A Random Walk?

After my rather long winter's break, I thought I should come back to the same topic that I left off on - gas prices. While we had covered a lot of ground under The Price of Oil,  there was one huge disclaimer that we needed to cover, and is especially appropriate to discuss in light of  this week's delightful drop in gas prices.

We have a piece of good news. US oil production has registered a record rise in production in 2012 and is on track to overtake Saudi Arabia (Yes,  you heard right!) by 2020. Now, shouldn't that be the reason oil and therefore gas prices will drop? Well...

- As we discussed under The Price of Oil, crude oil prices are dependent on global supply & demand and the US is just one of the big players. There is China, Brazil and a host of other important players who matter just as much, sigh!

- We also spoke about the Supply and Demand dynamics which can be extrapolated to say that when gas prices drop either Supply is very high or Demand is very low. The supply is indeed high. But here's the catch - the disclaimer - it is not just about Supply and Demand but also about 'perceived' future Supply and Demand. 

When price is linked to an opinion of the future, it can become as vagary as the stock market itself, and market sentiment ( be it worry or exuberance)  can be so strong that all underlying fundamentals can be overshadowed for a brief period of time. Unfortunately that is where we find ourselves now. The drop in prices is just a reflection of the markets worrying about the fiscal cliff and a possible recession.  But the silver lining is that in the stock market, any piece of news lasts just until the next news arrives. As we wait for that, lets drive, baby drive!

Can we have some gasoline, please!

Long after super-storm Sandy's retreat, as we pick up the pieces and try to get back to normal life, we continue to gaze, with stunned disbelief at the long lines for gas. Cars are now so low on gas that we have to line up with gasoline cans. Gas rationing in NJ.  I can read the unspoken, "Is this really happening?" on the faces of the weary folks in those serpentine lines. "Will the gas price now go up even further?"

And together with the looming presidential election, where both candidates have been using selective truths to debate their own cause, I thought this will be a great opportunity to discuss how the Price of Oil is determined.

In the larger scheme of things, like a lot of other commodities, gas prices are driven by Supply and Demand (When supply is less than demand, price is higher and vice-versa. Click on link for more details).

But there are a host of factors that are in play:

- Price of Crude Oil (Depends on global supply and demand, OPEC)
- Cost of transporting/refining crude oil to make into gasoline
- Federal Regulation (Permits/ EPA requirements inhibit or encourage setting up of more refineries)
- State regulation ( State taxes/fees - why gas price in NY/CA is higher than in TX/ AK)
- Technology ( Affects the efficiency and cost of refining - fracking?)
- Natural events/seasonal cycles
- Street competition
( See flowchart on page : The Price of Oil )

So increase in global consumption or production control by OPEC, will increase global demand and drive up price of crude oil and thereby impact the price of oil in the US. Increased regulation or poor technology that inhibits production within the US can impact price, having two gas stations on the same street can reduce gas prices or at least keep it steady and of course hurricanes, winter and other high consumption seasons can increase gas prices.

What about the rest of the world:

While we keep whining about gas prices in the US, we need to remember that US gas prices are still much lower than that of many other nations. But the US is more dependent on gas and US oil prices are also more volatile than many other nations as companies pass on to the consumer any spike or drop in global price. Some nations have an administered price system to cushion their economies from price fluctuations and periodically revise their gas prices upward, rarely ( if not never) downward.

Here is a chart on Global Gas consumption & Prices.

And what about NY/NJ in the aftermath of Sandy:

Oil price will go up or down in tandem with global prices and local supply and demand, but as long as NY/NJ continue their state of emergency, it is unlawful for retailers to increase gas price by more that 10%. It would amount to price gouging and will be a criminal act. You can ( and should) report it.

Wishing all NY/NJ readers a speedy recovery from Sandy!

When can you retire?

Fidelity Investments has issued a savings guideline suggesting that salaried employees save at least eight times their 'final salary' for retirement. Link to full article

The assumptions used are:

1. You have been contributing 12% every year towards your retirement for about 30 years

2. Your employer has contributed 3% for the same amount of time

3. You will earn an average 6% return on your retirement investments

If all these assumptions are true, then you will need to save eight times your last salary, if not, possibly a little more. For more details and a downloadable spreadsheet for retirement calculations, go to  Plan For Your Retirement. The goal is to define a number($) to start with, on day 1 of your retirement

To live a 'middle class' life in the United States the mean annual income stands around $55,000.  Please note the word 'mean'. It is the national average. If you happen to live in the NY /DC/LA metro areas, you will have to revise that up substantially,  but on the other hand, if you don't mind moving to a low cost state or country after retirement, you can live with a lot lesser than that! The rule of thumb used by retirement calculators is that you will need about 85% of your final salary to maintain your lifestyle after retirement.

So, if you have an annual retirement income requirement of $ 68,000, brace up my friends, you can retire when you ARE a millionaire!

When Big Ben Speaks.....

When Ben Bernanke, the Chairman of the Federal reserve speaks, the world listens. He spoke today (Sep 13, 2012) at 2.15 pm EST. And the Dow Jones Industrial Average burst out in celebration, ending the day up by over 200 points. He must have said something nice!

DJIA Courtesy: Yahoo Finance

What did he say?

• The Fed has decided to buy $ 40 billion worth of Mortgage Backed Securities every month continuously, until the dire unemployment situation improves
• This will drive down mortgage rates and encourage more home buying
• This will also drive mortgage investors to corporate bonds thereby increasing investments in other areas of the economy as well

What does this mean for the common man?

• More jobs? Maybe! Please refer to Case 1 on Monetary Policy to understand how interest rates are related to employment.
• A stock market bonanza? The stock market is very fickle. The benefit will last only until the next piece of news arrives. But we have already seen a 200pt improvement today and that is very good. With today's statement, the Fed has signaled to the market that it is willing to take bold steps to improve the economy and the market liked it.

You are here

When I launch my AT&T mobile GPS after a wrong exit, I usually start with,"Where am I?"
If I am leaving from home, I don't do that, but I believe, I know where I am.
We have all come across the ubiquitous "You are Here" sign boards. At the start of a mountain trail or when frantically trying to locate a store in a large mall. We start with identifying where we are, then determine where we want to get to and then think about other things such as how long will it take? How much will it cost? Is there a quicker route? Can I beat the rush hour traffic?

The same applies to a financial journey. We will begin with, "Where am I?" or  "How wealthy am I?"  or  like the financial folks, you can ask, "What is my Net Worth?"

It is a simple two step process. Click here.

And when you have the answer, that will be your starting point.

What next? That will be a personal choice:

Where do you want it to be? By when? What is your present rate of accumulating wealth?, et al...

We will get to it in the following posts. Hang in there. Keep your comments/questions coming!

Millionaires and New York City

I love NY. This city fascinates me. Every time I see the Manhattan skyline, I can't but marvel at the limitless capabilities of the human being. When you see the skyline from Ellis Island, it makes the vision all the more stark. People came to NY with nothing but a dream and down the road we see how they created unsurpassed wealth. The United States has the world's largest number of millionaires (~ 5.5 million of them)   and NYC is home to the largest number of millionaires within the country ( ~ 700 thousand) with LA being a far second (~ 300 thousand).

Unfortunately, we also see some people who fell by the wayside or were they pushed out? The center for working families recently put out a paper calling NY, "The Empire State of Inequality", referring to the unfortunately growing wealth divide between the super rich and the poor. We can tag this situation with fancy vocabulary -  Economic Crisis, Wrong Policy Decisions, Lack of / Too much regulation, Wall Street greed....the list goes on. It could be one or a combination of these, debating that is not the purpose of this blog, but I refuse to call it the 'Wealth' divide. I call this the 'Knowledge' divide!

This is the land of free enterprise. All you need is a basic knowledge of how to manage your own finances to keep you going on the financial highway and your dream is your destination, your determination, your speed!

Join me ( 'Follow me' , technologically speaking) as we empower the world with financial knowledge, one person at a time, beginning with you. Welcome to Finance for the Non-Financial folks.