The next few months are going to provide an excellent test of the Daily Income for Life trading and investing strategy.
After I dump my last remaining Active Trading (NOK, TNP) and underperforming income positions (AWP) tomorrow to stem further losses, I will only have income stocks remaining. I'm shorting one tech stock (HXL), but am not attached to the result. Catching it's correction might for a small gain might just make me feel better that I sold my HXL position too early back in April at 20% profit in a month rather than 60% gain in three months I could have made.
Left in the Income Portfolio
AGD
AOD
CPLP
FTR
AGNC
NLY
These stocks are all paying between 10% - 23% in dividends. The income stocks that were yeilding less than 10% were sold to realize capital gains from the last 14 month bull market.
Currently, only FTR does not have unrealised losses after the panic market correction and spiking volatility we saw in the last three weeks. However, because of the high yields, if I hold these positions long enough they will all turn around eventually and continue to provide long term dividend reinvestment.
As the prices decline further before we reach a stable bottom, the yields relative to price actually will increase. Also, dividend reinvestment will purchase more shares. This should position the Income Porfolio to gain healthily if this correction rebounds. These stocks were all purchases with the long term investment and dividend reinvestment in mind. Gains that were taken were based on the recent bull market and technical analysis providing solid reasons to exit.
The real question is, what will happen after this correction? Commentary is all over the map right now. The only sure thing is that trust in the entire financial system will sink to yet another low after the two shocking down days in the last two weeks.
May 20, 2010
Trying to feel better about losing 3.4% of entire portfolio value in one day today.
In the spirit of 'I did do something right in the last six months...' with links to the posts to prove it. Why does this feel like a desparate attempt to cheer myself up...Because it is, dammit. Today was a nightmare.
Sold O at $32.79 for 41% gain Today O is trading at $28.89.
Closed INTC at $24 for 46% gain Today INTC is trading at $20.77.
Closed 30% of AGD at $11.79 with 80% gain Today AGD is trading at $8.10
Closed BPT at $99 at 41% gain Today BPT is trading at $88.
Closed HXL at $13.50 for 20% gain in less than 1 month
Sold O at $32.79 for 41% gain Today O is trading at $28.89.
Closed INTC at $24 for 46% gain Today INTC is trading at $20.77.
Closed 30% of AGD at $11.79 with 80% gain Today AGD is trading at $8.10
Closed BPT at $99 at 41% gain Today BPT is trading at $88.
Closed HXL at $13.50 for 20% gain in less than 1 month
Swallowing Bitter Pills #2: Dump TNP Position
Lesson Learned: Always use a trailing stop. Oh, why is this a theme today?
Swallowing Bitter Pills #1: Dump NOK position
Dumping NOK position. Take the hit and learn the lessons
Lesson learned: 1. Don't put in long orders in falling markets until there is confirmation that the trend has turned around.
Lesson Learned 2: When you put an order in, hold your breath until you've put your stop loss in. If you need to think about the stop loss, while you breath is being held, you didn't plan the trade properly...
Lesson learned: 1. Don't put in long orders in falling markets until there is confirmation that the trend has turned around.
Lesson Learned 2: When you put an order in, hold your breath until you've put your stop loss in. If you need to think about the stop loss, while you breath is being held, you didn't plan the trade properly...
May 17, 2010
CPLP Dividend Paid 23c 11.26% p/a
Greek Shipper runs super tankers. They cut their dividend to 23 c, which still makes it 11.26% return P/A at the current price. May pick up more stock if I can see a good entry point.
O Realty income dividend paid.
Wait, I already sold this stock at close to the 2 yr high and they are still paying me!
A Chinese Conundrum by Doug Casey
This article from Doug Casey in The Daily Crux perfectly described my own thought process about China. I have no exposure to China right now in my portfolio, but the pullback happening there might be an opportunity to investigate
A Chinese Conundrum
There's been a tug-o-war over the last few months as to whether China is in a "bubble" that's about to burst – as the U.S. balloon already has and the one in Europe is now doing – or whether China is still "on trend" to become the world's biggest economic power.
I have spent a lot of time in Hong Kong and have been to China often, starting in 1986, when most people were still wearing simple blue, gray, or brown Mao suits and would give Westerners the kind of amazed stare you might give to a Venusian. I haven't been back to China for a few years, however. I was planning to go last year with a couple of friends, intending to hop a freight in the far west, at Ürümqi, and ride it to Beijing, but decided it would be too hard to accomplish. I was right; my pals found it just couldn't be done. It's a piece of cake, and a lot of fun, in the U.S. – although I've got to say I was once arrested in Utah by a railroad bull. But that's another story, and it's not his fault.
In any event, until recently I was of two minds as to whether China is going to blow up. On the one hand, I'm a longtime China bull. And why should an uptrend of 30 years duration be on the point of changing just now? Trends in motion tend to stay in motion until they stop. That may seem tautological, but it's a way of saying it's hard, and usually dangerous, to pick a top in any market. Especially since many of the fundamentals that have been propelling China are sound.
On the other hand, I haven't been back for a few years and hate to come to a conclusion without a full grip on the facts – not that anybody has such a grip. But it's quite clear to me that some trends in China can't continue. And when they stall, there's going to be some serious tumult.
Let's look at what facts we can, to make some sense of the biggest and fastest-growing country in the world. Reasons China may not be hurt too badly by the Greater Depression, and reasons it may be in real trouble.
The Bullish Case
Free-market environment – The long boom in China started in 1978 when Deng determined that the next iteration of the Chinese path to socialism would have certain market-based characteristics – Power to the People Puttin' On the Ritz. He shrewdly rationalized throwing Mao's foolish socioeconomic experiments on the scrap heap of history by saying "It doesn't matter if a cat is black or white, as long as it catches mice." He further set the tone by saying something that almost every Chinese wanted to hear but was afraid to say: "To become rich is glorious." Since then the economy in China has gotten ever freer and has turboed through what is probably the greatest boom in history.
The Maoist experiment of 1948-1978 – only 30 years – was just an interlude, likely to be viewed as something of an aberration, in the country's 5,000-year history. Mao was just another emperor, albeit bloodier and more destructive than most.
The fact is that doing business in China (at least for a Chinese) is easier than for an American to do business in the U.S. Taxes are much lower, and regulation is lighter, easier, less crazy, and definitely not in the hands of high-anxiety Puritans. When I hear an American refer to it as "Communist China," I know I'm dealing with someone who's either just ignorant or a Republican living in a time warp. As astounding as this may sound, there's actually more economic freedom in China than there is in the U.S. Astounding and sad.
There's less political freedom, however. But what does political freedom mean to an individual? For some, it's the right to tell your neighbors what they can and can't do. For most, it's the right to cast a meaningless vote for one hack instead of another. And for others, it's an invitation to become one of the hacks. The idea of political freedom is essentially a sales pitch – buy the right to vote for just 40% of your income, and we'll send you freedom of religion at no additional cost.
In practical terms, the only element of political freedom that has value is the right to say what one pleases about those who have political power. That is something the Chinese are denied, because it might compromise the interests of the party elite. Not a pretty or happy fact, but the government of every society on the planet arbitrarily subverts rights and freedoms that are taken for granted in other places or were taken for granted in other times.
The Communist Party in China today is basically a scam that allows its members to skim money from the economy – just like the ruling elite in any other country. So they're very pleased to see the country advance economically, because that means there is more to skim. But they pounce on anything that looks like a political threat, since political power is their only profit center. They serve no useful purpose from an economic viewpoint.
Chinese society, which is essentially very conservative, honors a dictum not to break anybody's rice bowl. That's why there are restrictions on Internet access, just as there used to be on putting up subversive posters. Change is dangerous – especially for fat cats in the party.
The party's control isn't a good thing, except in providing stability. The alternative would be China breaking up into multiple states, or prolonged chaos, or a new regime with its own priorities.
But if we look at things from a purely economic viewpoint, the environment for the Chinese entrepreneur/businessman is far friendlier than that in the U.S.
No welfare – There is no state welfare system in China – no equivalents of Social Security, Medicare, unemployment compensation, or the like. This is a doubly good thing. First, there's no mechanism for extracting capital from the productive sectors of society, for moving it from savers and entrepreneurs and into the hands of bureaucrats to, almost inevitably, misallocate. Second, it ensures everyone knows he's responsible for himself and, especially in rural areas, his extended family.
The various "safety net" schemes in the U.S. guarantee nothing but the U.S. government's bankruptcy and the ruin of large parts of the U.S. population who have come to rely on government. China is ahead of the game here. And its lack of a welfare system has encouraged another huge plus – a high savings rate.
High savings rate – There are, you'll recall, two things that underpin a society becoming wealthy: savings and technology. But savings – producing more than you consume and setting aside the difference – is by far the more important. China is justifiably lauded as having an extremely high savings rate, and as times get tougher, that's only going to become more ingrained. It augurs well for the country's future.
Education – Most of the Chinese population are still poor, ignorant peasants living at just above a subsistence level. But that was true of the Chinese in Hong Kong and Taiwan only a couple of generations ago. Education and self-improvement are central to the Confucian ethic that has informed China for the last 2,500 years; it's again being given free rein with the economic liberalization of the last 30 years. The U.S. used to have something quite similar, the Protestant Work Ethic, but it's been pretty well subverted by the ethos of the Consumer Society – which is still decades in the future for China.
The point here, however, is that the Chinese who go to college overwhelmingly take courses in math, science, and engineering – unlike their U.S. counterparts, who tend to take courses in things like English Lit, Gender Studies, Sociology, Psychology, Business, Economics, Law, and the like, which range in value from being meaningless wastes of time to actively counterproductive. In fact, students in U.S. colleges taking hard sciences tend to be foreigners from the Orient, and after graduation most of them are going home where the opportunity is, not staying in the U.S.
A preponderance of the top scientists and engineers in the world used to be Americans. That's changing. Over the next few decades, these people will mostly come from China and other cultures in Asia.
Low wages – A Chinese worker (and to a lesser degree, a Chinese scientist or engineer) makes a small fraction of his U.S. counterpart. That, combined with an overall better business environment, means China will outcompete the U.S. for many years to come. Two things will – inevitably and certainly – change along the way, however: the average Chinese wage will rise, and the average U.S. wage will fall. This will greatly augment Chinese power. What it means for the U.S. is highly problematical but not germane to our present discussion.
No foreign wars or military adventures – It's hard to be accurate with the numbers for military spending, since governments often bury those expenditures in other categories. But the Chinese seem to spend only $75 billion a year on their military, and they don't have bases in any foreign lands. By contrast, the U.S. is now bankrupting itself with an annual military budget of upwards of $1 trillion annually – more than the rest of the world combined.
These are some of the main reasons China has boomed, and why, everything else being equal, it should continue booming. But everything else is not, in fact, equal.
The Bearish Case
Real estate – This was the area that first really set off the alarm bells for me. It's one thing to read press reports; but I prefer to make judgments based on my personal experience. When I first moved to Hong Kong in 1986, it was quite inexpensive by world standards. No more. Almost nothing is cheap in Hong Kong, and real estate prices in particular are out of sight. An apartment I know well, with great location and an excellent view but in a very old building, cost US$40,000 in 1986; it sold for not quite US$1 million last week – about $1,500 a square foot. The Hong Kong property market has long been one of the world's most volatile, but never to this extent.
The situation is the same throughout China, however. Residential construction has been concentrated on the high end, because that's where the profits are, at least during good times. Builders assumed that everyone was going to continue making fortunes in stocks and property forever. As a result, there's a glut of high-end inventory, and people have been buying extra apartments for speculation. Some say the situation isn't out of control because the banks now may lend only 80% for primary homes and 60% for second homes. But these loans are made on inflated prices (apartments in Shanghai and Beijing go for US$500 a square foot and double to quadruple that figure for Hong Kong); prices are said to have gone up over 50% just in 2009.
A retrenchment to the levels of a year or two ago will put both buyers and lenders under water. We've seen how this drill plays out in the U.S. I have no doubt the same kind of hanky-panky, inflating values and incomes that went on in the U.S. is happening in China. Apartments sell for 15 to 20 times the average income, which is unaffordable and therefore unsustainable.
Some argue it is sustainable because the "average income" in China is skewed by the impoverished masses, in that only about 10% of the population (which is still 130 million people) can be considered truly middle class. But even the cheapest new construction, in second- and third-tier cities, apparently goes for $100 a square foot, which is a stretch for those living in the boonies of a poor country. It's a stretch for most Americans…
The residential market is an accident waiting to happen, as far as I can tell. But the commercial and office market collapse will be far worse. You may have heard of the South China Mall, outside the industrial city of Dongguan, which is about 40 miles from Guangzhou. It's the largest mall in the world, with 1,500 shops, all but four of which are apparently empty and have been since the thing was opened in 2005. It was financed almost entirely by bank credit, which simply won't be repaid.
What happens to mistakes like this? After they deteriorate enough, they're generally torn down, if there's enough capital to turn the land into something productive. Otherwise they're left standing and simply become ruins. The loans are total write-offs. It's a pity it was built on fertile farmland, something at a premium in China.
Another spectacular example is provided by the city of Ordos, Inner Mongolia. The South China Mall was financed privately; Ordos is a gigantic ghost town built by the government, where no one can afford to live. Or has a reason to live in or even go to, other than curiosity. This is the type of thing you can expect from China's $585 billion "stimulus" package
The biggest problem, however, is in China's office sector; here the numbers boggle the imagination. Something like 2.6 billion sq. meters (approximately 30 billion sq. ft. – or about 1,100 square miles) of office space are still under construction. That amounts to about 25 square feet for every man, woman, and child in the country. This is apart from the fact that vacancies are, according to official figures, already in the 20% range.
But it's not just that most of the capital here has been wasted, there's nothing to be done with these buildings, and the loans to the banks won't be repaid. These buildings will be about as useful as the Egyptian pyramids, but much less picturesque and a lot harder to keep up. All this construction entails continuing maintenance costs. In other words, it can be argued that the capital used to overbuild would better have been piled up and burned. At least then it wouldn't constitute a large and continuing drain every year.
It's all been done with bank credit. Insane booms don't occur in cash markets. People tend to act much more prudently when it's all their money, rather than that of a faceless and stupid bank.
Bank credit and bad loans – As mentioned above, apparently trying to take a lesson from the American property disaster, the Chinese have put restrictions on the amount of debt that can be used to buy a first or second residential property. That would be unnecessary if there weren't a surfeit of credit emanating from the banks – US$615 billion in 2008, something like $1.5 trillion in 2009, and early figures for 2010 are running twice the rate of 2009. The M-1 money supply was up 35% in 2009.
That credit boom is behind the fact that the three largest banks in the world by market capitalization are Chinese. Locals may point to it with pride, but to me it seems more like the kiss of death to an economy when its banks reach that position. That's because bank caps fluctuate based on the size of their assets, their reported profits, and the tenor of the stock market. All these things are cyclical, but they expand, in a leveraged way, with the amount of money in circulation – at least until the bubble breaks.
Before the collapse of Japan's economy in 1990, it had the biggest banks. Before the collapse of the U.S. economy, it had the biggest banks. I suspect China is in the same position. Perhaps even more so, because its banks don't do international business; they concentrate on the home market. The loans they've made financing factories selling consumer goods few can afford to buy will be written off. The loans financing the construction of hundreds of unoccupied office buildings across the country will be written off. But I suspect nobody will really know how bad it is until it all comes unglued. If there's one thing China doesn't have, it's transparency.
A lot is made out of "transparency" these days; it's a newly fashionable concept, considered an automatically good thing, like "democracy." Transparency sounds good – who could be opposed to seeing clearly what's going on? But in point of fact, it is really just a gentle way of saying "lack of privacy." Transparency is a good thing when we're talking about public institutions, but it's only meddlesomeness and busybodyism regarding private entities
That said, there's about zero transparency in the Chinese government or its state-owned enterprises, both corporations and banks. Although most industrial enterprises have been privatized over the last 30 years, it's estimated that 25 to 40% of the urban workforce is still employed by SOEs. These companies are by nature inefficient, corrupt loss-makers, kept alive by giant loans from the banks. They're unlikely to be cleaned up and privatized at this point, because most of the workers would have to be let go and, at this juncture, that's absolutely the last thing the Chinese government can afford; it could have a disastrous effect on social stability.
And what of the loans to these SOEs, which also represent the savings of Chinese workers? Well, I fear most of their capital has been dissipated and misallocated – basically destroyed and no longer exists. It's unknown how big a disaster this might be, but it's probably huge. So the government has apparently (taking exactly the wrong lesson from Wall Street, of course) packaged up the bad loans to SOEs into new entities to make it look like the banks are unaffected.
I don't know where consistent figures are available on these things. But it's academic, because they'd be completely untrustworthy. My guess is that most of the banks in China are soon going to be bankrupt
Exports to a non-existent market – The Chinese middle class have been buying their share of locally made electronics, clothing, and what-have-you; that's clear from a walk down the street in any Chinese city. But the vast majority of it has been made for export; that's how the reported $2.4 trillion has accumulated. The Chinese economy was built for export-type products. The world is still going to want and need some of these things, but not nearly to the degree it did during the long boom. Most of the tens of thousands of factories catering to the export market are going to be closed, many of their owners bankrupted, and most of the workers unemployed. Unemployed people tend to be unhappy people.
Press reports indicate there are about 100,000 serious riots every year in China, and this has been the case for a decade. (It's a mystery why China isn't a power in ice hockey or soccer.) If enough people lose their jobs or their savings, anything could happen. The country's 1.3 billion people have a number of distinct cultures and different languages – even among the majority Han. The Tibetans and the Muslims in the far west are actively separatist.
One encouraging factor is supposed to be that China has overtaken the U.S. as a car manufacturer, turning out over 13 million vehicles last year. Will they find that many buyers this year and next? I wonder.
$2.4 trillion of FX reserves – Some make the case that any country sitting on $2.4 trillion of foreign currency (over a trillion in U.S. paper alone) has to be in good shape. In addition, there's relatively little government debt (accurate numbers are iffy, but it's almost all owned domestically, issued in yuan, primarily by local governments). But there are some problems.
First, all those FX reserves are just the paper issued by other governments. Dollars, yen, euros – all of them are hot potatoes for different reasons, none has any fixed value, and all of them are circling the drain at different speeds and trajectories. Is it possible the Chinese could get stuck with most of it when the game of musical chairs ends? Quite possibly. They could wind up holding 2 trillion Old Maid cards, and I expect that would make them quite unhappy.
Second, much of the money that is invested is likely to be frittered away. To reduce the amount of foreign paper on their books, the Chinese are apparently spending these reserves as quickly as possible on foreign resource assets. But how competent will the bureaucrats be in acquiring things they don't have a personal interest in? Or perhaps they do. I expect there's a fair amount of bribery that's gone on, from the sellers to the bureaucrats closing the deal.
Third, a lot of those reserves may be needed to keep the SOEs and the banks afloat.
The Chinese government is in a tricky situation. It doesn't want to continue accumulating dollars since their eventual fate is clear. And doing so just amounts to subsidizing America's interminable foreign wars and unsustainable levels of consumption. But if they try to get rid of their super-sized dollar reserves, they could set off a panic among all the other holders of such debt; it could result in a complete collapse of the dollar and perhaps the start of a hyperinflation. And anything that decreases America's consumption of the bric-a-brac from Chinese factories will result in more bankruptcies, bad loans, and unemployment
This is one reason China is purchasing the 200 tonnes (+/- 6.4 million ounces) of gold from the IMF. It's also why, I suspect, the government has encouraged citizens to buy gold, which is easily available from many thousands of shops all over the country. The complete destruction of the national currency in the '40s under Chiang Kai-shek was instrumental in Mao winning the civil war, and they don't want to see that happen again.
How will it end? Well, anything that must end will end. And I don't see a happy ending. The yuan will probably maintain value better than other major currencies, for what that's worth, partly because it's underpriced now (based on purchasing power parity), partly because the Chinese can sell dollars to buy back yuan to maintain its value, and partly because the government appears somewhat more conscious of the dangers of hyperinflation than officials in the U.S.
Even so, I think the odds of a financial debacle in China are high, and its consequences could include political, social, and military turmoil. Because the same thing is happening elsewhere around the world, it's likely that the Chinese, too, will blame the free market for what has been caused by their government's interference in the market. But this, sad to say, is true most everywhere.
Big trends have long seemed to have a global aspect, starting with the fact that all over the world after the last Ice Age, at about the same time, people started moving into towns and cities and taking up agriculture. The same is true of the start of the Bronze Age, the Iron Age, etc. It gives some intuitive credibility to the so-called 100th Monkey theory. More recently, though, it's interesting how in the late '60s China, the U.S., and Western Europe – the three areas of the world where things "happen" – all simultaneously went through social convulsions. Then, starting in the early '80s, they all liberalized their economies at about the same time. Now they're likely to be the three big epicenters of the Greater Depression.
But all these things are actually somewhat tangential to the actual reason China is heading for a fall: the business cycle.
The Business Cycle – While you may find it hard to believe, extravagant booms followed by crushing busts don't form a part of the unfettered free market; rather just the opposite is true. That's because booms and busts are caused mainly by currency inflation and secondarily by tax and regulatory policies. The early part of China's long boom, say from 1978 to about 2000, was basically sound. It was financed by domestic savings and foreign equity investment and directed toward basics in an economy that was decades behind the times.
But, notwithstanding the comments I've made above, China is a long way from an unregulated free market. The Chinese government has always tried to direct the flow of investment and credit, and since the crisis started in 2007, it's taken some extremely foolish steps. Their "stimulus" program at 4 trillion yuan (US$585 billion), relative to the size of their economy, is bigger than that of the U.S. Worse, since they can more effectively tell their banks what to do than the U.S., they've created a gigantic credit bubble.
The Chinese stock market is grossly overpriced due to all the hot money they've created; stocks are trading at about 27 times trailing earnings and many urban Chinese are actively involved in it, lately even being allowed by the regulators to do so using margin.
When any economy expands as rapidly as China's, for as long as it has, lately with speculative loans and under political direction, you can be assured it's carrying huge distortions and huge misallocations of capital. I've explained this phenomenon at length in my books and in past editions of this letter, so I won't go into it again here.
How to Play It
First of all, if you have any property in China or Hong Kong, I'd hit the bid, yesterday if possible. The market resembles nothing more than Wiley E. Coyote just before he realizes he's walking on air. A collapse in Chinese property will almost certainly have spillover effects on other markets in the Orient. As I've mentioned before, I think real estate in most parts of the world is a dead asset class for many years in the future. But if you've been thinking about an apartment in the Orient, there are likely to be some bargains in the next few years
Second, the consequences for most commodities are likely to be grim. Prices of industrial metals have floated on a rising tide of demand from places like Dubai and China for years. It's over in Dubai and nearly over in China. Worse, there are stories of many Chinese having stockpiled large amounts of metal, especially copper, as a speculation. As demand falls, that material could be forced onto the market at exactly the wrong time. Base metals and base metal stocks impress me as a bad bet, at least until this shakes out.
Third, Australia and Brazil are two places that have profited handsomely from the long boom in China, supplying the Chinese with massive amounts of raw materials, including coal and iron ore. That's likely to come to an end for quite a while, with negative fallout for both economies. Brazil, especially, has been too hot for too long.
Fourth, a major upset in China is not going to help the earnings of companies anywhere – or their securities. And it's certainly not going to help the dollar or Treasuries, which will both see a lot of selling from China. Of course, their fate is pretty well sealed anyway, but this is another nail, railroad spike-sized, in their coffin.
Fifth, recognize that one of the few beneficiaries of a global monetary crisis is going to be gold. The fact it's quadrupled from the lows of a decade ago is trivial in the context.
When will China hit the wall? The chances are excellent it's happening now. One additional reason it seems to is that the Economist and Forbes both recently published articles on China assuring us that all is well. Magazine articles are historically great contrary indicators at major turning points.
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A Chinese Conundrum
There's been a tug-o-war over the last few months as to whether China is in a "bubble" that's about to burst – as the U.S. balloon already has and the one in Europe is now doing – or whether China is still "on trend" to become the world's biggest economic power.
I have spent a lot of time in Hong Kong and have been to China often, starting in 1986, when most people were still wearing simple blue, gray, or brown Mao suits and would give Westerners the kind of amazed stare you might give to a Venusian. I haven't been back to China for a few years, however. I was planning to go last year with a couple of friends, intending to hop a freight in the far west, at Ürümqi, and ride it to Beijing, but decided it would be too hard to accomplish. I was right; my pals found it just couldn't be done. It's a piece of cake, and a lot of fun, in the U.S. – although I've got to say I was once arrested in Utah by a railroad bull. But that's another story, and it's not his fault.
In any event, until recently I was of two minds as to whether China is going to blow up. On the one hand, I'm a longtime China bull. And why should an uptrend of 30 years duration be on the point of changing just now? Trends in motion tend to stay in motion until they stop. That may seem tautological, but it's a way of saying it's hard, and usually dangerous, to pick a top in any market. Especially since many of the fundamentals that have been propelling China are sound.
On the other hand, I haven't been back for a few years and hate to come to a conclusion without a full grip on the facts – not that anybody has such a grip. But it's quite clear to me that some trends in China can't continue. And when they stall, there's going to be some serious tumult.
Let's look at what facts we can, to make some sense of the biggest and fastest-growing country in the world. Reasons China may not be hurt too badly by the Greater Depression, and reasons it may be in real trouble.
The Bullish Case
Free-market environment – The long boom in China started in 1978 when Deng determined that the next iteration of the Chinese path to socialism would have certain market-based characteristics – Power to the People Puttin' On the Ritz. He shrewdly rationalized throwing Mao's foolish socioeconomic experiments on the scrap heap of history by saying "It doesn't matter if a cat is black or white, as long as it catches mice." He further set the tone by saying something that almost every Chinese wanted to hear but was afraid to say: "To become rich is glorious." Since then the economy in China has gotten ever freer and has turboed through what is probably the greatest boom in history.
The Maoist experiment of 1948-1978 – only 30 years – was just an interlude, likely to be viewed as something of an aberration, in the country's 5,000-year history. Mao was just another emperor, albeit bloodier and more destructive than most.
The fact is that doing business in China (at least for a Chinese) is easier than for an American to do business in the U.S. Taxes are much lower, and regulation is lighter, easier, less crazy, and definitely not in the hands of high-anxiety Puritans. When I hear an American refer to it as "Communist China," I know I'm dealing with someone who's either just ignorant or a Republican living in a time warp. As astounding as this may sound, there's actually more economic freedom in China than there is in the U.S. Astounding and sad.
There's less political freedom, however. But what does political freedom mean to an individual? For some, it's the right to tell your neighbors what they can and can't do. For most, it's the right to cast a meaningless vote for one hack instead of another. And for others, it's an invitation to become one of the hacks. The idea of political freedom is essentially a sales pitch – buy the right to vote for just 40% of your income, and we'll send you freedom of religion at no additional cost.
In practical terms, the only element of political freedom that has value is the right to say what one pleases about those who have political power. That is something the Chinese are denied, because it might compromise the interests of the party elite. Not a pretty or happy fact, but the government of every society on the planet arbitrarily subverts rights and freedoms that are taken for granted in other places or were taken for granted in other times.
The Communist Party in China today is basically a scam that allows its members to skim money from the economy – just like the ruling elite in any other country. So they're very pleased to see the country advance economically, because that means there is more to skim. But they pounce on anything that looks like a political threat, since political power is their only profit center. They serve no useful purpose from an economic viewpoint.
Chinese society, which is essentially very conservative, honors a dictum not to break anybody's rice bowl. That's why there are restrictions on Internet access, just as there used to be on putting up subversive posters. Change is dangerous – especially for fat cats in the party.
The party's control isn't a good thing, except in providing stability. The alternative would be China breaking up into multiple states, or prolonged chaos, or a new regime with its own priorities.
But if we look at things from a purely economic viewpoint, the environment for the Chinese entrepreneur/businessman is far friendlier than that in the U.S.
No welfare – There is no state welfare system in China – no equivalents of Social Security, Medicare, unemployment compensation, or the like. This is a doubly good thing. First, there's no mechanism for extracting capital from the productive sectors of society, for moving it from savers and entrepreneurs and into the hands of bureaucrats to, almost inevitably, misallocate. Second, it ensures everyone knows he's responsible for himself and, especially in rural areas, his extended family.
The various "safety net" schemes in the U.S. guarantee nothing but the U.S. government's bankruptcy and the ruin of large parts of the U.S. population who have come to rely on government. China is ahead of the game here. And its lack of a welfare system has encouraged another huge plus – a high savings rate.
High savings rate – There are, you'll recall, two things that underpin a society becoming wealthy: savings and technology. But savings – producing more than you consume and setting aside the difference – is by far the more important. China is justifiably lauded as having an extremely high savings rate, and as times get tougher, that's only going to become more ingrained. It augurs well for the country's future.
Education – Most of the Chinese population are still poor, ignorant peasants living at just above a subsistence level. But that was true of the Chinese in Hong Kong and Taiwan only a couple of generations ago. Education and self-improvement are central to the Confucian ethic that has informed China for the last 2,500 years; it's again being given free rein with the economic liberalization of the last 30 years. The U.S. used to have something quite similar, the Protestant Work Ethic, but it's been pretty well subverted by the ethos of the Consumer Society – which is still decades in the future for China.
The point here, however, is that the Chinese who go to college overwhelmingly take courses in math, science, and engineering – unlike their U.S. counterparts, who tend to take courses in things like English Lit, Gender Studies, Sociology, Psychology, Business, Economics, Law, and the like, which range in value from being meaningless wastes of time to actively counterproductive. In fact, students in U.S. colleges taking hard sciences tend to be foreigners from the Orient, and after graduation most of them are going home where the opportunity is, not staying in the U.S.
A preponderance of the top scientists and engineers in the world used to be Americans. That's changing. Over the next few decades, these people will mostly come from China and other cultures in Asia.
Low wages – A Chinese worker (and to a lesser degree, a Chinese scientist or engineer) makes a small fraction of his U.S. counterpart. That, combined with an overall better business environment, means China will outcompete the U.S. for many years to come. Two things will – inevitably and certainly – change along the way, however: the average Chinese wage will rise, and the average U.S. wage will fall. This will greatly augment Chinese power. What it means for the U.S. is highly problematical but not germane to our present discussion.
No foreign wars or military adventures – It's hard to be accurate with the numbers for military spending, since governments often bury those expenditures in other categories. But the Chinese seem to spend only $75 billion a year on their military, and they don't have bases in any foreign lands. By contrast, the U.S. is now bankrupting itself with an annual military budget of upwards of $1 trillion annually – more than the rest of the world combined.
These are some of the main reasons China has boomed, and why, everything else being equal, it should continue booming. But everything else is not, in fact, equal.
The Bearish Case
Real estate – This was the area that first really set off the alarm bells for me. It's one thing to read press reports; but I prefer to make judgments based on my personal experience. When I first moved to Hong Kong in 1986, it was quite inexpensive by world standards. No more. Almost nothing is cheap in Hong Kong, and real estate prices in particular are out of sight. An apartment I know well, with great location and an excellent view but in a very old building, cost US$40,000 in 1986; it sold for not quite US$1 million last week – about $1,500 a square foot. The Hong Kong property market has long been one of the world's most volatile, but never to this extent.
The situation is the same throughout China, however. Residential construction has been concentrated on the high end, because that's where the profits are, at least during good times. Builders assumed that everyone was going to continue making fortunes in stocks and property forever. As a result, there's a glut of high-end inventory, and people have been buying extra apartments for speculation. Some say the situation isn't out of control because the banks now may lend only 80% for primary homes and 60% for second homes. But these loans are made on inflated prices (apartments in Shanghai and Beijing go for US$500 a square foot and double to quadruple that figure for Hong Kong); prices are said to have gone up over 50% just in 2009.
A retrenchment to the levels of a year or two ago will put both buyers and lenders under water. We've seen how this drill plays out in the U.S. I have no doubt the same kind of hanky-panky, inflating values and incomes that went on in the U.S. is happening in China. Apartments sell for 15 to 20 times the average income, which is unaffordable and therefore unsustainable.
Some argue it is sustainable because the "average income" in China is skewed by the impoverished masses, in that only about 10% of the population (which is still 130 million people) can be considered truly middle class. But even the cheapest new construction, in second- and third-tier cities, apparently goes for $100 a square foot, which is a stretch for those living in the boonies of a poor country. It's a stretch for most Americans…
The residential market is an accident waiting to happen, as far as I can tell. But the commercial and office market collapse will be far worse. You may have heard of the South China Mall, outside the industrial city of Dongguan, which is about 40 miles from Guangzhou. It's the largest mall in the world, with 1,500 shops, all but four of which are apparently empty and have been since the thing was opened in 2005. It was financed almost entirely by bank credit, which simply won't be repaid.
What happens to mistakes like this? After they deteriorate enough, they're generally torn down, if there's enough capital to turn the land into something productive. Otherwise they're left standing and simply become ruins. The loans are total write-offs. It's a pity it was built on fertile farmland, something at a premium in China.
Another spectacular example is provided by the city of Ordos, Inner Mongolia. The South China Mall was financed privately; Ordos is a gigantic ghost town built by the government, where no one can afford to live. Or has a reason to live in or even go to, other than curiosity. This is the type of thing you can expect from China's $585 billion "stimulus" package
The biggest problem, however, is in China's office sector; here the numbers boggle the imagination. Something like 2.6 billion sq. meters (approximately 30 billion sq. ft. – or about 1,100 square miles) of office space are still under construction. That amounts to about 25 square feet for every man, woman, and child in the country. This is apart from the fact that vacancies are, according to official figures, already in the 20% range.
But it's not just that most of the capital here has been wasted, there's nothing to be done with these buildings, and the loans to the banks won't be repaid. These buildings will be about as useful as the Egyptian pyramids, but much less picturesque and a lot harder to keep up. All this construction entails continuing maintenance costs. In other words, it can be argued that the capital used to overbuild would better have been piled up and burned. At least then it wouldn't constitute a large and continuing drain every year.
It's all been done with bank credit. Insane booms don't occur in cash markets. People tend to act much more prudently when it's all their money, rather than that of a faceless and stupid bank.
Bank credit and bad loans – As mentioned above, apparently trying to take a lesson from the American property disaster, the Chinese have put restrictions on the amount of debt that can be used to buy a first or second residential property. That would be unnecessary if there weren't a surfeit of credit emanating from the banks – US$615 billion in 2008, something like $1.5 trillion in 2009, and early figures for 2010 are running twice the rate of 2009. The M-1 money supply was up 35% in 2009.
That credit boom is behind the fact that the three largest banks in the world by market capitalization are Chinese. Locals may point to it with pride, but to me it seems more like the kiss of death to an economy when its banks reach that position. That's because bank caps fluctuate based on the size of their assets, their reported profits, and the tenor of the stock market. All these things are cyclical, but they expand, in a leveraged way, with the amount of money in circulation – at least until the bubble breaks.
Before the collapse of Japan's economy in 1990, it had the biggest banks. Before the collapse of the U.S. economy, it had the biggest banks. I suspect China is in the same position. Perhaps even more so, because its banks don't do international business; they concentrate on the home market. The loans they've made financing factories selling consumer goods few can afford to buy will be written off. The loans financing the construction of hundreds of unoccupied office buildings across the country will be written off. But I suspect nobody will really know how bad it is until it all comes unglued. If there's one thing China doesn't have, it's transparency.
A lot is made out of "transparency" these days; it's a newly fashionable concept, considered an automatically good thing, like "democracy." Transparency sounds good – who could be opposed to seeing clearly what's going on? But in point of fact, it is really just a gentle way of saying "lack of privacy." Transparency is a good thing when we're talking about public institutions, but it's only meddlesomeness and busybodyism regarding private entities
That said, there's about zero transparency in the Chinese government or its state-owned enterprises, both corporations and banks. Although most industrial enterprises have been privatized over the last 30 years, it's estimated that 25 to 40% of the urban workforce is still employed by SOEs. These companies are by nature inefficient, corrupt loss-makers, kept alive by giant loans from the banks. They're unlikely to be cleaned up and privatized at this point, because most of the workers would have to be let go and, at this juncture, that's absolutely the last thing the Chinese government can afford; it could have a disastrous effect on social stability.
And what of the loans to these SOEs, which also represent the savings of Chinese workers? Well, I fear most of their capital has been dissipated and misallocated – basically destroyed and no longer exists. It's unknown how big a disaster this might be, but it's probably huge. So the government has apparently (taking exactly the wrong lesson from Wall Street, of course) packaged up the bad loans to SOEs into new entities to make it look like the banks are unaffected.
I don't know where consistent figures are available on these things. But it's academic, because they'd be completely untrustworthy. My guess is that most of the banks in China are soon going to be bankrupt
Exports to a non-existent market – The Chinese middle class have been buying their share of locally made electronics, clothing, and what-have-you; that's clear from a walk down the street in any Chinese city. But the vast majority of it has been made for export; that's how the reported $2.4 trillion has accumulated. The Chinese economy was built for export-type products. The world is still going to want and need some of these things, but not nearly to the degree it did during the long boom. Most of the tens of thousands of factories catering to the export market are going to be closed, many of their owners bankrupted, and most of the workers unemployed. Unemployed people tend to be unhappy people.
Press reports indicate there are about 100,000 serious riots every year in China, and this has been the case for a decade. (It's a mystery why China isn't a power in ice hockey or soccer.) If enough people lose their jobs or their savings, anything could happen. The country's 1.3 billion people have a number of distinct cultures and different languages – even among the majority Han. The Tibetans and the Muslims in the far west are actively separatist.
One encouraging factor is supposed to be that China has overtaken the U.S. as a car manufacturer, turning out over 13 million vehicles last year. Will they find that many buyers this year and next? I wonder.
$2.4 trillion of FX reserves – Some make the case that any country sitting on $2.4 trillion of foreign currency (over a trillion in U.S. paper alone) has to be in good shape. In addition, there's relatively little government debt (accurate numbers are iffy, but it's almost all owned domestically, issued in yuan, primarily by local governments). But there are some problems.
First, all those FX reserves are just the paper issued by other governments. Dollars, yen, euros – all of them are hot potatoes for different reasons, none has any fixed value, and all of them are circling the drain at different speeds and trajectories. Is it possible the Chinese could get stuck with most of it when the game of musical chairs ends? Quite possibly. They could wind up holding 2 trillion Old Maid cards, and I expect that would make them quite unhappy.
Second, much of the money that is invested is likely to be frittered away. To reduce the amount of foreign paper on their books, the Chinese are apparently spending these reserves as quickly as possible on foreign resource assets. But how competent will the bureaucrats be in acquiring things they don't have a personal interest in? Or perhaps they do. I expect there's a fair amount of bribery that's gone on, from the sellers to the bureaucrats closing the deal.
Third, a lot of those reserves may be needed to keep the SOEs and the banks afloat.
The Chinese government is in a tricky situation. It doesn't want to continue accumulating dollars since their eventual fate is clear. And doing so just amounts to subsidizing America's interminable foreign wars and unsustainable levels of consumption. But if they try to get rid of their super-sized dollar reserves, they could set off a panic among all the other holders of such debt; it could result in a complete collapse of the dollar and perhaps the start of a hyperinflation. And anything that decreases America's consumption of the bric-a-brac from Chinese factories will result in more bankruptcies, bad loans, and unemployment
This is one reason China is purchasing the 200 tonnes (+/- 6.4 million ounces) of gold from the IMF. It's also why, I suspect, the government has encouraged citizens to buy gold, which is easily available from many thousands of shops all over the country. The complete destruction of the national currency in the '40s under Chiang Kai-shek was instrumental in Mao winning the civil war, and they don't want to see that happen again.
How will it end? Well, anything that must end will end. And I don't see a happy ending. The yuan will probably maintain value better than other major currencies, for what that's worth, partly because it's underpriced now (based on purchasing power parity), partly because the Chinese can sell dollars to buy back yuan to maintain its value, and partly because the government appears somewhat more conscious of the dangers of hyperinflation than officials in the U.S.
Even so, I think the odds of a financial debacle in China are high, and its consequences could include political, social, and military turmoil. Because the same thing is happening elsewhere around the world, it's likely that the Chinese, too, will blame the free market for what has been caused by their government's interference in the market. But this, sad to say, is true most everywhere.
Big trends have long seemed to have a global aspect, starting with the fact that all over the world after the last Ice Age, at about the same time, people started moving into towns and cities and taking up agriculture. The same is true of the start of the Bronze Age, the Iron Age, etc. It gives some intuitive credibility to the so-called 100th Monkey theory. More recently, though, it's interesting how in the late '60s China, the U.S., and Western Europe – the three areas of the world where things "happen" – all simultaneously went through social convulsions. Then, starting in the early '80s, they all liberalized their economies at about the same time. Now they're likely to be the three big epicenters of the Greater Depression.
But all these things are actually somewhat tangential to the actual reason China is heading for a fall: the business cycle.
The Business Cycle – While you may find it hard to believe, extravagant booms followed by crushing busts don't form a part of the unfettered free market; rather just the opposite is true. That's because booms and busts are caused mainly by currency inflation and secondarily by tax and regulatory policies. The early part of China's long boom, say from 1978 to about 2000, was basically sound. It was financed by domestic savings and foreign equity investment and directed toward basics in an economy that was decades behind the times.
But, notwithstanding the comments I've made above, China is a long way from an unregulated free market. The Chinese government has always tried to direct the flow of investment and credit, and since the crisis started in 2007, it's taken some extremely foolish steps. Their "stimulus" program at 4 trillion yuan (US$585 billion), relative to the size of their economy, is bigger than that of the U.S. Worse, since they can more effectively tell their banks what to do than the U.S., they've created a gigantic credit bubble.
The Chinese stock market is grossly overpriced due to all the hot money they've created; stocks are trading at about 27 times trailing earnings and many urban Chinese are actively involved in it, lately even being allowed by the regulators to do so using margin.
When any economy expands as rapidly as China's, for as long as it has, lately with speculative loans and under political direction, you can be assured it's carrying huge distortions and huge misallocations of capital. I've explained this phenomenon at length in my books and in past editions of this letter, so I won't go into it again here.
How to Play It
First of all, if you have any property in China or Hong Kong, I'd hit the bid, yesterday if possible. The market resembles nothing more than Wiley E. Coyote just before he realizes he's walking on air. A collapse in Chinese property will almost certainly have spillover effects on other markets in the Orient. As I've mentioned before, I think real estate in most parts of the world is a dead asset class for many years in the future. But if you've been thinking about an apartment in the Orient, there are likely to be some bargains in the next few years
Second, the consequences for most commodities are likely to be grim. Prices of industrial metals have floated on a rising tide of demand from places like Dubai and China for years. It's over in Dubai and nearly over in China. Worse, there are stories of many Chinese having stockpiled large amounts of metal, especially copper, as a speculation. As demand falls, that material could be forced onto the market at exactly the wrong time. Base metals and base metal stocks impress me as a bad bet, at least until this shakes out.
Third, Australia and Brazil are two places that have profited handsomely from the long boom in China, supplying the Chinese with massive amounts of raw materials, including coal and iron ore. That's likely to come to an end for quite a while, with negative fallout for both economies. Brazil, especially, has been too hot for too long.
Fourth, a major upset in China is not going to help the earnings of companies anywhere – or their securities. And it's certainly not going to help the dollar or Treasuries, which will both see a lot of selling from China. Of course, their fate is pretty well sealed anyway, but this is another nail, railroad spike-sized, in their coffin.
Fifth, recognize that one of the few beneficiaries of a global monetary crisis is going to be gold. The fact it's quadrupled from the lows of a decade ago is trivial in the context.
When will China hit the wall? The chances are excellent it's happening now. One additional reason it seems to is that the Economist and Forbes both recently published articles on China assuring us that all is well. Magazine articles are historically great contrary indicators at major turning points.
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May 15, 2010
ADG buying back in long at $9.25 into income positon.
Executed as planned in my May 9 post, buyback of the shares I sold at $11.26, on May 14.
Here is what I said in my original post when I sold AGD at $11.26 on April 14.
" My AGD re-entry point is $9.25, although I'll fine tune that based on how things go. I'll be looking for similar pattern as the left of the graph for reintry - Red line above green, red candles turning to green, all candles below the green. A Doji or two to signal the market has beaten AGD down enough again.I'll probably have to wait 2-3 months for this reentry point. "
By buying back the same number of shares as I sold, I effectively I effectively boosted the capital appreciation on 30% of my AGD position by $2 per share by sacrificing one month of income while timing the market. Thank you you Greece for this opportunity to benefit from your malaise.
So, I did exactly what I had planned, with under a month turnaround of this strategy. Now it's time to hold this stock and collect those monthly dividends again.
If I had been even more confident, I would have shorted the down trend. My technical analysis skills and intuition are not that good yet, which is why I enrolled in the Online Trading Academy Professional Trader seminar.
Of course, there is the likelyhood that ADG goes lower. You can see I bought in a downtrend that hasn't necessarily shown a reversal, with the small green candle appearing on May 15th probably being more about exhausted sellers than confirmed buyers. Ironically, the last green candle on the chart was a a terrible day in the markets and also a 1% loss for my portfolio overall. However, I wasn't looking short term with this trade, although I did want to sneak in before May 15th, which is when you have to own this stock to get paid at the end of the month.
The real reason I'm in AGD is because it plays 11c per share every month - about 14 % per annumn. I'm willing to take some downside risk because that 14% dividend covers some of that risk. Also, because I'm cost averaging the reinvested income every month, if it drops down a bit, I'm reinvesting at a lower cost. Which in turn increases the payback if the stock rises to the level where technical analysis tells me that the capital gains are a safer bet than waiting on dividend checks.
Happy investing
Here is what I said in my original post when I sold AGD at $11.26 on April 14.
" My AGD re-entry point is $9.25, although I'll fine tune that based on how things go. I'll be looking for similar pattern as the left of the graph for reintry - Red line above green, red candles turning to green, all candles below the green. A Doji or two to signal the market has beaten AGD down enough again.I'll probably have to wait 2-3 months for this reentry point. "
So, I did exactly what I had planned, with under a month turnaround of this strategy. Now it's time to hold this stock and collect those monthly dividends again.
If I had been even more confident, I would have shorted the down trend. My technical analysis skills and intuition are not that good yet, which is why I enrolled in the Online Trading Academy Professional Trader seminar.
Of course, there is the likelyhood that ADG goes lower. You can see I bought in a downtrend that hasn't necessarily shown a reversal, with the small green candle appearing on May 15th probably being more about exhausted sellers than confirmed buyers. Ironically, the last green candle on the chart was a a terrible day in the markets and also a 1% loss for my portfolio overall. However, I wasn't looking short term with this trade, although I did want to sneak in before May 15th, which is when you have to own this stock to get paid at the end of the month.
The real reason I'm in AGD is because it plays 11c per share every month - about 14 % per annumn. I'm willing to take some downside risk because that 14% dividend covers some of that risk. Also, because I'm cost averaging the reinvested income every month, if it drops down a bit, I'm reinvesting at a lower cost. Which in turn increases the payback if the stock rises to the level where technical analysis tells me that the capital gains are a safer bet than waiting on dividend checks.
Happy investing
Executed increase in AOD Long at $8 for monthly dividend income
Executed increase in my AOD income portfolio at $8 on Friday, as posted last week after the Thursday meltdown. While the state of the market makes me extremely nervous right now, this is strictly an income play, as AOD is currently paying 18% p/a. As AOD pays it's monthly dividend based on your holdings on the 15th, timing was quite important. Hopefully I just sneaked in to paid at the end of this month on the new position.
For these income stocks, especially if they pay monthly, its a game between taking capital gains if the gains exceed your income reinvestment potential (like I did with AGD, where I wanted to take 80% profits from some of my initial investment off the table), and the long term ability of dividend reinvestment to outperform the market over the longer term.
If your technical analysis skills are good, you should be able to find a balance between taking short term swing or position trading profits, and long term dividend gains to increase the total p/a return into the 20 - 30% p/a range.
I easily did that with AGD, but had the advantage of getting in near the bottom of the 2009 market collapse.
Whether I can still do it with AOD will largely depend on what the market does next.
For these income stocks, especially if they pay monthly, its a game between taking capital gains if the gains exceed your income reinvestment potential (like I did with AGD, where I wanted to take 80% profits from some of my initial investment off the table), and the long term ability of dividend reinvestment to outperform the market over the longer term.
If your technical analysis skills are good, you should be able to find a balance between taking short term swing or position trading profits, and long term dividend gains to increase the total p/a return into the 20 - 30% p/a range.
I easily did that with AGD, but had the advantage of getting in near the bottom of the 2009 market collapse.
Whether I can still do it with AOD will largely depend on what the market does next.
May 9, 2010
AOD Alpine Total Dynamic Dividend - increase position at $8
Another opportunity created by the market correction. I'll probably double my current position in AOD if I can get in at $8.00 this week. I was much later into AOD than AGD, where my profit on 30% of the position was over 80%. Because of this I didn't take the profits as the market went up.
However, AOD actually has a higher dividend and a lower price, so pays now 12c every month as opposed to 11c each month on AGD. That doesn't sound like much, but it translates as 18% p/a in dividends alone.
If the market gets through Greece, Euro shock and BPs oil mess, and we see better jobs numbers, things may rebound, and perhaps we'll get 18% capital gains as well.
Look at the graph below showing the market corrections in February and May. I've included one of my favourite indicators - RSI (Relative Strength Indicator). When RSI hits 10 on the botton chart (red circles), thats one of my buy signals. When it hits 90 at the top of the chart, you think about sellling. It's not the final signal, I leave that to my gut. But its a more of a confirmation that the momentum is with you, and the wave is about to break.
However, AOD actually has a higher dividend and a lower price, so pays now 12c every month as opposed to 11c each month on AGD. That doesn't sound like much, but it translates as 18% p/a in dividends alone.
If the market gets through Greece, Euro shock and BPs oil mess, and we see better jobs numbers, things may rebound, and perhaps we'll get 18% capital gains as well.
Look at the graph below showing the market corrections in February and May. I've included one of my favourite indicators - RSI (Relative Strength Indicator). When RSI hits 10 on the botton chart (red circles), thats one of my buy signals. When it hits 90 at the top of the chart, you think about sellling. It's not the final signal, I leave that to my gut. But its a more of a confirmation that the momentum is with you, and the wave is about to break.
AGD Buyback opportunity after the market hammering
Wow! Am I glad I sold 30% of my favorite monthly income stock AGD (See earlier post, sold at the highest price in the last 18months.
Here is what I said I would do in the earlier post": " My AGD re-entry point is $9.25, although I'll fine tune that based on how things go. I'll be looking for similar pattern as the left of the graph for reintry - Red line above green, red candles turning to green, all candles below the green. A Doji or two to signal the market has beaten AGD down enough again.I'll probably have to wait 2-3 months for this reentry point. "
The recent market hammering because of the Goldman-Greece-Euro hysteria whacked the price down to below my buy point of $9.25. I'll wait to see if there is any permanent downtrend here, but look for a reentry at $9.00, instead of the $9.25 that I thought it would reach. I'm also only having to wait a month, rather than the 2-3 months I predicted. So I only lose out on one month of AGD dividend if I get in before the 15th. (AGD pays monthly, at the end of the month, based on your holding on the 15th).
ADG is a closed end fund, which according to the experts, often means it trades above Net Asset Value (NAV). In theory, this means it can be hit harder than other stocks by retrenchments, but it also means it may bounce back quickly.
Taking capital gains in income funds is part of our strategy at Daily Income for Life, although buying AGD was done originally for the pure income potential. At $9.25, AGD pays 14% p/a, which is not as good as it my initial purchase of AGD when it was paying 26% p/a, but its still a healthy income ETF to own.
In todays market, with even the stock exchanges uncertain whose computers screwed up to cause Thursdays panic, buy and hold is appears to be a completely outdated way to be in the market. By buying mainly dividend stocks that pay 10% p/a, we are hedging market volatility to a certain extent. Reinvesting the dividend month helps cost average out the price of the shares you own.
Here is what I said I would do in the earlier post": " My AGD re-entry point is $9.25, although I'll fine tune that based on how things go. I'll be looking for similar pattern as the left of the graph for reintry - Red line above green, red candles turning to green, all candles below the green. A Doji or two to signal the market has beaten AGD down enough again.I'll probably have to wait 2-3 months for this reentry point. "
The recent market hammering because of the Goldman-Greece-Euro hysteria whacked the price down to below my buy point of $9.25. I'll wait to see if there is any permanent downtrend here, but look for a reentry at $9.00, instead of the $9.25 that I thought it would reach. I'm also only having to wait a month, rather than the 2-3 months I predicted. So I only lose out on one month of AGD dividend if I get in before the 15th. (AGD pays monthly, at the end of the month, based on your holding on the 15th).
ADG is a closed end fund, which according to the experts, often means it trades above Net Asset Value (NAV). In theory, this means it can be hit harder than other stocks by retrenchments, but it also means it may bounce back quickly.
Taking capital gains in income funds is part of our strategy at Daily Income for Life, although buying AGD was done originally for the pure income potential. At $9.25, AGD pays 14% p/a, which is not as good as it my initial purchase of AGD when it was paying 26% p/a, but its still a healthy income ETF to own.
In todays market, with even the stock exchanges uncertain whose computers screwed up to cause Thursdays panic, buy and hold is appears to be a completely outdated way to be in the market. By buying mainly dividend stocks that pay 10% p/a, we are hedging market volatility to a certain extent. Reinvesting the dividend month helps cost average out the price of the shares you own.
May 6, 2010
How to Make Challenging Business Tasks Easier
By Pamela Bruner at Making Your Success Easy
Things that your subconscious mind does are easy. Things that you need your conscious mind for are much harder.
The conscious mind - let's call it Controller - is easily exhausted. Anything that takes focus and attention is tiring, including new tasks, and developing new habits. Using willpower is exhausting, and scientific studies have shown that when you use willpower for one task, you have less of it available for other tasks.
Working from the subconscious mind - let's call it The Flow - is not exhausting. Habitual actions and activities don't take willpower or attention, and so they don't tire out our Controller. They are easier. However, The Flow only goes where it's been programmed, like a river in it's banks.
This is why using willpower to accomplish anything is so challenging. You literally 'use up' your willpower, especially if you're trying to take on multiple new tasks or behaviors, like marketing, sales, or running a business in a new and different way.
Think of it this way - anytime you take on something new, such as learning a new sport or musical instrument, you have to concentrate very hard. Later, as you become more skilled at it, it requires less effort to do. It's moved into the subconscious, The Flow, so it's easier.
How can you use this information to improve your business?
You have to get what you need to do placed into the subconscious mind, The Flow, so you're not relying solely on the easily exhausted conscious mind - Controller. Most of us try to run things with Controller alone, and we're worn out.
Two things will activate The Flow:
1) Repetition. The more that you do an action, over and over, the more habitual it becomes. The more that you share your elevator speech with people, the easier it becomes to do. The more ezines you write, the easier it becomes.
Repetition is good, but it takes time.
2) Communication with The Flow. You can't do this directly with words, as you do Controller. The language of The Flow is pictures and emotions, and it's job is to protect you.
That's why visualization is such a powerful tool in effecting The Flow. The Flow actually can't tell the difference between an imagined picture and a real one. So if every time you think about talking to a prospective client, you see them rejecting you, The Flow will sabotage those conversations. You'll find a way NOT to have them.
If you visualize being accepted by your prospective client, The Flow will work with you to help you create more of that.
In sales, they say that you need a certain number of 'no' responses in order to get 'yes' responses. However, with visualization, you can start out with 50 yeses. Imagine how powerful that can be for The Flow!
Sports figures visualize sinking balls, and you can visualize getting yes responses, having a task be easier than it has been before, or any other measure of success or ease that you like.
How do we use this approach to increase our skill level in trading and investing?
Visualize, visualize, visualize, to get all parts of your trading analysis process into the The Flow. Visualizing is not just visual. Feel the emotions, see charts in your mind's eye, watch yourself making clear, focused decisons, etc.
Daily watchlist chart viewing. Picking entry points. Taking profits. Being patient. Waiting for your planned entry point. Creating a plan for every trade. Execution checklists.
All of these actions can be visualized and practiced again and again before you actual do them with real money.
Things that your subconscious mind does are easy. Things that you need your conscious mind for are much harder.
The conscious mind - let's call it Controller - is easily exhausted. Anything that takes focus and attention is tiring, including new tasks, and developing new habits. Using willpower is exhausting, and scientific studies have shown that when you use willpower for one task, you have less of it available for other tasks.
Working from the subconscious mind - let's call it The Flow - is not exhausting. Habitual actions and activities don't take willpower or attention, and so they don't tire out our Controller. They are easier. However, The Flow only goes where it's been programmed, like a river in it's banks.
This is why using willpower to accomplish anything is so challenging. You literally 'use up' your willpower, especially if you're trying to take on multiple new tasks or behaviors, like marketing, sales, or running a business in a new and different way.
Think of it this way - anytime you take on something new, such as learning a new sport or musical instrument, you have to concentrate very hard. Later, as you become more skilled at it, it requires less effort to do. It's moved into the subconscious, The Flow, so it's easier.
How can you use this information to improve your business?
You have to get what you need to do placed into the subconscious mind, The Flow, so you're not relying solely on the easily exhausted conscious mind - Controller. Most of us try to run things with Controller alone, and we're worn out.
Two things will activate The Flow:
1) Repetition. The more that you do an action, over and over, the more habitual it becomes. The more that you share your elevator speech with people, the easier it becomes to do. The more ezines you write, the easier it becomes.
Repetition is good, but it takes time.
2) Communication with The Flow. You can't do this directly with words, as you do Controller. The language of The Flow is pictures and emotions, and it's job is to protect you.
That's why visualization is such a powerful tool in effecting The Flow. The Flow actually can't tell the difference between an imagined picture and a real one. So if every time you think about talking to a prospective client, you see them rejecting you, The Flow will sabotage those conversations. You'll find a way NOT to have them.
If you visualize being accepted by your prospective client, The Flow will work with you to help you create more of that.
In sales, they say that you need a certain number of 'no' responses in order to get 'yes' responses. However, with visualization, you can start out with 50 yeses. Imagine how powerful that can be for The Flow!
Sports figures visualize sinking balls, and you can visualize getting yes responses, having a task be easier than it has been before, or any other measure of success or ease that you like.
How do we use this approach to increase our skill level in trading and investing?
Visualize, visualize, visualize, to get all parts of your trading analysis process into the The Flow. Visualizing is not just visual. Feel the emotions, see charts in your mind's eye, watch yourself making clear, focused decisons, etc.
Daily watchlist chart viewing. Picking entry points. Taking profits. Being patient. Waiting for your planned entry point. Creating a plan for every trade. Execution checklists.
All of these actions can be visualized and practiced again and again before you actual do them with real money.
May 3, 2010
Sold O at $32.79 for 41% total gain
O was the income stock that started my income portfolio in 2008. O pays income monthly, at around 6% pa. It's had a long ride upwards after I started investing in 2008, bought more in 2009, and reinvested all dividends.
My call was that a 41% gain in total over about 18 months is better than 6% compounding over the same time. Althouth Daily Income for Life is about finding income producing stocks, the trading strategy is also a three prong approach:
1. Using 75% of the portfolio, buy stocks that pay 10%+ dividend or royalty yeilds and reinvest all dividends/royalties.
2. Take capital gains income stocks and reinvest using technical analysis to accelerate capital appreciation
3. Actively trade small and medium cap stocks with up to 25% of overall portfolio value in order and direct capital gains into additional income streams.
O Exit Point Grapsh, show the nice long run. Too good not to take profits.
It's going back on the income watchlist, but my gut is telling me this latest rally is coming to an end, so I'm converting this position to cash to see if my intuition is right.
It's better to be sitting on cash at the end of a rally, and have all your positions being taken out by your trailing stops, than cursing yourself watching the graphs fall and your profits erode day by day.
However, the Daily Income for Life strategy needs to stay invested in dividend and royalty producing stocks to work. I'll be watching the market carefully using technical analysis to see where to reinvest - either in the same income producing stocks as were sold in the last month (BPT, AGD, O) or in new ones (Income Watchlist)
Even if the O pullback after this rally is only $2 per share, it will still be worth buying back in. Let's say our position size is 100 shares of O. The buy back price in two months is $30 after Greece is solvent again and Goldman execs are rightlully dragged through the mud.
The cost of lost dividends and exit-reentry commission would be about $32. So we are $200 - $32 ahead through actively managing our income investment using technical analysis. This is $168 cash. Tt would have taken approximately 20 months of dividend income to create this profit.
And if O keeps going up, we just pick another stock on our income watchlist that is looking better from a technical point of view.
My call was that a 41% gain in total over about 18 months is better than 6% compounding over the same time. Althouth Daily Income for Life is about finding income producing stocks, the trading strategy is also a three prong approach:
1. Using 75% of the portfolio, buy stocks that pay 10%+ dividend or royalty yeilds and reinvest all dividends/royalties.
2. Take capital gains income stocks and reinvest using technical analysis to accelerate capital appreciation
3. Actively trade small and medium cap stocks with up to 25% of overall portfolio value in order and direct capital gains into additional income streams.
O Exit Point Grapsh, show the nice long run. Too good not to take profits.
It's better to be sitting on cash at the end of a rally, and have all your positions being taken out by your trailing stops, than cursing yourself watching the graphs fall and your profits erode day by day.
However, the Daily Income for Life strategy needs to stay invested in dividend and royalty producing stocks to work. I'll be watching the market carefully using technical analysis to see where to reinvest - either in the same income producing stocks as were sold in the last month (BPT, AGD, O) or in new ones (Income Watchlist)
Even if the O pullback after this rally is only $2 per share, it will still be worth buying back in. Let's say our position size is 100 shares of O. The buy back price in two months is $30 after Greece is solvent again and Goldman execs are rightlully dragged through the mud.
The cost of lost dividends and exit-reentry commission would be about $32. So we are $200 - $32 ahead through actively managing our income investment using technical analysis. This is $168 cash. Tt would have taken approximately 20 months of dividend income to create this profit.
And if O keeps going up, we just pick another stock on our income watchlist that is looking better from a technical point of view.
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