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Tuesday, December 30, 2008

Don Coxe Indicators

Don Coxe Indicators

In the November Basic Points, Don Coxe had four indicators to gauge when "Mama bear is done her worst".

1) TED Spread: "We suspect if it breaks 150 and stays there for at least a week, the financial crisis part of this drama, while not humdrum, will no longer command center stage".

The TED Spread is currently at 132 and has been under 150 for pretty close to a week (if not already a week).

2) The bank stock index continues to outperform the S&P.

1 Month: S&P -3%, BKX -13%

3)The VIX Index Retreats

Currently at 43.
Month Ago: 60

4) The YEN and the U.S Dollar Decline

US Dollar index currently at: 80.5
Month Ago US Dollar Index: 83.5

JPYUSD currently at: 90.5 (Yen has strengthened)
JPYUSD Month Ago: 93

Saturday, November 29, 2008

The End of the Finance Economy - I Hope

For what is ‘normal’? Were the decades of the 1990’s and 2000’s, which witnessed unprecedented prosperity in the financial sector, normal? Logic dictates that the answer is no. There was “too much finance”. So much so that the financial system was a farce.

The financial sector became far too large in relation to the real economy. The compensation of those who worked in the financial sector became increasingly disproportionate, and abhorrently so, relative to the wages being earned in the real economy making real things. Too many financial instruments were being derived on other financial instruments, becoming too far removed from anything that even remotely resembled real assets or real economic activity.

These were abnormal times, and were therefore unsustainable times. The heyday of finance was nothing more than a pyramid scheme, only viable until it was unable to reel in the last sucker.

The world has finally come to the realization that pushing paper to other paper pushers for the sake of paper pushing doesn’t, in fact, constitute real value-added economic activity. The myth of the financial system as an unbridled source of wealth has been exposed.

Saturday, September 27, 2008

Money is the Most Egalitarian Force in the World Bestowing Power on Whoever Holds It

Novelist Joyce Carol Oates once wrote, "The only people who claim that money is not important are people who have enough money so that they are relieved of the ugly burden of thinking about it."

French existential writer Albert Camus agreed. He said, "It is a kind of spiritual snobbery that makes people think they can be happy without money."

In many ways, they're right. How can you feel genuine contentment if you are harassed by bill collectors, living paycheck-to-paycheck, or worried whether you have enough to retire?

Don't get me wrong. Money doesn't buy true love or friendship. It won't solve all your problems, fix your marriage, turn you into "a success," or make you charitable if you're not already charitably inclined.

But money is the most egalitarian force in the world, bestowing power on whoever holds it.

It gives you the freedom to make important choices in your life. No one is free who is a slave to his job, his creditors, his circumstances, or his overhead.
Money allows you to support worthy causes and help those in need. It allows you to do what you want, where you want, with whom you want. It's called financial independence. And it's a great feeling.

As author Tom Robbins once remarked, "There's a certain Buddhistic calm that comes from having money in the bank."

As my regular readers know, I think more about money than most.

I've given the portfolio a light-hearted name. But securing your financial independence is serious business. The money that you will retire on - or are already retired on - should not be treated like chips in a poker game.
The Gone Fishin' Portfolio is risk-averse by design. Yet it has compounded at 17.3% annually since inception.

I don't want to suggest that you can eliminate investment risk entirely. That's not possible. But investing for income is a realistic approach. No other investment system comes closer to guaranteeing you long-term investment success.

My goal is to allow you to redirect your time from worries about money to high value activities, whether that's work you enjoy, time spent pursuing your favorite activities, or just relaxing with your friends and family.

In "The Pleasures of Life," Sir John Lubbock writes, "All other good gifts depend on time for their value. What are friends, books, or health, the interest of travel or the delights of home, if we have not time for their enjoyment? Time is often said to be money, but it is more - it is life; and yet many who would cling desperately to life, think nothing of wasting time."

Sunday, August 17, 2008

Shale Gas Production Will Keep Natural Gas Prices in the $9-$11 Range

My thought is that the natuarl gas market is bifurcating.

That shale plays and tight sand plays are ones that can be profitable at probably an $8 NYMEX price. But what I think we see in many plays across the country that are what you would call conventional, those plays are at an increasingly large cost disadvantage to the shale plays. There are -- you think about our plays in the Barnett, Fayetteville, Haynesville, et cetera, we're able to drive costs down over time as we drill dozens, hundreds, even thousands of wells. If you look at companies that are out trying to find five and 10 well fields you just don't have the opportunity to drive your costs down.

You're always inventing kind of yourself as -- through these smaller targets. So I think if gas prices were to stay below $9 Henry Hub for some period of time I think that the shale plays probably continue to move forward, but I think you will see a lot of rigs drop out of what you would call conventional drilling. And another hought, people get fixated on what our Henry Hub price is.

Remember that basis differentials in the mid-continent in the month of July are about $1.30 to $1.40 per Mcf, when you start talking about compression and things like that $8 gas these days means probably something close to $6 at the wellhead. So there's kind of been a quiet or silent creep of about a dollar into basis differentials over the past 12 months on average that I think a lot of investors probably don't fully appreciate, that what companies get at the wellhead is kind of less and less related to what you read in the headlines at Henry Hub.

So I -- we think gas prices will stay in this $9 to $11 range. There will be times, like in July when -- there will be times when they're below it and of course the weather will matter a lot as well. But we're pretty confident that much below
nine you would see a drop off in drilling activity, particularly among the conventional drilling, then those pretty aggressive 35% to 40% first year declines are going to kick in and rebalance the market.

I saw something the other day where some analyst had come up with production in 2010 was going to be up by something like 8 Bcf to 10 Bcf a day and gas prices were going to be $6.25. That's that kind of analysis, I think, can only come at the dangerous intersection of Excel and PowerPoint. It can't happen in reality.

Saturday, August 2, 2008

Semgroup LP's bankruptcy is one of the Main Factors Behind the Recent Decline in Oil

I strongly believe that Semgroup LP's bankruptcy is one of the main contributing factors behind the recent decline in the price of oil. In the short term, speculators clearly determine the price of oil. Semgroup had a large short position in oil which had to be covered. This drove the price of oil to $147 per barrell. Once all the short covering was complete the price of oil has stabilised.

I still believe that the longer-term fundamental factors reign supreme. The current high price of oil is in my opinion clearly justified by fundamental factors and while short term factors such as the Semgroup blow up are important they should not detract from the story behind the oil run up.

I am still invested 90% in oil and gas income producing assets.

Saturday, July 19, 2008

UBS Analyst: Energy Trusts Offer Exceptional Value

The way Grant Hofer sees it, even when you lose you win.

Mr. Hofer, the UBS Securities guy crunching data on royalty trusts in Calgary, thinks now is the time to take a good look at the group. The trusts he covers are down 8% over the past month (but still up 34% this year), and Mr. Hofer thinks “the sector appears to us to be very well positioned and offers exceptional value today.”

Cash yields, he says, have climbed 10.7%, which makes the trusts attractive, given payout ratios of about 50% in 2009. His numbers are based on $120 per barrel oil and $10.10/mcf for natural gas. Don’t think those prices are reasonable? No sweat.

In bold, he wrote:

Should commodity prices continue to pull back, we believe that the yield should provide attractive support for unit prices.

Vermilion Energy Trust (VET) and Crescent Point Energy Trust (CPGCF.PK) were his two favorites on Thursday, given their high weightings to crude oil and growth plans and because of their acquisitive ways.

Mr. Hofer’s target on Crescent Point is $45, and he expects Vermilion to get to $49. Vermilion, he thinks, will be “essentially debt-free” by the end of the year. “With its low payout ratio, 75% weighting to crude oil (unhedged), and sector-based netbacks, the trust remains our best overall pick in the sector.”

For those of you who like to dig deeper into the numbers, Mr. Hofer notes the trust group is trading at just 83% of net asset value.

He said:

This is the lowest level that we can recall (typically the sector trades at a premium to our conservative NAVs).

When analysts get excited, they (sometimes) come up with eye-catching headlines for their reports. Looks like Mr. Hofer falls into that category on this one. At the top of his report, he wrote: “Valuation update: Back up the truck!”

Tuesday, July 15, 2008

Using Oil & Gas Trusts to Beat Inflation

Using Oil & Gas Trusts to Beat Inflation

by Mike Stathis, Managing Principle, Apex Venture Advisors

According to Washington, the official inflation rate is around 4.1%. At this point, I think it’s obvious most consumers know this data is wrong. Of course some people accept anything Washington reports, especially the agenda-driven “experts” on television who bring in media hams as cheerleaders to spread the ludicrous propaganda of a strong economy.

You don’t need a Ph.D in economics or finance to know that inflation is approaching levels similar to those seen in the 1970s. In fact, those who have been formally trained in these disciplines are more likely to miss what is really going on because they’ve been programmed to think that fancy math is always superior to common sense. But they often neglect to consider the fact that new standards are continuously being devised to hide the real data - from inflation and unemployment numbers to GDP and poverty statistics.

Understand that most economists are in some way connected to the government. Economists in private industry often sit on Washington committees. Most academic economists too are pressured to accept government methods of data analysis without question, or else they risk losing federal grants, government consulting projects, or being appointed to sit on government committees.

Important Considerations

14% returns are much better than the market’s historical average of around 8%. So what’s the catch? Well, we obviously need to consider the risks before we make any decisions. In the end, you should understand your risk tolerance and investment horizon. After considering the risks, you will be able to determine a risk-reward profile for these investments. This is the general method to determine suitability for all investments. Let’s take a look at some of the more important variables to consider.

Oil Demand

Oil demand is obviously a very important consideration one must make. Some of the questions you might pose are:

Is demand growth accelerating?

What are the reasons for this acceleration and what are the risks for it to end?
What impact will alternative energy have on oil demand and when might a real effect be seen?

While America is the clear leader in annual oil consumption, China leads the world in oil growth demand. In other words, China is accelerating is demand for oil more so than any other nation. This is expected to continue for many years, with all of Asia on a similar course. Unlike America, where oil demand will always (until alternative and renewable energy sources are mature) be quite high due its extensive reach within the economy, China’s demand is primarily the result of its export trade commerce. As corporate America continues to enrich the living standards of China, we will soon see very strong Chinese consumers who, from auto ownership alone will create huge demands for oil. While it should be quite clear that America faces a continued weak economy for at least the next two to three years, it is unknown to what extent these effects will spill over to the rest of the globe. I would estimate that we will see a global recession. Thus, demand from China is likely to stall at some point. But going forward thereafter, you should expect China’s demand for fossil fuels to continue its long-term trajectory.

While there is certainly much noise over alternative energy, the fact is that it will take many years before it makes a dent in the global oil demand. And it will come gradually, allowing OPEC and non-OPEC producing nations to gradually adjust output and resources so that they are able to control demand-supply and thus pricing. Even when alternative energy becomes highly competitive with oil and other fossil fuels (which might not be before 2020), keep in mind that we will always need crude for basic materials. It is a building block for many products.

Oil Prices

Without a doubt, crude is priced way ahead of itself. And while prices could easily correct downward by 30 to 40% over as little as a two-month period, you should understand a few things before you get spooked. As we have seen, oil demand does not necessarily have a high correlation with oil prices in the short-term. Although there is certainly a correlation, OPEC agendas, military conflicts, speculation and momentum-driven trading often causes huge swings in price.

Many independent oil experts believe the long-term price trend for oil is headed much higher. So while a price of $140 per barrel might be a couple of years ahead of itself, even with a 40% correction in the near-term, it is very likely that the fair value trading price of oil will back at this level if not higher over the next two years anyway.

Many of the oil trusts were trading near or above current levels when oil was below $100 just a few months ago. So if oil does correct, this does not mean the price of these trusts will decline proportionately. As I will discuss below, these companies lock in oil prices so they can provide consistent dividends. Therefore, the trading price of these trusts is not likely to collapse with a large oil correction, as long as management is able to lock in prices. However, investors ultimately determine prices of securities so we never know. And price volatility is a reality of investing. What we really need to focus on is the dividend. Therefore we should ask whether a large correction in price will affect the forward dividends. For reasons I will get to shortly, I feel the dividends for at least my favorite two Canadian oil sands trusts (PGH and PWE) are fairly safe.

Finally, understand that many Canadian oil trusts typically hedge or lock in oil prices at certain rates so as to ensure consistent dividends for investors.

Hedging Success and Strategies

When looking at the dividend payouts of these trusts, you might wonder why in the case of Penn Growth for instance, the dividend has remained fairly constant for several months even when oil was well under the $80 mark. Rather than gamble that oil will remain at $140 per barrel, management uses oil futures contracts to lock in what it feels are reasonable prices for oil. If you examine some of the previous statements and headlines for Penn Growth, you will see the company reported losses based on futures contracts. The reason was most likely because management bet against oil going up. They did this because they wanted to play it safe. While we can never be sure whether they will continue this strategy, I would expect them to because it is the most prudent way to deliver a consistent earnings stream to investors while minimizing the downside. Thus, it would seem reasonable to conclude that even a large correction in crude of say 30% over a one or two month period would not alter the dividend by much. In fact, if traders think otherwise, these trusts could sell off as they have recently, thereby increasing the dividend yield, assuming the future dividends remain fairly consistent.

Tax Changes

As a way to encourage investment capital into the new Alberta sands region, the oil trusts were exempt from corporate taxation. Since that time, billions of dollars from all over the world have flooded into the region and now the government wants a piece of the action. A couple of years ago the Canadian government announced that the tax treatment for its trusts would be changed starting in 2011. This caused these trusts to sell off in panic. However, I would not anticipate the dividends to be effected by much. The good thing is that this news is already known and factored into the price of these trusts. But that does not mean there won’t be another correction just before 2011.

Management

The ability of each management team to run these companies with prudence is always a risk we take as investors.

Risk Comparison

When we compare the risk of oil trusts, we should look at asset classes with similar rates of return. The first type of asset class that comes to mind is REITs. After all that has happened to the real estate market, I do not think I need to discuss the risk level here. On average, the Canadian oil trusts I have mentioned are yielding around 14% annually. The only other major asset class that even comes close to this is small cap stocks. However, you should note that even small caps only return around 11% on average, and that is over a long period, such as 20 or 30 years. As well, the volatility is higher and there are some small caps that go bankrupt. I certainly wouldn’t want to be in small caps during this market.

Even if you are willing to assume the risk of small caps given current market conditions, you would most likely need to actively trade these stocks in order to secure any chance of annual double digit returns over say a 5-year horizon. Otherwise, you could end up flat or even down over that period. In contrast, the oil sands pay monthly dividends. That’s money that comes every month; money that can help neutralize the declining purchasing power of the dollar. In conclusion, whether you want to go Canadian or American, oil trusts offer an excellent solution to counter the effects of high inflation. And during this period of economic uncertainty, perhaps one of the few things we can be certain of is that oil will remain high for many years.


Conclusions

Remember, before you can justify investing in oil trusts, the oil story is something you have to fully believe in because these securities are volatile. While trading opportunities are definitely available, you should be willing to hold them for several years. In fact, at current prices and assuming historical dividend payouts to continue, your cost basis (before taxes) would approach zero if you bought and held Baytex, Paramount, Bonavista, Arc, Advantage, Crescent Point, Enerplus, Freehold or Penn West over the next eight years.

Sunday, July 13, 2008

Oil & Gas Trusts are a Good Defense Against Naked Short Selling

I just listened to Jim Puplava's interview with Bud Burrell on naked short selling. It is a scary interview and quite frankly is quite worrisome. There are companies with more shares on brokers books then shares issued by the companies. This is basicly fraud.

My portfolio is mostly oil and gas trusts which pay healthy monthly distributions. A naked shorter would avoid these stocks because the stockholders would expect a monthly cheque which the naked shorters would have to cover.

I hope I am right.

Tuesday, June 17, 2008

Oil from Algae

With Oil prices hitting new highs there is lots of talk about alternate fuels. Ethanol from corn is a disaster and will not survive in the long run.

However, one biofuel I think has real potential is Oil from Algae. I like this concept because most of the oil we have today originated from ancient algae.

I like to keep things simple and quit trying to re-invent the wheel. Mother nature has been making oil for billions of years. Why don't we try and emulate mother nature and just speed it up.

The following is a video of an oil from algae experimental farm.



I will write more about this in the future.

Friday, April 18, 2008

Retiring Baby Boomers are Screwed and Most Don't Know it Yet

According to the 2007 Retirement Confidence Survey by the Employee Benefit Research Institute (EBRI) released last week, 60% of current retirees have less than $25,000 in total savings and investments.

Personally, I can’t imagine how they manage it. Sure, some of them have pensions. Virtually all of them are receiving Canada Pension. But heading into your “golden years” with less than $25,000 must be terrifying.

Those of us still in the workforce could use a little shaking up too. The same survey shows that 36% of workers have less than $10,000 in retirement savings! Another 13% have less than $25,000. In other words, nearly half of all workers have less than $25,000 saved for retirement.

Some of these folks could benefit from reading Aesop’s tale about “The Ant and the Grasshopper.” There are clearly a lot of grasshoppers among us.

I think I know why. Surveys show that nearly half of all workers – I think we can assume which half - believe their retirement costs are the responsibility of their employers or the federal government. Big mistake.

Yet pension plans are going the way of the Dodo bird. They've been replaced by RRSPs (the Trust Tax was a direct hit on RRSPs). Young workers will be expected to pay for this demographic time bomb. Guess what...they won't pay.

For political reasons alone, current retirees are safe. But we baby boomers can’t realistically expect future generations to pay the mountain of taxes required to support boomers into their 90s. It’s just a matter of time before the age of eligibility is raised, benefits are cut, or both.

However, if you’re working now you still have time to make the choices that will lead to a more comfortable retirement. As the American writer Elbert Hubbard said, “responsibility is the price of freedom.”

You have to forego current spending to receive future benefits. Essentially, you need to save as much as you can, for as long as you can, beginning as soon as you can. (Millions of boomers are learning that this means working longer than they originally planned.) You then have to take this savings and begin to create an income portfolio now. At first it will be slow but with the magic of compounding it will begin to grow.

When you take responsibility for your financial welfare, it’s empowering. You let go of the idea that it is someone else’s obligation to provide for you in retirement. It means making hard choices. But, trust me, no one at your company or or civil servant cares as much about your financial future as you do. They are trying to create their own financial future at your expense. For proof.....look at teachers pension funds. It won't do you any good unless of course you are a teacher.

Friday, April 11, 2008

Now is the Time to get Into Stocks

He's usually not known for mincing his words, nor for fear of raising his head above the cornfield others know as the global financial sector, but when Dennis Gartman called for a decisive change in the outlook for global equities last week his call will have caught the attention of many.

Is this the same Dennis Gartman who produced one bearish note after another bearish comment since mid last year -at times in strong and defiant opposition to raging market bulls who believed that temporarily rising share prices was a vindication of their own views? It surely is the same one. And to spice it all up a bit more, he was happily pointing out the call came with strong conviction.

Many more market analysts and commentators have -mostly cautiously- expressed a view that the worst could now be over for global equity markets. Few, however, have dared to go as far as Dennis Gartman (at FNArena, we don't know anyone ourselves and we certainly haven't seen anyone anywhere thus far).

The man himself has tried to explain it in the last two editions of his daily newsletter, the Gartman Letter:

"We are asked, "If you are so bearish still of the economy, how can you be bullish of equities?" The answer is very simple: It is called a capital market for a reason. Capital, created by the central banks, floods into the system as the economy wanes, but not being needed as inventories are worn down, as employees are laid off, and as business conditions deteriorate, that capital finds its way into equities.

"Therefore, equities rise even in the midst of recession. It is for this reason that the stock market is one of the "leading economic indicators." Conversely, as business conditions heat up; as inventories are accumulated and as employees are added to payrolls, capital is demanded by the economy itself, and that capital flows from the equity market at the margin.

"Therefore, equities begin to weaken long before the economy makes its top and turns to recession. If one keeps this simple, but elegant, notion in mind, it makes the game of investing in the midst of recession a great deal easier."

Gartman happily concedes more difficult economic times lay ahead. The bottom line remains, however, that stocks are heading higher.

Sunday, March 23, 2008

If You Are Investing Less Than 25% of Your Income Then You Aren’t Serious About Becoming Wealthy

If you are investing less than 25% of your income then you aren’t serious about becoming wealthy. But how do you afford to do this without suffering? The answer is here.

You can do this by eliminating waste and impulse spending from your spending habits. Studies have shown that the average person blows around 25% of their income in these two totally unnecessary areas; waste spend and impulse spending. Let’s see what these two types of unnecessary spending are and how to eliminate them.

First I will define waste spending. There are two main types of waste. Firstly waste is when you spend more money than you need to in order to get the result that you want. Secondly waste is when you buy more than you need in order to get the result that you want.

Here are two examples around food.

An example of Type 1 Waste would be buying a sandwich for lunch for $5 when you could have made the same sandwich at home, and brought it with you, for only 50 cents. You are paying ten times the true value of that sandwich by buying it ready made. You probably also spent more time standing in line to be served than the time you would have required to make the sandwich at home.

An example of Type 2 Waste is when you buy more food than you need and then have to throw it away. Because you couldn’t be bothered taking the time to calculate the amount that you really needed you overspent on your food bill.

The facts are that people are regularly guilty of both type 1 and type 2 waste on a regular basis, and not just with food. They tend to buy without asking for discounts and they over buy in all areas of their life.

Now let’s define impulse spending. Impulse spending is when you buy something that you had no intention of buying until you saw it by chance. It is no coincidence that supermarkets put chocolate bars and magazines next to the checkouts. They are there because the supermarket is well aware of the profit potential for them from impulse spending.

Impulse spending does not enhance your lifestyle. You are simply buying something just because you saw it and quite often you don’t even really want nor need these items. I was amazed to discover that most books purchased are never read. In fact the statistics are that 80% of books purchased are never even started and half of those that are started are never finished, People buy books on impulse, usually because they are attracted to the title and the cover design.

The main areas of impulse spending are sweets and magazines and anything that is “on sale”. People also tend to impulse spend in their areas of interest or hobbies. Young women will impulse spend on clothes, shoes and makeup. Musicians will impulse spend in the music shop, and so on.

If you can eliminate waste spending and impulse spending then, if you are like the typical American, you will free up around 25% of your income that you can put to investing. But how do you cure yourself of these costly habits? You can do this easily by developing two new habits.

New Habit Number 1:

The self-made rich decide in advance where and how they are going to spend their money. The average person spends their money randomly as the urge seizes them. Deciding where you money is going to go, while you are still at home, eliminates impulse spending. Making a conscious decision as to the value you will receive for each dollar spent will help eliminate waste spending.

Develop the habit of deciding, on pay day, where your money is going to go, write this down and then read over it and ask yourself if any of that planned expenditure is in the waste spending category.

When you are going shopping take a list and stick to the list. This will help remove the impulse spending habit. Developing the habit of deciding in advance where your money will go is a great way to ensure that you still maintain your quality of life in the present, but you free up money for investing so that you can become rich and enjoy a much greater quality of life in the future,

New Habit Number 2:

The self made rich have the habit of writing down every cent that they spend, as they spend it, so that they are fully aware of where their money is going. The average person is surprised when their money runs out because they were not fully aware of how much they where spending. As a result, bad money managers find that they have too much month at the end of the money whereas good money managers find that they have too much money at the end of the month.

Develop the habit of recording your expenditure as you spend it. Become fully aware of where your money is going and always ask yourself if this particular transaction is going to truly enhance your life or not. If the answer is no then don’t go through with that transaction.

Developing these two simple habits will free up a surprising amount of money for you to put to investing. So how should you invest that money in order to maximize your profits? Unfortunately this article is long enough already so that secret will have to be revealed on another day.

Monday, March 17, 2008

Bought 2,000 Units of Paramount Energy Trust Today

In spite of the market correction today I picked up 2,000 units of Paramount Energy Trust (PMT.UN-T).

Sunday, March 16, 2008

Top Pick Canroys Based on Discount to Net Asset Value

The March 7, 2008 issue of the CIBC Oil & Gas Royalty Trust weekly report has a Net Asset Value matrix for most of the Canadian Oil & Gas Trusts (Canroys). I like to buy Oil and Gas Trusts based on Net Asset Value (NAV) since all these business's are selling the same product. There are other metrics to consider. However, NAV is a good base to start from.

Based on NAV my Top Picks are as follows;

Advantage Energy (AVN.UN-T $10.85) Trading at a 26% Discount to NAV of $14.75
Paramount Energy (PMT.UN-T $7.86) Trading at a 18% Discount to NAV of $ 9.62
Baytex Energy (BTE.UN-T $21.00) Trading at a 12% Discount to NAV of $23.96

The discounts reported are based on March 7, 2008 closing prices.

Members of our mailing list will be emailed a copy of the CIBC report.

Please perform your own Due Dilligence.

In interest of full disclosure I own units in all three of the above Canroys.

Monday, March 10, 2008

Neglecting Dividend-Paying Companies Hurts Investor Returns

Many people who began investing during the tech craze of the 1990s were taught to ignore dividends. The logic was that company managers who couldn’t adequately reinvest in their own business for growth were probably a bad risk for any investment dollars.

Warren Buffett famously has never paid a dividend at Berkshire Hathaway because he wants to reinvest every dollar of free cash flow himself.

But neglecting dividend-paying companies hurts investor returns.

At the turn of the century, and with the change of tax treatment on dividends, money began pouring back into firms that paid dividends. (A prominent feature of the much-maligned Bush tax cuts included tax-code changes that dropped the rate for dividends from high ordinary income levels – 35% in the top bracket – to a maximum of 15%.)

Bernstein Global Wealth Management prepared the amazing chart below, which demonstrates the power of dividends over the long term.

The Bernstein study concluded, “It should therefore come as no surprise that dividends have been a major component of growth in an investor’s return over time.
Remember, calculations of a stock’s performance in a portfolio are based on total return, i.e., the annual price appreciation (or loss) plus dividends.”

One dollar in 1926 (when market data first became reliable) invested in large-cap U.S. stocks would have grown to nearly $2,300 by 2004. But the Bernstein report shows that if you remove dividends – and the magical effect of compounding those dividends – then that same dollar would be worth a meager $87.66.

A similar study by Standard & Poor’s showed the same results over a different time horizon. The study of total returns (price appreciation plus dividend income) shows that payers of dividends outdistanced non-payers by 1.9% annually from 1980 through 2003.

Saturday, March 8, 2008

Doom and Gloom

After the dismal US jobs report was announced the doom and gloom in the main stream media was deafening.

I learned over the years that what ever the mainstream reports today is the "top" or in this case the "bottom" of an investment cycle then we are near the end of the cycle.

The same dismal US Jobs report five years ago marked the beginning of the US bull market of 2003-2007, rising more than 60% in the next five years. Furthermore, US unemployment remains low by historical standards.

I am still fully invested in income producing assets and if I am right we could have a decent market rise over the the course of the year.

Monday, March 3, 2008

Natural Gas Weighted Income Trusts

Natural Gas Weighted Energy Trusts have been decimated since the "Tax Fairness" policy was announced on October 31, 2006.

Despite the spike in trading activity year-to-date, unit prices still remain depressed for Trilogy Energy Trust (TET.UN-T) and Paramount Energy Trust(PMT.UN-T). February 2008 to-date, Paramount’s unit price is 46% below its pre-Tax Fairness level and 43% below for Trilogy. Peyto Energy Trust (PEY.UN-T) and Progress Energy Trust (PGX.UN-T) have fared better, and currently exhibit average prices only 9% and 12% below their pre-Tax Fairness levels respectively.

Investors seeking the most exposure to increased natural gas prices should consider both Trilogy and Paramount. Trilogy has the highest cash flow sensitivity to natural gas given its unhedged production, while Paramount’s cost structure (both operational and financial) provides leverage but 25% of their production is hedged.

I presently have positions in Paramount and Peyto.

Friday, February 29, 2008

Why I Think You Got to Look at Natural Gas (Again)

Don Coxe on Natural Gas in his February 21, 2008 Conference Call

Another commodity that we have not had good things to say about for a long, long time - natural gas - is one I want you to start looking at. And I want you to pull up a long term chart on natgas and what you'll see is this is a long term base pattern after the panic associated with Katrina when we told you to get out of the natural gas stocks and switch to metals.

It's a long sideways move. But the reason why I think you got to look at natural gas, again, is that it looks like it's about to break out of its base on the upside. And if it does, the natural gas, which is a short reserve life index fuel in the US, is now a situation where massive amounts of capital are being committed by the big oil companies led by ExxonMobil on pulling out tight gas from formations where in the past they couldn't possibly extract the gas. They're using new technology. This is expensive gas.

We're going to get a new floor price for gas set by this. In the case of ExxonMobil they're reason for doing it is primarily to protect their reserve life index. They've had to cut it by three full years, this year, because of what's been happening to them on oil from political risk. And, because of this magic that you can use six units of natural gas to equal a barrel of oil then ExxonMobil by developing reserves of natural gas, high-priced gas, can protect its reserve life index on this barrel of energy equivalent.

ExxonMobil is a brilliantly run company. They're going to do what they can to preserve their reserve life index. But another big company is involved in this because you've got General Electric promoting, once again, the sale of gas turbines for electricity. And with oil prices staying high and if you look…if you take the price of oil as far ahead as 2010 - December oil is now at 92.34, which means that for users of residual, what they can't see is any relief in the future. And natural gas, of course, also wins on the basis of environmentally-sound fuel because of small amounts of air pollution.

So I think you're going to have major companies out there with big followings. They're going to be promoting this. And what they can't do is rely on LNG for the reasons we've discussed on so many calls, particularly terror risk, but in addition the fact that the LNG suppliers out there, so much of it is from places in the world that have definite levels of political risk in them. That was going to be the saviour.

And as I told you before, six years ago I attended a meeting of the partners in the natural gas industry in the Chicago Land, which was both the users of natural gas and the major pipelines that delivered gas. And at that time I watched as the head of Marathon Oil's operations for natural gas in North America covered a wall with a chart of all the natural gas fields with their reserve life indices. And he pointed out that by the end of this decade, we were going to be facing a full-blown crisis in this country for natgas, but it was going to be solved by a pipeline that was going to bring it in from Canada.

And I got up at the meeting, spoke after him and said first of all he also said that LNG was going to come in big and I said I don't believe all those LNG projects are going to go forward because of 9/11. And the guy from Marathon jumped up and said “Who invited him to the meeting? We checked out our approvals for these projects with the FBI and they've all been approved as being safe. and I said, "Have you talked to them since 9/11?" and he said "No, we didn't have to. We've got approvals." And then I said, "As for the pipeline in Canada, that's not going to go forward in this decade. Not a chance." Once again he jumped up and said, "We have all the arrangements in place. We've got an agreement from the federal government in Ottawa that it's going forward," and I said, "You haven't got an agreement from the native peoples." Well the meeting became very difficult at that stage because once again he said I didn't know what I was talking about and there weren't going to be a few native tribes holding back a project like this. I tell you that only because it illustrates that the industry collectively had a comfort level on gas, which wasn't vindicated.

So we could get yet another energy surprise coming. And that's not just because we've
had such a cold winter because, of course, nobody out there who could be intellectually respected thought we could have cold winters. But, because it illustrates that the supply side response that you would have ordinarily expected, has been constrained by conditions they can't control.

So I think you have got to start looking at natgas as being maybe the next commodity that's going to join the bull market, having been in not a real bear market but a nothing market, for so long.
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This is the time to start buying oil and gas income trusts. I have been buying Paramount (PMT.UN), NAL Oil & Gas (NAE.UN), PennWest (PWT.UN) and Daylight Energy Trust (DAY.UN).

Tuesday, February 12, 2008

When The Sun Doesn’t Shine and the Wind Doesn’t Blow We Need Natural Gas

When the sun doesn’t shine and the wind doesn’t blow, we need natural gas. Until new plants are approved and built for clean coal and nuclear, we need natural gas. If we want to subsidize agriculture, we need natural gas to convert food crops to energy. To supplement oil that faces increasingly short supply, we need natural gas. Finally, if hydrogen is going to be the last clean fuel, it will likely be created from natural gas.

Natural gas weighted Canroy's have natural gas selling at half price, judging by the incremental price of liquefied natural gas in Asia. Last week, according to trade reports, Japan paid $18 a million btu for the liquid form of the same commodity that is priced in the futures market at $8 for the next six years.

Since $18 LNG is roughly equivalent to $100 oil burned in the same Japanese power plants, the stark difference points to an upward price trend for the clean fuel.

Meanwhile, monthly distributions are likely to be higher in 2008 judging from the trend in the price for natural gas prices.

I have been buying NAE.UN, PMT.UN and PWT.UN.

Monday, February 11, 2008

Raymond James Forecast for Lower Natural Gas Prices

Raymond James is forecasting week natural gas prices for the balance of the year.

Click here to get limited time access to this report.

Canaccord Puts Verenex Energy on its Best Ideas List

VERENEX ENERGY

VNX : TSX : C$9.76 | SPECULATIVE BUY, C$12.75 target

We are adding Verenex (VNX: TSX)to the Canaccord Adams Best Ideas List. Verenex is an oil and gas exploration and production company that has exploration acreage in the Ghadames Basin in Libya and in the Paris Basin and Aquitaine Maritime in France.

Verenex has had remarkable exploration success in Libya with 100% success on six exploration wells in Area 47. In addition, the company recently released test results from an appraisal well in Area 47 that provides increasing confidence that there is a significant stratigraphic component to the oil deposit.

Stratigraphic traps provide the potential for very large accumulations of oil, in the range of hundreds of millions to billions of barrels of oil (as opposed to more modest individual accumulations of 25 to 40 million barrels in structural traps typical of the Ghadames basin).

Our SPECULATIVE BUY recommendation and 12-month target price of C$12.75 per share are based on our contingent asset valuation of the company. Our estimate of contingent asset value for Verenex is based on recoverable reserve potential of about 2 billion barrels (gross). Verenex currently trades at about 77% of our target price of C$12.75 and is down about 45% from its 52 week high of $17.63.
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In the interest of full disclosure I own 5,000 shares of Verenex.

If you want a safer way to play Verenex (VNX-T) you could by Vermillion Energy Trust (VET.UN-T). It has a substantial interest in Verenex. Vermillion pays $0.19 per month per unit anf is trading around $35 per unit.

Tuesday, February 5, 2008

Real Estate is no Longer a Sure Thing

I think residential real estate booms in most Western Countries are over. Real Estate is going to be experiencing its own kind of implosion.

The fundamental statistic that nobody can change, is that each new generation across the OECD is roughly 60% of the size of the previous generation. The thing that made real estate the investment that you couldn't lose on in the long term simply because there'd be more people out there to move into the buildings or the homes. We've gone into reverse on this.

So places like the coast of Spain will continue to benefit from people who get second homes or decide to move there. The number of Brits who move to Spain to escape the British climate and so forth. You get home buyers that way. Similarily in palces loke the coast of Florida, Mexico and Panama. But on a total basis, what you have is a failure to reproduce (or even replace) the population. So that real estate has moved from being a growth asset over the longer term to one that over the longer term can only go into contraction.

Many people I know plan on selling their home and use the proceeds to fund their retirement. As time marches on and the Baby Boomers retire and try to cash out of their homes we will experience a long term secular decline in real estate.

This is a new theme that has not been considered by most of us.

This is why we must invest in income producing assets today to fund our retirements tomorrow.

Wednesday, January 30, 2008

S&P 500 and TSX extremely cheap in relation to bonds

S&P 500 and TSX extremely cheap in relation to bonds

Nick Majendie

What a week in global equity markets! For the short term, we believe that a significant rally is likely over the next few weeks/months. For the long term, in relation to bonds, we believe the S&P 500 has recently been as cheap as it has ever been since 1979, while the TSX last week was as cheaply valued as it has ever been back to the late 1950s.

As longer-term investors start to allocate assets over the next few week/months, we believe there is a decent chance that they will conclude that it makes sense to increase equity allocations against competition from Government bond yields.

Saturday, January 26, 2008

The interest rate reduction announcement in the US this week was in all the headlines and the buzz on the investment boards.

What was lost amidst all the panicky selling and then panicky buying, is that real yields, almost everywhere, are negative.

And when you have negative real yields almost everywhere, then you have the beginnings of a chance for things to recover.

Most recessions come at a time when there’s been a huge run-up in interest rates as central banks have been tightening and you already have high real yields and those real yields grow as prices fall during the recession phase because of inventory liquidations.

Well, this is going to be so different from past cycles. First of all, we start a recession with a record low inventory-to-sales ratio in the US. Now that’s contrary to past recessions where the crucial factor was a big build-up in inventories.

Well, the real answer is that real interest rates are below zero. Far below zero on the ten year note, which is what we price mortgages off. We’ve got a 3.66 ten year US nominal yield, which means it’s negative forty-one basis points. In past recessions the real interest rates were very high.

Therefore, we should get a bounce in the equity markets but in the short term logic does not matter. I am raising a little cash for now and will be buying back in when I feel safer. I still feel that income producing assets will suffer least.

Friday, January 18, 2008

Finacial Sense Newshour Transcript on Investing for Income

Investing for Income

Partial Transcript of Finacial Sense Newshour with Jim Puplava and John Loeffler on January 12, 2008

JOHN: Maybe the hallmark of the next few years is actually going to be the word “uncertainty” like we've been using here on the program today. A lot of people, baby boomers, a huge block of population moving into retirement, and if they are moving into retirement in a time of uncertainty, especially given the fact that the Social Security trust fund is bust, there is nothing in it, nor can it be sustained at these levels except by devaluating the currency (which means everybody will get their Social Security check, but it's not going to be worth very much), what does that mean for people who are trying to plan economically in these times?

JIM: Well, you know, we used to have these standard formulas. I started out as a certified financial planner –and you know, you retire, you put 50, 60% of your portfolio in fixed income because now you need income to live on because you no longer have a paycheck or money coming in from a business. But, John, that assumes that you're in a period where you have low inflation as we did throughout much of the 80s and 90s.

But what do you do in a period where you have high inflation? You know, it's very tempting, right now, to say, “okay, I'm going to retire, I'm going to turn my portfolio into fixed income, I'll get 4 or 5% income.” The problem that investors have today is if you look at where the yields are, you've got less than 2.6% on a two year Treasury note, a 10 year treasury note is less than 4% (it's actually less than 3.8) and it's probably going lower here in the short term. I sure in heck would not want to be investing long term given the levels of inflation that we see today. And so, you know, that's why we've always stressed about, you know, about blue chip dividend-paying stocks.

And over the long run, the rate of return is going to be much, much higher to an investor or somebody that is retiring today than, let's say, somebody who is going to be in a fixed income. I mean if I go out and buy a 10 year Treasury note today, let's say I invest $10,000. I can get right now 3.8%.

And every six months I'm going to get my check. I'll make $380 dollars a year every single year. The question is what is going to be the cost of living in the year 2018or 10 years from now, you know, because 10 years from now, I will get my $10,000 back, and I will have gotten $380 dollars a year. But that $380 dollars a year that I'm getting from that Treasury note is not going to buy the same goods and services 10 years from now that it will buy today.

And for that matter, the $10,000 that will mature 10 years from now is not going to have the same purchasing power. And if you just think about anything you're buying today, what does it cost to buy a house today compared to 10 years ago? My kids can only afford to buy a condo for the price that I bought a large house 10 years ago. And that's what's happened. I mean think of what a car costs today compared to 10 years ago.

Think of what it costs to send your kid to a four year college to get a degree compared to 10 years ago. Compare that to what you're paying to visit your doctor, compare that to what you're paying to just go out and take a vacation. It's just absolutely remarkable in terms of what we've seen and the cost of living in basic goods.

JOHN: Well, does that mean, then, that some people aren't going to retire? The day of Sun City Arizona and retirement places like that may be over, per se. People are going to have to work.

JIM: Yeah. I think that is probably more in the retirement formula today for a lot of boomers, which is going to be that you're going to retire, but during retirement, you'll be doing some sort of part-time work. And actually, you can look at it quite positively, John. They find people that keep themselves active in retirement, actually live longer, their minds are more alert.

And, you know, maybe you don't do what you did for a living during your working career. Maybe you do something that you enjoy doing. I had a client that retired many years ago who was in the publishing industry and he ended up being a tour guide at the Hearst Castle. Just absolutely loved it. I have another client that retired six, seven years ago and because he was a history professor he serves as a tour guide for one of the travel companies.

So let's say you're, I don't know, you're taking a trip to Europe, Italy or something like that, he's sort of a tour guide. So I mean he's having the time of his life. And actually, he gets to go free. So working during retirement is going to be part of the retirement picture for a lot of boomers, but I think more importantly investors or retirees are going to have to think differently about their portfolio in an age of low interest rates and higher rates of inflation.

I mean if you take a look at the yield on a two year Treasury note or one year Treasury bill or 10 year Treasury note, the yield on a 10 year Treasury note is less than the headline inflation number, and even though we know that headline inflation number is actually basically a sort of a fictitious number.

JOHN: Okay. Every year you put together, usually around this time of the year, a portfolio of 10 stocks. And say you had bought these stocks, what, 10 years ago?

JIM: Yeah.

JOHN: What would your income have been?

JIM: Well, what we do, and I use this as an exercise and I don't -- anybody listening to this, this is not an endorsement or recommendation. It is done for illustration purposes.

But mainly we take a look at the Dow 30 stocks. And we pick sort of a wide variety of stocks, some financial stocks, consumer stocks, industrial stocks, medical stocks, energy stocks. And we've been using this formula for these stocks mainly over the last couple of years to illustrate this point. But what we assume is you had a portfolio.

You had $100,000 and you put $10,000 into each one of these stocks and then you just held on to them for 10 years. And just once again, I'm going to mention the companies and this is not an endorsement. This is done strictly for illustration. But we had a financial stock, an insurance company AIG, a consumer retail McDonalds, Disney Entertainment, Johnson & Johnson (on the medical side), Honeywell, Exxon, American Express (financial company), 3M (manufacturing), GE (manufacturing) and Coca Cola (consumer products company). And so in 1998, had you invested in these stocks – remember, we were going through a stock market boom during that period of time, and stocks were expensive –but let's say you put $10,000 into each one of these stocks, you would have received in dividends at the end of 1998 holding them for a whole year roughly about $1700 in dividends.

Five years later in 2003, the 1700 in dividends grew to 2400 in dividends. So basically, we saw a 700 dollar increase in the value of those dividends. And finally 10 years later in the year 2007, dividends would have grown to a little over $4100. But what's really remarkable about this, assuming that you spent all of the dividend income, your $100,000 would have grown – and remember, that would have meant buying stock in 1998, and remember the terrible bear market that we went through for three years in 2000, 2001 and 2002 – during that period of time, you would have gotten over $81,000 of capital appreciation; you would have gotten almost $33,000 in income.

And so basically, without dividends, your return was 181,000. Final investment with dividends was 214,000. If you want to take a look at that, it was a simple return of 81% or 8.1% a year. If you want to look at total return, which was income –the dividends – plus capital appreciation, it was 114% return, or an annualized return of 11.4%, easily increasing what you would have gotten in fixed income.

What was even more remarkable, the top performing stocks, Exxon, McDonalds, 3M and J&J had the highest total dividend payments. So companies that had good business models, that had good cash flow and consistent earnings are able to increase their dividends at a much higher rate than companies that don't.

So the top performing of the 10 stocks were the stocks that had the highest total dividends payment. The worse performing stocks, AIG and Disney had the lowest dividend payments. And here's something that's even more remarkable. The average total return for the top two dividend players was 219%, an annualized return of 21.9% a year, while the total return for the two lowest paying dividend stocks was only 33.5%, or a return of a little over 3%.

The highest dividend paying stock out of the group was Exxon Mobil that had a total return of 282%; and even if Exxon stock price went nowhere, the dividend alone would have given you a return of 76%, an annualized return of 7.6% just on the dividends. And Jeremy Siegel in his book The Future For Investors did a comparison. I'm not going to repeat it here because we talked about it last year on the show where he took, from 1950 to the year, I think -- I think it was 2004, he took two stocks: and if one would have thought of the ideal growth stock in the year 1950, it would have been IBM (the computer industry was coming into itself and changing the way we work today with computers); and then Exxon, which is basically an oil stock. And the total returns from Exxon versus IBM were far superior. And here, John, is just the study that we do each year confirms this very same thing because the best performing out of those 10 stocks were the stocks that produced a consistent higher stream of dividends.

JOHN: And that would seem, you know, in this environment we're in right now of really high inflation, which threatens to stay that way for some time to have things in your portfolio that are going up which offset that, so you're keeping pace with it.

JIM: Absolutely. I mean if you look at Exxon in the last five years, Exxon has increased its dividends at an annual rate of 8.3% a year. Imagine getting an 8.3% pay raise every single year. If you look at Johnson & Johnson, another one of the top four performing dividend stocks, Johnson & Johnson has increased its dividends 15.3% a year over the last five years. Here's one that will blow your mind: McDonald’s. I mean we're talking about basically hamburgers here. McDonald’s has increased its dividend roughly 45% a year.

Think of that number. 45% a year over the last five years. How many of us would love to get a 45% pay increase every single year with the kind of inflation rates. And even 3M, a manufacturing company has increased its dividend roughly about 9.2% a year over the last five years. And this is why, John, I think that as you get into retirement, having blue chip companies, and that's why I like to look at the Dow stocks. They are the biggest, the most stable, sound financially. And you don't get to be a blue chip in the Dow without having a successful business model and being a very stable company. I mean Johnson & Johnson (medical), 3M (manufacturing), Exxon (oil), McDonald’s (food franchises and now they are getting into adding coffee bars to compete with Starbucks).

And whether you're looking at a book written by three authors Dimson and Marsh wrote a book called Triumph of the Optimists. They talked about dividend studies going back over the last 100 years. Not only just in the US but 16 other markets. Study after study after study, it's confirmed dividend investing is a far superior approach and a more stable approach. And especially for somebody entering into retirement that wants to be a little bit more conservative in thinking about what they are going to be doing when they retire: maybe they have 401(k) program or a pension that they are going to have to rely on. That's why I think in an age of inflation, you've got to think about the dividend approach for income with high stable companies because that's what's going to keep you even with inflation. A Treasury bond today, yes, it may allow you to sleep at night the first six months of the first year.

But with the levels of inflation that we're seeing today, it's not going to keep you even with inflation five years from now and you're going to be struggling 10 years from now if you're on a fixed income because what are you going to have that's going to increase and compensate you and allow you to buy the same goods and services that you buy today. It's absolutely amazing, but year after year, the study continue to improve itself.

Thursday, January 17, 2008

Bought 2,000 Units of NAL Oil & Gas Trust Today

This year has been terrible for stock market and I have been staying on the sidelines (like everyone else) and waiting for the market to bottom.

However, I could not resist and I bought 2,000 units of NAE.UN at $11.84 each.

The results of three high impact wells from the Seneca acquisition are nearing release. Depending on the outcome of the three Seneca wells, NAL could have further development potential opportunities with its partners.

Presently, NAE has has a $0.16 per month ($1.92 per year) distribution resulting in a yield of 16.2%. The payout ratio 69% and the payout ratio including capital expenditures is 114%. This Trust has some exploration upside potential. With a +15% yield you get paid to wait. Hopefully we not only get our distibutions but some capital gains potential too.

Monday, January 14, 2008

22 Startling Predictions for 2008 and Beyond

22 Startling Predictions for 2008 and Beyond

By Michael Masterson

January is a time to look ahead and make predictions.

As I look ahead, I can see one major trend. And it's one that will have repercussions for the economy as a whole. That trend involves baby boomers. Boomers have been a major factor in consumer spending, saving, and investing for 50 years. So it's likely they will continue to be. In fact, they will probably affect the economy for the rest of their lives - for the next 20 to 25 years.

If you accept this premise, the following 22 predictions may make sense to you:

1. Baby boomers will get poorer this year. They lost half of their retirement nest egg when the tech bubble exploded. And they have been losing much of the rest of it as real estate prices come down. This will continue in 2008. Credit will be harder to come by. Banks will get tougher with loans. And the many businesses that took stock in the real estate boom will continue to implode.

2. Scared by their shrinking wealth, some boomers will make one final, frenzied attempt to "get back" the wealth they never really had. They'll scrape together their last dollars. They'll borrow money. And they'll use it to make high-risk, leveraged financial investments in such things as currencies and commodities. The greediest sectors of the financial services industry will benefit, temporarily, from this short-term trend. Later, they will suffer from it a s their customers disappear.

3. As 2008 ends, boomers' speculative investments will fail to rescue them. So they will grudgingly accept the fact that they will never be as wealthy as they wanted to be. They will feel defeated, and they won't have the energy to start anew. As a result, they will drastically decrease their discretionary spending.

4. Following the boomers' lead, consumer spending in general will slow down. The Fed will do what it can, but it won't be enough. Lower credit rates won't be enough to stimulate the economy. Growth will slow. Businesses will continue to go bankrupt at record rates.

5. With decreasing revenues on one side and increasing fixed costs (related to real estate) on the other, retail will be especially hard hit. Many, if not most, medium-sized retail businesses that exist today will be defunct within 10 years.

6. On the bright side, Internet spending will continue to grow. But the growth will be much slower than in the past. Lots of opportunities will allow people to make money by marketing products and services on the Internet. But many of those who are in business today will go bankrupt as the market becomes more competitive.

7. Estate homes and multimillion-dollar condominiums will tumble in value, even below current prices. Many will be left vacant. It will take at least seven years for many of the properties that have been built in the past two years to be occupied. Investors in these properties will be wiped out.

8. More than 80 percent of the existing real estate development industry will go bankrupt.

9. Following real estate development will be the larger part of the banking and financial services industry. Thousands of young investment bankers and hedge fund managers will be out of work. This could happen as early as the middle of next year.

10. As the U.S. economy slides into a protracted recession, baby boomers will recognize that they are poorer than their parents were when their parents were in their early sixties. Without the appreciation of a house to cash in on, they will give up their long-held dreams of retiring comfortably at 65.

11. Luxury will be uncool. Understated elegance will be in.

12. The campaign against conspicuous consumption will accelerate. Twelve-cylinder cars will be ridiculed and possibly outlawed entirely.

13. Hippie values will return. Peace and love and blue jeans will prevail... simply because baby boomers won't be able to afford to indulge themselves materialistically as they have been doing for 40 years.

14. Technology and the baby boomers' shrinking wealth will favor products that are simple and small.

15. The wristwatch will begin a 20-year disappearing act.

16. Yoga, meditation, and Pilates will continue to increase in popularity. Aerobics, weight training, and kickboxing will diminish.

17. Yachts, luxury automobiles, and Learjets will stand in warehouses, unused.

18. Migration to the Sun Belt will slow because of hurricanes and high prices. Local Sun Belt municipalities will be forced to lower taxes. Services will decline.

19. Technical jobs will continue to be outsourced to India and Latin America. And in the U.S., boomers will start to agree to work phones and read X-rays for minimum wage.

20. The information-publishing industry - particularly the specialized information-publishing industry - will continue to grow, outpacing the general economy. Entrepreneurs who understand the difference between information, advice, and opinion will make fortunes.

21. Direct marketing will continue to grow as general advertising declines. Businesses that are unskilled at direct marketing will have a tough time staying competitive. Many will fail.

22. Boomers will "decide" to continue working during their retirement years. But many of them - lacking the skills to contribute to the Internet, information-publishing, or direct-marketing industries - will go unemployed.

Those are my predictions for 2008. But what good are such predictions? Can they make you any money?

I don't know. I do know a few things about investing in trends, though. Lessons I've learned from a lifetime of starting all sorts of businesses. For example:

You can make the biggest money on a new trend that emerges quickly and grows strongly... if you get in early.

It's difficult to predict new trends with precision. You can sometimes see that a certain change is inevitable, but it is often difficult to know when it will happen. Usually, it happens later than you expect.

For any given day or week or month, chances are good - some studies say 70 percent - that things will remain the same the following day or week or month. That's why it doesn't usually pay to play trends in the stock market. Unless, that is, you know what you're doing or are getting good advice from someone who does.

The sensible way to invest in trends is to buy into good businesses that provide neutral or positive cash flow. That gives you a Plan B. You can sit out short-term fluctuations while you wait for the long-term trend to take hold.

Sometimes even medium- and shorter-term trends are more obvious. This is especially true on the downside. Such is the case with the baby boomer driven economy today.

Emmett, a friend and business partner in real estate development, doesn't like it when I speak negatively about the future of the economy, and real estate in particular. He feels like I am being disloyal to the businesses he is running. He would rather have me encourage him to go full steam ahead. He seems to feel that if I were more positive, things would get better.

"I hope you're right," I tell him. "But no amount of hoping is going to make the U.S. debt go away. And no amount of positive thinking will get people to buy property if they don't have any money and can't get credit."

"Anything you can conceive, you can achieve," he tells me.

"So long as you achieve it before you go broke," I reply.

Hope for the best. But make your business plans based on a realistic assessment of current trends. Hoping against hope works in fairy tales. But in the real-life world of business, it's better to put aside the rose-colored glasses.

If I am right about the future for baby boomers, it won't be the end of the financial world. People who are smart enough to put their time and money into developing industries (such as direct-marketing, information-publishing, and Internet-related businesses) will do well. Others, like my friend Emmett who lives in Neve r-Never Land, will get poorer.

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If these predictions do come true I recommend you stay with the investing for income theme that we are promoting.
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