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  • Archive for May, 2007

    Crying Bull

    Posted by ML on 30th May 2007

    Crying bull, you know, it’s just like crying wolf, except you yell “bull” instead. Seems like this is what gold bugs been doing for over half a year now. I myself certainly have been guilty of that to a degree. Fortunately, I have also been buying when the selling goes out of hand and the great majority of my PM positions enjoy healthy gains.

    Here I want to take a look at the wave structure of HUI in time that is suggestive of a turning point at hand. The two charts below compare the early part of this PM bull market (chart 1) with the current correction (chart 2). The particular wave designations may be in contention; nonetheless, the point here is to look at the relative time lapse of a correction following a powerful up leg in the HUI. Chart 1 clearly shows the pair to be substantially equal in time. The current correction, depicted in Chart 2, has also lapsed more or less equal time with the preceding up leg. Thus if this rhythm were to continue we would expect an imminent up tick soon. We also know that the current wave is unfolding at around half the pace (52 vs. 27 weeks). Furthermore, wave 3 of the previous wave of large degree is approximately 50% longer than 1 and 2, so the next up leg may last a year and half, culminating around the next presidential election.

    Commitment of traders (COT)
    It’s hard to place a lot of faith in a simple relationship like that, but at least the current COT is conducive to a PM advance. Both gold and silver COTs show a large drop in the commercial net short positions. Since this data did not include last Thursday’s drop which was past the Tuesday cut-off, the actual commercial short position should be even smaller. In gold, the open interest (OI, the green line behind the bars in the figure) has steadily climbed even as commercial net short decreased, so the commercial net short as a percentage of OI is amongst the lowest ever. It also begs the question of whether long term investors are weighing in. I would also urge a look at the most recent commentary from Ted Butler on the composition of the commercial traders which could be earth shattering if his predictions are realized.

    If PMs are in a secular bull market as I believe, then the bull will resume at some point. As a trader, I don’t believe in anticipating a turn, but if I were to learn anything from the boy that cried wolf, it’s to be ready when the big, bad wolf (or bull) does come.

    Posted in Gold/Silver, Investing | 1 Comment »

    My Bank Sold Out Almost All of Its Assets

    Posted by Frugal on 29th May 2007

    I have been banking at NetBank for almost 10 years now. I like their service overall. But internet banking is a tough business. NetBank is transferring all the accounts to Everbank, another very good bank. I never got around with opening an account at Everbank for CDs in international currency. But now I guess I don’t need to do anything to get an account at Everbank.

    Here is the stock chart of NTBK (NetBank) of about 10 years:

    I hope the person who bought at $80 has cut his losses long time ago. The stock chart is kind of telling the story of internet & internet banking. It was very hot initially. But as brick & mortar banks caught up and got into internet banking and free online payment, there is only shrinking business and profit margins for NetBank. The similar thing is happening in various industries, transforming the way businesses are done. For the people who made it earlier and made it big, it can be really big. But for every one of the success stories, there will be hundreds of untold failures.

    As for the consumers, there will only be benefits. Increased competitions always resulted in lower price. For banking, it’s better interest rates and less fees. I think similar thing will eventually happen to mortgage and real estate business too. 6% real estate commission will one day be history (if not already). One to three thousand dollars of profit per loan processed will be history too. The “Walmart” in those businesses will eventually take up the majority of the business, and squeeze out mom & pop shops. Instead of resisting changes, a better option may be adopting the changes.

    Posted in Miscellany | 5 Comments »

    Happy Memorial Holiday

    Posted by Frugal on 28th May 2007

    No regular post today. Hope you all had a fun long weekend.



    Posted in Investing | 1 Comment »

    Mania of the Unfallable 2008 Olympics

    Posted by Frugal on 25th May 2007

    I used to believe that because 2008 Olympics is held in China, China wouldn’t have a slightest chance to crack the stock bubble. Not anymore. Why? When everyone believes in the same thing and act accordingly by putting money into the same thing, it just can’t work. Everyone cannot all get rich. It just can’t by logic.

    The great volatility of the global economy has made everyone a gambler. When you watched your neighbors/colleagues getting rich in a short timeframe, how does that change your psyche? When your own pay & saving would take equivalent of 10 to 20 years to reach the same goal that other speculators have reached, the whole society is turned into a speculative manic crowd. Among the worst of the process about a bubble blowing and bubble crashing, it is not about smart or lucky people getting rich nor unsuspecting people getting burned, it is about a whole society getting its moral standard sunken to the lowest, making the money as the falsehood god, turning the last bunch of naive and good people into another gambler, and destroying the last sense of our sanity about the good habits about working hard and saving along.

    I don’t know how many times my wife called me an investing coward, being not daring enough to buy a bigger home earlier. I have a much stronger personality than my wife’s, and I held on through the housing bubble and insanity. But I can’t imagine how many other men and women turned/torn upside down throughout the entire process.

    Mania after mania globally, and each getting bigger after the next. This great volatility of capitalism will be seeding its own demise.

    Posted in Investing | 3 Comments »

    Which Index Fund?

    Posted by ML on 23rd May 2007

    This is the next to last installment in my series on passive investing/indexing. I have already written about asset allocation plans, various indexes and rebalancing. I take it settled that we look to purchase index funds, but that still leaves the all important question of which one actually to buy. As with the rest of the series, I’ll eschew the more prosaic facts. Instead, I want to take a look at a couple of interesting articles loosely tied around this topic.

    Mutual funds vs. ETFs
    This match-up has become the financial equivalent of boxers vs. briefs. Personally, I’m partial to silk boxers, but that’s beside the point. The explosive growth of ETFs is evidence of its popularity with investors. Quite often they are compared with the average mutual fund and their cost advantages are quite apparent. However, that’s somewhat of a straw man argument, as any investor would and should gravitate towards the best option available. That means index ETFs must be compared with the best of breed no-load, low-cost mutual funds which more often than not, are from the two industry giants: Vanguard and Fidelity. WSJ recent ran just such a comparison for funds for the S&P, broad US and international indexes. Their findings are summarized in the table below. In almost all categories, mutual funds were winners (numbers in bold). One caveat is that the winners were all institutional class funds that carry lesser expenses. The retail classes were more closely matched with the ETFs. If anything, it shows the importance of low expense ratios.

    [The WSJ article also highlighted some important difference between ETFs and mutual funds, such as tax advantage, cash levels, ETFs being continuous offered, etc.]

    So anyway the fierce competition for your dollars has reduced the difference between the best mutual funds and ETFs to a handful of basis points per year, in the most hotly contested domestic large stock funds. To put things in perspective, 10 basis points (0.1%) corresponds to $100 on $10k per year. One take away was that commission costs and convenience factors may be more important. Given the rise of zero commission and dividend reinvesting among deep discount online brokers, ETFs are giving the best mutual fund companies for a run for their money.

    Buy an index fund to but the indexes?
    No, this is not a joke. This is the actual punch line (sans the question mark) of an article written by William Bernstein, titled “How to Beat the Benchmark — Indexing’s Ultimate Irony”. Bernstein is, of course, the author of such modern classics in asset allocation as The Intelligent Asset Allocator and The Four Pillars of Investing. The article was written in 1998, but I have not seen the same concept mentioned elsewhere so I’d like to share it with my readers.

    Bernstein first defines the term “tracking error” (TE) as a measure of the efficiency of index funds.

    The ultimate measure of the efficiency of an index fund is its “tracking error” (TE). This is the difference between the return of the fund and its benchmark. If an index fund is doing its job perfectly, then its TE will be a small negative number, equal to the opposite of its expense ratio. (A positive TE means the fund is beating its benchmark — ML)

    He then noticed this curious fact:

    The tracking error of the Vanguard Small Cap Index Fund (symbol NAESX) has been persistently positive, and by no small amount either – about 1.38% annually since 1994. And that’s after expenses.

    The granddaddy of small cap indexing actually resides in Santa Monica, in the form of the DFA (Dimensional Fund Advisors) 9-10 Small Cap Index Fund (symbol DFSCX). Founded in 1982 by Rex Sinquefield and David Booth, the fund’s benchmark is the CRSP (Center for Research in Security Prices) 9-10 Decile Index, which comprise stocks in the smallest quintile of the NYSE/AMEX, and NASDAQ stocks with the same capitalization included as well. Again, I’ve plotted the 24 month TE of the fund since inception:

    Bernstein attributed this index-beating feat this way:

    A small cap index fund cannot possibly own all of the thousands of stocks in its benchmark; instead it owns a “representative sample.” Further, these stocks are usually thinly traded, with wide bid/ask spreads. In essence what the folks at DFA learned was that they could tell the market makers in these stocks, “Look old chaps, we don’t have to own your stock, and unless you let us inside your spread, we’ll pitch our tents elsewhere. Further, we’re prepared to wait until a motivated seller wishes to unload a large block.” In a sense, this gives the fund the luxury of picking and choosing stocks at prices more favorable than generally available. Hence, higher long term returns.

    I want to make a couple of quick comments here:
    - This article actually restored in me a little respect for investment managers since what their decisions made a positive impact.
    - It’s not clear to me why ETFs per se cannot replicate this strategy. Of course, they would have to be clear that what they deviate from the target index. So I don’t expect IWM to be able to do this. However, from what I understand of Vanguard Vipers (i.e., VB), they can. Perhaps that is also why many index funds aren’t specific about the index they follow. It could both be a licensing issue as well as giving themselves leeway to get the best pricing.
    - Before you go run out and buy DFSCX note that DFA funds are only sold through advisors. But note it has underperformed NAESX lately.

    Not all indexes are created equal

    I wish the WSJ article covered small cap stock index funds that were the focus of the Bernstein article. There seems to be far greater variability among them. First of all, not all indexes are created equal and differences are more prominent among small cap indexes. For example, I have seen the notable underperformance of Russell 2000 being attributed to its excessive rebalancing and bigger overall capitalization than its peers (see chart below from MS ETF quarterly, Nov’06).

    Looking at the 2-year record of a number of small cap index ETFs, Vanguard’s VB leads the pack; whereas IJR, the S&P 600 small cap ETF is the laggard. [If you have time, you can look up each of these ETFs which were based on different indexes.] However, as we just saw, the Russell 2000/IWM is supposed to underperform S&P 600/IJR, albeit over a 10-yr time frame. Here however, IWM outperforms IJR during the past two years. It’s not clear whether this switch was due to index behavior or the disparity between price and NAV. Life is not that clear-cut after all. The second chart shows a number of mutual funds including NAESX and DFSCX that Bernstein wrote about.

    If the recent short history is any guide, VB with the best performance and lowset fees (0.1%) would be my choice for the small cap blend component of the allocation plan. I’m fully aware that “past performance is not an indication for the future”, but what else do we have to go by?

    Fundamental indexing

    Fundamental indexing refers to indexing based on value metric (price/earnings, price/sales, dividends, etc.) other than just market capitalization. (See the section titled “Problem with indexes” in this article for a more in-depth look. I find the idea attractive, although there are detractors such as, not surprisingly, John Bogle.

    WisdomTree with Jeremy Siegle as a senior advisor has taken the lead in dividend and earnings based indexing. Many of their international dividend indexed funds look interesting in that they beat the MSCI indexes handily in back-testing (check out their individual ETF pages). Of course, they need to be proven in real life before wide institutional adoption. One of their most popular funds is the small cap international fund, DLS, which happens to fill the space left by its bigger rivals. I personally think fundamental indexing is an idea with legs and won’t be surprised to see more institutional at least add them to the mix.

    I made few concrete suggestions here but I hope the articles I quoted were helpful. To close, let me refer again to this nice table from Altruist Advisors where you’ll find their recommendations for each asset class. It’s an eclectic mix of ETFs and mutual funds which fits well with my philosophy: I’ll take the best of both worlds at the lowest cost.

    Posted in Investing | Comments Off

    Details of Bush’s Immigration Reform

    Posted by Frugal on 22nd May 2007

    Immigration issues is an extremely tough thing to deal with, and devils are truly in the details of the implementation (since people always find the loopholes in whatever obstacles presented to them). I googled to find out the some details on the reform. There are MANY sections to this reform, and indeed you probably need all of them for any reforms to work.

    Title I: Border security

    This is quite a big expenditure item. I won’t comment on whether it’s possible at all to protect this long border from illegal immigrants, but with the help of technology, it is certainly easier. The important thing to note here is that there is an end to the practice of CATCH and RELEASE. The illegal entering people will be imprisoned now. But I’m not so sure how much this will deter people from entering. Sometimes, economic improvement may outweigh other factors. After all, some of cross-border attemps are life-threatening. Losing one’s own life is the biggest deterrent, but it didn’t deter those illegal immigrants who have perished on their way.

    Title II: Internal enforcement of immigration laws

    There is not much that I would like to comment here.

    Title III: Workplace immigration enforcement

    This is a welcome change to stop unscrupulous employers from competing illegally by employing cheaper illegal immigrants. All employers eventually must verify all employees. However, this is still at least 3 years away. What would be the results from this? I believe that low-wage earners can finally see some increase in their paychecks due to less illegal job competitions, but also the inflation on all goods and services will inevitably go up as a result.

    Title IV: Temporary work visa or Y visa

    This section obviously will counter the inflationary influences from Title III. Assuming that the wage paid is the “prevailing competitive wage” (which is hopefully higher than minimum wage), then this section will still help the legal minimum wage workers at large overall I believe.

    Title V: Immigration reform on family-based ground

    From what I can read, it appears that it will be much tougher to immigrate through family relationships. The goal here is to reduce chain migration through extended family relationship. This spells bad news for the people who have not immigrated yet.

    Title VI: Z visa for illegal immigrants already in the USA

    The total cost of converting to a legal status for an illegal immigrant I believe is in the order of $20000. This is probably a big bill. I don’t know how fair nor how feasible it is for the illegal immigrants to complete such requirement. But my own opinion is something around $10000 is probably a fair figure (if not too little) to account for all the needed expenditures for patroling the border, detaining illegal immigrants, social and educational costs, and healthcare system strains, etc. But this is just my personal opinion (without any detailed studies on the problem). At the end of days, what matters is whatever that gets written to the laws.

    I obtain most of my information from this link. Please feel free to add any informative links to the comment section. Thanks.

    Posted in World Politics | 1 Comment »

    The Craze From Private Equity Buyout

    Posted by Frugal on 21st May 2007

    I have been investing and watching the stock market for the last 11 years. But I have never seen SO MANY buyouts by private equity companies in such a short period. I have already lost counts on how many companies, big or small, got bought out since Jan 1st of this year, or rather since March 1st. Almost every week, there is one or two companies got taken out by private equity. That is propelling the stock market higher and higher. Frankly, it is almost weird. I have seen more big buyouts in the last two months, than the last 2 or even 4 years combined.

    But if you think through this buyout process, there is simply ZERO real economic benefit generated, assuming that the new owners of the companies can only do as well as the old owners. The available stocks are disappearing. In replacement is more new debts that were used to finance the purchase, not to mention any special dividend payouts to hollow out the balance sheets of the good old companies at the expense of the current bondholders. It is simply a process of more leveraging.

    When will this all ends? Bond yields have been acting badly for the financial markets. Going thru 5% on the 30 years treasury will not be pretty. The good days on Wallstreet seems to be endless for now. But nothing goes up forever. That is simply a fact.

    Posted in Investing | 3 Comments »

    Bailout of Subprime Borrowers

    Posted by Frugal on 18th May 2007

    I cannot believe how dare these government officials to use the taxpayers’ money (my annual $20000 to $50000 tax contribution included) to “save” these subprime homeowners from foreclosure. Why don’t they give me a free two loan points on the loan or the cash back to me for buying a home? America is about fairness, but it has all but disappeared in these callings for help.

    If you cannot afford to buy a home, then you should not buy to drive up the prices further. Such bailouts are unethical and unfair. It creates moral hazards where speculation is encouraged and prudence is thrown out of window (well, actually this is probably not the first time nor will be the last time). American society has been getting more speculative and materialistic as a result. Being a diligent saver or conservative often gets you nowhere. These subprime borrowers and lenders who have taken excessive risks are not punished but rather rewarded by big gains before blow-up, and then (plan/hope to be) compensated by taxpayers’ money later. In the name of “saving home”, government officials are trying to please these constituents and sounding politically correct.

    In all these blowups, government officials even dare to make the investors legally responsible for the entire mess. These investors who provided all the money to make everything possible, will be the biggest losers among all. Once the homes go into default and foreclosure with negative equity, the bond investors will not only lose interest but also principal. And now Chairman (of House Financial Services Committee) Barney Frank, D-Mass., and Spencer Bachus, R-Ala., want to hold bond investors legally responsible. If such legislation passes, it will dramatically make the mortgage-back bonds to be a lot more expensive, making the homes be even less affordable.

    Out of all politician in the USA I like Ron Paul the best. He is the only one who sticks to the original spirit of US constitution and can stop the government getting bigger and bigger in increasing the burden on everyone else in the private sector. I will definitely vote for him when/if he runs for president in 2008.

    Posted in Mortgage, Real Estate | 13 Comments »

    California Foreclosure Up and Up

    Posted by Frugal on 16th May 2007

    Here is some of the latest real estate headline news:

    1. Home builders’ confidence falls to 16 years low.

    2. Notice of defaults in California up by 23% from last quarter, and up by 148% from last year.

    3. New Century goes bankrupt, slimming down from 6000+ employees down to 100+ people, right at Irvine, Orange county, the center of the mortgage fraud so to speak (Impac, Ameriquest, Resmae, Option One are all here).

    4. California new home sales down 37% on an annual basis. Slowest total March sale since 1997. You got to remember one thing that if the absolute number of sale is worst than 1997, it is actually much worse than 1997. In these 10 years, California has been growing population at about 1.5% annually. Normalizing the real estate sale by population, the sale would actually be 14% worse.

    I have been saying that the bottom of the bubble zone of real estate won’t come until after 2009/2010, which I have arrived by adding 5 years (before negative ARM gets fully amortized) to 2004/2005, plus 1 extra year of time delay for a home to go through the entire foreclosure process. Jim Puplava said in his online radio that he expects the bottom to come at about mid-2008. I personally think that real estate market is still in the denial stage, where sellers are not willing to drop price. That attitude will really take time to change, until the home owner/mortgage holders get burned through monthly negative cashflow for an extended period like 1 to 2 years. If the amount of price drop is more than 2 years worth of the negative cashflow, sellers are more likely to hold out than cutting price.


    I didn’t need a chart to convince myself, but above (click to enlarge) is the mortgage resetting “map” going forward. As you can see, the subprime mortgages are not flushed out yet and coming to reset in volume later this year. The next bigger wave is the 5-year period from the loan origination, which will come in 2010 through 2012 for the option ARM. If you use 9 to 12 months for the foreclosure process, the real estate market is likely to have a small break in 2010 before getting hit by mortgage reset again.

    I think that the only way to stop the housing deflation is through inflation of everything else. I expect the real inflation (not the one published by government) to stay above normal for an extended period.

    Posted in Mortgage, Real Estate | 10 Comments »

    Forever Stamp

    Posted by Frugal on 15th May 2007

    For those who are mailing out letters this week, the postage for 1st class mail has gone up by 2 cents to 41 cents now. You can also buy the new Forever Stamp (see the picture below) to shield future stamp cost increase. They are meant to be “forever”, which means that you can use them no matter how much the postage has gone up.


    Sounds like a good deal? I myself don’t plan to rush out to buy lots of forever stamps. Forever stamps don’t earn you interest. So it’s probably going to be an investment on par of inflation. On the other hand, because it doesn’t earn interest, your return is somewhat enhanced due to the lack of capital gain or income tax due to the earning from the interest.

    So how do you think government can keep this forever stamp program going in case when the postage has gone up a lot? Easy. Just tax more and funnel the money into the US postal service. Either way, someone will need to pay for the cost of mail delivery. If you are not paying for it because of your “capital gain” from the forever stamps, the taxpayers will pay for it.

    In any case, this forever stamp is certainly a good idea. Time saved from buying and pasting those 2 cent stamps can finally be put into productive use for other matters. But wait, I still have a whole bunch of 39 cent stamps and even some 37 cent stamps that need to be used.

    In case you wonder (and I actually asked this at the postal office), the forever stamps can also be used at the face value of 41 cents even though it doesn’t say 41 cents on it. That’s how I usually used up my old stamps by putting several first class stamps for international mails.

    Posted in Miscellany | 5 Comments »