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  • Archive for February, 2008

    My Market-Based Solution to the Housing Market Mess

    Posted by Frugal on 28th February 2008

    I think few people realize that America/the world is facing the biggest financial storm ever, and how dangerous it is for investing in stocks before a full implosion. The housing-induced credit crisis has gone far beyond anyone can potentially control, probably not even the Fed.

    Reading over so many current/future proposals from politicians and bloggers, I have my own thoughts in this. For sure, there simply isn’t a solution without pain. But there can certainly be solutions that are more fair and less pain.

    One of the most fair and easiest way to help propping up the housing market is to subsidize all the buying or holding cost for primary residences. Instead of helping on the sell-side directly, the government can help the buy-side. Of course, the subsidy will indirectly go into sellers. But the solution is market-based.

    Why is this a fair solution? For sellers, there is simply no direct bailout. For anyone who chooses to buy, the buying decision is done on the open market where everyone else is competing on the same ground with subsidy, and existing real estate investors will also be helped with a more stable housing price. For any renters who choose not to buy and take up the subsidy, their decision is solely of their own based upon their evaluation of the current housing market and personal circumstances.

    What kind of subsidy will make sense? The easiest way is certainly done through mortgage interest reduction or tax deduction. The tax deduction cannot be limited by the amount of adjusted gross income, and has to be actually beneficial on top of the existing standard deductions. By reducing the overall housing cost, government will encourage more of it, and prop up the housing market.

    Since 65% to 70% of the Americans are home owners, most of this housing aid will effectively become a tax cut for middle class. I suggest that 50% of the total amount of both property tax and mortgage interest from primary residence can be used as a tax credit (rather than tax deduction in the itemized section). Here are some examples of the housing aid scenarios, with loan interest at 6%:

    1. $700K home in California with 20% down for someone with tax bracket at 28%:
    Because loan amount is $560K, the interest is $42K a year, and the additional tax subsidy amount will be roughly (50% – 28%) * $42K / 12 months = $616 a month. This monthly subsidy will effectively lower the interest rate from 6% ($3357) to 4.25% ($2755). That will be a tremendous stimulus.

    2. $500K home with 20% down for someone with tax bracket at 15%:
    The additional tax subsidy amount will be roughly (50% – 15%) * $500K * (1-20%) * 6.00% / 12 months = $700 a month. This monthly subsidy will effectively lower the interest rate from 6% ($1852 payment) to 3% ($1686 payment). This is an even better deal for lower income people.

    Effectively speaking, this tax cut will target middle-class home owners specifically. Using the assumption of a median home value of $240K, and an average tax bracket of 15%, this tax aid comes to be about $4032 dollar per family household, 110 million US households, with 70% home owners, it will be about $300 billion annually. I’m not going to re-do my numbers here, but probably instead of 50%, one could go for 40% of the interests as tax credit. This will adjust this bill from $300 billion to about $214 billion. I hesitate to go to much lower, simply because in California, where most of the housing problems are, you have to be at 25% to 28% tax bracket to afford the homes. Since one is already getting existing tax benefits at 25% to 28% through itemized deduction, the 40% as tax credit will only give 15% to 12% additional benefit.

    Bottomline, this printing of tax money will be truly the best way of distributing the helicopter money, since it goes to the homeowners directly without discrimination, AND it is also tax-progressive. The rich who has a bigger loan do get a lot more, but only because they are paying a lot more for their home. But the middle class will not be left out at all, and will enjoy the biggest piece of the tax reduction. This will effectively encourage home purchase/consumption, and props up housing market. The solution is also market-based without ANY bailouts to those people who abuse the mortgage markets.

    In respect to Republican tax position, this is a market-based solution. In respect to Democrat tax position, this is a tax aid for most of their incumbents. In respect to stock markets and US economy from Keynesian economics, this is a huge positive. Tax cuts stimulate economy. On the other hand, money from direct taxpayer bailouts go into the pockets of these fraudulent bankers and homeowners, and continue to encourage moral hazards and speculation.

    Frugal at

    Posted in Real Estate, Stock Market | 11 Comments »

    Pounding the table about PMs

    Posted by ML on 28th February 2008

    HUI made a new closing high of 485.9 today, besting the 480.99 mark set in January. The intraday high of 491.58 was also a record. With this new high, it is almost certain that we are in the middle of wave (3) of iii of 3 of III, first suggested here. In Elliott wave jargon, wave 3 is the most sustained portion of a 5 wave advance; more so for iii of 3, and so on. If this is the case, the advance of PM mining stocks in the next two months is likely to stun all but the most devout gold bugs.

    Very tellingly, both ratios of HUI:Gold and Silver:Gold have been trending up which is an indication that the move in precious metals is gaining recognition and speculative fervor is brewing.

    Click to enlarge>

    The picture at the start purports to depict a notorious incident when the then Soviet First Secretary Khrushchev pounded the table with his shoe at a UN assembly in 1960 (Wikipedia: Nikita Khrushchev).

    Posted in Gold/Silver, Investing | 2 Comments »

    Macro-Trading Through Asset Classes

    Posted by Frugal on 27th February 2008

    I took up the challenge from Prof. Peter Navarro on his macro-trading challenge (Feb 23rd, 2008). It was a very interesting mental exercise. I must say that it took longer than I expected to complete it. You can see the answers here if you can’t find it at Peter Navarro’s site. My own answers are in parenthesis if they differ from Peter’s.


    Global Recession

    Only-US Recession

    Global Stagflation












    S (L)

      Base Metals



    S (L)





    Bond Market




      US Long Bond









    S (L)


    N (S)


    N (S)


    N (S)


    S (L)

    N (S)

    N (S)





    Equity Index Funds




      US S&P 500












      US Growth sector


    S (N)






    US Residential Real Estate




    Before I go further, I misunderstood that Navarro meant only 3 Neutral per scenarios, instead of a total of 3 Neutrals. Therefore, I ended up with less neutrals than I would like. Here was my email sent to Peter Navarro for my tradings:

    I only had 1 college class in economics, but I’m going to give a try on competing for your book. My answers are at the bottom. I will probably write up a blog post on this competition linking back to your own site:

    Explanation for trades:
    LONG in Energy/Metals if Asia growth does not abate. Due to inflation in scenario #2 & #3, I will also be long in commodities in general. I will be SHORT in commodities for scenario #1, due to a potential outsized correction at the current “lofty” price of commodities.

    Long in US bonds if in a global recession. Neutral in a decoupling scenario due to a potential devaluation of $US. Short in US bonds for stagflation, since bond yields will go up.

    On US real estate, it will be highly dependent on the long term interest rate/credit availability at today’s price, and somewhat dependent on US growth. So I will be SHORT in scenario #1 due to recession, NEUTRAL in scenario #2 due to a low US interest rate, and SHORT in scenario #3 due to interest rate.

    On stocks, it’s dependent on growth and inflation. Mild inflation is actually good for stocks which is an inflation hedge. Since US growth stocks tend to be companies with significant international sales, they would benefit from Asia and Europe growth. Therefore, in scenario #1, I will be SHORT in all stocks. In scenario #2, I will be SHORT only in US stocks, but NEUTRAL in US growth stocks, and obviously LONG in foreign stocks. In scenario #3, I will be SHORT in stocks in all developed countries (US & Europe), while SHORT (to NEUTRAL) in Asia/US growth stocks due to inflation factor. Since I can only have 3 NEUTRAL, I decided to stay SHORT in Asia/US growth stocks.

    On currency, it is dependent on the strength of economic growth and also potential interest rate levels. US interest rate is highly dependent on economic growth and always skewed towards growth side. Therefore, in recession, US interest rates will be LOW. Europe has a more balanced growth profile. Asia on the other hand has a problem of (imported) inflation, and they will NEED to raise the currency exchange rate to tamper down inflation effects (especially since their absolute income in $US is lower relative to US/Europe). Therefore, in scenario #2, the currency strength should go from Yuan, Euro, $US. In scenario #3, $US is probably the worst, while Euro/Yuan may be skewed towards Yuan or on par. In scenario #1, Euro vs $US probably will have a positive carry-trade, and therefore I expect to SHORT in Dollar/Euro. Dollar, a senior currency, tends to get more respect in a recession, especially since Yuan needs to stay low so that China won’t have a serious unemployment problem due to US recession. So I will be LONG in Euro/Yuan, and LONG in Dollar/Yuan.

    Post-review of the differences between mine and Navarro’s:
    1. I’m longing energy and base metals, while Navarro is shorting. I guess the difference lies in that I personally believe that inflation force will overpower recession, while Navarro believes in the other way, especially given the current potential episode of stagflation.

    2. I tend to believe a much weaker $US than the regular scenarios that Navarro presented. Therefore, my currency trades tend to short $US, and long Yuan, and then long Euro.

    This is an interesting exercise. I encourage everyone to take up this challenge. My own prediction for the current unfolding economy is that it will resemble scenario #1 (global recession) first for maybe 3 to 9 months, and then go into scenario #2 for about 1.5 to 2.5 years, and then go into scenario #3 and possibly hyper-inflation afterwards for possibly 5+ years. However, stocks may not necessarily be a short, because under hyper-inflationary scenario, stocks will rise in nominal values too. The coming decade obviously is going to be very tough on regular investors.

    Frugal at

    Posted in Investing | 4 Comments »

    The Golden Rule

    Posted by ML on 26th February 2008

    Gold was weak Monday on the heels of news that the Treasure department is lobbying congress to allow the IMF to sell 400 tonnes of its gold. Here’s the original Reuters report of the planned gold sale. If we look at where the potential systemic financial failures are today, we’ll come up with a handful of countries that were, let’s say, never intended to be the recipient of IMF funds when it was founded. Surely, that irony is not missed by many. Be as it may, I don’t expect the bureaucracy to call for its own demise, hence I don’t yet consider its attempt to shore up revenue by selling gold as gold price manipulation.

    On the other hand, similar proposals have come before, and each time rejected by the US Congress, proving that its collective IQ is at least in the double digits. Perhaps it is even aware of the golden rule:

    He who has the gold, makes the rules.

    While 400 tonnes may sound like a lot (about $12 billion at current market value), its a drop in the bucket compared with central bank reserves of countries that have stated their intention to diversify away from US dollar denominated assets. Here’s a list of central bank gold holdings as a percentage of total reserves. A clear dichotomy exist between the CBs of “East” and “West”. Since the annual production of gold is a small fraction of the above-the-ground stock (a defining characteristic of monetary metal, one might add), the best way to in crease CB gold holdings is to buy from other CBs. Hence I predict that no matter how much of its gold the IMF will sell, it will find eager buyers. At the mean time, any price weakness is a gift to buyers of physical bullion.

    Posted in Gold/Silver, Investing | 2 Comments »

    A brief review of my past recommendations

    Posted by Frugal on 25th February 2008

    I seldom recommend specific stocks for buys or sells. The only reason is that there is simply nothing that can guarantee you, my readers, 100% certainty with profits. The other thing is that while I can suffer huge percentage losses without disrupting my daily financial matters, you may not be able to take such big volatility in stride. But for the very few occassions that I (not including my partner ML’s recommendations) do recommend, here are the performances:

    1. I recommended silver on May 4th, 2006, and Aug 22nd, 2006 if you just have $100 to invest. These are long-term recommendations. 2008 year-to-date is 14.25%, but silver only returned 28.5% since May 4th, 2006. I bought my first silver coins for $10 in 2006 January. Now it’s $18 roughly, a 80% total return (less if annualized).

    2. I recommended Bershire Hathaway’s shares if you only have about $1000 to $10K to invest on Aug 29th, 2006. This is a long term recommendation. The return since Aug 29th, 2006 would be 4648/3200 -1 = 45%, roughly.

    3. I recommended Conoco-Phillips COP on Aug 28th, 2006. That is a return of 80.61/66-1 = 22%. I did issue a potential sell (which I actually sold for $83 on Jan 14th) . The stock dropped to $67.46 this January and came right back up to $80.61. So you could have pocketed almost the same return, if you were able to buy the exact low.

    4. I recommended ADM on Jan 31st 2007. The title of my post was “The coming headline in 2008″. I was prescient of the market by almost 1 full year. What do we have now? ALL agricultural products have risen like crazy. Wheat is almost doubled now. Didn’t I tell you that a year ago? If you had invested in ADM, you should have returned about 41.5% since Jan 31, 2007.

    5. I recommended UNG on Jul 24th, 2007, and natural gas sectors in general. UNG should have returned 20+%, but due to the inefficient tracking to the spot market price, its return is barely positive. Of course, natural gas sectors have been going gang-buster in the last 30 days. Many names were up by some 20% in a very short time, even better than oil sectors.

    6. I recommended purchase of mining stocks on Jun 13rd, 2005. I hit the jackpot and that was the day of the lowest point. I’m a long term investor, and have been holding most of those shares since. My last check with the latest prices, those purchases had a total return of about 77%. The two still losing bets were GFI and KRY among those. But I’m satisfied with a 77% combined (total non-annualized) return.

    7. My last recommendation (unsure about the price level however) was JOYG. You would have returned about 12+% if you had bought. The price right now is $68.

    I hope you have profited from reading my blog. Probably 95% of the blog or websites that you read, you don’t get to see their performance at all. I always have doubts about them. They can talk big, but nobody knows the actual trading performance. But I’m posting my daily performance/net worth faithfully on my blog. I simply can’t stand un-truth, especially if it’s coming from me.

    I do wish that I can recommend more. But this treacherous market is extremely dangerous right now. I recommend cash and possibly gold. The bear market has just shown its force. Investing going forward is a very tough business.

    Posted in Investing, My Portfolio | 3 Comments »

    Getting Rich by Generating Wealth

    Posted by Frugal on 22nd February 2008

    I came across an excellent article while web surfing on How to Make Wealth. The article is extremely long, but the author is very impressive and had such a good understanding of the money matter.

    Here are some key excerpts from his article:
    1. Why is joining a start-up or starting up a company a good way to get rich? In a big company, you can’t get paid 10 times more if you work 10 times harder. Start-up is a place where you can work extremely hard and have an impact and possibly get rewarded.

    Here is a brief sketch of the economic proposition. If you’re a good hacker in your mid twenties, you can get a job paying about $80,000 per year. So on average such a hacker must be able to do at least $80,000 worth of work per year for the company just to break even. You could probably work twice as many hours as a corporate employee, and if you focus you can probably get three times as much done in an hour. You should get another multiple of two, at least, by eliminating the drag of the pointy-haired middle manager who would be your boss in a big company. Then there is one more multiple: how much smarter are you than your job description expects you to be? Suppose another multiple of three. Combine all these multipliers, and I’m claiming you could be 36 times more productive than you’re expected to be in a random corporate job. If a fairly good hacker is worth $80,000 a year at a big company, then a smart hacker working very hard without any corporate bullshit to slow him down should be able to do work worth about $3 million a year.

    2. Money is not Wealth: According to the author’s explanation, wealth is the stuff we want. Money is only a medium for exchange. The amount of money may be fixed (theoretically), but one can create new wealth (stuffs that people want) that is not already there.
    3. Measurement and Leverage:

    To get rich you need to get yourself in a situation with two things, measurement and leverage. You need to be in a position where your performance can be measured, or there is no way to get paid more by doing more. And you have to have leverage, in the sense that the decisions you make have a big effect.

    The jobs that can be easily measured for the performance and have an impact are CEOs, movie stars, hedge fund managers, professional athletes. A good hint to the presence of leverage is the possibility of failure. Upside must be balanced by downside, so if there is big potential for gain there must also be a terrifying possibility of loss. CEOs, stars, fund managers, and athletes all live with the sword hanging over their heads; the moment they start to suck, they’re out. If you’re in a job that feels safe, you are not going to get rich, because if there is no danger there is almost certainly no leverage.

    I’m going to stop quoting directly. This article is extremely powerful in its messages. And it really makes me want to do my own start-up company. I’m one of those workalcolics who can work 48 hours straight if necessary, and produce at least 3 times in quality output per hour. I once coded so many lines of codes in a couple of months, such that my small baby finger was hurting because of skin abrasion from too much typing.

    Anyway, if you get a chance, I strongly suggest you to read over the article. There is quite a wealth of information on How to Make Wealth.

    Posted in Career/Salary | 15 Comments »

    Money outflow from both stocks and bonds

    Posted by Frugal on 20th February 2008

    So we have stocks failing to rally, and bonds falling in values. This is just NOT GOOD. Most of the bonds are falling in value due to credit crisis, but now treasury bonds are also falling due to today’s inflation report. We now have a deflation going on in both stocks and bonds.


    It appears that there is no place to hide your cash. Yes, cash is king in deflation. Before this cycle of deflation is over, you will most likely lose money in whatever assets you choose to put in.

    Before government and Fed can stablize the financial markets, the downward trend is with us. I was expecting a retest low in March, but it looks like we may stay low all the way to May.

    In any case, if we do have a panic low going down, it would be the last best chance to lock in your loans, since bonds will almost always rise during panic. In case you are interested, I’m collecting people’s info to collectively bargain for a better deal for refinancing or getting a loan. You can look at this post for more details on joining me.

    Frugal at Posted in Market Pulses | 7 Comments »

    Net worth review: My year-to-date performance

    Posted by Frugal on 19th February 2008

    Usually I do a monthly review on my networth, but I have been too busy to do this (and anything else). So I will just keep this short as a quick update.

    So what has happened to my net worth (from Feb 14 closing to Dec 31st 2007 closing prices)? Bad news first.

    First, let me say that my home value has gone down significantly (10% to 20%). That has not been reflected in my net worth page. When I get some time, I will start to mark it to market, and smooth out the losses in several chunks.

    Now the really bad news, even worse than my home value going down is that my company options have pretty much gone into nothing. I’ve suffered close to 90+% in this category. Year-to-date (since Jan 1st) the value of my company holdings have gone down by 59.4%.

    My net worth has gone down by 7.43% (without counting the dropping home value) mainly because of the huge loss in my company stock.

    My own investment however has fared much better. My total stock portfolio has gone down by 3.44% (about 30% of which is contributed by my money manager), while including cash, my cash+stock portfolio has gone down by 1.86%. This compared to a gain of 3.6% in HUI index, 10.9% loss in OIH, 8.4% loss in XLE, 7.6% loss in SPY, 14.2% loss in QQQQ. I guess a loss of 3.44% is probably satisfactory, given that I have incurred some small trading losses, plus some hefty losses in junior mining stocks. Certainly, my cash+stock portfolio compared to the overall market is doing pretty okay, since my loss is less than 2%.

    Unfortunately, I simply have not taken enough hedges against my company and real estate holdings. Those positions are so out-sized that I’m usually afraid of taking a big bet. My inaction has certainly caused my overall net worth to suffer tremendously.

    In any case, what’s gone is gone. I’m pretty sure that given enough time, I can make those money back. It’s just going to cost me 10 to 15 extra years of my working life, yak!

    I was going to do a year-end review for 2007, but it’s probably too late to be meaningful. I know my portfolio was up about 16%, but my net worth was pretty much flat, due to a huge loss of 50+% in my company stock options. I’ve made up quite a bit of those losses through investment gain and savings for the entire year. However, if I count from the peak, I’ve only made up some 40% of the losses in company stock options.

    Actually, come to think of it, I probably should start account for the capital gain taxes that I need to pay on my investment gain. I haven’t counted those, but the amount of capital gain tax that will be due is getting so big that it’s actually going to affect my net worth. I would never imagine that this is going to be an issue when I started logging my net worth on this blog (only 2 years ago). For now, I’m just going to leave it at that. I just have too much that I need to take care and I don’t have time yet to account for everything in the last details.

    Posted in My Portfolio | 5 Comments »

    A Counter-Rally that Never Really Happened

    Posted by Frugal on 15th February 2008

    After a big dive in January, stock markets quickly rallied for less than two weeks and fizzled away.

    Congratulation to all the stock market bulls. The bull market since 2003 has been so relentless that it destroyed all the bearish shorts. Without the shorts, there is no short-covering in significant amount. So the markets fell into empty vacuum, and drift with a downward bias.

    I have been expecting a rally that hasn’t materialized. Or will the markets rally towards early March, or March 18 when Fed will take their next 0.5 % cut? I just can’t tell from the charts. But it’s quite likely that S&P will NOT go to 1400 anytime soon in the next 2 to 3 months. Brian Stoll puts it very well that for S&P 500 to go to 1420 to 1500, it is the kill zone for short-sellers and longs who want to lighten up. Markets will frustrate the majority of the people most of the time.

    I also believe that the stock market simply has not factored in a more serious protracted downturn. The only question left is that will we see a mirage of economy turning up mid-year before everything goes out of window again? It is indeed possible due to the aggressive Fed cuts and government bailouts.

    While Jim Puplava is still bullish for the year, and bullish in tech infrastructure, I’m totally in the bear camp now. In fact, I’m considering placing a restriction for no more tech on my managed portfolio. I just can’t see how markets can rise to a new high. I think ANY rallies at this point will be counter-rallies in a long term bear market unless there is a massive effort in inflating. However, when that happens, the beneficiaries are probably commodity and emerging economies.

    Posted in Investing | 4 Comments »

    Auction-Bond Failures Roil Munis, Pushing Rates Up

    Posted by ML on 14th February 2008

    Bloomberg reports:

    Feb. 13 (Bloomberg) — Bonds sold by U.S. municipal borrowers with rates set through periodic auctions failed to attract enough buyers as banks including Goldman Sachs Group Inc. and Citigroup Inc. that run the bidding won’t commit their own capital to the debt.

    Rates on $100 million of bonds sold by the Port Authority of New York and New Jersey, with bidding run by Goldman, soared to 20 percent yesterday from 4.3 percent a week ago, according to data compiled by Bloomberg. Presbyterian Healthcare in Albuquerque and New York state’s Metropolitan Transportation Authority also experienced failures, officials said.

    What began three weeks ago with too few bidders for auction-rate debt backed by relatively small entities, such as Georgetown University and Nevada Power, has widened in recent days to include large issues of state governments, such as New York state’s Dormitory Authority. The auction failures provide new indication of Wall Street’s unwillingness to commit capital amid $133 billion in credit losses and asset writedowns.

    Recall that I exited my closed-end muni fund positions (NXZ in particular) the day after MLK day. Well, NXZ been trending up ever since and I had a great deal of self-doubt. Today it gave back 3.86% which was an enormous move for a bond fund. It’s still above where I sold it but I’m beginning to think that my conservatism may be vindicated.

    Despite Warren Buffet’s offer to provide a back-stop to the monoline insurers, the credit crisis is far from over. First of all, it’s clear that if the monolines give up their muni business they may as well sign their own death warrant. The way I see it, the muni business is the only bargaining chip they have, as in “If we go down, we take the system down with us. So how about a few billions to help us out?”

    That said, I’m sure eventually most of the muni bonds will find a high quality insurer. Their yields are very attractive now. Even more so should the dividend rate cut expire in 2010. The way things are going, soon I may even have a chance to go back in for less.

    Posted in Bonds, Investing | Comments Off