My 1st Million At 33 - yes, you can do it too

You can imagine how bad the downturn will be numerous times, but not until it hits you, you won’t feel the full effect. The sell-off in mining sectors have truly shaken me. In fact, I have started considering to bail out the sector.

My original thesis of investing in precious metals and commodity in general has always been the following:
1. Peak oil
2. Demographics changes in combination with the heavy US debt/future obligation.
3. A serious US housing downturn, inducing a credit crisis, and thus driving up the value of the “good money” or gold.
4. Emergence of BRIC (Brasil, Russia, India, and China) and third world countries to participate in the consumption of natural resources.

For the above factors, some are near term, and some are longer term. It is still hard to say whether how soon the peak oil will occur or has occurred even. However, some of other trends are probably unavoidable. The financial crisis I believe is still ongoing, and will unfold until mid-2011. It is arguable whether capital will seek safety in gold. But as far as I can see, it should be “natural” for it to occur. As Bob Hoye has explained, a rising gold price is the mother nature’s way of encouraging gold production, which “increases” money supply to offset the deflationary crisis.

For obvious reasons, #3 should be the most immediate driving force (if it’s still there). #4 BRIC is obviously going down to the drain temporarily. Whether #4 or #1 prevails, at least one of the factors is bound to either increase the demand of natural resources or decrease the supply of natural resources. #2 factor is purely monetary on a longer term horizon. But of course, the reckoning day for US deficit gets closer everyday. Although it is more likely that it unfolds gradually, market confidence is often quite fragile and easily shatterred. For now, this factor may not kick into high gear for another 10 years.

While Bob Hoye is still predicting an upcoming turmoil in stock markets, Todd Harrison has moved on to the long side. For now, I am betting with Bob Hoye.

Regardless, the timing of those above four factors will affect greatly on the performance of my portfolio. If the timing of the events is off by some 3 to 5 years, I will be looking at a sub-par return for sure.

By the way, abiotic oil does appear to have truth to it. I will be googling more on it to see if I can refute peak oil theory.

Nearing the Fed meeting, precious metals have entered another sell-off. It’s almost predicable, but brutal too.

Is this the time to buy? Probably not.

By the way, if you ever want to buy, 12pm EST is probably the best time to buy. I can never explain why, but 12 pm EST almost always tend to get a big drop on the down days. The other best time to buy is right before the market opens, near 8am EST to 9:30am EST. This is from my personal observations in the past years.

I think HUI has broken the shoulder on the head & shoulder pattern. Therefore, it’s conceivable technically speaking that HUI may drop all the way to 300 level. My personal guess is that it could drop to 325. However inconceivable it is, the pattern is still consistent with Elliot wave labeling. That is we are in the wave 2 of wave 3. And wave 2 CAN correct majority of the gain made in wave 1 which started at HUI=285.

For long term investors, I think one can add to the stakes at the coming low point. Of course, the pain for holders (and myself) will be very high. Unfortunately, I think that there may be just no way around it.

With some 100+ banks (if not more) that probably will fail in the next two years, that averages out to be about 1 bank per week. Since FDIC is under-staffed in the first place, and you don’t want things to go too crazy, FDIC should probably be closing at least 1 bank per week, just to make everything and all the processes more smoothly.

The last Friday was First Priority Bank. The week before was First Heritage Bank in California, and First National Bank of Nevada in Nevada. Since it should be always Friday, you don’t need to worry on any other days.

IndyMac’s closure was certainly triggerred by a run on bank. The reason that FDIC wants people to emphasize that your money is “safe” as long as it’s under $100K per depositor is that such run on bank could be fatal for the financial system, since your money really doesn’t exist. For every dollar in your checking account, ten dollars can be lent out, not to mention that the reserve requirement for saving account is zero.

Closing the weak banks simply allows the game of financial systems to continue. I will certainly not wait in line to get my money back when my account balance is less than $100K. All the money “will be there”, and of course, I also know fully well that it’s also not there, since it’s lent out to crazy home buyers from 2004 to 2007.

Volatility is taking over the markets in all ways. Huge down and huge up. In less than a month, commodity complex has corrected significantly, while financial stocks have rebounded “strongly”.

(Click to see enlarged charts)

Since I’ve unloaded most of the energy stocks back in January (missing the entire run-up), I have been quite low on energy holdings. I picked up some natural gas stocks this week given that the price has dropped to the 40-weeks moving average.

There are many names that one can buy, APA, XTO, and CHK, not in any particular order. For a more conservative investor, one can also buy many of the Canadian energy trusts such as ERF, HTE, PWE, and PGH, which didn’t go up as much. And energy ETFs such as XLE, OIH, UNG, and USO, should be a very good way to participate too.

On the other hand, I don’t think the decline in commodities is over. The Elliot wave 3 should be over, and it will take some time for wave 4 to finish its consolidation. I do expect that commodities will probably trade in a range, either flat or slightly down.

If you are an investor, it should be a good time to restock at the low points. If you are a trader, you can probably trade this range for sometime, probably several months, or maybe even into next year.

Regardless, it is very evident that we have a synchronized global slowdown, signalled by emerging stock markets and commodity markets, as I have always believed back in January. In such a slowdown, most stocks will be down. I think the theme going forward will be first recession, and then stagflation.

This is a story from OC register:

Orange County property records show that on Oct. 29, Jose Castro bought 920 W. Camile from the Bank of New York, which took title to the home after it was foreclosed last year. On Nov. 16, Wells Fargo lent Castro $289,275 for the property.
On Dec. 3, Castro transferred title of the house to Asset Disposition Venture Capital LLC, a West Covina company managed by Sergio Praslin, who signed documents on behalf of the company. Praslin did not return calls requesting comment that were left on his answering machine daily for the past two weeks.

On Jan. 15, Praslin signed the deed selling the property to the Gomezes. Mario Gomez said he was surprised when it came time to sign the papers.

“They lied to us,” he said of the sellers. “They said the house was really $500,000, but when I bought it, the papers said $625,000.”
Gomez said someone else – he’s not sure exactly who – paid the $125,000 down payment.

Documents examined by the Register, including papers in the Gomezes’ loan packet, did not show who paid the down payment.

Emily Ralles, who served as escrow officer in the sale of 920, said she didn’t know or care who paid the down payment – as long as the check was good and the parties agreed to the terms of the deal.

“It sounds to me like the seller helped out,” she said. “If someone gave them $125,000, what’s the problem? That’s a beautiful thing, if you ask me.”

For the seller, the advantage of paying the down payment was getting Wells Fargo to cover the $500,000 mortgage – as much or more than the house would fetch on the open market.

Wells Fargo spokeswoman Julie Green Rommel declined to comment on the Gomezes’ loan, citing privacy concerns. She said a homebuyer is free to receive assistance with a down payment as long as it is fully disclosed.

“In many instances, borrowers are able to use gifts from family members or friends for a portion of their down payment, provided the amount and source of the gifts are documented,” she said.

“I didn’t pay any money down,” Gomez said. “The man who sold it to me said, ‘No money, no problem.’ And later he told me I would get $30,000 for buying the house.”

This property is only worth some $375K maximum (if the original loan was 80% LTV). The property was resold as $625K, with $125K down payment from a “mysterious” person/company. Since $125K is 20% of $625K, it would make the loan to be at “80% LTV”, while in reality, the buyer has no skin, and it’s really 100% financing. The seller got a net of $500K minus the $30K that he shared with the straw buyer. So the seller walked away of $500K - $30K - $375K (estimated property value) - $20K (for remodeling) = $75K profits. The buyer will walk away with $30K, and if the loan later gets reset and become unaffordable. At the end, WellsFargo will probably end up with $500K - $400K = $100K loss on the primary loan again.

Actually, WellsFargo will probably resell this loan to Fannie Mae, which gets bailed out by taxpayers’ money. Fannie Mae will sustain a $100K loss, but in the name of propping up the mortgage & housing markets, it “would be okay”.

You and I are obviously continuing to pay for all the fraudulent scams. These liars continue to roam free, game the system, and pocket massive amount of money at your and my expenses. And we have a Congress, Senate, President, and two presidential candidates, continue to bail out and pay for the mistakes and scams that all these liars have caused.

I think the government should jail all these bankers, appraisers, real estate agents, and fraudulent sellers. Very unfortunately, the eventual effect will be a massive inflation thru a dramatic fall in US dollar, and cause everyone to suffer.

From bloomberg,

In yesterday’s statement, Merrill said it agreed to sell $30.6 billion of collateralized debt obligations — the mortgage- related bonds that have caused most of the firm’s losses — for $6.7 billion. The buyer is an affiliate of Lone Star Funds, a Dallas-based investment manager.
….
Merrill will provide financing for about 75 percent of the purchase price, according to the statement. The financing is secured only by the assets being sold, meaning Merrill would absorb any losses on the CDOs beyond $1.68 billion.

It’s just amazing how toxic these CDO bonds are. Selling 30.6 billions for just 6.7 billion dollars. That’s only 22 cents for every dollar. Furthermore, 75% of the purchase is seller-financed by Merrill. That means the buyer is only putting up 25% of the money, which is 1.68 billion. For obvious reasons, if the loss on the 6.7 billion is more than 1.68 billion, then Merrill will need to eat the losses. So after everything is said and done, Merrill Lynch only got a “cash infusion” of 1.68 billion from this deal. The rest are either loans, or being written down as losses.

Furthermore, it’s selling 8.5 billion of stocks, and paying back Temaasek (the previous Singapore investor) 2.5 billion due to sale agreement. So that’s only 6 billion from stocks.

For a 24 billion market cap, Merrill Lynch is raising about 6 + 1.68 = 7.68 billion of cash. I assume that the dividends will soon be all gone. At the current dividend rate of some 5%, that’s about 1.2 billion cash payout. I’m pretty sure that the money will not be there. I think all the new cash will probably be needed for further write-downs.

Merrill Lynch is the 3rd largest broker. Looks like it will become smaller and smaller in size. Boy, the option ARM mortgage reset is not here yet. I can’t imagine how the whole thing will go bad to worse.

Disclosure: shorting financials via SKF.

Martin Pring is one of the best market technician, and he is listing the following four reasons to be optimistic about stock markets:
1. Low consumer confidence = Profits ahead
2. Bull markets always follow bear markets
3. Lower oil prices ahead
4. Record cash levels on sidelines

My personal While I do expect an intermediate rally starting sometime later in the year, my guess for the next intermediate top is less than 1420 in S&P 500. And it will be even worse for financial sector indexes.

And I don’t believe that oil prices have peaked for good. $150 peak was probably the peak for the 3 of 3 Elliot wave. But the wave 5 is still yet to come. My current guess is that wave 4 will ends at around next April 2009, after which the general stock markets may start to go down with a 3 to 6 months lag. Certainly since that’s still quite far away, the bad news probably would be for the precious metal sectors. Although I think precious metals will bottom between now and next April 2009, that’s quite a long time by any measure.

I have been seeing several good market technicians having some blind spots in their own analysis. Sometimes, it’s almost like they have made up the mind on certain assumptions before going into great length on analysis, probably myself included. The most important thing however is to realize that anything is probably possible. There are histories for precendents, and there are paradigm changes. The tough thing is to recognize the paradigm change.

In any case, I believe that some sort of paradigm changes have occurred. I could be wrong totally. But we will see what stories the stock market will present.

I have been thinking about getting a safety deposit box to store some jewelry. To my surprise, safety deposit box is not so safe at all. So many reports of thefts.

I googled “safety deposit box theft” and came up with several horror stories. There were 3 different reports on thefts of WellsFargo’s safety deposit box (reports in the comment section, right after Mar 14 at Los Angeles, Oct 10 at Marina Del Rey, Jul 18 at Santa Clarita, and last one at Rancho Mirage, all four in California), and 1 report of a theft on more than 100 safety deposit boxes at Wachovia.

I have also personally asked a WellsFargo representative about some details on their safety deposit boxes. I was told that “WellsFargo is NOT liable for the losses in the event of theft or fire“. By the way, FDIC insurance on the $100,000 does NOT cover anything stored in safety deposit box. NOTHING is covered in there basically. Getting any home insurance to cover your safety deposit boxes will be very tricky too, since they are not at your home.

What’s worse is that it will be extremely hard for you to prove what’s in the safety deposit box. As for evidences, banks may or may not have any surveillence video tapes backup for investigation, and these crimes probably happen long before you discover that your precious items are gone. You can claim all you want, but since banks supposedly never check what’s inside, they would not have any knowledge of what’s in there.

From the comments at the soundmoneytips.com:

When you go to get in your saftey depos. box the teller asks for your key then she puts in both keys, turns both keys and pulls out your box. Upon returnig and locking your box all she has to do is position her body between you and the box insert both keys and only turn her key. She then hands your key back and you leave. She can now go in at any time and open your box because your key was never turned to lock the second lock. My friend understood this and said to the lady I am keeping my key I will insert and turn it to be sure my (the second) lock is locked.

…that simple slight of hand leaves your box hers or his for the taking. She can then have a friend come in pretend to sign in and pretend to hand her a key and then empty out your SD box. Then the teller can claim the person showed ID and had the key so how was she to know it was not the right person.

Another thing that you may want to know about homeland security confiscating safety deposit boxes. It is rumored that in the event of emergency, you cannot access your safety deposit box for any items such as gold, silver, guns, and cash. Just google “homeland security safety deposit box”, and you can find more than 20 articles reporting the same story over and over at so many different sites. But the fact is it is nothing new. The terrorist-related acts passed since 911 have put executive branch of the government in the supreme power. Since FDR (Roosevelt) has done it before, it won’t be surprising to do the same in the name of “national security and interest”.

At my nearby shopping mall, things are clearly getting quite bad. You would think that people may buy less clothing or toys in an economic slowdown. But having more than one third of the food court eateries shut down is just beyond belief. The stores that were shutdown were a frozen yogurt store, a burger fast food restaurant, a japanese eatery, a chinese eatery, and the last one I can no longer recall its past existence.

The other mall where I go often is in the higher income area, and it fares much better. Still the signs for sale are everywhere. Many stores are doing a lot of heavy discounts. A few are running back-to-school sales already. Back-to-school sales in mid-July! My wife said that more and more stores are front-running other stores a lot earlier than before.

With credits tightened everywhere, American spending habits can no longer continue. Economists have always marvelled at the resilience of American consumers. I think they will be sorely disappointed this time (and going forward). Indeed, as long as you make credits available for big spenders, they will not think twice and spend it all. But the moment the banks pull back, you know very well that most American consumers simply don’t have cash sitting in the bank for spending. Without credit, consumers can no longer continue the game of rolling over/transferring debts via Ponzi scheme.

In the past, I could always easily increase my credit limit. Not anymore. Not only I was refused for higher credit limits several times, but also I couldn’t charge my card before my bank payment was all cleared. I only had $6000 on one of my credit card. Due to my charity donation and other one-time spending items, I ran up my credit card balance to $4000 in previous statement plus $2000 in the current statement. I paid all $4000 in full, but the credit card company put a hold on my account for 14 days after I electronically transferred the payment over. The only reason was that the two statements added up to $6000 and a bit more. Even though technically I was below the credit limit, the bank was not willing to take ANY risk beyond $6000.

I think credit card companies have been too lax in approving credits in the past. If I add up all the credit lines from all of my credit cards that aren’t cancelled, I have about $50,000 “available” to be used. How any combination of these companies can extend $50K to me is beyond my understanding. I cannot imagine myself carrying those debts while paying just the minimum payment. Maybe it’s just a choice of lifestyle.

With less spending, less stores will be in the malls. Mervyn may soon file bankruptcy. I just bought a few last items at the bankrupt Sharper Image. Linen Things may make one LAST trip to bankruptcy for probably the third time, since I believe majority of the store bankruptcy going forward will be full liquidation only. Hold on to your cash in the wallet. There will be an unimaginable amount of bargains available to be picked up later this year, and next year, and probably next next year too.

The following data is directly from Energy Information Administration:
Year 2000: 77.762 billions of barrels (bb), average price at $27.40 per barrel.
Year 2001: 77.684 bb, $23.00
Year 2002: 76.995 bb, $22.81
Year 2003: 79.615 bb, $27.69
Year 2004: 83.124 bb, $37.41
Year 2005: 84.631 bb, $50.00
Year 2006: 84.597 bb, $58.30
Year 2007: 84.600 bb, $64.20
Year 2008: estimated 86.48 billions of barrels (the first half so far is at the estimated rate of 85.85 billions of barrels), while the average price is at $102.70.

Now can somebody give me an intelligent answer on why the oil prices have more than quadrupled since 2002, while the oil production only increased from 77 billions to about 85 billions, a tiny 10% increase? Economic laws of supply and demand are always valid in a free market. Because the supply is not increasing fast enough, the price HAS TO skyrocket.

Why wouldn’t any oil company pumping out a lot more oil when the prices have gone up 4X? I can only think of only one logical answer, and it’s here in this link.

The news on oil production is not in the headline yet. Here is the current headline: “Why the oil crunch may grow worse“. And you’d better prepared yourself before that. Once it’s in the headlines, the news is already old, and too late for you to do anything about it.