Dollar Hits A New Low

Posted on July 4, 2007 by Nirav

This week the US Dollar sank to 25 year lows against the Pound, AU/NZ Dollars and other currencies. There’s a saying that money flows to where its treated best.

What does that mean? It means people are converting their money into currencies with the highest yields.

Yields on the AUD,NZD and South African Rand are quite a bit higher than here in the US. Their economies also seem to be growing faster than the US’ too. SA Central bank Governor Tito Mboweni said last week that interest rates were ‘too low’. The South African Reserve bank raised the benchmark lending rate by 50 basis points on June 7th and may raise them again on Aug. 16. Not surprizingly, the South African Rand is sitting at a six week high.

I don’t know if its already too late to the party, but buying foreign currency ETFs or stocks with foreign exposure might not be a bad idea. I’ve done very well with Anglo Amercian (AAUK) and BHP Billinton (BHP).

More on Synthetic Long Positions

Posted on June 15, 2007 by Nirav

As previously mentioned, I entered a synthetic long stock position using options in Seabridge Gold.

As a recap, a synthetic long stock position is buying the calls and selling the puts to offset the cost the of calls. (If you don’t know what calls and puts are, I suggest you read up on option trading. Options Made Easy: Your Guide to Profitable Trading is a good book).

With $60 I was controlling $1650 worth of stocks, or about 100 shares. On Friday, or about a week later, the stock was up just over a dollar, so I sold 2/3s of the call contracts and all of the puts. On the call side, I netted a profit of $0.40 or $40/contract and on the put side I netted an additional $0.35 or $35/contract. I actually closed out all the puts and kept only 1/3rd of the calls.

If I had closed out the position entirely I would’ve made about $70/contract or about 116% in roughly 1 week. As it stands, since I’ve liquidataed most of the position, I’m now in each call contract at almost cost and I’ll recognize a total net profit when I exit the calls. Currently the calls are selling for $235.

Last friday was also Triple Witching Day, (the contracts for stock index futures, stock index options and stock options all expire on the same day) and historically the week after that in June has a tendency to ended lower. Thats why I decided to close out most of my position. If the stock market does move lower, I can re-enter the position at a cheaper price. If not, then I’ll still make money on my existing call options.

If the stock drops, so long as I sell the calls before they drop under $10-$15, I won’t lose any money. If the stock moves significantly to the upside, the Delta will move towards parity with the stock and I then get most of the upside.

Currently I’m in a good situation. Lots of upside potential with minimal downside risk!

On another note, BHP Billiton (BHP) and Anglo American (AAUK) are hitting new highs! I love my commodity stocks.

Shanghai Stock Market Finally Corrects

Posted on June 4, 2007 by Nirav

About 2 weeks ago, I mentioned that the Shanghai Stock market was likely to correct.

Well today is the 3rd straight day that the Shagnhai market has traded down. So far its down 20% from its peak but its still up 28% for the year.

The Chinese government thought that the markets were getting ahead of themselves and had implemented a large tax hike to help cool down the “irrational exuberance”. Seems like they got what they wanted and should be quite pleased.

When the markets dropped 8.8% on 27th February, it triggered a drop in global markets. This time though, its all alone.

Apparently, 1000 out of the 1,400 class-A stocks dropped the daily maximum allowed 10%! If they didn’t have controls in place to limit the drop, they might have dropped a lot more. Because of this, I think the market might continue to drop for a few more days.

China economy is unlikely to suffer because of this market correction because its dependent on exports and not financial markets.

Hopefully it’ll create some good investment opportunities!

Beware The Chinese Stock Market

Posted on May 18, 2007 by Nirav

On the front page of today’s South China Morning Post, there’s a quote from Li Ka-shing, Asia’s richest man.

As a Chinese, I am worried about the mainland stock market. History shows that any phenomenon whereby shares are priced at 50 to 60 times forward earnings will end in a disaster. And any economic fluctuation in the mainland will absolutely hit Hong Kong.

In a sharply volatile stock market, small investors will be the victims in the end.

If any of you own China Funds it might be a good idea to lighten up on them now. Li Ka-shing didn’t get to be Asia richest person by being dumb!

Here’s a comparison between the Shanghai Stock Market Index and the Dow Jones Industrial Average.
If this doesn’t look bubblicious, I don’t know what does!

Note: There’s a difference between the Shanghai Mainland stock market and the Hong Kong Stock Market. The Shanghai Stock Market is where the locals and Jim Rogers trade. The big multi-national companies like PTR trade on the Hong Kong Market which hasn’t had such a speculative run-up.

Also of interest is this note from the China Fund (CHN), dated April 30th 2007.

Our returns in April came mostly from the A-share market, which is building up a good head of steam. The ‘B word’ is increasingly appearing in commentaries on the market, but as veterans of the late-80s bubble in Japan, when any stock under 30X was considered dirt cheap, we think this bubble will inflate still further. There have been disparaging comments about panic buying by local investors, now opening stock accounts at the rate of about 200,000 per day. We think they are reacting perfectly rationally to extremely high earnings growth (34% in 2006, accelerating in the first quarter of 2007) and negative real interest rates (Chinese banks only pay 2.2% after tax on one-year deposits, but the latest official inflation number was 3.3%). Ahead of the 17th party congress in October, it seems unlikely that Chinese politicians will make the ‘courageous’ decisions necessary to stop the market (big increases in interest and exchange rates), so they will continue to fiddle in vain with increasing equity supply and administrative guidance.

Hmmm….200,000 illiterate poor farmers/workers lining up to open a brokerage account doesn’t look like a market top? ok, so they don’t believe that the market’s over-valued. But then why are they acting like it is? Here’s a quote from a few paragraphs later.

The Fund is 93.5% invested with holdings in 65 companies. In April we began a big switch, selling US$19 million of A-shares to cut the Fund’s weighting there to 24.1%, whilst buying a net US$46m of the laggard, low-priced Taiwan market to lift the Fund’s exposure there to 29.4%. We believe that the A-share market has further to run, but Taiwan looks better when risk is balanced against potential reward. The NT dollar has also recently depreciated against the weak US dollar, never mind the mighty renminbi.

In addition to the broad-based buying of Taiwan favourites (Fu Hwa Financial, Formosa Petrochemical, Wah Lee, Synnex, Lien Hwa, Wistron Neweb and Taiwan Secom) the Fund received miniscule allocations to two hot Hong Kong IPOs, Yangzijiang Shipbuilding and China Molybdenum.

Ah, so they want to buy the somewhat undervalued Taiwan stock market and the Hong Kong Market instead of mainland China! Atleast they’re not as stupid as you pretend to be!

Disclaimer: I own a miniscule amount of PetroChina (PTR) in my Roth. PTR is traded on the HK stock exchange. I’m not selling it but I’m not actively encouraging you to buy it or anything else, except maybe gold 😉

Profiting From Investment News

Posted on April 26, 2007 by Nirav

I read an email today that mentioned China (who is already the planet’s largest coal consumer) claims it will need an extra 80 million tons by next January. India is also estimated to need an extra 120 million tons, and most other Asian countries are expected to increase demand by 7%.

According to Kevin Kerr, “Coal prices are going much higher than I thought. Keep an eye on those diesel prices too, they are already creeping up. These two markets are going to surge this summer, absolutely.”

Since I like to take advantage of investment opportunities whenever I come across them, I placed an order to sell PUT option contracts on James River Coal Company (JRCC). Its essentially a long position on the companies stock, which has nicely trended up 50% in the past several months.

If the order is executed tomorrow (the order was placed after hours) I get a net credit of $195/contract. By september, if the stock trades above $8.05, I’ll have made a profit. My maximum profit is $195/contract and it occurs at stock prices over $10.00. If the stock drops below $8.05 I will either have to buy it or sell my option before expiration date at a loss. But I’m bullish on the stock so the loss would be smaller than actually buying the stock outright.

If the stock stays at the same $9.50 price, I’ll still make $145/contract at expiry. Both my upside and my downside are limited, but I think there’s a great chance I’ll make more money selling the puts with a lower risk than by buying the stock outright. Plus for each contract instead of putting up nearly $1000, I’m collecting $195 instead. It does use up my margin limits, but it does mean I don’t need to pay interest on the amount, since I’m not borrowing any money.

Of course you manage the risk here by not betting the farm. If the stock moves against me and my option moves against me 50% (ie, I’m down $100/contract) I’ll close out my position. Since this total draw-down is only 0.33% of my portforlio, it doesn’t give me ulcers. And while the total profit is only 0.66% of my total portfolio and isn’t exactly an earth-shattering return, its a 2-1 risk-reward scenario that I’m comfortable with.

If the stock goes BK overnight and I lose the max $805 per contract, it still only 2.66% of my portfolio, which is a bearable loss. Remember, risk management will determine whether you succeed or fail in the long term.

How Do Your Investments Stack Up Against Schiller

Posted on April 19, 2007 by Nirav

If any of you remember Robert Schiller, of Irrational Exuberance fame, he thought tech stocks were overvalued and now he thinks real estate is over valued too.

According to an interview, he stated that between 1890 and 1990 the after-inflation return for real estate was ZERO!

This is not really surprising because real estate has to be affordable in the long run otherwise people are priced out. Since 70% of the population owns a home as opposed to being homeless, in the long run, homes have to have stayed affordable! Right now places like California seem unaffordable and they will correct until they are. (They’ll probably over-correct until they’re insanely cheap too).

So what is Schiller investing in right now?

I’m probably a little over 60 percent in stocks, almost all of it outside the U.S. I have a lot of cash. And I’ve been reducing my exposure to real estate. It may be at the end of a cycle.

Most of my stocks are outside the US too. My 401k has 60% of it invested in foreign stocks. The rest is divided over mid-cap & large growth and value funds.

In my brokerage account, the mix is a little different. According to TDAmeritrade’s Instant XRay tool (which shows you what your portfolio would look like if it were a mutual fund), my asset allocation is

High Yield – 7.33%
Hard Assets – 61.11%
Slow Growth – 12.83%
Classic Growth – 17.63%
Aggressive Growth – 0.58
Speculative Growth – 0.51

Of course I have a smaller more speculative account at Interactive brokers too which comprises mainly of a Japanese REIT (which I bought on the Tokyo Stock Exchange), an Argentinian REIT, and a bunch of speculative long calls and short puts.

Foreign Stocks – 70%
Speculative Growth – 30%

How does your portfolio stack up?

Friday Rant

Posted on February 9, 2007 by Nirav

I came across this article last night, 32 Reasons Why The Stock Market Will Jump This Year.

While its written as a serious prediction, I personally feel its more like a christmas wish list or a list of finalist answers at the Miss World Beauty Pagent!. Here are some of the gems

#1. Housing and Auto-manufacturing weakness will subside
Based on what? Major layoffs in both industries?

#5. Unemployment with stay at record lows.
Hmm…with the massive layoffs in Housing and Auto-manufacturing, you really think so?

#7. Inflation will continue to decelerate, with CPI averaging around 2.0%.
Hmm…ever since the minimum wage was jacked up, small business around where I live jacked up the price of everything along with it. That doesn’t sound like low inflation to me. Anyone who thinks that CPI is an accurate measure of inflation makes way too much money to begin with. Once you take out all the factors that cause inflation, of course you’ll be left with 2%. What a doofus.

#11. The US Dollar will firmer up and even maybe become stronger
With almost all the worlds major currencies strengthening against the USD how is this going to happen? Oh yeah, Bank of Japan is enforcing a weak Yen policy. And of course the USD will strengthen against the Iraqi Dinar! And with China owning a Trillion USD do you think a strong Dollar is actually in our interest????

#12. The U.S. budget deficit, which is currently 1.5% of GDP, well below the 40-year average of 2.3% of GDP, will continue to trend lower as healthy economic activity continues to boost tax receipts substantially more than estimates.
Uh…isn’t the US GDP is currently mainly comprised of government spending? Thats not really a show of healthy economic activity. Although it is true that the tax receipts are up more than estimated.

#15. The mania for commodities will completely end.
Yeah Right!!! All those millions of people in India and China who can now afford to buy a car and a decent place to live will choose to buy plastic go-karts and tents instead of regular cars and houses that use steel & copper. Is he completely blind to the global industrialization thats taking place? Every year China adds to its electricity generating capacity by the same amount as the entire UK. This electricity comes from coal and is used to make more cars and power more houses. The dude’s smoking crack now.

#16. Oil falls to $35 to $40 per barrel and eventually $20-$25.
#19. Gas prices will drop below $4/mcf.
#20. Gold will drop below $550 per ounce
This was written on the 1st of Feb 2007 when Oil was around $50/barrel. Its since gone up to nearly $60 and is probably on its way up. Corn has quadrupled to over $4/bushel making ethanol almost as expensive as gasoline now. Similarly Gold is also up to $665. I actually bought some GLD (the gold ETF) 2 days ago and I’m already up 7%. I predict its going to $800 in 2 years.

#17. Peace in the Middle East.
HAHAHA.

Some of the points are actually valid, but the ones I’ve mentioned are pretty stupid. Like I’ve said before, I’ve taken exactly opposite bets in my stock investing, so of course my views are out of line with the authors.

What do you think?

$10 Billion Dollar Stock Buyback

Posted on February 7, 2007 by Nirav

BHP Biliton (BHP) just announced a $10 Billion Dollar stock buyback over the next 18 months!!! Thats on top of the $3 Billion previously announced. About 4 months ago I bought BBL. BHP also trades as BBL and BBL trades at a slight discount to BHP, making it cheaper to own blocks of 100. Since BBL closely follows BHP it doesn’t matter which one you buy. I’m up 8.5% since then and I think there’s still a long way to go.

Most of my holdings are oil & gas or commodity companies. I’ve also been selling naked puts sporadically on companies like STP and CRDN which have done pretty well. Well enough to offset my losses on WCI. Since I started shorting WCI in October its up about 30%.

Has anyone had luck consistently buying options instead of selling them???

Canroy Update

Posted on November 2, 2006 by Nirav

The Canadian Royalty Trusts [or Canroy’s for short] sold off big today.[For a great post on Canroys, check out this post on Wealth Building Lessons.] People just dumped them. I lightened my load a little bit too. I sold about 15% of my Canroys and bought gold stocks instead.

I think a lot of it is an over-reaction. Even if the government does raise the taxes 40% some of them are yielding over 15% at these low levels. In the energy sector, between 40-60% of the dividend is termed as return of capital so its tax exempt.

So a 15% yield now becomes a 12.4% yield. Thats not so bad is it? What do you guys think?

Besides, on existing canroys theres a 4 year grace period. Maybe the next Canuck Finance Minister might reverse the decision.

But even then, just to make sure I’m not mistaken for a socialist, The POX on you Mr Flaherty!!!

And just a reminder, the competition at The Weekend Investor ends soon. Register and post for a chance to win a $50 Amazon gift certificate.

Washed out by the Canuks!

Posted on November 1, 2006 by Nirav

I’d recently put a bit of money into Canadian Royalty Trusts – the Canadian equivalent of REITs here in the US. Now, thanks to the socialist Finance Minister I’m down 10% today!

Toronto stock market tumbles after Ottawa moves to tax income trusts
Wed Nov 1, 12:34 PM

TORONTO (CP) – Finance Minister Jim Flaherty created havoc Wednesday on Bay Street and Main Street as income trust investors suffered massive losses following his Halloween surprise announcement that trusts will be taxed.

The Toronto stock market’s main composite index tumbled more than 300 points in early trading, and late in the morning was off 223.23 at 12,123.36, a decline of 1.8 per cent.

The loss was much steeper for trusts, with the S&P/TSX income trust index down 10 1/2 per cent.

“I’m put out, not to put too fine a point on it,” declared Brendan Caldwell, president of brokerage firm Caldwell Securities Ltd.

“I tell you, I’ve got seniors that have income trusts that are down $25,000 or $30,000 today. . . . They’re getting hit in a big way.”

Among major names, the Yellow Pages trust (TSX:YLO) faded 17 per cent, the CI Financial fund (TSX:CIX.UN) plunged 16 per cent and the Aeroplan fund (TSX:AER.UN) descended 12 1/2 per cent.

There also were big losses for Telus (TSX:T) and BCE Inc. (TSX:BCE), whose plans to convert into trusts – and the prospect that other major corporations would do the same – provoked Flaherty’s move. Telus was down 14 per cent and BCE lost 12 per cent.

The proposed rules would tax the money distributed to unitholders by newly formed income trusts, while existing trusts get a four-year transition period.

Income trusts pay much less tax than corporations as they distribute most of their cash flow to investors to be taxed in their hands.

Flaherty says changes are needed to prevent a shift in billions of dollars of the tax burden onto individuals and away from companies.

The Pox on you, Mr Flaherty!!!!

I’m surprised they announced this after they threatened last year and then reversed tune when the stock market tanked. I wouldn’t be surprised if they reneged on this announcement too.

Achieving financial freedom through passive income

Category Archives: Foreign Stocks