy really recovering? When you look at the economic numbers there is some evidence that it is -but the evidence is slight while the signs on the street don't look so good. Our first article takes a look at the current investment climate and some of the dangers ahead for retirees.

Employment figures out this week show more bad news. Total job creation grew about 450,000, but over 400,000 of those were government jobs, most of which were temporary census workers. It takes approximately 5 workers in the private sector paying taxes to cover the cost of just one Federal government employee. Therefore you would have to create 2 million private sector jobs just to cover the cost of the 400,000 new hires.

A large number of the unemployed are turning to online self-employment. Website hosting companies report sustained growth in sales to individuals setting up websites and blogs. And, Amazon reports rapid growth in the number of sellers signing up to sell on Amazon. The same thing seems to be happening at eBay because the sales of my various books on eBay are up strongly as unemployment grows.

Many of our readers bought the blogging book I wrote with my Webmaster and WordPress blogging expert, Marsha Perry. How To Make Money Blogging From Home has been a huge seller. If you bought the book, or if you already blog, I found a great site called Smart Bloggerz, that has an excellent article called Ten Ways to Get More Readers To Your Blog. This is an excellent article and must reading for any blogger.

Lets get started with this month's articles:

======================================

[top]

1. Where Goes The Economy From Here

Living on a fixed income has always been challenging, but these times are testing our efforts to the limit.  This is why we work so hard to find safe moneymaking opportunities for our readers so you can supplement your income.

Simply put, I am terrified at the direction of our economy and how it will affect retirees.  There are some slight gains in employment and strength in some areas of the housing market, but there are so many storm clouds on the horizon that one of them is bound to turn into a tornado.  Lets look at a few of these storm clouds:

Market Volatility

Volatile markets are historically a predictor of major turns in the market.  And it works both ways.  Before the market meltdown in July/August 08, market volatility spiked to extremely high levels. The S&P VIX that tracks volatility jumped from 20 to 80 in the space of one month.  That preceded a 50% drop in the DOW and the S&P. Volatility also works at market bottoms.

Back in March of 09, just before the market took off, the VIX spiked again. It was already at a fairly high level, but it spiked higher.  Now with the markets hovering around 10,200, volatility is rising again. The VIX has spiked from 17 to 46. Its now backed off slightly from that, but is still high.  Whenever a market is near a top or a bottom and volatility spikes, the market almost always turns.

US Government Debt

The stunning growth of the deficit and the total debt is nothing less than scary. As Greece and Spain found out, you simply cannot go on borrowing money to spend on social welfare for your citizens without the income to service the debt.  The problem with socialism is that sooner or later you run out of other people's money.  Yes you can raise taxes on the rich for a while. But the rich aren't stupid. After a certain point they start moving their money elsewhere or placing it in tax sheltered investments.  And if you try and cut social benefits, the renegades and the anarchists take to the streets and violent protests erupt.  If you don't think that can't happen here, then you weren't in Seattle during the World Trade Organizations protests. I was and I saw hundreds injured and millions of dollars worth of property damage.

The deficit this year will exceed a trillion dollars. And the total government debt just passed 13 Trillion and will hit 14 trillion by early in 2011.  This virtually guarantees rising interest rates.  Simply put, if our debt is seen as risky by foreign investors (and sophisticated domestic investors), then investors will demand higher interest rates to offset the risk.

The same thing happened during the Carter Administration when Treasure Bond prices fell dramatically as long bond interest rates went as high as 11%.   Mortgage rates are now at around 5% and houses still aren't selling that fast.  If rates climb to 7% or more, which is highly likely, any turnaround in housing will stall.

Oil Prices

Rising oil prices are the other shoe to drop and an additional threat to the economy.  There are three factors that affect oil prices:  Supply & Demand, Political Risk and the value of the US Dollar.

If the economy remains soft then oil prices may stabilize for a while, but our economy no longer has as much effect on oil prices as it used to.  The phenomenal growth of the BRIC countries (Brazil, Russia, India and China) is driving oil demand. In 2009 China passed the US as the largest market for automobiles in the world. And demand for cars and other goods that use energy is rising in most of the developing countries.  So any softness in demand by the US economy will soon be offset by increased demand in these other countries.  Just last week, Saudi Arabia said that their increasing domestic consumption of oil would reduce imports in the years ahead.

Oil production worldwide is falling. The North Sea fields are running 50% below the production they produced just ten years ago. Mexican production (our leading foreign supplier) is already off 15% and forecast to fall further.  It is just a question of time until demand once again exceeds supply and prices start rising again.  The gas prices we saw in 2009 when oil passed $150 a barrel may seem like a bargain in the near future.

When it comes to political risk, one only has to look at the recent events in Korea when N. Korea sunk a S. Korean Navy ship, and Israel, where protestors were shot trying to run a blockade.  Iran is still working on a Nuke and the US has made it clear we are not going to interfere in any serious way.  The betting that Israel will launch a pre-emptive strike at Iran is taken seriously by many investors. Should this happen, oil prices would skyrocket and this would drive a major stake through the heart of the recovery.

Lastly is the US dollar. Oil is priced in dollars. So when the dollar looses value, oil prices rise.  Until the crisis in Greece, the US Dollar has been in a multi-year bear market, losing over 40% of its value against a basket of major currencies. The recent rise cause by a flight to safety from the Euro is seen as temporary.  Major investors and hedge funds are still shorting the dollar on a long-term basis.

So what to do?  When you are retired or about to retire, you are in no position to speculate.  Preservation of capital is your number one goal.  I always hesitate to give investment advice as I am not a professional investor or registered advisor of any kind, but my money is in high yielding stocks and mutual funds that are connected to commodities and natural resources.  There is simply no way that our government can increase debt and print the amount of money we have been printing for the past few years and not have inflation.  When you get inflation you get rising prices for commodities including food, oil, and metals like Iron ore, alminium, silver and copper.  And of course there is gold.

I have never been a gold bug, but gold has always been an excellent hedge against inflation.  The percentage you decide to hedge is up to you, but most experts recommend at least 10%.  For myself I am about double that today as I think the risk of inflation is very real.

General stocks and government bonds are probably the riskiest investments you can be in today. If you are in stocks, then you should be in the bluest of blue chips only and even then, pick the stocks with a decent dividend (3% or more).  Some examples are PepsiCo (PEP), 3.1% yield; Johnson & Johnson (JNJ), Automatic Data Processing (ADP), 3.3 % yield; Chevron (CVX), 3.9% yield; 3.7% yield; Phillip Morris International (PM), 5.3% yield; Southern Co. (SO), 5.6%; and Verizon (VZ), 6.9% yield.  When the market retreats, these stocks will also go down, but not as much and the yield will give you some protection. And if you don't own these stocks and the market falls then that is a good time to buy them.

About the only government bond I like is the Treasury Inflation Protected Security. These are securities issued by the US Government that are designed to rise with inflation. Over the past year, TIPs have returned just over 4% total return with virtually no risk. You can easily buy TIPs through the exchange traded fund, symbol TIP.

Of course the other thing you should be doing is finding ways to make some extra money during your retirement.  Setting up a small part-time online business is perfect for seniors. You may only earn a few hundred a month or a few thousand, but this is the best way to help insure your future financial viability –and if you pick the right business its actually fun.

======================================

[top]

2. Is eBay's New Fixed Price Selling Format Working

Last month eBay completed the series of major changes designed to move the site from a primarily auction site to a fixed price selling site.  Unless eBay sells their auction business to another company, or moves it to a separate platform, auctions will still be a part of eBay –just a smaller part.

The big change was to divide eBay sellers into two camps:  Those who have an eBay store and those who don't. eBay charges monthly fees for store subscribers, so what they did was come up with two different fee schedules –one for store subscribers and a different, higher, fee schedule for non-subscribers.  eBay also did away with the Fixed Price listings and now all store listings are fixed price listings and appear in the eBay search engine –whereas before this change, the store listings did not.

So what are the early results?  In my case I am doing well, because we always sold a high percentage of our goods as fixed price listings and since I am a store subscriber, I am now paying less fees.  And my sales are up.  However, many auction sellers I have corresponded with are seeing just the opposite.  They are seeing higher fees and fewer sales.

The big guys are really happy. I have spoken to some really large eBay sellers and they seem to be seeing improved results.  eBay's last few financial quarters have not been so great. Most of the profits are coming from PayPal and other non-eBay marketplace activities. So this quarter will be very telling.  If eBay marketplace sales and profits do not recover, I doubt if the shareholders will continue to be patient with the current management. We won' t know until the middle of October when results are released.  The summer quarter is historically the slowest quarter for sales on eBay, but from August 15 to September is the hot back to school selling season which is historically good for eBay. So I will be looking at how my sales compare to the same time last summer and how that hot season compares.

Despite all of these issues, eBay is still the best place to start an online business. It is the easiest place to learn how to sell and the lowest risk. And almost everything you learn on eBay can be applied to selling on other online venues like Amazon or your own website.

======================================

[top]

3. The IRS Wants a Cut of Your Online Sales

Many people think about online auction and selling sites, like eBay and Craigslist, as online garage sales -- a convenient way to clean out closets and attics full of old clothes, books, knickknacks and wedding gifts.

But if you're a frequent seller, the government considers your profits to be income.  They can and will come after you for taxes.

One eBay seller learned that lesson the hard way –and she was employed by the IRS at the time.  IRS employee, Andrea Orellana sold over $40,000 worth of goods from her closet over the two-year period from 2004-2005.  She claimed a high cost basis for the items, but didn't have records to back it up and the IRS got her for over $15,000 in taxes and penalties.

Starting in 2010, the IRS has reached an agreement with PayPal whereby PayPal will supply the IRS with every seller's transactions over a certain amount.  I don't know what that amount is –it wasn't released, but some reports put it at PowerSeller level of $12,000 per year.  That makes sense, as the IRS doesn't have the time or resources to go after every seller.

In general if you are an occasional seller, you don't have to worry about record keeping and reporting.  But if you sell regularly, then you should keep good records that show your fees, product costs, shipping expenses and other expenses related to your business (I.E. mileage to the post office and back, home office expenses, etc.), and keep a record of your sales.  Then you should claim as income any profit you realize and report that to the IRS.  In many cases when you take all of the deductions you are allowed for a home business, you will actually show a loss on paper even though you actually made money.  When this happens, you also want to report it as it reduces the taxes you pay on your other income.

======================================

That's it for this month. I know we haven't been doing our newsletter that frequently but this has been a tough economic environment and we have been focusing on what makes money and limiting our expenses, which is always good to do when times are tough.

Skip McGrath
Head Geezer
Official Geezer Guides, Inc.

P.S. If you missed the last issue, check out our newsletter archives.

Home | Free Articles | Products | Resources | About Us | Testimonials | Contact Us