How Not to Invest in the Oil Market – And My Suggestions

Oil StocksMany of you may want to invest in the oil market, betting that the price of oil will either go up or down. It would seem that the most logical thing to do is either buy the United States Oil Fund (USO)  ETF (buy to go long or short the ETF to bet oil goes down). This ETF tracks West Texas Intermediate oil (WTI), and is down about 16% year-to-date after falling about 45.5% last year.

One problem with this strategy is that you may think that the USO, or the similar OIL ETF’s actually owns the oil in the ETF. For example, most stock ETF’s like the SPY actually own the stocks in the ETF. USO doesn’t actually own any oil as such. Furthermore there are fundamental issues with holding these types of ETF’s for long term investors.

Let me explain. The USO ETF buys “near month” crude oil futures contracts on the NYMEX. Today the near month is the May 15 WTI contract, for which they own 61,041 contracts.


The problem, as any Futures Trader will tell you, is that every month you need to settle up (sell) your position and in the case of USO “roll” into a new position (buy new contract). A monthly futures contract expires at the end of that month. Each time they do this there are both fees involved along with the fact that they are buying high and selling low during the cycle. This is not a great situation for a “buy and hold” type of investor. This USO ETF is a great short-term “trading” stock with plenty of liquidity (daily volume). Their  ETF expense ratios are well above other equity-based energy ETF’s. For example, USO charges 0.45% per year while OIL charges 0.75%.

“Those costs accrue with each passing month. The United States Oil fund saw comparable demand from investors in February 2009, the last time oil prices imploded. From there, spot crude more than tripled from $34 a barrel in about two years. Yet, investors holding the fund captured only about a third of that,” according to Barron’s.  To further complicate the situation, USO has added over $2 billion in new money this year and most of it “shorting” the fund, rather than going “long” in an inverse oil ETF. These huge short positions make the ETF even more volatile. 

As Barron’s also reports, “As more people get into oil ETFs, new investors should understand the potential risks of trading futures-backed funds. Specifically, oil traders should be aware that USO tracks front-month WTI future contracts and the underlying oil market is currently in a state of contango. Consequently, USO could experience a negative roll yield when rolling a maturing futures contract.”

My suggestion is that you invest in the energy sector ETF’s that hold real stocks, like the SPYDR  XLE or the Market Vectors Oil Services  OIH ETF’s. The XLE holds mostly large cap energy companies like Exxon, Chevron, ConocoPhillips, etc. The OIL ETF holds oil service companies like Schlumberger, Halliburton, National Oilwell and Baker Hughes.

I have no idea whether the price of oil is going up or down in the next few months, but I do believe that this time next year both XLE and OIL will be much higher and their lower prices have already enhanced their now respectable dividends (as compared to bonds and US Treasuries.)

Disclosure, I am long XLE,and KMI.

A Tip on How to Not Over Pay Tax on Social Security

SS   First read my post on the April 1st deadline for taking your first “required minimum distribution” (RMD) from your tax-deferred accounts like IRA’s and 401K’s.

Here is the tip for reducing a potential tax bite from your Social Security benefits.

First of all, a portion of your Social Security benefits may be taxable if your Adjusted Gross Income (the very last line on your 1040) excluding your Social Security benefits for the year plus

  • Any tax-exempt interest you earned, plus
  • 50% of your Social Security benefits.

Combine these and it becomes your “combined income”, if it is below $32,000 (married filing jointly), none of your Social Security benefits will be taxed.


  • For every dollar of “combined income” above that level, $0.50 of benefits will become taxable until 50% of your benefits are taxed or until you reach $44,000 of combined income (married filing jointly).
  • For every dollar of combined income above $44,000 (married filing jointly), $0.85 of Social Security benefits will become taxable — all the way up to the point at which 85% of your Social Security benefits are taxable.

So what is the tip and what does it have to do with your RMD? Simple, if you have a medium to larger amount of tax deferred investments in IRA’s and 401K’s don’t delay your first RMD to the following year. For example if you have $500,000 in tax deferred accounts your annual RMD might be $17,000, and if you have $50,000/yr Social Security benefits you’ll already be in the 50% bracket of Social Security being taxable. However if you take your first RMD in the following year you just moved some of your Social Security to the 85% bracket.

The best thing to do for many people is take your first RMD in the year you turn 70 ½, don’t wait till April 1st of the following year.

Don’t Be a Retirement Fool on April 1st

April 1st

If you miss the April 1st date you will be taxed at a 50% penalty rate!

April 1st might be a good day to play a trick on a friend or family member, but if you turned 70 ½ during 2014, April 1st is a very serious date.

For those that crossed the 70 ½ mark, April 1st is the deadline to take your first “required minimum distribution” (RMD) from your tax-deferred accounts like IRA’s and 401K’s. Roth IRA do not require a RMD and therefore there is a planning strategy to convert tax deferred accounts into Roth’s. Keep in mind that the annual requirement for the RMD is December 31st of the same year and only in the first distribution can you delay it till April 1st. Therefore if you wait till April 1st this year, you’ll have to take another distribution for 2015 before December. This in total could amount to a 7% withdrawal from April-December 2015 which for some people is both a lot of money and a potentially large tax bill. Keep in mind that all distributions from a tax deferred account are taxed as “ordinary income”, no special breaks for dividends or LT capital gains. Fidelity Investments reports that over 40% of the people needing to take their first distribution have not done so as of a few weeks ago. The IRS says, “If an account owner fails to withdraw a RMD, fails to withdraw the full amount of the RMD, or fails to withdraw the RMD by the applicable deadline, the amount not withdrawn is taxed at 50%.”

This can get a little complicated, but if you have multiple IRAs, you should calculate the RMD separately for each account – but you can withdraw the total amount from a single IRA. In addition,, if you have different types of tax deferred plans – such as an IRA and 401(k) the RMDs must be taken separately from each kind of plan.

Europe is on Fire (Sale) – Time to Travel

Time to visit Rome, Paris or Barcelona and save a bundle.


Monumento Nazionale – Rome

You’ve seen in my past posts how strong the US dollar has become. One major benefit is that that Europe, especially Eurozone countries are on sale. Many times we have been jealous of Asian visitors to the US because the dollar was dirt cheap, now it’s our turn. As of today, the dollar is over 30% stronger than Euro in just the last 12 months.

Here are some facts:

  1. The dollar will continue to be strong as the Fed raise interest rates
  2. The dollar will benefit from the huge glut of oil especially in the US.
  3. The Euro will weaken even more as they just start their quantitative easing.
  4. The European economy is still weak and even without foreign visitors prices will be down.
  5. European hotels are now priced a little less than American equivalent hotels, this is a major reduction.

The world just loves to see us flash those US dollars around.

Valuable Tax Items I’ve Seen People Miss


I’ve been doing 2014 tax returns for the last 6 weeks as an IRS certified volunteer and I thought I’d share with you some tax items that some people are missing.



  1. Education Credits. These are a tax credit (better than an income deduction) available to a self-supporting student or a parent assisting with educational expenses. The American Opportunity Credit offers up to $2,500 per student per year covering tuition, required enrollment fees and course materials. The Lifetime Learning Credit offers up to $2,000 credit per “return” and can be even be used for just picking up an educational course not related to any specific degree.
  2. Child and Dependent Care Credit. If you pay someone to watch your children (under age 13) or for a spouse or dependant who can’t care for themselves so that you can work you can qualify for a Credit. You’ll need either a tax ID or the social security number of the person you paid for these services.
  3. Married Filing Separately. This is a really lousy tax filing status and will be costly to both parties. Even filing as “Single” may result in lower tax burdens. The best situation if you are married as of the last day of 2014, is to agree to file a joint return and just split any taxes due or refund.
  4. Not understanding who must or should file. Parents are often unsure if their dependents should file their own taxes. In general if the dependent is under age 65 and had earned income over $6,200 they must file a federal tax return. From a practical point of view if they worked any job that withheld any tax from their pay, they should file just to get this back.
  5. You can’t negotiate a dependent. I’ve seen parents say that they had a young adult son or daughter still living with them, they paid for ½ of their expenses but say they will allow the son or daughter to claim themselves as a dependent. Sorry it doesn’t work that way, if your son or daughter “can be” claimed by you, they cannot claim themselves on their own return.

Taxpayers who do their homework ahead of time may be able to save money be either getting a larger refund or owe less tax.



Getting Ripped Off on the Price of Gasoline (Again)!



For those that follow my blog you know that I explained back on December 5, 2014 how the real price of gasoline is determined, by the RBOB futures market.

The price of gasoline is supported by the price of oil. The US is swimming in oil, we have a major oil storage problem. On Wednesday each week the U.S. Energy Information Administration releases the weekly crude oil inventories. This week the forecast was for 4 million barrels in storage, instead we actually had 10.3 million barrels. We have a crude oil glut and just can’t seem to turn it off.

Based on just a little bit of math it’s real easy to see that the refiners are making a ton of money on the spread between the price of oil vs. the price of gas (RBOB). Here are the numbers:

December 5, 2014    WTI Oil   $65.89      RBOB Gas $1.78

March 6, 2015           WTI Oil   $49.84      RBOB Gas $1.88

In the last 90 days oil has dropped 24%, yet the price of gasoline has gone up.  

The Gascalc site has an interesting tool that calculates the price of gasoline based upon the price of oil. It says that if oil is at $50/barrel, gas should be $1.64/gallon at the pump. The price at the pump can be  $.50 – $.80 higher than RBOB due to shipping costs, gas station profits and all the taxes.

Here are the excuses (reasons) why gas is so high:

  1. About 7,000 members of the United Steelworks are on strike at various US refineries.
  2. Refineries usually shut down in the spring to switch to summer gasoline blends, however it usually takes place a little later than this.
  3. A secret government conspiracy. (I just made this up)

The real reason that gasoline is so expensive is that the refiners have slowed down production, creating an artificially tighter supply of gasoline and are therefore making huge margins on what they are producing.




How Important is the US Dollar to World Trade?

Obama Dollar



We hear the stories now and then that some people, outside the US, propose that we change the world currency from the US dollar to say the Swiss Franc, the Euro or even the Chinese Yuan. This talk usually starts after moves by our Federal Reserve to increase or decrease liquidity. The discussion is really foolish. 

The US dollar leads the world for global payments, with a 45% share in 2015, compared to the Euro at 28% and the Chinese Yuan at just 2.2%. However, the use of the Yuan in global payment currency did almost double in the last year. That is a huge increase, however still a tiny factor. 

Our strong dollar has weakened the Yuan from 6.05 Yuan to the dollar in the last year to 6.26 currently. A strong dollar lowers the price of oil since oil is priced in US dollars worldwide. A Federal rate hike in 2015 will further strengthen the dollar. Some of this will come from foreign investors who are currently getting .05% on their foreign bonds vs. our 2-3% yield on our 10 & 30 year bonds. 

A strong dollar has both plus and minuses. In general, modestly rising interest rates, low inflation and a strong dollar have historically been very good for the overall stock market.  Besides its also very nice when you travel to Europe and you get a 25% “discount”.

If you are looking for a way to invest in the strong US dollar, check out this article I wrote in December 2014. The UUP has risen 10% alone since I wrote that story.

King dollar is here to stay.