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

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  • Archive for July, 2007

    I am owed with an uncollectable $4500

    Posted by Frugal on 31st July 2007

    Any good ideas on how to collect an uncollectable personal debt?

    I loaned $5000 to my friend back in 2001. It was meant to get him temporarily thru a job loss. So I never asked for any interest on my loan. Maybe he had a series of bad luck, or something. He found another job, and then got laid off again. It was during those high-tech recession. Later he managed to pay me back $500, which obviously wouldn’t cover any interest money that I would have lost. In any case, I counted it towards the principal.

    As months and then years gone by, he is still unable to pay me back, and ran up his credit card debts. In fact, his credit scores were so poor that he couldn’t get any more credits nor even open a new bank account. Throughout these years, as a good friend to him, I have always being lenient to him by not giving him any pressure at all in repaying me. I only reminded him twice probably in 6 years that he should have a repayment plan. I also made it clear to him that requiring him to come up with a plan is really meant to get him in some financial order, rather than repaying me. Without a plan, an undisciplined person can’t go anywhere.

    Then I sort of given up on him ever repaying me back. I simply asked him to help me document a personal loan loss with his social security number, plus signing/back-dating this loan document. This way I can properly deduct a long-term capital loss on my Schedule D, which would be allowed for this category, if such loan were not interest-free, and not meant to be a personal gift. I told him that he doesn’t need to pay me back, and that the worst consequence financially to him would be that he would have a personal and taxable gain of $4500, on which he most likely doesn’t need to pay any taxes (since it appeared that he didn’t have income that was taxable).

    Throughout the entire process, I have never felt upset by him, but rather felt very sorry for him about his financial state. What was very unfortunate for him as a person was that he didn’t help me at all on documenting this. Rather, several months later, he simply disappeared. His phone number nor his address worked.

    What a friend that I had! Despite this, I would still treat him as a friend if I see him again.

    Of course, this unpaid loan hasn’t made my wife happy at all. Especially when my friend was buying the latest notebook computer, while I still had desktop, and that he has been using cell phones for years, when I had none. But given a choice of consuming my way to bankruptcy or saving my way to great wealth, I will always choose the latter option.

    Posted in Debt/Frugality, Tax | 12 Comments »

    To buy or sell? That is always the question.

    Posted by Frugal on 30th July 2007

    Last week majority of the stock market gain for the year was wiped out. The violent drop in the stocks probably had most investors in shock. Has the stock market done dropping?

    ML’s post last Friday was optimistic. But I’m more bearish, especially on the US stock market. I believe that the recent subprime woes are really just the beginning. The great mortgage ARM resets are not even here yet. But so many lenders (and stocks) have gone under already. reports that there are 105 lenders imploded. Stocks such as AHM, NFI, LEND, IMH, CFC have suffered tremendous loss. In fact, the worst thing for this stock market is liquidity loss in the credit market. And that is really happening.

    With the exception of, many other pundits have already turned negative several months back. To name a few, Puplava, Bob Hoye, and Frank Barbera have all been taking negative stands. Of course, none of them was able to time the peak exactly. Timing the market is extremely difficult. But it is more important to take a stand for the intermediate term rather than getting bound to the daily whipsaw in the stock market. And for the intermediate term I believe that stock markets will be going down by 15+% from the top (which may or may not have happened).

    It is true and amazing that Shanghai’s stock market is at a new height. And that is very positive for global stock markets. While a parabolic rise is not sustainable, (I forgot that) it is NOT guaranteed that a fall is automatic. In fact, mathematically from the book of “Why stock markets crash“, it is only required that the mathematical curve changes to a different function instead of continuing on a unsustainable curve. That is probably what is happening in the Chinese stock markets. With Chinese stock market holding up, I believe that US stock markets will continue to underperform foreign stock markets going forward.

    So what kind of actions one should take from now? I just want to repeat my disclaimer: This is solely my opinion, not any formal investment advice. Please only take them as such. Short term wise, I will be looking to sell more once the stocks go back to its 50 days moving average. Long term wise, I’m very positive on the stock markets, especially BRIC (Brazilian, Russian, India, and China) and emerging markets. For the intermediate term (for 6 months out), I’m negative on US stock markets, especially priced in foreign currency or gold. As I have said previously in my net worth review, I’ve sold out all of my general stock market holdings at the end of June. All of my company 401K are in cash/short term bonds now. (Note: I asset allocate across all of my accounts, and won’t hold stocks in retirement accounts only because I can’t/won’t get those pre-tax money out.) However, I continue to hold a significant amount of energy holdings that are tied to economic growth, and a lot of precious metal & mining companies to hedge against a US dollar fall. I also continue to hold my company stock options, and intend to ride out the upcoming intermediate storm. Bernanke has not officially helping out the stock market bulls. I fully expect that he will not let deflation get out of hand, and will create more paper money and credits like there is no tomorrow (well, if not already). With that understanding of US Fed, I’m positive long term on pretty much everything except cash and bonds.

    Posted in Market Pulses | 3 Comments »

    Late night thoughts, 7/26/07

    Posted by ML on 27th July 2007

    It’s late so I’m not going to dwell too much on the sell-off today. I’ll try to be brief and to the point.

    I expected earnings to take a hit in Q3 so the string of Q2 downside surprises was somewhat of a surprise for me. For now, I’m still treating this as a controlled descent even though I have always expected housing weakness to “spill over”. There is a tendency to think the market will keep falling after a big drop like today but things rarely move in a straight line. While I’m not a buy-and-holder, I’ll wait for a downtrend to be convincingly established before changing my long stance.

    Precious metals

    The XAU put/call ratio made a new high on Wednesday. I have discussed this ratio previously so I won’t belabor the background here. Let’s take a look at the three highest spikes, viz:

    • 6/12/06 XAU put/call ratio = 6.7, 6/13/06 XAU intraday low = 119.11, 7/12/06 XAU intraday high = 150.70, a gain of 26.5%
    • 6/26/07 XAU put/call ratio = 5.3, 6/27/07 XAU intraday low = 130.83, 7/20/07 XAU intraday high = 159.14, a gain of 21.6%
    • 7/25/07 XAU put/call ratio = 7.3, 7/26/07 XAU intraday low = 144.50, …

    To summarize, on the first two occasions, a significant bottom in XAU was made one day after and XAU gained 20+% within 1 month. What this most recent spike foretells remains to be seen.

    Disclosure: I picked up some GDX calls today.

    New high in Shanghai

    Unbeknownest to many, Shanghai (SSEC) made a new high Wednesday night. Not too long ago just about everyone was worried about a Shanghai bust taking out the rest of the global markets. Well, I was never on that bandwagon. Recently, there has been an increase of IPO activity in China which is the chief mechanism by which mal-investments occur. However, my main argument was that time, or the persistence of price movements rather than its magnitude, contributes more to mass psychology in a bubble than anything else. Given that SSEC made a significant bottom in late 2005, this “bubble” is still in its early stage yet.

    CAF (Morgan Stanley China A Share Fund) is the easiest way that I know to participate in the A shares market. It’s now sporting a 17% discount as US investors have been inundated with bubble talk. I currently have a small position in CAF in addition to some FXI.

    “There’s a bull market somewhere”
    So the saying goes. Today that somewhere is agricultural commodities (besides treasuries, that’s too obvious). On a Dow-down-300-pts day, they massively outperformed. Just check out DBA, POT, TNH, and of cause, this impressive break out by BG:


    Posted in Gold/Silver, Investing, Market Pulses, Natural Resources | 1 Comment »

    Amazon (AMZN) trading at about $85

    Posted by Frugal on 25th July 2007

    Amazon just announced its quarterly profit at 78 million dollars, or 19 cents per share, with revenue jumping by 35% from a year ago to 2.88 billion. With 19 cents in quarterly profit, that is a current P/E of 111.

    Here is my take after looking over its financial statements. The gross margin for AMZN is roughly 25%. For every dollar it sells, it earns about 25 cents (at least for 2006/2007). In order to get to 35% revenue jump, the operating expenses had to increase by about 27%. This is showing some economic leverage power, but not by much. If we assume that AMZN can continue to grow its revenue at 35% annually, and also increase its operating expense by 27% annually, one year from now, AMZN would have 2880 * 1.35 * 25% – 585 * 1.27 = 160 million quarterly profits. Projecting 5 years out with this hyper-growth, the income after 30% tax bite (but without interest) will go from the current 94.5 million to 907 million quarterly. The annual revenue will be about 52 billion. For a comparison, Walmart’s revenue is currently at 355 billion.

    At the price of $85 dollar, or 34.8 billion market cap, assuming that AMZN will trade at a P/E of 20 in 5 years, that will be 72 billion market cap. Apparently, if the growth story upholds, there is still room for stock to double.

    Unfortunately, everything is at best an assumption. Using a very good growth, law of compounding always work towards your favor. Company stocks always keep rising until the growth starts to slow or even go in reverse.

    But at the minimum, the bulls are not so crazy at least on paper. Is this an internet dot com Act II, but simply better?

    Posted in Investing | Comments Off

    UNG: Natural Gas ETF

    Posted by Frugal on 24th July 2007

    After USO for crude oil, there is another energy commodity ETF for natural gas. It’s UNG. Like most of other commodity ETF, it starts falling right after debut. And it has fallen big too, down about 30% from the height. Given the recent price history of natural gas, it could fall to $4 from the current $6 (price is for the futures market, rather than UNG itself). That’s another 33% potential drop. But for sure it cannot go down to zero, unless you don’t need to pay any natural gas bill.



    The advantage of diversifying into pure commodity plays is that while commodity producers are influenced by all kinds of stock market related factors, commodity itself is less swung by the up and down of the stock markets. Rather it is determined by the economics of the supply and demand. The supposed un-correlation should serve a good complement to a portfolio reducing the overall volatility.

    To invest in natural gas, one can invest in UNG directly, and/or natural gas companies such as XTO, CHK, BTU, etc. I already own CHK and BTU, but XTO has been a much better performer. I have always wanted to buy XTO, but when I occasionally do remember to check its stock price, the price has never seemed right to me.

    As the demand for energy goes up, I expect rotation of rising prices among all energy sources. It’s really the relative economics of different energy that matters. If crude oil prices go up too high, people will shift to other energy sources whenever and wherever it’s viable to do so. There are plenty of choices such as natural gas, nuclear energy, coal, or any other alternative energy. One should asset-allocating for different energies components, and possibly rotate through different forms of energy investment.

    At the price of $6 natural gas, and $74 crude oil, it may make sense to re-balance the stakes between natural gas and crude oil bets.

    By the way, UNG like USO is an ETF that employ futures contract, and is subjected to price manipulation around expiration dates. Excessive cost in rolling over the contracts will eat into the performance of the ETF. USO is probably the best example in how your pocket can be emptied even when you’re right. The crude oil price is roughly the same around $72 to $75 in May 2006 and now. But some manipulators have managed to empty USO by 20% in a little bit more than 1 year timeframe from $70 down to $56. Now if that is not manipulation, I don’t know what that is. Is that a “random walk”? Shouldn’t the average of contango and backwardation be zero? I’m sure you’ve read the story on Amaranth’s 6 billion hedge fund blowup. But probably less people paid attention to who pocketed their money.

    Anyway, for the above reason, I would definitely not put my money into USO or UNG for the long haul. But as a trading vehicle, it should be fine.



    Posted in Natural Resources | 8 Comments »

    Commercials upping their long positions

    Posted by ML on 23rd July 2007

    “Curiouser and curiouser“ is how I would describe the latest commitment of traders report. Records from CME indicate that commercial traders increased their net long positions by nearly 6000 contracts in the S&P 500 index (each contract = index value X $250), and their net long positions in the S&P e-mini’s (each contract = index value X $50) by over 3000 contracts in the week to July 17. These are not large numbers by themselves, but remarkable since the commercial net long positions were already at extremes as this market climes a proverbial wall of worry.

    Click on image to enlarge

    One particularly cynical explanation I had was that Wall St. insiders were front-running the sovereign wealth funds, especially China’s. Of course, it may as well be that those running China’s 200 billion fund were smart enough to buy the futures first, knowing full well that their stock buying will drive up the S&P 500 index. No matter what the real story, it’s hard to believe this emphatic buying is not based on certain fore-knowledge. As long as this situation persists, it’s hard to imagine a big fall in the market even as we’re seeing more Q2 earnings disappointments, Google and Caterpillar being the latest examples.

    Posted in Market Pulses | Comments Off

    Close to 100% Loss on Bear’s Hedge Funds!

    Posted by Frugal on 20th July 2007

    What else to be expected?

    Leverage works both ways. A leverage of 5 times takes 20% loss to wipe it out. A leverage of 20 times only takes 5% loss to wipe it out. Bear Stearn obviously didn’t even bother to save the “enhanced” fund which used some 10 to 20X leverage. But the other fund that used some 5X leverage is also wiped out, given a dramatic fall in the subprime mortgage market. Check out the ABX index charts. They are terrible from BBB to all the way up to AAA ratings:



    So who are the empty bagholders? These are the gullible investors and pension funds who help financed the BIGGEST bubble in US real estate. Whether it’s “structured credit” or “enhanced structured credit”, it’s really structured to keep the non-worthy mortgage lending going…until it breaks.

    The recent breakdown of CFC, DSL, IMB, GM, NFI, and credit-market related stocks is a very telling sign. Financial sectors is also under-performing in general. How long can the stock market break new highs with the bond & credit markets getting tightened?. By the way, Hindenburg omen was triggered just about a month ago. The only positive for this stock market is that the record amount of shorts will help to stem the fall, assuming that majority of them don’t get squeezed to produce a market melt-up and then a melt-down. I’m not going to take a bet on either way. I will continue to hold my gold shares in the expectation that in the long term, US dollar will break down.


    In the meantime, stocks keeps happily chucking along.

    Posted in Investing | Comments Off

    The “utility” of gold

    Posted by ML on 18th July 2007

    Gold and gold stocks seem to be gaining more and more attention among the investing public lately, and for good reason: although they may be overbought in the short term, they have likely started another exciting upleg. Said “attention” is often based on gold’s traditional role as an inflation hedge or as a counter to the declining dollar. More often than not, I read comments along the lines of “It sure is nice to look at, and I wouldn’t mind owning as jewelry, but I just don’t see any investment value in it.”

    This post is not for those of you for whom an uptrend in price along is a justification for buying in and of itself, in fact I salute you as a trader. For the rest of us who prefers our investment decisions seasoned with a little logic I want to present a case for the utility of gold.

    The real value of base metals is quite apparent. Even silver, the other precious metal, has plenty of industrial uses besides a favorable supply/demand outlook. On the other hand, gold interact with us daily predominantly in the form of jewelry and on rare occasions as an anti-oxidation coating. However, the real use of gold is monetary. Over half of the gold ever mined resides in the vaults of central banks as part of their reserves despite the fact that no country today has a gold backed currency.

    To appreciate the utility of gold, we have to first appreciate the utility of money.

    Money is evil (an interesting digression)
    This is not an uncommon uttering among liberal ideologues. I only want to mention it in the context of this amusing “proof” (apocryphally?) attributed to Albert Einstein:

    Proof that women are evil
    It is well known that Woman takes Time and Money,
    ==> Women = Time X Money
    Since Time is Money,
    ==> Women = Money * Money = Money2
    And Money is the root of all evil,
    ==> Money = Sqrt[Evil]
    ==> Money2 = Evil
    ==>Women = Evil

    Ok, now back on topic.

    Money is good
    This sounds a lot like what Gordon Gekko would say (he actually said “Greed is good”, but I’m sure he’d agree), but there is a lot of truth in it. Money, or the medium of exchange, arose out of necessity as commerce developed beyond the stage of barter. If there are 100 items to be transacted, rather than having to establish 100 * 99/2 = 4450 bartering cross rates, only 100 separate prices (in the medium of exchange) are needed. Further, money comes very handy when exchanging goods across both distance and time. It is no coincidence that some form of money developed in every human civilization that I’m aware of.

    Gold as money
    Many objects, from salt to rare sea shells, have served as money. But over time, metals emerged as the dominant form of money because they are durable, compact and easy to work with. Among the metals, gold stood out because of its rarity and for thousands of years, gold was the standard against which all other money was measured. Gold won this role by its innate attributes, well before any biblical or Koranic prescriptions. For the majority of human history where there was commerce as we would recognize today, gold (and sometimes silver) had served as a monetary standard. That is, until 1971 when Nixen closed the gold window, making the US$ inconvertible into gold directly.

    Problems with gold money
    Gold is not without its detractors. No less a respected investor than Warren Buffett has ridiculed using gold as money “digging it out of ground then putting it back”. While it is true that there is a cost associated with mining gold, it goes hand in hand with the non-counterfeitability of gold, by both unscrupulous individuals and governments. Besides, the mining cost is becoming ever miniscule in comparison with the size of the world economy.

    The gold (or silver) standard is not an absolute guarantee against big jumps in money supply as new supplies of gold (and silver) could suddenly materialize which was what the Spaniards discovered in the New World. However, today the possibility of such a find is remote and gold remains the only monetary anchor when world governments are inflating their money supplies as far as eye can see. I once said of democracy: human nature being what it is, it’s not a perfect system, just better than the rest. The same can be said for gold money.

    The point of this post is to convince you that there is a use for gold, a crucially important one at that. The logic goes like this:
    Money (medium of exchange) is necessary or commerce, i.e., money is useful.
    Gold was the chose form of money for much of human history, due to its intrinsic properties. Half of all gold mined remain in central banks’ vaults as their reserves, hence gold remains money today.
    Therefore, gold maintains a monetary utility.

    There are those who claim that one cannot “invest” in gold, since gold is a store of value, one can only “save” in gold. To me that is a matter of semantics. I chose to hold gold because I believe its monetary utility, or value as money, is underappreciated. I’m betting on a more general acceptance of that value which is the essence of value investing.

    Other thoughts

    There is a persistent misconception that investing in physical gold is costly. As I discussed in my guide to invest in gold and silver bullion, the internet has made owning bullion much easier. One can readily find buy/sell spread of around 5%. Besides, there is a myriad of ETFs that replicate the price movements of gold.

    The media has often associated gold’s rise with geopolitical instability, hence gold investors are often compared with Chicken Littles or survivalist kooks. More than once have I heard the line, “if these end-of-the-world scenarios really pan out, better trade in your gold for guns and ammo”. Incidentally, I have no problems with preparing for the worst; I carry plenty of insurances. However, to imply that gold will only function as money in chaos and anarchy is to widely miss the mark. The fact is that gold has never ceased to be money, despite being vilified as a barbaric relic by bankers who nonetheless have never ceased to account for it as a monetary asset. Owning gold has little to do with surviving catastrophic events, but everything to do with guarding against the on-going, persistent debasement of all currencies.

    I’ll end with a chart on the trade-weighted dollar index from the St. Louis Fed. A lot of attention has been paid to the regular dollar index which is heavily weighted in the Euro. It has yet broken the long term support at 80. On the other hand, the trade-weighted dollar index, which has much stronger dependencies on Asian currencies, has been in a downtrend since 2002.

    Once again, it’s the problem of which yardstick measures what. In the end, what matters is that gold has been rising against all currencies since 2001. That and a little conviction in its utility should make everyone a believer in gold.

    Posted in Gold/Silver | 1 Comment » Shutting down

    Posted by Frugal on 17th July 2007

    Casey Serin at I am Facing is shutting down his website in about 18 days. I received an email notification from him about the news:

    I’m shutting the blog down on August 3rd. That’s about 23 days from now.
    Any publicity is good publicity. Right?


    My marriage and my family has been affected in a big way by my actions and this toxic exposure. The internet could be a cruel place and I am the one who put myself and my family out there. If I knew things were going to get this bad I would have done investing and blogging in a much different way.

    Now I may lose my wife over this.

    I think he made a tough but wise decision. Family should be always first, money or fame second. You just cannot buy a happy family, no matter how much money you want to spend, but little time for them.

    When I first heard about Casey’s blog, I wonder it was for real. At least personally I will never document my own crime if I commit such white-color crime. I assume that getting more publicity will only bring investigation (in his case, FBI) sooner, since one of the million readers must either be a policeman himself or know a policeman well enough.

    In any case, he was able to sell his blog for some $20K to $30K, and also had a book publisher interested in his story. Frankly, he has a good chance of making himself a multi-millionaire if he simply play his cards right.

    His blog and real estate experience is simply one of the housing bubble phenomena. Unfortunately, all the debts left behind by these liar’s loans (some 2 million in Casey’s case) will not be paid back, but rather get discounted after foreclosures. Well, as you are fully aware, the stratospheric housing price was simply too good to be true. The housing price is only as good as the loans and the money availability behind them.

    Who is going to take the loss? Mainly the loan investors, but eventually the whole society takes up the cost one way or the other. We will be paying for the cost of housing bubble through the coming higher inflation and higher interest rates (if not already).

    Posted in Real Estate | 6 Comments »

    Pay 0% tax on capital gain!

    Posted by Frugal on 16th July 2007

    This is not another tax scam, but a tax law change. In 2008, if you qualify, you can pay 0% capital gain tax on your stock gain. But of course, this is not for everyone. If your marginal tax bracket is in 10% or 15%, you can pay 0% capital gain for any amount of stock gain before you exceed the 15% bracket. The maximum potential tax saving is about $3250 if you use $65000 for married filing joint, and all of the income comes from stock gain, which would be taxed at 5% in 2007, but will be taxed at 0% in 2008.

    Although this doesn’t apply to me now, I was in 15% tax bracket only 7 to 8 years ago. I am sure that some of the younger readers here may take advantage of this, especially young couples. Even though you may not save much tax in total since you only pay 0% tax on the portion before your AGI (adjusted gross income) exceed the 15% bracket, it sure feels good. At the minimum, beating the inflation will be some 15% easier.

    This tax saving however does not apply to kids under 19 or 24 if they are full-time students and dependent on their parents. But hey, who says that you must put your children as your dependents. You may save a lot more taxes if they (>19) simply file the returns on their own, paying a lot less capital gain, beating the kiddie tax at your own marginal bracket. Of course, this case is rare, but it would have applied to me, if not for the fact that my children are not more than 19.

    Posted in Tax | 4 Comments »