Gold At New High In US

Gold broke all time record in $US today. It is a confirmation that the bull market is alive.

Some people could argue that this may be a double top. That is definitely possible. However, if gold does get up to more than $1100, then I think that argument is a little weak. Furthermore, based on the recent consolidation of gold prices, it just doesn’t look like it’s a double top formation. A double top usually falls sharply afterwards. Gold consolidation has been quite flat, indicating its continual strength.

In fact, gold has indeed climbed a giant wall of worry. Majority of gold investors have not put in more money because of fear in impending stock market correction.

I have no way to know whether the gold mining index HUI is making a small double top right here. It is certainly possible. But I try not to predict the short term moves too much. After all, it’s not easy to out-smart the markets on a daily basis.

I understand that the great trader Bill at BillCara.com has sold partially out from stock markets & gold/mining. I also know that JC, one of the very few successful traders amid 2008 stock market crash at www.simplyprofits.org have gone out of markets for quite a while. I understand that the person who called the credit market crash in 2007, Bob Hoye (normally at HoweStreet.com), has turned bearish on general stock markets, and especially on silver, for a number of months. But I kept thinking to myself that in this wave 3 up, most people/traders will be missing the bull ride. Ha, ha, myself included!!

The next big milestone if it comes will be a new high in international currency, first in Euro, and then in commodity currencies. I continue to believe that this new high will NOT come until the next big fall in the financial sector happens, which may be next March/April. From that regard, at least, for the international investors, they probably still have time to digest the current volatility in gold market. However, I wonder whether there may be some fireworks first when priced in $US before the year ends. Yeah, I know $US is supposed to rally right here right now. But is this another episode of “markets stay irrationally longer than one can stay solvent”?

Next Friday is an option expiration week. Maybe there is a chance of pullback. Maybe BillCara & Bob Hoye is right. I dare not to go in nor go out of this market. Brave trader I’m not. Patient investor I am, and I need to take actions accordingly.

Best luck,

Frugal at 1stMillionAt33.com

Last Week In Review

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.

My Advice To Preserving Wealth

At 30s to 50s, if you have put in some efforts in saving up a nest egg, you probably will have an okay to decent size of money, depending on your saving rate and age. At this stage, you probably should start constructing a picture of your networth & portfolio, if you have not already done so. The picture of your networth by market value gives you the idea of where your money is. The picture of your networth by the leveraged total value gives you the idea of how your networth may change per different asset classes that you have. Most people have their networth view as marked to value, but I strongly advise one to always take a look at the alternative picture of the leveraged view on the networth. I won’t go into details of the leveraged view, which you can read more about it by clicking the link.

With all the money in your nest egg, the most important thing for it is how one can preserve (if not expand) the buying power of the money through time before retirement or the time when you need it. Since the modern paper money is a fiat money backed only by the faith in the government, combating above inflation rate is the minimum goal that every money holder or investor should achieve.

Investing money is probably the most difficult task for anyone. Every minute, every second, every dollar from everyone is trying to gain the best return on investment (ROI). You can see how much competition is out there. If there is someone (including me) who tells you that he can consistently produce an annual return of 20% above inflation, you can almost be certain that he is telling a lie. Why? Compounding 20% for 25 years will give you 95.4 times back for your money. A mere $1000 dollar will become $95,400. Now if he has such investment knowledge to have such mida golden touch, will he be investing only $1000? He should be borrowing as much as he can and probably invest $100K to get some $9.54 million dollars. And if he has some $9.54 million dollars, I bet that he won’t be talking to you, but probably even making even more money for himself, or retired in some Carribean island. Such outrageous return simply don’t last long, or if it’s true, no one will be telling you about it. This applies to ALL investment, whether it’s real estate, precious metals, or stocks in general. The investing world is pretty much a self-correcting process. Any inefficiency (for investing trick) in the market will be immediately exploited in a short time to the extent that such inefficiency doesn’t work anymore. Every now and then, there will be some inefficiency in the market, but with so many investors and so much capital in the whole world, you can bet on that it will disappear before you know about it.

Despite the tremendous difficulty in investing, you can be sure that if you don’t pay attention or don’t do it, you will be at the bottom of the ROI (unless by pure luck). There are mainly two approaches to investing: passive and active. Passive investors follows the style of index investing by putting money into the general market weighted by market capitalization. An index investing style believes in the EMH, efficient market hypothesis, that the best current asset allocation is the current opinion of the market, which is expressed through the market capitalization of every stock. Therefore, buying index funds or ETF will give you the best asset allocation. I highly recommend the book Four Pillars of Investing by . It’s one of the most outstanding investment book that one can ever read. The arguments for index investing are so strong that I can barely find any faults in them.

The other style of investing is active investing, which is my current style of investing. I believe that I still have time to experiment with different investing strategies, and afford to get sub-par returns. But the biggest reason for me to follow such investing strategy is that the reasons for $US dollar devaluation and investing in natural resource sectors are so compelling that I cannot turn my eyes away from it. I will have separate posts on my reasons, but it is known that index investing gives you the average performance. Besides, it is also know that EMH in the most strict sense does not hold, and academics are discovering examples of market inefficiencies here and there (which gets exploited right away of course).

My own criticism to EMH is that in the entire formulation of EMH, there exists no time element. Obviously, nothing happens instantaneously. The time during which the market digests the information should be full of opportunities for smart people to take advantage. And while EMH claims that there is no market advantage at every time instant, I believe it does not directly translate into a conclusion that when you look out further in time for months or years, there exist no advantages. In essence, I believe that the entire formulation of EMH lacks the very important element of Time. That’s why I believe that by investing long enough (and smart enough), one should be able to harvest the inefficiency accumulated through time, and/or inefficiency projected into the future.

Of course, I may be wrong in my active investing, but it is for sure, that in every market, there are out-performers and under-performers, and index investing gives you the average performance of all market participants. One of the better books for active investing is the book from the master market technician Martin Pring “The Investor’s Guide to Active Asset Allocation”. It has explanations of how one can use potential knowledge of business cycle to dynamically allocate one’s asset.

While there is not a lot of concrete advices that I can give you for investing, definitely invest, invest, and invest to at least beat inflation. Also I suggest you to at least read my article on the importance of diversification, which relates directly to preserving wealth through diversification. And I won’t tell you that I know a trick to return 20% every year because I will be flatly out lying as I have explained. I have and will have many more articles on Introduction to Investing in certain asset classes, and Reasons for Investing in certain asset classes, to help you on how-to and understand why. But since I have no magic trick, you will need to make up your own portfolio compositions, and invest accordingly. And if you have time to spare, the following two books will probably increase your knowledge in investing tremendously, whether you choose to invest actively or passively.

Comparison Of Cashback Credit Cards

The credit card issuers got more competitive again since the last time I shopped around. Because the average cost for Visa/Mastercard transactions is about 1.7%, and can be almost 3% for small merchants, I always thought that getting mostly 1% cashback out of 1.7% total on my Citi Dividend Platinum Select Card is pretty good already. I just found out an even better cashback credit card offered by Emigrant Direct. Here is the summary of some credit cards (all zero annual fee) that I think are worthwhile mentioning:

  1. Citi Dividend Platinum Select Card: 5% cashback on gas/drug/grocery, and 1% on everything else. $300 max rebate per year. Cash rebate can be paid out once it’s more than $25. I currently have two cards because I usually run out of the $300 yearly limit. At 5%, you only need to have $6000 of gas/grocery bill to reach $300. (The term of this card has been changed, and I have replaced this card by two other cards in another post.)
  2. TrueEarnings Card from Costco and American Express (AMEX): 3% for restaurants, 2% for traveling, and 1% on everything else. Annual fee waived with Costco renewal. Since Costco does not accept Visa/Mastercard, I also have this card. Two other American Express (AMEX) credit cards, AMEX Costco Cash Rebate and Blue Cash have tiered structure, and you will need to spend $11000 and $13000 a year separately to beat a flat 1% cash rebate card. Above those spending levels, you get only 0.5% extra back.
  3. EmigrantDirect Platinum MasterCard (issued by Juniper Bank): this is my new find. It will pay a flat 1.40% cashback if your average daily balance of your EmigrantDirect Savings Account is at least $10000. Otherwise, it’s 0.50% cashback. It pays every six month, and goes into your saving account directly. I called EmigrantDirect, and have confirmed that the cashback will not be lumped in as part of the bank interest money on which you will need to pay tax. Since EmigrantDirect Savings Account earns 4.65% APY, this is really a no brainer deal.

Why is that I’m only interested in cashback credit cards? Other credit cards such as airline credit cards may end up giving you a slightly better value. However, accumulating airline miles or reward points is simply not straightforward enough. The credit card company can always change the reward schedule of airline or redemption point to their benefit. I prefer a simple straight deal of simply getting cashback.

P.S. I got most of my pointers from www.creditcards.com. It’s a pretty easy website to navigate, if you are interested in any other kinds of credit cards.