Management vs Activity

Feb 25, 2010
I haven't kept up in recent days - not that there wasn't anything going on, what with financial pillaging and misdeeds in Greece being exposed (March 16 should tell all or at least most, in terms of international financial impact), economic stats from the US being all over the place, stock and commodity indexes hanging over a precipice, etc.

What is a boy to do? Players with positions are sitting pat. Players without positions are sitting pat. Both situations have rational support. I have a fairly complete position in place and for now I am taking no action. No activity in a situation like this is definitely not the same as no or passive management despite looking like a duck. This is a time for hyper vigilance, continuously reviewing every possible piece of relevant information available in order to reasses the decision "take no action". In this case the decision is essentially bullish even though my next plan of actual action is to be a short-term, and temporary, seller.

Because I have so tightly focussed my primary position during this time phase I am capable of being affected by US dollar/gold action; any major change in perception as to the immediate future direction of the US economy; good or bad news re my particular holding, mostly influenced by short-term events and to a lesser degree longer-term events.

Technically, most analysts feel that a major drop in gold is closer than a resumption of its secular uptrend. This is tied to their view that an increase in the value of the US dollar in the short run will for a while reverse its continuing slide downward. Charts from 1937 abound in an effort to support the gold decline thesis. I am prepared to wait and watch, but with my track shoes on in case data starts to make the odds of their outlook strengthen.

Economic data has seemed better but looks unreliable and on shaky ground and will mean dollar weakness. Problems in Greece (if they worsen) will have a destabilizing affect on Spain and the Euro, which could have the opposite effect and move funds from the Euro into the USD. In fact if it is resolved next month there are troublesome dominos behind it. On the other hand, it will also cause some governments and funds to move into gold. Whether China will buy at current prices the balance of the IMF gold now for sale, the likelihood becomes much higher in the event of a temporary price drop. There is an unlimited supply of dollars, but not of gold. I expect that in the end this differential will continue to move the price of gold upward towards the end of a long cycle. This will end in its own gold bubble and before that one blows up, everybody will know and want in before its over.

Corporately, good news for JIN will become public on March 8. We were pleased to be officially invited to attend their announcement affair at the Intercontinental Hotel in Toronto on the evening of March 7. The stock's individual price performance relative to the market generally, as measured by its Relative Strength Index (RSI) has been terrific, a positive indicator.

There are a range of news possibilities I expect for 2010. Selling on good news (normally a best results action in cases like this) will have to be carefully assessed, depending entirely on the scope the actual release may have, as well as whether positive commentary on the outlook is also offered. I have price targets selected now, but not etched in stone. The question will be, on initial news to what degree will it appear worthwhile to exit, to adjust or wait through the time gap until release 2, 3 etc. This will depend on the actual market reaction, the character of the broader market background, how quickly the next release might come and how easy or difficult will it be to replace a position advantageously, once sold.

So knowledgeable consideration of appropriate factors represents real portfolio management, not the volume of transactions themselves. Correct interpretation coupled with good tactical execution will yield positive results. Equal effort with wrong conclusions or poor execution will do the opposite. In an account that is not being day-traded as a technique, activity in itself could just represent churning. In a broker-managed account, this can point to a manager creating commisions for himself. In a self-managed case it could at best mean indecision and uncertainty, and at worst, inexperience and ill-considered emotional plunging.

Drawing on the logic above and further illustrated by the chart, an aspect I will consider for later and if the right circumstances materialize, will be to borrow Euros in order to buy JIN. I think this strategy would be better than doing the same thing but with the the gold spyder GLD, which is denominated in US funds. I can see why the latter would be of interest to an institutional investor who couldn't use JIN as having too small a market cap for their scale of action.

A Key Point of Concern

Feb 19, 2010
This excellent commentary http://www.theglobeandmail.com/blogs/bruce-anderson/money-talk-will-become-deeply-divisive/article1474175/relates to why I decided a few years ago to return to the market. When I made that choice, this is what I thought might be coming. Now it is a fact, with its uncomfortable implications.

When I was a child, a series of relatives came into my life and into our house who were elderly and could no longer support themselves. This left an indelible imprint. There was no social safety net. That was yet to be created in the socially-conscious (although politically incorrect) Father Knows Best and Mad Men aftermath of WWII. The reference in the article about another generation possibly becoming dependent upon their children was what actually galvanized me into action, especially when adding in the big surprise of how much longer generations were living.

For those inclined to look ahead, more than ever the best option continues to be to obtain a government pension, preferably double-dipping and at a senior level, if it can be arranged. The alternative amount of capital needed on a personal basis, what with today's government debt and actuarial tables, is quite startling. If that doesn't seem in the cards, be prepared to do some heavy lifting because somebody is going to have to pay for those benefits, even if they are not coming to you. In Greece, the public is about to find out. Consider that an outlier of what can happen elsewhere.

Zero Percent

Feb 17 2010

At lunch with Phil Thompson last Thursday, the subject of interest rates and cars came up. I had occasionally been thinking about the possibility that for the next couple of years we may be looking at a range-bound market (ie, a nominally flat, non-directional trading-range market contained between identifiable upper and lower bands), in which the principal remaining consumer economic stimulus were the current 0% automobile bank loans. These unnatural loans might last a calendar quarter or two, but that would be about it. If this were to be the case, such a market would probably remain highly volatile and be a stock-picker's, rather than an invest-and-hold period.


It had already crossed my mind that inasmuch as we actually needed a new car to replace a 10-year old one, I could set up a project for the purpose but got sidetracked with travel plans. Later, that lunch became the spark for action. On the weekend, we found and bought a suitable vehicle, 0% down and every penny financed. In the past for this kind of purchase I would write a check on a bank account or draw on our home equity line of credit (HELOC) that was available waiting for the day when I was prepared to use leverage (borrowed money) to go overweight in stocks.

That would cost x% and reduce either cash or available credit. By using the unprecedented (and probably never again to be seen) 0% financing, I did neither. Because this offer contains more opportunity than no cost for the money to buy a car. It also provides the possibility of no cost for the car itself.


Tuesday am (Monday was a holiday) I put the cash purchase value of the car into a particular stock that I already held and was thoroughly researched. This took about a minute for the online cash transfer from a bank account to a trading account, plus perhaps one minute to complete the market execution. Although merged as an asset, I set up separate spreadsheet tracking for the purpose. At the market close today, 1 day later - and we have not even picked up the car - the investment was up the equivalent of 14.4 actual monthly payments. It could be sold now in 60 seconds and paid out to the bank tomorrow morning - returning the original capital in full to myself - but I have 60 months available.


In this experiment, I believe I can reasonably expect not only to get the car, net for free, but to continue to benefit in excess of its contract payout until such time as I choose to sell the stock. The point of all this is that capital, used opportunistically, can achieve specific goals in ways impossible in the past. This is because of the structure of today's financial system and the tools that are now available to anyone who chooses to learn how to use them and who has the personal capacity to manage the "animal spirits" that will join in along the way. Of course, it could all go wrong. However, this is a case where odds are it won't. And never without a plan that goes past the beginning, through to the end.

24 hours later
The US Fed, in its first step towards its unwinding of low rates and super-easy credit, just lowerd its rates by 0.25%. The surprising part is that it was done a half hour after the market close, adding drama. I watched gold start a fast drop in Australia and I expect JIN, which closed at a new high, to sell off first thing Friday morning. Despite this, nothing has really changed that had not already been telegraphed to the market. The nervousness is that by making a move when it is difficult for the market to respond, people may wonder what is coming next. Rates on mortgage backed securities are now starting to push up.

This should not turn the trend in the market. Cool heads should quickly prevail, but a trading sale and quick repurchase might be OK to try in the morning. Lows on news like this usually hit Toronto around 10:30am when the bulk of traders get the news, but it makes the opportunity look pretty tight and easy to wind up on the wrong side. In the AM we'll see how gold and the Euro is doing in London plus the pre-market on JIN in Toronto to decide on trading action if any. In addition, although Chinese New Year was this past Sunday, government officials and key executives will not be back until Monday (Sunday afternoon here). If by chance any positive corporate news was timed for release then, an overzealous trader could easily be caught out of position with no time to act on Monday morning, our time.

Friday Feb 19 2010 9:50am
Attitudes to the Fed rate move last night are tempered. Even when added to the IMF announcement Wed night of more possible gold sales, JIN was only off 17c at the initial low this morning and have recovered to down 1c. A bit of consolidation now would actually be useful and from the market's perspective, the minor effect actually looks pretty positive, especially for a Friday. This means that from a US Treasury perspective the move is likely a failure. Its early, but the event may be a sign that their actions are losing their intended effect.

Could it be? A possible and rare Canadian Government display of backbone:
The WSJ this morning says Jim Flaherty will announce, perhaps today, against the US-sponsored global bank tax concept, instead pushing for better supervision using properly applied existing rules rather than the distortions to which such a tax would undoubtedly lead.

Hard to believe but Canada could actually derail the proposal. This would not endear Canada to politicians (it would eliminate a brand new source of revenue), especially Obama and Brown of the UK, but will likely be applauded by conservative and libertarian economists. If this happens it will be positive for bank stocks across the board.

Day One of the Tiger

Tues Feb 16, 2010
When things work out in the direction of a plan, it doesn't mean that the wait wasn't just as hard, just that the relief is a bit more heady. After the nearly worldwide long weekend, the Year of the Tiger has begun. Right on cue, talking heads are reviving the reflation trade. JIN returned to its all-time high in good time for the return of the Chinese political elite back to work on Mon Feb 22 upcoming. I would expect some positively-slanted news.

Also on the news front, I had already noticed that at least 2 months had gone by without a word from Vermilion (VET.UN). The stock had been flat and I had been very anxious to reverse my pairs trade and reinstate the somewhat larger VET position the trade paid for, before something broke and the stock ran away. I got the execution. Today VET reported very positive drilling results in Holland (4 succesful mainland wells from 4 spuds). Added revenues are expected very fast - by Q2 2010 and a decent production life. The stock moved up with some conviction. I would think there will be positive talk on the new gas field off the coast of Ireland soon. If so, an increase in the monthly tax-free distribution to shareholders would make sense, perhaps as early as Q3 this year. Even so, at $34 the stock is far below the $50 level it reached before the 2008 market break.

A lot of people are very nervous today that the market has not yet collapsed as expected, so they sold into the very strong buying today. I think many of these are likely the same people that did not buy into the 2009 massive upward until very late in the game and most of the benefit was over. BUT, it is very easy to be complacent as soon as things go well. A concern, but getting frightened on Day 1 seems a bit too weak-kneed. So I recalculated where I should sell, first on a 2-week to 2-month change scenario, then also on a 3-month to 6-month case. My long-line (1 year to 3 years) scenario remains unchanged. But with those baselines laid down, I can look at unfolding data over time in order to have a flexible but coherent plan as to how to achieve my goals. I can talk about conceptualizing goals and reality checks and modifications along the way.

There are some events coming out there that will be very unsettling. One of these may be the Chinese reaction to Obama's upcoming meeting with the Dalai Lama. People mistakenly believe the Chinese position on Tibet has something to do with religion or minority discrimination. That superficiality is trumpeted by the media as a reason for Western counter-action. Nothing is further from the underlying reality, which like Kashmir, is all about upstream water. It is sufficiently important that the Chinese military is starting to speak out.

If the meeting goes ahead (and it will), it may result in China intervening in the announced sale by the US of very valuable aircraft contracts to Taiwan. This is a US mid-term election year. If such a scenario occurs, all hell will break loose in Washington and against Obama. He will not be able to take the implied recognition back - implied recognition both of Tibetan independence but also of Taiwanese independence, in a single incident. The Chinese now have a high-tech bluewater navy. The South China sea in now a Chinese lake. No US aircraft carrier will ever go to Taiwan. It is denouement, the recognition of shocking new realtities and the adjustments they require that most unsettle markets. One such market would be currencies.

What about the 2011 Outlook

Feb 9 2010

The Obama US budget just unveiled involves $3.8T, $1.6T of which involves debt. Even in an era of gigantic numbers, this one is HUGE. Consideration of its impact is being pushed to the side at the moment with all the hand-wringing over European debt, but this cannot last for long. Sooner rather than later, investors will return to this enormous and sobering reality.



And the reality is this. It wil enormously cramp the US ability to grow its economy, which in turn means its employment. Counteracting the effect in the very short-term, 2010 is an election year. The large unspent balance of the US stimulus bill will go into the economy during the next few months. Demand for labour will have to rise through this summer and show up as positive numbers at least until January 2011. Also, interest rates will be suppressed by every means possible until then. Pressure on commercial banks to make new loans during the months immediately ahead will be very high as well, leading to monetization of some of the system's capital and increase velocity. The PR machine will be flooding media with data pointing up. After the votes are counted, all bets are off.


The resulting pullback, encouraged by a new populist outcry for cutbacks by groups like the Tea Party movement that do not seem to appreciate the consequences of what they are doing, will hit hard. Financial problems that are being papered over will break wide open in California, Florida, Ohio, Michigan, Indiana, North Carolina and several other states. At that point, the need to cut expenditures will impact public need for entitlements and public services in a major disruptive way.

It is hard to believe that more money will not be printed to "solve" the problem, not just of the federal government but these states. Others will immediately want their share if money is being handed out to cover property tax shortfalls. Without a recovery in housing construction alone, which with related expenditures on appliances, furniture etc, together amout to about 20% of total US GDP, there will be no real economic and jobs recovery. Pensions will be in jeopardy. (In Canada, the Harper government has already set an ominous precedent by agreeing to covering the shortfall in the private and bankrupt Northern Telecom pension. People with perhaps no pensions will be taxed to pay for those who have, but in this case were never on the government payroll. The fact that the bulk of those affected live in a hotly-contested Ottawa-area riding will not stop the outrage if the same largesse is not provided to other companies). If it has not happened by the January-February 2011 time frame, these financial events spell serious trouble for the US dollar that could make the Euro effect appear mild.

Markets Feb 9 2010

Tues Feb 9 2010 pre-open


Markets, including gold (which we use as a reverse proxy for the underlying trend of currencies) are on a knife edge. Markets are enormously nervous. The VIX is recording very high expected volatility. Because the Euro has been so weak with the hammering on Greece and the whole PIGS chatter, it makes the USD look and act better in the moment. People forget that the whole Euro thing is very analagous to the US and the financial position of the states, especially the 7 or so led by California. While the UK in not part of the Eurozone, financial problems there are at least as difficult as in the weaker Euro states. But since its GDP is vastly larger, it would be capable of creating much more havoc if the GBP were to seriously appear in jeopardy of devaluation. So everything is relative and strength in the USD does not necessarily mean there is an expectation that the systemic problems with the US economy are about to end.



We also know that trader short positions in the Euro are massive. This means that major financial groups are actively working to bring it down, which in effect is working against the public interest. Market talking heads are very fearful of another break downwards in the market and the rest say they will 'take something off the table' on any short term bump up.



The technicals of JIN continue to look OK, which reinforces never to overlook what is happening to your specific holdings. As the French officer commanding the Old Guard is reported to have said as the Prussians entered the field at Waterloo, "Courage, my children".

The impact of indirectly positive breaking news:
Information was just released by CNBC and I now have it confirmed online from the G&M:
In a disclosure to the US SEC, China Investment Corp, its $200B sovereign wealth fund, has been quietly accumulation stakes in Canada, including Kinross Gold and Potash Corp of Saskatchewan. It has also already made about $2B on its earlier investment in Cdn gold and base metals miner Teck Resources, making it the fund's largest single equity holding. JIN responded instantly to this news, gaining 20c by 10:30am and appears to be consolidating there, just below my re-entry point.

more on gold

Feb 1 2010 8:30pm

Carrying forward re JIN and therefore gold:

I think it only makes sense to say that my interest in JIN is because of more than its position as a start-up producer. Some indication of my strategic view can be inferred from my original remarks. But I would never break the investment rules to such a degree on just a good-looking startup in any industry, whether here or overseas.

There is a huge divergence of opinion among professional investors as well as economists relating to US monetary policy (affected by fiscal policy), inflation and gold. These impact policies in other countries around the world. This is way too big and hot a topic to cover comprehensively in a single blog , but I should try to touch the main points. Note that the USD has been the sole international reserve currency for most of the period since WW2.


Many people believe, just from practical observation, that inflation is the result of too much demand chasing goods in shorter supply than for those who want them. Terminology gets a bit confusing here. Those who call themselves "supply siders" in the US also say they are "conservative" but by this they mean politically (eg, Republican). Let it just be said that conservative economics is more technically connected to the "Austrian school", which is more rigorous and not supply side. Supply in this sense means policies supportive of increasing the aggregate productive capacity of goods within the economy.



Feb 3, 2009

Prior to year end we all knew that massive strategic trader John Paulson was going to list a new gold ETF in early 2010. Knowing that he was already heavily positioned, you could take that a couple of ways. The most negative take would be that if the gold market started to move ahead again after flirting with a technical breakdown in January (..watch out, it's the most crowded trade in the world! - or so some say), he could use any appreciation to substitute other people's money for his own, keeping the physical position stable but thereby getting out without crashing the market - at the same time cashing in big time without any further material rise in price. Or he might not. Investments in Paulson ETF will require a minimum of $10 million and a 1-year lockup.


The heavyweight on the other side is Bill Gross of PIMCO, the largest bond fund in the world. Paulson's giant call in the past was multi-billion bet that sub-prime mortgages would collapse. Paulson as said he will put $250 million into the new fund. This, in effect, is a put against the USD.

Paulson's Gold Thesis:

Again excepted from the Time article, according to presentations from Paulson & Co., their thesis for gold is threefold. Firstly, they believe that the printing presses of money that have been working overtime in America and other countries will cause depreciation in paper currency. Secondly, they believe that demand for gold will increase, particularly as a reserve currency. In fact, they think gold could beome the primary reserve currency again as they have been looking at gols as currency, not a commodity. Thirdly, their belief is that demand for gold in general will be far greater than supply, causing prices to head higher. Overall, they see a very high probability of inflation in America's future and have selected gold related investments to hedge against this.

I have the same point of view on this. The US monetary base has expanded to an absolutely exponential degree. The correlation between the monetary base and money supply (the monetary base, when transformed through bank loans, becomes the money supply when placed in borrowers' hands) is very close, almost 1:1. In turn, unit money supply as also highly correlated to the GDP price index, nearly 1:1 again. So the main argument here is that the monetary base has expanded dramatically, yet the money supply growth has not yet expended. This is due to the fact that the velocity of money (the pace at which it changes from hand to hand and business to business) dropped furiously after the collapse of Lehman Bros. last year. Once money supply expands, look out for inflation!

Other countries have been following the profligate US lead. From late 2008 until Q2 early last year, while the US balance sheet expanded by 119%, the Bank of England expanded 127%, the Swiss National Bank's by 80% and the European Central Bank (ECB) by 39%. The rates have increased since then.

To those citing the 'crowded trade' or gold bubble argument, Paulson argues there has been a vast appetite for gold, particularly in the popular exchange-traded fund GLD. In comparison to GLDs $60 billion, the comparable pool of US money market reserves (which are capable of being moved instantly) was $3,850 billion. This implies a vast amount of room for savers to shift from very low money market rates into gold. But very importantly, he expects central banks to become net buyers of gold after decades of selling. We saw this with India in December 2009.

It appears more likely to continue in this direction than revert back to net sales. Some highly stressed banking systems like Greece - maybe even the US to some degree - could be sellers, but I would expect these volumes to be handled successfully by the market if they occur.

Even the highly-regarded Dennis Gartman tonight (Feb 8) grumblingly (he says he always hates to be positive on gold because it can mean bad things for other sectors) acknowleded that the technical price performance of gold during the current VERY shaky market looks impressive and he is staying long, mostly in actual gold and the GLD ETF.

As an aside, there is an element of suspicion that the amount of physical gold held by the GLD ETF and even by the US Treasury at Fort Knox is overstated. The Treasury, a known seller, has reported identical, unchanged hodings every month for nearly 2 years. There has been no actual third-party audit of the secret offshore holding by GLD. If significant under-reporting is a fact, in the event of a sharp price rise, this would be considered very bullish for the price. The point being that the missing portion might have to be purchased under duress and the supply available to the market may be significantly less than it is genearally stated to be.

So the crux of this argument revolves around money suupply. Historically, inflation has lagged money supply growth by 2 to 3 years. It says that when you have this kind of money supply growth, inflation is just around the corner. Gold has historically held its value and/or appreciated in times of inflation. Paulson selected the the gold equity strategy (along with some long-dated options) as having greater potential upside as the think gold equities will benefit most should gold prices stay flat or continue to rise.

I have held these views and a position in JIN for several years. Until lately, this was during a very slow gold price rise. Despite this, returns have been far above average. On the other hand, developments within the company itself have been very positive with an outstanding outlook over the next several years, regardless of this background. However, if you row you boat in the direction that the river flows, your work is easier and the distance travelled is greater.

The thing that changed the game from ordinary prospect for traders to a strategic investment opportunity was "quantitative easing". Once that at the US Treasury, history and a new direction was set.

Part 1 to the gold case - which is really about monetary inflation or deflation - has already happened in the unparalleled increase in the US Fed's increase in debt used to save the banks, auto industry, the economic stimulus, the wars and as of Feb 1, the new $1.3T deficit budget for the year just started.

The trick that those on seeing no inflation on the horizon while recognizing the negative Fed problem, is they maintain that as the economy eventually recovers and the banks begin to lend the vast liquidity available, monetary and tax policies will be deftly implemeted to avoid a roaring emergence of inflation and currency debasement. This is fine except for the fact that no government has ever been able to actually succeed in dampening the inflation. Paul Volker, Obama's key adviser in this regard, eventually snuffed inflation at the end of the '80s, but with 20% interest rates that caused a new recession.


The historical experience is seen by many as why the US government will not be any more successful in containing the problem that it has now created, than any other government. One could even reasonably question if indeed it actually expects to try, as distinct from talk. Without taking decades of no growth, it is hard to see another route left for the government is to make itself and homeowners whole again by letting inflation wipe out the debt. Of course, it is politically impossible to admit this or be seen to allow it. Hence the cries of "King Dollar".

We have not even touched on the subject of whether the rest of the world is prepared to see the US and King Dollar reign by itself again and what they seem to be doing about it..


What Paulson actually said last year in the Time article was that his gold fund's objective "is to outperform gold price in a rising gold price environment." They will pursue this by investing in gold equities that are levered to the price of gold, as well as derivatives on the price of gold. In additions to its other characteristics, JIN is a gold equity, unhedged and highly leveraged to the gold price.


SA reports that three private equity firms are on the shortlist to bid for Morgan Stanley's stake in China International Capital Corp. All are competing for the $1B-plus stake that MS bought for just $37M in 1995. The sale could get up to $1.5B.

At Davos, legendary currency trader George Soros (who once broke the Bank of England) made a statement strangely capable of being read two ways. The negative way hit the UK press immediately at the end of January while markets were in a funk. But in reality he was just stating a fact in his comment about gold as "the ultimate bubble". Historically this is true. Gold will not reflate before mortgages or land and financial speculation. He did not say the bubble was here now and was about to break. But the price did drop in a way to frighten many. Then only days later, on Feb 1 it rose strongly after Obama disclosed the massive size of unfunded spending in his scheduled announcement today of the new US budget.


If Soros had intended, unlike the panicky conclusion of the Daily Telegraph, to create a buying opportunity for himself, it certainly worked. Of course, I do not know whether he made a move at that time or not, nor do I KNOW that today's action is the re-establichment of gold's strong upward trend - at least not yet. But one thing for is for sure I stood pat in my position.

In the end, for practical purposes it is what the Fed DOES that counts. To date they have not 'talked their book', that is what they have been saying is not what they have been doing. But good ol' 'helicopter Ben' Bernanke has said specifically "I will not monetize the debt". Events outside the US, or the law of unintended consequences could force monetization regardless oof intent. At present, the contiuation of the Fed doing more of what they been doing looks more likely than any serious change for the better. This is also an US election year. Unemployment is an economic drag that is making the electorate both angry and irrational. More on this as events unfold.