Sunday, May 22, 2016

Assets and cash flow diversification are essentials for a roadmap to richness

An asset is something that you can own that either makes you money or retains or appreciates in value. A liability is something that results in you owing something to someone else. You could see your lifestyle as a liability while the labor/expertise that you may provide is an asset. If the money that you can produce exceeds the cost of your lifestyle, then you become richer every day and if the situation reverses you are becoming a liability to your estate and you will get poorer by the day. It is all about your balance sheet, your income statement and don’t forget the cash flow statement. After all, as we discussed, your body may depreciate and you are not an infinite resource. Although with immortality on the horizon… who knows. J
Not all assets are created equal and not all assets perform the same and do so at the same time. Stocks of public companies are typically assets but their value may fluctuate greatly. Fluctuations are fine because they allow you to buy when cheap and sell when expensive.  The fluctuations are often called ‘volatility’ and you can measure volatility for example by using the VIX (Volatility index). At high volatility, option premiums tend to be high and so you may add to your income by selling said options. Although many fear volatility, it becomes to me increasingly clear that volatility is an investor’s friend and whether you like it or not, volatility is a fact of life. Right now, Calgary experiences volatility in another asset class:  real estate (both in value and rental income). Gold is yet another asset class and it appears to appreciate right now because of increased demand. But not everything called ‘Gold’ is gold. Many gold ETFs are just derivatives rather than holders of physical gold. It is becoming tricky when an ounce of Gold held at COMEX has 500 owners. In other words, when 500 owners want to exchange their ETF shares for ‘their’ ounce of gold only 1 in 500 will actually get it. That is why owning physical gold in a bank deposit box or even under the mattress may be a lot more desirable than a share in a Gold ETF.
Bonds generally return money, but right now after inflation your bond yield is often negative. Investors may think it is safer than volatile stocks but that is mostly their perception. Stocks right now in the U.S. are becoming less attractive – earnings seem to have peaked and a strong U.S. dollar suppresses the value of the 40-60% of net income earned by S&P companies overseas. So if earnings don’t grow, U.S. stock prices go only up because people value those earnings higher and higher. So, when expressed as a percentage of stock price, earnings yield is falling just like bond yield. Yes dividends are still raised but are they paid at larger and larger proportions out of earnings (rising payout ratio)? 
Canada experienced over the last five years flat to declining stock market performance. In fact, 2015 can be counted as an actual bear market, but now we are turning the corner and our commodity dominated stock market is one of the world’s best performing stock markets. Around 2008 all economies seemed to crash at the same time and regional diversification seemed no longer valid; instead diversification in stock performance was more by sector than by country. Now we see a more diverse performance again by country as illustrated by the divergent performance of Canadian versus U.S. markets. Will it last? Who knows – hindsight is definitely 20/20.
Overall, because of inflation and because of higher GDP (or should I say our ever improving lifestyles) our investment returns will increase over time. A lot is relative – if everyone loses money and becomes poorer, then the one who loses least is ‘richer’.  When the stock market dives and Bill Gates ‘loses’ 10% or $5 billion in the market is he poorer than any other investor in that same market?  Wealth and net worth are relative.  When Bill loses 10% and you lose 5% you got richer in relative terms than Bill. Overtime we will experience bear markets and bull markets in all kinds of asset classes. We can’t be experts in every asset class or in every publicly traded company and we cannot participate in every bull market. But general investment principals remain the same – especially ‘buy low and sell high’ or ‘cash flow is king’!
So, if dividends in financial stocks are cut, wouldn’t you be happy to have rental income? Or capital gains from gold mining stocks?  That is why diversification in different types of assets (or better asset classes) and cash flow sources is so important. You know about the continuous bickering between eastern and western Canada. Well it is not only because of population density but also about a financial and manufacturing dominated economy versus a commodity dominant economy. It is easy to say that the West should move away from a resource based economy and diversify, because we have here a lot less people (labor) and we are far away from the large consumer markets. In the East we have big consumer markets and manufacturing is nearby, how could the west compete with that?  So different styles of economies require different approaches that are dependent on the lands and the people living in it. Alberta’s governments have tried to steer the economy away from resources but after losing serious money they learned that you need more than just money to steer an economy.  Alberta, though, has moved over the decades away from resource dependence. Now 24% of our economy is from energy versus 30% in the 1980s. But to do that took lots of time and population growth as well as technological change – not government subsidies and pet projects.

Luckily, it is a lot easier for individual investors to diversify using some very simple rules. Understanding that ‘real’ physical assets are different and often a lot less volatile and less dependent on government than paper investments. I would think that it is a lot easier to take residence in a real estate property than in a REIT stock certificate. Diversification between ‘real’ assets – the ones you can touch and use – and paper assets is very important. I prefer to hold a bird in the hand over a bird in a bank which one day may go under. Diversity reduces the overall volatility of your portfolio while it allows you to benefit from the volatility within specific asset classes. It is the best of both, or better, of all worlds. In a following post I’ll compare the performance of a portfolio with changing asset allocation and I will show how asset allocation combined with position sizing matters.

Saturday, May 21, 2016

The commodities recovery is on its way; so is the boom.

Was it the China bubble that caused a worldwide expansion of commodity production and related capital overinvestment? But in the sobering aftermath of 30 years of nearly uninterrupted Chinese growth, we have been switching to more moderate requirements – for nearly 5 years now. Yet India and other emerging economies may be waiting in the wings and with improvements in the more mature economies of Europe and the U.S. demand for commodities may now be going up at a faster pace than many expect.  Peter Tertzakian, lately on BNN, pointed out that in spite of all the green thinking and fossil fuel cursing, world oil demand is now approaching 100 million barrels per day.  How much was total oil storage in the U.S. (with storage numbers distorted by imports)? Yep about 530 million barrels or… 5 days of world consumption.
In the meantime, U.S. production has dropped by close to 900,000 barrels and we’re starting to talk about 8 million barrels per day down from 9.6 million. Ohh and non-US production has declined by another 900,000 barrels per day or so and this is assuming that Ft McMurray’s heavy oil production will be mostly restored approaching 2017. That I somehow doubt. Do you really think all that insurance money will be deployed as fast as facilities and infrastructure was destroyed? Especially less economic projects will remain shut-down and insurance money will be used to pay down debt.
So, as perennial controversial Goldman Sachs states, we’re already in supply DEFICIT! Not only Ft McMurray infrastructure was destroyed during this downturn. Thousands of experienced petroleum professionals retired and may not want to come back. The moral damage of young professionals who were sent packing months after they came out of university may also make many think twice to come back rather than picking a less risky career path. Then there is the damage to the oil and gas service industry. No, it will take a while before the oil patch will regain its swagger and not just in North America. Think Venezuela, Iran damaged by 30 years of sanctions, Nigeria, Libya, Iraq, and many other places that were damaged over the last number of years. OPEC is kaput but the new oil tiger on the block is North America. Did the Saudies win by destroying OPEC? Hmmmm? Or was OPEC already gone before the price war?
So yes the best antidote to high oil prices is low prices and vice versa. So if Doha fails and oil prices go up; if the U.S. Fed talks about increasing rates (and thus a higher dollar) and you still don’t see oil prices fall it becomes pretty clear that the game has changed once again. Gold is following a similar story and I think the latest Fed talks about increasing interest rates may be not much more than bluff poker. U.S. inflation is approaching 2% and that doesn’t include the effect of near future rises in oil and gasoline prices. Next winter is nearly certain to be colder than the winter of 2015 and thus natural gas prices maybe on the increase as well. Neither do oil companies need $100-dollar oil any longer to be profitable; think closer to $50 or 60 per barrel. At $70 dollar there may be a new boom. Inflation may be closer to 3 or 4% next year. Even if the Fed interest rate would move above 2%, real interest rates would still be negative – even more so on an after-tax basis. So gold will likely keep on booming, and especially when Justin Trudeau’s Liberals and Alberta’s Notley will increase their deficits, inflation will start biting.
Then there is silver. The Gold price/Silver price ratio is near all-time highs. If gold goes up, silver will go up even faster. Also, don’t forget, as pointed out on BNN by Jaime Carrasco, that silver is often a mining by-product of copper and copper mines are being shut-in as we speak. So silver may go up in price even faster than gold.  Then there is the perpetual discussion on fiat money and government debt: many billionaires like Jim Rogers and George Soros as well as others at the infamous Sohn conference seem to love the precious metals. One billionaire claimed to have 30% of his portfolio in physical gold!

Yes, ladies and gentlemen, the commodities recovery is here and the bull is not far behind,

Tired of Average. NO MORE BS, DARN IT!


J J

I MEAN IT… eh, eh… eh

I think I placed the commas and periods correctly.

Anyway, I am getting older. Yesterday I made the 63 mark. So I am getting a bit older, but when I go to a doctor; being eye, dental, or family doctor I just get overwhelmed about all that is wrong with me.  Yes I swim 1600 m in under 45 minutes and I bike to work, to the eye doctor, to do groceries and to have coffee with friends. My BMI is close to perfect which on my FiBit watch is ‘normal’. There is ‘normal’ and then there is BAD! UNDERweight; OVERweight and OOOOBESE!  My cholesterol is 'high' but I hardly eat any red meat. 2 or 3 eggs per week, skimmed-cholesterol free- milk, fish (I love smoked salmon) and I use barrels of olive oil.
Today my eye doctor found a trace of deposits on my macula. That is age-related macular degeneration (AMD not to be confused with AMT or is that ATM?) and 2 million other Canadians are suffering from the same lot. Mine is initial-initial but guess what, there are some special vitamins to fight against it. So too for diabetes (60% of the US is expected to develop diabetes – talking about ‘normal’) and high cholesterol.  As you may remember from an earlier post, my doctor told me that I would have a 20% change of being dead within ten years unless I took all those pills. I won’t go on about the baloney of his/her statistics, I did that some posts ago.
Guess what, there are some 35 million Canadians and of those 6 million or so are over 65. If I am a very healthy old piece of meat that now is supposed to spend more than $100 per month on pills and vitamins, and that amount seems to go up exponentially with each year, I guess the average old coot spends around $250 per month on pharma! Oops that is $250 x 12 x 6 million = a measly $25 BILLION per year – just in Canada!  Then they say that seniors don’t contribute significantly to this economy.  Oh yeah? Last month Baby boomers were a significant proportion of 2nd home, recreational home or retirement home buyers in Canmore.  Wonder how that is in Whistler and in areas of milder climates?     
Yes, invest in the drug industry and I don’t mean the recreational one and … in senior housing! What about empty nester luxury condos? Yes, the millennium generation tries to push the old fogies out of the workplace and make them feel obsolete.  The problem is that they don’t know what they don’t know and old fogies have forgotten more than the millenniums have learned during their entire life!  It is frustrating but reality is that today’s workplace does not respect seniority and to be honest, it is difficult to ‘report’ to a manager of the same age as your kids. Especially when the old guy is a technical specialist and the ‘manager’ is in his position because of his flair, interpersonal skills or he worked at the place since he/she came out of school but mostly NOT because of his/her technical skills. The worry of corporate ratios prescribed by analysts representing the public trading houses and other investment institutions is reaching levels of hysteria not seen before. Like with any stock market excess, ratios are important especially when involving corporate debt, but while managements are scrambling to meet quarterly earnings expectations and consensus ratios expressed by stock market gurus they focus more on stock price performance than on running a long term business with environmental; technical and resource conservation sound practices. Yes, they may want to, but stock market hysteria makes this entirely impossible.  Today’s balance sheet darling is declared tomorrow as being too conservative and not growth oriented. How do you expect these businesses to perform?
We thought that computers would help to become more customer oriented and products would be made more custom tailored. In reality we see the opposite. We’re oppressed by averages and other ratios whether it is health related (I better be ‘normal’ BMI!) or whether it is school grades (everyone has to be in the top 10% of the normal distribution curve - boy, do I hate Jack Welch!) or whether it is corporate averages. Anything that deviates needs to be bankrupt or to be put on medicine.  And it doesn’t stop there. Look at PC (political correctness); politicians and their pols. Everything is based on averages; average perceptions; average ideologies, average… religions??  You get my drift.  If one country has high debt, then the neighbor needs it too. Justin Trudeau is the champion of the average (or better mediocrity) and if the average man doesn’t get his way he manhandles the opposition!  That is how a millennium (is he that young?) treats old and grizzled NDPers like Mulcair (boy was Tom shouting).  Not that I like that slippery eel!  But really, to justify increasing our deficit Justin compares our ratios to U.S. debt - per capita GDP… boy if the Jones-es can do it, we should!  And Alberta’s Notley is there right along with Justin. The recent tax grabs by government from carbon taxes to income taxes are just beyond believe!
Anyway, everyday we’re controlled by fears imposed upon us by our neighbors who resent that you’re richer than the average; who wants you to think like them – just average, which then is referred to as politically correct.  And if you are not with the mainstream… boy oh boy!  You’re pushed into line like cattle by security guards at the airport to fight terrorism; you lose your privacy because of terrorism or… even worse because if you don’t supply your data to industry you don’t get ‘their’ software and you will not able to use the products you bought.  The latest example is Microsoft’s Windows 10 – it will be subscription based and if your equipment is not new enough it will no longer work and if it is new enough the software is buggy! Isn’t it amazing how many apps require access to your cameras and to your family photographs and to the GPS on your phone?  Are we truly living in a free society or are we under continuous threats to be pushed and shoved into mainstream so that we are better controlled by the wealth management companies; by car dealerships and leasing companies; by big pharma and our doctors who receive perks for pushing yet another pill into us; by our employers who threaten us continuously with layoffs and consequently the loss of our family home or worse by government.  Haven’t you noticed how everyone else is an expert and you are just an idiot?

It is time to stand up. It is time to say along with James Altucher,'I chose myself'!  It is time to stand-up for yourself and not to be threatened and cajoled by the unthinking herds that politely votes for the same politicians and bends for the dictatorship of technology and industry. It is time to see that if you properly plan, you can be telling your employer to screw himself (or herself or itself to be ‘PC’ J). It is time to no longer be bullied by statisticians who apparently can tell you what you think before you even think of it. It is of course all bullshit and I would love hearing you shout: No more BS, I am my own woman, man or it!

I know, I am ranting... yet?