Sliver is tussling

It is really a difficult time for precious metals, especially sliver. A short a while ago, it appeared that sliver was making a bottoming price action and I hoped it could overcome the headwind from its May low. To test the water, I made some bet with AGQ but at the same time I was also very cautious as I was not totally convinced an upper trend of silver had clearly been established. Sure enough, silver prices started to drop almost immediately after I bought AGQ. It is now testing its May low at around $33.50. From the technical charting perspective, if it further drops and breaks through this level, it usually means it resumes its corrective action with a downward trend. If that happens, a big drop may likely ensue. As I said, I'm prepared for both directions but really hope that it will drop more so that I can buy more silver, not only silver stocks but also physical silver. Right now silver is struggling with no clear direction. Watch closely the price level of $33.50.

How soon to become a millionaire starting with one penny?

If you start with one penny (cent) and you double your money everyday, how soon will you become a millionaire? One year? Six months? Or just 2-3 months? Nope! You may not believe but it will just take 28 days for you to get to the million dollars level.

How can this happen? This amazing phenomenon is what Einstein called "The World Eighth Wonder" -- Compounding. Of course, daily double is not something one can realistically make. It is just to show the magic power of compounding. Realistically speaking, if your money can increase at 15% per year, it will double in 5 years with compounding. At 10%, it will double in less than 8 years with compounding. This is not something unthinkable. The power of compounding is more pronounced as the time passes in accumulation, the longer the better. In other words, it is better to start investing with compounding as early as possible. While it is never too late to start to do so for our own retirement planning, it is more important to help your kids to start at their young ages.

What is the best way to compound your money? You can try with bank saving with an interest of near zero to about 1% at the most. Or you find some magic way to increase your capital dramatically, say consistently over 20% annually. I'm not sure the latter is realistic for general investors. Here is my formula for a relatively painless and low risk way of effectively compounding your money over a long time:

- Keep a substantial amount of cash in your hands, with which you will be able to take good opportunities down the road if they arise. This is especially important in the current very uncertain period of time! Rest assured that such kind of opportunities will always pop up without prior notice. In my earlier years of investment, I ran into several times when I wish I could have enough cash to put to work but I regret I didn't. I learned the lesson now and I'm raising cash at the moment.
- Set up your core portfolio with solid and well managed companies with a track record of paying increasing dividends for decades. I have discussed many of them in the past and will do so as well if I find more good ones. In the past 2 months or so, the overall market was really doing badly, which also brought down the share prices of good companies. As long as it is not due to the fundamental problems with such good companies, you should feel great to see the dropping of their share prices. You should take the opportunities to add more shares of such companies to accumulate, not to run away from them. This is one of the keys to succeed in creating your wealth over the long term. Companies such as Microsoft, Intel and Cisco are really great in their valuations at the current prices. I noticed Microsoft shot up today for about 4%. I would not pretend to know in advance of such a price move for Microsoft, but I'm not surprised to see this for any of them given how deeply they have been undervalued. Some day people will understand their values and start to be crazy about them. So you are sort of paid for waiting with their good dividends.
- Lastly but not least, be sure to enroll into their DRIPs, i.e. to reinvest their dividends, which is a sure way to effectively compound your money. I'm sure you will be very happy if you look back after 5 years how greatly you have done.
- Not for everyone but if you are savvy enough with options, you may try covered calls to significantly increase your income with your existing shares. With this strategy, it is really not difficult to reach a goal to have your return at a double digit rate. It appears daunting but really it is not that difficult to play with options.

Another virtual bank (AGNC) for high interests

You probably know I love Annaly (NLY), which I call it a virtual bank because it, although not a real bank, pays you a high interest at about 14% and at the same time it is critically importantly that it is very safe under certain circumstance. Why? Because it buys government-backed residential mortgage securities; as such it virtually has no credit risk. When the Fed rate is low as it is now, it can borrow money cheaply and lend money at a relatively high rate. The difference between the borrowing and lending rates is where its profit comes from. Since it is set up as a real estate investment trust (REIT), by law it must pass 90% of its earnings to its shareholders in order to avoid paying the corporate tax. As you know, Benanake has kept the Fed rate at near zero for 2 years by now and there is no chance that he will be able to raise the Fed rate any time soon due to the very depressing economic situations right now. The current consensus is that the Fed rate will be kept at this near zero level till at least the end of 2012. In other words, it is quite safe to invest in virtual banks for at least another 6-12 months. The price action of NLY in the past few weeks is a kind of verification of this analysis. Actually it is a bit beyond my expectation that its share price is kept appreciated beyond $18. I have bought NLY for over 2 years. Not only I have enjoyed its high dividends and capital gains, I have also used options to juice my incomes from it. With all these, my return has been much more than double my initial invested capital.

I just found another virtual bank, which has the exact same set up as Annaly but pays much better dividends. Its dividend yield is around 19%. The company is called American Capital Agency Corp. (AGNC). From the investment point of view, I like AGNC more than NLY, given its consistent better performance in the past year but a relatively weakness in its price in the past few weeks, i.e. a better entry point. It just announced that it is planning its largest stock offering since going public three years ago, potentially raising more than $1 billion to fund its investments. The offering is expected to close on June 28, 2011. So its price will likely remain weak or even drop a bit further due to this share dilution. I'd take this weakened price as a good opportunity to establish positions for this high dividend yield. A trailing stop (TS) should be in place to protect your capital for any unexpected risks. Maybe a 15% TS is a good cut but you may make it more tight (say at 10%) or more loose (say at 25%) depending on your personal risk tolerance. 

Money saving tips

I read a lot ever day and often run into some interesting tips related to money saving, one way or the other. Not everything is interesting to everyone but I'm sure you all may find something appealing to you. Here are some tips for today:
1) There are many websites for bartering and swapping. You may find something useful for you by exchanging something you don't need anymore. Check out here.
2) How about save some money if we go into another recession?
3) If you are thinking to buy a used car, you may want to know which used cars to avoid.
4) There may be some easy ways out of your parking tickets and speeding tickets.

Silver appears to be bottoming

While I'm still very nervous about what may happen after the D-day, i.e. the end of QE2 on Jun 30 and I still think it is very likely there may be a more severe sell off of precious metals, the price actions of silver in the past few weeks are revealing a bottoming pattern. It appears the silver price has a very strong support at about $35. Given what is going on around the world, which is fundamentally super bullish for precious metals over a long term, together with being supported by the bullish technical price patterning,  I think it may be wise to start to accumulate silver and related products.  But I'd do this slowly, using the dollar averaging approach, i.e. buy a small portion at a time and add more if its price drops further over time. I will add some positions of AGQ, a leverage ETF for silver.

To be very clear, this is a 2 times leverage fund; as such it is more risky but also potentially more profitable. It will roughly increase by 200% of silver prices but will also drop as much and quickly, double the loss if silver prices drop. Less risky silver ETFs include SIVR or SLV. As I said, don't be surprised if silver indeed experiences severe sell off in the next few weeks. Considered to have been warned.

I wish Euro could appreciate more

Have you ever thought about to enjoy your life by asking your neighbors to pay your bills and expenses? I'm sure you would think I have lost my mind to even ask this stupid question. I agree but don't call me stupid too quickly.  This is exactly what the Greek people are thinking and expecting. If you follow the news, you know nowadays Greece is in a big mess and riots are prevalent there. Why? Because people think they still have the rights to enjoy their life even though their country is already bankrupt. How? Well, rich countries like Germany should pay their bills! Do you know the vast majority of Greeks do not pay income tax and they can retire with a full pension at the age of 50? They don't care whether or not they can pay for their life style. They just want to continue to enjoy their illusional life style even at the expense of their rich neighbors.

This is what the Euro is based upon with this kind of insane mentality: it is our debt but it is your problem. I have shorted Euro for 2 years now and I will continue. I really wish Euro will appreciate much more, e.g. to above $1.50, so that I can short more. To me, it is free money I want to pick up. The more the better!

What happens to CSCO?

I talked about CSCO in Apr and thought it was a good buy when it was around $17. It is not around $15, a 12% drop of its price. What happened? Nothing really. If anything, it becomes even better a bargain. Remember, CSCO to me is a long term value investment, not a short term trade. As a value stock, I'm really not too much worried about its daily price changes, as long as its fundamentals remain unchanged. As part of the stock market, its share price will inevitably influenced by the overall market sentiment. The stock market has come down for 6 weeks nonstop. With very few exceptions, most of the stocks have also dropped, including good ones. Actually this kind of stock devaluation is great news for value investors. It creates a much better entry point for them to buy the stocks they want at more discounted values. So to me, CSCO is just 12% cheaper to buy, a better stock I want to own more.

What should be expected after the D-day?

It is Jun 30, the end of QE2 (Quantitative Easing #2), which is being called the D-day for the financial market. Why? Because this is the day when Benanake has officially announced that he will end the purchasing of the US government bonds. QE is a fancy name for money printing. This second QE (so called QE2) was purposed to buy $600 billion worth of treasury bonds to keep interest rates low and help spur lending and economic growth. Indeed, the long-term interest rate has been kept low, but artificially of course thanks to the QE2. We have already seen the impact of the Benanake asset bubble, i.e. everything has been inflated extensively except the US$ obviously.


So what will happen after the D-day? Actually no one really knows for sure. This is uncharted water, which is unprecedented. But we probably can make an educated and logical guessing. Up until now, about 70% US treasury bonds are bought up by the Fed QE2 money. The remaining part is largely absorbed by China and Japan. China is already too much scared about what is going on in the US and has raised their concerns repeatedly about the safety of their money tied to the treasury bonds. It would be lucky enough to expect them to keep the current level of buying, letting alone further increasing of their purchases of the US bonds. Japan is busy with dealing with their rebuilding, which requires a huge amount of money. They probably will sell, not buy more the US bonds. Looking around the world, EU is also heavily indebted and is unlikely to be able to pick up the bill. So who is going to fill the gap after the Fed stopping the purchases of the treasury bonds? This is the question asked by the Bond King, Bill Gross. If no one is going to fill the gap and the logic holds true, then we should expect a crash of the treasury bonds, which will cause a spike of the long-term interest rate. If this does occur, then a chain reactions will ensue: an appreciation of the US$ (although short-term), plummeting stocks and unfortunately also a correction of commodities including precious metals (potentially severe but fortunately also short-term). Of course, this won't happen overnight and likely will be seen over a few months. Actually it seems the market is behaving as such right now to anticipate this result to happen. We don't need to wait too long to see how it will evolve.

Personally I'm raising cash, shorting Euro (via EUO) and the overall market (via SDS), shorting treasury bonds (via TBT), and buying put options to hedge against my gold and silver (e.g. put for GLD and SLV as well as put for my mining stocks). In this unprecedentedly uncertain period of time, I want to be very cautious and be prepared to be able to jump in with enough cash in hand. Just to be clear that I'm not expecting to gain too much with such measures. I rather treat them as my insurance, in case the worst comes true. This market has been irrational for too long and the logic is often not applied; therefore I may be wrong but I just don't feel safe to stay with the herd.

Entertainment today: How to foreclose your bank

Do you know how to foreclose your bank? Watch here to see how Bank of America was foreclosed by its client. Some details can also be found here. Enjoy it.

My lesson with Chinese stocks

I don't know how many of you have noticed the report that the famed hedge fund manager, John Paulson, has lost a big trunk of money recently, due to a 60% haircut of one of its holdings, Sino-Forest. This is a Chinese company claimed to have inflated the value of its timber holdings with fraudulent data. I also got a hit recently for a Chinese stock I held, CCME. It was doing fine initially when I bought it and then suddenly the stock was frozen for trading for a few months. When it came back, its share plummeted sharply. I lost a few thousands. Not a big deal in terms of the amount but it does serve a good warning for betting on Chinese stocks.

 

About 3-4 years ago, my friend urged me to invest in Chinese stocks. I was not moved as I just did not feel comfortable with them due to too many unknowns involved. Basically I was not sure about their accounting numbers as reported. Also gambling behaviors seemed to be the main force behind the movements in Chinese stocks. Of course, I missed the opportunity of earning some good money by not participating at all in the Chinese stock market. In the past few years, more and more Chinese companies have come to the North America and are listed in the US or Canadian market. I thought it was a good time now to invest in them, given the monitoring system is stringent here for financial reporting. I started with FXI, an ETF for 25 largest Chinese companies. Actually it has been doing quite well, even until now. The problems started with individual stocks, especially those young but growing companies. For CCME, currently there are quite a few class lawsuits for it due to a claim of false accounting. This is a big headache for any company when it is sued by such a claim. Regardless of whether it is truly involved in such an illegal conduct or not, the damage has already been done for individual investors. I had another position, CMED, which was doing quite well actually till a week ago. It was my greed that I did not give it up earlier to simply take my profits. I still hoped that this one could probably survive without a big problem. Yesterday it seemed very clear it was my illusion to hope so. I got out with a small profit (fortunately). Today its price plunged and it would have been a big loss for me if I still held it.

 

My lesson? It is still a gamble to invest in Chinese stocks no matter how great they look. They are still vulnerable to accounting problems. If you like Chinese stocks, try ETF for a basket of stocks instead of individual stocks. Of course, if you want to gamble with your money, it is another story and good luck with you!

Why is NLY doing well, while the whole economy is terrible?

On Jan 6, 2011, I wrote about Annaly (NLY). Here is what I said: this stock is fundamentally not related to the stock market but to the Fed rate. As long as the Fed rate remains low, it will make money and distribute dividends in a huge amount.
As you may have noticed, the overall market is really not doing well recently. The Friday's economy news was especially poor with a significantly anemic new job creation number associated with an increasing unemployment rate. It is just bad and understandably the market did not like it and was dropping. So what did NLY do in such a grave market? You should not be surprised if you understand what I told you before: it's appreciating against the overall depreciating market. Why is that? Because the poor the economy is doing, the less chance Benanake will dare to raise the Fed rate any time soon. The market just knows this perfectly and has discounted that. When Annaly enjoys the extremely low fund borrowing rate, its profit margin is kept large; so the dividends you are getting, which are almost at 14%. 

I hope you did have bought some shares of NLY early this year, with which you have not only got a huge dividend payment, but also some capital gain along with the stock appreciation. Do I recommend to buy more shares of NLY at the moment? I'm reluctant. Although I think it is very safe to bet that there won't be a chance to see a Fed rate hike this year, the stock has very limited room for its price appreciation. It is very likely it will fluctuate within a tight range. At this relatively high price level, one may see some capital loss, although the loss will more than enough be offset by the huge dividend yield.

Bank of America: A good bargain?

It is brutal for bank stocks in the past few weeks. Every one has been down and a lot! Just take look at the Financials Select Sector Fund (XLF), an ETF tracking all the major US bank stocks. Since its peak around mid-Feb, it has been moving down for over 11%. The big banks such Citigroup and Bank of America (BAC) have done even worse. I guess you don't need me to tell you how ugly the economic news is out there. Regardless how you want to slice it, it is just awful and wretched. The most horrible part is probably the falling housing market, which seems never ending and will likely continue for a long time. This will translate into further losses on the balance sheets for banks.

While the situation for banks is indeed very dreadful, my contrarian nature tells me this is likely overdone in terms of the extent of their stock drops. I think the most, if not all, of the problems facing the banks have already been priced in. These are the banks which have huge amount of concrete assets in hands, which won't simply disappear due to financial problems. As I have discussed in the past for Citigroup, when the stock price drops below its tangible book value, it is a good bargain for investment. Tangible assets are something which can be "touched", i.e. you can in theory sell them for money back, such as cash, inventory, or buildings etc. According to the latest balance sheet for Bank of America, its current tangible book value has been improved to $13.21 per share. However, BAC is currently trading at about $11.30 per share, nearly a 15% discount to its tangible book value. I think BAC is a good bargain at this depressed price and I'm in. Of course, I wanted other traders to pay me to buy at an absurdly lower price, $7.5 per share!