My 1st Million At 33 – yes, you can do it too

In my projection, stock markets may make a lower high in about March timeframe. My advice is to sell and get out.

Despite my general bearishness, I want to emphasize that this is NOT 1929 great depression, when deflation ruled the days. In fact, at the next intermediate long of stock market probably 8 to 18 months from now, that low (which should be 20%+ lower than the current prices) should be bought. The longer term picture for financial markets is still
1. (long/intermediate term) Bonds go down.
2. Inflation goes up.
3. Stock goes up nominally, but possibly goes down if adjusted by inflation.
4. Cash will be “trash”.
5. Housing markets most likely stay flat AFTER it reaches another new low, EVEN with general inflation going up.
6. US dollar will go down, but not YET.
7. Commodity will be very volatile with upward bias.

The next big time bomb should be around mid-April to late June. Prepare to see the fireworks (and make sure your portfolio is not used as part of the fire powder). In the meantime before next big inflation comes, deflation & deleveraging will continue to put a lid on asset prices. Have patience.

Here is an interesting article detailing on how the “club” of financial institutions may be profiting while all of us suffer.

When Enron and WorldCom debacle happened, the people who were responsible went to jail. When financial & mortgage (CDS, SIV, etc.) markets collapsed, NO ONE is even investigated. We are talking about trillions of dollars, and our government officials didn’t even put anybody through legal proceedings. Oh, sorry, I forgot! There is one. The whistleblower for the case on UBS collusion with tens of thousands of multi-millionaires to evade US tax got 3 years and 4 months of jail time, while ALL others at UBS and all the multi-millionaires got a free pass. Can you believe this? The rule of laws in this country are controlled by the “ruling elites” who are the bankers, lawyers, and government officials. Where is the justice for the common people? There is something seriously wrong in this country. After all, the whistleblower Bradley Birkenfeld helped US to recover $780 million dollars from UBS. For that, he got 40 months of prison time. Now, let’s see who else is going to mess around with the “big guys”.

When all the money is coming from future generations instead of our pockets, nobody is paying much attention. Yeah, just put it on our national credit cards. US is running at a rate of about $130 billion every month (average rate from July 1st to Dec 31st), which is about the entire net worth of one Berkshire Hathaway or Intel company. Who is going to foot the bill when it is due? It will be everyone of us.

If we do not voice our concerns, and take a stand for liberty and justice, we will all lose it, if not one by one. Prison statistics show this clearly. US has 5% of the world population, but has 25% of the all the jailed population in the world. Ranked #1 in the incarceration rate in the world. Higher than Russia and China. You have to wonder whether our cops are better, or US citizens are more immoral, or just maybe some innocents are jailed unnecessarily.

Year 2009 for me personally was an amazing comeback year, and totally beyond my wildest imagination.

I don’t know how many people out there can say this, but my net worth luckily almost recovered to the stock market peak of 2007. Without counting the 35+% loss in my home valuation, I’m just a couple of percentage point down from the peak. Counting the home paper losses, I’m still higher than the end of 2007. Throughout last year, there were numerous financial advisers cold-calling me to promise a retirement make-up plan. Unfortunately, most financial advisers know very little about stock markets. When the stock markets don’t behave like 2008, they are simply stunned without words. And of course, they dare to claim all the credits for the upturn of the year 2009 too.

Throughout 2009, I have positioned myself as short in the general market, and long in natural resource stocks. Most of my shorts were done through naked shorting the option markets at a higher strike prices. I phased in those shorts gradually, and before they turned into a big disaster, I have realized that the markets were not going my way at all. I probably have lost more than $30K in shorts through a notional shorting value of about $400K+, but the loss is not very significant in the grand scheme of everything. Even today, I still hold some short positions. And I plan to increase my short positions again as the year progresses.

What saved my portfolio & net worth throughout 2009 is my steadfast investing in natural resource stocks (more in mining sectors). I increased my original stake somewhat. I still hold almost 40% in cash, waiting for a pullback that never materialize. Year 2010 will be volatile for sure. I should have plenty of opportunities to put my money into work. My portfolio will not be wrecked with this high percentage of cash. Return OF capital is much more important than return ON capital.

Looking forward, I have the plan to get fully vested probably this year. The climatic fall should be behind us (or at least in the sectors that I invest). It’s possible that there is another big leg down, but that will definitely be a buying opportunity in my opinion. The long term pictures on bonds/cash are terrible. There will not be many places to hide.

Best luck to everyone,

Frugal at 1stMillionAt33.com

P.S. Just making sure that everyone gets this: I do NOT (and will NOT) invest in the general stock market, but only specific sectors. Such strategy has a particularly high risk, and it will not correlate with the general indexes. But it is the strategy that I have chosen, and I do NOT want to correlate to the general stock markets.

As the new year begins, the stock market again continues the rally that doesn’t seem to ever end, enough to convince most participants that the bear market has ended, missing the “bargain” of the century back in March of 2009. But all good things come to an end, especially the ones that are just too good to be true.

Before that happens, new highs will be in store first. The last Christmas shopping season has been exceedingly good for most retailers as far as I could see. Most stores simply ran out of popular items to sell, and heavy discounts are basically non-existent. For that reason, I think the stock market rally can very well last into late March in 2010 before any significant pullback. And of course, that is going to kill any remaining bears in the stock markets. Although I seriously doubt that S&P 500 can rise to 1200, the markets can always stay irrationally bullish than the shorts can stay solvent. Above 1200 level, I think it should be a very good opportunity to initiate short positions, assuming such bears are still alive.

Regardless, I expect downside volatility to return to the stock markets as soon as the 2nd week of January, or as late as June of 2010. I would prefer to stay on the sideline when such events happen, instead of milking out the last 5 to 10% of the remaining gain.

Energy stocks along with emerging stock markets will most likely take a cue from the general stock market indexes, correlating with extra magnification both on the upside and downside. Gold & mining stocks which have enjoyed an exceedingly good year in 2009 may or may not correlate again in 2010. Cash is always one of the viable option, although most bulls are too greedy to even consider a 1% interest-yielding account.

Bond markets on the other hand will most likely have some indigestion mid-year if not sooner. At the current pace of US debt issuance, US deficit will probably end at about 14 trillion dollars near the end of 2010. That is quite a lot of money, considering that the total worldwide stock market capitalization is only about $50 trillion dollars (see graph below). So how in the world will US pay back the debt that it owes, if the debt continues to increase at such pace? The short answer is that it simply cannot and won’t. The end game is definitely ahead of us, not behind us. When the crisis hits, and economic confidence is shattered, the rout in global bond markets will transmit its shock waves many times over to other asset classes, in such a short breath-taking period that most people cannot act to save themselves financially. However, this may still be years away, but no longer decades away.

For now, let us pace ourselves gradually. The majority of the people who made it through is often the people who lose the least, not the extremely “lucky” or smart people who gain the most. Trying to be too smart when you’re not can easily back-fire on you.

I’m trying to read one of my favorite blog by Mish at http://globaleconomicanalysis.blogspot.com, and I’m getting this message:

Sorry, the blog at globaleconomicanalysis.blogspot.com has been removed. This address is not available for new blogs.

I hope that there is some mistake on the part of eBlogger (belonged to Google), but my personal experience with Google Adsense was definitely not very friendly.

It is quite sad if his blog were removed. I’m sure he has made numerous enemies around the country, due to his quite negative stands against Federal Reserve & various levels of government. I would personally offer him free hosting space, since Dreamhost allows me to have two different domain names.

I hope to see his blog back online ASAP. On the internet, it’s still the big boys that get to call the games unfortunately. We cannot afford to have monopoly to degrade the internet experiences that offer us various opinions from different bloggers.

Helicopter Bernanke has been chosen as the Person of the Year 2009. That is just ridiculous in my personal opinion.

For someone along with Greenspan created the single biggest housing bubble (in size) in human history so far, bailing out all the guilty parties and mopping up all the mistakes with even greater mistakes through printing of more free money, he is “coined” as the savior of the economy from another great depression. A country does not attain prosperity through devaluing its own currency. Such acts when the confidence game is up will be met with great consequence. I have no doubts that history in the future will not have kind words for Bernanke, nor Greenspan (whose reputation has already been turning thru this financial crisis).

Aren’t you glad that banks are paying back all the TARP money? I guess all of them are hopeful eternally, and wishing that all the option ARM and alt-A borrowers will be paying back more when they start to reset to 25-year amortization schedule, starting now until the end of 2011. I think banks are very likely to negotiate all the option ARM mortgages back to 30 years or longer if possible. However, the biggest problem is that once the mortgages are re-negotiated, the mortgage payment will NO LONGER be less than the prevailing rent. Furthermore, who is going to pay down more principal towards a property that is already 10% to 20% under-water? I expect that the two factors combined will cause significant portion of the borrowers to simply walk away, or become home squatters to take advantage of one year of free rent through foreclosure process.

So when the hands of banks are tight, and they will tighten even more on the new loans. Some will probably go under and join the weekly FDIC’s Friday parade, and some may come back and ask for government money again. Ha, except that for the second time when they want to dip the “honey pot” again, the money will not be available because American and politicians will be so upset and simply shut down the institutions. If they are able to sustain without asking for more money, you can be sure that lending in economy will take a dive, driving USA onto the same Japanese-style deflationary track. But don’t worry, our beloved Helicopter Bernanke will come in his helicopter in a hurry, bombing free money from the sky at the fastest speed. It is likely that in the not-too-distant future, we will see a more volatile stock market, dropping at first due to the resurgence of financial crisis, and then zoom back up and onto new highs (higher than 2007) due to out-right devaluation of US dollar.

By the end of 2010, US fiscal deficit will probably end at 13.5 trillion dollars or more. The speed that it will increase will be exponentially faster until it collapses. Before US goes full speed on this exponential debt curve, there may be still a chance of stopping before the point of no return. But such opportunity does not exist as long as Bernanke is still in office as Federal Reserve chairman. I guess Greenspan will be remembered as the Bubble Man, while Bernanke may be remembered as the Bubble-death Man, who would blow up the final bubble in $US and US bonds, without any further ability for US to attract/wield global capital.

Gold just made a new high at $1217 today. I believe that it can easily go to $1300, and possibly touching $1400 before pulling back. BUT it can also easily fall back to $1080.

The bottomline is that I don’t know whether it will go up or go down tomorrow. But nobody else knows either for sure. However, recognizing your own ignorance is often better than being the best trader in the world to try to catch the lowest point and cash out at the highest point. This strategy is especially powerful in a true bull market like gold.

As I have explained in my post on Kelly’s Criterion for investing, such strategy is very well suited for an asset class that is in a bull market. Simply buy more when it falls, and buy less when it goes up. This strategy goes counter to a traders’ mind, of cutting your losses early, and placing stop orders. And as I have also said in my post that such strategy WILL bring extreme volatility beyond the tolerance of most people. The obvious risk for such strategy is that one must ascertain the validity of such a bull market.

It is clear to me that gold & mining stocks are in a major Elliot wave 3. I don’t know whether this is wave 1 of wave 3 (which I’m leaning towards), or wave 3 of wave3, but either of the up waves should be quite strong.

So the train is leaving the station. Are you on or not?

The volume is extremely low today. Anybody buying or selling out there needs to be very careful. The market will not reveal its true direction until Monday.

I believe that if there is a pullback, it would be more healthy. I still don’t see markets going down big time yet, despite my overall bearish stand. The real stress may come first or second quarter of next year, when banks can no longer hide the ongoing resets of option ARM mortgages. For now, the levitation act performed by Wallstreet may continue for awhile.

I will definitely be a buyer in the gold sector if it pulls back. Tech sector may be another good choice, ASSUMING that Xmas sale is good. The weak sectors will continue to be separated from the general markets, since capital around the world is still chasing quality stocks to avoid inflationary assault.

Hang on tight. Greed seems to be still the word of the day.

This is the first time that I’ve ever tried to “bust the door” for black Friday sale. I went to Toys R us to get legos for my kids. The sale started at midnight, and I was 30 minutes late since I was going through global stock market news due to Dubai debt panic. Stocks are down 3% to 6% around the globe, and US will open with hefty losses too. Gold has already sold off in Asia by $50.

Anyway. At 12:35am, I arrived at ToysRus, and parked my car at a really far away location since the entire parking lot was basically full. Starting from the door, I kept walking to get to the end of line. It took me about 5 to 10 minutes of walking to get to the end of line, which is about 500 feet away. The store itself was full of people already, as I could see thru the window, and there are probably some 200 people outside waiting to just get into the store. I asked the person who was at the end of line, and confirmed that the line was indeed for Toys R us. Man, I couldn’t help but laughed. This is just crazy! Thirty minutes after the sale begun, and I probably won’t get into the store for another 40 minutes.

Realizing that the lego items that was on sale was most likely sold out already, I decided to go home instead. As I drove away from the full parking lot which was designed & allocated for 3 other big chain stores like Toys R us, I also noticed that all other stores are still closed. Boy, all the cars there were mostly for Toys R us, except for a few early campers at other stores.

I’m not sure where the recession is. Looks like the Thanksgiving & Christmas sales may not be too bad. If you want to look for bargains, you will have to find a way to beat others to store. I think I’m going to try online. Bing search engine is providing cashback for various stores. At Walmart.com thru Bing, you can get 15% off. Maybe that’s an easier way to get to your bargains.

Happy Thanksgiving.

GDXJ was debut this Wednesday. Both GDX and GDXJ (the junior companies) are offered by Van Eck.

Here are the links to the company site for GDX and GDXJ. The complete weighting of the components are listed below:

GDX is a tracking ETF to GDM index, a mining index determined by Nyse. The component weighting cannot be determined by Van Eck. Unfortunately, the top holding ABX at 14.5% is probably one of the worst choice. ABX recently announced to dehedge its gold forward sale, which was costing ABX some 4 billion dollars. ABX is also rumored to be the accomplice of gold suppression scheme together with JPM & Fed. The other components in GDX that I don’t like are AU at 5.62%, GFI at 4.25%, HMY at 3.24%, all are deriving 100% or significant gold productions in Africa. As the gold prices zoom upward, mining gold in an impoverished (relatively speaking) continent will tend to be problematic. I expect more labor and theft and political problems. Also gold production from Africa is declining as a whole. With the exception of GFI, which has expanded its production to other continents, the other two companies are definitely not my preferred choice (especially HMY). GFI is probably the “cheapest” company among major gold producers that one can buy, since its mine life is still quite long. HMY may have the highest leverage to gold price, due to its very high cost basis. At later stages of gold bull market, HMY could easily come back with a vengeance despite the terrible management. Although one may consider shorting out those components when owning GDX, I hesitate to do that. The other company that derive its production from Africa is RangGold (GOLD) at 4.72%. This has been one of the company that has baffled me, easily outperforming all other components, without me owning it. Definitely one should not short this component out.

Onto the new GDXJ, top components (CDE, SSRI, HL, SVM) are taken by all silver mining companies instead of gold mining companies. That’s 21% of the GDXJ. My ongoing concern about investing in silver companies is that they will couple to the general stock market a lot more than gold mining companies (at least initially). In a deflation, gold/silver ratio will zoom upward, relatively depressing the price of silver. I would have hoped to have less silver components. By the way, junior companies or small-cap stocks also tend to get depressed more in a downwave. Regardless, CDE and HL (and MFN) don’t seem to have good management in shareholders’ interests, raising big amount of capital at the recent zenith of 2008/2009, diluting a big percentage of their stockholders. I suspect that the deals were hammered out with hedge funds in the Wallstreet who have shorted all these companies in the backroom. With a big short ratio, it was simply not possible to cover those short position via open market purchases without driving up the stock prices. And what is the chance of having so many companies silmultaneously raising capital all the the absolute zenith of the stock market?

Most of the rest of the GDXJ components beyond top ten are not familiar to me. And that is the beauty of investing in an ETF, not needing to know every individual company. Assuming that gold bull market continues, GDXJ will eventually outperform GDX, with much higher volatility. I expect the rallies in both will be kind Read the rest of this entry »