Stocks and Oil

Are stocks in general cheap? I don't believe so. Of course stocks have come back to more reasonable prices but they are by no means really cheap for most of them. However, relatively speaking, stocks are indeed cheap historically. Why so? Right now, the dividend yield for S&P 500 is exceeding the 10-year treasury bond yield. This is a very rare phenomenon, which only occurred once or twice in the past 40 years or so.  When investing in bonds, people are only looking for the fixed income, not capital gain or growth. For stocks, people are more interested in growth and gains. That's why usually bond yields are much higher than that of stock dividends. But now it is inverse. It means, comparing to bonds, stocks are historically cheap. This means, investing in stocks in general will be a good choice for the mid-term. However, with one caution. At the moment, it is rather uncertain in terms of the stock market direction. While either way is possible, I think the chance is more for a short term decline, potentially severe. The investors' sentiment is just too much bullish right now, which is usually not good. I expect a quick sharp dip of the stock market. If it happens, it is likely a good opportunity to get in for the next 6 months at least.

About three weeks ago I turned to be bullish on oil, when it was $91. I said it could reach $100 in the next few months. I was wrong. It has almost reached this $100 level in less than one month. It is just too far too fast. I think this kind of fast price appreciation is mostly related to the headline bullishness. If the headline news changes, oil will likely drop, also fast. I'm more bearish about oil now and actually I bought ERY, a leverage inverse ETF fund to bet against the oil sector. Of course it is a risky speculation.

By the way, I will be away for 2 and a half weeks. I'm not sure if I will have time or easy access to Internet to write blogs. If I cannot, talk to you again when I'm back early December. Early greetings to all of the friends for the Thanksgiving!

Make money from water

No one pays attention to water. It seems abundant and it is cheap. People get water for granted. When people talk about commodities, they are referring to gold and oil. Rarely anyone is serious about water as a commodity. I think this will change in a big way, probably not obviously at first but will be more and more so eventually.

Yes, water covers nearly 3/4 of the Earth’s surface, but over 97% it is seawater which is undrinkable. Actually the world is becoming more and more short of fresh drinkable water for the world’s 7 billion people. The shortage of fresh water becomes more severe when taking into consideration climate change, pollution and mismanagement of water resources. I won’t be surprised that in 5 years or so, people will talk about water like what they are talking about gold and oil today. After all, it is one commodity that human beings cannot live without. We are actually facing a very dire situation with respect to the clean water resources. 

I think it is the time to start to build up the water portfolio, slowly but surely. I bought American States Water (AWR) about 5 years ago, a company that serves approximately 15 million people with drinking water, waste-water, and other water-related services in approximately 30 states and 2 Canadian provinces. While it is certainly not a super star in terms of its performance, it is very stable with an upward trend. It has been certainly doing much better than the general performance of S&P (see below the comparison). More beautifully, it is paying a respectful dividend, over 3% at of now. So you are getting paid for waiting for other people to wake up about water companies. Of course, there are more such water utility companies, which are also paying very good dividends, such as Aqua America (WTR) and American States Water (AWR). Do your home work and act accordingly. I think you will not regret over time.

Cuba: An unheard opportunity?

Probably not many people may notice anything happening in Cuba. Under the strict long term economic sanctions imposed by the US as well as due to its own problems in its economic structure and policies, Cuba is no doubt a very poor and underdeveloped country in the world. However, you may have heard that Cuba has started its economic reform. A recently announced reform, I think, is revolutionary and may potentially make some smart early investors a lot of money.

On Nov 10, the Cuba government announced that effective immediately, Cuban citizens could buy and sell real estate on the open market. Do you know what this means? It is for the first time in 50 years! Simply think about what has happened in China with respect to the impact of housing on its whole economy. If you participated in this trend in China early enough, you would probably have had made many times of your money before it went into bubble. Eventually I also think Cuba will go into the bubble state as China, but this will be years later.

I don’t know there is any pure play specific to the Cuba companies. But there is an alternative, the Herzfeld Caribbean Basin Fund (Nasdaq: CUBA), a closed-ended fund loaded with tourism-oriented firms. This fund has its portfolio of travel, cruise, banking and telecom companies will benefit from any jump in Cuban tourism. Probably seeing the upcoming opportunities, it is also adding a small number of companies which are highly speculative in a pure Cuba business plan.

A laughable prediction for gold

Gold and silver are on fire again lately. Today gold jumped $40 to close just a hair under $1800. Honestly I hope it wouldn't be too hyped. If too much attention is given to it, the uptrend won't last for long. Two weeks ago, I took profits from shorting Royal Gold (RGLD) when it plummeted to low $60s and I said it would a good buy if below $60. It didn't. On the contrary, it has bounced back strongly and it has come back to above $80 again today. I'm worried short-term as it is too far too fast. Technically speaking it has reached its strong resistance and has a high risk of reversing back. If so, it will create a double top, a bearish setup. If it breaks through this resistance level, then it is very bullish. I have already got in to some extent. Either way, it is fine with me. I will only add more if it drops again.

I happened to see some prediction about the gold future on Bloomberg today. According to some "experts", the gold price will be around $1812 by end of 2012, around $1830 by 2013 and it will plummet to low $1500s in 2014. I cannot help but laugh when I see this experts' opinion. I hope this is kind of widely held opinion so that no euphoria will be created for gold and silver. As I said the gold bull does not like spotlight. It wants to move up silently without public attention. The lower public expectation, the better for its uptrend!

Platinum: A rare opportunity emerging

While not as famous as gold and silver, platinum is also a key family member of the precious metals. The primary utility of platinum is for the car industry; therefore it is highly sensitive to the overall economy. Platinum is quite rare and it is usually more expensive than gold. During the last decade, platinum has averaged a 64% premium over gold.  And in the past 2 decades, platinum was traded below gold only once, which happened in Nov 2008 when everything was sold off during the overall market panic and crash. It was a historic meltdown for platinum when the auto industry, actually the whole world, was almost felt like coming to the end. It tumbled from over $2000/oz all the way down to less than $800. But you know what, in the next 2 years, platinum jumped back almost 150%.

Now we have got the second opportunity that platinum is currently cheaper than gold. Gold is trading over $1750/oz at the moment but platinum is in $1600s. If the history is any guide, this won’t last for long and I bet platinum will bounce back in the near future to cost more than gold.

If you want to invest in platinum, there are 2 ways: one is to go with the platinum ETF, symbol PPLT. PPLT should more closely reflect the price of physical platinum. The other way to trade platinum is to invest in the platinum mining company, Stillwater Mining (SWC). Of course, as with any mining companies, SWC is more volatile and risky but potentially it may be much more profitable when the platinum’s price appreciates.

Astonishing long-term inflation trend

I just saw the chart below and was shocked. So thought to share with you. I guess you don't need me to say too much about what it means. Yes, your and my money has been devalued continuously in a big way. You may notice that before 1970, the inflation was kept relatively mild. Starting from 1971, the inflation has jumped up steeply. Why? Because in 1971 the late President Nixon destroyed the gold standard for the US$ by decoupling the two with a fixed ratio. Before that, one oz gold equaled to $35 and everyone could legally go to the bank to exchange the US$ for gold. In other words, the US government could not freely print the paper money as much as they wish, because each dollar was backed up by gold. This is the only way to effectively control the inflation. As soon as this connection was cut, the paper US$ could be created from the thin air, which is more so nowadays. That's why our money has been devalued so much and our purchasing power has declined by 20 times in a short 40 years time. Friends, this trend is only deteriorating and worsening quickly every passing day. You may see another 20 times less purchasing power in no time. That's why I love gold and would like to buy more whenever there is a dip. I'm simply frightened and more so now!

Great price actions for gold and silver

If you follow the market closely, you are just experiencing rollercoaster actions, up or down in a wide range on a daily basis. At the moment, the market is very much driven by the Eurozone drama. If you ask me what may happen in the next few weeks, I don't know. I can say confidently no one really knows for sure. It is such an unprecedented saga that no one has every experienced it. I have said before and will continue to say that I'm sure the Euro will not survive for long. I just don't know precisely when it will dissolve. Looks like Greece is finally given up and may leave the Eurozone much sooner than I have expected. Anything is possible. Watch your steps!

Right now I'm very pleased about the price actions for gold and silver. I cannot say for sure that the relatively significant correction for the precious metals has been over. But silently they appear to have built up a solid base, from which they are moving up. Actually the longer the slow moving period lasts, the better it would be for the precious metals for a much powerful jump into the next high level. As I said before, the gold bull does not like limelight. It prefers low key. Same for the silver. I have taken the opportunity to add my positions to both in the past few weeks. Actually more so for the gold or silver mining stocks, as I think the greater values are currently embedded in the stocks than the physical metals. Actually I have found and am testing a great way to generate short-term income on a weekly basis from gold or silver positions. This is especially great and suitable for the retirement accounts such as IRA or Roth. Tomorrow will be my first day of taking fruits from it. Will share this later.