Reversing My Positions On Canadian Trusts

After I thoroughly reviewed the tax law changes, I believe that they should be sold. Not only corporate income will be taxed, withholding rates for US investor will be raised to 41.5%. If anyone of you have further details on the tax changes, please comment.

My total loss from this tax change is about $5800 from all of my positions (so far). I’m just going to take the losses on the chin.

I won’t be selling them out immediately. I will take whatever dividends that I can get at the rate before tax changes are kicked in, and wait for market to reach some consensus. I will probably put the proceeds into either US trusts or partnerships, the other two categories that I have recommended in my high dividend stock lists. I am still lucky in the way that I have diversified my dividend streams into different country and different kinds of business. Otherwise, my losses will be much worse.

I hope that crude oil stops falling here. If it does, rise of crude would help lift these trusts somewhat. But if you want to play the crude oil, you could put the proceeds into many other alternatives. Bottomline, diversification has always been the saving grace in a down market (and also a dragger in an up market). It’s about how greedy you are and how much risk you want to take.

Certainly a BAD day for all Canadian trust investors. I wish that they could have preserved the trust structures for certain types of business.

My Thoughts on the Current Market

I have written this post, before I leave for the extended vacation. I just want to leave and recap my thoughts on the markets for anyone who is interested. I have not been posting much on the market, but I do watch things daily.

Macro economic picture

  1. Housing bubble has finally popped. In my second post on this site, back on April 8th, I have indicated that housing bubble may pop in mid-2006, based on the studies of bubbles in the book of Why Stock Market Crash. Back in April, the signs were not that clear, but after June/July, it became increasingly clear that bubble cannot be pushed higher.
    Associated with the housing bubble in the mortgage market, 1 trillion out of 9 trillions mortgage will be reset next year. This will increase housing market inventory further, while Fed cutting interest rate next year will help the market somewhat. However, if you think a slow-motion market can finish its correction in a mere 3 months, you got to be joking (did David Lereah at NAR or Greenspan f*rt?). Even a super-fast volatile sector like precious metals couldn’t finish its correction in less than 2 months. I think the correction or crash in housing market will last for YEARS, about 5 to 6 years to be exact until 2011/2012 in my best guess. Possibly with the later 2 to 3 years to be flat or slightly up (0% to less than 3% range annually).
  2. US economic growth is slowing down. And the biggest culprit is the housing market. I believe that although you may not see a headline recession due to all the economic fudged reports and skewed media, a US recession could be here already. By recession, I mean any actual growth rate that is close to 0% or slightly negative.

With the above macro picture, I believe that in the short to intermediate term (now to end of 2007), this is probably what would happen:

  1. US central bank will print like crazy, with money supply increasing probably at 8% annually or above. This is to drive money back towards into bond, housing, and stock markets. However, they cannot control fully where these additional money supply will go. A higher bond market, which translates into a lower interest rate will alleviate anyone who wants to refinance their ARM into fixed rate loan. But I believe that a 2002-style of yield crashing will NOT happen this time around, due to the growing diversification of $US around the world. In the short term however, stock markets may from time to time experience the jubilating rallies due to the extra shower of newly minted money. I tentatively believe that the secular bear market in stocks is NOT over, at least on the inflation-adjusted basis.
  2. Due to the slower or zero growth, Fed and big brokerages will try to keep a lid on the commodity and precious metal markets. A slower “growth” in USA is definitely a negative for base metals, steel, cement, energy producers. But they will also continued to be supported by the Asian demand (or the Chindia, China+India). My guess is that the stocks of these commodity may go into a range trading, but a bigger trading range of maybe some 30% peak to bottom (on the average) in 2007. This trading range allows the secular bull market in energy to catch their breath. Some may outperforms others, such as uranium. I think the bottom range of these stocks are around here. While it is possible that selected few of the raw commodity price may either go on and make new highs, or trade with a slight bullish tone.
  3. A slower US growth means lower short-term US interest rate, and lower $US foreign exchange rate. This is bullish for precious metals. The rallies in precious metals may or may not be capped, and/or range-bound, due to their counter-party in the oil world, but saying that the bull market in precious metal market is over is probably wishful thinking for PM bears. Overall, starting from mid-2006, to maybe end of 2007, it could be a time for the general commodity markets to catch their breath before launching UP further.
  4. I begin to see signs of energy inflation making its way into agricultural commodity. I believe that 2007 will probably be the year of stellar return for agricultural commodities, IF not already in 2006. Many agricultural commodities are breaking new highs (corn & wheat, and guess what, meat from animals is “corn”-based). Eventually these prices will get passed down to the final food product. I think Fed will have a hard time managing the inflation numbers going forward. first, it was energy. Then it was core rate. And then it will be FOOD. This inflation fire simply CANNOT be put out, and will continue to rotate and spiral upward from one physical thing to the next. Why? It all goes back to the root of evil, Fed printing money. To think that you can print money, and still be able to contain inflation, is simply insulting and ridiculous. On one hand, Fed wants to appear to be an inflation fighter; on the other hand, Fed WANTS inflation to save the housing market and all the USA debtors.
  5. There could be a short war like the one between Israel/Lebanon in early 2007. I won’t bet any money on it. But the macro picture of commodity inflation, or relative lack of natural resources usually leads to wars in which precious resources are the target of grab. If such war happens, it will support both oil and gold prices.

With all of the above thoughts, here are my specific predictions:

  1. On the stock market, it will take a short fall about right now, marching even higher, and then take a big 20%+ fall probably sometimes in the first half of 2007. What’s after that really depends on how much Fed intervenes into this market. The stock market could slowly keep marching higher after the big fall, but again, on an inflation-adjusted basis, the return will be unimpressive.
  2. On the bond market, 2007 should be temporarily good, due to cutting of interest rates and potential recession. Beyond that, especially if commodity markets pick up steam, it will be terrible.
  3. On the commodity market, I’m guessing that it will be ranged bound in 2007 generally speaking. Gold may even have another dip later this year. While Wallstreet may not want to put money into the commodity stocks, it does NOT mean that the actual commodity prices will not march higher.
  4. On the real estate, the hopefuls of 2007 to be saved by the interest rate cuts will be surprised by many more new companies whose ARM mortgages reset in 2007, and cannot refinance their ways out. I believe that bond yields will refuse to go down too much due to elevated inflation rate, and a weaker $US. Same thing in 2006 will be replayed again in 2007, with inventory starts to increase in about March/April, and then all the way to October/November. Certainly, it will be different from 2006. It’s just bigger inventory all the way. That will further sack the housing price. On the other hand, rents will keep climbing higher at +6%. In 2007, people’s mood will be worse. Renters are not happy because rents are up. Home owners are not happy because the wealth effect is in the reverse gear. And more things will be more expensive as time goes on.

My sincere apology if I have depressed you. See, I truly wish that the world is a better place to live for everyone. But the world will be what it will be, and the market will do what it does, irrespective of your or my personal opinions. The world will change if collectively we all change and set it back on the right course. But before that happens, which eventually it will for certain (cycle of political activism comes AFTER lower living standards), I will make my advanced purchases of my commodity that I need in the future. Maybe it won’t do as good as a 5.25% 1-year CD (as my thought indicated, could be ranged-bound), but at least I “lock in my price for commodity” whether the price will be lower or higher, it matters less.

I highly suggest you to click on all the hyperlinks in this post to research any related topics further. I’ve pull together various sources for you if you want anything more in-depth.

The Case For Investing In Silver

Frugal has written about Reasons for Investing in Gold & Silver Market where he presented a compelling case for investing in gold and touched upon the case for silver. It’s a case I want to further develop here.

Silver supply/demand
The structural deficit in silver makes it a compelling investment. This situation is illustrated by the figures from The Silver Institute (the first on supply, the second demand). For years running, mine production and scrap (recycle) have not kept pace with demand and the gap has been met by sales of above ground stock.


The natural follow-up question at this point would be: “what is the remaining above ground stock?” An even better question is, “what is the amount of market accessible silver at $X?” Unfortunately, I’m not sure if anyone knows the answer. There are some estimates, for example, here’s one on how much silver remained in 1992:

Total Silver that remains above-ground (all forms): 19.06 billion ounces
Total Silver contained in silverware and art forms: 16.48 billion ounces
Total Silver contained in bullion form: 1.40 billion ounces
Total Silver contained in coin and medallion form: 1.18 billion ounces

ROHS and silver
Silver is often called the poor man’s gold, but unlike gold which is primarily a monetary metal, it has many industrial. Silver is a known bactericide. Some humidifier currently on the market uses silver rods to kill bacteria. Silver is also a well known conductor of heat and electricity.

As a investor, I’m always on the lookout for new incremental demand of silver. ROHS (Restriction Of Hazardous Substances) presents such a situation. It’s an EU directive banning certain harmful substances from consumer products. One material affected is lead solder in electronic products. The main lead-free alternative is an alloy of tin, silver and copper. My back-of-the-envelop calculation says that to replace all leaded solder requires roughly 50 Moz of silver each year.

The current annual silver consumption is about 900 Moz. To put an extra 50 Moz/year into perspective, note that in the crude market six month ago, all the spare capacity in the world was an extra 1 Mbbl/day from the Saudis, while world consumption was 80+ Mbbl/day. We all know what happed to oil prices then. ROHS was implemented this July and California will likely follow suit. If this trend takes hold, it will be an additional drain on an already tight supply/demand relationship.

Gold/silver ratio
So how does silver compare with the other precious metal, gold? The chart below shows 600 yrs of price history and the corresponding gold/silver ratio. The real silver price peaked around the time of Medici and has been heading down every since. Even the corner by the Hunt brothers that sent the price to $50/oz only brought the real price to the level of the 1880’s. The gold/silver ratio remained near 16:1 for centuries before rocketing up. Today it stands at 621.8/12.73=48.8.

The historic ratio of 16:1 is not far from the ratio of silver to gold in earth’s crust which is 17.5:1 (see ref 3 here). On the other hand, silver analyst Ted Butler has claimed that silver is more rare than gold when comparing accessible stock piles in bullion form. A more complete study of the existing above ground supply by David Zurbuchen found the silver/gold ratio to be 5.88:1. No matter how you cut it, any reversion to the lower ratios would imply that silver will appreciate much faster than gold in this bull market.

Silver plays
There are may ways to invest in silver:

I’ll end this article by addressing two common refrains from investing in silver:

  1. Print photography is being replaced by digital photography, hence the demand for silver is going down.
  2. Silver is an industrial metal, as the economy slows down, silver demand will go down, too.

Rebuttal:

  1. From the latest World Silver Survey, 2005 photography use was 164.8 Moz down from 181 Moz in 2004. However, this is only one side of the coin. A large part of the scrap supply comes from recycling photographic films and solutions. If 70% of the 2005 scrap supply (187.3 Moz) came from photography, net photography use was only 33.7 Moz, to be further off-set by the silver went into digital cameras and printers. The truth is that silver demand has been climbing even though print photography is rapidly going out of fashion.
  2. Using 2005 as an example, only 29% of the mined silver came from primary silver mines. Fully 59% were byproducts of zinc, lead and copper mining. Since base metals are more economically sensitive, silver supply is expected to reduce during hard times, cushioning the impact of lower demand.

Like gold, silver is extremely volatile, so please make sure it is for you and observe strict allocation and stop-loss rules. Please do you due diligence before making any financial decisions.

Not SO Golden

Another day, another record in the Dow. By now you are probably aware that the previously lagging Nasdaq and Russel 2000 have joined their bigger brethren in making new highs for the year. There is just no stopping this money train! I still believe the underpinnings of the US economy is weak, but as Henry To of MarketThoughts.com put it, “many of the major hedge funds out there are underinvested and underexposed to U.S. equities in general“. There is no use fighting the trend! I managed to exit my housing related shorts this week with small profits and is counting my blessings.

Gold and oil stocks are conspicuous by their absence in this feeding frenzy. Since I suggested taking a partial position via GDX here, I want to follow up today. The weakness in the gold stocks relative to the metal in recent days was not encouraging, so although the HUI is still above my “line in the sand” of 315, I trimmed down the weaker names that amount to about 25% of all my PM stocks. FWIW, what I decided to keep were AUY, AEM, SSRI, SLW and others.

As I cautioned before, the gold sector can be extremely volatile even though I’m a long term believer. If you have any doubt, live to fight another day.

The above is not investment advice. Please do your due diligence before making any financial decisions!

Muffin Calculator: Little Savings That Goes For A Long Way

This article is from Frugal Duchess. She writes a weekly column in Miami Herald, and had been a stringer for People Magazine. In the past, she worked at Institutional Investor’s newsletter division in Manhattan, covering IPOs, M&As and LBOs, CMOs and the rest of the financial alphabet.
I hope you will enjoy her frugal tips from this post.

Hugh Chou, a systems network administrator at Washington University in St. Louis, is a hero in many financial circles for his free online devices: The ‘’Coffee Calculator,’’ ‘’the Lunch Savings Calculator’’ and the “Gas Guzzling Calculator.’’

Here’s a link to Sharon’s Muffin Calculator, designed by Hugh for this blog.

He calculates how much our little expenses cost on an annualized basis and how much we would earn if those funds were stashed in a long-term investment account.

I recently chatted with Chou and learned a lot. Ten years ago, he created a website that contained an online mortgage loan calculator. That service led to requests for more calculators from consumers and mortgage companies.

His calculators — dozens of them — are featured on his site, www.Hughchou.org. Click on Mortgage and Other Calculators.

Here’s how the coffee calculator works: Plug in the cost of a cup of coffee, plus tax and your regular coffee-break snack. Input the number of cups you consume each working day. Based on $3 per day over a typical work year of about 250 days, the coffee calculator figures that your coffee break costs $750 a year.

Homemade coffee, Chou calculates, would cost only about 25 cents a day and over the period of a year, home-brewed coffee would save you $687. If you invest that amount in a 6 percent investment vehicle, and continue to do so on an annual basis, you would amass $9,061.80 in 10 years.

Chou’s calculators enable you to plug in various dollar amounts, numbers of coffee cups and even the investment yield.

‘’I’ve always been pretty frugal,’’ Chou told me. ‘’I’ve always brought my own lunch.’’ Watching colleagues buying lunch each day led to Chou’s Lunch Savings Calculator. The daily cost of a homemade lunch ($1.50) when compared to $5 takeout produces a savings of $875 a year. Over a 10-year period, skipping the $5 daily takeout could generate $11,000, based on a 5 percent annual yield.

Chou’s Gas Guzzler Calculator lets you compare how much you’d save if your next car merely sips gas instead of guzzling it. You can plug in your car’s miles per gallon and your commuting distance.

By the way, Chou donates a hefty portion of the proceeds from his calculators to charity. A portion of the donations also support his free site.

Here is his donations page.

Gold Breaking Out

On Oct. 25, I noted the positive price action in gold which consisted of a sharp 1-day sell-off and a quick recovery. At the time, gold was trading in the low $590′s and the HUI was at 316. Since then gold climbed to $620′s and HUI has consolidated in the high 320′s where several retracement levels congregated.

We are seeing similar actions today, where gold is up ~$16 now after easing over $8 yesterday. Concurrently, HUI has gained over 3% to 338+. The minor drawback I can see is that the PM stocks are in overbought territory. A prudent plan for gaining PM exposure anew may be to take some position now and the rest upon a pull back to the low 330′s.

One way to capture the upside in the miners while circumventing individual company risk is through GDX, the Market Vectors Gold Miner ETF. Over its short life, it has a very high correlation to the HUI index.

PMs are extremely volatile, so please be sure to do you due dilligence and adhere to a strict allocation and stop-loss discipline.