About a week ago I wrote in my blog “What to do when the sun comes up in the West”. Essentially, you bail, put your money is cash and sit tight. In the last week, for reasons that I have not been able to understand, the commodity markets have collapsed. So intense has this collapse been that I do not feel as if I should be directing anyone with regards to investing and/or finances at this point in time. For this reason, I am suspending entries into my blog and reducing my own corporate investing to more modest pieces until I see some level of stability. I am sincerely sorry, but I feel a great burden for anyone that I am trying to move ahead financially. I am uncertain whether I can actually see clear enough to help at this point in time.
Prov. 8:17 -20 I love them that love me; and those that seek me early shall find me.
Riches and honour are with me; yea, durable riches and righteousness.
My fruit is better than gold, yea, than fine gold; and my revenue than choice silver.
I lead in the way of righteousness, in the midst of the paths of judgment:
Wednesday, May 4, 2011
Wednesday, April 27, 2011
Laying some ground work on Options trading
I make a lot of assumptions about one's knowledge of trading, and sometimes it is helpful to get a primer. I have found this program (FREE) to be helpful. Either download it to an IPOD or MP3 player, or you can play it on line. There are a total of 100 episodes (as of writing this). You don't have to listen to all of them, but they sure can help explain certain techniques I use. I don't use all of this...and in fact, you may find only one or two that you like. If so, then enjoy. Use them, and know them cold. It's your money.
http://www.podbean.com/podcast-detail?pid=17574
http://www.podbean.com/podcast-detail?pid=17574
Monday, April 25, 2011
When the sun comes up in the West
There is nothing in the world like enjoying a nice cup of coffee and watching the sun coming up over the ridge of the Western horizon…until you say. Hold it! The sun doesn’t come up in the west!
Such was my day today. I woke as I do early and read through some articles about the state of the US economy, trade, dollar values etc.
http://news.xinhuanet.com/english2010/china/2011-04/23/c_13842843.htm
I was particularly struck by an article that talked about the amount of US dollar debt China has purchased and their desire to trim it down by 2/3 and add diversification to their monetary portfolio. I was thinking about this as I poured myself a cup of coffee.
If China did this suddenly (or if they were perceived to do this suddenly) it could drop the perceived value of the US dollar. Could it (in theory) crash the dollar? It seemed possible, although I doubted that China would take such an action at least very quickly…but. I kept thinking.
I am sitting on cash (sure would be nice to have some hard assets. Silver had been moving up and I checked the pre-market orders lots of buys (very few sells) which meant should see a surge at the opening bell. I did what I don’t like doing (put in an order as soon as the market opens at “the best price I could get”). This type of trade is called a Market order. I tend to like buying “limit orders”, which means only buying if something goes on sale. However, silver in particular kept going up and never filling my market order, so I thought I would try a market order instead. Not a good idea.
Market opened with a surge. I bought 400 units of the trust SLV at a price of 47.00. I had a cup of coffee with my wife and breakfast and then decided to see what happened. Wow, didn’t see that coming. Silver unexpectedly tumbled. I was down $200 and I only had the unit’s a few minutes. I thought…well, that can happen. My general direction is up, I may have to keep this holding longer before I pull a profit. It took another dramatic tumble. Now I am backwards almost $300 dollars, I still hadn’t waited an hour. Wow, if I was working a job making -$300/hour, I couldn’t afford that job long.
I chose a stop loss. I bailed at a loss of almost $300. I looked at my gold which was now losing money for the day (still profitable from when I bought it), so I bailed (took my profits, and ran). I wish I could say I didn’t enter Silver again, but it levelled (sometimes called a “sucker rally”) I bought again, and took another $80 loss. I had a order on oil if it ever dropped low enough, so it bought and kept dropping. I decided I didn’t want to risk this one on a day like today. I sold (actually made just a couple dollars there). In a short time, I was all in cash. I had to accept a total loss for the day of $285.12. Not my favourite situation.
Are there lessons to learn? Yes. First, if you buy anything for investments you need both a point where you are leaving (taking your profits and running) and you need a stop loss (a point where you say…hey, that’s all the pain I am willing to take). Any trading without those is sloppy at best and will force one to pay some “stupid tax”.
Next, flexibility is a wonderful thing. Today I dumped everything and am sitting in cash. If the world is crazy I don’t want to suffer along. Look for a morning when the sun comes up in the East and sets in the West. Not a day like today. If I had some holding with a broker, I would likely find him/her unavailable on a day like today. It’s Easter Monday, the banks and brokerage houses I worked for were closed. Most people perceive the markets as closed here in Canada. Also, unless I was watching this I would have dropped by and found out I took a huge loss with no real way to get out.
Mutual funds don’t trade moment by moment. If you want to sell, you have to put in the trade and the sale happens at the end of a day. This would make sure that you took the losses that happened that day. Not very flexible.
Any rate, I am not telling this to show how smart I am. In fact, the opposite is more true, but I hope you might be able to learn from my mistakes.
We are stewards of these resources, we need to do the best we can with them.
Monday, April 18, 2011
Inflation not a problem?
This video from Jim Grant gives a "real sense" of why we care about inflation and why we are leaning on hard assets, as opposed to fixed income.
General principles
More general principles:
I figured I can write what I am doing, but sometimes it is helpful to lay out some foundational considerations so everyone understands the basic why. Hopefully, if this is the case, then one can see the how more clearly.
Hard Assets:
Most of the trading I have done recently has been in three area Gold, Oil and Silver. Just to get the visual on this, Gold is selling for 1405.00 and ounce. Silver is selling for 41.84 an ounce, and Oil is selling for WTI at 108.30 per barrel.
The first question might be asked…why these three?
I am not an expert in any one of these industries and in fact I have found those who call themselves “experts” to be unreliable. Some of the work for companies who’s job is to sell you their product. Some are just optimistic and are part of a circle of people who continue to affirm what they already believe. Some in the industry call this “drinking your own bath water“.
The reasons I choose these three is they are the most watched, tend to move the most and can be easily followed. I also have reasons why I think a direction one way or another is likely. In the end, that’s about all I really have to go by.
The third reason I choose these over company ownership (but I do own companies all the time), is that these materials don’t have a human element. If I own XYZ company, they have a president, and usually many levels of officers. They have products, and industries. Their product could be proven to have a fatal design flaw. Someone in the executive could be lying about the company. They could loose everything they have in a costly lawsuit. There are so many factors which come into play.
Materials, don’t have any of those items. There can be (and always are) external influencers that effect the price, but it’s not the company itself. This doesn’t take out all the risk, but it does limit some possible risks.
Do I actually have Gold, Oil and Silver sitting around the house?
No, not anymore then anyone else. Yet, I will trade 50 to 100 or more barrels of oil regularly. I trade Gold in 1/10 of an ounce bites (and usually trade 5-30k) every time. Silver I trade by the ounce, generally 100 to 400oz at a time. However, I have no interest in finding secure storage for chunks of gold and silver, of shipping barrels of oil. There are people who do, but since I am simply using this for income flow, I have no interest in the underlying asset. So, how do I do this?
Exchange Traded funds (ETF). These are trust units which mirror the value of the underlying asset. They are very cheap to own, and can be traded every week day like a stock. Most specifically, I trade the following codes.
GLD- an ETF for the price of Gold 1/10 oz
SLV - an ETF for the price of silver 1 oz.
USL - an ETF for US price of oil in ½ barrel units.
With respect to these holding you need some system to watch them. I have several. Some I pay for and some I do not. Just for the sake of argument, let’s use Yahoo. If you go to Yahoo.ca on the left side of the page you will find a tab that says “finance”. If you click on that you will enter a sub-site, which provides a lot of good information. If you have a yahoo e-mail account, they will even remember which holdings you tend to watch and will post those every time you log in.
http://ca.finance.yahoo.com/
It pays to get familiar with this site, of which ever site you choose. The tool I use most often with regards to this site is the charts. So, let’s find the chart for GLD.
Under “get quote” (if you are doing this the first time) type GLD, and you should get to a cover page for the Standard and poor’s ETF on Gold in 1/10 units.
http://ca.finance.yahoo.com/q?s=GLD
The chart I am referring to is on the right side of the page. I think mine shows a 1 day return on yesterday’s close. But I can set it to show what it’s been doing for today, 1 week, one month, three months, 6 months, etc. The first thing I am looking for is what direction the chart is going. I just want to know in the most general sense is this asset going up, down or no where. If you load a 1 year number (back up enough to see) you will see Gold is certainly going up. This won’t always be the case, but it is right now.
If a holding is going up we can but it and sell it (hopefully at a higher price). If it is going down (we can lock in a sell price and then sell the contract to people who have the gold and want to sell at a better deal…more advanced, let’s not worry about it for now.). If it’s going no where (flat), I want to look closely (day by day basis or even hour by hour). If it goes up and down a lot everyday then there is a possibility to get in and out in a single day (or a couple days). That would be my favourite situation, but to be honest it is tough to find. Yet, over this last year I have found times where that was the case in all three of my favourite indexes.
So, just looking at gold, I find it’s opened up for the day. My hope is never to buy things while they are high. I am trying to get a deal and then sell as it moves up. In my case, I wish I was in before the positive move, but life is like that. So, I look back over the chart and try to find a point where the price was down (a dip). Often times, a moving asset will hit those old lows and bounce. In fact, one of the thing I have noticed is that these three investments generally “miss” the old dip, but come close, so I set up my computer to buy if we get “close” to that old low. A purist would set the price AT the old level, but like I said my experience is I hate being close and missing the new dip. So, if I am looking to make a trade on Gold, I would say the bottom of the last dip was 141.61 which was hit on April 12. One week ago. To be honest, I am not confident it will hit that mark again, so I am putting a Buy in if the price of gold 144.50 (Price it was at late Friday). There is some flexibility, but if I had bought it on Friday I would have been up over $100 in the first hour of trading. I of course wasn’t, but that is what I am thinking as I am reading the charts. If I see Gold suddenly drop, I might cancel my order and see where it levels off. If it goes no where near my price, then I will have to look at the price again and see if I can make some money.
The principle is looking for a deal, and then taking a small move (I generally use $200) and then trying to look for the next entry point. At some point I might find that these three are not looking as well, and I will pick other items, but I don’t lose money when I have cash (in a general sense). I also try not to fall in love with my own ideas. If something doesn’t work and I am SURE it should…give it up. The market is always right. I am just looking at ways to move in and out and make some cash in the process.
Although I think I have said this before, but I am using Gold and Silver because I do not trust the world economies. I think the value of many world currencies is going down. Many people seem to think the same which is why we see Gold and silver moving up. People want these to protect against a devaluing dollar.
Oil, is going up (I think) because the mid-east is going crazy. As long as oil shipment doesn’t appear safe, it is expected that the price of oil will continue to go up. There is a point where people will simply quit using oil, but we have yet to see that. As long as I am telling my own conspiracy theories…I think large oil companies are helping create volatility in the oil market. I also see a target (sometime in the future of $200 or maybe even $300 a barrel for oil.
So what happened to my holdings as of the close last week?
As expected Silver sold. This made me a profit but in the option and in the selling of the silver. That was a win.
USL (oil) did not close about the strike point so the option expired worthless. This is a fancy way of saying I got someone to pay me to hold onto my own stock and wait for the price to move up. So, my holding (oil) went down and I still made money. (just so you know, oil is down further today, so I may put in a trade if I see the price level off). It is suddenly becoming a “good deal”, even better then when I bought it last). I will keep you posted.
I have one company CVX (Chevron) which I sold an option on. I chose this simply because I had too much money in cash. I made money on the option, but the stock itself is down from when I bought it, so I will hold onto it until it becomes profitable. If I get to about mid April (God forbid) and I am still holding this stock I will sell another option on it and use the same trick I did the month before.
So, it’s not pretty, but that is the way things rolled for me today.
I figured I can write what I am doing, but sometimes it is helpful to lay out some foundational considerations so everyone understands the basic why. Hopefully, if this is the case, then one can see the how more clearly.
Hard Assets:
Most of the trading I have done recently has been in three area Gold, Oil and Silver. Just to get the visual on this, Gold is selling for 1405.00 and ounce. Silver is selling for 41.84 an ounce, and Oil is selling for WTI at 108.30 per barrel.
The first question might be asked…why these three?
I am not an expert in any one of these industries and in fact I have found those who call themselves “experts” to be unreliable. Some of the work for companies who’s job is to sell you their product. Some are just optimistic and are part of a circle of people who continue to affirm what they already believe. Some in the industry call this “drinking your own bath water“.
The reasons I choose these three is they are the most watched, tend to move the most and can be easily followed. I also have reasons why I think a direction one way or another is likely. In the end, that’s about all I really have to go by.
The third reason I choose these over company ownership (but I do own companies all the time), is that these materials don’t have a human element. If I own XYZ company, they have a president, and usually many levels of officers. They have products, and industries. Their product could be proven to have a fatal design flaw. Someone in the executive could be lying about the company. They could loose everything they have in a costly lawsuit. There are so many factors which come into play.
Materials, don’t have any of those items. There can be (and always are) external influencers that effect the price, but it’s not the company itself. This doesn’t take out all the risk, but it does limit some possible risks.
Do I actually have Gold, Oil and Silver sitting around the house?
No, not anymore then anyone else. Yet, I will trade 50 to 100 or more barrels of oil regularly. I trade Gold in 1/10 of an ounce bites (and usually trade 5-30k) every time. Silver I trade by the ounce, generally 100 to 400oz at a time. However, I have no interest in finding secure storage for chunks of gold and silver, of shipping barrels of oil. There are people who do, but since I am simply using this for income flow, I have no interest in the underlying asset. So, how do I do this?
Exchange Traded funds (ETF). These are trust units which mirror the value of the underlying asset. They are very cheap to own, and can be traded every week day like a stock. Most specifically, I trade the following codes.
GLD- an ETF for the price of Gold 1/10 oz
SLV - an ETF for the price of silver 1 oz.
USL - an ETF for US price of oil in ½ barrel units.
With respect to these holding you need some system to watch them. I have several. Some I pay for and some I do not. Just for the sake of argument, let’s use Yahoo. If you go to Yahoo.ca on the left side of the page you will find a tab that says “finance”. If you click on that you will enter a sub-site, which provides a lot of good information. If you have a yahoo e-mail account, they will even remember which holdings you tend to watch and will post those every time you log in.
http://ca.finance.yahoo.com/
It pays to get familiar with this site, of which ever site you choose. The tool I use most often with regards to this site is the charts. So, let’s find the chart for GLD.
Under “get quote” (if you are doing this the first time) type GLD, and you should get to a cover page for the Standard and poor’s ETF on Gold in 1/10 units.
http://ca.finance.yahoo.com/q?s=GLD
The chart I am referring to is on the right side of the page. I think mine shows a 1 day return on yesterday’s close. But I can set it to show what it’s been doing for today, 1 week, one month, three months, 6 months, etc. The first thing I am looking for is what direction the chart is going. I just want to know in the most general sense is this asset going up, down or no where. If you load a 1 year number (back up enough to see) you will see Gold is certainly going up. This won’t always be the case, but it is right now.
If a holding is going up we can but it and sell it (hopefully at a higher price). If it is going down (we can lock in a sell price and then sell the contract to people who have the gold and want to sell at a better deal…more advanced, let’s not worry about it for now.). If it’s going no where (flat), I want to look closely (day by day basis or even hour by hour). If it goes up and down a lot everyday then there is a possibility to get in and out in a single day (or a couple days). That would be my favourite situation, but to be honest it is tough to find. Yet, over this last year I have found times where that was the case in all three of my favourite indexes.
So, just looking at gold, I find it’s opened up for the day. My hope is never to buy things while they are high. I am trying to get a deal and then sell as it moves up. In my case, I wish I was in before the positive move, but life is like that. So, I look back over the chart and try to find a point where the price was down (a dip). Often times, a moving asset will hit those old lows and bounce. In fact, one of the thing I have noticed is that these three investments generally “miss” the old dip, but come close, so I set up my computer to buy if we get “close” to that old low. A purist would set the price AT the old level, but like I said my experience is I hate being close and missing the new dip. So, if I am looking to make a trade on Gold, I would say the bottom of the last dip was 141.61 which was hit on April 12. One week ago. To be honest, I am not confident it will hit that mark again, so I am putting a Buy in if the price of gold 144.50 (Price it was at late Friday). There is some flexibility, but if I had bought it on Friday I would have been up over $100 in the first hour of trading. I of course wasn’t, but that is what I am thinking as I am reading the charts. If I see Gold suddenly drop, I might cancel my order and see where it levels off. If it goes no where near my price, then I will have to look at the price again and see if I can make some money.
The principle is looking for a deal, and then taking a small move (I generally use $200) and then trying to look for the next entry point. At some point I might find that these three are not looking as well, and I will pick other items, but I don’t lose money when I have cash (in a general sense). I also try not to fall in love with my own ideas. If something doesn’t work and I am SURE it should…give it up. The market is always right. I am just looking at ways to move in and out and make some cash in the process.
Although I think I have said this before, but I am using Gold and Silver because I do not trust the world economies. I think the value of many world currencies is going down. Many people seem to think the same which is why we see Gold and silver moving up. People want these to protect against a devaluing dollar.
Oil, is going up (I think) because the mid-east is going crazy. As long as oil shipment doesn’t appear safe, it is expected that the price of oil will continue to go up. There is a point where people will simply quit using oil, but we have yet to see that. As long as I am telling my own conspiracy theories…I think large oil companies are helping create volatility in the oil market. I also see a target (sometime in the future of $200 or maybe even $300 a barrel for oil.
So what happened to my holdings as of the close last week?
As expected Silver sold. This made me a profit but in the option and in the selling of the silver. That was a win.
USL (oil) did not close about the strike point so the option expired worthless. This is a fancy way of saying I got someone to pay me to hold onto my own stock and wait for the price to move up. So, my holding (oil) went down and I still made money. (just so you know, oil is down further today, so I may put in a trade if I see the price level off). It is suddenly becoming a “good deal”, even better then when I bought it last). I will keep you posted.
I have one company CVX (Chevron) which I sold an option on. I chose this simply because I had too much money in cash. I made money on the option, but the stock itself is down from when I bought it, so I will hold onto it until it becomes profitable. If I get to about mid April (God forbid) and I am still holding this stock I will sell another option on it and use the same trick I did the month before.
So, it’s not pretty, but that is the way things rolled for me today.
Friday, April 15, 2011
Excellent Article by Kathleen Peddicord
5 Places to Retire for Under $500 per Month
Kathleen Peddicord, On Monday April 11, 2011, 4:07 pm EDT
Housing is likely to be one of your biggest retirement expenses. One way to approach your search for the ideal overseas retirement haven is to focus on retire-overseas choices where housing is cheap.
It's important to note that, for these bargain rents, you won't be getting a palatial or luxurious abode. I'm limiting my picks to places where you could rent something modest and cozy but reasonably outfitted from a North American's perspective. Here are five places where you could rent for as little as $500 per month.
Leon, Nicaragua. Nicaragua has suffered serious bad press as a result of its troubled past and current President. Those unfortunate realities aside, this beautiful land of lakes and volcanoes has a great deal to offer the would-be retiree, including a new program of special benefits for resident retirees. There is also a growing and welcoming community of expats from around the world, top-notch health care in Managua thanks to the international-standard Vivan Pellas Hospital Metropolitano, and bargain-priced rentals.
Leon is the second of this country's two colonial cities, and generally less developed and recognized than its sister city, Granada. In many ways, Leon is preferable. It's a university town with museums and theater that sits less than a half-hour from the coast. Because it's been largely ignored until recently, it's also a more affordable place to rent than higher-profile Granada. You could rent a two- or three-bedroom colonial house here for as little as $500 or $600 per month.
Medellin, Colombia. The downside to Leon is the climate. Mornings and evenings can be pleasant, but midday temperatures are often brutal. If that bothers you, consider the mountain city of Medellin instead. This pretty city built almost entirely of red brick boasts a spring-like climate year-round. Like Leon, Medellin is an emerging retirement haven, meaning the existing expat community is small but growing and the costs of living and of renting are temptingly low. One friend is renting a small studio in a non-central neighborhood for the equivalent of $210 per month. You can rent a two-bedroom apartment in a new building at a central address for $700 or $800 per month.
Las Tablas, Panama. My top recommendation for a beachfront retirement where the cost of renting is low enough to accommodate almost anyone's budget is Las Tablas, a city on the Pacific coast of Panama's Azuero Peninsula. Panama has first-class and affordable medical care and facilities, a pensionado program of special benefits for foreign retirees, and well-established expat communities. The city also has a developed infrastructure, many user-friendly options for establishing foreign residency, and can be a tax-haven for those wishing to minimize their taxes.
Not all of Panama qualifies as bargain-priced. As this country has become increasingly favored by retirees and investors, the costs of both living and of real estate have been rising, particularly in discovered areas such as Panama City. But Panama offers a number of appealing lifestyle possibilities beyond its capital city, including Las Tablas. The downside to Las Tablas is its distance from Panama City. It's about a four-hour drive away. However, the cost of living can be half that of Panama City and you can rent a small house within walking distance of the beach for $300 or $400 per month.
Chiang Mai, Thailand. I know of a single American man who lives in Chiang Mai on $200 a month, with half that going for rent. He gets around on a bicycle and eats at low-cost noodle stalls or for free when a temple offers lunch. He makes a sport of spending as little as possible. I also know a Thai American woman who bought an apartment in a small town 15 kilometers from Chiang Mai. She manages on $600 a month from Social Security and, as she is Thai and over 60, she enjoys free government health care. It wouldn't cost you very much more to live and rent in Chiang Mai. House and apartment rentals in Chiang Mai can vary dramatically, from perhaps $150 per month for a small home and garden in the country to $400 or $500 monthly for a larger, newer place in town.
Languedoc-Roussillon, France. If you're willing to look beyond Paris, the southwest of this country can be highly affordable. Cessenon-sur-Orb, in the Languedoc-Roussillon region of southwestern France, is colorful, eclectic, and very open to retirees. The village dates from prehistoric times, but the feel is medieval, with the church dominating the center and the tower of Le Donjon looking down from above.
Here in this quintessentially French country corner, you'll find many expats of several nationalities. They've sought out this unsung region because it offers everything you need for a comfortable life, yet boasts a small, charming, typically French village atmosphere, with centuries of history and lots to do and see. As a result, this town is growing and attracting both more French people and expats. Perhaps the most appealing part is that the cost of renting in this picture-postcard corner of France can be modest, certainly relative to Continental Europe in general. A monthly rental of 400 to 600 euro is realistic.
Kathleen Peddicord is the founder of the Live and Invest Overseas publishing group. With more than 25 years experience covering this beat, Kathleen reports daily on current opportunities for living, retiring, and investing overseas in her free e-letter. Her book, How To Retire Overseas--Everything You Need To Know To Live Well Abroad For Less, was recently released by Penguin Books.
Kathleen Peddicord, On Monday April 11, 2011, 4:07 pm EDT
Housing is likely to be one of your biggest retirement expenses. One way to approach your search for the ideal overseas retirement haven is to focus on retire-overseas choices where housing is cheap.
It's important to note that, for these bargain rents, you won't be getting a palatial or luxurious abode. I'm limiting my picks to places where you could rent something modest and cozy but reasonably outfitted from a North American's perspective. Here are five places where you could rent for as little as $500 per month.
Leon, Nicaragua. Nicaragua has suffered serious bad press as a result of its troubled past and current President. Those unfortunate realities aside, this beautiful land of lakes and volcanoes has a great deal to offer the would-be retiree, including a new program of special benefits for resident retirees. There is also a growing and welcoming community of expats from around the world, top-notch health care in Managua thanks to the international-standard Vivan Pellas Hospital Metropolitano, and bargain-priced rentals.
Leon is the second of this country's two colonial cities, and generally less developed and recognized than its sister city, Granada. In many ways, Leon is preferable. It's a university town with museums and theater that sits less than a half-hour from the coast. Because it's been largely ignored until recently, it's also a more affordable place to rent than higher-profile Granada. You could rent a two- or three-bedroom colonial house here for as little as $500 or $600 per month.
Medellin, Colombia. The downside to Leon is the climate. Mornings and evenings can be pleasant, but midday temperatures are often brutal. If that bothers you, consider the mountain city of Medellin instead. This pretty city built almost entirely of red brick boasts a spring-like climate year-round. Like Leon, Medellin is an emerging retirement haven, meaning the existing expat community is small but growing and the costs of living and of renting are temptingly low. One friend is renting a small studio in a non-central neighborhood for the equivalent of $210 per month. You can rent a two-bedroom apartment in a new building at a central address for $700 or $800 per month.
Las Tablas, Panama. My top recommendation for a beachfront retirement where the cost of renting is low enough to accommodate almost anyone's budget is Las Tablas, a city on the Pacific coast of Panama's Azuero Peninsula. Panama has first-class and affordable medical care and facilities, a pensionado program of special benefits for foreign retirees, and well-established expat communities. The city also has a developed infrastructure, many user-friendly options for establishing foreign residency, and can be a tax-haven for those wishing to minimize their taxes.
Not all of Panama qualifies as bargain-priced. As this country has become increasingly favored by retirees and investors, the costs of both living and of real estate have been rising, particularly in discovered areas such as Panama City. But Panama offers a number of appealing lifestyle possibilities beyond its capital city, including Las Tablas. The downside to Las Tablas is its distance from Panama City. It's about a four-hour drive away. However, the cost of living can be half that of Panama City and you can rent a small house within walking distance of the beach for $300 or $400 per month.
Chiang Mai, Thailand. I know of a single American man who lives in Chiang Mai on $200 a month, with half that going for rent. He gets around on a bicycle and eats at low-cost noodle stalls or for free when a temple offers lunch. He makes a sport of spending as little as possible. I also know a Thai American woman who bought an apartment in a small town 15 kilometers from Chiang Mai. She manages on $600 a month from Social Security and, as she is Thai and over 60, she enjoys free government health care. It wouldn't cost you very much more to live and rent in Chiang Mai. House and apartment rentals in Chiang Mai can vary dramatically, from perhaps $150 per month for a small home and garden in the country to $400 or $500 monthly for a larger, newer place in town.
Languedoc-Roussillon, France. If you're willing to look beyond Paris, the southwest of this country can be highly affordable. Cessenon-sur-Orb, in the Languedoc-Roussillon region of southwestern France, is colorful, eclectic, and very open to retirees. The village dates from prehistoric times, but the feel is medieval, with the church dominating the center and the tower of Le Donjon looking down from above.
Here in this quintessentially French country corner, you'll find many expats of several nationalities. They've sought out this unsung region because it offers everything you need for a comfortable life, yet boasts a small, charming, typically French village atmosphere, with centuries of history and lots to do and see. As a result, this town is growing and attracting both more French people and expats. Perhaps the most appealing part is that the cost of renting in this picture-postcard corner of France can be modest, certainly relative to Continental Europe in general. A monthly rental of 400 to 600 euro is realistic.
Kathleen Peddicord is the founder of the Live and Invest Overseas publishing group. With more than 25 years experience covering this beat, Kathleen reports daily on current opportunities for living, retiring, and investing overseas in her free e-letter. Her book, How To Retire Overseas--Everything You Need To Know To Live Well Abroad For Less, was recently released by Penguin Books.
Fresh Start
In the last couple months:
I have been stunned by the level of interest in what I have been doing financially. In fact, I am a bit embarrassed by the level of interest. So, I am dusting off this blog again and setting up the general instructions for those who want to follow what I do.
A few disclaimers (sort of). Normally, I am very careful. I don’t like recommending anything. The reason is two-fold. On the one hand, it is lousy to say I am looking to buy something and then the next day you find reasons to believe it’s a dog. That happens. It looks bad on me. But, more importantly, my second is that fear someone might take an action and then find out it was a poor choice. However, I can’t see a way to lay this out without using real life examples. Please note: when I write that down, I am telling what I am looking at and why. Things may change. If the circumstances change substantially, then play with caution. Sometimes, the circumstances even get better, if so that’s great. If I say XYZ company looks like a deal at $49 and then it falls to $48...simply put, that’s an even better deal (unless something substantial has changed in the company. I will explain more about this later.
Second, I can’t be held legally responsible for a recommendation. My blog was based on “coffee chat”, the idea that happens all over the world where one guy says, they are buying oil and another guy says they are thinking about buying Research in Motion (RIM). No person attacks someone for what they were doing and if it’s helpful another person might use they “free tip”. I have no system to sell. I have no book to write. I make not a dime out of anything I am putting forward here. I have worked in the past as a broker and financial planner and am aware that certain recommendations may not match one’s level of risk, experience, tax considerations, and income needs.
So, here goes:
Back when I was in grade 5, I used to love watching illusionists. They would do cool slight of hand tricks, and I would stand amazed. In fact, as the years went on I would drop by local magic shops, and buy little pocket tricks. Each trick would have some sort of “gimmick”, a magnet, a lever, a hidden switch, a lead weight or something which would make the action lead to what would not be the normal result. If I practiced the “system”, I could make the flow create the illusion. It was fun. It’s still fun today.
However, as time went on, there would be other illusionists who would like to “talk shop” about a trick and I would show them the “gimmick”. The illusion is over. The mystery is done, but now they know how to pull off the trick.
In short, that is what I am going to try to accomplish here. I will show “The trick”, and when you see it, you are likely not to be impressed. It isn’t magic…sometimes it’s not even interesting.
Hint 1: Debt
“I owe, I owe so off to work I go”
Cute bumper stick, but in reality, that is what we do. We go to work because we have bills to pay. We have to supply the basics of life, but more then that we often are trying for much more then that. We aren’t just living, we are trying to have a lifestyle that we enjoy.
Again, I mentioned that I was a financial planner. As I would sit down with clients, I would find the people on the other side of the desk were vastly different people. Some seniors would own their house, family nearby, don’t like to travel, good health and modest needs. These people would live very comfortably on the money they received on Old Age security (OAS), Guaranteed Income Supplement (GIS) and Canada Pension Plan (CPP). In fact, some people would actually get more money each month then they needed. They were savers, and lived modest.
On the other side, I had clients who lived large. They were elderly people who had to remain doctors and lawyers, and business owners long after they have lost their heart for it. They could easily retire but their lifestyle was such that they needed more income. These people couldn’t even “squeak” by on $10,000 a month. They just couldn’t handle such a lifestyle cutback.
I am not making an condemnation on either one. However, if we have debt, we have to increase our income to afford the debt.
If you make mortgage payments of $1000 a month (I know that’s not a very high mortgage payment), but we have to make that much money (after taxes) just to have a home. The name mortgage even implies a lifetime burden: mort- “death“, gage- “contract”
So, my first step in “doing the trick” is being debt free. If you want to retire, it is very difficult to do so with debt. Make radical efforts to get rid of debt. If you have a mortgage, talk to your lender about ways that are set into the system to pay off early without penalty. Generally, there are ways to be rid of a mortgage early, but most people don’t understand how to do it.
Do you have unsecured debt (Visa, Mastercard, Company cards, etc.) move heaven and Earth to make that disappear. There is almost no benefit from it and more often then not these are purchases on assets which go down in value (toys).
The advice is simple…perhaps a bit too simple. It’s the kind of advice our grandparents would give, but the truth is still good for today.
In my world, when I finally had no debt and a paid for house, I realized that I no longer needed to be a financial planner. My last job (Financial Planner at Bank of Montreal) averaged for people in that role about $100,000 a year. No mortgage, no debt…I could take a job at ¼ my salary, no stress and still have almost no problem making ends meet. It wasn’t a full solution, but it sure made my world a lot easier. I urge you to look at your world and see what you can do to build yourself the same freedom.
Proverbs 22:7 The rich ruleth over the poor, and the borrower is servant to the lender.
Couple other quick hits:
What’s in my portfolio right at this moment:
Symbol: Name
SLV- iShares Silver Trust 400units
CVX- Chevron Corporation USL 200 shares
USO- United States 12 Month Oil Fund, LP 200 units
Cash: $4,763.25
Why: I bought the silver first because there is momentum in the market. If you look at a chart of what’s happen with silver it’s tough not to see it as a positive movement. I also thought the silver market might turn on me, so I sold a Call option on it that will expire this weekend. The Call option paid me when I sold it and the Silver will be taken away from me at a profit this weekend. The Call served to insulate me in case of a swift market down turn. Not perfect plan, but it worked.
Why is silver moving up? Generally hard assets move when the faith in fiat paper is diminished. Simply put, the US govt is unstable and people are looking for stability. This is the story for gold and silver…perhaps other metals like copper as well, but I don’t trade that because the public doesn’t care much about the other metals.
Why CVX? I wanted something other then just hard assets. I traded stocks for years and still have a soft place for that. I chose Chevron because oil was doing well. Also, I was sitting on too much cash and wanted to make even a modest return on my “sitting money”, so I bought CVX and then sold a call that was near the money. The call gave me money when I sold it, but Chevron went down a bit. So, my call will likely expire worthless. (That’s great). I got paid to do nothing. I will likely hold CVX until it becomes profitable ($200 profit) and sell it. If we get within a week of the May expiration date, I may sell another Call. We’ll see. No reason yet to sell for a loss.
USO- is oil and been rising constantly. This is based on volatility in the mid-east. I am looking eventually at a target of oil near $200 a barrel, so unless there is massive peace in the mid-east, or some major change I will buy oil when it drops a little and sell it when it goes up. I take small bites ($200). Also sold an option on oil, it’s out of the money, but could move “in the money” if today is a big day for oil. The Call was just free money on holdings I already had, so I don’t care what happens for this call. Best case would be selling off the oil and then, a good drop on Monday so I could buy it back.
Final remark:
The classic date is dinner and a movie. If a husband learns to cook, and can rent a movie from the local video store, this turns the whole system into a very affordable adventure.
Here’s my breakdown:
Dinner for Julie and I at -2nd Ave grill, Saskatoon without wine $35 plus
tip. (wine add $10-25 more)
Movie at local theatre, Galaxy 2nd Ave- Saskatoon $11.25 each ($22.50 plus treats $10-15)
Parking: $4.00 after 6:00pm
Babysitting: I have teens, so I would generally pay $15 much less then a
regular babysitter.
Total: aprox. $94...again, we can choose a different restaurant, or go to
dollar theatre, but you can see a $100 is no surprised for a date.
I can do the same supper and watch a movie I rent from the local store on our DVD player in our room after the kids go to bed. The whole thing is done for less then $20. Just keep that in mind.
I have been stunned by the level of interest in what I have been doing financially. In fact, I am a bit embarrassed by the level of interest. So, I am dusting off this blog again and setting up the general instructions for those who want to follow what I do.
A few disclaimers (sort of). Normally, I am very careful. I don’t like recommending anything. The reason is two-fold. On the one hand, it is lousy to say I am looking to buy something and then the next day you find reasons to believe it’s a dog. That happens. It looks bad on me. But, more importantly, my second is that fear someone might take an action and then find out it was a poor choice. However, I can’t see a way to lay this out without using real life examples. Please note: when I write that down, I am telling what I am looking at and why. Things may change. If the circumstances change substantially, then play with caution. Sometimes, the circumstances even get better, if so that’s great. If I say XYZ company looks like a deal at $49 and then it falls to $48...simply put, that’s an even better deal (unless something substantial has changed in the company. I will explain more about this later.
Second, I can’t be held legally responsible for a recommendation. My blog was based on “coffee chat”, the idea that happens all over the world where one guy says, they are buying oil and another guy says they are thinking about buying Research in Motion (RIM). No person attacks someone for what they were doing and if it’s helpful another person might use they “free tip”. I have no system to sell. I have no book to write. I make not a dime out of anything I am putting forward here. I have worked in the past as a broker and financial planner and am aware that certain recommendations may not match one’s level of risk, experience, tax considerations, and income needs.
So, here goes:
Back when I was in grade 5, I used to love watching illusionists. They would do cool slight of hand tricks, and I would stand amazed. In fact, as the years went on I would drop by local magic shops, and buy little pocket tricks. Each trick would have some sort of “gimmick”, a magnet, a lever, a hidden switch, a lead weight or something which would make the action lead to what would not be the normal result. If I practiced the “system”, I could make the flow create the illusion. It was fun. It’s still fun today.
However, as time went on, there would be other illusionists who would like to “talk shop” about a trick and I would show them the “gimmick”. The illusion is over. The mystery is done, but now they know how to pull off the trick.
In short, that is what I am going to try to accomplish here. I will show “The trick”, and when you see it, you are likely not to be impressed. It isn’t magic…sometimes it’s not even interesting.
Hint 1: Debt
“I owe, I owe so off to work I go”
Cute bumper stick, but in reality, that is what we do. We go to work because we have bills to pay. We have to supply the basics of life, but more then that we often are trying for much more then that. We aren’t just living, we are trying to have a lifestyle that we enjoy.
Again, I mentioned that I was a financial planner. As I would sit down with clients, I would find the people on the other side of the desk were vastly different people. Some seniors would own their house, family nearby, don’t like to travel, good health and modest needs. These people would live very comfortably on the money they received on Old Age security (OAS), Guaranteed Income Supplement (GIS) and Canada Pension Plan (CPP). In fact, some people would actually get more money each month then they needed. They were savers, and lived modest.
On the other side, I had clients who lived large. They were elderly people who had to remain doctors and lawyers, and business owners long after they have lost their heart for it. They could easily retire but their lifestyle was such that they needed more income. These people couldn’t even “squeak” by on $10,000 a month. They just couldn’t handle such a lifestyle cutback.
I am not making an condemnation on either one. However, if we have debt, we have to increase our income to afford the debt.
If you make mortgage payments of $1000 a month (I know that’s not a very high mortgage payment), but we have to make that much money (after taxes) just to have a home. The name mortgage even implies a lifetime burden: mort- “death“, gage- “contract”
So, my first step in “doing the trick” is being debt free. If you want to retire, it is very difficult to do so with debt. Make radical efforts to get rid of debt. If you have a mortgage, talk to your lender about ways that are set into the system to pay off early without penalty. Generally, there are ways to be rid of a mortgage early, but most people don’t understand how to do it.
Do you have unsecured debt (Visa, Mastercard, Company cards, etc.) move heaven and Earth to make that disappear. There is almost no benefit from it and more often then not these are purchases on assets which go down in value (toys).
The advice is simple…perhaps a bit too simple. It’s the kind of advice our grandparents would give, but the truth is still good for today.
In my world, when I finally had no debt and a paid for house, I realized that I no longer needed to be a financial planner. My last job (Financial Planner at Bank of Montreal) averaged for people in that role about $100,000 a year. No mortgage, no debt…I could take a job at ¼ my salary, no stress and still have almost no problem making ends meet. It wasn’t a full solution, but it sure made my world a lot easier. I urge you to look at your world and see what you can do to build yourself the same freedom.
Proverbs 22:7 The rich ruleth over the poor, and the borrower is servant to the lender.
Couple other quick hits:
What’s in my portfolio right at this moment:
Symbol: Name
SLV- iShares Silver Trust 400units
CVX- Chevron Corporation USL 200 shares
USO- United States 12 Month Oil Fund, LP 200 units
Cash: $4,763.25
Why: I bought the silver first because there is momentum in the market. If you look at a chart of what’s happen with silver it’s tough not to see it as a positive movement. I also thought the silver market might turn on me, so I sold a Call option on it that will expire this weekend. The Call option paid me when I sold it and the Silver will be taken away from me at a profit this weekend. The Call served to insulate me in case of a swift market down turn. Not perfect plan, but it worked.
Why is silver moving up? Generally hard assets move when the faith in fiat paper is diminished. Simply put, the US govt is unstable and people are looking for stability. This is the story for gold and silver…perhaps other metals like copper as well, but I don’t trade that because the public doesn’t care much about the other metals.
Why CVX? I wanted something other then just hard assets. I traded stocks for years and still have a soft place for that. I chose Chevron because oil was doing well. Also, I was sitting on too much cash and wanted to make even a modest return on my “sitting money”, so I bought CVX and then sold a call that was near the money. The call gave me money when I sold it, but Chevron went down a bit. So, my call will likely expire worthless. (That’s great). I got paid to do nothing. I will likely hold CVX until it becomes profitable ($200 profit) and sell it. If we get within a week of the May expiration date, I may sell another Call. We’ll see. No reason yet to sell for a loss.
USO- is oil and been rising constantly. This is based on volatility in the mid-east. I am looking eventually at a target of oil near $200 a barrel, so unless there is massive peace in the mid-east, or some major change I will buy oil when it drops a little and sell it when it goes up. I take small bites ($200). Also sold an option on oil, it’s out of the money, but could move “in the money” if today is a big day for oil. The Call was just free money on holdings I already had, so I don’t care what happens for this call. Best case would be selling off the oil and then, a good drop on Monday so I could buy it back.
Final remark:
The classic date is dinner and a movie. If a husband learns to cook, and can rent a movie from the local video store, this turns the whole system into a very affordable adventure.
Here’s my breakdown:
Dinner for Julie and I at -2nd Ave grill, Saskatoon without wine $35 plus
tip. (wine add $10-25 more)
Movie at local theatre, Galaxy 2nd Ave- Saskatoon $11.25 each ($22.50 plus treats $10-15)
Parking: $4.00 after 6:00pm
Babysitting: I have teens, so I would generally pay $15 much less then a
regular babysitter.
Total: aprox. $94...again, we can choose a different restaurant, or go to
dollar theatre, but you can see a $100 is no surprised for a date.
I can do the same supper and watch a movie I rent from the local store on our DVD player in our room after the kids go to bed. The whole thing is done for less then $20. Just keep that in mind.
Thursday, October 14, 2010
Rising Canadian dollar
Good article in the Montreal gazette, thought I would share. -Bradley
Loonie's rise made in U.S.A.
By JAY BRYAN, The Gazette October 14, 2010 With the Canadian dollar rising near parity with the U.S. greenback yesterday, it's reasonable to ask why this is happening and how far it can go.
While nobody has an entirely clear crystal ball, the answer is that we might see this period of currency strength last for several months, maybe longer. It depends largely on developments south of the border.
This is because the ultra-easy monetary policy of the U.S. is probably the single biggest reason for the loonie's apparent strength.
While Canada has real, durable economic advantages, they aren't enough to push our currency up as far and fast as it's moved in the past several weeks -a gain of about five cents since early September. It's more a case of shrinkage in the yardstick against which we measure our dollar: the once-mighty U.S. greenback.
How long will this be the case?
While we've seen the loonie rise to equality with the U.S. dollar before, it's not usually a long-lasting phenomenon. Canada's economy is far less productive than that of the U.S., and most economists would agree that the fundamental value of our currency is well below that of our big neighbour: maybe 85 to 90 cents.
On the other hand, a currency can stay far above or far below its fundamental value for years if flows of capital keep it there. During most of the 1990s and early 2000s, one could argue convincingly that the loonie should have been trading well above its market value, which was below 63 cents U.S. as recently as 2002.
About then, it began strengthening, until by late 2007, soaring global prices for oil and other resource products, which are big export earners for this country, helped to push our dollar several cents above parity for a few weeks.
It then hovered near parity through the first half of 2008 -until the global financial crisis brought it down to Earth with a thump.
With Canada enjoying a milder downturn and stronger recovery from the recession than the U.S., the loonie bounced from recession lows below 80 cents to hover in the high 90s most of this year, even touching parity briefly last April.
The dollar is now benefiting from rising belief that the U.S. Federal Reserve system is about to resume using a technique it tried in the depth of the financial crisis last year. It's known to economists as quantitative easing, but most people just call it printing money.
The idea is that if an economy doesn't perk up much once a central bank has cut interest rates as low as they can go, this is the major weapon it has left.
It can work largely because the only interest rates a central bank controls directly are short-term ones, but in a very tough economy, it can create new money in order to buy up longer-term bonds and other securities, forcing down longer-term rates, too.
The lower long-term rates could help support the deeply troubled U.S. housing market by making it even cheaper to take a mortgage loan and might also have some impact on businesses that need long-term funding in order to expand.
How does all this affect the Canadian dollar? Well, when it's clear that U.S. interest rates are going to stay low for a long time, the incentive for investors to look elsewhere for a better return on their money becomes pretty strong.
An investor looking for a two-year government bond recently could get 1.32 per cent on a Government of Canada issue, but only a paltry 0.35 per cent on an equivalent U.S. government bond.
This creates enormous pressure for funds to flow out of the U.S. and into countries with higher yields, like Canada.
As well, Canada's resource-heavy stock market has recently looked like an increasingly good bet as the price of commodities like oil and copper soared. Copper is up 32 per cent from its low point in July, calculates Diana Petramala, an economist with the Toronto-Dominion Bank.
How long will the party last? Petramala suspects that with the Bank of Canada likely to halt its campaign of rising interest rates next week, the flow of funds supporting the loonie could taper off, leaving it to subside a bit later this year.
But Douglas Porter, deputy chief economist at BMO Capital Markets, thinks this could be a longer-lasting phenomenon.
The next round of quantitative easing in the U. S, which is likely to begin within another month or so, could have an impact that will last for many months. Meanwhile, resource prices remain strong.
Porter thinks this will maintain pressure on Canada's dollar to reach and surpass parity -he's guessing about $1.05, probably next year -although it's not clear how long this will last.
jbryan@montrealgazette.com.
© Copyright (c) The Montreal Gazette
Read more: http://www.montrealgazette.com/business/Loonie+rise+made/3669514/story.html#ixzz12KufpnR2
Loonie's rise made in U.S.A.
By JAY BRYAN, The Gazette October 14, 2010 With the Canadian dollar rising near parity with the U.S. greenback yesterday, it's reasonable to ask why this is happening and how far it can go.
While nobody has an entirely clear crystal ball, the answer is that we might see this period of currency strength last for several months, maybe longer. It depends largely on developments south of the border.
This is because the ultra-easy monetary policy of the U.S. is probably the single biggest reason for the loonie's apparent strength.
While Canada has real, durable economic advantages, they aren't enough to push our currency up as far and fast as it's moved in the past several weeks -a gain of about five cents since early September. It's more a case of shrinkage in the yardstick against which we measure our dollar: the once-mighty U.S. greenback.
How long will this be the case?
While we've seen the loonie rise to equality with the U.S. dollar before, it's not usually a long-lasting phenomenon. Canada's economy is far less productive than that of the U.S., and most economists would agree that the fundamental value of our currency is well below that of our big neighbour: maybe 85 to 90 cents.
On the other hand, a currency can stay far above or far below its fundamental value for years if flows of capital keep it there. During most of the 1990s and early 2000s, one could argue convincingly that the loonie should have been trading well above its market value, which was below 63 cents U.S. as recently as 2002.
About then, it began strengthening, until by late 2007, soaring global prices for oil and other resource products, which are big export earners for this country, helped to push our dollar several cents above parity for a few weeks.
It then hovered near parity through the first half of 2008 -until the global financial crisis brought it down to Earth with a thump.
With Canada enjoying a milder downturn and stronger recovery from the recession than the U.S., the loonie bounced from recession lows below 80 cents to hover in the high 90s most of this year, even touching parity briefly last April.
The dollar is now benefiting from rising belief that the U.S. Federal Reserve system is about to resume using a technique it tried in the depth of the financial crisis last year. It's known to economists as quantitative easing, but most people just call it printing money.
The idea is that if an economy doesn't perk up much once a central bank has cut interest rates as low as they can go, this is the major weapon it has left.
It can work largely because the only interest rates a central bank controls directly are short-term ones, but in a very tough economy, it can create new money in order to buy up longer-term bonds and other securities, forcing down longer-term rates, too.
The lower long-term rates could help support the deeply troubled U.S. housing market by making it even cheaper to take a mortgage loan and might also have some impact on businesses that need long-term funding in order to expand.
How does all this affect the Canadian dollar? Well, when it's clear that U.S. interest rates are going to stay low for a long time, the incentive for investors to look elsewhere for a better return on their money becomes pretty strong.
An investor looking for a two-year government bond recently could get 1.32 per cent on a Government of Canada issue, but only a paltry 0.35 per cent on an equivalent U.S. government bond.
This creates enormous pressure for funds to flow out of the U.S. and into countries with higher yields, like Canada.
As well, Canada's resource-heavy stock market has recently looked like an increasingly good bet as the price of commodities like oil and copper soared. Copper is up 32 per cent from its low point in July, calculates Diana Petramala, an economist with the Toronto-Dominion Bank.
How long will the party last? Petramala suspects that with the Bank of Canada likely to halt its campaign of rising interest rates next week, the flow of funds supporting the loonie could taper off, leaving it to subside a bit later this year.
But Douglas Porter, deputy chief economist at BMO Capital Markets, thinks this could be a longer-lasting phenomenon.
The next round of quantitative easing in the U. S, which is likely to begin within another month or so, could have an impact that will last for many months. Meanwhile, resource prices remain strong.
Porter thinks this will maintain pressure on Canada's dollar to reach and surpass parity -he's guessing about $1.05, probably next year -although it's not clear how long this will last.
jbryan@montrealgazette.com.
© Copyright (c) The Montreal Gazette
Read more: http://www.montrealgazette.com/business/Loonie+rise+made/3669514/story.html#ixzz12KufpnR2
Saturday, August 28, 2010
US housing struggles
Got an e-mail this morning from Larry Levin, a popular investment trading expert. I thought you might find his information about the housing situation worth a read. In Canada (where I live) we are not seeing the same situations although the significant drop in real estate values can be seen in some of the most urban centres.
Here is an article which shows you what I am talking about:
http://www.montrealgazette.com/business/Housing+much+longer/3444387/story.html
Back to the article of Larry Levin (just so you know he does have a free newsletter that sometimes has some really good material. Enjoy-
Housing Part III
I have already given the details of the two recent housing reports; however, today I'd like to give you "Rosie's" perspective today. Breakfast with Dave is always a good read.
Burning Down the House
Once again, the consensus was fooled. It was looking for 330k on new home sales for July and instead they sank to a record low of 276k units at an annual rate. And, just to add insult to injury, June was revised down, to 315k from 330k. Just as resales undercut the 2009 depressed low by 15%, new home sales have done so by 19%. Imagine that even with mortgage rates down 100 basis points in the past year to historic lows, not to mention at least eight different government programs to spur homeownership, home sales have undercut the recession lows by double-digits.
In the aftermath of a credit bubble burst and a massive asset deflation, trauma has set in. The rupture to confidence and spending from our central bankers’ and policymakers’ willingness to allow the prior credit cycle to go parabolic has come at a heavy price in terms of future economic performance. Attitudes towards discretionary spending, credit and housing have been altered, likely for a generation.
The scars have apparently not healed from the horrific experience with defaults, delinquencies and deleveraging of the past two years — talk about a horror flick in 3D. The number of unsold homes on the market exceeds four million and that does include the shadow bank inventory, which jumped 12% alone in August, according to the venerable housing analyst Ivy Zelman.
Nearly 1 in 4 of the population with a mortgage are “upside down” and as a result are now prisoners in their own home. We have over five million homeowners now either in the foreclosure process or seriously delinquent. The government’s HAMP program was supposed to bail out between 3 and 4 million distressed homeowners and instead we have only had a success rate of fewer than half a million.
Now back to the new home sales data. Every region in the U.S. was down, and down sharply. The homebuilders did not cut their inventory levels and as a result, the backlog of new homes surged to 9.1 months’ supply from 8.0 months in June, which means more discounting and margin squeeze is coming in the homebuilder space. As it stands, median new home prices were sliced 6% in July and this followed on the heels of a 4.7% drop in June. And, at $235,300, average new home prices are down to levels last seen in March 2003, down nearly 30% from the 2007 peak. If the truth be told, if we are talking about reversing all the bubble appreciation that began a decade ago, then we are talking about another 15% downside from here. The excess inventory data alone tell us that this has a realistic chance of occurring.
The high-end market, in particular, is under tremendous pressure. In fact, it is becoming non-existent. Guess how many homes prices above $750k managed to sell in July. Answer — zero, nada, rien; and for the second month in a row. Only 1,000 units priced above 500,000 moved last month. That’s it! Over 80% of the homes that the builders managed to sell were priced for under $300,000. Just another sign of how this remains a full-fledged buyers’ market — at least for the ones that can either afford to put down a downpayment or are creditworthy enough to secure a mortgage loan (keeping in mind that 25% of the household sector does have a sub-600 FICO score).
This is going to sound like a broken record but it took a decade of parabolic credit growth to get the U.S. economy into this deleveraging mess and there is clearly no painless “quick fix” towards bringing household debt into historical realignment with the level of assets and income to support the prevailing level of liabilities. We are talking about $6 trillion of excess debt that has to be extinguished, either by paying it down or by walking away from it (or having it socialized).
Trade well and follow the trend, not the so-called “experts.”
Behold the age of infinite moral hazard! On April 2nd, 2009 CONgress forced FASB to suspend rule 157 in favor of deceitful accounting for the TBTF banksters.
Larry Levin
larrylevin@tradingadvantage.com
Trading Advantage
(888) 755-3846__
Here is an article which shows you what I am talking about:
http://www.montrealgazette.com/business/Housing+much+longer/3444387/story.html
Back to the article of Larry Levin (just so you know he does have a free newsletter that sometimes has some really good material. Enjoy-
Housing Part III
I have already given the details of the two recent housing reports; however, today I'd like to give you "Rosie's" perspective today. Breakfast with Dave is always a good read.
Burning Down the House
Once again, the consensus was fooled. It was looking for 330k on new home sales for July and instead they sank to a record low of 276k units at an annual rate. And, just to add insult to injury, June was revised down, to 315k from 330k. Just as resales undercut the 2009 depressed low by 15%, new home sales have done so by 19%. Imagine that even with mortgage rates down 100 basis points in the past year to historic lows, not to mention at least eight different government programs to spur homeownership, home sales have undercut the recession lows by double-digits.
In the aftermath of a credit bubble burst and a massive asset deflation, trauma has set in. The rupture to confidence and spending from our central bankers’ and policymakers’ willingness to allow the prior credit cycle to go parabolic has come at a heavy price in terms of future economic performance. Attitudes towards discretionary spending, credit and housing have been altered, likely for a generation.
The scars have apparently not healed from the horrific experience with defaults, delinquencies and deleveraging of the past two years — talk about a horror flick in 3D. The number of unsold homes on the market exceeds four million and that does include the shadow bank inventory, which jumped 12% alone in August, according to the venerable housing analyst Ivy Zelman.
Nearly 1 in 4 of the population with a mortgage are “upside down” and as a result are now prisoners in their own home. We have over five million homeowners now either in the foreclosure process or seriously delinquent. The government’s HAMP program was supposed to bail out between 3 and 4 million distressed homeowners and instead we have only had a success rate of fewer than half a million.
Now back to the new home sales data. Every region in the U.S. was down, and down sharply. The homebuilders did not cut their inventory levels and as a result, the backlog of new homes surged to 9.1 months’ supply from 8.0 months in June, which means more discounting and margin squeeze is coming in the homebuilder space. As it stands, median new home prices were sliced 6% in July and this followed on the heels of a 4.7% drop in June. And, at $235,300, average new home prices are down to levels last seen in March 2003, down nearly 30% from the 2007 peak. If the truth be told, if we are talking about reversing all the bubble appreciation that began a decade ago, then we are talking about another 15% downside from here. The excess inventory data alone tell us that this has a realistic chance of occurring.
The high-end market, in particular, is under tremendous pressure. In fact, it is becoming non-existent. Guess how many homes prices above $750k managed to sell in July. Answer — zero, nada, rien; and for the second month in a row. Only 1,000 units priced above 500,000 moved last month. That’s it! Over 80% of the homes that the builders managed to sell were priced for under $300,000. Just another sign of how this remains a full-fledged buyers’ market — at least for the ones that can either afford to put down a downpayment or are creditworthy enough to secure a mortgage loan (keeping in mind that 25% of the household sector does have a sub-600 FICO score).
This is going to sound like a broken record but it took a decade of parabolic credit growth to get the U.S. economy into this deleveraging mess and there is clearly no painless “quick fix” towards bringing household debt into historical realignment with the level of assets and income to support the prevailing level of liabilities. We are talking about $6 trillion of excess debt that has to be extinguished, either by paying it down or by walking away from it (or having it socialized).
Trade well and follow the trend, not the so-called “experts.”
Behold the age of infinite moral hazard! On April 2nd, 2009 CONgress forced FASB to suspend rule 157 in favor of deceitful accounting for the TBTF banksters.
Larry Levin
larrylevin@tradingadvantage.com
Trading Advantage
(888) 755-3846__
Wednesday, June 9, 2010
Part 2: trading Covered Calls with LEAPs
OK, so let’s pretend that you have a general understanding of the “Covered Call”. Let’s mention just a couple items that you have to keep in mind before you start on this.
1- You must always be working in what is called “board lots” this means multiples of 100 shares. So, if you have 1 share of IBM stock that your grandpa gave you, you need 99 at least more to trade options on it. 1 contract means 100 shares worth of stock.
2- Make sure that you like the company that you trade Covered calls on. You might have this stock for a while, so if you hate the company, or what they do, don’t buy them. They are plenty of other companies. For example, I eat Kosher, so even Campfire Bacon company is making some great moves, I still don’t want my futures set on a company that I don’t ideologically support.
3- Principle 3: if you don’t understand what this company does, or how they make money, this is generally not one I want to be involved. I like to be able to know how my success is working. In these covered calls, I am owning a portion of a business (although there are other ways to do this as well, but that’s beyond this example). I have to feel confident how their success is coming.
4- You will also notice that options are not always available for all companies. These are usually only traded on larger companies, actively traded, significantly of interest to the public. For me, this is more often US companies, or a Canadian company that trades on a US exchange. This is hardly ever a ‘flash in the pan’ new penny stock.
Which brings me to my second possibility. What if you are dealing with a company that you want to trade options on, but the cost is high.
Case in point: Google (trade symbol GOOG) trades on the Nasdaq) and as of today is trading at 484.78 (business close: June 7). Personally I like this company, I think it could trade a lot higher (the trend however is going the exact wrong direction), but I will pretend for this, that it isn’t. However, 100 shares would cost me almost $50,000. That’s a substantial cost for 1 contract. But, let’s say I really wanted this. The trend is going the right way (remember, this is just an example, the trend is actually dropping a lot). Other indications are also looking positive, so I want to trade this company.
Also, although this chart comes from the program I use, almost every on-line trading program uses these types of charts. They may look different, but if you can get used to looking at them you will gain a lot of understanding.
There is a cheap way to get into this holding without the full cost investment. This is called a LEAP (Long term Equity Position). So, rather then buying the stock I actually buy an option far into the future, and then sell calls on this month over month.
To make this work, you need to understand the principle behind options. Every Option has two parts that make up it’s cost. The first is a built in value. For example, if you have a stock like GOOG and you want to buy the option for $450 (the stock is already trading higher then that, so the difference is it’s built in value). You would have to pay at least the difference between the “strike price” and the price the stock is trading for. (484.78- 450.00= $34.78) remember this is a per share price so in an option of 100 shares (single contract this is still $3478.00).
The other part of an option that makes it’s value is the “time value”. How long does it take before it expires. When an options expires, the time value reaches 0. It drops everyday until that expiration date. You can sure see this in the last few days before the option expires. However, if you have a very long term option (a year or two) there is so much time available that the time value is not really significant. It is mostly the embedded value that makes the difference.
So, let’s go back to our GOOG example. I can buy a Call for GOOG that expires in January 2012 (deep in the money) , a $350 strike point for $167.90. The reason you buy a deep in the money, is you want wiggle room. You don’t want a sudden drop in price that suddenly makes this not work for you. Back to our example, 167.90 for 1 contract is $16,790. It still costly, but not nearly as costly as owning the stock (almost $50,000).
So, now that you have the call, you can sell an option of the stock. In this case, you likely don’t want to really sell the stock. You actually want the ability for the system to create you money. So, I wouldn’t pick an option that is as likely. So, rather then sell a Call at 490.00. I would more likely sell an option at 500.00 or maybe 520.00. So, a June option for 500.00 would make 4.80 per contract (remember this is times 100 $480.00) for 8 days. If you don’t sell the stock (which we don’t really want to do), you turn around and sell an option for July, and August.
What happens if the stock does reach the strike price you set? Well, then you use your “option” to buy the stock cheap (LEAP) which should have also gone up in value to get your stock and then sell to the person who called you out of position. A bit of a pain, but certainly possible.
Your desire is to use this as a system to continue to make you money
What if you get tired of this stock. Maybe Google gets upstaged by some new company, or for some reason you just don’t want this trade anymore. All you have to do is sell of the option for whatever value is left. You chose to be deep in the money so as long as the stock is still trading higher then your option there will always be embedded value.
If you want to hear an audio on this, then listen to the “covered calls with LEAPs” pod cast. This is episode 99.
http://www.podbean.com/podcast-detail?pid=17574
Like I said before some good education…and the price is right (free). God’s continued grace to you and yours. -Brad
1- You must always be working in what is called “board lots” this means multiples of 100 shares. So, if you have 1 share of IBM stock that your grandpa gave you, you need 99 at least more to trade options on it. 1 contract means 100 shares worth of stock.
2- Make sure that you like the company that you trade Covered calls on. You might have this stock for a while, so if you hate the company, or what they do, don’t buy them. They are plenty of other companies. For example, I eat Kosher, so even Campfire Bacon company is making some great moves, I still don’t want my futures set on a company that I don’t ideologically support.
3- Principle 3: if you don’t understand what this company does, or how they make money, this is generally not one I want to be involved. I like to be able to know how my success is working. In these covered calls, I am owning a portion of a business (although there are other ways to do this as well, but that’s beyond this example). I have to feel confident how their success is coming.
4- You will also notice that options are not always available for all companies. These are usually only traded on larger companies, actively traded, significantly of interest to the public. For me, this is more often US companies, or a Canadian company that trades on a US exchange. This is hardly ever a ‘flash in the pan’ new penny stock.
Which brings me to my second possibility. What if you are dealing with a company that you want to trade options on, but the cost is high.
Case in point: Google (trade symbol GOOG) trades on the Nasdaq) and as of today is trading at 484.78 (business close: June 7). Personally I like this company, I think it could trade a lot higher (the trend however is going the exact wrong direction), but I will pretend for this, that it isn’t. However, 100 shares would cost me almost $50,000. That’s a substantial cost for 1 contract. But, let’s say I really wanted this. The trend is going the right way (remember, this is just an example, the trend is actually dropping a lot). Other indications are also looking positive, so I want to trade this company.
Also, although this chart comes from the program I use, almost every on-line trading program uses these types of charts. They may look different, but if you can get used to looking at them you will gain a lot of understanding.
There is a cheap way to get into this holding without the full cost investment. This is called a LEAP (Long term Equity Position). So, rather then buying the stock I actually buy an option far into the future, and then sell calls on this month over month.
To make this work, you need to understand the principle behind options. Every Option has two parts that make up it’s cost. The first is a built in value. For example, if you have a stock like GOOG and you want to buy the option for $450 (the stock is already trading higher then that, so the difference is it’s built in value). You would have to pay at least the difference between the “strike price” and the price the stock is trading for. (484.78- 450.00= $34.78) remember this is a per share price so in an option of 100 shares (single contract this is still $3478.00).
The other part of an option that makes it’s value is the “time value”. How long does it take before it expires. When an options expires, the time value reaches 0. It drops everyday until that expiration date. You can sure see this in the last few days before the option expires. However, if you have a very long term option (a year or two) there is so much time available that the time value is not really significant. It is mostly the embedded value that makes the difference.
So, let’s go back to our GOOG example. I can buy a Call for GOOG that expires in January 2012 (deep in the money) , a $350 strike point for $167.90. The reason you buy a deep in the money, is you want wiggle room. You don’t want a sudden drop in price that suddenly makes this not work for you. Back to our example, 167.90 for 1 contract is $16,790. It still costly, but not nearly as costly as owning the stock (almost $50,000).
So, now that you have the call, you can sell an option of the stock. In this case, you likely don’t want to really sell the stock. You actually want the ability for the system to create you money. So, I wouldn’t pick an option that is as likely. So, rather then sell a Call at 490.00. I would more likely sell an option at 500.00 or maybe 520.00. So, a June option for 500.00 would make 4.80 per contract (remember this is times 100 $480.00) for 8 days. If you don’t sell the stock (which we don’t really want to do), you turn around and sell an option for July, and August.
What happens if the stock does reach the strike price you set? Well, then you use your “option” to buy the stock cheap (LEAP) which should have also gone up in value to get your stock and then sell to the person who called you out of position. A bit of a pain, but certainly possible.
Your desire is to use this as a system to continue to make you money
What if you get tired of this stock. Maybe Google gets upstaged by some new company, or for some reason you just don’t want this trade anymore. All you have to do is sell of the option for whatever value is left. You chose to be deep in the money so as long as the stock is still trading higher then your option there will always be embedded value.
If you want to hear an audio on this, then listen to the “covered calls with LEAPs” pod cast. This is episode 99.
http://www.podbean.com/podcast-detail?pid=17574
Like I said before some good education…and the price is right (free). God’s continued grace to you and yours. -Brad
Monday, June 7, 2010
Line by line what I do for monthly income
I have been getting requests from friends to show the how of what I have been doing. My business is based on running an investment company. My company (entitle Financial Wisdom Inc.) has a trading account that buys and sells stock and options. There are about a million ways to do this, but I will show you line by line a real example that I am running.
The first tool I will explain is called a “covered call” I own some stock. Some I purchased simply to sell covered calls, some are leftover from my former employers (BMO and BNS). For this example I am using Crocs Inc.
My son (Noah)
and I were looking at stock and saw that this company had a nice positive trend. Basically while so many companies have stock prices going down or sideways (nowhere), this one was actually going up, and going up at a pretty good rate. There is a lot more analysis I did with my son, but this will show you what interested us. The price was also very attractive (about $10.00 a share). So, I bought 1000 shares (or $10,000 worth of the stock). To be honest, my entry price was $10.25. The stock is doing fine, but to be honest, I have no loyalty to the stock. I can keep the stock and sell it as it has an up day, but I am using a covered call plan.
If you sell an option, those options expire on the 3rd Saturday of the month. Yes, I know the markets are closed on Saturday, but that’s just the way it works. US options can be traded (called) at any point in time in the month until expiration. So, today is June 7. The June calls will end on June 19. Since I own this stock, I can sell a contract which says. “Hey, if this stock reaches a certain I price I will sell it to you at that price.” For this contract, people pay money. In my case, I have said I would sell my stock if the price (called the strike point) reaches $11.00 on or before June 19. Remember, I don’t care about holding this stock. If it sells, it sells. There isn’t a lot of time left until expiration, so I only got a price of ($.15) which is a fancy way of saying I got $.15 per share of stock or (.15 X 1000) in this case $150. Had I chose a longer expiration date (3rd week in July) I would have gotten $550.
Whatever happens, I got that money up front, and if I still have the stock on June 20th, I will sell another option for July, and August, and September until someone buys my stock.
I told my wife, it’s a lot like renting a house. I bought a house for $10,000 (you can only imagine what kind of house you could buy for that), buy as a slum rent lord, I am making $150 a month on my apartment. The bonus is not bad tenant. No backed up toilets in the middle of the night. No excuses for rent checks being late.
So, what can happen?
Best case would be: the stock goes to $11.00 If it goes past $11.00 then I will dump my stock at exactly $11.00. Now if the stock price goes to a million per share (no fear of that), then I will say…”bummer I guess I lost that opportunity”, but if the stock hits $11.01 on or before market close on June 18, then I will likely be called out of position. They will buy my stock. I will have made .75 per share ($750.00) plus the $150 up front money. Total $900. I made the money with a $10,000 investment, so my yield is actually 9%. That sounds pretty good, but you need to understand, that would be 9% in a 30 day time line. If, I could keep this up, my yield would be 9% times 12 months or 108% for the year. So my $10,000 would make $10,800 (and I would still have the $10,000. By the way, this it totally utopian. This is not likely to happen under any circumstances, but I am laying out the best case scenario.
Possibility 2: I think Croc (trade symbol CROX on the NASDQ exchange) will hit $11.00 maybe not by June 18, but sometime. If, we reach June 19 and we are still under $11.00, then I will make sure I have the same deal set up for July, and August etc. until my stock is sold. I collect my slum lord rent checks.
Possibility 3: Bought the stock at $10.25 what if the stock goes down. Can I still sell options on it? Yup. It helps to curb even a small amount of loss month over month.
Possibility 4: Crox appears to be a flash in the pan (maybe they are lying about the money they are making). Maybe no one really buys those cheap comfy sandals. Maybe everyone finds out about this at once by a CNN expose. The stock collapses and 0. In this case, I have lost my stake $10,000. I still get to keep the monthly premium until the stock has no value. By the way, I also don’t think this is likely.
There are many variations of how we do this, but I wanted to put this one out. If you can follow this, you can also understand some more advance plans that I will explain later.
The first tool I will explain is called a “covered call” I own some stock. Some I purchased simply to sell covered calls, some are leftover from my former employers (BMO and BNS). For this example I am using Crocs Inc.
My son (Noah)
and I were looking at stock and saw that this company had a nice positive trend. Basically while so many companies have stock prices going down or sideways (nowhere), this one was actually going up, and going up at a pretty good rate. There is a lot more analysis I did with my son, but this will show you what interested us. The price was also very attractive (about $10.00 a share). So, I bought 1000 shares (or $10,000 worth of the stock). To be honest, my entry price was $10.25. The stock is doing fine, but to be honest, I have no loyalty to the stock. I can keep the stock and sell it as it has an up day, but I am using a covered call plan.
If you sell an option, those options expire on the 3rd Saturday of the month. Yes, I know the markets are closed on Saturday, but that’s just the way it works. US options can be traded (called) at any point in time in the month until expiration. So, today is June 7. The June calls will end on June 19. Since I own this stock, I can sell a contract which says. “Hey, if this stock reaches a certain I price I will sell it to you at that price.” For this contract, people pay money. In my case, I have said I would sell my stock if the price (called the strike point) reaches $11.00 on or before June 19. Remember, I don’t care about holding this stock. If it sells, it sells. There isn’t a lot of time left until expiration, so I only got a price of ($.15) which is a fancy way of saying I got $.15 per share of stock or (.15 X 1000) in this case $150. Had I chose a longer expiration date (3rd week in July) I would have gotten $550.
Whatever happens, I got that money up front, and if I still have the stock on June 20th, I will sell another option for July, and August, and September until someone buys my stock.
I told my wife, it’s a lot like renting a house. I bought a house for $10,000 (you can only imagine what kind of house you could buy for that), buy as a slum rent lord, I am making $150 a month on my apartment. The bonus is not bad tenant. No backed up toilets in the middle of the night. No excuses for rent checks being late.
So, what can happen?
Best case would be: the stock goes to $11.00 If it goes past $11.00 then I will dump my stock at exactly $11.00. Now if the stock price goes to a million per share (no fear of that), then I will say…”bummer I guess I lost that opportunity”, but if the stock hits $11.01 on or before market close on June 18, then I will likely be called out of position. They will buy my stock. I will have made .75 per share ($750.00) plus the $150 up front money. Total $900. I made the money with a $10,000 investment, so my yield is actually 9%. That sounds pretty good, but you need to understand, that would be 9% in a 30 day time line. If, I could keep this up, my yield would be 9% times 12 months or 108% for the year. So my $10,000 would make $10,800 (and I would still have the $10,000. By the way, this it totally utopian. This is not likely to happen under any circumstances, but I am laying out the best case scenario.
Possibility 2: I think Croc (trade symbol CROX on the NASDQ exchange) will hit $11.00 maybe not by June 18, but sometime. If, we reach June 19 and we are still under $11.00, then I will make sure I have the same deal set up for July, and August etc. until my stock is sold. I collect my slum lord rent checks.
Possibility 3: Bought the stock at $10.25 what if the stock goes down. Can I still sell options on it? Yup. It helps to curb even a small amount of loss month over month.
Possibility 4: Crox appears to be a flash in the pan (maybe they are lying about the money they are making). Maybe no one really buys those cheap comfy sandals. Maybe everyone finds out about this at once by a CNN expose. The stock collapses and 0. In this case, I have lost my stake $10,000. I still get to keep the monthly premium until the stock has no value. By the way, I also don’t think this is likely.
There are many variations of how we do this, but I wanted to put this one out. If you can follow this, you can also understand some more advance plans that I will explain later.
U.S. inflation expected to decline further: BMO
This article taken from the Financial Post. It sounds good (limited inflation for US economy, but if you read the details as to the why, you see all is not as roseyas one might suspect. Enjoy, Brad
By John Shmuel May 31, 2010 – 10:35 am
Inflation in the U.S. remains weak and is expected to decline further despite a surprisingly solid American economic recovery, according to BMO Capital Markets analyst Sal Guatieri.
Core consumer prices have risen 0.9% year-over-year from 2009. Much of that has been bolstered by a 38.3% hike in gasoline prices during that period. Without gasoline, consumer prices have increased a mere 0.5%.
Mr. Guatieri notes that inflation will likely continue to decline further because of several stress factors on the economy. That includes a high unemployment rate which is keeping consumer spending in check.
“The unemployment rate is about four-to-five percentage points above its steady-inflation level. The current high rate discourages workers from demanding wage increases, while draining pricing power from retailers,” he writes in his report titled Deflation Déjà Vu. A high vacancy rate meanwhile will also drag down inflation.
“Rents should continue to soften in the wake of a near record-high 10.6% rental vacancy rate and record-high mortgage delinquencies and foreclosure inventories,” Mr. Guatieri notes.
The disinflation, as Mr. Guatieri refers to it, contrasts with gains made in Canada, where the inflation rate rose in April and retail prices surged.
Canada’s April inflation rate was 1.8%, compared with 1.4% in March, according to Statistics Canada. The April increase caused the country’s core rate to edge up to 1.9%.
Despite continuing decreases in inflation in the U.S., Mr. Guatieri highlights a number of factors will prevent deflation from taking root.
Some services, such as medical care and education, are not considered to be in excess supply and will keep balance out deflationary elements such as rental prices. Mr. Guatieri also highlights that expectations remain near the preferred 2% inflation rate. He also points to a rise in commodity prices due to global demand and an expected GDP growth number of 3% as reasons that will alleviate the downward pressure on deflation.
“All in, these factors will likely prevent CPI inflation from slipping below 1% and core inflation from breaching 0.5% this year, and could lift inflation slightly in 2011,” he writes in his report.
John Shmuel
By John Shmuel May 31, 2010 – 10:35 am
Inflation in the U.S. remains weak and is expected to decline further despite a surprisingly solid American economic recovery, according to BMO Capital Markets analyst Sal Guatieri.
Core consumer prices have risen 0.9% year-over-year from 2009. Much of that has been bolstered by a 38.3% hike in gasoline prices during that period. Without gasoline, consumer prices have increased a mere 0.5%.
Mr. Guatieri notes that inflation will likely continue to decline further because of several stress factors on the economy. That includes a high unemployment rate which is keeping consumer spending in check.
“The unemployment rate is about four-to-five percentage points above its steady-inflation level. The current high rate discourages workers from demanding wage increases, while draining pricing power from retailers,” he writes in his report titled Deflation Déjà Vu. A high vacancy rate meanwhile will also drag down inflation.
“Rents should continue to soften in the wake of a near record-high 10.6% rental vacancy rate and record-high mortgage delinquencies and foreclosure inventories,” Mr. Guatieri notes.
The disinflation, as Mr. Guatieri refers to it, contrasts with gains made in Canada, where the inflation rate rose in April and retail prices surged.
Canada’s April inflation rate was 1.8%, compared with 1.4% in March, according to Statistics Canada. The April increase caused the country’s core rate to edge up to 1.9%.
Despite continuing decreases in inflation in the U.S., Mr. Guatieri highlights a number of factors will prevent deflation from taking root.
Some services, such as medical care and education, are not considered to be in excess supply and will keep balance out deflationary elements such as rental prices. Mr. Guatieri also highlights that expectations remain near the preferred 2% inflation rate. He also points to a rise in commodity prices due to global demand and an expected GDP growth number of 3% as reasons that will alleviate the downward pressure on deflation.
“All in, these factors will likely prevent CPI inflation from slipping below 1% and core inflation from breaching 0.5% this year, and could lift inflation slightly in 2011,” he writes in his report.
John Shmuel
Wednesday, May 26, 2010
Wednesday, May 12, 2010
Really good article comparing Quebec and Greece
Great article, wish I had written it, but thought it would be good to share. Enjoy.
The disturbing similarities between Quebec and Greece
By Licia Corbela, Canwest News Service May 11, 2010 In Greece, citizens on average, retire at age of 58.
Germans, who are helping bail out the bankrupt Greeks, work on average until the age of 65. Naturally, German citizens are wondering how this can be considered fair. Why should they work seven years longer on average so Greek citizens can live a life of leisure and be less productive?
What's more, in Germany, most working people pay taxes. In Greece, only 20 per cent pay taxes. Again, unfair. And yet equalization between "have" European Union states and "have not" European Union states continues, even though it's not making things equal -- it's rewarding laziness, leisure and possibly even criminal tax evasion. Why pay taxes if some hard-working Germans will do it for you? Thus the riots in Greece. They believe they are entitled to those entitlements.
Dysfunctional? You bet. Canadians would never stand for such a thing, right? Think again.
Equalization in Canada was established to ensure that "have-not" regions could enjoy the same programs as "have" regions and most Canadians wouldn't quibble with that. But that has not happened. In fact, the reverse has occurred. The have provinces have fewer services than the have-nots.
According to a Dec. 2009 report by the Institute of Statistics of Quebec, Quebecers' average age of retirement is 62 whereas in the rest of Canada it is almost 65. While the Quebec Pension Plan and Canada Pension Plans are identical and carry the same penalties for collecting your pension earlier than 65, those who stop working earlier are less productive and contribute less to Canadian society in terms of income and taxes.
In light of the fact that Quebec received $8.6 billion in equalization payments in 2010-11 out of a total equalization pot of $14.4 billion, it's safe to say that citizens in Canada's "have" provinces -- British Columbia, Alberta and Ontario -- are paying for Quebecers' early retirement, as theirs is the only province which has such a generous, early retirement benefit.
In other words, equalization is not very equal.
What's more, Quebecers can take advantage of $7-a-day daycare, whereas, in most other provinces, $7 wouldn't even buy you an hour of daycare.
Quebec has a generous pharmaceutical program unlike any other in the country, and Quebec university students pay considerably less for tuition within Quebec than students from elsewhere in the country.
To attend McGill University in 2010, Quebec students pay $3,475 for tuition and fees. An out-of-province student attending McGill pays $7,008, or $3,533 more than a Quebec student -- more than double. Five of the six cheapest universities in Canada are in Quebec -- but they're only the cheapest for Quebecers. Those same universities are among the most expensive in Canada for non-Quebecers.
Sherbrooke has the lowest university tuition and fees in the entire country -- but again, only for Quebecers, who pay just $2,381. To attend the same university, a non-Quebecer, from Alberta, for instance, must pay $5,914 or $3,533 more than his Quebec colleague. When that Alberta student works through the summer in Alberta to save for tuition and living expenses, the taxes he or she will pay helps subsidize the Quebec student's tuition.
Lately, Quebecers such as Conservative MP Maxime Bernier have criticized Quebec's overreliance on equalization, saying Quebecers are "spoiled children."
That's got Quebec's provincial government fighting back. In its 2010-11 budget document, the Jean Charest government is arguing that it should receive even more equalization than it's getting because Alberta's oil industry is keeping the Canadian dollar high, which in turn harms Quebec's manufacturing sector. This is not a joke.
"A rise in the world price of a barrel of oil favours provinces that have that resource," states the budget document in Section E. "However, the rise in the Canadian dollar that accompanies the rising price of oil hampers the exports of the other provinces.
"An adequate equalization program can mitigate this phenomenon by increasing the revenues of provinces that are negatively affected by the rise in the dollar, without reducing the revenues of provinces that benefit from the higher price of oil."
In other words, Quebec, which received $8.6 billion of the $14.4 billion doled out in equalization this year, is arguing that it's not enough. It wants more and it blames Alberta's oil industry for its troubles. It's a curious argument since it can be argued that Alberta's oil industry is fuelling Canada's economy and largely provided the money was sent as equalization to Quebec.
In 2007, the last year Statistics Canada figures are available for all provinces, B.C., Alberta and Ontario were the only provinces that paid more into Confederation than they received. Alberta paid a total of $37.064 billion in taxes and transfers to the federal government and the feds returned $17.567 billion in services and programs, meaning that Alberta contributed $19.5 billion net to the rest of Canada.
But Charest, who complained in Copenhagen that Alberta's oilsands industry "embarrassed" him, is making the argument that despite Alberta's largesse, it's to blame for the trouble Quebec is in.
In short, it's all Greek to Quebec -- and that's frightening.
© Copyright (c) The Vancouver Sun
Read more: http://www.vancouversun.com/business/disturbing+similarities+between+Quebec+Greece/3011792/story.html#ixzz0nixkfSjU
The disturbing similarities between Quebec and Greece
By Licia Corbela, Canwest News Service May 11, 2010 In Greece, citizens on average, retire at age of 58.
Germans, who are helping bail out the bankrupt Greeks, work on average until the age of 65. Naturally, German citizens are wondering how this can be considered fair. Why should they work seven years longer on average so Greek citizens can live a life of leisure and be less productive?
What's more, in Germany, most working people pay taxes. In Greece, only 20 per cent pay taxes. Again, unfair. And yet equalization between "have" European Union states and "have not" European Union states continues, even though it's not making things equal -- it's rewarding laziness, leisure and possibly even criminal tax evasion. Why pay taxes if some hard-working Germans will do it for you? Thus the riots in Greece. They believe they are entitled to those entitlements.
Dysfunctional? You bet. Canadians would never stand for such a thing, right? Think again.
Equalization in Canada was established to ensure that "have-not" regions could enjoy the same programs as "have" regions and most Canadians wouldn't quibble with that. But that has not happened. In fact, the reverse has occurred. The have provinces have fewer services than the have-nots.
According to a Dec. 2009 report by the Institute of Statistics of Quebec, Quebecers' average age of retirement is 62 whereas in the rest of Canada it is almost 65. While the Quebec Pension Plan and Canada Pension Plans are identical and carry the same penalties for collecting your pension earlier than 65, those who stop working earlier are less productive and contribute less to Canadian society in terms of income and taxes.
In light of the fact that Quebec received $8.6 billion in equalization payments in 2010-11 out of a total equalization pot of $14.4 billion, it's safe to say that citizens in Canada's "have" provinces -- British Columbia, Alberta and Ontario -- are paying for Quebecers' early retirement, as theirs is the only province which has such a generous, early retirement benefit.
In other words, equalization is not very equal.
What's more, Quebecers can take advantage of $7-a-day daycare, whereas, in most other provinces, $7 wouldn't even buy you an hour of daycare.
Quebec has a generous pharmaceutical program unlike any other in the country, and Quebec university students pay considerably less for tuition within Quebec than students from elsewhere in the country.
To attend McGill University in 2010, Quebec students pay $3,475 for tuition and fees. An out-of-province student attending McGill pays $7,008, or $3,533 more than a Quebec student -- more than double. Five of the six cheapest universities in Canada are in Quebec -- but they're only the cheapest for Quebecers. Those same universities are among the most expensive in Canada for non-Quebecers.
Sherbrooke has the lowest university tuition and fees in the entire country -- but again, only for Quebecers, who pay just $2,381. To attend the same university, a non-Quebecer, from Alberta, for instance, must pay $5,914 or $3,533 more than his Quebec colleague. When that Alberta student works through the summer in Alberta to save for tuition and living expenses, the taxes he or she will pay helps subsidize the Quebec student's tuition.
Lately, Quebecers such as Conservative MP Maxime Bernier have criticized Quebec's overreliance on equalization, saying Quebecers are "spoiled children."
That's got Quebec's provincial government fighting back. In its 2010-11 budget document, the Jean Charest government is arguing that it should receive even more equalization than it's getting because Alberta's oil industry is keeping the Canadian dollar high, which in turn harms Quebec's manufacturing sector. This is not a joke.
"A rise in the world price of a barrel of oil favours provinces that have that resource," states the budget document in Section E. "However, the rise in the Canadian dollar that accompanies the rising price of oil hampers the exports of the other provinces.
"An adequate equalization program can mitigate this phenomenon by increasing the revenues of provinces that are negatively affected by the rise in the dollar, without reducing the revenues of provinces that benefit from the higher price of oil."
In other words, Quebec, which received $8.6 billion of the $14.4 billion doled out in equalization this year, is arguing that it's not enough. It wants more and it blames Alberta's oil industry for its troubles. It's a curious argument since it can be argued that Alberta's oil industry is fuelling Canada's economy and largely provided the money was sent as equalization to Quebec.
In 2007, the last year Statistics Canada figures are available for all provinces, B.C., Alberta and Ontario were the only provinces that paid more into Confederation than they received. Alberta paid a total of $37.064 billion in taxes and transfers to the federal government and the feds returned $17.567 billion in services and programs, meaning that Alberta contributed $19.5 billion net to the rest of Canada.
But Charest, who complained in Copenhagen that Alberta's oilsands industry "embarrassed" him, is making the argument that despite Alberta's largesse, it's to blame for the trouble Quebec is in.
In short, it's all Greek to Quebec -- and that's frightening.
© Copyright (c) The Vancouver Sun
Read more: http://www.vancouversun.com/business/disturbing+similarities+between+Quebec+Greece/3011792/story.html#ixzz0nixkfSjU
Friday, March 19, 2010
Credit Debt Swap
I ran across this article from a very good source (Newsweek) not some conspiratorial group. It put very well the concept of the Credit Debt Swap and how this is similar to the MBS which caused so much difficulty in the last economic woe.
By Daniel Gross | Newsweek Web Exclusive
Mar 17, 2010 | Updated: 5:43 p.m. ET Mar 17, 2010
Does it make sense to buy insurance against, say, a nuclear attack on Washington—if all the insurance providers' headquarters are inside the Beltway? Of course not. So why do investors buy insurance on U.S. government debt?
As many of us learned painfully during the economic meltdown, credit-default swaps are a form of insurance on financial instruments. They're contracts that pay off in the event that an entity fails to make good on its debt. You could, for example, pay a $2 premium to insure $100 in debt of, say, Lehman Bros. If Lehman goes Chapter 11, the party that sold the insurance pays $100 (or the difference between $100 and the amount Lehman can actually pay its creditors). Selling credit-default swaps is a fantastic business so long as the insured instruments or companies don't fail. That's what got AIG into so much trouble. It sold cheap protection on huge amounts of subprime mortgage bonds and collateralized debt obligations but never put money aside to make good on potential claims—leaving taxpayers on the hook to pay them off.
This brings us to the odd business of credit-default swaps on countries. In the sovereign credit-default swap market, investors can purchase (and trade) protection against the default of debt issued by governments, such as, say, Greece. In the wake of Greece's recent woes, there have been accusations that trading in CDS helped aggravate the crisis. Of course, Greece, it turns out, was never in real danger of defaulting on its debt—the notion that Europe's financial powers would have stood by while a euro-using country simply reneged on government debt was far-fetched.
So why bother with credit-default swaps on nations? CDS are a way of hedging existing positions: The value of CDS rise when the value of the bonds they insure fall. They can also be a cheap way of expressing a pessimistic view on countries' financial prospects without going to the trouble of selling short the bonds issued by the national government. Many people buying CDS for a country don't expect to collect the insurance, they expect to sell the insurance policy to somebody else. For investors, sovereign default swaps are not buy-and-hold insurance policies. They are a form of casino chip.
But in the long run, CDS only make sense as an asset class if they pay out in the event of default. This is why it's so curious that there is a market—albeit a small one—for credit default swaps on U.S. government debt. After all, if the U.S. government were to default, who would be able to pay the claims?
According to the Bureau of Public Debt, there is $8.15 trillion in U.S. government debt owned by the public. In addition, now that the United States has taken control of the failed mortgage giants Fannie Mae and Freddie Mac, the government is formally standing behind the debts of those two entities, which surpass $5 trillion. Now, let's imagine a world in which the U.S. government, lacking the will to tax or cut spending, can't scrape up the cash to stay current on interest payments and can't roll over debt as it matures. That would trigger a huge decline in the value of treasuries and mortgage-backed securities. The balance sheet of every U.S. financial institution—JPMorgan, Goldman, Citi, your neighborhood bank, the Federal Reserve, money-market funds—would be decimated. There wouldn't be a single solvent bank, insurer, or company in the United States. The large multinational banks, which have significant U.S. operations and plenty of this stuff on their books, would likewise be wiped out. Oh, and foreign holders of U.S. debt—see this list topped by China and Japan—would be toast, too.
In this dystopia, who, precisely, would be able to make good on the insurance sold on U.S. government debt? The last time we had a set of events that were supposed to trigger large-scale payment of credit-default swaps, the system basically shut down. All the investors who bought insurance on financial instruments from AIG got paid off in full only because the U.S. government bailed the company out. Who would bail out the Treasury Department and the Federal Reserve?
By definition, you can't collect an insurance payment on an entity that's too big too fail. That may help explain why the sovereign CDS market on U.S. debt is comparatively small. According to the Depository Trust and Clearing Company, there are about 415 contracts outstanding on about $2.25 billion in U.S. debt. That's tiny in comparison to the amount of total U.S. debt and in comparison to the market as a whole. According to DTCC, CDS on U.S. government debt are the 98th-largest position in the market today, between CDS on CenturyTel and Wal-Mart. By comparisons, investors have bought insurance worth $25 billion on Italy's debt, $15.6 billion on Spain's debt, and $6.4 billion on Bank of America's. (Here's more data and pricing on CDS form Markit.)
In 2008, we learned—or should have learned—that when a systemic crisis hits, hedges and insurance are worthless when the party on the other side of the table can't make good on its financial commitments. We learned—or should have learned—that much of the innovation that was touted as a new mode of investment, and as a spur to greater transparency, liquidity, and efficiency, turned out to be just another form of reckless gambling.
Daniel Gross is NEWSWEEK's economics editor and the author of Dumb Money: How Our Greatest Financial Minds Bankrupted the Nation and Pop!: Why Bubbles Are Great For The Economy .
© 2010
By Daniel Gross | Newsweek Web Exclusive
Mar 17, 2010 | Updated: 5:43 p.m. ET Mar 17, 2010
Does it make sense to buy insurance against, say, a nuclear attack on Washington—if all the insurance providers' headquarters are inside the Beltway? Of course not. So why do investors buy insurance on U.S. government debt?
As many of us learned painfully during the economic meltdown, credit-default swaps are a form of insurance on financial instruments. They're contracts that pay off in the event that an entity fails to make good on its debt. You could, for example, pay a $2 premium to insure $100 in debt of, say, Lehman Bros. If Lehman goes Chapter 11, the party that sold the insurance pays $100 (or the difference between $100 and the amount Lehman can actually pay its creditors). Selling credit-default swaps is a fantastic business so long as the insured instruments or companies don't fail. That's what got AIG into so much trouble. It sold cheap protection on huge amounts of subprime mortgage bonds and collateralized debt obligations but never put money aside to make good on potential claims—leaving taxpayers on the hook to pay them off.
This brings us to the odd business of credit-default swaps on countries. In the sovereign credit-default swap market, investors can purchase (and trade) protection against the default of debt issued by governments, such as, say, Greece. In the wake of Greece's recent woes, there have been accusations that trading in CDS helped aggravate the crisis. Of course, Greece, it turns out, was never in real danger of defaulting on its debt—the notion that Europe's financial powers would have stood by while a euro-using country simply reneged on government debt was far-fetched.
So why bother with credit-default swaps on nations? CDS are a way of hedging existing positions: The value of CDS rise when the value of the bonds they insure fall. They can also be a cheap way of expressing a pessimistic view on countries' financial prospects without going to the trouble of selling short the bonds issued by the national government. Many people buying CDS for a country don't expect to collect the insurance, they expect to sell the insurance policy to somebody else. For investors, sovereign default swaps are not buy-and-hold insurance policies. They are a form of casino chip.
But in the long run, CDS only make sense as an asset class if they pay out in the event of default. This is why it's so curious that there is a market—albeit a small one—for credit default swaps on U.S. government debt. After all, if the U.S. government were to default, who would be able to pay the claims?
According to the Bureau of Public Debt, there is $8.15 trillion in U.S. government debt owned by the public. In addition, now that the United States has taken control of the failed mortgage giants Fannie Mae and Freddie Mac, the government is formally standing behind the debts of those two entities, which surpass $5 trillion. Now, let's imagine a world in which the U.S. government, lacking the will to tax or cut spending, can't scrape up the cash to stay current on interest payments and can't roll over debt as it matures. That would trigger a huge decline in the value of treasuries and mortgage-backed securities. The balance sheet of every U.S. financial institution—JPMorgan, Goldman, Citi, your neighborhood bank, the Federal Reserve, money-market funds—would be decimated. There wouldn't be a single solvent bank, insurer, or company in the United States. The large multinational banks, which have significant U.S. operations and plenty of this stuff on their books, would likewise be wiped out. Oh, and foreign holders of U.S. debt—see this list topped by China and Japan—would be toast, too.
In this dystopia, who, precisely, would be able to make good on the insurance sold on U.S. government debt? The last time we had a set of events that were supposed to trigger large-scale payment of credit-default swaps, the system basically shut down. All the investors who bought insurance on financial instruments from AIG got paid off in full only because the U.S. government bailed the company out. Who would bail out the Treasury Department and the Federal Reserve?
By definition, you can't collect an insurance payment on an entity that's too big too fail. That may help explain why the sovereign CDS market on U.S. debt is comparatively small. According to the Depository Trust and Clearing Company, there are about 415 contracts outstanding on about $2.25 billion in U.S. debt. That's tiny in comparison to the amount of total U.S. debt and in comparison to the market as a whole. According to DTCC, CDS on U.S. government debt are the 98th-largest position in the market today, between CDS on CenturyTel and Wal-Mart. By comparisons, investors have bought insurance worth $25 billion on Italy's debt, $15.6 billion on Spain's debt, and $6.4 billion on Bank of America's. (Here's more data and pricing on CDS form Markit.)
In 2008, we learned—or should have learned—that when a systemic crisis hits, hedges and insurance are worthless when the party on the other side of the table can't make good on its financial commitments. We learned—or should have learned—that much of the innovation that was touted as a new mode of investment, and as a spur to greater transparency, liquidity, and efficiency, turned out to be just another form of reckless gambling.
Daniel Gross is NEWSWEEK's economics editor and the author of Dumb Money: How Our Greatest Financial Minds Bankrupted the Nation and Pop!: Why Bubbles Are Great For The Economy .
© 2010
Wednesday, February 10, 2010
A man after my own heart
Monday, I was listening to John Gormley Live in Saskatchewan and heart their guest David Trahair, an accountant who published a book called "Enough Bull". I have the link for the radio interview, but they have segmented this by hours (4th hour), and I thought that was a bit long of a segment to hear. The link I have listed is a video link from the same author. Basically, he thinks far too much time is wasted on setting up early retirement plans while ignoring paying down debt. Totally backward. Any rate, I though this guy was excellent and worthy of a listen. Brad
Friday, February 5, 2010
Every little thing is goin’ to be alright:
As parents, you wonder if you are properly impacting your children. It is the secret dread of parents, and although there are lots of chances where you see things that prove you are doing OK, it is the events which oppose your values expressed in your children that come to the front. In fact, these small events usually get talked about (sometimes loudly). These events are the subject of a child’s punishment, or special attention. These events worry a parent into sleepless nights.
Such has been one of my worries. I have over the last few years, due to a variety of circumstances, embraced simplicity and am trying to push excessive materialism out of my world. I am examining much of my world to find what is important and what is of limited value. What I found in this experiment was a value on things that were often free and/or of limited real cost. Value is a characteristic we add to an object.
Right now I am wearing one gold ring. The gold ring was the symbol of my marriage to my lovely wife. I have not weighted it, but since the value of gold has gone up, I imagine the value of that ring has also gone up. However, the real value of that ring is the representation of the marriage which is 18 years old this Spring. That is true regardless whether the price of gold goes up or down.
Of course, this emphasis against materialism is not always easy and I worried about how my children would respond. My daughters responded in kind. They caught our vision right away. The younger boys, to be honest were too young to think things were too different. My eldest son was my major concern. This week, we took a walk around town together to visit. My wife had bought me a new coat, and following the Biblical mandate, I was taking my old coat to a mission in hopes that they could give it to someone in need (John 3:11). I mentioned to him my concern. He and I were almost going in opposite directions. I was trying to de-accumulate while he was accumulating. Again, I am 39, he’s 15, so it’s not a shocker that “cool” plays a larger role in his world, and dressing the part of High School was vital to his existence. Our conversation was not harsh, just observational. It came and it went. I didn’t notice any real impact. My eldest has learned the “poker face”.
This week, I finished a book I was writing and sent it off for peer review, and am working through picking out a publisher. It is on a new design of how to flesh out the church. A significant portion of what I wrote centered on the fact that we have so neglected “the least of these” (Matthew 25). So, as I was putting some material together I found it was amazingly cost efficient to send a poor family in Asia a gift that would change their world. A pair of chickens (hen and rooster) would be as little as $11. This pair can produce up to 40 dozen eggs a year. If they let the eggs grow into chicks they can have a flock that can keep a family well fed for years. Eggs can also be traded. They are good currency to buy other stuff. Also, since an average family lives on $200/year, a couple chickens is generally a luxury that most people really can’t afford. They would have to starve themselves to save enough to buy the chickens
Goats, are another wonderful gift. $60 and you can have a goat sent. They will breed the goats. They normally have 2 babies (kids) a year, but they also produce milk which can be made into cheese. It’s a wonderful gift.
Or you can “have a cow, man!” $375 and you will change their world for years. Lots of milk, they can be bred for a full “cattle industry”, it’s a wonder.
If you remember the old Veggie-tale song “everybody’s got a water buffalo”, it sounded silly at the time, but a water buffalo is quoting from Gospel for Asia’s web site:
A gift of a water buffalo to a poor South Asian family is good news indeed! Transportation, plough animal, cart hauler, milk giver and more-all in one sturdy creature that is often considered a "member of the family."
How much would it take for everyone to have a water buffalo? $475. Maybe Phil Vischer was on to something.
So, I was talking to my children about this and the idea came up that we could pull our change together. Years ago, my family kept a jar out and we threw extra change into it and that became part of our vacation fund. Why not have a fund for “the least of our brethern”? I had a couple dollars in change, so I dumped it into the cup. One of my little boys threw in a “toonie”, which was a lot of money from the little guy. A couple other children threw in some change. We scouted around the house and got $3.50 in returned bottles. I was hoping we might have enough to buy a pair of chickens at the end of the week. We’d do it just before Sabbath, and we have a good deed done to start the day of rest.
My eldest son, grabbed his wallet and dumped a large wad of money in there. My wife and I stood silent. I am not talking a $10 or a $20, but well over $100, and then my second oldest daughter dumped another large sum of money she made. I was so moved I didn’t know what to say.
Later that day, I was alone with my son, and asked him…”what was up with that?” He said, in his usual, casual way, he’d figured he’d bought enough cool clothes and stuff for himself, he figured he could he could give some money to people who needed this just to have enough food to eat.
He’s done many things that have brought me joy, but I have to admit, I don’t think I have ever been so impressed with him as I was that moment. For just a second, I could see that maybe we were getting through. Perhaps, everything will be alright.
What will we do with the money? Right now, we have a decision to make. We might buy a cow (that would change a family and perhaps a village forever), or we might buy something like 30 pairs of chickens and impact 30 families for years, maybe forever. I think we will also spring for a water purifier (they are only $30) and that would turn poisoned water into drinkable water. For us, they are simple gestures, but for the “least of our brethern”, it will change the world.
Such has been one of my worries. I have over the last few years, due to a variety of circumstances, embraced simplicity and am trying to push excessive materialism out of my world. I am examining much of my world to find what is important and what is of limited value. What I found in this experiment was a value on things that were often free and/or of limited real cost. Value is a characteristic we add to an object.
Right now I am wearing one gold ring. The gold ring was the symbol of my marriage to my lovely wife. I have not weighted it, but since the value of gold has gone up, I imagine the value of that ring has also gone up. However, the real value of that ring is the representation of the marriage which is 18 years old this Spring. That is true regardless whether the price of gold goes up or down.
Of course, this emphasis against materialism is not always easy and I worried about how my children would respond. My daughters responded in kind. They caught our vision right away. The younger boys, to be honest were too young to think things were too different. My eldest son was my major concern. This week, we took a walk around town together to visit. My wife had bought me a new coat, and following the Biblical mandate, I was taking my old coat to a mission in hopes that they could give it to someone in need (John 3:11). I mentioned to him my concern. He and I were almost going in opposite directions. I was trying to de-accumulate while he was accumulating. Again, I am 39, he’s 15, so it’s not a shocker that “cool” plays a larger role in his world, and dressing the part of High School was vital to his existence. Our conversation was not harsh, just observational. It came and it went. I didn’t notice any real impact. My eldest has learned the “poker face”.
This week, I finished a book I was writing and sent it off for peer review, and am working through picking out a publisher. It is on a new design of how to flesh out the church. A significant portion of what I wrote centered on the fact that we have so neglected “the least of these” (Matthew 25). So, as I was putting some material together I found it was amazingly cost efficient to send a poor family in Asia a gift that would change their world. A pair of chickens (hen and rooster) would be as little as $11. This pair can produce up to 40 dozen eggs a year. If they let the eggs grow into chicks they can have a flock that can keep a family well fed for years. Eggs can also be traded. They are good currency to buy other stuff. Also, since an average family lives on $200/year, a couple chickens is generally a luxury that most people really can’t afford. They would have to starve themselves to save enough to buy the chickens
Goats, are another wonderful gift. $60 and you can have a goat sent. They will breed the goats. They normally have 2 babies (kids) a year, but they also produce milk which can be made into cheese. It’s a wonderful gift.
Or you can “have a cow, man!” $375 and you will change their world for years. Lots of milk, they can be bred for a full “cattle industry”, it’s a wonder.
If you remember the old Veggie-tale song “everybody’s got a water buffalo”, it sounded silly at the time, but a water buffalo is quoting from Gospel for Asia’s web site:
A gift of a water buffalo to a poor South Asian family is good news indeed! Transportation, plough animal, cart hauler, milk giver and more-all in one sturdy creature that is often considered a "member of the family."
How much would it take for everyone to have a water buffalo? $475. Maybe Phil Vischer was on to something.
So, I was talking to my children about this and the idea came up that we could pull our change together. Years ago, my family kept a jar out and we threw extra change into it and that became part of our vacation fund. Why not have a fund for “the least of our brethern”? I had a couple dollars in change, so I dumped it into the cup. One of my little boys threw in a “toonie”, which was a lot of money from the little guy. A couple other children threw in some change. We scouted around the house and got $3.50 in returned bottles. I was hoping we might have enough to buy a pair of chickens at the end of the week. We’d do it just before Sabbath, and we have a good deed done to start the day of rest.
My eldest son, grabbed his wallet and dumped a large wad of money in there. My wife and I stood silent. I am not talking a $10 or a $20, but well over $100, and then my second oldest daughter dumped another large sum of money she made. I was so moved I didn’t know what to say.
Later that day, I was alone with my son, and asked him…”what was up with that?” He said, in his usual, casual way, he’d figured he’d bought enough cool clothes and stuff for himself, he figured he could he could give some money to people who needed this just to have enough food to eat.
He’s done many things that have brought me joy, but I have to admit, I don’t think I have ever been so impressed with him as I was that moment. For just a second, I could see that maybe we were getting through. Perhaps, everything will be alright.
What will we do with the money? Right now, we have a decision to make. We might buy a cow (that would change a family and perhaps a village forever), or we might buy something like 30 pairs of chickens and impact 30 families for years, maybe forever. I think we will also spring for a water purifier (they are only $30) and that would turn poisoned water into drinkable water. For us, they are simple gestures, but for the “least of our brethern”, it will change the world.
Wednesday, January 6, 2010
A Childrren's book worth the read
A children’s book that may surprise you:
As I have mentioned before. I have 7 children, and in fact, as of just a couple days ago I now have 8. It’s amazing. Our newest addition is Josiah Ephraim. His name means “the Lord is my help” and Ephraim means “double blessing”. Certainly, he is that, as all the children are. Yet, that is not what I wanted to write about. I wanted to recommend a children’s book. My little boys (Noah, Shamus and Shimone and even Shemiel) love listening to me read stories. I have a bit of the actor flare, and they gather around like I was the best television show going. Years ago, my daughters started to read Barbara Parks book “Junie B. Jones” I overheard one on a book on tape and thought the concept was cute. Last week I started to read one of these books a day to the boys. They loved it.
Yesterday, I read Junie B. Jones is a Party Animal. Which is the 10th in that series. I would encourage anyone to read it. It will take about ½ an hour read at roughly Junie B.‘s communication speed. I was hoping I could find a book review that captures what I read, but I am afraid that seems to be difficult. Too many people talk about Barbara Park’s writing style (which is very creative) or general information about the story, but so far almost no one seems to center on the point.
In summary: Junie B. has a friend named Lucille. She lives with her wealthy Nanna. Lucille is self center, and not always a lot of fun, but she is one of Junie B.’s best friends. Junie B convinces Lucille that if she invites her and another friend over for a slumber party they could all help beg the rich Nanna for a poodle for Lucille. Lucille finds this will work.
The house and home is amazing, from “castle-like gate” to crystal and china, and flowers and silk. However, Junie realizes that the “shows” of wealth are in a world that is almost unliveable for her. She breaks a crystal glass, and stains the linen. She doesn’t understand that the amazing stuffed animals are just for looks. You can’t sit on a bed with a silk bedspread.
There are many things to make Lucille a “princess”, but this world makes Junie B. miserable. In the end, she goes and has breakfast of blueberry pancakes with her own Nanna’s house (who isn’t a “Richie Nanna”, and who was described by Junie B. earlier as a “dud”).
Junie B wants a plastic cup, and perhaps a plastic cereal bowl, but it’s not available. Lucille thrills at the wealth and has lived to survive in that environment. Junie B. (the character that we love and embrace) find herself standing away from the table alone eating a banana because that is all that she finds “safe”.
Silly children’s story, a bit like Aesop’s fable about the city mouse and country mouse. Yet, the truth is embedded there. If we choose to amass the images of wealth, we may have conversation pieces. We may have the admiration of some. We may even feel a bit better about our “comfort” with these images of wealth, but what do we really have?
Let’s pretend, I have an original Van Gogh oil painting in my house. It’s hung in the living room and a conversation piece for people. Can the children play in that room? Of course not! They might damage the painting. Do I have to get an incredible security system and extra insurance to protect my fine work of art? Absolutely! I may have to repaint or redesign the living room for my fabulous work of art, and if that happens I should do the same for the rest of the house. It doesn’t take too long before one can see that I am no longer the Master who owns a fine work of art. In fact, I am a servant to a painting from a dead guy. It’s worse then that, the painting (like almost all Van Gogh’s) had almost no value while he was alive. Van Gogh lived in poverty. Sometimes his friends might buy a painting just to make sure he had some money to live on. I didn’t even say whether the “van Gogh” was a painting that was “nice or good”. The value was perceived from others. Amazing… just pause to think. The painting (which could be in fact ugly) has taken me as it’s slave and forced me to live to serve it, and I willingly ran to embrace it.
It’s even scarier then that. This is true of art. It is true of almost all collections. We amass for comfort. We amass for the admiration of others. We buy Curio cabinets to show off our collections. We protect, and encase these dear precious things.
This last month, I heard of a man I knew who has lost his family (and why did they leave?) for many reasons, but one of the items that came out was there really was no room for his wife and his children and his DVD collection.
Jesus (Yeshua) said:
“Lay not up for yourselves treasures upon the earth, where moth and rust consume, and where thieves break through and steal: but lay up for yourselves treasures in heaven, where neither moth nor rust doth consume, and where thieves do not break through nor steal:for where thy treasure is, there will thy heart be also.”
John the Baptist took the idea further:
“And he answered and said unto them, He that hath two coats, let him impart to him that hath none; and he that hath food, let him do likewise.”
The idea is foreign to our world, but we might just find that it is necessary for the salvation of our very soul. Not your normal wealth concept, I know, but I think it might be one that was worthy to share.
As I have mentioned before. I have 7 children, and in fact, as of just a couple days ago I now have 8. It’s amazing. Our newest addition is Josiah Ephraim. His name means “the Lord is my help” and Ephraim means “double blessing”. Certainly, he is that, as all the children are. Yet, that is not what I wanted to write about. I wanted to recommend a children’s book. My little boys (Noah, Shamus and Shimone and even Shemiel) love listening to me read stories. I have a bit of the actor flare, and they gather around like I was the best television show going. Years ago, my daughters started to read Barbara Parks book “Junie B. Jones” I overheard one on a book on tape and thought the concept was cute. Last week I started to read one of these books a day to the boys. They loved it.
Yesterday, I read Junie B. Jones is a Party Animal. Which is the 10th in that series. I would encourage anyone to read it. It will take about ½ an hour read at roughly Junie B.‘s communication speed. I was hoping I could find a book review that captures what I read, but I am afraid that seems to be difficult. Too many people talk about Barbara Park’s writing style (which is very creative) or general information about the story, but so far almost no one seems to center on the point.
In summary: Junie B. has a friend named Lucille. She lives with her wealthy Nanna. Lucille is self center, and not always a lot of fun, but she is one of Junie B.’s best friends. Junie B convinces Lucille that if she invites her and another friend over for a slumber party they could all help beg the rich Nanna for a poodle for Lucille. Lucille finds this will work.
The house and home is amazing, from “castle-like gate” to crystal and china, and flowers and silk. However, Junie realizes that the “shows” of wealth are in a world that is almost unliveable for her. She breaks a crystal glass, and stains the linen. She doesn’t understand that the amazing stuffed animals are just for looks. You can’t sit on a bed with a silk bedspread.
There are many things to make Lucille a “princess”, but this world makes Junie B. miserable. In the end, she goes and has breakfast of blueberry pancakes with her own Nanna’s house (who isn’t a “Richie Nanna”, and who was described by Junie B. earlier as a “dud”).
Junie B wants a plastic cup, and perhaps a plastic cereal bowl, but it’s not available. Lucille thrills at the wealth and has lived to survive in that environment. Junie B. (the character that we love and embrace) find herself standing away from the table alone eating a banana because that is all that she finds “safe”.
Silly children’s story, a bit like Aesop’s fable about the city mouse and country mouse. Yet, the truth is embedded there. If we choose to amass the images of wealth, we may have conversation pieces. We may have the admiration of some. We may even feel a bit better about our “comfort” with these images of wealth, but what do we really have?
Let’s pretend, I have an original Van Gogh oil painting in my house. It’s hung in the living room and a conversation piece for people. Can the children play in that room? Of course not! They might damage the painting. Do I have to get an incredible security system and extra insurance to protect my fine work of art? Absolutely! I may have to repaint or redesign the living room for my fabulous work of art, and if that happens I should do the same for the rest of the house. It doesn’t take too long before one can see that I am no longer the Master who owns a fine work of art. In fact, I am a servant to a painting from a dead guy. It’s worse then that, the painting (like almost all Van Gogh’s) had almost no value while he was alive. Van Gogh lived in poverty. Sometimes his friends might buy a painting just to make sure he had some money to live on. I didn’t even say whether the “van Gogh” was a painting that was “nice or good”. The value was perceived from others. Amazing… just pause to think. The painting (which could be in fact ugly) has taken me as it’s slave and forced me to live to serve it, and I willingly ran to embrace it.
It’s even scarier then that. This is true of art. It is true of almost all collections. We amass for comfort. We amass for the admiration of others. We buy Curio cabinets to show off our collections. We protect, and encase these dear precious things.
This last month, I heard of a man I knew who has lost his family (and why did they leave?) for many reasons, but one of the items that came out was there really was no room for his wife and his children and his DVD collection.
Jesus (Yeshua) said:
“Lay not up for yourselves treasures upon the earth, where moth and rust consume, and where thieves break through and steal: but lay up for yourselves treasures in heaven, where neither moth nor rust doth consume, and where thieves do not break through nor steal:for where thy treasure is, there will thy heart be also.”
John the Baptist took the idea further:
“And he answered and said unto them, He that hath two coats, let him impart to him that hath none; and he that hath food, let him do likewise.”
The idea is foreign to our world, but we might just find that it is necessary for the salvation of our very soul. Not your normal wealth concept, I know, but I think it might be one that was worthy to share.
Monday, November 30, 2009
So, does money have any real value?
I was in a bit of a difficult conversation yesterday. We had some friends in the area and they had heard an interview with someone who was saying that the US economy was doomed. I get about 2 of these though e-mails a day. I am sure you have seen these as well, but I usually can just avoid the whole conversation (an e-mail doesn’t automatically require a reply). But this question was coming from friends, and I had to admit some of the most difficult realities for a financial planners. Money: national currency is a representative economy. It is backed by the faith of the government that prints the currency, and as time has gone by, the governments have not proved as strong as people suspect.
I have never been a precious metal trader. I have only owned precious metals as a bit jewellery, but today we are talking more then ever before about gold (and silver). This is outside my field.
The US dollar was tied to hard metals up until 1974. This meant that the US government actually had metal (either gold or silver) to cover the value of the money they were printing. This would be a classic representative economy. The printed dollar represented the metal behind it. In 1974, this standard was removed. Today’s US (and other national currencies) dollar is back only be the faith of the government. This allows the government to print as much money as is necessary.
However, for 35 years, this has been the case. Why is there so much talk about precious metals today? First, the value of both of these metal have grow substantially. The second reason, is that metals are not subject to inflation and/or exchange rate problems. It become a true international currency. This second reason is really “The” reason for most watchers. The US has significantly increased it’s national debt in the bail out of so many companies. The value of the US dollar doesn’t have the same strength as before as people are starting to not hold it as the “great international currency”. In my present home of Canada, we have certainly see the Canadian dollar function very well in light of this US weakness.
Of course, the final nuts and bolts question, is “what should one do?” Should we all run out and buy gold or silver? Gold is about 1200/oz. Silver is 18.25/oz. If someone wants to buy gold, the Canadian bank “Bank of Nova Scotia” has made this very easy. You can order it on line from 8am to 5pm EST on any weekday. Most of your other banks also offer it but they generally do a manual system. (meaning- you walk into the branch and they fill out some forms and you drop by in a few days to pick up the metal). 1oz silver bars at BNS are running about $23.51 silver coins (minted by the Canadian gov’t) are running a bit more. Some have preferred a gold and silver note, although this is a lot easier if you want to trade gold and silver, in the event of an economic meltdown the note is likely to be to cumbersome to work with. Another problem with the metals is how do you trade with them? If you showed up at a grocery store with a sack of gold, who would accept it? What rate would you get? Would would even be able to tell you it’s real?
Back as a financial planner, a man came into our branch with a silver brick and set it on the desk of my receptionist. We all stared at it. He asked “so, how much is it worth?” We all stared. We had no idea. Was it really silver? It looked heavy. It was grey and shiny. He told us he paid $1000 for the brick back a decade ago when he thought the world economy would collapse. It didn’t collapse, so he decided to bring it back. We sent the brick away to Toronto to our precious metals depository and they assessed the value as $1000.53 (or something like that). Not his best economic decision.
Let’s pretend you had the gold bars…where would you put it to keep it safe until you needed it? That’s difficult. For the present, a safe deposit box would make sense, but again, if we were in an economic meltdown and the banks closed, you would find it difficult to get back into a branch to get the gold. Do you keep it in your house? You could, but gold could be subject to loss of theft. I have had 2 total loss house-fires. We never did find any “jewellery” in the ash heap.
I guess when you come down to it, although we all want to do the best to plan for the future, planning for a complete economic meltdown would be very difficult. One financial planner and I were talking about this idea a few months back and he mentioned that when Hurricane Katrina hit, we actually found an economy where the dollar didn’t matter much at all. Batteries were the best thing to have or fresh drinking water. There was no one (as far as I know) trying to trade silver or gold. My friend, said for him “chickens” would be the best item to have around, and I tend to agree.
So, will there come a time when we can not rely on the government?…I think so. The Bible predicts a time when there would be one government and this government would be hostile to believers. In fact, it says no one could buy or trade without a mark of the “Beast”. I am confident that will someday become a reality, but for most of us, until we start to see those “end of the age signs” we might do well to not bring a bag of gold or silver to Walmart. Have a good day, Brad
I have never been a precious metal trader. I have only owned precious metals as a bit jewellery, but today we are talking more then ever before about gold (and silver). This is outside my field.
The US dollar was tied to hard metals up until 1974. This meant that the US government actually had metal (either gold or silver) to cover the value of the money they were printing. This would be a classic representative economy. The printed dollar represented the metal behind it. In 1974, this standard was removed. Today’s US (and other national currencies) dollar is back only be the faith of the government. This allows the government to print as much money as is necessary.
However, for 35 years, this has been the case. Why is there so much talk about precious metals today? First, the value of both of these metal have grow substantially. The second reason, is that metals are not subject to inflation and/or exchange rate problems. It become a true international currency. This second reason is really “The” reason for most watchers. The US has significantly increased it’s national debt in the bail out of so many companies. The value of the US dollar doesn’t have the same strength as before as people are starting to not hold it as the “great international currency”. In my present home of Canada, we have certainly see the Canadian dollar function very well in light of this US weakness.
Of course, the final nuts and bolts question, is “what should one do?” Should we all run out and buy gold or silver? Gold is about 1200/oz. Silver is 18.25/oz. If someone wants to buy gold, the Canadian bank “Bank of Nova Scotia” has made this very easy. You can order it on line from 8am to 5pm EST on any weekday. Most of your other banks also offer it but they generally do a manual system. (meaning- you walk into the branch and they fill out some forms and you drop by in a few days to pick up the metal). 1oz silver bars at BNS are running about $23.51 silver coins (minted by the Canadian gov’t) are running a bit more. Some have preferred a gold and silver note, although this is a lot easier if you want to trade gold and silver, in the event of an economic meltdown the note is likely to be to cumbersome to work with. Another problem with the metals is how do you trade with them? If you showed up at a grocery store with a sack of gold, who would accept it? What rate would you get? Would would even be able to tell you it’s real?
Back as a financial planner, a man came into our branch with a silver brick and set it on the desk of my receptionist. We all stared at it. He asked “so, how much is it worth?” We all stared. We had no idea. Was it really silver? It looked heavy. It was grey and shiny. He told us he paid $1000 for the brick back a decade ago when he thought the world economy would collapse. It didn’t collapse, so he decided to bring it back. We sent the brick away to Toronto to our precious metals depository and they assessed the value as $1000.53 (or something like that). Not his best economic decision.
Let’s pretend you had the gold bars…where would you put it to keep it safe until you needed it? That’s difficult. For the present, a safe deposit box would make sense, but again, if we were in an economic meltdown and the banks closed, you would find it difficult to get back into a branch to get the gold. Do you keep it in your house? You could, but gold could be subject to loss of theft. I have had 2 total loss house-fires. We never did find any “jewellery” in the ash heap.
I guess when you come down to it, although we all want to do the best to plan for the future, planning for a complete economic meltdown would be very difficult. One financial planner and I were talking about this idea a few months back and he mentioned that when Hurricane Katrina hit, we actually found an economy where the dollar didn’t matter much at all. Batteries were the best thing to have or fresh drinking water. There was no one (as far as I know) trying to trade silver or gold. My friend, said for him “chickens” would be the best item to have around, and I tend to agree.
So, will there come a time when we can not rely on the government?…I think so. The Bible predicts a time when there would be one government and this government would be hostile to believers. In fact, it says no one could buy or trade without a mark of the “Beast”. I am confident that will someday become a reality, but for most of us, until we start to see those “end of the age signs” we might do well to not bring a bag of gold or silver to Walmart. Have a good day, Brad
Friday, November 27, 2009
Smith Maneuver
When I worked as a Financial Planner, this was one consideration when trying to expand someone's wealth. This is not for everyone, but I think anyone can benefit from understanding the concept. I always thought this was certainly creative.
Fraser View House Debt as Positive
By Ellen Roseman Personal Finance Colulmnist
Published On Wed Jan 24 2007
Fraser Smith has written a bestselling book on personal finance by telling Canadians not to pay off their mortgages.
He wants people to convert bad debt (a mortgage) to good debt (an investment loan) by swapping one for the other.
By using something called a "readvanceable mortgage," you can get a tax deduction for the interest paid on a mortgage (which is generally not tax-deductible).
The strategy to convert a negative to a positive is called the Smith Manoeuvre.
Here's how it works: (1) Make your regular mortgage payments. (2) Borrow back the principal reduction that occurs as you make each payment. (3) Create an investment loan that is tax-deductible.
After the first year, you will get a big tax refund. Use this money to make an extra payment against your mortgage, then immediately borrow back and invest the same amount.
What's interesting about the Smith Manoeuvre is that you never reduce your debt. Borrow $250,000 to buy a house and pay off that loan over 25 years. Guess what? You still owe $250,000 at the end.
But now you have investments that are worth more than $250,000 – or so you hope. You can sell these investments to discharge the loan.
What about the time-honoured strategy of contributing to a registered retirement savings plan? Doesn't that offer a hefty tax saving?
In many cases, Smith says, you would do better to cash the RRSP, pay the tax and use the money to make a lump-sum reduction of the first mortgage. Then, you immediately borrow back that money and invest it outside the RRSP.
Only after converting all non-deductible mortgage debt to tax-deductible investment debt should you resume your RRSP contributions.
As you might expect, you won't hear much about RRSP alternatives from your friendly banker or investment dealer.
They're too busy asking you which mutual fund you want to buy before March 1, the deadline to invest in an RRSP and save taxes on your 2006 return.
Despite a lack of support from mainstream financial institutions, the Smith Manoeuvre has taken off through word-of-mouth and vigorous debate at online discussion forums.
"I've passed 30,000 books sold and I'm printing 10,000 more this week," he told me about his The Smith Manoeuvre: Is Your Mortgage Tax-Deductible?
These are amazing sales figures for a self-published book, not terribly user-friendly, that first came out in 2002. I picked up a copy of the seventh printing recently at a Costco warehouse store for $12.99 (half the cover price).
So, who is Fraser Smith? As a financial adviser in Vancouver, he came up with the idea in 1984 and pitched it to Canada's largest credit union.
The Vancity credit union attracted many new customers by working with them to make their mortgages tax-deductible and helped secure a dominant position in the B.C. market.
Smith, now retired and living in Victoria, has been working with partners to start a new company, Smith Manoeuvre Financial Corp. They opened an office last month on Bay St. in downtown Toronto and set up a website, www.smfc.com.
He has names and numbers of about 450 financial planners and mortgage brokers who can help put the plan into action.
"It's a great strategy, but it's not for everyone. You have to consider your risk tolerance," says Elisseos Iriotakis, a certified financial planner and vice-president of mortgages for Safebridge Financial Group in Toronto.
He finds clients are split. Half welcome the idea of swapping bad debt for good debt, while the other half worry about borrowing to invest and possibly losing money.
"It's not good for the average person. Most of my clients wouldn't understand it because it's very complex," says Gary Newby, a certified financial planner in Toronto.
Newby took a course on the Smith Manoeuvre, which explains why his name is on the list of advisers who endorse the strategy. But he says his request to remove his name was not honoured.
David Trahair, a Toronto chartered accountant, wrote a book urging Canadians not to invest in RRSPs before paying off mortgages and other non-deductible debt. He disapproves of swapping one loan for another.
"I recommend the total opposite, paying off your principal residence and not borrowing against it," he says.
"It's a high-risk strategy because you're betting the farm that some investment adviser can do better than you can. You have a guaranteed return from getting rid of the mortgage."
Love it or hate it, the Smith Manoeuvre is a runaway success. It appeals to those who want the best of both worlds, paying off a mortgage while building an investment portfolio at the same time.
Ellen Roseman's column appears Wednesday, Saturday and Sunday. You can reach her by writing Business c/o Toronto Star, 1 Yonge St., Toronto M5E 1E6; by phone at 416-945-8687; by fax at 416-865-3630; or at eroseman@thestar.ca by email.
Fraser View House Debt as Positive
By Ellen Roseman Personal Finance Colulmnist
Published On Wed Jan 24 2007
Fraser Smith has written a bestselling book on personal finance by telling Canadians not to pay off their mortgages.
He wants people to convert bad debt (a mortgage) to good debt (an investment loan) by swapping one for the other.
By using something called a "readvanceable mortgage," you can get a tax deduction for the interest paid on a mortgage (which is generally not tax-deductible).
The strategy to convert a negative to a positive is called the Smith Manoeuvre.
Here's how it works: (1) Make your regular mortgage payments. (2) Borrow back the principal reduction that occurs as you make each payment. (3) Create an investment loan that is tax-deductible.
After the first year, you will get a big tax refund. Use this money to make an extra payment against your mortgage, then immediately borrow back and invest the same amount.
What's interesting about the Smith Manoeuvre is that you never reduce your debt. Borrow $250,000 to buy a house and pay off that loan over 25 years. Guess what? You still owe $250,000 at the end.
But now you have investments that are worth more than $250,000 – or so you hope. You can sell these investments to discharge the loan.
What about the time-honoured strategy of contributing to a registered retirement savings plan? Doesn't that offer a hefty tax saving?
In many cases, Smith says, you would do better to cash the RRSP, pay the tax and use the money to make a lump-sum reduction of the first mortgage. Then, you immediately borrow back that money and invest it outside the RRSP.
Only after converting all non-deductible mortgage debt to tax-deductible investment debt should you resume your RRSP contributions.
As you might expect, you won't hear much about RRSP alternatives from your friendly banker or investment dealer.
They're too busy asking you which mutual fund you want to buy before March 1, the deadline to invest in an RRSP and save taxes on your 2006 return.
Despite a lack of support from mainstream financial institutions, the Smith Manoeuvre has taken off through word-of-mouth and vigorous debate at online discussion forums.
"I've passed 30,000 books sold and I'm printing 10,000 more this week," he told me about his The Smith Manoeuvre: Is Your Mortgage Tax-Deductible?
These are amazing sales figures for a self-published book, not terribly user-friendly, that first came out in 2002. I picked up a copy of the seventh printing recently at a Costco warehouse store for $12.99 (half the cover price).
So, who is Fraser Smith? As a financial adviser in Vancouver, he came up with the idea in 1984 and pitched it to Canada's largest credit union.
The Vancity credit union attracted many new customers by working with them to make their mortgages tax-deductible and helped secure a dominant position in the B.C. market.
Smith, now retired and living in Victoria, has been working with partners to start a new company, Smith Manoeuvre Financial Corp. They opened an office last month on Bay St. in downtown Toronto and set up a website, www.smfc.com.
He has names and numbers of about 450 financial planners and mortgage brokers who can help put the plan into action.
"It's a great strategy, but it's not for everyone. You have to consider your risk tolerance," says Elisseos Iriotakis, a certified financial planner and vice-president of mortgages for Safebridge Financial Group in Toronto.
He finds clients are split. Half welcome the idea of swapping bad debt for good debt, while the other half worry about borrowing to invest and possibly losing money.
"It's not good for the average person. Most of my clients wouldn't understand it because it's very complex," says Gary Newby, a certified financial planner in Toronto.
Newby took a course on the Smith Manoeuvre, which explains why his name is on the list of advisers who endorse the strategy. But he says his request to remove his name was not honoured.
David Trahair, a Toronto chartered accountant, wrote a book urging Canadians not to invest in RRSPs before paying off mortgages and other non-deductible debt. He disapproves of swapping one loan for another.
"I recommend the total opposite, paying off your principal residence and not borrowing against it," he says.
"It's a high-risk strategy because you're betting the farm that some investment adviser can do better than you can. You have a guaranteed return from getting rid of the mortgage."
Love it or hate it, the Smith Manoeuvre is a runaway success. It appeals to those who want the best of both worlds, paying off a mortgage while building an investment portfolio at the same time.
Ellen Roseman's column appears Wednesday, Saturday and Sunday. You can reach her by writing Business c/o Toronto Star, 1 Yonge St., Toronto M5E 1E6; by phone at 416-945-8687; by fax at 416-865-3630; or at eroseman@thestar.ca by email.
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