Sunday, April 19, 2015

Update on oil

Oil has broken out of its bottoming trading pattern. It is now trading above its past resistance level of $53 or so. In fact, it rocketed through that resistance level and now we’re taking about $60.00 oil soon!
But don’t throw all caution into to wind yet. Refineries are past their maintenance season and preparing for June’s driving season by producing loads of gasoline.  In the meantime, North American shale oil production shows signs of falling off. But don’t forget that the short sellers of oil and their bearish option trading cousins were caught with their pants down when options expired last Friday. There was a short squeeze on April 17.  Also, we still don’t know how much of the oil price is manipulated in an economic war with Russia.   Low energy prices and natural gas exports from the U.S. have not been good for Mr. Putin and collaterally damaged Venezuela.
Still, it looks like we have turned a corner and as such, the alarming claims of a crashing Alberta Economy may be somewhat pre-mature. Soup is rarely eaten as hot as it is being served!  The ‘safe’ time to invest is not necessarily at the bottom of a market but after a significant recovery. Yes, you may lose out on a quick double but the risk is catching a falling knife. 
Yet, my gut tells me that the worst is over for the energy markets.  Unfortunately, it is the U.S. that controls the North American energy exports while Alberta and B.C. and the Northern Territorial markets have been held hostage by well-meaning, but unscrupulously manipulated, activists. ‘Canadians’ never seem to learn!

 

Silver Bullet

Precious metals, especially silver are out of favor, or better are deeply buried in the dumpster below layers and layers of garbage.  Money, as expressed in short and long term interest is cheap. "You have an idea? Here take out a loan at near zero interest and repay me in 10 or so years!  Yeah you could go broke but I can’t earn fixed income any way – cash today is worthless."  Gold and silver are often considered to be mere currencies although not burdened by debt issued by fiat currency printing nations. Thus right now many consider it worthless as well.  Gold, who wants gold? Warren Buffett is known to have stated that gold is not productive and does not throw off a predictable stream of future cash flow. Discounted at 10% it is worthless!  Well maybe not in Europe where we have negative interest rates, but elsewhere….

At least silver can make you some money as an ingredient for some industrial products. But a lot of that has been lost since the obsolescence of photographic film. Remember that quaint material we used ages ago, long before the digital camera, containing images of you as a very small kid, or of your grandparents?  No?  Your relatives probably scanned those some years ago and their files are now present everywhere in the ‘cloud’. 
These days we can barely keep pace with all the new tech such as immunotherapy for cancer and 3D printing of objects.  O yeah, there is now a new angle to 3D printing.  3D printing ‘ink’ can now contain conductive materials patterned like microchips and memory chips. Much smaller though (they're called 'chiplets'), but with significant computing power and even memory storage capacity. Chiplets can now be embedded in any 3D printed object.  Yes, they are an essential ingredient of the ‘IoT’ or Internet of things and the even more live altering Industrial Internet. The possibilities are endless. Cisco’s John Chambers predicts the IoT to be a $19 trillion dollar market.  Guess what conductive material is used in the new revolutionary 3D printing ink?  Did you guess it by now?   Yes it is silver.
So now, in addition to an ersatz currency, Silver may have found a new massive industrial application that will be used in goods ranging from intelligent underwear to your fridge and your intelligent solar panel!  This stuff may soon go up like a rocket! Or better like a silver bullet!
BTW The term 'chiplets' is so new, my spell checker marks it as an error. J
 

Saturday, April 4, 2015

Investing should be boring

Trading stocks or having a high turnover of your stocks in your portfolio is expensive and reduces your overall return over the long term. You may have read about all those high MERs (Management Expense Ratio) and commissions for mutual funds which cause them to underperform the markets by nearly 50% over the long term. The example below compares the long term stock market return (6% plus 4% inflation) versus that of a mutual fund that performs as well as the market (87% under performs) minus MER and commissions estimated at 2.5% per year.  Well frequently buying and selling stocks in your portfolio is not a lot better!


What would your commissions be if you turned over your portfolio at least once per year? With a full service brokerage you’re charged 2-3% per transaction so a buy and sell costs you 6%.  Now add to that the taxes you have to pay every time you sell a trade. 

Holding on to a stock means you don’t pay capital gains taxes until you sell. This amounts to an interest free loan from the government. Say you held on to a stock that returns 10% per year in appreciation, after 7 years your investment has doubled, i.e. if you sold your investment half of your capital gains would be taxed at close to 50%. 

 If your original investment was $1000 then at 7 years it would be worth $2000. If you sell then $250 in capital gains taxes would be due (assuming a marginal tax rate of 50%)  plus 3% commission equals $60. When your $1690 would be reinvested at 10% ROI, then another 7 years later (i.e. in year 14) your $1690 minus 3% purchase commission would be worth $3279 minus capital gains taxes if you sold or $3279-$409.0=$2869.1
If you didn’t sell after the first seven years, then another 7 years later (i.e. in year 14) your investment would be worth $4000 minus capital gains taxes of $750 = $3250. Thus the government’s ‘interest free loan’ added nearly $381 to your profits or close to 38% of your initial investment and 17% of your total profits. On an after tax basis, via your discount broker, the picture would have been slightly prettier.

All Kinds of risk was posted on this blog in June 2010 and it shows some eye-opening stats on buying stocks for the short term versus long term investing. For your convenience, here is the key chart:
Commissions and taxes related to frequent buying and selling of stocks or investing in high MER mutual funds eat up a large portion of your future investment returns. So buy stock market ETFs or good companies that provide you good returns over many, many years. That may sound like a boring strategy but it makes you money. If you want excitement go play in a casino or work in the oil industry. J