Is your budget busted? I really have to re-do my budget created a little more than a year ago.
I selected a preschool owned by my acquaintance, but further from my work & home. That was really a big mistake (in terms of commute). All these little drivings add up very fast day after day. I’m paying regularly about $300 a month for gas. Sure enough, the high gas price probably helped by some 50% from $2.xx to $3.xx.

And my grocery bills have gone up too. Same with my homeowner association fee, utility bills, etc. Now don’t you wish you could invest your money in eggs or milk or gasoline? Save yourself for paying some 20% to 40% on the capital gain taxes. Government makes things more expensive through printing more money and inflation. And then they are guaranteed to take away a substantial tax bite out of your gain before adjusting for inflation. I only wish that the capital gain taxes are computed after adjusting for inflation.

Unfortunately, the food inflation wave is just starting. Due to the push for ethanol, corn demand/supply went up, and corn acreage went up. All other agricultural products have less plant acreage. Plus that bees are dying dramatically in great number and unable to pollinate for fruits. Also with corns being the primary animal feeds, prices for pork & cattle & chicken are all going up. Haven’t you noticed that the price of a burger is about 10% to 20% more?

I think bond yields will eventually head even higher in the next 3 years. That is going to be very bad for housing market (and therefore not so great for stock market too). Yak!

This is a short message. It appears to me that there “may” be a big dip coming in the PM market. The question now is that whether you should sell first and avoid the pain going down, or double your stake when it finishes falling.

I have been waiting for a big rise in PM, but it may not come before a big dip (20+%) is finished.

Best luck.

I’m still trying to make sense out of last the stock market decline last week and the bounce on Friday. Clearly global interest rates are on the rise; and the 10 year, in particular, took it on the chin. Its yield broke above a decade plus trend (link).

That China has announced its intention to not recycling its trade surplus into US treasuries as readily may be an indication of a long term shift in the treasury market (related link). Medium term, consumption in the US is on the wane due to declining mortgage equity withdrawal. The trade deficit is improving as a consequence. Paradoxically it also means our trading partners have less demand for treasuries. As a near term catalyst, Paul Kasriel of Northern Trust pointed to the most recent Fed custody holdings which showed a relatively large $12.5 billion reduction in the previous week.

Seeing that a rate cut may not arrive later this year in the best case (or the worst case depending on your point of view), and even if the Fed cuts, the yield curve can further steepen, only 20% is allocated to bonds in my re-worked asset allocation/passive portfolio. In addition to high quality, short term bond funds, I’m adding some floating rate, loan participation funds that I mentioned in passing in my article on closed end funds. Tim Middleton at MSN Money wrote about these types of mutual funds very recently. FFRHX (1 yr total return 7.16%) which was mentioned is actually the fund I own through my solo 401k account at Fidelity. I won’t go crazy with these funds since default risk goes hand in hand with high yields. So this is in effect a bet that higher rates now won’t plunge us into a severe recession.

Stock Market
I have iterated numerous times that I anticipate a housing-led slow down, but how the market will react is altogether another question. The daily chart on the S&P shows another short term trend line broken but the index took a stand at the 50 dma on Friday. In the weekly chart, the trend line is very much intact. The CBOE put/call ratio showed a big spike last Thursday, but we are still ways from the capitulatory levels seen in Feburary/March, so a little more down side is to be expected.

On the other hand, this market has shown too much resilience at the most critical junctures, so I’m not ready to go short yet. My current plan is to wait for the next leg down and see what kind of divergences, if any, reveal themselves.

PMs
I was far from the only one noticing the recent break out in PMs and PM stocks. Alas, money is not so easily made! The one characteristic of a bull market is to throw off as many people along the way as possible! After a couple days of reasonable relative strength, PM stocks went back to their old way of doubling to tripling losses in the general indices. As seen in the chart below, HUI briefly wend below the down trend line that it broke out from not too long ago. GDX, the ETF that tries to replicate HUI, has more clearly broken below its trend line.
I’m not letting these developments affect my core PM holdings which I still believe is in a secular bull market. But many johny-came-lately’s apparently has abandoned ship as GDX temporarily dipped below its recent low of $37.50 on Friday. Just to add another mildly useful indicator, the put/call ratio on XAU also spiked above 3 on Thursday which points to higher PM equity prices ahead.

I have consistently said that I’ll let the market tell me when it pays attention to evidence of a slowing economy. My ears perked up last Thursday, but as the rebound on Friday showed, we are not going anywhere in a straight line. Even if we go into a meaning correction/bear market from here, it’ll be a lengthy topping process. And if we do go to new highs, I intend to milk the last drop.

Kiddie tax is a tax paying at the parental rate when the child’s income exceed $1700 (in 2007). For the first $1700, the tax that you would pay is 0% on the first $850 and 10% on the second $850, which amounts to $85. Assuming your marginal tax bracket is at 28%, that’s a tax saving of $391. But $1700 is not much at all after years of inflation. If you have a $34000 bank CD in your child’s name, you will have $1700 interest. And let’s say if your gift your appreciated stock to your child, which has returned you 25% total accumulated gain, you are due paying kiddie tax when this stock investment is valuing at $8500 (while your original cost was $6800, giving a 25% gain of $1700).

If you can afford to give away money to your child, I would guess that $8500 is not that much. It is almost guaranteed that you will be hit by the kiddie tax. The only way was to sell the stock with gain beyond the age of the kiddie tax, which was 14 and then changed to 18. But now it has been effectively changed to 24.

Here is from thestreet.com:

Last year, the age limit was raised, requiring children under age 18 to be taxed at the parents’ rate. Now, starting in tax year 2008, the age limit will apply to children under age 19 — or to “kiddies” who are full-time students under the age of 24.

My own child paid more than one thousand dollar in kiddie tax last year from the stock gain. Tax sucks. There are just very little ways for savers to get ahead. Especially when the income tax rate is high like mine is at 40% marginal bracket, sometimes it is very hard to motivate myself earning more money. I only get 60 cents out of every $1 anyway. Even my long term stock capital gains/losses are marginally taxed at almost 30%. No wonder America likes to consume instead of working for the government 5 months (~40%) in a year every year. Maybe I really need to change my state of residence.

What did I tell you yesterday (or rather the day before)? Here are two pictures comparing yields of ^TNX and S&P500 index. The comparison is not meant to show the percentage change (one is yield, inverse to the bond price), but rather the overall trends. It’s some food for your thoughts.

Five days chart:

3 months chart showing S&P 500 is breaking down hard due to the jump in yields.

This is very bad. Stock market tanked, but money is NOT returning to the bond market. Normally, you see money flows between stocks and bonds. Now money is going out of both markets. Besides, this is the sharpest jump in yields that I’ve seen for probably the last two years.

Be really careful.

The market is falling today because Fed is telegraphing that there is no rate cut coming. Markets obviously don’t like it. Plus the rate raise from European market and a crippled Shanghai at some 15% off, gradually the picture is turning worse. The market is falling at an earlier date than I am expecting. Next week is option expiry week. I expect at least some short term support until next week. Distribution of stocks is going on as we speak.

While I’m hoping the market to go up one more time, I am ready to sell more if things don’t turn around. I expect Fed to be market unfriendly going forward. With the 30-year bond breaking 5%, a slowdown in mortgage financing is underway. That will be very bad for a housing market at a high inventory. With the summer “peak” selling season for houses supposedly here, mortgage rates cannot go too high. Bond market is definitely suffering from the strength in equity market, and that has to change.

The key is interest rate (in bond market) these days. The higher the interest rates go, the higher likelihold the stock market will go down.

Are we there yet?

Thanks to the latest genius or scammers (whichever you choose), now you can improve your FICO score by renting other people’s credit. Some people even get a monthly income of a couple of thousand dollar by renting out their credit cards. Boy, that’s some 10X than I am making from my blog.

In fact, I have never really fully caught up with the idea of FICO score. Scoring your credit worthiness based on your past payment history? To me, the capacity to repay is equally if not more important than the past payment history. Without considering the capacity to repay is simply asking for trouble. These days I can’t believe the credit lines that credit card companies are giving out. It is almost an invitation to convert your FICO score to junk by running up tremendous debt. If I simply add up all the credit lines that I have, it probably amounts to more than $50,000 dollars. But I don’t think my income level can afford such a high debt.

In any case, you can rent out your credit cards at www.addatradeline.com and www.seasonedtradelines.com if you are interested. But I won’t be renting out mine for sure.

A coincidence on the location of addatradeline.com and many other major subprime lenders all in Orange county, California?? Looks to me that it’s the perfect combination to scam the bank legally.

For the month of May from 5/1/07 to 6/1/07,

1. Net worth is up by 0.93%.
2. Value of my company holdings is down by -11.78%. That doesn’t feel too good especially when the stock market is breaking new highs every week if not everyday.
3. Everything else excluding my home and cash is up by 3.86%.
4. If including cash in #3, it’s up by 2.93%.

I’m raising more cash as you can see from “My NetWorth” page. This month is not a good month for precious metals & goldminer stocks at all, except the last 2 to 3 days when XAU/HUI had a significant rally.

With stock market breaking new highs, my large cash position seems to be over-conservative. As I have commented last month about doing a cash-out refinance from my home equity in preparation for a potential coming low, I stopped short of going through the refinance deal. Everytime (for the third time in the last two years) when I am so close of doing an actual refinance, I am right at the low point in bond yield/mortgage rate. I wonder whether I would make a better bond trader than a stock trader.

My asset allocation plan is also not working very well this month (or I should say this year). My company stock really really sucks. It is probably lagging the general market by some 25%. My total net worth would be breaking record high if my company simply tracks the market performance. So far, I’m still about 3.4% below the all time high of my net worth on 2007-04-26.

In any case, I’m not ready yet to ditch my bearish stand on the general stock market. Is that the reason for this stock market not falling yet because this “last bear” has not turned bullish yet? Maybe. We shall see.

By the way, I have put back the daily update of my portfolio composition in “My Networth” page if you’re interested.

Special note: returns were calculated by subtracting 3.00% APR return of my cash position.

Since the Chinese stock market has grabbed so many headlines recently, I thought I’d weigh in. First of all, recall that I wrote about $SSEC in early 2006 and was quite adamant that it had double bottomed at 1000 the year earlier. That was a time that no one wanted to touch Chinese stocks, particularly people in China. How much things have changed!

Today we have not shortage of people calling the bubble in China, while I don’t dispute the price rise has been nothing short of meteoric, and we may indeed have witnessed a 5th wave blow-off top. Nonetheless, it’s interesting to point out that we call other people’s bubbles far more readily than our own. According to Roubini, the P/E of the Chinese market has reached 50. I have been trying to find the P/E of the Nikkei at its peak, but that data has proved elusive. I have so far found one reference that the average bank stock P/E was 60 at the time! Triple digit P/Es were also common. This is not to say that the Chinese stock market has a lot further to go, but rather that it’s iffy to call a peak based on the P/E ratio, especially before it happens The Chinese government is trying to curb excesses, most recently by increasing the stamp tax to 0.3% from 0.1%. The increase is insignificant but sends a clear message that it intends to curb speculation. In the end, the Chinese government always has the option to release official shares which was a big reason behind the market down turn in 2002-5 (see the first chart which was drawn in Jan 06). However, I believe it won’t be a step taken lightly. IMO, the issue with China is the non-convertibility of its currency and consequent lack of outlet for people’s vast savings.

Since few individual investors buy shares in Shanghai, the more pertinent question is how will a large drop in the Chinese stock market impact the rest of the world, given the size and open nature of the Chinese economy. I’m an optimist in that regard in that I believe a large drop tomorrow (say 30%) will not have much impact on even the domestic Chinese economy. It follows naturally that commodity should demand will remain robust.

Here’s my reasoning: Bubbles wreak havoc because it distorts price information which is the best feedback mechanism in a free economy for resource allocation. However, for mal-investments like the dot com’s of 1999-2000 and Miami condos in 2005 to take hold, new investment decisions must be made based on the elevated asset prices and the bubble must persist for some time. Neither of these elements is present in China. First of all, most listed companies are state owned enterprises and listing is very much a political process. Consequently, small to medium sized non-state own enterprises that are the most vital parts of the economy cannot raise capital in the stock market. On top of that China has only a nascent VC sector and they are not rushing to give money away. Secondly, if the bubble burst tomorrow, it would have lasted less than two years from deeply oversold levels. Not enough time to do lasting damage. There isn’t a mechanism in China to borrow against appreciated securities which is how many Japanese companies got into trouble. After all, without new issues, a stock market is merely a wealth transfer mechanism. Those few individuals who mortgaged their house to speculate on shares may be hurt and the reverse “wealth effect” may curtailed some spending, but I don’t see a lasting effect on the economy as a whole.

The corollary of the above is that there’s a good chance the Chinese stock bubble will continue and cause more problem when it finally bursts. There is a chance that the bursting will be a positive for gold as people look for the next speculation target. One should never underestimate Chinese people’s propensity to gamble.

As I finish this up Sunday evening, $SSEC is down over 7% to 3700 (roughly where the trend line is) at one point but has recovered to down only 4% or so. Recall that at the end of February, a 9+% drop there initiated a mini-crash in the rest of the world. Last Wednesday’s 6+% drop dragged down Asian and European markets across the board but US markets reversed higher nicely. Tonight, most Asian markets are up in the wake of the turmoil in Shanghai. It seems people are realizing the Chinese market for what it is: an isolated casino that matters little to its own economy, much less the rest of the world’s.

Apparently the UAW (United Auto Workers union) has been running radio ads urging people to call their congressmen to prevent the implementation of tougher gas mileage standards for cars and trucks, in the guise of protecting “American jobs”, of course. This ticks me to no end. Two points need to be made:

• Domestic automakers’ staunch opposition to higher mileage standards was very much part of their falling behind foreign competition, notably Toyota, in making vehicles that people actually want.
• By churning out gas guzzlers they contribute to the rise in gasoline prices, thus hitting my pocket book directly.
  And now they have the gall to ask me to preserve their jobs? Or is it the gold-plated health plans they really want to keep? Haven’t they learned anything now that Daimler had to pay Cerberus to take Chrysler off their hands?

It is often said that in a democracy, sensible policies can be derailed despite their aggregate benefit, because the small minority who stands to lose are vocal in opposition while the great majority to whom the benefit is real but diffuse, falls silent. Well, this blogger refuses to be silent.

Raising automobile fuel efficiency is the simplest and most cost-effective way to lower energy prices. If you agree with that, let your congressmen know that you support higher gas mileages. Ask them to say no to the UAW.