March 2016 – The Stocky Fox

The investment that is awesome for both your pocket book and the environment

March 14, 2016March 11, 2016 Stocky 3 Comments

The Fox family made an exciting purchase/investment (Foxy Lady calls it a “purchase” and Stocky calls it an “investment”, with the distinction leading to extensive debate) this week—solar panels. I guess you can take the fox out of California, but you can’t take California out of the fox.

For those of you who like to bottom-line it, our solar panels are going to give us an 9% investment return, all the while reducing our carbon footprint by about 9 tons of CO₂ annually.

Back in California, solar panels were really taking off. On our street alone we probably had four or five neighbors who put solar panels on their roof. Since we have moved to North Carolina, literally I have yet to see a house with solar panels. Back in California, Foxy Lady and I had agreed that we would take the plunge and get solar panels, but we were waiting for the falling prices to stabilize. Once we figured that we were going to move, we put those plans on hold until we settled in our new home.

So we moved to North Carolina and started seriously looking into the idea of putting solar panels on our roof. Here’s our story:

How much does it cost?

We bought a 20-panel set-up, with each panel being a 265 watt array (they are about 6 feet long and 3 feet wide). The all-in cost was $18,900, and that included everything from the panels to installation to all the permitting with the state and energy company.

When all the dust settles, I won’t end up paying $18,900 but quite a bit less. First, there are massive tax incentives when you install solar panels. The federal government gives you a 30% tax credit on your purchase. The state of North Carolina also had a big tax break but they discontinued it at the end of 2015, so I missed out on that which was a bummer.

There is financing available, but since I was paying up-front, I got a 6% discount. Plus, I was able to pay with a credit card, and since it was such a large purchase I played credit card roulette and saved another $1300. When you add all that up, our net price was $11,000.

List price	$18,900
Federal tax credit	-$5,700
Cash discount	-$800
Credit card roulette	-$1,400
Net price	$11,000

How does it work with your electric bill?

The solar panels are installed on our roof, and when the sun shines on them they product electricity—that’s the whole point. Then there’s this thing called “net metering”. Basically that means that during the day, when the sun is shining on our panels, we’re producing more electricity than our house is using. That excess electricity goes into the power grid, and our meter actually goes backwards.

Then at night, when the sun isn’t shining, we’re using power from the grid and our meter goes up, as normal. So the “net metering” is when you take all the power we used and subtract the power our solar panels generated.

That’s a pretty sweet deal for us because we get the use and reliability of the power grid, but only pay for a fraction of it. As you can imagine, the power companies are trying to move away from this system to something where you buy electricity at retail and then any excess power you put back into the grid you sell at wholesale. Politically it’s a hot potato as states want to encourage solar panels and other renewable energy, so they’re keeping net-metering, at least for now. For us, since we got in with net-metering we’ll be grandfathered in if the law changes, but that’s a big factor in all this.

How did you figure out the financial return?

As you would expect, I ran the numbers a thousand different ways to understand what type of return I would get for this investment.

First, you have to estimate how much electricity your panels will produce. As I said, we got 20 panels each with a 265 watt capability. That comes to 5300 watts, but that would be in 100% perfect conditions. When you factor things like the angle of our roof, and more importantly the direction of our roof, you end up reducing that by 22%. Just in case you’re curious, south facing roofs are the best and for those you would reduce by 15%. Our roof facing almost due west, with a slight southern slant.

Then you have to estimate the number of sunlight hours per day. The government has rated all the municipalities for this calculation, and western North Carolina comes in at about 6 hours per day. Of course, that factors in clear days during the summer when you’ll get 14 hours of sunlight, cloudy and rainy days, and winter days. Put that all in and it’s supposed to average 6 hours per day.

Solar panels	20
Wattage per panel	265
Total watts	5,300
“Real life” adjustment	78%
Expected kilowatts	4.1
Sunlight hours per day	6
kWh per day	24.8
kWh per month	744
kWh per year	8,930

You can do all the math and you get about 25 kilowatt-hours per day or about 750 kWh per month. Our current electric rate is about 10¢ per kWh, so we expect this investment to generate about $75 in savings per month. A $75 monthly return on a $11,000 investment comes to about 7% return. If you factor in that electricity rates will probably rise about 2% per year, the return goes to 9%. 9%!!!!!

Remember that in the stock market returns average about 6-8%, but there are major ups and downs, like what we went through last year. This is 9% pretty much guaranteed. The closest thing you could compare it to is a 30-year US bond, and right now those are returning about 4%, so this is over double that, and we all know how important an extra 1% return is. Yowza!!!

Of course, the proof of the pudding is in the eating. Over the next bit, I’ll find out how many kilowatt-hours our solar panels actually generate, and I’ll find out if electric rates go up that fast or not. Those will obviously impact our return, possibly dramatically. I did a quick sensitivity analysis that shows worst-case the return is 4% and best case it’s 10%. Obviously that’s a big range which would drastically impact if this is a good investment or not, so stay tuned and I’ll provide more detailed updates on this as I see how we’re tracking.

How did you figure out the environmental return?

The other major benefit, and some would say the more important benefit, of solar panels is the environment. We are generating pollution-free energy to power our house. There’s no coal or natural gas or oil that is being burned to generate those 750 kilowatt-hours which means there are no carbon emissions. I know some people question the role of carbon dioxide on global temperatures, but I definitely think that it has a negative impact, and I want to do what I can to help. If in doing so I get a really good financial return, all the better.

Those 8,390 kWh per year, if generated at a coal power plant, which is where our normal power comes from, would be over 9 tons of CO₂ each year. That certainly seems like a lot. Just to put it in perspective, Foxy Lady drives a Honda Fit and I drive a Toyota 4-runner, and together those generate about 6 tons of CO₂ per year. Basically our solar panels will eliminate the carbon footprint of our cars, and have some carbon offset left over for one more car. To me, that’s a pretty big deal to me.

What are the risks?

There are three major risks that I see. First, we need to see what type of power the panels actually generate. The math says it should be about 9000 kWh per year, but we’ll see. As we said above, that number can have a huge impact on the type of return we get.

Second, this is a long-term investment. The payoff for the panels is about 11 years. That’s a long time and a lot of stuff can happen. The warranty on the panels is 25 years, so we should be okay there. But what if we move? Will the new buyers pay extra for the panels? Who knows.

Third, and this is the biggie, is the chance that Duke Energy changes their rules. We mentioned that net metering is a huge advantage to all of this, and we’re supposed to be grandfathered with that. But laws can change and sometimes people get screwed. If we got taken off net metering to a less advantageous system, this investment would take a real nosedive.

There you have it, the first chapter in our story on solar panels. There’s a lot that we need to see play out, so I’ll keep you updated. But going in to this, I think it’s an amazing opportunity to do something great for the environment (taking 3 cars off the road), as well as an awesome investment return (9%+).

I screwed myself by rolling over my 401k

March 9, 2016March 8, 2016 Stocky Leave a comment

Kind of, but not really. I wanted to put a dramatic headline up to see if that would drive more traffic. However, I did lose a little bit of money by rolling over my 401k from Medtronic into my IRA with Vanguard. Here’s my story:

As you know, I left my job at Medtronic a while back. Whenever you leave a job, there’s actually a lot of work involved with your finances. You have to move them from the accounts set up by your company, to your own individual accounts. Best case is it’s a pain in the butt; worst case is you can forget about some of it and lose it forever. So it’s an important process.

So when I left Medtronic I knew I had to take my 401k account and roll it over into an IRA. But there wasn’t a lot of urgency because Medtronic had their 401k at Vanguard, and all our other accounts are at Vanguard, so it seemed fine. But then the Medtronic/Covidien merger happened, and as part of that, Medtronic switched from Vanguard to Aon Hewitt. I wanted to keep all my money in one place for convenience sake, so I called Aon and initiated the rollover.

For those who have never done it, it’s a pretty simple process. You set up an IRA account where you want the money to go (Vanguard in my case). They’ll ask you how you want to fund the IRA and you click on a choice that says something like “Rollover”. Then you call up the place where you’re money is at (Aon in this case) and start the process. Usually they’ll send you a check which YOU DO NOT CASH, but instead just send it on to Vanguard. Overall the process takes about two weeks.

But that two weeks is what screwed me a little bit. During those two weeks your money is not in the market. As you know from many posts I have done, the stock market is really unpredictable in the short-term, so it’s impossible to time the rollover process to your advantage. Ideally, that two week process would coincide with a brief downturn in the market. Conversely, you hope that two week period isn’t when the market stages a blazing recovery.

Based on the title of this post, you can probably guess what the case was for me. As we know, the first few weeks of the year were really bad for stocks, and then they started a slow recovery. If I could predict the future, that would have been the time to do my rollover, at the beginning of the year right before stocks fell 10% over the course of a couple weeks. Of course, if I could predict the future, I would own my own island in the Caribbean.

I took the plunge in mid-February, and as you can see, stocks started inching up. It was a perverse feeling: of course I like when stocks go up because we have so much invested in stocks. But on the other hand, I felt that part of my portfolio was missing out on those gains. Following the stock market too closely can really mess with your head. Anyway, after a week, I got my check from Aon, which I promptly sent to Vanguard. In that week, stocks were up about 0.8%. My 401k from Aon was worth about $140,000, so missing out on that 0.8% gain cost me about $1100.

Once I put the check in the mail to Vanguard, the investing gods decided I needed to be further humbled, so in the next week stocks went on a major tear, rising about 3.2%. Of all the times, why then? My being out of the market for that week cost me another $4400.

Roll over IRA

Add that up and you’re talking a decent chunk of change. My timing for doing the rollover couldn’t have been worse, and in the end I missed out on about $5500 in market gains. That sucks.

But you win some and you lose some. I am sure that I have come out ahead some of the other times I’ve transferred accounts, but as Matt Damon’s character said in Rounders: you tend to remember your spectacular loses more than your amazing wins. Just human nature I guess.

That said, there’s definitely a lesson there, which is you need to stay in the market. As we have discussed ad naseum, the market is very unpredictable in the short term often times with wild swings. But over the long term it has a relentless upward march. I had to get out of the market for a pretty unavoidable reason, so maybe I get a pass. But what about those people who got spooked by the January plunge and then missed out on the February recovery? They got crushed and could have really hurt their financial plan.

So there you go. I hope you were entertained by my misfortune.

Why are falling oil prices dragging the market down?

March 7, 2016March 6, 2016 Stocky 2 Comments

Oil is pretty special. After air and water, it’s probably the most important substance for mankind. Different from air and water, oil is not free (or nearly free). Oil touches every part of our life, even the lives of “green” people who drive electric cars and have solar panels on their roofs. Oil takes us from point A to point B in our cars and airplanes. It gets every single product from its producer to its consumer—food, clothes, cars, phones, everything. In many communities it powers the plants that literally keep our lights on.

Historically, going all the way back to its discovery in Pennsylvania in the 1859, the price of oil has been prone to booms and busts. Early on, the discovery of a single well could send prices plummeting, driven by fears of over-supply. More recently, supply restrictions like OPEC or geopolitical conflict can send the price soaring; while signs of weakness in demand like a global economic recession can send prices diving.

The past couple years have been no different. Oil has fallen from over $100 per barrel to where it stands today, less than $35. That’s quite a fall in prices, but why is that such a big deal? Interestingly, as the market has been struggling the past few months, many market pundits cite the fall in oil is hurting the stock market. But does that really make sense? Let’s take a look.

Market pundits, as usual, are full of crap

As we all know, the market has been extremely volatile lately. That coupled with the price of oil falling has led a lot of talking heads on channels like CNBC to correlate the fall in the market to the fall in oil. However, if you look closely, you’ll see that there isn’t much of a correlation.

Since 2014, the price of oil has fallen 65 weeks and risen 47 weeks, while the S&P 500 has fallen 49 weeks and risen 63 weeks. So there different but the real nail in the coffin is that of the 112 weeks, oil and the S&P 500 have moved in the same direction . . . (wait for it) 53% of the time. So they have both risen or both fallen a little more than half the time. They have gone in opposite directions, one goes up and the other goes down, 47% of the time. That seems like a flip of the coin to me. So the data totally refutes the idea that oil is driving the market in a major way.

The markets are incredibly complex, and it’s naïve to believe that the price of a single commodity, even the most important commodity there is, would drive the market. Those talking heads need their sound bytes and need to appear as though they’re explaining what’s going on, but we know better.

So first, and foremost, don’t believe everything you hear from CNBC. They have a lot of airtime to fill, and they say a lot of stuff that under the slight of Stocky’s analytic scrutiny is total crap.

Case for the fall in oil hurting the stock market

Obviously if the price of oil falls 70% over the course of a couple years that is going to have a devastating impact on the oil industry. And remember that the oil industry is incredibly big (probably about the third largest industry in the US) and incredibly complex. There are geologists looking for new oil deposits, drillers, truckers and pipeline people taking oil to/from refineries, refiners, all the way down to gas station attendants. So let’s look at how the price of oil impacts them.

The people who run gas stations aren’t going to be affected at all. Drivers are still filling up their cars (probably even more than before because gas is so cheap), and the gas stations are still making their couple cents markup on each gallon of gas. No Impact.

Refiners are probably impacted a little bit, not because their business is going down (similar to the gas station people, it’s probably going up), but because their customers, the oil producers are getting squeezed by price, so that is probably trickling down to them. My neighbor owns a couple oil refineries and he has mentioned that they normally charge something like 15% of the cost of the oil they refine, so obviously if prices go down they get impacted. But people are still using plenty of oil so the refiners are still going to be plenty busy, and if they have to raise prices to make it work, basic economics say they should be able to. Small impact.

Geologists and drillers in the US are feeling the pain. When oil was at $100 there was a huge incentive to try to find extra supply so that kept a lot of these people employed looking for and then drilling new oil wells. However, as you can easily imagine, when oil is trading at $30 there’s no where near that incentive to find new wells. Plus you have all the industry that goes with helping set up wells and keeping them running. Think of cranes and enormous drills, wiring and tubing; all sorts of crap (Halliburton is a big player here). When you aren’t looking for new wells, you don’t need all that other stuff. A lot of those people are out of work. Major impact.

That even flows through (pun intended) to the people running the wells that are online. Even after you factor in the huge start-up costs to find a well and get it going (more on that in a minute), there are significant costs in keeping a well up and running. If a well is profitable at $100 but not at $30, then those wells might get shut down, and those people might lose their jobs. Medium-major impact.

Finally you have the truckers who transport the oil around. They are probably getting less business taking crude oil from US fields to the refineries, but they should have just as much business as ever from taking refined gasoline to the gas stations. Plus, truckers are pretty flexible; if they aren’t driving oil they can easily drive something else. Small-medium impact.

There are a lot of players in the oil industry, and some of them, especially those involved in the discovery of oil are really hurting. And of course this has a compounding effect where they lose their job, can’t buy things other people product, and on with the downward spiral. But let’s not lose sight of the bigger picture. There are probably 150 million working Americans. Only a very, very small fraction of those are in the energy industry, and only some of them are losing their jobs. So this impacts a relatively small number of people, but it impacts them in a large way.

Case against the fall in oil hurting the stock market

How about the rest of us? Oil’s price falling is unambiguously a good thing. Something we all need is getting less expensive. Obviously we feel that at the pump where it used to cost $60 to fill up our car and now it only costs $25. We can all use that $35 to spend on other things which keep other people employed, or we could (gasp!!!) save it.

And as I said above, oil permeates through every part of the economy. So if you don’t drive a gasoline car, you’re still getting the positive benefit because it cost less to get your food to the grocery store, to fly your FedEx package across the country, and nearly every other thing you use in your daily life. This is what the press has called the “oil dividend,” the extra money that we’re all getting because things aren’t as expensive. It won’t add up to millions, but it’s not unreasonable to imagine a family saving $1000 a year because of the lower oil prices.

If you compare two scenarios though, it seems lopsided. An oil worker is losing his job while a family is saving $1000. But remember it’s a numbers game. Maybe there are a tens of thousands of people (and that seems high to me) in the oil industry who lost their jobs. But there are a hundred million people who are getting a small benefit. It’s a numbers game and the masses, with their small benefit, clearly make up for the relatively small amount of people who get crushed.

Final verdict

So if you look at all that, clearly the fall in oil prices should be a good thing for the economy. And largely it is. The nation is pulling out of a recession and there is broad-based economic growth.

But there’s still a nagging voice that is saying “not so fast”. The problem with oil prices isn’t that it’s low now and a while ago it was high. We have an amazingly adaptive economy that can thrive with low oil prices just as easily as it can with high oil prices.

What screws things up is when oil price change so quickly. As I briefly mentioned earlier, starting up a new oil well is a major undertaking, and “major undertaking” is French for “expensive”. Before a single drop of oil comes to the surface, companies are investing tens and hundreds of millions of dollars.

Of course, they would only do this if they thought they could generate a profit. If oil was at $100 then they would look at all the places that can profitably produce oil at $100 and start getting to business. Now they aren’t dummies and they know oil prices can move, so there’s a risk involved but that gets factored in too. But when the bottom falls out of the price of oil and those wells become unprofitable, at some point they have to shut down the well and much of that initial investment gets lost.

And it’s not just oil producers. Look at a company like Tesla. They make electric cars, and as you can easily imagine, electric cars are really attractive when oil prices (and thus gas prices) are high. You can see it in their numbers: sales have slowed down considerably as oil prices as fallen. Just like the oil producers, the fine people at Tesla need to figure out if they should expand, make a new factory, all that stuff. If they did that when oil prices were high (which in fact they did) then a lot of that investment might be in trouble now that oil prices are low.

Making it even more local, imagine your neighbor was looking to buy a new car. When gas prices were high she was considering a Nissan Leaf (about $30,000) instead of a Honda Civic ($18,000), in large part to take advantage of savings on gas. She buys her Leaf figuring she’ll save $2000 per year on gas, but then gas plummets and her savings are only $1000. Her “investment” of the extra $12,000 she spent on the Leaf is in bad shape.

To bring this home, I think it’s unquestionable that lower oil prices are a good thing. Yeah, a few people might get hurt, but that’s pretty small compared to the masses that are helped. But the real problem isn’t high or low oil prices, but it’s unpredictable oil prices. That’s when people or communities or companies make large investments which might turn out to be really bad decisions.

What about you? How is the low cost of oil impacting you?