Friday, January 9, 2015



And We’re Off……..
9 Days Into 2015 And Here’s How We Should Be Making Money For The Remaining 356.

For those first few days of the new year it wasn’t looking pretty. The S&P 500, already slipping a bit on the closing day of 2014 was looking like it was all over.

And few investors really were panicked – there were a great number of investors that were thinking maybe something is wrong. I say that from my interactions with friends, family and neighbors that know I’m in the business of prognosticating in which I’ve been pebbled with queries that were coming with concern that perhaps they might need to do something before its too late.

And in their eyes I could see plans running in their minds ranging from selling everything and loading up on canned goods and junk silver – to just sitting on more cash.

So after discussing how I see things playing out in both the near term and for the coming year – I thought that it would be a helpful idea to write some of it down to start my ongoing missives on the markets.

A Well-Oiled Market

No market or economy does well in the near term with drastic and dramatic moves in any major segment. And with Oil prices down over 50% in just 6 months – it has had a big impact on everything in most markets.

Now in a pending issue, I’ll go into how I see oil playing out and how each and every one of my oil-related companies are going to fare – for now know that I see oil prices remaining lower unless an unforeseen dramatic move occurs such as a true action from OPEC or the easing of US export restrictions comes forth.

But the key for now is that the quick plunge in oil has upset a lot of companies’ budgeting and planning from producers to consumers and everyone in the middle.

This upheaval means that many companies that were set to profit from or at least deal with prices like we were seeing last summer are now having to throw out their plans and start all over.

Producers that were hedged like my one and only US producer, Vanguard Natural Resources (VNR) were set up to deal with lower prices. In fact as I wrote in Lifetime Income Report, the company changed how it did business back in 2010 in preparation for the recent price moves.

It began to shift its focus from being a primarily oil with some gas to being primarily gas with some oil. And it began to aggressively hedge its production of gas and oil by various transactions that for much of last year in particular cost them from making more money with the then much higher oil prices.

But now as many of its peers have been slaughtered in the market, while Vanguard is down a lot from its recent highs – from the trough on December 15 to date it’s recovered some 18.2% and so far this year – it’s up some 5.1%.

Moreover, while I do see that it should reduce some of its hefty payout – due to its hedging, it will still be able to rake in lots and lots of cash this year and for the following years to support a very nice dividend.

But the companies that haven’t hedged as well – this year looks dire. And it’s not just passthroughs including MLPs – but the big oils as well. In fact, I’ve read a recent review of the industry this week that suggests that cashflows from their operations will be short some 24% on average than what they will need to pay for basic capital maintenance and their dividends.

That’s going to be a problem.

Meanwhile, companies that pipe and process should be doing fine. And that will continue to work out well for the collection of companies that I have that continue to do just that including Enterprise Product Partners (EPD) Sunoco Logistics (SXL) and Kinder Morgan (KMI).

Now, these are merely toll takers that do not have to worry about the price of what gets pumped through. But there still is the risk that if producers stop producing, then there may well be less being piped. For now, that’s not happening as even the most challenged of non-hedged producers need cash to keep their businesses running even at a loss near term.

But there are some major beneficiaries to the oil market. Sure transports including my favorite Airline, American Airlines Group (AAL) which is up some 77.71% over the last 365 days comes to mind.

But also retailers should fare well given that consumers in the US have suddenly a lot of extra spending cash that isn’t being pumped into their cars’ tanks to spend elsewhere.
That’s why we’re seeing even the more challenged of retailers including JC Penny stepping up with their recovery.

And as an aside, I’ve been following this company for a while and for those of you that would like to take a little flyer on a minibond of JC Penny – look at the company’s minibond trading under the symbol KTP which is now around $18.20 which will pay you twice a year for a yield of around 10.50% with the next payout set for March 1.

Beyond US companies – there are whole economies that should be getting a nice boost from lower energy costs. One of my favorites that I’ve been writing about more recently is Indonesia which went from being an exported to an importer some years ago.

This is a great economy to invest in before the cheaper oil story, as electoral stability is there and it has a well-educated, younger population eager to produce and consume.

My easy to buy play on this continues to be the Aberdeen Indonesia Fund (IF) which is paying a cumulative annual dividend of just shy of 7% and is trading at a discount to the fund’s actual market value by more than 10%.

Bonds, Still Better

With all of the upheavals in the stock markets as well as the political strife in Europe, The globe’s serious money has been pouring into US Treasury bonds. The 10 year is down to 1.9% in yield which makes much of the rest of the bond market even more compelling to buy.

And with the concerns in Europe over the state of the euro – the dollar has been on a tear – heading back up where it should be. This sets up even more demand as investors around the globe will seek to cash in on a healthy dollar or at minimum hedge their portfolios with more dollars.

And those dollars start being put to work in bonds.

Treasuries might be fine for trading or for central banks – but for us, I continue to like US dollar corporate bonds from non-oil related companies including my collection of minibonds such as the Solar Capital (SLRA).

And for municipal bonds – last year was great for munis and so far in the first 9 days – they continue to be positive.

With state’s finances increasingly more flush, munis should continue to gain in credibility. And with yields still well above US Treasury rates and taxes remaining ever higher – they will make more and more sense to buy.

My three favorite muni closed-end funds are the way to go. They include the AllianceBernstein (AFB), Blackrock (BLE) and Nuveen (NQU). Together they pay a taxable equivalent around 10% and still trade at a collective discount making for great buys right now.

What I Really Want Is Real Estate

Last Christmas I watched “A Charlie Brown Christmas” and I always enjoy the scene in which Lucy van Pelt tells Charlie Brown why she’s not so high on Christmas. Sure, she gets toys and stuff – but not what she really wants….real estate.

Real estate should be exactly what you should want for the rest of the 356 days of the year as well.
REITs in the US turned in a return last year of some 29% and so far in our first 9 days they’re up some 4.63%.

The two areas that I continue to focus on in particular include commercial real estate – where in the US we continue to see progress and even in the EU – despite all of the challenges in their economies – commercial real estate investments are well in demand. And the other area is rental residential real estate.

Households renting their primary residences is becoming the new norm in the US. Demand is rising and even with new construction being done – the vacancy rate in the US is only 4.2% - the lowest since 2000.

Rents keep rising with many markets seeing climbs as high as 7 to over 9% with the national average of nearly 4% last year.

And the average rent now is sitting at $1,124 per month – which is seen to be the highest ever since the residential real estate industry tracking company REIS (REIS) began to track rent rates.

On the commercial real estate side – I continue to love WP Carey (WPC) with its continuously rising dividend yield of over 5%. The company does business like no other. It operates as a sale lease back company.

This means that it buys properties from major corporations and in turn leases the properties right back to them. The companies get financial and other benefits from the deals – and WP Carey gets properties with locked in clients that pay for all of the expenses of the properties.

And on the residential side – there’s my newer favorite Independence Realty Trust (IRT). This REIT has a very stable portfolio of mid-level apartment buildings in well-defended markets around the US.

Nice dividend and it is well capitalized and makes for a great buy with its yield running at 7.7%.

Stock Up?

Last year, anybody in the general stock market that just put cash into the S&P 500 got lucky if they held on despite some big dips to get a return of 13%.

That’s better than many actively managed portfolios which got the attention of many short-sighted managers and investors.

Managers got edgy later last year and piled into the general market index helping to propel the S&P higher. They did it as fears of investors pulling their money out and doing the same thing was coming into fashion.

And the same thing is plaguing the market so far in the first 9 days. Investors (both professional and amateur) kept betting on the general market and that’s one of the reasons for the dramatic ups and downs we’ve had so far. And I see that trend continuing throughout this year.

With the economy in good shape, lower interest rates remaining for the year, employment better and consumer spending coming back – I see the potential for the S&P to turn in a positive number 356 days from now.

But that positive will not come without similar gut-wrenching volatile times along the way. And it will be during those times that way too many investors will panic and sell at the absolutely wrong times.

The key for me for 2015 is just like for 2014 and all the way back to the ‘80s – the best way to make money through bull and bear markets with the lesser of risks is to focus on bigger dividends.

And as I’ve also written, one of the core parts of dividend investing for stable returns includes my preferred stocks.

For if you plot preferred stocks against the general stock market – you’ll see that not only do they turn in consistent returns – but they remain a whole lot less volatile along the way.

And while I have plenty of individual preferreds – an easy way to start is with my favorite closed-end fund – the Flaherty & Crumrine Preferred Securities Income Fund (FFC).

This owns a nice collection of good paying preferreds that combined dividend yield of over 8% which is paid monthly as well.

That’s my lay of the land for the next 356 days. But in the coming days, look for more specific write ups in this website.

And if you have a comment or a query – please email me directly at neil@neilgeorge.com.

Thanks for reading.

All my best,

- Neil George




The above is only opinion and does not represent and/or offer to buy or sell any security and/or any financial advice. The opinions contained may not be suitable for all investors who should consult their own financial adviser before making any investment or other decisions. I may own some of these same securities noted in accounts under my control or for my benefit. Errors/Omissions: I always welcome being called on facts, figures and commentary from readers and look forward to your feedback. I can be reached by email at neilgeorge.com or at 01-703-679-7180.

Friday, June 26, 2009

HEALTHY WEALTHY AND WISE

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HEALTHY, WEALTHY & WISE

We’re getting a healthcare bill one way or another. The key will be if we can get wealthy by being wise even if we don’t get healthy.

By Neil George

You would think that as a nation that spends up to 20 percent of its GDP on healthcare that we’d be one of the healthiest in the world.

Putting that into perspective – other nations such as our neighbor to the north Canada only spend about 10 percent – or about half as much as a percentage of its GDP. And then there are others that spend much less – including Britain and New Zealand that keep their spending down around 8 percent or so of what they produce.

Meanwhile – on the list of nations with the longest average life expectancy – guess what? The US is only number 45 on that list with other nations that spend a whole lot less in percentage of GDP as well as per capita ranking far and above the US.

So, we spend gobs more money – but are we really getting what we pay for? And then there’re the millions that aren’t spending because they’re out of the mainstream healthcare market.

The result is one of the really big political hot potatoes that the House and Senate are currently trying to rush through before the next campaign season begins to formulate as we head into the later part of this year.

Rush Job

Like so many government initiatives over the past several years – the healthcare legislation is being rushed through in very short order and we as taxpayers, investors let alone patients are going to be stuck with the outcome.

Everybody has a skin in this game. And with trillions of dollars at stake – the lobbyists are working overtime.

Everything from liability and lawsuits for lawyers and then on to the doctors, hospitals, insurers, pharmacies, pharmacy benefits managers, drug companies, medical device companies, medical real estate investment trust companies as well as plenty of other direct and ancillary businesses and industries have big money to be made or lost.

And then on the user side – there are plenty groups that want everything for their beneficiaries while not wanting to sacrifice or pay for anything.

It does beg the question – why don’t we just begin to nibble on troubles and the challenges – rather than creating a huge government plan all at once?

Why don’t we take some of the real issues and begin to fix them one by one?

Piecemeal Policy?

Let’s start with a speech that the president gave to the American Medical Association (AMA) on the 15th of this month? One of the biggest cost factors in medical care involves the cost of lawsuits and insurance and procedures to defend against them.

The president gave a speech that called for cutting malpractice lawsuits as a major cost savings. I would agree and the AMA and all the doctors and affiliates have been dying for this – stating that it would save billions which would reduce the cost of healthcare.

But another group – the American Trial Lawyers (ATL) is steadfast against this as this would take those billions out of their pockets. So, the president stated that while we need to cut malpractice suits – we can’t limit damage awards. Why not? We do in plenty of other industries – including the financial and banking industries?

Just this step alone would be a big saver. And as I’ve written for years and years – we could couple it with a tracking of medical errors and publish the records of doctors and hospitals so that we as patients and insurers would move to avoid the troubled providers while seeking to reward the better quality providers. A win-win for all sides?

Well, the AMA doesn’t like tracking of errors like we do for brokers in the financial industry. And of course as noted about – the ATL doesn’t like cutting back on how they can sue – so we’re stuck.

As for the millions of uninsured – did you happen to see the George Will column on the 21st of this week?
(http://www.washingtonpost.com/wpdyn/content/article/2009/06/19/AR2009061902334.html)

He made a pretty good case for what I’ve been agreeing with again for years. If you take the number of the uninsured it’s a lot more manageable than what is being blown up by too many lobby groups.

The core of his message is that the uninsured can be broken down into a few key groups starting with the temporary uninsured. These are the folks that lose their employer-provided coverage moving from one job to another. And for the vast majority this group get solved within 6 months or less.

The next group tends to be eligible for Medicare and/or Medicaid – but fail to or don’t even try to apply.

Then there are the millions of non-US persons that really are outside of the government’s concern for healthcare as that’s another hot button political issue.

The remaining group is the really uninsured – including the uninsurable which is a fraction of the 40-50 million number that gets thrown around in speeches around the nation.

And the fix is a whole lot smaller than remaking the entire market for all of us. Why not just issue tax credits or as Will suggests – just issue designated debit cards with cash and arrange for private insurers. Or if this is unpalatable – set up an extension of Medicare for this group.

But trying to address the core smaller issues doesn’t get as great press as a huge government program does. And when the smaller issues are brought up to the public – that’s were we tend to get bogged down by the lobby and political interest groups that stop any small changes.

What We’ll Get

So, we might end up with nothing done by this Congress – or if we do get the big huge government program – I continue to think that it’s going to end up looking just like I’ve been writing about for a while now.

And it’s the same spiel that the president and other politicos have been doing their stump speeches about for years now.

How many times have you heard and read about that the nation should be entitled to get the same healthcare plan as members of Congress and the US government?

Well then – that’s pretty much what’s running through the Senate right now.

The deal might well end up following the model of the Federal Health Benefits Plan (FEHBP). This is the system of health insurance coverage for Uncle Sam Incorporated’s employees.

This looks much like the cafeteria benefit plans of many private sector employers. There are a collection of insurers that have plans that vary in flexibility and benefits that are priced at different levels on user/consumer expenditures.

To get there – we’re going to get a legal mandate to participate and pay or be taxed and then forced to enroll.

And employers will be mandated to provide coverage or pay fees to have the government provide the coverage.

And lastly, we’re all going to be taxed one way or another – much like we’re already taxed for Social Security (FICA).

Now the good news. While this won’t fix costs, service issues or even quality – it will feel good for the politicos. And for us investors – we can cash in as this all unfolds by buying into the companies that already have the inside track as they’re already the leaders operating inside the government’s existing FEHBP plans.

One of the leaders in this market segment continues to be UnitedHealth (NYSE: UNH) which should be inline to get a bigger chunk of public and private cashflows as this whole big plan goes through.

And if it doesn’t – well then it keeps collecting all of its current premium flows from Uncle Sam as well as the myriad of private sector companies and individuals. And of course it has some pretty good lobbyists to make it work for it one way or the other.

Finally, a man that made it his life’s work to tell us what we all were really thinking about issues ranging from the healthcare debate to every other issue – died at 81 years.

Alec Gallup was the scion of the founder of Gallop polls George Gallup. George started it up back in 1935 – when he began to ask about how well the government’s plans to get huge were sitting with the American voters. Alec continued the tradition running the Gallup organization for many years.

Neil George is editor of By George and Stocks That Pay You as well as the pending investment journal – The Pay Me Strategy.





The above is only opinion and does not represent and/or offer to buy or sell any security and/or any financial advice. The opinions contained may not be suitable for all investors who should consult their own financial adviser before making any investment or other decisions. I may own some of these same securities noted in accounts under my control or for my benefit.

Errors/Omissions: I always welcome being called on facts, figures and commentary from readers and look forward to your feedback. I can be reached by email at njgeorge@att.net or njgeorgejr@gmail.com or at 01-314-616-3325.

Wednesday, June 17, 2009

THE ETF SCAM

THE ETF SCAM

When so many are selling something so hard – perhaps you should go and long and sell rather than buy.

By Neil George

Over the past few years there’s been movement to convince as many folks as possible to buy and hold Exchange Traded Funds more commonly known by the acronym of ETF.

And seemingly every fund management company has come out of the woodwork with ETFs that are supposed to provide investors with an easy means of investing in just about any particular market sector, index or even themes.

And over the past several months – these supposedly index-linked investment vehicles -have been repackaged and with the permission of US regulators have become more flexible and even managed – so that they’re not even indexed to anything.

And whether an ETF is linked to an index or not – they can of course also supposedly be created to perform at a multiple of what underlying basket of securities or index or even to perform in the opposite direction.

Billions upon billions of dollars have been spent on advertising and pitches to buy into this supposedly new form of investing.

The idea is that rather than having to actually pick out stocks to buy or sell – you can just buy an ETF and have it all done for you.

And as the pitches go – ETFs are really much cheaper than investing in a mutual fund – closed end or open end – because all the managers have to do is put together the ETF based on an index and let the market price them. So, its almost like investing for free.

Again – no wonder that so many investors – even supposed professionals buy and hold ETFs across many markets.

Because if you look at the literature - they’re cheap, easy and the modern way to run a portfolio.

Except that they’re not.

First, let’s look at the core of what makes for an ETF.

An Exchange Traded Fund might have a great name on the outside – but most investors will never ever be able to find out what’s actually inside them.

That’s because the folks that build and run ETFs will only release what’s really in them to the specialist traders that sign on to make markets in them.

While ETFs trade on exchanges and folks think that they’re buying or selling at the net asset values of the moment – the truth can be far and away different.

That’s because throughout the day – few folks actually know what’s inside the ETF’s underlying assets that are embodied what are called “Creation Units”. Each Creation Unit is what is used to deliver an ETF share to the market. And each share of an ETF really is just a share in the underlying real basket of assets.

And those assets can vary widely throughout the trading day and are not usually made up of actual stock shares – but rather a series of options, swaps, forwards and a host of other derived securities that only the specialists and the managers of the ETF know about and in the exact amounts.

Traders in the know love these things because they get to trade against the underlying basket of assets. So, they get to buy, sell, short and everything else that can enable them to arbitrage against the secret baskets of assets behind every ETF.

So, while you might think that you are buying or selling an ETF at the real value of the index that it’s supposed to be linked to – you really will never, ever know for sure.

And when it comes to less than current markets – say for foreign stocks or bonds – not only do you have the uncertainty of the underlying murky mix of derivatives that really back up an ETF – but you also have the uncertainty of what the supposedly basket of assets might be priced at.

In past years – I’ve seen some Asian ETFs trade at premiums and discounts amounting to over 30 percent away from what should be the real market prices.

So, not so easy are they.

But it gets worse.

While the performances of ETFs can track underlying indexes – they often underperform. And when you match up many ETFs against closed-end funds focused on the same or very similar markets ETFs tend to lag.

One prime example can be seen in an past recommendation that worked out quite well for my subscribers years ago in the Brazilian market.

I recommended buying and owning a closed-end fund called The Brazil Fund for years – selling it in 2006. the returns for that fund held for 5 years was just shy of 300 percent. Now if you had been reading my stuff back then and instead of buying my fund recommendation went along with an ETF supposedly tracking the Brazilian market trading as the Brazil iShare – you would have made money – but with less than half of the return of the fund and the market.

This lag in performance is bad enough for non-leveraged ETFs – but it can get even worse for leveraged ETFs and more so for ETFs that supposedly move in an opposite fashion to an underlying index or basket of assets.

Many folks have been sold the bill of goods that if they buy an ETF that’s supposedly short a particular part of the market that they’ll either have a hedge for their portfolio or even better that they just might make a buck if trouble hits.

And over the past year one market in particular that did get hit was of course the collection of US banks.

The ETF that is supposed to track the opposite of the leading index for US banks – the KBW Bank Index is run by ProShares trading under the symbol of SKF.

Over the past year – this index has lost over 63 percent. And how did the short ETF fund do? Perhaps a little gain? Nope.

It lost 50 percent. That’s right – the ETF that’s supposed to trade and be valued in the opposite direction of banks lost almost as much as the index that it was supposed to short.

Or how about when you wanted to trade oil on its recent near term rally over the past few months?

The US Oil ETF fund that’s supposed to track the performance of the underlying price of West Texas Intermediate Crude is pitched as the way to cash in that particular commodity.

So, as crude has nearly doubled since later February – the ETF has lagged big – by nearly 62 percent.

The key for all of the ETFs is that the longer the period of time that you look at their performance – the worse that they match up against their objectives.

If you were to look at any of the above ETFs on any given day – there is the greater propensity for them to track what they’re supposed to track. But as you move out from 1 day to 2 days and so on – the correlation begins to break down very quickly.

The lesson here is that while ETFs can make for great trading fodder for those that understand the real underlying asset mix of the underlying creation shares – there can be money made.

For the rest of us mere mortals – we’d all be better served to steer our portfolios away from the pitches of Wall Street and instead – follow the move by one of the biggest creators of ETFs – Barclays – which earlier this year dumped its ETF fund operations.

Neil George is editor of By George and Stocks That Pay You.


The above is only opinion and does not represent and/or offer to buy or sell any security and/or any financial advice. The opinions contained may not be suitable for all investors who should consult their own financial adviser before making any investment or other decisions. I may own some of these same securities noted in accounts under my control or for my benefit.

Errors/Omissions: I always welcome being called on facts, figures and commentary from readers and look forward to your feedback. I can be reached by email at njgeorge@att.net or njgeorgejr@gmail.com or at 01-314-616-3325.

WHERE'S MY CHECK?

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WHERE’S MY CHECK?

Why worry whether the S&P 500 is still on its way up or ready to retreat – when what you own keeps cutting you checks month after month?

By Neil George

Having regular checks coming in buys a whole lot of patience when it comes to a bad market.

With too many folks trying to guess or hope that the market has bottomed – the real way to prepare yourself for if and when they’re wrong is to make sure that you own enough of a base of stocks that pay you to own them.

Dividends are one of the surest means to make this all happen. And it doesn’t matter what age you are or where you are in your investment career – as everybody, and I mean everybody needs a large base of cash paying stocks for their portfolios.

Right now, there are lots of folks that are looking at some of the economic data of the US and trying to make the case that the worst is behind us. Even the May jobs data is being cited as evidence that things are better because only 345,000 folks supposedly lost their jobs rather than the expected or anticipated 520,000.

And with some surveys of the businesses including the ISM showing a slight up-tick along with consumers showing similar upticks in sentiment – there are folks that are calling on the National Bureau of Economic Research (NBER) to make the call that the recession is somehow over.

On the market front – no one is debating that the S&P 500 is at least for now in positive territory so far this year. But the key thing is what will keep it gaining rather than retreating.

For me – I can’t make bets on that with serious cash. Instead, I like you need to keep owning steady cash generators so that if the S&P keeps up with its long term history of crummy performance that I’ll still be able to keep paying my bills.

One of the groups of stocks that I have been writing about for many years and recommending that continue to pay you to own them are publicly traded partnerships or PTPs.

And in particular – I’ve been recommending two partnerships since I started my new publications in February that are doing exactly what you and I need for our own portfolios.

They are Linn Energy (NSDQ: LINE) and Enterprise Products Partners (NYSE: EPD).

These are on two sides of the energy market. Linn produces oil and gas from lower cost fields while Enterprise Products processes and transports petrol and its derivative products.

Linn and Enterprise have outgunned the S&P so far this just past the start of this year. Linn has a return of over 29 percent – while Enterprise has delivered a return of over 18 percent. This compares quite well even to a bounce in the S&P by muliples.

And along the way – dividends are solid and haven’t budged for Linn paying 63 cents quarter after quarter for the past year – and up from the prior years equating to a yield of over 12 percent.

Meanwhile, Enterprise being the ideal middleman in the petrol market keeps upping the payments currently running at around 54 cents giving you and I a yield of around 8 percent.

The key of course is that these partnerships have solid assets that keep generating cashflows. They have stress-tested balance sheets and successful game plans for keeping credit when they need it. And all along the way – even when petrol is that profitable for most – they keep chugging along.

These might be new to you – but they shouldn’t be for that much longer. For some of you that haven’t bought into a partnership I’ll go through the basics.

Partnerships also known as PTPs (Publicly Traded Partnerships) and/or MLPs (Master Limited Partnerships) are stock shares that trade on the major exchanges including the New York Stock Exchange (NYSE) like Enterprise or Nasdaq for Linn.

Unlike regular corporations with publicly traded stock, partnerships don't pay any corporate-level tax – rather they effectively pass through the majority of their profits to investors in the form of dividends.

Partnerships raise capital by issuing shares that are also called units. To qualify for partnership status in the US market – a partnership must receive at least 90 percent of its income from qualifying sources that can include a wide variety of businesses ranging from energy and other resources to real estate, infrastructure and a host of other heavy capital intensive industries and businesses.

Partnerships mostly are made up of two basic entities - limited partners (LPs) and a general partner (GP). When you buy a share in a partnership you become an LP owner - entitling you to the cash distributions that come from the basic operation of the partnership business. And of course – just like with a ownership of shares in a regular corporation – LP owners do not actively manage or control the assets of the partnership.

The management of a partner is done by the GP – just like management of a regular corporation is done by the guys in the executive suites and boardrooms of regular traditional public corporations.

For Partnerships - GPs are paid for running the operations for LP owners in two ways.

First, most GPs also own LP units and receive cash flows just like any investor.
And second - GPs earn what's known as an incentive distribution or dividend for their management duties.

The effect of the incentive distribution deal is that the higher the dividends paid to LP shareholders - the higher the management fee paid to the general partner. The idea behind this is that the GP has an incentive to try and boost distributions.

The bottom line is that partnerships simply another form of incorporating that enables companies with steady cash generating businesses to efficiently raise capital and distribute profits to us regular shareholders.

Now, some of you might have bought into a partnership or two way back in the ‘70s and ‘80s and have a bad memory of the experience.

As always – the US tax code isn’t always well put together and is fluid over time resulting in opportunities and pitfalls for those caught on the wrong side of Congress’ fiscal whims.

Back a quarter century ago the US tax law set up a great ride for the charlatans of the brokerage industry. Under the old IRS tax code – partnerships were able to pass through lots of depreciation and passive losses which not only could count against partnership revenues for tax liabilities – but also for other passive and in some cases active incomes for shareholders of partnerships.

This led to some wild times and way too many abuses. The result was that Congress finally stepped in and ended the fiasco and changed the laws that disallowed using the phantom tax losses against other non-partnership tax liabilities.

This meant that scam partnerships that were sold to shelter other income become worthless or even a liability for investors. And with all of the bad ones overshadowing the quality ones – the market went through the wringer and scams were outted, lawsuits filed and settled. But the genuine quality partnerships that weren’t just tax scams went on and continue to provide solid performance for investors.

Moving forward we now have a long history of tax law that has enabled quality partnerships to thrive with investors profiting and Uncle Sam getting his cut as well.

Now Partnerships do not pay corporate taxes like regular common stock companies as the profits are passed directly to shareholders that then have to pay tax on the dividends. This avoids the double-taxation of profits that has continued to be part and parcel of a regular common stock corporation.

In addition to not being subject to double taxation – depreciation also works to reduce the shareholder’s tax liability.

In the annual tax statement from the partnership’s GP and reported by your broker, bank or trust company will show the gross amount of the dividends that were paid to you as well as how much of the payment is made up of a depreciation allowance which can amount to as much as the majority of the dividends.

This is considered a return of capital by Uncle Sam and thus reduces the amount of income that is taxable. The catch is that the amount of the return of capital reduces your cost basis of your shares which then comes into play on any capital gains that you might and hopefully will have when you sell your shares in a partnership.

The statements of the dividend income and the depreciation comes not in the form of your regular 1099s - but rather in another very similar form called a K1. But just like with your 1099s – these should just go on to your accountant/taxman with usually no more fuss than with any other investment income tax reporting.

The key of course to all of this is that good partnerships are structured to cut you in on the profits much better than a regular common stock corporation and why they’re perfect for investors that like me want to own stocks that pay you to own them month after month and year after year.

Finally, some or many of you know that I was on the debating teams of my prep school and college. And while I was pretty good – I was no where even remotely close to the skills and victories of a man that died suddenly at 69 years.

Frank Harrison was on my college’s debate team and took it all the way to the National Championship in 1960 along with the help and guidance of a former fellow mentor of mine as well - Bob Connelly who died years ago.

Frank would capitalize on his debate training and experience to become a highly successful attorney as well as a member of Congress. And along the way he helped to serve many including his fellow debating team members that would follow him and his many friends including my father as well as his constituents.

His sister has noted that for anyone that might have known Frank that memorial contributions should be made to the Trinity University Debate Program, Department of Speech and Drama, One Trinity Place, San Antonio, Texas 78212-7200, attention Jarrod Atchison (www.trinity.edu) where Frank directed his own team for many years.

Neil George is editor By George and Stocks That Pay You.


The above is only opinion and does not represent and/or offer to buy or sell any security and/or any financial advice. The opinions contained may not be suitable for all investors who should consult their own financial adviser before making any investment or other decisions. I may own some of these same securities noted in accounts under my control or for my benefit.

Errors/Omissions: I always welcome being called on facts, figures and commentary from readers and look forward to your feedback. I can be reached by email at njgeorge@att.net or njgeorgejr@gmail.com or at 01-314-616-3325.

RINGING THE RIGHT NUMBERS

RINGING THE RIGHT NUMBERS

The business of rural phones can be very cash generous or cash gobbling. Here are two that pay you and two that won’t.

If you were to look at your monthly checks that you cut to companies providing communications it might end up being a bit of a shocker of a total.

All of us have expanded our demands to be able to speak with, text to, email with, gain access to the internet as well as receiving evermore entertainment and other content.

And we want all of it – all of the time.

In our offices, homes, on the road, on planes, trains and every other place. And if we can’t get and keep connected – well, we won’t be happy campers.

And we’re willing to pay for it.

Over the past 15 years – communications and related content delivery companies have seen a continuing surge in services demanded and paid for by everyone. Think about it – back in the early ‘90s – you had basic landlines and perhaps a cellphone the size of a small brick and perhaps cable television.

But now, more likely you have landlines, multiple cell phones, smartphones, data connections for your laptop as well as data connections for your homes, cable, satellite and many other subscription services that quickly add up to hundreds of dollars a month for households.

And for businesses – the bills very quickly run into the thousands and many thousands each month and every month. And since the early ‘90s through the last current calendar year – the growth in spending has soared by nearly 200 percent on a national average as tracked by the US Bureau of Economic Analysis (BEA)

This is an interesting industry to be in. For there’s cash, lots of it – and that cash keeps coming in month after month and year after year – making for a very nice and steady stream of revenues that you can bank on to build and maintain a very lucrative business.

But there is a catch. You have to keep investing in capital expenditures to maintain the services that you have – while also investing to build and expand to meet new and expanding demand for services. And in many markets – there’s plenty of competitors that are just itching to poach some of your very nice cash cow customers.

Running a business in the communications world therefore comes down to maximizing revenues while controlling costs and keeping and building customer bases.

There are markets that have plenty of steady customers – but with less direct competition. Rural areas around the nation offer different market conditions than urban centers. Fewer providers means less competition and not only potentially better pricing power – but also stickier customers. More certainty that the cash will keep coming in not just over months – but years.

And there is an added benefit – Uncle Sam Incorporated is eager to see rural markets better served.

Back in the Franklin Roosevelt Administration – the US Department of Agriculture and its Rural Development Division began a major public investment to provide a host of utility services to households and businesses that were underserved by private companies more focused on urban areas.

By providing underwriting and cash subsidies – rural communications providers sprung up around the nation – often being local operations. This continues through today and has expanded considerably in recent years.

In 2005, the government expanded its mission to subsidize not just landline and wireless – but also higher-speed or broadband data transmission capability throughout the rural markets of the US.

And in the recent additional expenditures including chucks of the Stimulus Package Legislation – billions upon billions of Uncle Sam cash is continuing to flow to companies providing and expanding communications in rural areas.

So, the bottom line is that this is a market that has lots of steady customers and lots of Federal cash and credit to keep it going and expanding.

The result has been a move to consolidate many of the local companies serving rural markets. Over the past several years – companies have gone public and have acquired local service providers. In addition, in markets where the major Baby Bells have been operating – rural focused companies have been buying out local rural services as the Baby Bells have been increasing focused on what they see as there core markets in urban areas.

I got involved in this market years ago as I recognized that there were plenty of these companies that were operating good businesses with lots of cash and were paying out large cuts to investors.

But like with any industry or market – even good ones like rural services – it comes down to finding the right companies rather than just the right segment.

The key to investing in the right company comes down to finding management teams in markets whereby they can maximize cashflow while controlling costs. And not just doing acquisition deals just for the deals’ sake.

In addition, landline customers are contracting around the nation from urban to rural markets. With alternative communications products and services – every telecom company has to minimize losses of landline revenues with growth in other alternatives to keep the cash coming in.

This comes in two ways. First, add additional services – from wireless to higher cost data and entertainment and media services. Second, buy up other markets at a faster pace than what is being lost to declining demand for landlines.

The first is harder. For it involves improving services and sales as well as additional capital expenditures. The second can be easy in the shorter term – but it comes with lots of costs – including overpaying for customer bases and the costs of integrating the acquired customers into the existing businesses.

There are two companies that continue to prove out on both approaches and two that should be avoided.

On the buy side – there’s Otelco (NSDQ: OTT) and Iowa Telecommunications (NYSE: IWA). On the sell side – there’s Fairpoint Communications (NYSE: FRP) and Frontier Communications (NYSE: FTR).

Otelco is based in Alabama and has operations in rural markets in that state as well as in central Missouri, select areas of Maine and Massachusetts and West Virginia. The company is a cost container – one of the better ones and continues to grow overall revenues by an average annual rate of over 20 percent. Margins are fat with gross running in the 63 percent. And more importantly – it keeps lots of cash on hand and controls debt with a debt to assets running at only 76 percent.

For investors, the company’s shares are structured as an Income Deposit Security (IDS) in which each share is made up of one common share of stock and one intermediate corporate bond.

The dividend is made up of cash from operations paid to the common stock and the interest coupon paid to the bond. That gives us a lot more certainty and security of the dividend – while also continuing to focus management on serving shareholders.

Paying a rock-steady dividend of 42 cents – the yield is running in the 13 percent range and should continue to be bought under 16.

Iowa Telecommunications operates as its name implies - throughout the state of Iowa. It has a decline rate in local landline services running at an average annual rate of 3 percent – yet, like Otelco, it continues to ramp up additional data and bundled services for both households and increasingly to business customers resulting in overall revenue gains in these complementary and off-setting services amounting to average gains of 20 to 40 plus percent.

And also like Otelco, it’s a cost controller with heavy gross margins in the 60 plus range and less debt with debt to assets running only in the low 60 percent range.

This well-focused rural operator pays steady every quarter and has kept paying 40.5 cents giving you a yield from its regular common stock of just shy of 13 percent. It’s a buy under 16.

First on the sell side is Fairpoint. It’s been on the sell side from me for the last few years stemming from a grave departure by management away from shareholders.

This company continues to me more focused on acquisitions rather than local business growth. The results have been that the company has entered into a series of deals that have come at too high a cost and have resulted in a debt strain that potentially puts the company at risk for bankruptcy.

Two deals in particular are responsible for the continued slide. Both have been bought from Verizon – one in Maine and the other in Vermont. In both cases – the company failed to do enough diligence to determine what they really were buying – including antiquated switching systems and not all of the business customer base.

Adding to the troubles were local union leaders that saw the deals as threatening their power. With Verizon – the unions could always threaten other major markets to get want they wanted. But with Fairpoint – this leverage would be reduced.

The campaign against the deals led to the local Public Utility Commissions resulting in Fairpoint making major concessions including cutting back on dividend distributions.

Now as the deals have been done – revenues are lacking and capital needs are outstripping the potential of the company to fund them. Dividends are now suspended and debt rating agencies are now finally weighing in with downgrades and negative outlooks. This should be sold or avoided.

The other sell side rural operator Frontier Communications has been following a similar and increasing aggressive deal making campaign over the past few years. And while not as initially challenged as Fairpoint has become – its debt load particularly with maturities in the next couple of years will be challenging to rollover.

And with local landline business attrition – other services are not expanding as rapidly as Iowa and Otelco have been able to generate. This puts its dividend further in jeopardy and is why I am recommending selling and avoiding Frontier.

Neil George is editor of Stocks That Pay You and By George.


The above is only opinion and does not represent and/or offer to buy or sell any security and/or any financial advice. The opinions contained may not be suitable for all investors who should consult their own financial adviser before making any investment or other decisions. I may own some of these same securities noted in accounts under my control or for my benefit.

Errors/Omissions: I always welcome being called on facts, figures and commentary from readers and look forward to your feedback. I can be reached by email at njgeorge@att.net or njgeorgejr@gmail.com or at 01-314-616-3325.

25-BUCK BARGAINS PAYING 14 PERCENT

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25 BUCK BUYS PAYING YOU AS MUCH AS 14 PERCENT

You and your portfolio don’t need drama right now – you need sold and simple stocks that pay you.

By Neil George

Everybody is getting all ecstatic over the pitch that the economy is fixed and on the rebound and that the stock market is back running with the bulls.

Now, it might well be true – and nothing would please me more than for all of us to be headed on to better times and market booms. But I’m not remotely ready to bet the farm on it – and nor should you.

My way of investing doesn’t need bulls or bears to work. I don’t have to worry about whether the Dow or S&P 500 is up, down or sideways today, tomorrow or next week.

Instead, by buying stocks that pay me to own them – all I have to make sure of is that I stress test them enough so that I can sleep knowing that the companies behind them will stay in business and that their checks will keep coming my way.

Even better, if I can own stocks that don’t just pay a good dividend – but have to pay a good dividend it ups the certainty factor for my portfolio.

What kind of stock not only pays a good dividend – but is actually contractually and legally obligated to pay a good dividend?

Stocks that no one on television or in the financial papers has ever mentioned. And for me – if it stays that way – you and I will be all the better for it.

Anonymous to me is the new synonym for profitable.

For if I can buy stocks that no one touts and that have to pay me every quarter or ever month a fat dividend – I can just keep humming along knowing that my portfolio is paying my bills and quietly growing its balance.

So, by now you should want to know what are some of my stocks that have to pay you and are nice and steady.

Ok. First, they look like stocks, trade like stocks – mostly on the New York Stock Exchange (NYSE). But second, they really are bonds – even if few really ever notice – including your broker.

Bonds are supposed to be for the big guys. You know – the mega financials, insurers, pension funds and the like. But there is a corner of the stock market that actually continues to bring bonds back to the reach of the individual investors.

But there are bonds that look and trade just like regular stocks. And rather than being like traditional bonds with typical 1,000 dollar pieces in lots usually traded in the tens of thousands or millions – these trade in more palatable sums with face values of 25 bucks or less.

Now here is where I need to roll out some of the fine print on these bonds that look and trade like stocks. And the fine print is that they have various acronyms by the banks that put them together and brought them to the market.

I’ll start with one of them called Trust preferred securities (TRUPs). These are stocks that have been quietly trading for quite a while, yet haven’t been on most investor's – let alone brokers’ radar because they're just not widely touted by anyone.

Behaving much more like preferred stocks, regular everyday companies including big utilities and many other industries essentially issue them to bank holding companies which then package them up as a trust and then issue them to investors in the markets just like a stock.

The bank holding company then uses the funds to invest in bonds from the issuing company. Those bonds typically have intermediate to longer maturitiess and the cash flow from the bonds is what pays dividends on a TRUP.

That creates the advantage for the issuing company of being able to treat the TRUP stock as equity for its balance sheet without having to register the issue with the SEC, but the IRS lets the company treat the dividends as debt that allows it to reduce its tax liabilities just like regular bonds.

So the investor benefits from the steady dividends and the advantages and security of owning a bond and the company gets access to cheaper after tax capital.

There are a plethora of these issues as well as other varieties of these easy to buy bonds that can be called other acronyms including PINES (Public Income Notes), QUIBs (Quarterly Interest Bonds) and others in the market.

But what makes them all similar is that they’re issued in sums typically amounting to 25 dollars with calls by the issuing company at their issuance price – again typically at 25 dollars. The key then is to understand the credit of the issuer, know the current price of the TRUPs and then know the yield to the call price as well as the call dates.

The result is that you and I can put together a collection of these bonds from a variety of industries that pay us quite well – with yields running for most at between 7 to over 14 percent.

And even better, even though these trade like stocks on the NYSE – they tend to be very steady in price – even when the stock market is in a tizzy of trouble mostly because nobody in trading rooms or hedge funds knows about these – and that’s again perfect for us.

One more thing to note – because these are brought to the stock market by banks – some of these can have their names shortened and can actually have the name of the bank bringing them rather than the company behind them. So, don’t get spooked – just look behind some of the names on the stock tables to find the real issuer.

How about some examples of these bonds that trade like stocks?

I’ll start with an easy one from the giant US telecom company – Verizon (NYSE: VZ). The A-rated issuer has a TRUP trading under the symbol of PJL on the NYSE with a dividend of 7.625 percent due in 12/01/30.

Trading pretty consistently in the just shy of the 25 buck range – the yield is running currently at around 7.8 percent. I see this paying you a steady and solid dividend rate that trumps the dividend from the common stock and the regular bonds by a whopping margin.

Next is an issue with a bit more in yield from another telephone operator with regulated phone lines based in the Kansas side of Kansas City in Overland Park. Embarq has it’s 7.1 percent due 06/01/36 TRUP which trades on the NYSE under the symbol of FJA. The bond continues to trade a bit more up and down that the Verizon issue in mid to upper teens – giving us a yield bargain.

The result is a current yield nearing 10 percent payable every June and December. A newer issue – it’s not callable until June of 2012 which would be a huge gain for you at the current price in the market.

Verizon isn’t the only Baby-Bell to go to the NYSE for some of its bond issuance. Qwest (NYSE: Q) has had a pile of issues – but still maintains an impressive chunk of telecom assets in a crucial section of the US market.

I see the credit prospects of this utility being good enough to sustain the cash coming from the company’s TRUP trading under the symbol PKH. The bonds are the 7.75 percent due 02/15/31. They continue to trade positively – in the mid-teens dollar range. Callable like the others at 25 – so we have only upside if that were to occur. The yield therefore is a big one – currently over 12 percent.

Last up in my examples of these stocks that pay you comes from my favorite airline holding company – AMR (NYSE: AMR).

The holding company for American Airlines has a PINE trading under the symbol AAR paying 7.875 percent. Trading around 13-14 dollars apiece they’re generating a another huge yield of over 14 percent.

And while many might question the stability of owning a bond from an airline – note that the company continues to pay its bills, and has continued to prove that it can rollover credit lines and bonds and has continued to have ample access to new leases and other new lines of credit.

Finally, a man that liked to provide quality at a bargain price died at 78 years. Norm Brinker liked to sit down and enjoy a good meal. But at the same time, he didn’t like much of the fuss of formal restaurants – including the prices. So, he came up with an alternative and founded not just a collection of companies – but an industry now known as casual dining.

His legacy can be found in cities around the US and well beyond with names including Steak & Ale, Bennigans, Chiles – all park of Brinkers International (NYSE: EAT).

Neil George is editor By George and Stocks That Pay You.



The above is only opinion and does not represent and/or offer to buy or sell any security and/or any financial advice. The opinions contained may not be suitable for all investors who should consult their own financial adviser before making any investment or other decisions. I may own some of these same securities noted in accounts under my control or for my benefit.

Errors/Omissions: I always welcome being called on facts, figures and commentary from readers and look forward to your feedback. I can be reached by email at njgeorge@att.net or njgeorgejr@gmail.com or at 01-314-616-3325.

Friday, May 29, 2009

INVEST IN UNCLE SAM INC.

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INVEST IN UNCLE SAM INCORPORATED

The biggest investor isn’t a Warren Buffet, Bill Gates or George Soros – But Uncle Sam and his US Government Incorporated.

By Neil George

Now for a while now I’ve been writing that some of the biggest and best bets for the general stock market might well not be found in the private sector – but rather investing in what I call Uncle Sam Incorporated.

The US Government.

Now, I know that Uncle Sam doesn’t issue publicly traded stock and yet the government does issue bonds – which in my weekly Stress Test found at the www.stocksthatpayyou.com website I just outlined that I wouldn’t be a buyer of right now.

But at the same time – it’s interesting and perhaps a bit more disturbing how quickly and with such size – that the US Government has been acquiring ever larger stakes in what used to be some of the biggest companies in the world.

Let’s start with American International Group (NYSE: AIG). This mega insurer and financial is now 80 percent owned by Uncle Sam amounting to an investment of around 180 billion dollars. Not all in direct equity – but still a significant amount of capital has been contributed by the US Government in this company.

And as the government has been making its inroads into this company – its been grabbing control over management with 5 of the 9 board members effectively chosen by the West Wing.

Then let’s move on to Citigroup (NYSE: C). This used to be the biggest of the big global banks. While not as big as it used to be – that hasn’t stopped Uncle Sam from grabbing some 33 percent of its capitalization amounting to around 50 billion dollars. And like AIG – the West Wing has made it’s mark on management with 4 directors coming one way or another from the government’s choice.

How about some of the consumer and other financiers in the US? GMAC - that is not a listed company and used to be called General Motors Acceptance Corporation – now has some 35 percent of it owned by the US Government amounting to what nowadays seems like a paltry sum of only some 12 to 13 billion bucks.

As for control of the company – Uncle Sam has been a bit behind in his directives as only 2 board members have been selected by the West Wing.

Then there are the two automakers. Chrysler – on its way to becoming an Italian company – has 8 percent locked up by the US Government costing Uncle Sam the bargain price of 12 billion. But even with a smaller stake – the West Wing controls 4 of the 9 board members.

And the company that’s making all the news – General Motors (NYSE: GM) might well have Uncle Sam taking as much as 70 or so percent of it – costing 50 or more billion. We already know that the CEO was replaced by the West Wing and the board of directors are made up of 5 of the 13 picked by government hands.

Really, is this anyway for a free market economy to operate if the government is the big owner and controller of an increasing number of the leading companies?

Even this week – we have Bank of America (NYSE: BAC) announcing the departure of a long-standing board member that has been on the executive committee. Temple Stone was one of the board members that fought tooth and nail over the West Wing’s desires to make CEO Ken Lewis step down from his spot as chairman of the board. Temple lost as did Ken – and now it seems that Temple has been kicked to the curb as well.

I wonder how that happened?

This comes as Uncle Sam’s Treasury Secretary – Tim Geithner is winging his way over to China to meet with the government in Beijing. It will be interesting how he tries to tell the Chinese how they need to me more market friendly while back home Geithner and the rest of the guys from the West Wing are grabbing more and more of the public market and putting into the hands of Uncle Sam.

But as investors this isn’t as disturbing as it might be. Instead, it continues to play into one of my strategies for getting your portfolios back on better footings in this very challenging market and economy.

One strategy is to buy into the companies that aren’t yet controlled or owned by Uncle Sam – but have Uncle Sam as some of their best customers.

From healthcare – to defense – there are plenty of companies that you need to own that are making good money as federal dollars and contracts keep coming their way.

Defense in particular is quite interesting. Did you see the durable goods numbers for the last month?

The data released by the Commerce Department showed a gain of 1.9 percent. Now as the cheerleaders in the West Wing were popping corks – the bad news was that without defense contracts the real number was still a sagging minus 2.1 percent.

But lets look at the positive – buy the defense contractors getting the contracts and the durable goods orders. One to note continues to be Long Hauler favorite of mine – General Dynamics (NYSE: GD).

And for more – I’ll be posting some of my other core favorites in the days to come.

Lastly, there are two housekeeping notices that I want to make you aware of. First, for those reading this on www.neilgeorge.blogspot.com note that this is just one part of what I am currently writing and publishing. More can be found at www.stocksthatpayyou.com. And on this site, I would encourage you to sign up for my alerts and notifications as well as to post comments on my writings.

Second, one of the sections on the stocksthatpayyou.com website is called my Stress Test. Every week I go through a particular segment of the markets – from individual companies and funds to whole market groups of securities and outline the real and potential threats that they might pose to investors. I would encourage you to read this section and in coming weeks if readers like – I’ll be emailing it to you just like I do for subscribers to By George.

Finally, a man that didn’t quite like the lack of choice on the proxy votes for Uncle Sam’s leadership teams around the nation – died at 80 years.

How many of us would like to have a little more say on proxy votes for board members of the companies that we invest in? But here’s the thing – while we have little real voting power on who gets to be on the boards of directors of public companies – we arguably have the same trouble when it comes to political leadership elections.

Think about so many of the past elections whereby we really didn’t think much of any candidate. Our choices often come down to the lesser of two evils. But what if we could have a third option when voting for elected posts from mayor to congressman or even president? No, I’m not writing about independents and third party candidates – but rather a choice of none of the above.

That’s exactly what Luther Knox wanted to put on ballots around the nation starting with his own state of Louisiana. He saw that there really wasn’t a choice of none of the above and fought the courts to have it as a legal choice on ballots. He didn’t get his way – but perhaps, just maybe, someday?

Neil George is editor By George and Stocks That Pay You.




The above is only opinion and does not represent and/or offer to buy or sell any security and/or any financial advice. The opinions contained may not be suitable for all investors who should consult their own financial adviser before making any investment or other decisions. I may own some of these same securities noted in accounts under my control or for my benefit.

Errors/Omissions: I always welcome being called on facts, figures and commentary from readers and look forward to your feedback. I can be reached by email at njgeorge@att.net or njgeorgejr@gmail.com or at 01-314-616-3325.