Investing for Income

Streams of Income

2010-11-14T22:16:00.001-05:00

It’s bad enough to initially depend on just one source of income, but it’s even worse to not invest it or diversify it such that you protect it over time. In other words, there is more than one way to diversify your income.

(1) You can diversify your sources of income so that you have, say, two or three jobs
(2) You can diversify the ways in which you earn income

It’s better to go with the second option, even though, strictly speaking, it can be considered a version of the first.

You can work three jobs if you want. That will definitely give you three different sources of income. If you get laid off at one place, you’ll still have the other two jobs. It’s great to keep your options open, after all. Maybe you’re moving up at one place and you want to give it some time.

But working three jobs is really no different than just working more hours at the same job. You’re still a rat running on the wheel – just a bigger wheel, and you’re running faster, or for a longer period of time, and you get a bigger piece of cheese to take home.

What you really need to do is slowly outsource your own income stream.

Progressively safer streams of income

1. Invest in high yielding dividend stocks that grow their dividends yearly.
2. Reinvest a portion of the dividends into more high-yield stocks.
3. Use the other portion to pay current bills (and debt servicing if you have it)
4. Repeat by reinvesting proceeds into a different asset class: real estate with cashflow.
5. Repeat by reinvesting remainder of RE cashflow into another class: a business of your own, for example.

You may want to change the exact order and the benchmarks at which you would buy an investment property, for example, but the idea is generally the same. Protect your investment income by diverting it into different asset classes with (ideally) less risk.

Your day job is the most risky form of income. Not only do you have just one, but you have to pay with your time and energy just to get a return. You need to take that most highest level of risky income and lock it in to less risky streams, like dividends. I think these are actually less risky than starting a business on the side, because that’s just going to take up more of your precious energy in the beginning. Some can do it – for various reasons. I think starting a business is an excellent idea, but I think you can get more leverage in the beginning with juicy dividend growers.

On this model, the more that your day job kills you, the more you should try to save as much of that money as possible and convert it into another, less taxing, source of income. Do the same with your high-yield stocks. Precisely because they are high-yield (especially if the payout ratio is high, or they’re high yielding because of a recent price drop), you’ll want to redirect those dividends into forms of money with less velocity, like the money market or a bond fund. Then I’d get out of the corporate sphere altogether and create my own source of cashflow by buying an investment property and renting it out.

If you have enough income right now, perhaps you can skip these steps and just purchase your rental property right away. But the idea is the same. Recycle that money into a system that can be set on automatic, but wherein your money cycles through progressively lower levels of risk (you can do the work to determine the order of risk for each opportunity). Once that’s done you can focus on how to increase it the velocity of these cycles of money

the bottom line on money printing

2010-11-05T20:49:00.001-05:00

So, here’s the bottom line on money printing, or QE if you prefer. If nothing happens, the whole thing was a waste of time. If inflation takes off, the Fed will have to choose between holding bonds and letting inflation get worse or selling bonds and going bankrupt in the process. Since no entity goes down without a fight, the Fed will naturally hold the bonds and let inflation take off. Do not ask about the exit strategy from QE; there is no exit.

Do you need to build a portfolio that will generate cash?

2010-09-19T19:53:00.000-05:00

Are you more concerned with paying your bills and having enough income than growing richer?

If so, you need to focus on something called income investing.

This long-lost practice used to be popular before the great twenty-year bull market taught everyone to believe that the only good investment was one that you bought for ten dollars and sold for twenty.

Although income investing went out of style with the general public, the discipline is still quietly practiced throughout the mahogany paneled offices of the most respected wealth management firms in the world.

The Root of All Evil

2010-09-18T11:51:00.002-05:00

Is the love of money the root of all evil? Or, is it the ignorance of money?

What did you learn about money in school? Have you ever wondered why our school systems do not teach us much—if anything—about money?

Is the lack of financial education in our schools simply an oversight by our educational leaders?

Or is it part of a larger conspiracy?

Regardless, whether we are rich or poor, educated or uneducated, child or adult, retired or working, we all use money.

Like it or not, money has a tremendous impact on our lives in today's world.

At investingforincome.com we believe that all can live a properous life if we just save and invest in income producing assets.

Fundamentals are Not the Fundamentals

2010-09-13T20:53:00.001-05:00

If it is, then, primarily newly printed money flowing into and pushing up the prices of stocks and other assets, what real importance do the so-called fundamentals — revenues, earnings, cash flow, etc. — have? In the case of the fundamentals, too, it is newly printed money from the central bank, for the most part, that impacts these variables in the aggregate: the financial fundamentals are determined to a large degree by economic changes.

For example, revenues and, particularly, profits, rise and fall with the ebb and flow of money and spending that arises from central-bank credit creation. When the government creates new money and inserts it into the economy, the new money increases sales revenues of companies before it increases their costs; when sales revenues rise faster than costs, profit margins increase.

Specifically, how this comes about is that new money, created electronically by the government and loaned out through banks, is spent by borrowing companies.[7] Their expenditures show up as new and additional sales revenues for businesses. But much of the corresponding costs associated with the new revenues lags behind in time because of technical accounting procedures, such as the spreading of asset costs across the useful life of the asset (depreciation) and the postponing of recognition of inventory costs until the product is sold (cost of goods sold). These practices delay the recognition of costs on the profit-and-nloss statements (i.e., income statements).

Since these costs are recognized on companies' income statements months or years after they are actually incurred, their monetary value is diminished by inflation by the time they are recognized. For example, if a company recognizes $1 million in costs for equipment purchased in 1999, that $1 million is worth less today than in 1999; but on the income statement the corresponding revenues recognized today are in today's purchasing power. Therefore, there is an equivalently greater amount of revenues spent today for the same items than there was ten years ago (since it takes more money to buy the same good, due to the devaluation of the currency).
"With more money being created through time, the amount of revenues is always greater than the amount of costs, since most costs are incurred when there is less money existing."

Another way of looking at it is that, with more money being created through time, the amount of revenues is always greater than the amount of costs, since most costs are incurred when there is less money existing. Thus, because of inflation, the total monetary value of business costs in a given time frame is smaller than the total monetary value of the corresponding business revenues. Were there no inflation, costs would more closely equal revenues, even if their recognition were delayed.

In summary, credit expansion increases the spreads between revenue and costs, increasing profit margins. The tremendous amount of money created in 2008 and 2009 is what is responsible for the fantastic profits companies are currently reporting (even though the amount of money loaned out was small, relative to the increase in the monetary base).

Since business sales revenues increase before business costs, with every round of new money printed, business profit margins stay widened; they also increase in line with an increased rate of inflation. This is one reason why countries with high rates of inflation have such high rates of profit.[8] During bad economic times, when the government has quit printing money at a high rate, profits shrink, and during times of deflation, sales revenues fall faster than do costs.

It is also new money flowing into industry from the central bank that is the primary cause behind positive changes in leading economic indicators such as industrial production, consumer durables spending, and retail sales. As new money is created, these variables rise based on the new monetary demand, not because of resumed real economic growth.

A final example of money affecting the fundamentals is interest rates. It is said that when interest rates fall, the common method of discounting future expected cash flows with market interest rates means that the stock market should rise, since future earnings should be valued more highly. This is true both logically and mathematically. But, in the aggregate, if there is no more money with which to bid up stock prices, it is difficult for prices to rise, unless the interest rate declined due to an increase in savings rates.

In reality, the help needed to lift the market comes from the fact that when interest rates are lowered, it is by way of the central bank creating new money that hits the loanable-funds markets. This increases the supply of loanable funds and thus lowers rates. It is this new money being inserted into the market that then helps propel it higher.

(I would personally argue that most of the discounting of future values [PV calculations] demonstrated in finance textbooks and undertaken on Wall Street are misconceived as well. In a world of a constant money supply and falling prices, the future monetary value of the income of the average company would be about the same as the present value. Future values would hardly need to be discounted for time preference [and mathematically, it would not make sense], since lower consumer prices in the future would address this. Though investment analysts believe they should discount future values, I believe that they should not. What they should instead be discounting is earnings inflation and asset inflation, each of which grows at different paces.)

Excerpt From Ludwig Von Mises Institute

Who Should Manage Your Money? Only You!

2010-09-12T16:51:00.002-05:00

The typical stockbroker went from selling shoes or cars to hustling stocks after passing the exam.

Your financial future is not his or her concern; generating sales commissions is. Of course there is plenty of free advice out there, from Jim Cramer to Suze Orman. But, you will likely get what you pay for.

Finding good investments is very hard work. Buying them at the right price is even harder work. Having the patience to buy at the right time and sell at the right time is nearly impossible.

Your best bet is to invest in companies that pay monthly distributions. At least this way you get paid to ride things out or to recover your capital if your investment was poorly timed.

Forced Investing

2010-09-11T07:35:00.000-05:00

As we have seen, the whole concept of rising asset prices and stock investments constantly increasing in value is an economic illusion. What we are really seeing is our currency being devalued by the addition of new currency issued by the central bank. The prices of stocks, houses, gold, etc., do not really rise; they merely do better at keeping their value than do paper bills and digital checking accounts, since their supply is not increasing as fast as are paper bills and digital checking accounts.

"An improving economy neither consists of an increasing GDP nor does it cause the overall stock market to rise."

The fact that we have to save for the future is, in fact, an outrage. Were no money printed by the government and the banks, things would get cheaper through time, and we would not need much money for retirement, because it would cost much less to live each day then than it does now. But we are forced to invest in today's government-manipulated inflation-creation world in order to try to keep our purchasing power constant.

To the extent that some of us even come close to succeeding, we are still pushed further behind by having our "gains" taxed. The whole system of inflation is solely for the purpose of theft and wealth redistribution.

In a world absent of government printing presses and wealth taxes, the armies of investment advisors, pension-fund administrators, estate planners, lawyers, and accountants associated with helping us plan for the future would mostly not exist. These people would instead be employed in other industries producing goods and services that would truly increase our standards of living.

iShares That Pay Monthly Distributions

2010-07-31T13:15:00.001-05:00

IShares that Pay Monthly Distributions

www.investingforincome.com

As an income investor I prefer investments that pay monthly distributions. For those that like exchange traded funds that trade on the TSX I suggest iShares.
Cash distributions for the eleven iShares funds listed on the Toronto Stock Exchange which pay on a monthly basis. Unitholders of record on the second to last business day of the month will receive cash distributions payable on last business day of the month. Details of the "per unit" distribution amounts are as follows:
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Cash
Fund Distribution
Fund Name Ticker Per Unit ($)
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iShares DEX Universe Bond Index Fund XBB 0.09828
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iShares DEX All Corporate Bond Index Fund XCB 0.08879
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iShares Dow Jones Canada Select Dividend Index Fund XDV 0.09638
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iShares S&P/TSX Capped Financials Index Fund XFN 0.07515
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iShares DEX All Government Bond Index Fund XGB 0.06154
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iShares U.S. High Yield Bond Index Fund (CAD-Hedged) XHY 0.13200
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iShares U.S. IG Corporate Bond Index Fund XIG 0.07016
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iShares DEX Long Term Bond Index Fund XLB 0.07347
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iShares S&P/TSX Capped REIT Index Fund XRE 0.05900
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iShares DEX Short Term Bond Index Fund XSB 0.08410
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iShares S&P/TSX Income Trust Index Fund XTR 0.06625
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The Great Reflation

2010-06-13T16:31:00.003-05:00

The Great Reflation:

The Mother of all Financial Experiments Chuck Prince, the former CEO of Citigroup, who presided over the bank’s collapse, famously remarked in July 2007 that "as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”

Shortly after, the music stopped, the financial system broke, and Citigroup and other financial behemoths went under.

To rescue the economy and financial system from near‐total meltdown, the government created an unprecedented package of bailouts, stimulus, free money and massive fiscal deficits.

It succeeded, and a 1930s style debt deflation and depression were aborted. Liquidity, on a vast scale was unleashed into the financial system, demonstrating, once again, the power of such flows to drive up the prices of stocks, commodities and other risky assets.

In The Great Reflation we focus on how the authorities pumped air back into the balloon, and got the music playing again. Investors and banks, including Citigroup, are back out on the dance floor.

However, just because the system was saved, doesn’t mean it has been fixed. Why do we say that the system isn’t fixed? The major theme running through The Great Reflation is that we have been living through a multi‐decade period of money and credit inflation that started back in the 1960s when the post‐World War II global monetary system (Bretton Woods) began to break down. The Great Reflation is about this inflation and the consequences of the Act II, which is now unfolding.

From the late‐1960s until 1982 we had out‐of‐control price inflation; after that, a series of asset bubbles and mini‐crashes, leading up to The Big One in 2008‐2009. One of the implications outlined in The Great Reflation is that we continue to live in an age of money and credit inflation and a monetary system that is unanchored and has no brakes. Until that is fixed, monetary inflation and instability will be a way of life.

The great reflation can only be understood properly in this longer‐term context. It is a continuation of what went before, but with two main differences. The first is the sheer magnitude of the reflation this time—by far the biggest in peacetime U.S. history. The second difference is that the governments of the U.S. and other countries have had to transform collapsing private debt into a burgeoning public debt supercycle with projected government debt:GDP ratios heading to the stratosphere.

This effort to reflate—pump air back into the balloon—had to be on a scale at least as large as the bubble itself. It is an experiment never before attempted in the context of U.S. experience, and it will have consequences unlike anything seen before.

No one knows exactly where the great reflation is going, what is going to happen, and what the end point will be like. However, there are some things we do know. When new money is created on a grand scale, it must go somewhere and have some major consequences. One of these will be greatly increased volatility and instability in the economy and financial system compared with the roller‐coaster ride of the past 15 years when the private credit bubble was forming.

The Roller‐Coaster

It is critical for investors to understand that there has been a linked sequence of events since the 1960s that lead to the disaster of 2008‐2009. In particular, over the past 15 years, we experienced first the tech bubble, followed by a crash, then the recession and deflation of 2000‐2002.

Next came the Federal Reserve’s first effort at massive reflation to avoid a debt collapse. This led to new bubbles—in housing, exotic new financial products, commodity prices, energy, and world food markets. They were financed by an unprecedented credit bubble that was unsustainable. When the bubble burst, debt levels were much higher and more precarious than ever. In 2008‐2009 asset prices were crushed, causing the collateral behind the debt to evaporate. That, in turn, is what triggered the mother of all reflation experiments.

This sequence of events has an ominous undertone. The great reflation effort has clearly given the economy a big boost, just as the preceding one did but it is very artificial, based on free money and unprecedented fiscal deficits and subsidies to spending.

Extrapolation of this out‐of‐control roller coaster suggests more bubbles in the short run. Hot markets have already begun forming in such things as commodities, gold, and world stock markets.

There are many assets that could be recipients of the new money created. However, a warning for investors: We don’t believe another inflation of asset prices will last as long as the previous one for several reasons. Private debt has been pushed to the limit; government debt will be pushed to the limit in a few more years; the U.S. dollar, as the world’s main reserve currency, will not be able to withstand open‐ended monetary and fiscal reflation; and finally, the world economy is too fragile to withstand another spike in energy and food prices which will certainly occur if monetary inflation continues.

The great reflation, if left unchecked, will run into a brick wall in the next few years, and another credit implosion and deep recession will occur. The result will be even bigger budget deficits and lower economic growth. Logic says that if the recent crisis was caused by excessive money and credit inflation, even more of the same should cause an even bigger crisis. The ultimate end point to this trend is
worrisome, to say the least.

The Engine of Inflation Inflation is the biggest enemy of investors in the long run. However, in the short term, inflation in its early stages is often a wonderful elixir, greasing the wheels of the economy and causing riskier assets like stocks, commodities and corporate bonds to levitate. Euphoria tends to build as people get
richer.

But, it is important to understand that inflation is an undue expansion of money and credit. It can have the effect of raising the prices of things we consume or the prices of assets that we own or want to buy. But those are the symptoms of inflation that, if extreme, tell us that a bust is coming. In the case of rising consumer prices, the central bank ultimately has to raise interest rates and curtail credit. Recession follows. Or, if asset prices rise on the back of credit expansion, debt servicing ultimately becomes unbearable and asset prices—the collateral—start to fall, but debt levels are fixed in the short term. When people can’t service or repay debt, panics and crashes follow, and the risk of a debt deflation and depression rises dramatically.

Too much debt and falling asset prices caused the depression of the 1930s and almost another one in 2008‐2009. One Important reason that debt rose to such extremes, both in 1929 and 2007 was that the monetary system had a built‐in inflationary bias. In the 1920s, it was called the gold exchange standard, whereby countries held both gold and currencies in their reserves. In the post‐1971 world, it was called the floating dollar standard or Bretton Woods II. Countries held mainly dollars in their
reserves. As a result, the U.S. could inflate at will and foreign countries had to buy the excess dollars on the foreign exchange market if they wanted to prevent their currency from rising. In a world of low and falling price inflation, as was the case after 1982, almost all countries want a cheap currency.

This is an important consequence of our flawed monetary system. Countries that buy dollars to keep their currency depressed, experience money and credit inflation. Bubbles result.

When those countries re‐invest their dollars back into the U.S., the U.S. financial markets remain highly expansionary. Lenders keep lending and borrowers keep spending beyond their means. In a fixed exchange rate system in which countries do not hold dollar reserves, a U.S. international payments deficit results in a drain on domestic liquidity until the deficit is corrected. In the current system, the U.S. can inflate and run huge balance of payments deficits with no pain and no mechanism to stop it, other than a financial panic. It is like a fast car with no brakes. Sooner or later a crash occurs.

This fundamental flaw in the international monetary system remains. The combination of this with the unleashing of the great reflation has created a toxic brew. There is little wonder that people fear even greater monetary instability in the future than we have experienced.

When looking for scapegoats to point the finger of blame for the crash, it is natural that people have looked to the appalling performance of the regulators. That is valid, and it is also right to highlight the greed‐driven excesses of lenders and the virtually criminal conflicts of interest of the ratings agencies. But these characteristics—greed, conflict of interest and criminal behavior—are always present when inordinate inflations and manias occur. It is the inflation that is the real villain.

The Long Wave and Deflation The money and credit inflation following the breakdown of the Bretton Woods I system in 1971 originated, we believe, from the deflationary forces of the long wave decline that became quite evident after 1973. The private debt supercycle build‐up and overspending in the 1982‐2007 period caused a countertrend, but artificial, recovery in some long wave economic forces.

Employment, earnings and wealth in industries that benefitted from the credit inflation, such as real estate, the financial industry in general, retail spending, technology (from the 1990s bubble) rose quite strongly, masking the continued downward pressure on capital intensive industries and particularly, but not exclusively, in the capital goods industry itself.

Growing excess capacity resulted. Middle‐class incomes on average continued to erode and the gulf between rich and poor widened dramatically as in the late 1920s.

With the end of the private credit bubble, the long wave decline has resumed its downward course. No one knows how long that will last until the natural, Schumpeterian forces of long‐term renewal take over. This would include the implementation of new technologies and the development of new industries. Our guess is that it could take another five years or so.

Policy and Markets In The Great Reflation, we look at the inflationary causes of the credit bubble and the ensuing crash of 2008‐2009 and the consequences of the massive monetary and fiscal program that was needed to abort an incipient debt deflation like the 1930s. The world, and in particular the U.S., will remain very deflationary for a few more years as the post‐crash stimulus will soon begin to dissipate. The recovery engineered by the authorities will face additional headwinds from the unwinding of the private debt supercycle, the resumption of the long wave economic decline and the coming massive fiscal restraint.

The U.S. and almost all other governments, at both national and lower levels (states, provinces, municipalities, hospitals, etc.) will rein in expenditures and raise taxes. That is the new imperative—no one wants to hit the wall like Greece.

However, massive fiscal restraint also carries risks, just as the lack of restraint causes risks of a different sort. The big issue is whether there exists a middle ground thatcould eventually bring us to stability. That will only be revealed in the fullness of time. Spending and borrowing excesses of governments and the public have a long and dangerous history, suggesting a deeper malaise is affecting the nation. Moreover, there are other serious signs of long‐term decline, and policy and leadership will have to be particularly adroit in steering the U.S. through the difficult few years ahead.

It has been documented that the latter stages of a long wave decline are parochial, nasty and politically unstable. People are fed up with the system, their loss of wealth, jobs, and income. Traditional politicians are blamed. People look for quick and easy solutions and are open to simplistic solutions provided by demagogues. It is difficult to sell the austerity, sound policies and pro‐growth strategies needed to transition through the long wave trough before really big crises occur. Countries in denial face the prospect of repeating Greece’s calamity.

The risk for the U.S. and other countries is that politicians will cater to populist
pressures and impose spending and tax policies that are counterproductive. In the aftermath of the Great Reflation, this could mean more government programs (e.g. health care), failure to raise taxes, where appropriate, out of fear of losing office, and excessive monetary ease because the Treasury bond market cannot absorb government funding on its own.

However, we should avoid the temptation to get too pessimistic. It is important never to underestimate the ability of the U.S. to recover from adversity, rejuvenate itself and get its house in order. Its long‐term track record is pretty good, and realistic hope should not be jettisoned too readily.

The question remains however, as to whether the U.S. needs an economic Pearl Harbour before serious action is taken. Investors have seen empty promises many times before and hence should be sceptical until they see clear, positive evidence that such action is being taken. Until then, they should take the attitude “show me”.

The Investment Challenge The great problem for investors in today’s environment is that there is no return on short‐term, safe assets yet the higher risk levels on longer‐term, higher return assets are too uncomfortable for most people.

They are the single most important force driving investment markets both up and down. Contracting liquidity caused the crash in 2008‐2009 and dramatically expanding liquidity since March 2009 has triggered one of the greatest bull markets in U.S. history. The next bear market will also be driven, at some point, by a contraction in liquidity flows. However, as long as the great reflation is doing its work, that day can be postponed. Chuck Prince, if he were to comment today, would probably point out that the music is playing again. People are back out on the dance floor. But, if the great reflation is as artificial as we believe, then this is still musical chairs. When the music stops, there won’t be a chair for everyone, just like the last time.

Tony Boeckh

If You Are So Smart Then Why Aren't You Rich?

2010-04-25T18:13:00.002-05:00

Are the Rich Smarter Than You?

"Well if you're so damn smart, why aren't you rich?"

I never knew how to respond to this. Still, it ingrained in us the notion that the rich must have a little something extra going on upstairs, otherwise we'd all be rolling in it. Right?

There is, in fact, some evidence to support this.

According to a recent report from the U.S. Census Bureau, there is a strong positive correlation between education and income. Over an adult's working life, high school graduates should expect, on average, to earn $1.2 million; those with a bachelor's degree, $2.1 million; those with a master's degree, $2.5 million; those with doctoral degrees, $3.4 million; and those with professional de grees, $4.4 million.

But here's the rub: Studies show that those who earn the most aren't necessarily the richest. To determine real wealth, you need to look at a balance sheet - assets minus liabilities - not an income statement.

We generally envision millionaires as Lexus-driving, Rolex-wearing, mansion-owning, Tiffany-shopping members of exclusive country clubs. And indeed, Stanley's research reveals that the "glittering rich" - those with a net worth of $10 million or more - often meet this description.

But most millionaires - individuals with a net worth of $1 million or more - live an entirely different lifestyle. Stanley found that the vast majority:

• Live in a house that cost less than $400,000.
• Do not own a second home.
• Have never owned a boat.
• Are more likely to wear a Timex than a Rolex.
• Do not collect wine and generally pay less than $15 for a bottle.
• Are more likely to drive a Nissan than a BMW.
• Have never paid more than $400 for a suit.
• Spend very little on prestige brands and luxury items.

This is certainly not the traditional image of millionaires. And it makes you wonder, just who the heck is buying all those Mercedes convertibles, Louis Vuitton purses and $60 bottles of Grey Goose vodka?

The answer, according to Dr. Stanley, is "aspirationals" - people who act rich, want to be rich, but really aren't rich.

Many are good people, well educated and perhaps earning a six-figure income. But they aren't balance-sheet rich because it's almost impossible for most workers - even those who are highly paid - to hyper-spend on consumer goods and save a lot of money. (Unfortunately, saving is the key prerequisite for investing.)

In his new book, Stop Acting Rich... and Start Living Like a Real Millionaire, Dr. Stanley recalls an appearance on Oprah when a member of the audience asked the question - one he's heard hundreds of times before:
"What good does it do to have all this money if you don't spend it?" She was angry, indignant even. "These people couldn't possibly be happy."
Like so many others, this woman genuinely believed that the more you spend, the better life is.

Bear in mind, we're not talking about people living below the poverty line. We're talking about middle-class consumers and up who have lived beyond their means and have suddenly found themselves under enormous pressure in a weak economy.
Some were overly optimistic. Others didn't realize that they are up against an army of the best and most creative marketers in the world, whose job it is to convince you that "you are what you buy," that you need to outspend - to out-display - others.

The unspoken message behind the constant barrage of TV and billboard ads featuring all those impossibly good-looking men and women is that you are special, you are deserving, and you need to look and act successful now.

According to Dr. Stanley, "The pseudo-affluent are insecure about how they rank among the Joneses and the Smiths. Often their self-esteem rests on quicksand. In their minds, it is closely tied to how long they can continue to purchase the trappings of wealth. They strongly believe all economically successful people display their success through prestige products. The flip side of this has them believing that people who do not own prestige brands are not successful."

Yet "everyday" millionaires see things differently. Most of them achieved their wealth not by hitting the lottery or gaining an inheritance, but by patiently and persistently maximizing their income, minimizing their outgo and religiously saving and investing the difference.

They aren't big spenders. According to Stanley's surveys, their most popular activities include:

• Socializing with children/grandchildren (95%)
• Planning investments (94%)
• Entertaining close friends (87%)
• Visiting museums (83%)
• Raising funds for charities (75%)
• Attending sporting events (69%)
• Participating in civic activities (69%)
• Studying art (63%)
• Participating in trade/professional association activities (56%)
• Gardening (55%)
• Attending religious services (52%)
• Jogging (48%)
• Attending lectures (44%)

You'll notice the cost associated with these activities is minimal. Most millionaires understand that real pleasure and satisfaction don't come from the car you drive or the watch you wear, but time spent in enjoyable activities with family, friends and associates.

Yet they aren't misers, especially when it comes to educating their children and grandchildren - or donating to worthy causes. Although they are disciplined savers, the affluent are among the most generous Americans in charitable giving.

They "give" in another important way, too. According to the IRS, the top 1% of America's income earners pay 37% of the entire federal income tax bill. The top 5% pay 57%. The top 10% pay 68%. (The bottom 50% pay less than 4%.) It's a far cry from the populist complaint that the rich "don't pay their fair share."
Just how prevalent are American millionaires?

According to the Spectrum Group, there were 6.7 million U.S. households with a net worth of at least $1 million at the end of 2008. Very few of them won a Grammy, played in the NBA or started a computer company in their garage. Clearly, thrift and modesty - however unfashionable - are still alive in some parts of the country.

So while millions of consumers chase a blinkered image of success - busting their humps for stuff that ends up in landfills, yard sales and thrift shops - disciplined savers and investors are enjoying the freedom, satisfaction and peace of mind that comes from living beneath their means.

More often than not, these folks are turned on not by consumerism but by personal achievement, industry awards and recognition.

They know that success is not about flaunting your wealth. It's about a sense of accomplishment... and the independence that comes with it. They are able to do what they want, where they want, with whom they want.

They may not be smarter than you, but they do know something priceless:

It's how we spend ourselves - not our money - that makes us rich.

The Age of Inflation

2010-04-11T10:50:00.002-05:00

In this age of inflation, we are all forced to do many tasks that others could do better for us. The fact is that inflation impedes the process of civilization, which is brought about by the division of labor. While, without the central bank's continual monetary infusions, prices would gently fall as technology made all things and all people more efficient, we don't enjoy that luxury. Instead we're mowing our own grass, fixing the flappers in our toilet tanks, and managing our own retirement funds.

Now, pushing a mower requires little skill, is no more than an annoyance, and provides the benefits of fresh air and sunshine. But managing one's retirement funds is a different matter entirely. It is an especially cruel result of inflation that instead of simply being able to hoard money, people must "invest their money into the financial markets, lest its purchasing power evaporate under their noses," explains Jörg Guido Hülsmann in The Ethics of Money Production. "Thus they become dependent on intermediaries and on the vagaries of stock and bond pricing." And unfortunately most of us aren't neurologically wired well for the job.
But we can't just throw up our hands and trust the state to take care of us in our golden years. Saving money isn't enough. The state is continually making what you have saved worth less. And unless you're a government employee, most likely you're left with the assignment of making sure you have enough for when emergencies occur or you're unable to work.

The typical stockbroker went from selling shoes or cars to hustling stocks after passing the Series 7 exam. Your financial future is not his or her concern; generating sales commissions is. Of course there is plenty of free advice out there, from Jim Cramer to Suze Orman. But, you will likely get what you pay for. Finding good investments is very hard work. Buying them at the right price is even harder work. Having the patience to buy at the right time and sell at the right time is nearly impossible.

Austrian business-cycle theory can give investors ideas on when to invest and what to invest in, but the Austrian School provides little in the way of analyzing specific companies and stock prices. What Hayek and Mises are to the business cycle, Benjamin Graham and David Dodd are to value investing. In their famous treatise, Security Analysis, Graham and Dodd painstakingly lay out their method for valuing stocks, looking for deeply depressed prices.

"Saving money isn't enough. The state is continually making what you have saved worth less."

While the average amateur investor may be excellent in their own career field, it doesn't mean they know what to invest in, or how to pick stocks. In fact being very good at your field can give you the false sense that whatever stocks you pick or your broker picks for you must be good, because after all, you picked them and you picked your broker — and you're smart. So, no doubt those stock prices will go up.

But the smart and talented stock-picking neophyte is not investing at all but speculating. "An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return," Ben Graham wrote. "Operations not meeting these requirements are speculative." The vast majority of people just don't have the time or possess the patience to thoroughly analyze an investment opportunity. In The Millionaire Next Door, authors Thomas Stanley and William Danko point out that the average person tends to spend more time on purchasing a car than on looking at potential appreciating investments.

So for those who are interested in accumulating wealth and willing to put the time and hard work toward that end, Joseph Calandro, Jr. has masterfully melded the work of Graham and Dodd with Austrian business-cycle theory. The result is a very readable how-to guide for value investing, aptly named Applied Value Investing: The Practical Application of Benjamin Graham and Warren Buffet's Valuation Principles to Acquisitions, Catastrophe Pricing and Business Execution.

One can see by the title that the book is not for someone looking to take the next step after Stock Investing For Dummies, but it's not the handful that the title implies. The beauty of Calandro's work is that he teaches value investing through case studies. The reader can follow along while the author does his own valuations of Sears, GEICO, and General Re. These of course are not made-up theoretical cases, but real-life deals made by value investors Eddie Lambert and Warren Buffett.

Calandro first provides the reader with the basics of Graham and Dodd valuation in order to be "approximately right rather than precisely wrong." The author does this by valuing Delta Apparel, Inc., as a potential investment in 2002. When his analysis indicated that Delta was undervalued, Calandro bought Delta stocks and immediately offered to resell them at a fairer, higher price. This exercise is all about making money, not falling in love with stocks and their stories.

Much of Graham and Dodd's analysis is in assigning different valuations to balance-sheet items to determine what the real value of a company is beyond the accounting. This requires much more art than science.

"Finding good investments is very hard work. Buying them at the right price is even harder work. Having the patience to buy at the right time and sell at the right time is nearly impossible."

A couple of reviewers of Applied Value Investing have taken Calandro to task for the assumptions he makes in his case studies. Although the author doesn't provide much explanation of many of his assumptions, readers should understand that the talent of investing comes through experience and training. Reading one book will not provide all the answers, but Calandro does give us a roadmap. Investors must still make their own judgments.

These reviewers may not have made it to the book's conclusion, where the author reminds us that applied value investing is all about "identifying what you know and what you do not know, and then taking steps to quantify what you do know in a conservative yet rigorous manner so that a disciplined valuation can be formulated."
In chapter 5, the author draws upon an article he wrote for the Quarterly Journal of Austrian Economics to give the reader/investor insights into the best times to buy and sell from a macro perspective. He breaks the business cycle into eight stages by "synthesizing [George] Soros's boom–bust model, Austrian business cycle theory (ABCT), and behavioral characteristics."

In an interesting appendix to the chapter, Calandro writes of Warren Buffett's criticism of the efficient-markets hypothesis (EMH), which is the Rational Expectations School of the investing world. EMH posits that prices on assets traded in the market already reflect all available information. The Oracle of Omaha refuses to donate money to his alma mater, Columbia, because of the school's research in the area of EMH.

After applying Graham and Dodd valuation to make a catastrophe valuation, the author applies his tools to firms' business strategies. Next he circles back and discusses the important aspects of each layer of value-investing analysis, emphasizing that the key to long-term success is "research, checking, rechecking and cross-checking of assumptions."

To conclude, the author tells the reader to ignore economists shilling for newspapers, TV shows, political parties, the government, or financial institutions. Calandro quotes renowned Fidelity Fund manager Peter Lynch, who said, "If you spend 13 minutes a year on economics, you've wasted 10 minutes." However, Calandro recommends, in addition to a number of other books, Murray Rothbard's America's Great Depression, Roger Garrison's Time and Money, Ludwig von Mises's The Theory of Money and Credit, and other Austrian titles. With all due respect to Peter Lynch, Mises — a real economist — wrote that economics "concerns everyone and belongs to all. It is the main and proper study of every citizen."

And while the practice of value investing the Graham and Dodd way is more prudent than throwing money at that stock tip you overheard at the bar the other night, always remember what Mises wrote in Human Action: "There is no such thing as a nonspeculative investment.… In a changing economy action always involves speculation. Investments may be good or bad, but they are always speculative."

Investing for Income Rethink

2010-03-13T09:44:00.000-05:00

For many years we have been taught that our investments should be split between stocks and bonds. Stocks for growth, and bonds for income. With extreme volatility in the stock markets in recent years and record low interest rates on bonds, many investors have questioned their asset mix.

Investors are increasingly looking for alternative income-generating investments, that give more than the meager returns on bonds and GIC's and greater stability than the stock market has given them.

Financial Chaos

2010-03-10T21:01:00.000-05:00

John M. Templeton
Lyford Cay, Nassau, Bahamas

June 15, 2005

MEMORANDUM

Financial Chaos – probably in many nations in the next five years. The word chaos is chosen to express likelihood of reduced profit margin at the same time as acceleration in cost of living.

Increasingly often, people ask my opinion on what is likely to happen financially. I am now thinking that the dangers are more numerous and larger than ever before in my lifetime. Quite likely, in the early months of 2005, the peak of prosperity is behind us.

In the past century, protection could be obtained by keeping your net worth in cash or government bonds. Now, the surplus capacities are so great that most currencies and bonds are likely to continue losing their purchasing power.

Mortgages and other forms of debts are over tenfold greater now than ever before 1970, which can cause manifold increases in bankruptcy auctions.

Surplus capacity, which leads to intense competition, has already shown devastating effects on companies who operate airlines and is now beginning to show in companies in ocean shipping and other activities. Also, the present surpluses of cash and liquid assets have pushed yields on bonds and mortgages almost to zero when adjusted for higher cost of living. Clearly, major corrections are likely in the next few years.

Most of the methods of universities and other schools which require residence have become hopelessly obsolete. Probably over half of the universities in the world will disappear quickly over the next thirty years.

Obsolescence is likely to have a devastating effect in a wide variety of human activities, especially in those where advancement is hindered by labor unions or other bureaucracies or by government regulations.

Increasing freedom of competition is likely to cause most established institutions to disappear with the next fifty years, especially in nations where there are limits on free competition.

Accelerating competition is likely to cause profit margins to continue to decrease and even become negative in various industries. Over tenfold more persons hopelessly indebted leads to multiplying bankruptcies not only for them but for many businesses that extend credit without collateral. Voters are likely to enact rescue subsidies, which transfer the debts to governments, such as Fannie May and Freddie Mac.

Research and discoveries and efficiency are likely to continue to accelerate. Probably, as quickly as fifty years, as much as ninety percent of education will be done by electronics.

Now, with almost one hundred independent nations on earth and rapid advancements in communication, the top one percent of people are likely to progress more rapidly than the others. Such top one percent may consist of those who are multi-millionaires and also, those who are innovators and also, those with top intellectual abilities. Comparisons show that prosperity flows toward those nations having most freedom of competition.

Especially, electronic computers are likely to become helpful in all human activities including even persons who have not yet learned to read.

Hopefully, many of you can help us to find published journals and websites and electronic search engines to help us benefit from accelerating research and discoveries.

Not yet have I found any better method to prosper during the future financial chaos, which is likely to last many years, than to keep your net worth in shares of those corporations that have proven to have the widest profit margins and the most rapidly increasing profits. Earning power is likely to continue to be valuable, especially if diversified among many nations.

Stocks for growth and Bonds for Income

2010-03-01T06:42:00.002-05:00

For many years we have been taught that our investments should be split between stocks and bonds. Stocks for growth, and bonds for income.

With extreme volatility in the stock markets in recent years and record low interest rates on bonds, many investors have questioned their asset mix.

Investors are increasingly looking for alternative income-generating investments, that give more than the meager returns on bonds and GIC's and greater stability than the stock market has given them.

REITs are a way of getting a decent way to earn income and protect capital. However, stocks may be the income vehicle of the future.

Investing for Income is Still Your Best Strategy

2010-02-28T19:57:00.003-05:00

The big driver of investment returns over time is not figuring which sector is going to be best, or which country is going to be best, or which style is going to be best over the next year or three – the big driver is income and the reinvestment of income.

The baby boom generation is now retiring (or attempting to retire) and will begin to take a closer look at their investments ability to generate income without liquidating their portfolio.

I still maintain that you must begin building a income portfolio as early as possible. My retirement account presently generates over $3,000 a month in income and I am still in my early fifties.

Every asset in my account generates an income.

I started this strategy in my mid forties. I wish I would have started earlier.

Cash Flow Generating Securities

2009-10-03T17:44:00.001-05:00

One of my personal favorites is calculating the Net Present Value/Breakeven point for a stock that pays a stable dividend stream. This metric actually has relevance because the dividend is a cash payment that comes directly to the investor as a consequence of owning the shares. In the short-term, dividends are a known quantity. Obviously the metric only applies in the case where a dividend is paid. In the case where an investor is focusing on dividend investing for income purposes or simply for generating the maximum cash from their investing capital, these are important considerations.

An example is on order. Let’s say that an investor purchases 100 shares of a stock trading at $10/share that pays a $1/share annual dividend. The dividend yield on his investment is 10%. The P/Div ratio is 10. This means that the investor paid $10 for every dollar in dividends. Now the nice thing about dividends is that they are cash streams and we can use some common time value of money calculations to make determinations as to whether or not to invest. Let’s use the 100 shares as an example and do a net present value calculation with the following assumptions:

•Our time horizon is 25 years
•Dividends over the 25 years will average the current $1/year
•The Cost of Capital (COC or inflation) will be 6%/year for the duration of the exercise
Most popular spreadsheet programs contain the NPV function where you can set your COC and the value of the individual cash flows if you desire to perform this analysis for yourself.

The Net Present Value of this situation is $262.58, giving a positive indication or a ‘buy’ signal. This alone should not be used to make a buy determination, but should be used as a tool to validate or invalidate individual investment opportunities that arose from our analyses in parts I and II.

The Time to Cover or Breakeven point of this hypothetical investment is Year 15. What this means is that after 15 years, the dividends (after accounting for the deterioration in value due to inflation) will cover the cost of the initial investment. Whatever the investment itself is worth at that time is added value. So even if our stock is still at $10/share, it is paid for, we’re in the clear, making dividends for another 10 years before we need the funds, and can sell the stock at any time thereafter for a pure profit. And since inflation has already been figured in, we’re talking about real gains. We can easily modify the analysis to accommodate hypothetical taxation circumstances as well. Another important point may also be made from the above analysis. Considering that we’re getting $1/year in dividends, in nominal terms, the Time to Cover/Breakeven would be 10 years. Inflation at a rate of 6% per annum increased the breakeven point by 50% or 5 years. While 6% doesn’t seem like that much, this example illustrates exactly how much of a burden on wealth it represents. If anyone really wants to see why clipping bond coupons isn’t such a hot idea, run this analysis on the 30-year Treasury Bond and it will become immediately obvious.

Moving forward, when looking at dividend paying investments, we are looking for lower P/Div ratios (higher yields), and consequently lower Time to Cover/Breakeven points. While looking at the yield gives some good insight, using the NPV and breakeven analysis allows us to quantify the deleterious effects of inflation over time. The yield alone doesn’t give us that ability since it is a snapshot in time and changes as the price of the underlying security changes. It is important to note that in this study, we are NOT valuing the firm. We are valuing the cash streams that the firm pays to shareholders and discounting them to the present.

The risks to the above analysis are obviously many. 25 years is a long period of time, and things can change dramatically. Firms can go out of business or eliminate dividend payments thereby rendering the above effort worthless. Also, the major types of risk such as market, currency, political, and systemic cannot be accounted for over such a long period of time. This is one of the reasons why it is never a good idea to buy today and walk away. Successful investing is a journey, not a destination. As soon as you think you’ve got it all figured out, that is when you’ll get bitten. Vigilance is the name of the game. Another obvious takeaway here is that we’re dealing with long term investing, not trading. Such studies are a moot point for the short-term trader since their focus is on a different goal. Realize I am not trying to be impertinent towards traders, but simply pointing out the difference between their objectives and those of long-term investing.

Will Oil Be the Last Asset Standing?

2009-08-26T19:49:00.000-05:00

Stocks and commodities gained last week while the dollar – as is often the case these days – fell.

As you recall from last week's update, the correlation between these three assets has unusually close. The see-saw today has stocks and commodities on one side and the dollar on the other.

Investors must ask themselves how long this party can continue, and which of these assets they should be left holding when it ends.

To be perfectly honest, when the party ends it will probably end for all three assets, with stocks, commodities, and the dollar all losing value. However, while all three will go down, only some will be down for the count...

THE RESILIENCE OF OIL
Leaving aside the dollar for the moment, let's focus on stocks and one key commodity, oil.

Our feeling is that oil prices have greater staying power over the long-term than stock prices. Unless you just walked in the door, you won't be surprised to hear us say that. But let's look at two of our most important reasons.

Right now, increased demand for oil stems from the part of the world where economic growth is highest – the emerging economies and especially China.

(Recently someone argued that Chinese growth is not really sustainable because the Chinese consumer accounts for only a small part of China's economy. We disagree that this situation constrains the economy. Chinese consumers are starting to step up their purchasing. We've seen a huge jump in Chinese auto sales for instance, to the level where they surpassed the car sales in the U.S. And retail figures suggest that the Chinese consumer is becoming more of a leader than a follower.)

Overall, Chinese industrialization, infrastructure building, and the rise of its consumer should prevent any collapse in oil demand.

On the other side of the equation, oil production is unlikely to overtake demand unless oil prices rise dramatically. Right now, producers need a minimum oil price of $70 a barrel to justify investing in new production.

And a temporary spike above $70 (like we have now) won't cut it. If anything, producers need to feel confident that $70 will be the bottom of oil's price range for the foreseeable future.

Given oil's huge spike and subsequent plunge in 2008, oil will need to get a lot more expensive and stay expensive for quite a while before producers get brave enough to start bringing new supplies online.

If oil prices fall back to under $70, oil supplies will remain at a level where they cannot keep up with even lackluster economic growth. Eventually, the world would not have enough oil available to increase production of other commodities or manufactured goods. With a fixed or even declining oil supply, Americans and other Westerners would have to consume less – gallon per gallon – in order for China and the emerging world to consume more.

And that's not a scenario anyone wants to see (especially since the developing world would win the contest).

Bottom line: we need oil prices to remain above $70 to sustain any growth whatsoever.

Meanwhile, U.S. consumers have problems of their own. They have sustained a serious blow, in the form of a $13 trillion drop in their collective net worth, which has them focused on saving more and spending less for the first time in decades. Under these conditions, higher commodity prices will act as a tax, giving consumers even more reason to stop spending. Eventually, it will hold back U.S. economic growth too.

How high can oil prices go before they start to impact economic growth? Actually, it's a question of both price and time. If oil prices remain in the mid-$70s between now and the end of December 2009, that would do it. It would mean we had a year-over-year increase of more than 80% - the level at which our Long Term Master Key would issue a “sell” signal on the overall stock market.

We are betting that oil (and commodities in general) will have more staying power as this scenario unfolds than stocks. Oil is in a cyclical uptrend whereas stocks are trapped in a trading range. However, you should know that both groups will decline in the short-term if that signal is reached.

By now, you may be wondering, “What do we do in the meantime?”...

FOLLOWING THE IRRATIONAL HERD
All we can say for now is that today's market is irrational to be following a path in which both stocks and commodities rise together. It's also irrational to see the most speculative, high risk stocks such as AIG or Fannie Mae accounting for the lion's share of market volume. Yet this has been the case on many recent trading days.

However, markets can stay irrational for some time. All we can expect, while we're waiting for the correction, is that the market leaders will continue to lead. Despite the incredible risks in today's economy the “high beta” (high risk) stocks may continue to outperform.

So if you are impatient and want to make some gains while waiting for the music to stop here's what to do...

First, hold on to gold and zero coupon bonds as a hedge for when the correction comes. Same with the conservative defensive/offensive stocks we mentioned last week.

With that protection in place, and only to the extent of your risk tolerance, you can pursue gains among our high beta choices. Our recommendations here are long-term keepers. Even though they could come down hard in a correction, they are also likely to lead the market in the meantime. They include:

Potash (POT) and Mosaic (MOS), the world's two leading fertilizer producers.
Fluor (FLR), the world's leading engineering and construction company, which will benefit from any drive to raise energy supplies.
Intel (INTC) and Apple (AAPL) as Information Technology plays.
Oil service companies, such as Transocean (RIG), Nabors (NBR), Schlumberger (SLB), and National Oilwell Varco (NOV).
While these stocks will surely decline when the overall market tanks, they are still good stocks to own for the long haul, as they are set to dramatically outperform the market that’s destined to be erratic in the foreseeable future. And with our recommended hedges in place, you should get through the decline, when it comes, in much better than average shape.

Views of a Contrary Investor

2009-07-25T09:26:00.001-05:00

I see discussions of short term percentage gain or loss in investing all the time. I rarely see similar long term discussions. Important? Maybe not. But is the fact that there is simple asymmetry between percentage gains and losses actually considered? If it really was, I think a fair number of investors would change their thinking, at least a bit.

If you invest for two years, one up 10% and one down 10% (either order) you end up losing 1%. If you had twice the variability (up 20%, down 20%), you end up losing 4%. If you have a real rollercoaster ride like we’ve had recently and have a +40% and -40% year, you end up losing 16%. And that’s just in a two year time frame. Over a couple decades or so, this is no small matter.

Here’s a different example. Suppose you had five and a half years in which you had an annual return of +24%. But you also had 4 years of -30% performance. 5.5 years compared to 4 years is a bigger ratio than 30% to 24%, so it could look close to a wash on first blush. Actually you’d end up with a loss of 36%. I didn’t pick these numbers randomly. They’re the combined rates of return for the two cyclical bull and two cyclical bear cycles for the S&P 500 in the current secular bear market (counting the last 4+ months as the second bull cycle) since March 2000. For retirees the loss is even worse because nearly a decade has been lost too, and there’s much less time to make it up.

It’s been noted that there’s a fine line between investing and gambling. It’s also been noted that gamblers as a whole notoriously inaccurately report their betting results. This is true even though they know the games are all rigged and casinos very consistently report gaming profits. I’m only suggesting that there’s a psychological driver that can keep us from being objective when it comes to some numbers.

Focus on the short term is the name of the game for TA. It can work well, until it doesn’t. The trends and indicators traders use can be useful for the well informed, and there are people making a lot of money using it. But it’s a combination of skill and getting more right calls than wrong ones, because technicals simply change at some point and go in another direction. They always do that at some point whenever they have been going in a direction for some time that the fundamentals aren’t going in. Ironically, the longer term you use in TA the better the predictive power. I recall seeing a discipline using the 20 and 50 week moving avg. which would only involve trading every few years. It actually resulted in very few bad signals.

But if you go out to the very long term, you can find very durable trends that you can use to guide you. The problem of course is that all of this takes a lot of patience. I suspect, more than anything else, the gambling/investing crossover has some merit here. Gambling is done to make money quickly or at least to have fun. The most successful long term investors tell us success comes with patience and discipline. Now there’s a conflict.

The most useful long term trend I know about is the two century pattern of secular market oscillation. The characteristics of the trend are that the length is fairly uniform, and the investment results over for the opposing cycles are hugely different. In other words you could reliably make money for years during one phase of the cycle and avoid most of the loss in the other phase of the cycle. But very few people have any interest in this phenomenon and it basically gets ignored.

The other very useful long term trend I know of is the fact that the variance in performance of a given security is due much more to the variance of its asset class than its individual characteristics. And the variance in performance of a given asset class is much more due to the variance in the economic fundaments than characteristic differences from other classes. So the greatest bang for the DD buck in the long run is to learn about the big things. This too is pretty unappealing. None of this is any fun. And it takes too long to get any results.

A knowledge of secular market history and characteristics would put a lot of beliefs and myths into a better perspective IMO. We live and work in a shorter time frame, and get our expectations conditioned accordingly. In the last secular bull market (1982-2000), the only cyclical bear market was the very brief one because of the 1987 crash. 17 plus years of bull market and a few months of bear market. Everybody was making money, especially the risk takers. But to a lesser extent, the same thing was true of the prior secular bull market (1949 – 1966) – 15 years of bull market and only 2 yrs. of bear market.

But the secular bear markets are a long tough grind, which have the added characteristic of being cruel because there is actually more bull market time in them than bear market time. In the intervening secular bear market (1966 – 1982), there was 6.7 yrs. of cyclical bear market but 9.7 years of cyclical bull market.

Maybe surprisingly, the compound annual growth rate for the bear years was almost the mirror image of the bull years (-21% vs. +20%). But as you might guess the result wasn’t a real gain because of how percentages work against you. Actually the overall CAGR was about +0.6%. But there’s nothing positive about 17 years of almost no nominal gain in the face of rapidly rising inflation. Real gain was distinctly negative.

Even in the current secular bear market (2000- present), there has been the 5.5 years I mentioned of cyclical bull market and “only” a bit under 4 years of cyclical bear market. Small consolation, and again cruel, as cyclical thinking still has investors with a shorter term outlook anticipating a fairly timely recovery of the lost ground.

A few years ago I posted in other places a number of times about my deep concern with the long term investing environment we were in. I took some real criticism for being so conservative and being satisfied with trying to earn no more than an 8% return while the domestic equity market was turning out a 14% gain.

I have nothing that isn’t obvious to suggest as a way to achieve good long term results.. But here goes. It really does take more to make up a loss than it took to make it the first time, so don’t lose it. The best investment advisors are the ones with the longest experience. Pay attention to the big picture, even study it. Of course the real world consists of an overwhelming number of market participants with a short term outlook, people trying to make money quickly, and most of the attention focused on bottom up thinking. This is after all a post from a contrarian investor.

joatmon

Low Price for Natural Gas May be Just What is Needed

2009-07-21T20:05:00.001-05:00

The low price for natural gas may be just what is needed to expand markets in the transportation and electric generation sector.

Instead of pouring printed money into uneconomic alternative energy, American political leaders could have Government Motors apply its efforts to building vehicles to run on the proven technology of clean natural gas. Utility executives can make the easy choice of simply running natural gas through generating capacity already in place rather than agonizing over the expense and political uncertainty of new coal and nuclear capacity.

While natural gas cannot meet all the transportation and electric generation needs entirely at once, there appears to be the capacity to supply all of the expected growth and more. Considering that $3 a gallon gasoline is equivalent to $24 a million btu natural gas there is ample room for the price of natural gas to rise and still be a bargain for consumers.

Gartman calls the end of the recession "official"

2009-07-19T16:55:00.002-05:00

THE DOLDRUMS HAVE STRUCK BUT THE
YEN AND THE US$ CONTINUE GENERALLY

Firstly, let us turn our attention to the chart at the
bottom left this page of weekly jobless claims. Clearly
now they have “spiked” lower. We were willing to
“give” the weakness in claims last week some room for
seasonal problems attendant to the closing of various
auto plants around the country and to the July 4th
holiday itself.

Obviously now, after another week
has passed and the weakness of the previous
week was followed hard upon by even greater
weakness… even greater “spikiness,” we’ve
concluded that this is indeed the sign we’ve
needed to officially call for the end of the current
recession… and so we are making that call.

The recession has ended. In light of the spike in
jobless claims AND in light of the recent upward
turn in the Ratio of the Coincident to Lagging
Indicators, we are making this statement as
clearly and as unequivocally as we are able to
make one. The recession is over. The worst of the
economic news shall all soon be behind us.

Make no mistake about this, however, it will be
months… even perhaps a year or more… before the
NBER meets and officially decides that the recession
has ended. Our long standing clients will recall that in
late ’04 when the Ratio turned down we said that
history mandated that we call for a recession sometime
in ’07 and we stood by that statement time and time
and time again, even to the point of being laughed at.

When jobless claims began to rise in mid-’07, we went
on record stating that the recession was only months
away… again to laughter. Finally, when Chinese
stocks first broke from their highs and when the US
stock market began to show clear signs of weakening
in late ’07, we said that the recession had begun…
always to derision by others.

Eventually, however, the NBER said that our views were the proper views and
that the US economy had indeed entered recession in
late ’07. They did not make that statement officially,
however, until only quite recently, more than a year
after the recession really had begun.

The recession is now over. But do not expect the
economic data to reflect that fact for many, many
months into the future. Unemployment is still going to
rise and rise dramatically. Indeed, we’ve every belief
that unemployment will not top out until it has touched at least
10% and we’ll not be surprised to see it “trade” to 11% or even
12% before its bull run is finished.

Too, we can expect retail sales to be very hard to
forecast for the next several months, for the consumer
remains distraught and concerned about his/her future.
In that environment, any propensity to ramp up spending
will swiftly meet head-on with continued rising propensities to save. Until the employment “stats” turn for the better, consumer spending stats will follow to
the downside. Such is the historic nature of things
economic, and despite the SEC’s, the NFA’s, the
NASD’s and FINRA’s admonitions that past performance is not indicative of future performance, in the economy the past is indeed prologue to the future.
In the future, given that it was housing and autos that
took us into recession, we’ll be brave and say that it
shall be housing and autos that take us out.

So long as the population here in the US continues to grow… and
it will unless Americans have chosen to give up sex,
which we doubt; and unless the Congress moves to
enact legislation that will clamp down upon
immigration, which it may do but which we fervently
hope it will not do; so go sit down and be quiet, Mr.
Buchanan and Mr. Dobbs! Please!!... we cannot live for
long with housing starts reported each month to be at
annualised rates of less than 0.7 million units. Too, the
average automobile in the US is growing very old and
the entire fleet is going to need replacement sooner
rather than later.

We have said before and we shall say
again that we’ll l soon have shortages of housing and
perhaps even shortages of autos. Again, that’s the
nature of things as the empiricist economists project
recent trends years into the future and forecast no
demand, while we know that all things economic ebb
and flow, moving from shortage to over-production and
to shortage again.

In this light we note that housing starts for June will be
reported this morning and they will be down, despite
our “call” above for the end of the recession. As our
clients will remember, starts rose smartly in May, but
we must see the May increase in its proper light: in
historical terms this supposedly 17% increase
from the April lows was a mere mote in the eye o
the downward trend in place since mid’06 when
starts topped-out just above 2.0 million
annualised units. 2.0 million annualised starts
for any protracted period of time is unsustainable.

That has been proven time and time and time again
over the past fifty years, and starts of less than 0.5
million are also unsustainable. We are there now.
Starts will turn for the better sooner rather than later.
The lows very probably were made in April, but the
new uptrend in starts will not be evident until such time
as we see something above 0.7 million annualised
units and the monthly data rushes upward through the
6 month moving average noted in the chart this page.

The consensus is looking for today’s starts figure to be
somewhere near .53 million annualised starts and we’ll
not argue with that “guess-timate” too loudly. We’d like
to see something above 0.6 million, but we won’t… not
until next month perhaps.

To this end, we’ll keep a much close watch in the
coming months on the building permits figures, for
permits always lead actual starts. Permits, however,
are horribly erratic because just because a permit is
issued does not mean that a “start” must start. The
consensus is looking for permits to be up a bit from the
May figure, calling for something close to 0.55 million
units. We’ve no reason to argue; we’ll await the actual
number however… it might be interesting.

Finally, regarding housing, the supply of new homes
for sale was recently reported at 10.2 months, down
from the record high of 12.4 months January, but far,
far above the 4 or 5 month supply that was the norm
back in the earlier part of this decade. This onerous
supply of new homes will be worked off before builders
shall have the confidence to begin building again…
and long before the nation’s banks will even consider
lending on building again!

This latter concern is probably the most important concern, for without
lending the entire industry is tainted. Banks will lend
when banks lend; it is that simple. Bankers will wait
until the other banker down the street has chosen to
act, and once the new process of lending to real estate
turns it will turn swiftly. It will be as if the present
problems were wholly forgotten, despite the promises
otherwise. Banking has always been thus; it shall
always be thus. Anyone want to bet otherwise?... We
thought not:

To make our final point, the NAHB homebuilder index
was reported out on Wednesday, rising 2 points to 17.
This index is like that of the ISM: it ranges between 0-
100, with 50 as the growth/no growth point. A figure
above 50 means the industry is strengthening; a
number below 50 means it is shrinking.

At 17 the industry is clearly still shrinking but up from 15 it means
that the shrinking is proceeding at lesser pace. This is
not then a “green shoot.” It is rather than the old shoots
are withering less quickly. “Green-ness” lies some way
into the future, but it will come. For the building
industry, at the moment, the line from “A Field of
Dreams” is turned around. Rather than “If you build it
[they] will come,” it is instead “If they come, it will be
built.”

Producing Fuel from Algae

2009-07-17T16:45:00.002-05:00

Last year I wrote that I felt Oil from Algae was the technology to watch.

Well Exxon is now investing $300 Million into research (Via SGI) in this technology. I consider Exxon to be "smart money".

SGI is harnessing photosynthetic microbes (i.e., algae) to produce a range of liquid fuels and chemicals directly from sunlight and carbon dioxide. Algae produce significantly higher amounts of biomass and oil as compared to terrestrial crops, can be grown on land that is not suitable for agriculture, can thrive in sewage or other types of waste water, and are efficient at capturing and recycling carbon dioxide, a major greenhouse gas.

Current methods to produce fuel from algae include processes that resemble farming. Algal cells are grown, harvested, and then bioprocessed to recover the lipids from within the cells. In contrast, in one of our solutions, SGI has engineered algal cells to secrete oil in a continuous manner through their cell walls, thus facilitating the production of algal fuels and chemicals in large-scale industrial operations. Our first product in this area is a biocrude to be used as a feedstock in refineries

Equality of Outcome vs Equality of Opportunity

2009-05-10T14:13:00.001-05:00

May 6, 2009
Nothing New Under the Sun
by Victor Davis Hanson
Pajamas Media

The Same Old Equality of Result

Rather than nitpick about Obama’s envisioned brave new world, I think it wiser to see it in the larger context of age-old divides over the nature of Western democratic and liberal society. Nothing that we have seen proposed since January 20 is novel; everything is merely the promise of the past outfitted with a new snazzier veneer of hope and change.

Take his domestic policies. What overarching philosophy seems reflected in raising taxes, borrowing trillions to spend trillions more on new entitlements, creating a new health care bureaucracy, cap-and-trade, allotting trillions more for education, and the expectation of the appointment of more liberal judges?

It’s old…

In a word, it is adherence to the idea of equality of result rather than an equality of opportunity, the age-old debate that goes back to the Greeks. From Aristotle’s Politics and Plato Laws, we learn of the original dilemma: a stable city-state of roughly similar property owners, who vote as equals, and fight as comrades in the phalanx, tragically, but inevitably, soon becomes tragically unequal.

Divide the land up equally to found the polis; give everyone an similarly-size plot (klêros); and then health, luck, brains, accident, strength, ambition, character, and a myriad of other factors, some understandable, some capricious, conspire to create inequality. I agree with Aristotle; I have seen it with families and communities in which equal inheritances soon led to radically different outcomes, as one sibling on rocky ground thrives, while another in deep loam starves; one town with abundant resources goes broke, while another without natural advantages thrives.
As Aristotle saw, some lose, some expand their original homesteads, and suddenly we have Hoi beltistoi and Hoi polloi — and the rallying cry that someone’s liberty to do as he pleases means that egalitarianism of the lowest common denominator becomes impossible.

American vs. French

The notion of freedom then butts up against equality, as if they are as often antithetical as symbiotic. (N.B.: note the French Revolutionary sloganeering of “fraternity” and “egalitarianism” versus the American Revolutionary emphasis on “Give me liberty, or give me death”, “Don’t Tread on Me!”, “All men are created equal” [by opportunity rather than by result]. And note Obama’s references to the French ideal.)

In response, the state has two choices to preserve its original ideal of equality (and we see elements of this further debate voiced in the Old Oligarch, Aristotle, Plato, Hobbes, Hume, etc, as well as in histories of the middle and late Roman Republic).

The Therapeutic

1. The state and culture at large can be coercive to ensure an equality of result — in the modern liberal world by high redistributive taxes, generous means-tested entitlements, inflationary monetary policies to diminish the power of capital (in the ancient world by forbidding the alienability of land, mandating the maximum size of estates, coining cheap bronze/silver coated money in vast amounts, redistribution of property, cancellation of debt, etc.).

Such efforts at commonality are what we are now witnessing with income tax hikes, $1.7 trillion dollar deficits, inflationary federal spending and borrowing, along with huge new entitlements. Its extreme form is the European Union, its extreme, extreme manifestations are the failed -isms and -ologies of the bloody 20th century where authoritarian elites broke the requisite eggs for the omelet of “for the people” and in service to “equality.”

The Tragic

2. Or instead of the therapeutic mode, we get the tragic acceptance of innate inequality combined with the notion of personal responsibility to care for one’s fellow citizen.

That is, in the American version of equality of opportunity, we accept some will always end up poor, some rich, some in-between due to factors both in, and beyond, our control. But rather than sacrifice liberty to use the coercive powers of the state to enforce equality, we set a foundation at the bottom, a safety net to ensure a minimum level of support for the poor, and laws at the top to prevent buccaneering and piratical behavior — in theory.

Then the tragic view accepts that some will be very wealthy, but assumes that the race for individual riches will, first, create greater prosperity for society at large (the much caricatured “trickle down”). And, two, a host of private mechanisms exists to channel individual bounty back for the general welfare: the status; and/or sense of right of giving to non-profits, charities, etc; the shame of living it up to an excessive degree; the patriotic call upon one to invest their riches in the public good; the informal practice of lending and giving to family and friends, etc. In other words, millions risk dying to leave temperate, naturally rich equality of result Mexico to enter the once equality of opportunity United States.

Been There, Done That

It seems to me that on three occasions during the last seventy-five years we have someone who really did believe in the therapeutic, equality of result — FDR, LBJ, and Jimmy Carter (Truman, JFK and Clinton proved to be centrists in comparison).
FDR had the rhetorical gifts and personal genius to implement such an agenda; LBJ and Carter tried, but were inept and poor messengers. And now we have a fourth avatar, who, given the current alignment of the planets, has a real chance to complete the FDR mandate — not in the dark days of the Great Depression replete with real want and starvation, but in a recession during the greatest age of affluence in the history of civilization — making both success and failure obsolete, and turning us into a sort of egalitarian polis much like Sweden or France.

I Don’t Owe You Any More

Turn on the radio: ads blare out how to renounce mortgage debt; get out of maxed out credit-cards; short the IRS; be eligible for a subsidized government loan, or new entitlement. Other ‘buy gold’ ads warn: plenty of danger, but no money in passbook accounts, stocks, real estate, as the debtor gains on the creditor, and capital earns little in comparison to protected salaries. To match a $100,000 government salary (as an upper-level bureaucrat), the despised capitalist, at a 2% interest payout on his stash, would need $5 million in accumulated cash: advantage bureaucrat.

Ironies Galore

Obama rather brilliantly counts on two great constituencies (other than the professional Ivy League technocracy whose responsibility is to figure out how to borrow and tax the money, lavish it on constituencies, and do rather well themselves as government overseers). One is the hyper-rich, the Kerrys, the Soroses, the Gateses, and their appendages in universities, government, foundations, and the media. These power players either make enough to be unconcerned with high taxation, or are so well connected politically (cf. the machinations of a Daschle, Dodd, Geithner, Rangel) that the coercive state rules simply do not apply.

Instead the hyper-wealthy receive a sort of psychic gratification in helping the ‘poor’, and romanticizing the underprivileged, thereby alleviating the guilt of being blessed, and at relatively small cost — and so they quite enthusiastically support the equality of result state.

Again, the poor present no challenge, offer no threat to the hyper — wealthy, but are thankful client recipients of ensured government largess. In contrast, the fellow elites have the necessary taste and education to satisfy the demands of aristocratic society.

And The Upper Middle Class?

But those in between, and especially those of the upper-middle class — the hardware store owner, the dentist, the paving contractor, the successful restaurateur, the real estate agent? These grasping who wish and aspire and may reach a mythical $250,000 salary some day (again, the threshold where one becomes the hated “they”), well now, they are not poor, need no government or private help, and offer no psychological alleviation of guilt to the elite. Romanticize a gardener or farm worker, or even clerk or teacher, but how does one mythologize a successful optometrist or insurance agent?

And yet they are not usually sophisticated in the snobbish sense, not opera-goers, not familiar with museums, not symphony buffs. Their children don’t necessarily attend Stanford or Harvard. In other words, they are near-to-wells, wannabes, without requisite culture, deserving of neither cultural awe and acceptance nor noblesse oblige.

A leftist elitist would always prefer the dubious (and now upscale, tax avoiding) huckster Al Sharpton, Tawana Brawley and all, to Sarah Palin, former mayor of Wasilla and Idaho University graduate. Joe the Plumber, the Cuban upper-middle class of Miami, the local talk show host, anyone who wants to get ahead, but shows so visibly the scars of the struggle to do so, lacks the refinement and taste of the more affluent, yet is in the crosshairs of the Obama revolution.

The only impediment to our new polis? There are not simply enough of these entrepreneurial dinosaurs to pay the taxes to feed the new $3.6 trillion annual beast. One can take all the income of the $250,000 “them”, and there won’t be enough to pay down the $9 trillion in new debt.

In short, Bush = lower taxes, more spending, and more debt; Clinton = higher taxes, more spending, and less debt; Obama = more taxes, more spending, and a lot more debt — and the same old dream that we can make everyone equal in the end — or else!

©2009 Victor Davis Hanson

The Key to Personal Freedom

2009-04-10T19:28:00.004-05:00

Due to rising unemployment and the sharp contraction in the economy, personal bankruptcies are hitting record levels, up more than 50% from a year ago.
There is another factor here too, of course. Millions overreached.

In some ways, this is understandable. It's natural to want to improve our circumstances, enjoy the best life has to offer and "go for the gusto."
Without moderation, however, our wants have no natural limits.

True, some of us have fewer desires than others. Yet conservative spenders don't necessarily lack ambition, imagination or even money. More often than not, they have spent years cultivating an attitude of restraint.

Freedom, after all, is not the absence of responsibility. It is the absence of restraints imposed by others. To be truly free, however, we must generally impose severe restraints on ourselves.

That often means delayed gratification... or settling for less... or simply doing without.

This is bitter medicine to the thousands of consumers who hang on to their material desires like caterpillars to a cabbage leaf. Especially when the media glamorizes the materialistic lifestyle, their neighbors - who may be two payments from the edge - are living high, and advertisers bombard them daily with subtle - and not-so-subtle - messages meant to stir their cravings.

There is a reliable defense, however. And it begins with your frame of mind.
If you or someone in your family suffers from the "urge to splurge," here are four steps to help reclaim your personal freedom - and, perhaps, your credit rating:

1. Recognize that we are wired to feel dissatisfied with our circumstances. It's in our genes. An early human who was content with what he had - who spent his days lazing on the African savannah admiring the clouds and thinking "ahh, life is good" - was far less likely to survive and reproduce than his neighbor who spent every waking moment trying to gain some advantage.

2. Understand the psychology of desire. We all tend to "miswant" - to want things we don't really need and won't appreciate once we acquire them. Remember how your last major purchase failed to "do it for you" and you're less likely to believe that this time will be any different.

3. Stop regarding life as an ongoing competition for social status. Opt out of the game - even if everyone else seems to be playing it - and you can't be controlled or disappointed by the opinions of others. Do work you enjoy, even if it's lower paying. Spend your time and money collecting great memories rather than more stuff.

4. Instead of focusing on what you want, try appreciating what you already have. Nothing cures your craving for the next bauble like the thought of losing your partner, your children, your health, or the things you already own.

In "On Desire: Why We Want What We Want," William B. Irvine argues that many of us lack "a sense that we are lucky to be living whatever life we happen to be living - that despite our circumstances, no key ingredient of happiness is missing. With this sense comes a diminished level of anxiety; we no longer need to obsess over the things - a new car, a bigger house, a firmer abdomen - that we mistakenly believe will bring lasting happiness if only we can obtain them. Most importantly, if we master desire, to the extent possible to do so, we will no longer daydream about living the life someone else is living; instead, we will embrace our own life and live it to the fullest."

Sounds simple enough. Yet we face a powerful headwind.
Modern culture and our own heritage have programmed us to want ceaselessly, spend liberally and compete for resources in order to keep up with the Joneses. Millions today suffer from so-called "status anxiety."

Their prison, however, is entirely self-imposed. Unbeknownst to most of them, the key is right between their ears.

Any of us can make the conscious choice to turn our backs on the consumptive lifestyle and live simply, happily and with dignity.
Idealistic? Perhaps. But then freedom often is.

Investing and the Use of Leverage

2009-02-16T19:38:00.000-05:00

Investing and the Use of Leverage

Many investors see the current bear market and economic slowdown as a reason to sell stocks. We believe the opposite action should be taken and that investors may think about using leverage to increase their potential net worth. Here’s why:

The current situation for real estate, bonds and equities

In Canada, the real estate market has been buoyant these past several years and has begun to slow as prices have levelled off. People who wanted to purchase a home have done so and they are probably content to stay in that residence for the next 10-15 years. Therefore, the real estate market is not as appealing an investment as it once was. We think that future returns should continue to be decent but are unlikely to mirror those of the past decade.

We believe that the bond market, perceived to be a safe haven from a collapsing U.S. economy, is now overbought. That’s because real returns (after tax and inflation) are now negative.

Currently, the 10-year Government of Canada bond yield is 3.4%. After 50% tax (interest income) and inflation (2.25%), the real return is –0.55%. This means that investor spending power against tax and inflation is falling, not growing.

As a result, we believe there’s more risk inherent in the bond market and that risk could increase if the U.S. Federal Reserve Board quickly raises rates once the financial sector stabilizes – an increase in interest rates causes bond prices to fall.

Equities, meanwhile, have been in a bear market (down 20% or more from the market peak last October) as the economy has entered a contraction phase of slower or even negative growth. But this economic phase should not last forever. We think there’s a tremendous opportunity for growth in the equity market.

The opportunity in equities

While stock market corrections are unsettling, investors must understand that four things remain static, even in a bear market:

1) Stock prices will fall in a bear market but the capital is not lost unless it is sold. It’s more important for investors to remember that they are making an investment in a business with an expectation of a payback on that capital over time, usually through a combination of dividend payments and price appreciation.

2) If the financial health of the company is solid, dividends should continue to be paid, giving investors income to buy more shares at cheaper prices, waiting for the day when the stock market recovers.

3) As dividends rise, stock prices ultimately follow.

Consider a stock that trades at $20, pays a $1 dividend and yields 5% ($1 divided by $20). If the dividend subsequently rises $0.20 a year for five years to $2:

At $20, the yield will be 10%. Given such a high yield, investors would be attracted to buy that asset. For the stock to return to its previous 5% yield, the share price would have to rise to $40, eventually earning a positive capital return for the investor in addition to their growing income stream.

4) A “slingshot effect” usually occurs and the market rebounds before investors recognize it. Just before the U.S. invaded Iraq, the stock market reached its last low on March 11, 2003. Nobody wanted to own equities then because the fear of war tends to wreak havoc on economies, causing markets to tumble.

It wasn’t until 2005 that many investors felt comfortable enough to buy equities again. Unfortunately, this was a huge missed opportunity. The “slingshot effect” in this case was a 45% stock market decline from 2000 to 2002 followed by a 50% rally from 2003 to 2005.

Those investors who stayed in equities and used the market decline as an opportunity to buy more stocks, earned better-than-average returns when the market recovered.

We believe that opportunity has re-surfaced in the stock market.

1) Some dividend yields are as high now as they have been in 35 years.

2) If there is another 20% drop in the market, price-earnings ratios would be at their lowest since 1975, a period that signalled the beginning of the greatest bull market of the 1980s and 1990s.

3) Globalization has given corporations a chance to sell into greater and more diverse markets, especially in emerging markets where per capita incomes have risen much faster than in the more mature G7 countries.

There are generally three stages in a bear market:

• The first - when just a few prudent investors recognize that, despite the prevailing bullishness, things won’t always be rosy,

• The second - when most investors recognize things are deteriorating, and

• The third - when everyone is convinced things can only get worse.

Certainly we’re well into the second of these three stages. There’s been lots of bad news and many write-offs. More and more people recognize the dangers inherent in things like innovation, leverage, derivatives, counterparty risk and mark-to-market accounting. And increasingly the problems seem unsolvable.

One of these days, though, we’ll reach the third stage, and the herd will give up on a market turnaround. And unless the financial world really does end, we’re likely to encounter the investment opportunities of a lifetime.

What is leverage?

Leverage is the action of taking the value of an asset or the steady income stream of a salary and borrowing against it. For example, individuals can take out an investment loan based on a percentage of the equity in their house - the difference between the appraised value of the house and any mortgage outstanding.

Another way is to borrow against your annual income. If you have consistent earnings, the bank will lend you a percentage of your annual income based on your ability to pay, net of all other expenses.

The purpose of leverage is to have more capital available to earn a greater return over time than if you just had a small amount of cash savings to invest.

It’s even more attractive because the government allows you to deduct a portion of the interest paid on your income tax return.

For example, if you own a house worth $600,000 and the mortgage has just been paid off, the bank may lend you up to 80% of the appraised value of the house in the form of an investment loan, or $480,000.

With the loan, you now have over $1 million of total assets that can grow and compound over time.

Given that interest rates continue to trend lower, the low cost of capital is making it attractive to use leverage through an investment loan.

For Canadian investors, the Bank of Canada is expected to keep pace with the Fed and reduce interest rates. This should lower the prime rate offered by the banks.

For example, if you take out a loan at 6%, the after-tax cost of capital would be roughly 3%. If that capital is invested in a stock that yields greater than 3% after-tax, the interest can be covered by the dividend income and the residual amount can grow through time and compounding to an amount greater than the loan.

What rules should be followed when using leverage?

While leverage helps capital grow over time, there is a downside. That occurs if the investment falls during the period of the loan. If the investment went to zero, there would be no capital growth but the debt would still have to be serviced.

That’s why it’s important to use some disciplined rules if you decide to use leverage:

1) Buy only dividend-paying stocks.

These companies should be more mature (large-cap, blue chip names) and have a proven track record of annually raising dividends.

Another benefit of dividend-paying stocks is that the yield should help set a floor as to how low the stock price may go, relative to current bond yields.

Non-dividend-paying stocks have no guarantees of growth. Unlike dividend payers, their share prices will be determined by their earnings. If the earnings disappear, the share prices will plummet.

2) The holding period should be 10-15 years.

Using leverage isn’t a get-rich-quick scheme. When buying stocks (with or without leverage), it’s important to let the companies grow through economic cycles.

This becomes clear if you leveraged at the worst possible time in the market, such as when the technology bubble burst in 2000. For anyone leveraging their portfolios in 2000-2001, a significant amount of time was needed for the investments to increase in value.

3) Borrow only what you can afford to pay monthly.

Do not extend yourself by borrowing too much. Decide first how much you can afford monthly to pay on the loan. The bank can then determine how much they will lend you.

4) If you currently have a mortgage, don’t leverage further.

Your mortgage is the highest after-tax cost you will face in your lifetime. It is more important to pay off this debt as soon as possible. Once the mortgage is paid, you can then decide if you wish to leverage the equity in the house in the form of an investment loan. A simple method is to borrow an amount that makes the monthly payments similar to your previous mortgage payments.

5) Retirees should not leverage.

During retirement, it is essential to be debt-free. Using leverage would be a dangerous strategy because there is no guaranteed income stream like a salary and bad investments could wipe out your retirement nest egg or worse, force you back to work.

6) The new Tax Free Savings Accounts – TFSAs may be an attractive use of leverage.

These accounts were introduced in the recent federal budget and should begin in 2009. The guidelines are that individuals may put $5,000 annually into this tax shelter. Because there is no tax liability and funds may be withdrawn without penalty, the after-tax cost of using leverage would be minimized.

For investors who can afford to leverage, who have the time-horizon to use it and who understand the inherent risks behind the strategy, we believe this may be an ideal time to do so.

An Investor Receiving Dividends Can Choose What to do With the Money

2009-02-16T18:13:00.001-05:00

Dividends - Asymmetric Information

January was a poor month for markets across the globe with most major indexes falling between 5 and 7 percent. The period from September to January has been one of the most volatile on record and the gloomy economic news continues unabated. However, during this period of gloom and turbulence no less than 15 of our holdings increased their dividends. Clearly some corporations are capable of coping with the current economic environment, and are optimistic about their long-term prospects. Dividend increases should not be taken lightly and are a powerful signal of management's view of the future.

Unless management is confident of a business's long-term prospects they would not commit to paying out cash. Based on the current news one could argue that conserving cash might be the way to go, but dividend increases speak to long-term prospects. This is a case of asymmetric information - management might know more about the business outlook than the market or investors. To quantify the impact of dividends on long-term returns consider that a full 2/3rds of long-term equity returns have come from dividends and dividend reinvestment. Look at this decade to date. Dividends paid to investors have added a full 10% to market returns since January 1, 2000 compared to simple price appreciation. Dividends may seem small, but over long periods they add up to a significant amount.

Dividends may seem quaint in this day and age. Any finance textbook demonstrates that an investor should be indifferent between receiving dividends and having a corporation buy back its own stock. Here is how this equivalency is supposed to work.

Companies buy back stock thereby reducing the number of shares outstanding. As a direct result, earnings per share increase, and all else equal (meaning the p/e ratio remains the same), the price of the stock goes up and presto, there is your dividend. If an investor actually wants cash, then they just sell a portion of their holdings.

But if the last few months have shown us anything it is that what is supposed to work in theory does not always work in practice. We have a couple of issues with this view of returning money to shareholders through stock buybacks. First, is one of control.

An investor receiving dividends can choose what to do with the money; save it, reinvest in other companies or buy more of the corporations stock. But make no mistake about it- the control is in the hands of the investor. In contrast share buybacks are controlled by the corporation. They are not scheduled to occur on a quarterly basis and can be terminated at any time.

In fact, most announced buybacks are never completed. Contrast the ease with which buybacks can be announced, delayed or terminated with cash dividends. To suspend a cash dividend is the last thing management will consider and can sometimes indicate a serious problem at the corporation.

Second, dividends impose a capital discipline on corporations. To maintain a dividend commitment a corporation must remain focused on cash generation. Moreover, it curtails the potential for cash to be put in marginal or risky ventures.

Dividends represent a commitment to long-term shareholders. Finally, dividends encourage and reward long-term ownership. The concept of owning a company is all but lost on many investors. Indeed as the average mutual fund portfolio turnover reaches 120% per year (average holding time of 10 months) portfolio managers are just speculating on the price rather than buying solid businesses as a long-term investment. It is not surprising that turnover is one of the best predictors of performance - the higher the turnover, the lower the performance.

Dividends are an important driver of investment performance and increasing dividends are a powerful signal about future prospects. Through your Toron portfolio you are an investor in businesses for the long term and not a speculator about where the next quarter's price will be. This discipline will help grow your portfolio over the long haul.

Arthur Heinmaa, CFA Managing Partner

How They Took Down the Price of Oil

2009-02-12T23:50:00.000-05:00

I figured out how they took down oil.....it went like this.....

1) They wanted to desperately take down the price of light sweet crude because its a bench mark for all pricing

2) There was (is) a shortage of light oil but a glut of heavy

3) so they pump light sweet to cushing from the SPR and replace it with heavy sour

4) The EIA week reports no change in SPR levels but Cushing is full of light sweet

5) Market concludes there is a glut of light sweet and they are right but for the wrong reasons

6) Don Coxe was right about the deliberate take down in oil

7) I just figured out how they did it

see

http://news.goldseek.com/GoldSeek/1234386901.php

I am a genius (but a broke one)

Ten Surprises for 2009

2009-01-04T20:37:00.002-05:00

These are my Ten Surprises for 2009

1) Oil Trades above $140 per Barrell
2) Oil Trades below $30 per Barrell
3) GM merges with Chrysler
4) Italy leaves the Euro and returns to the Lira
5) British Pound trades Below $1 US
6) Natural Gas Price trades below $4 per MMBTU
7) Iran's government Falls
8) Cuba elects its first President as a democracy
9) The Canadian Dollar reaches parity with the US$
10)All major stock Indexes in North America break the 2008 lows

Don Coxe Indicators

2008-12-30T17:56:00.000-05:00

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

The End of the Finance Economy - I Hope

2008-11-29T19:24:00.004-05:00

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.

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

2008-09-27T20:40:00.004-05:00

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."

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

2008-08-17T22:04:00.003-05:00

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.

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

2008-08-02T14:21:00.003-05:00

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.

UBS Analyst: Energy Trusts Offer Exceptional Value

2008-07-19T09:43:00.000-05:00

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!”

Using Oil & Gas Trusts to Beat Inflation

2008-07-15T20:56:00.003-05:00

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.

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

2008-07-13T11:38:00.001-05:00

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.

Oil from Algae

2008-06-17T15:08:00.003-05:00

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.

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

2008-04-18T18:51:00.005-05:00

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.

Now is the Time to get Into Stocks

2008-04-11T19:24:00.001-05:00

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.

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

2008-03-23T11:43:00.001-05:00

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.

Bought 2,000 Units of Paramount Energy Trust Today

2008-03-17T16:41:00.001-05:00

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

Top Pick Canroys Based on Discount to Net Asset Value

2008-03-16T14:42:00.004-05:00

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.

Neglecting Dividend-Paying Companies Hurts Investor Returns

2008-03-10T10:27:00.001-05:00

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.

Doom and Gloom

2008-03-08T14:39:00.003-05:00

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.

Natural Gas Weighted Income Trusts

2008-03-03T20:52:00.004-05:00

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.

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

2008-02-29T21:55:00.007-05:00

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).

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

2008-02-12T19:27:00.000-05:00

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.

Raymond James Forecast for Lower Natural Gas Prices

2008-02-11T20:01:00.000-05:00

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

2008-02-11T16:21:00.000-05:00

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.

Real Estate is no Longer a Sure Thing

2008-02-05T14:52:00.000-05:00

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.

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

2008-01-30T21:13:00.000-05:00

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.

2008-01-26T16:45:00.000-05:00

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.

Finacial Sense Newshour Transcript on Investing for Income

2008-01-18T11:10:00.000-05:00

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.

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

2008-01-17T19:23:00.000-05:00

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.

22 Startling Predictions for 2008 and Beyond

2008-01-14T19:49:00.000-05:00

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.

There Is A Real Shortage Of Agricultural Stocks

2007-12-31T11:45:00.000-05:00

To quote Don Coxe from his December 28, 2007 Conference Call;

"We have a shortage. There's more of a shortage of agricultural stocks than there is of soy beans. So this is a good time for investors in this group but it's always dangerous when you've had the kind of runups that these have had to say, "Well next year is still going to be a good year." But if you think back to what happened when oil came off $22 and started its way up. When you got to $50 oil there were fewer people on board to say that we could have a run from there.

So remember that adjusted for inflation these grain prices are still at trivial levels. What people have got to adjust to is the idea that a bigger and bigger part of total consumer expenditures in the world are going to have to go on food and that's being resisted all over the place. You had the elections in Venezuela and Russia where they froze food prices during the election campaign and then they're surprised when there's scarcity in the stores and that's one of the things that beat Chavez. He thought he could by just extending the imperial arm continue to deliver cheap food to the voters and the urban mob. He got fooled.

So the food story is one of genuine scarcity of food and of stocks but you're right. The biggest scarcity is in the stocks themselves."

I have been searching for agricultural stocks and its been difficult to find anything that has not all-ready doubled or tripled.

I have found one income stock called Cervus LP. It trades on the Canadian Venture Exchange with the symbol CVL.UN-X. It trades at $16.50 and pays a $0.09 monthly ($1.08/year) distribution (6.6% yield). This company owns some John Deere dealerships in Western Canada as well as some construction equipment dealerships. It to has a big run up and is very illiquid. You can find out more by clicking here.

You can read a transcript of Don Coxe's December 28, 2007 Conference Call by Clicking here.

2008 Investment Recommendations

2007-12-30T12:10:00.000-05:00

BASIC POINTS INVESTMENT RECOMMENDATIONS with my comments in italics at the end of each point.

1. Remain heavily underweight banks, particularly investment banks that have displayed monumental stupidity. Do not assume that a change at the top will automatically convert them into temples of wisdom, (unless it is accompanied by demands for the departing to repay bonuses based on bets that turned out disastrously). Better to assume that, like subprime-based CDOs, there are layers of rot that can make the entire product dangerous to your financial health.

Stay away from Canadian Banks for now. Especially the CIBC.

2. Remain overweight Emerging Markets, emphasizing those that are oil, gas,and/or food exporters.

I do not like investing in emerging markets.

3. Soaring food costs threaten stability for some Third World economies. We have been ardently endorsing India since we returned from our leave of absence a year ago. We are now more cautious, because a weak monsoon could be politically and economically destabilizing at a time of $4 corn and $10 wheat.

Stay away from Indian stocks or ETFs for now.

4. Remain heavily overweight gold—both stocks and the ETF. Gold is almost as good a protection against banking problems as SKF—the UltraShort Financials ETF—a security which may not be a suitable investment in some portfolios.

SKF-N is interesting or you can try HFD-T in Canada.

5. We continue to believe that the Agricultural stocks are the pre-eminent investment class of our time. Farm incomes are rising rapidly, and, in the US, farms and farm land are the real estate assets that are rising in value and are virtually immune to foreclosures. That means the leading Ag companies have great pricing power and minimal credit problems. We now hear suggestions that because food inflation has finally made it to the cover of The Economist, it is time to start moving toward the exits. Not so: We think that fine cover story could be the atonement—At Last!—for
the magazine’s famous 1999 cover: $5 Oil.

Look at CVL.UN-X

6. Remain overweight oil and gas producers, including the Alberta oil sands producing companies. As disappointed as we are with the new royalty schemes in that province, Alberta certainly remains more attractive than Nigeria or Angola—and much more attractive than Russia, Kazakhstan, or Venezuela.

Recommend COS.UN or how about HTE.UN?

7. We think it is time to begin accumulating the refiners that are equipped to handle heavy high-sulfur crude. The collapse of the crack spread has savaged refiners’ earnings, but that will eventually rebound. The Saudis have virtually turned out the Light, and less and less of the oil that the Gulf states will be lifting will be of the most desirable grades.

This makes Harvest Energy HTE.UN very interesting

8. Retain the base metals stocks that have long-life unhedged reserves in secure areas. Even if there is a global recession caused by global collapses of subprime paper and LBO loans, it will not be deep enough to drive base metal prices back to 2004 levels—but would be worrisome enough to push further mine development even farther into the future.

Take a look at MMP.UN-T

9. When borrowing, borrow where possible in dollars. When investing, invest where possible in other currencies.

Good idea.

10. Stagflation is a bad backdrop for bonds—and for non-commodity stocks. The central bankers could have headed it off had Wall Street behaved with a modicum of morality, but the Fed and its brethren are forced into sustained reflation because of the global solvency crisis. Corporate earnings for most sectors will not meet current optimistic Street forecasts, and rising inflation will reduce the market’s P/E.

Stay away from market index funds for now.

Enervest Diversified Income Exchange Traded Fund (EIT.UN-T) Is Trading At A 20% Discount to Net Asset Value

2007-12-29T16:26:00.000-05:00

Enervest Diversified Income Exchange Traded Fund (EIT.UN-T) Is Trading At A 20% Discount to Net Asset Value.

At the close of trading on December 27, 2007 the units of this exchange trade fund closed at $5.23. Meanwhile its Net Asset Value (NAV) is $6.61. This is a discount of $1.38 which translates to a discount of 20.7%. This is extraordinary and unprecedented.

The fund is paying out $0.07 per month distribution which translates to a yield of 16.1%.

I think this fund should trade at a discount of 10% so I expect a 10% pop in the unit price unless the NAV collapses.

In interest of full disclosure I still own 15,000 units and I suggest you conduct your own due diligence. Click here to learn more.

Agricultural Stocks Are The Pre-eminent Investment Class Of Our Time

2007-12-28T18:43:00.000-05:00

Don Coxe continues to believe that the Agricultural stocks are the pre-eminent investment class of our time. Farm incomes are rising rapidly, and, in the US, farms and farm land are the real estate assets that are rising in value and are virtually immune to foreclosures.

That means the leading Agricultural companies have great pricing power and minimal credit problems. We now hear suggestions that because food inflation has finally made it to the cover of The Economist, it is time to start moving toward the exits.

Not so fast.

In Don's December 19, 2007 Basic Points newsletter he makes an elegant argument of where we have been and where we are going. Don has been recommending Agricultural stocks for the last year and those that have listened to his advice have all-ready made some nice gains.

I will be emailing a copy of Don's December 19, 2007 Basic Points newsletter (this is only issued to Clients of Nesbitt Burns) on December 29, 2007. So if you haven't signed up for our free service then please do as soon as possible.

Harvest Energy Trust Recommended at These Levels

2007-12-20T18:01:00.000-05:00

Harvest Energy Trust: Kicking Out Healthy Distribution
by Peter Everds

Harvest Energy Trust (HTE) is a Canadian Royalty Trust with upstream and downstream operations.

As many of you may know, HTE cut their distribution recently and their units, which were trading at $28.96 in early November, got a big haircut and are now trading around $20. At current prices, the trust is yielding 17.5%.

Right now the market is not acknowledging the bottom line cash flow increases because of higher crude and NG pricing, not to mention the increase in the crack spread.

Even in Canadian dollar terms, the increases in natural gas [NG] and crude futures [CL] are significant. On November 20th, Don Vialoux estimated that the price of crude in Canadian dollars had gained roughly 28% from the low in August. He also estimated that natural gas in Canadian dollars had gained 46% from the beginning of September.

We have seen a number of Investment Banks, including Merrill Lynch (MER) and Goldman Sachs (GS), start to revise their CL price decks up in the last couple of weeks and this will help HTE's estimates. Moreover, the price decks are being upped by pretty hefty amounts. FBR (FBR) just upped their 2008 CL price $20, from $60 to $80 per barrel.

The kicker for HTE is the refinery. After 2 months of maintenance the refinery is running at full capacity. The 312 crack spread has been trending higher, more than doubling in the last 8 weeks. It has gone from a low of around $7 to the current price of $14.61 At one point this year the refinery was contributing roughly 55% of cash flow. The refinery will start contributing substantially to the bottom line as seasonal pressures lead to an increased crack spread.

We are starting to get seasonal upgrades in refiners: For instance: "Bank of America raises Refiners to Buy from Neutral; Raises 2008 refining margin outlook"; Valero Energy (VLO) raised to Buy from Neutral; Price Target raised to $80 from $68; Western Refining (WNR) raised to Buy from Neutral; Pri ce Target raised to $38 from $35

The 3Q payout ratio [POR] was 86%. Under the reduced distribution, the POR would have been roughly 70%. This is pretty reasonable considering how bad the quarter was. 4th quarter POR, with the refinery limited for 2 months, should still be in the 70s. In the "if everything goes swell category", 2008 2nd quarter POR could be in the 50s, compared to 2007's 2nd quarter POR of 63%.

Technically, HTE is at 3 year lows and the RSI and MACD are indicating HTE is oversold (surprise). There is a nice little gap in the 25.5 area. The chart is very similar to HTE's chart last year including the November gap down. Hopefully, the results will be the same with the strong rally though the first half of the year.

Insiders have bought 36,000 units since the mid-November announcement of the distribution cut. If you want a refiner that is kicking out a healthy distribution, Harvest might be worth taking a look a

Income Generating Securities Do Well In An Interest Rate Cutting Environment

2007-12-04T18:21:00.000-05:00

Tha Bank of Canada reduced interest rates by 25 basis points today and the US Federal Reserve is expected to do the same next week.

The US Federal Reserve and the Bank of Canada are expected to continue to lower interest rates in an effort to prevent a recession.

When that happens, investors generally turn to dividend-paying stocks to boost their return.

If history is any guide than stocks in the utilities sector, dividend paying stocks and income trusts will trend higher over the coming months.

REIT Review Sent Out to Our Email List Subscribers

2007-11-23T23:15:00.000-05:00

Members of our mailing list were sent a 31 page REIT review. If you are not a member of our mailing list then you cannot have access to these reports.

I urge you to sign up at www.investingforincome.com

There is no obligation and we do not sell or rent our mailing list to others.

If you signed up in the past but have not recieved any emails then I suggest you resubmit your address because our emailing provider automatically removes all emails that have had soft or hard bounces in past mailings.

SDT.UN Trading at a 14% Discount to Net Asset Value

2007-11-23T08:48:00.000-05:00

Sentry Select just published the Net Asset Value (NAV) of SDT.UN as of November 22, 2007 of $4.71. It closed at $4.04 resulting in a $0.67 discount to NAV. This translates to a 14.2% discount to NAV.

It appears that the diversified exchange traded funds move towards a 15% discount NAV when the market is weak and uncertain.

Investors can't go wrong by purchasing these funds at such a deep discounts but you must be willing to hang on until the price recovers and I recommend trading this particular fund when it gets close to NAV or they announce share offerings. This particular fund is not a buy and hold type investment in my opinion.

Collapse of SDT.UN Market Price

2007-11-22T13:25:00.000-05:00

Sentry Select Diversified income exchange traded fund has experienced a severe market price collapse. It appears to me that a lot of the new unit holders from the share exchange offering are jumpimg out of their positions.

The question on everyone's mind is why hasn't Sentry conducted a large buy back to support the unit price.

I can't answer this question but I can tell you the following;

Approximate Number of Units Outstanding as of Oct 1, 2007; 200,000,000

Approximate Nmber of Units Outstanding as of Oct 31, 2007; 265,000,000

Approximate number of units cancelled due to share purchase on the open market as of Oct 31, 2007; 6,500,000

Approximate number of units available for cancellation in the 4th quarter (5% of outstanding units at begining of qtr); 10,000,000

Approximate number of shares available for cancellation in Q4; 3,500,000

Approximate Number of Units held by Manager Sandy McIntyre; 365,000

Net Asset Value as of Nov 15, 2007 (even less now); $4.82

Market Value as of Nov 21, 2007 (even less today); $4.00

Discount to Net Asset Value; 17%

Annualized Distribution per Unit; $0.54

Yield on Market Value; 13.5%

Yield on Net Asset Value; 11.2%

It appears to me that SDT.UN will not repurchase units to support the unit price until later on this quarter. Until then if you want to sell you will need to accept a huge discount to Net Asset Value.

I am holding on to my remaining position until the units trade within 5% of Net Asset Value. At that point I will probably exit my position.

Please perform your own due diligence.

Inflation or Deflation? - Canada Will Begin to Experience Deflation

2007-11-18T17:10:00.000-05:00

Although inflation concerns are proving to be a concern due to rising commodity prices, other sectors of the economy such as retail prices and imported goods rasises the possiblity of a deflation scare are climbing in Canada.

Goods prices are already firmly in deflationary territory. Service sector inflation (outside of housing) failed to overly inflate during the boom, and is likely to lower in eastern Canada with the economy growing at a sub-par pace. Retailers are in price discounting mode. Inflation is not going to be a constraint on the Bank of Canada, and I expect rate cuts ahead, especially with the credit crunch continuing to roll on in the US.

As a matter of fact the bifurcating economy will result in the deflationary pressue of the non-commodity producing sector to overtake the inflationary pressure from the commodity sector resulting in a defaltionary bias.

This should provide a lift to interest sensitive securities over the coming months. I especially feel that Canadian REITS will be one of the first beneficiaries of this trend.

Transcript of French President Nicolas Sarkozy's Address to US Congress on November 7, 2007

2007-11-16T20:31:00.000-05:00

This posting is a little different than most of my postings. However, there is a major political and economic re-alignment taking place in the world today which is under the radar of most media. This has long term implications for our investments which I feel are very positive.

In a nutshell, the entire Eurozone (Eastern and Western Europe) is re-aligning themselves with the USA. Most of the media carries stories of world wide hatred of the USA and the latest American credit mess will be the downfall of the USA.

However, the exact opposite is true. I have written that we should never underestimate the Americans and they will get themselves out of this econmic credit mess and the US$ will eventualy recover.

To prove my point I am publishing the transcript of French President Nicolas Sarkozy's address to US Congress on November 7, 2007. France, under Chirac led the Eurozone and worldwide anti-american crusade. This speech is so pro-american that it shows the French have made a 180 degree turn on their foreign policy.

Please take a moment to read this transcript...you will be surpsised.

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November 07, 2007
Renewing the French-American Alliance
By Nicolas Sarkozy

Madam Speaker, Mr. President, Ladies and Gentlemen of the United States Congress, Ladies and Gentlemen,

The state of our friendship and our alliance is strong.

Friendship, first and foremost, means being true to one's friends. Since the United States first appeared on the world scene, the loyalty between the French and American people has never failed. And far from being weakened by the vicissitudes of History, it has never ceased growing stronger.

Friends may have differences; they may have disagreements; they may have disputes.

But in times of difficulty, in times of hardship, friends stand together, side by side; they support each other; and help one another.

In times of difficulty, in times of hardship, America and France have always stood side by side, supported one another, helped one another, fought for each other's freedom.

The United States and France remain true to the memory of their common history, true to the blood spilled by their children in common battles. But they are not true merely to the memory of what they accomplished together in the past. They remain true, first and foremost, to the same ideal, the same principles, the same values that have always united them.

The deliberations of your Congress are conducted under the double gaze of Washington and Lafayette. Lafayette, whose 250th birthday we are celebrating this year and who was the first foreign dignitary, in 1824, to address a joint session of Congress. What was it that brought these two men--so far apart in age and background--together, if not their faith in common values, the heritage of the Enlightenment, the same love for freedom and justice?

Upon first meeting Washington, Lafayette told him: "I have come here to learn, not to teach." It was this new spirit and youth of the Old World seeking out the wisdom of the New World that opened a new era for all of humanity.

From the very beginning, the American dream meant putting into practice the dreams of the Old World.

From the very beginning, the American dream meant proving to all mankind that freedom, justice, human rights and democracy were no utopia but were rather the most realistic policy there is and the most likely to improve the fate of each and every person.

America did not tell the millions of men and women who came from every country in the world and who--with their hands, their intelligence and their heart--built the greatest nation in the world: "Come, and everything will be given to you." She said: "Come, and the only limits to what you'll be able to achieve will be your own courage and your own talent." America embodies this extraordinary ability to grant each and every person a second chance.

Here, both the humblest and most illustrious citizens alike know that nothing is owed to them and that everything has to be earned. That's what constitutes the moral value of America. America did not teach men the idea of freedom; she taught them how to practice it. And she fought for this freedom whenever she felt it to be threatened somewhere in the world. It was by watching America grow that men and women understood that freedom was possible.

What made America great was her ability to transform her own dream into hope for all mankind.

Ladies and Gentlemen,

The men and women of my generation heard their grandparents talk about how in 1917, America saved France at a time when it had reached the final limits of its strength, which it had exhausted in the most absurd and bloodiest of wars.

The men and women of my generation heard their parents talk about how in 1944, America returned to free Europe from the horrifying tyranny that threatened to enslave it.

Fathers took their sons to see the vast cemeteries where, under thousands of white crosses so far from home, thousands of young American soldiers lay who had fallen not to defend their own freedom but the freedom of all others, not to defend their own families, their own homeland, but to defend humanity as a whole.

Fathers took their sons to the beaches where the young men of America had so heroically landed. They read them the admirable letters of farewell that those 20-year-old soldiers had written to their families before the battle to tell them: "We don't consider ourselves heroes. We want this war to be over. But however much dread we may feel, you can count on us." Before they landed, Eisenhower told them: "The eyes of the world are upon you. The hopes and prayers of liberty-loving people everywhere march with you."

And as they listened to their fathers, watched movies, read history books and the letters of soldiers who died on the beaches of Normandy and Provence, as they visited the cemeteries where the star-spangled banner flies, the children of my generation understood that these young Americans, 20 years old, were true heroes to whom they owed the fact that they were free people and not slaves. France will never forget the sacrifice of your children.

To those 20-year-old heroes who gave us everything, to the families of those who never returned, to the children who mourned fathers they barely got a chance to know, I want to express France's eternal gratitude.

On behalf of my generation, which did not experience war but knows how much it owes to their courage and their sacrifice; on behalf of our children, who must never forget; to all the veterans who are here today and, notably the seven I had the honor to decorate yesterday evening, one of whom, Senator Inouye, belongs to your Congress, I want to express the deep, sincere gratitude of the French people. I want to tell you that whenever an American soldier falls somewhere in the world, I think of what the American army did for France. I think of them and I am sad, as one is sad to lose a member of one's family.

Ladies and Gentlemen,

The men and women of my generation remember the Marshall Plan that allowed their fathers to rebuild a devastated Europe. They remember the Cold War, during which America again stood as the bulwark of the Free World against the threat of new tyranny.

I remember the Berlin crisis and Kennedy who unhesitatingly risked engaging the United States in the most destructive of wars so that Europe could preserve the freedom for which the American people had already sacrificed so much. No one has the right to forget. Forgetting, for a person of my generation, would be tantamount to self-denial.

But my generation did not love America only because she had defended freedom. We also loved her because for us, she embodied what was most audacious about the human adventure; for us, she embodied the spirit of conquest. We loved America because for us, America was a new frontier that was continuously pushed back--a constantly renewed challenge to the inventiveness of the human spirit.

My generation shared all the American dreams. Our imaginations were fueled by the winning of the West and Hollywood. By Elvis Presley, Duke Ellington, Hemingway. By John Wayne, Charlton Heston, Marilyn Monroe, Rita Hayworth. And by Armstrong, Aldrin and Collins, fulfilling mankind's oldest dream.

What was so extraordinary for us was that through her literature, her cinema and her music, America always seemed to emerge from adversity even greater and stronger; that instead of causing America to doubt herself, such ordeals only strengthened her belief in her values.

What makes America strong is the strength of this ideal that is shared by all Americans and by all those who love her because they love freedom.

America's strength is not only a material strength, it is first and foremost a spiritual and moral strength. No one expressed this better than a black pastor who asked just one thing of America: that she be true to the ideal in whose name he--the grandson of a slave--felt so deeply American. His name was Martin Luther King. He made America a universal role model.

The world still remembers his words--words of love, dignity and justice. America heard those words and America changed. And the men and women who had doubted America because they no longer recognized her began loving her again.

Fundamentally, what are those who love America asking of her, if not to remain forever true to her founding values?

Ladies and Gentlemen,

Today as in the past, as we stand at the beginning of the 21st century, it is together that we must fight to defend and promote the values and ideals of freedom and democracy that men such as Washington and Lafayette invented together.

Together we must fight against terrorism. On September 11, 2001, all of France--petrified with horror--rallied to the side of the American people. The front-page headline of one of our major dailies read: "We are all American." And on that day, when you were mourning for so many dead, never had America appeared to us as so great, so dignified, so strong. The terrorists had thought they would weaken you. They made you greater. The entire world felt admiration for the courage of the American people. And from day one, France decided to participate shoulder to shoulder with you in the war in Afghanistan. Let me tell you solemnly today: France will remain engaged in Afghanistan as long as it takes, because what's at stake in that country is the future of our values and that of the Atlantic Alliance. For me, failure is not an option. Terrorism will not win because democracies are not weak, because we are not afraid of this barbarism. America can count on France.

Together we must fight against proliferation. Success in Libya and progress under way in North Korea shows that nuclear proliferation is not inevitable. Let me say it here before all of you: The prospect of an Iran armed with nuclear weapons is unacceptable. The Iranian people is a great people. It deserves better than the increased sanctions and growing isolation to which its leaders condemn it. Iran must be convinced to choose cooperation, dialogue and openness. No one must doubt our determination.

Together we must help the people of the Middle East find the path of peace and security. To the Israeli and Palestinian leaders I say this: Don't hesitate! Risk peace! And do it now! The status quo hides even greater dangers: that of delivering Palestinian society as a whole to the extremists that contest Israel's existence; that of playing into the hands of radical regimes that are exploiting the deadlock in the conflict to destabilize the region; that of fueling the propaganda of terrorists who want to set Islam against the West. France wants security for Israel and a State for the Palestinians.

Together we must help the Lebanese people affirm their independence, their sovereignty, their freedom, their democracy. What Lebanon needs today is a broad-based president elected according to the established schedule and in strict respect of the Constitution. France stands engaged alongside all the Lebanese. It will not accept attempts to subjugate the Lebanese people.

Ladies and Gentlemen,

America feels it has the vocation to inspire the world. Because she is the most powerful country in the world. Because, for more than two centuries, she has striven to uphold the ideals of democracy and freedom. But this stated responsibility comes with duties, the first of which is setting an example.

Those who love this nation which, more than any other, has demonstrated the virtues of free enterprise expect America to be the first to denounce the abuses and excesses of a financial capitalism that sets too great a store on speculation. They expect her to commit fully to the establishment of the necessary rules and safeguards. The America I love is the one that encourages entrepreneurs, not speculators.

Those who admire the nation that has built the world's greatest economy and has never ceased trying to persuade the world of the advantages of free trade expect her to be the first to promote fair exchange rates. The yuan is already everyone's problem. The dollar cannot remain solely the problem of others. If we're not careful, monetary disarray could morph into economic war. We would all be its victims.

Those who love the country of wide open spaces, national parks and nature reserves expect America to stand alongside Europe in leading the fight against global warming that threatens the destruction of our planet. I know that each day, in their cities and states, the American people are more aware of the stakes and determined to act. This essential fight for the future of humanity must be all of America's fight.

Those who have not forgotten that it was the United States that, at the end of the Second World War, raised hopes for a new world order are asking America to take the lead in the necessary reforms of the UN, the IMF, the World Bank and the G8. Our globalized world must be organized for the 21st century, not for the last century. The emerging countries we need for global equilibrium must be given their rightful place.

Ladies and Gentlemen,

Allow me to express one last conviction: Trust Europe.

In this unstable, dangerous world, the United States of America needs a strong, determined Europe. With the simplified treaty I proposed to our partners, the European Union is about to emerge from 10 years of discussions on its institutions and 10 years of paralysis. Soon it will have a stable president and a more powerful High Representative for foreign and security policy, and it must now reactivate the construction of its military capacities.

The ambition I am proposing to our partners is based on a simple observation: There are more crises than there are capacities to face them. NATO cannot be everywhere. The EU must be able to act, as it did in the Balkans and in the Congo, and as it will tomorrow on the border of Sudan and Chad. For that the Europeans must step up their efforts.

My approach is purely pragmatic. Having learned from history, I want the Europeans, in the years to come, to have the means to shoulder a growing share of their defense. Who could blame the United States for ensuring its own security? No one. Who could blame me for wanting Europe to ensure more of its own security? No one. All of our Allies, beginning with the United States, with whom we most often share the same interests and the same adversaries, have a strategic interest in a Europe that can assert itself as a strong, credible security partner.

At the same time, I want to affirm my attachment to NATO. I say it here before this Congress: The more successful we are in the establishment of a European Defense, the more France will be resolved to resume its full role in NATO.

I would like France, a founding member of our Alliance and already one of its largest contributors, to assume its full role in the effort to renew NATO's instruments and means of action and, in this context, to allow its relations with the Alliance to evolve.

This is no time for theological quarrels but for pragmatic responses to make our security tools more effective and operational in the face of crises. The EU and NATO must march hand in hand.

Ladies and Gentlemen,

I want to be your friend, your ally and your partner. But a friend who stands on his own two feet. An independent ally. A free partner.

France must be stronger. I am determined to carry through with the reforms that my country has put off for all too long. I will not turn back, because France has turned back for all too long. My country has enormous assets. While respecting its unique identity, I want to put it into a position to win all the battles of globalization. I passionately love France. I am lucid about the work that remains to be accomplished.

It is this ambitious France that I have come to present to you today. A France that comes out to meet America to renew the pact of friendship and the alliance that Washington and Lafayette sealed in Yorktown.

Together let us be worthy of their example, let us be equal to their ambition, let us be true to their memories!

Long live the United States of America!

Vive la France!
Long live French-American friendship!

Nicolas Sarkozy is the President of France.

Is It Time to Get Out of the Market? Not Yet!

2007-11-15T20:38:00.000-05:00

Once in awhile I like to republish an article that I have read that seems very relevant. This past year has been troubling as my income from investments has been eaten up by capital losses. I have been seriously rethinking my strategy because of all the uncertainty in the market.

I subscribe to Max Whitmores newsletters. I just received this news letter and its not yet published on his web site. I am watching his key line chart. If the markets violate his chart I think we may have to move into cash.

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Whitmore: It’s A Confidence Thing

I have been through a lot of ups and downs in my 40 years as a broker-money-manager-analyst-columnist and they are always the same in one crucial respect. There comes a moment when one side or the other — the bulls or the bears — blink.

Call it what you will, this business is a business of backbone and beliefs. The beliefs that one carries down deep in his heart of hearts about anything is the true summing up of an individual’s outlook on life and selection of values and ethics to live by. But the even greater part of that heart is the backbone. Call it courage, guts, or what have you, to brace against the storms that seek to shake one’s deeply held convictions.

Now, hang with me on this. This is not a philosophical discussion I am embarking on today. It is a look at what I believe is one of those pivotal moments of our current market cycle where somebody’s about to blink. Yes, I have written on this subject before, alerting you to this coming event, but at that time we weren’t upon the threshold of the event.

In my estimation, the next three to four weeks will determine the direction this market takes for the next six to 12 months. And it will all come down to the same “one moment” I have seen so often before, where one side or the other blinks.
What is it that causes the blink? It is the oldest of old human qualities — CONFIDENCE. In this case, it will be the confidence in one’s studied evaluation of the economic facts against the huge supply of rumors that have filled many pages and talk shows during the last six months or so.

Will this deluge be bad enough that the bulls will blink or will the stubborn refusal of the market to tank finally sap the bears determination to drive the market lower? Clearly, it will be a confidence thing for either side.

Again, hang with me as I would like to digress for just a moment. Early in my career in this business, I was fortunate enough to have met a guy that, as I look back on it now, was one of the most savvy market analysts that I have ever met. His name was Roy Klopper.

He was a contrary son-of-a-gun, he was. Short on talk, unless it was to say something that counted and yet, one of the nicest guys I have ever met. For reasons I still don’t understand, he took me under his wing in those days because I was really struggling to try and understand this business and frankly not doing too well at it.

Roy took me to lunch one day after a particularly tough morning and after a sandwich and coffee (I had to pay — he never gave anything away, he said) he proceeded to spend three hours telling me what it was all about.

The bottom line was, he said, I needed to forget all about studying that huge number of reports I got every week on all of those companies. He told me even the best fundamentalist can’t remember all those facts and figures. He said, “Go to the one place where nobody can fool you. Go to the charts.”

I listened to him and embarked on what turned out to be a four-year study course from Professor Roy. What did I learn? I learned the basics of how to build what I now call my Super Chart. In it is included all the world’s real-time evaluation of what the future holds for investors. He said that it was far more important to listen to what people do versus what they say they might do.

OK, back to business. Just below is my current Weekly Super Chart for the S&P 500, as of the close on Nov. 14.

Can I ask you for one final hang in there? I have been asked quite often why I use the S&P 500 instead of the Dow Jones Industrial Average to call the market moves. The answer is really quite simple.

The 500 stocks are much more difficult to distort with concentrated trading by big traders than the Dow. Often in tough markets, the big money will concentrate on the Dow (comfort food for big money) and avoid the S&P stocks.

The result is a false picture of the market. Let me illustrate. Below is my Dow Jones Industrial Average Super Chart for the same period as the above S&P 500. Note especially the period from 2000 to mid-2003.

The S&P gave a solid sell signal during the week of Nov. 17, 2000, but not the Dow. The S&P never gave another signal until the week of June 20, 2003, while the Dow gave no less than five and, depending on the interpretation, as many as seven false signals. Hope that helps you better understand why I use the S&P.

But now, back to the guts of this column. After a huge 3000-point Dow point from July 2006 to July 2007, the market has seemingly chosen to work a 1,000 point range between Dow 13,000 and 14,000. Such trading ranges are not unusual, but occur more often at the bottom of a decline, not the top of a move.

A trading range at the top of a move is, 75 percent of the time, a “cooling off” move, “a correction in time” Roy use to called it.

The length of this correction period is usually best timed by counting the number of times the correction touches the bottom and top of the trading range without breaking through it to the upside or downside.

This current correction has touched top and bottom four times (including the new high as touch No. 1. And count the last touch No. 4 as last Friday, even though it did not close right on the trading range low at S&P 1432.

I have seen trading ranges go as many times as seven touches before they break — usually BIG! So, yes, we could still see as many as three touches before one side or the other blinks.

But I think that this trading range, being at the top of the move, leans more to the fewer touches (say four to five) before the breakaway. That puts us very, very near a possible break-away move.

So, what does my deep-down confidence say will happen? Well, both of the bottom touches in this trading range occurred above my Super Chart Keyline, 35 points for the first touch and 55 points on the fourth touch last Friday, but both were clearly above.

Experience tells me when this happens the move has a probability of better than 70 percent to 75 percent to break to the upside when all is said and done.

But, we are close enough to the Keyline to have to keep a close eye on it the next several weeks. We had a very similar situation in July 2006 and in that one the bears blinked first. Then, what a beautiful rally!

Bottom line is that despite all the fears, rumors, ups and downs of the market, scandals, and potential (notice I said potential) disasters looming in the background, the majority of traders still see a good future in the market — at least up until the close on Tuesday. For now, that is the real news of the day.

As I get ready to close this week’s column, it is interesting that some sage words of my mentor come to mind. As I neared the finish of his four years of training, Roy said to me, “Max, above all I have taught you, remember this first rule.

Never, never get married to a price target or the direction in which you think the market should go. Let it tell you what is happening. Put your confidence in the chart, and then put your money where its mouth is.”

I have never forgotten that sublime, quietly spoken sentence. It has saves me many times when I was just so sure that the chart must be wrong!

My advice to you is the same. Until we see different, use sell-offs to be a buyer. Look for bargains in stocks you like and know something about. And buy long-term call LEAPS on the S&P or Dow and cash in even more. As long as the Super Chart says buy, let it tell us what to do. And above all, don’t blink!!

NAL Oil and Gas Trust -NAE.UN-T- Has Interesting Exploration Upside

2007-11-11T13:12:00.000-05:00

RBC reports that Q3 Results are good with 45% production from natural gas and 55% from oil.

At the close of the third quarter 2007, NAL had 650 boe/d of production ready to be tied in, which will occur in Q4 2007. Furthermore, NAL is primed to increase its production as a result of a number of development projects now underway.

The next milestone are the three high impact Seneca Wells which are getting closer . The results of three high impact wells from the Seneca acquisition are nearing release. Depending on the outcome of the three Seneca wells, NAL should have further development potential opportunities with its partners.

RBC's target price and Rating Unchanged. RBC are maintaining their 12-month price target of $12.25 /unit, and an Outperform but RBC have not included the possible results of the three new wells.

We believe NAL has an interesting mix of exploration and development prospects converging in 2008, which could prove financially rewarding to patient investors.

I had a large position in NAE in 2006 but I sold it all because of the Halloween 2006 Tax Fairness Plan massacre.

Presently, NAE has has a $0.16 per month ($1.92 per year) distribution resulting in a yield of 15.6%. 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.

Now that is investing for income!

SDT.UN and EIT.UN Trying to Support Unit Price With Buy Backs on the Open Market

2007-11-10T20:17:00.000-05:00

The managers of SDT.UN and EIT.UN were actively in the market last week trying to support their unit prices.

Its hard to believe how far the unit prices have fallen and the discount to Net Asset Values are widening. Its no question that they are experiencing panic selling.

I have not sold the positions I still have at this point because sooner or later the unit prices will get closer to their net asset value. Furthermore, these stock buy backs will automatically increase the Net Asset Values of the remaining units.

Its like shooting fish in a barrell for the managers right now. They can raise their Net Asset values just by purchasing units. They will look like geniuses.

As the unit prices approach 95% of Net asset value I will begin to unload my remaining units.

Verenex Energy Q3 Results- $19 Haywod Securities Target

2007-11-02T14:25:00.000-05:00

Verenex Energy (VNX : TSX : $10.65)

Verenex issued their third quarter results. They spudded their seventh well in Libya. However, they don't expect cash flow from their Libyan discoveries until late 2009.

Haywood Securities maintains "sector outperform", 12-month target price is $19.00.

This is one of two "none income" producing holdings at this time. A safer way to play Verenex is by holding Vermillion Energy Trust (VET.UN:TSX) which is Verenex's largest sharholder. Vermillion pays out $0.17 per month and is trading around the $40 mark.

Verenex will be very volatile until they actually start production and can publish accurate reserve calculations. Please conduct your own due dilligence.

SDT.UN Lost 3.3% of Net Asset Value for Existing Unit Holders

2007-11-02T09:37:00.000-05:00

SDT.UN reported their Net Asset Value (NAV) as of November 1, 2007 as $5.06 per unit. The NAV on October 25, 2007 was $5.23 per Unit. This represents a dilution of $0.17 or 3.3% to the existing unit holders as result of the share exchange offer they recently completed.

This is unfair and shows that management cares more about itself then unit holders.

As I said in my last post, all the benefits of professional management are accruing to the manager and not the investor.

SDT.UN is now trading at a 10% discount to Net Asset Value which is the normal range since the October 31, 2006 Income Trust melt down caused by the new Government of Canada 31.5% tax on Trusts. This explains their recent weakness.

I plan on slowly unloading my units in SDT.UN and develop my own diversified holdings. I may not do as well as Sandy McIntyre but I will probably beat him on a total return basis due to Sentry Select's disregard for its unit holders.

SDT.UN is no longer one of my top picks. Keep watching the BLOG as I will update my Top Picks selection shortly.

I am Deeply Disappointed in the Managers of EIT.UN and SDT.UN

2007-10-27T15:28:00.000-05:00

This year my largest holdings were in units of SDT.UN and EIT.UN. These two exchanged traded funds invest primarily in Canadian Income Trusts and provide excellent monthly distributions which is a core value of investing for income.

Both firms recently closed a share exchange where investors in Trusts and Canadian Banks could exchange their holdings into units of the funds. The problem is that they exchanged the holdings with Units that are trading well below Net Asset Value.

This is a bad deal for existing unit holders. EIT's Net Asset Value decrease at least $0.12 per unit. The only ones that win are the managers because their fund gets larger and they consequently get more fees. Its obvious to me that the fund mangers put their interest ahead of unit holders.

If the managers were acting in the interest of existing unit holders they could have undertaken the following;

1) a rights offering to existing unit holders at a discount to market value. Unit holders would then be able to excercise their rights (and suffer no dilution) or sold their rights in the open market.

or

2) they could have waited until the market price of the units was within 5% of the Net asset Value before undertaking a share exchange

or

3) They could have done nothing and waited for the market price to catch up to the Net Asset Value.

SDT.UN's new Net Asset Value after accounting for the share exchangehas not yet been published but I suspect that the Net asset Value decrease will be in the range of 2%-3%.
SDT.Un's sister ETF fund SEF.UN undertook a similar share exchange offering last spring and unit holders lost almost 10% of their Net asset Value.

What to do now?

I am slowly starting to unload my units in SDT.UN and EIT.UN. These funds are no longer a buy and hold investment. It is my opinion that whatever value the professional management brings to these funds its all eaten up in fees and dilutions.

I am developing my own diversified portfolio of income securities.

Target Prices for Canadian Royalty Trusts

2007-10-18T19:52:00.000-05:00

Please click here to download a spread sheet summary of Canadian Royalty Trust (affectionately known as Canroys) target prices by various Candadian Investment Houses as of September 28, 2007. Investors should use this information to determine good entry points into Canroy positions.

This spread sheet is courtesy of THOR on the Yahoo Canroy board.

Please note that this link will only be available until November 30, 2007.

Investing for Income and the Power of Compounding

2007-10-16T20:59:00.000-05:00

Compounding

The following is an excerpt from Richard Russell?s web site called the Dow theory letters. This is so well written that I could not explain the power of compounding in simpler terms then the way Mr. Russell has.

Richard writes;

"One of the most important lessons for living in the modern world is that to survive you've got to have money. But to live (survive) happily, you must have love, health (mental and physical), freedom, intellectual stimulation -- and money."

He goes on to say;

"Compounding is the royal road to riches. Compounding is the safe road, the sure road, and fortunately, anybody can do it. To compound successfully you need the following: perseverance in order to keep you firmly on the savings path. You need intelligence in order to understand what you are doing and why. And you need knowledge of the mathematics tables in order to comprehend the amazing rewards that will come to you if you faithfully follow the compounding road. And, of course, you need time, time to allow the power of compounding to work for you. Remember, compounding only works through time."

And finally

"But there are two catches in the compounding process. The first is obvious -- compounding may involve sacrifice (you can't spend it and still save it). Second, compounding is boring -- b-o-r-i-n-g. Or I should say it's boring until (after seven or eight years) the money starts to pour in. Then, believe me, compounding becomes very interesting. In fact, it becomes downright fascinating."

This excerpt is the key to riches and wealth using Canadian income trusts. These trusts pay dividends every month, month after month. If you reinvest these dividends then voila.....compounding!

Its so simple that you will wonder why you never though of this before! Income trusts pay you every month. If you re-invest the dividends of a trust then the magical effect of compounding will kick in. After a few years you will notice that your passive income level is begining to reach significant levels.

Conventional stocks say buy me now and maybe in the future I will give you back more money then you started. Well income trusts give you the cash every month so even if your stock price is the same 10 years from now you still have a decent total return.

Paramount Energy Trust - PMT.UN-T - New Top Pick

2007-10-12T14:42:00.000-05:00

I picked up 5,000 units of Paramount Energy Trust (PMT.UN-T) for Under $8 this week. This is a risky pick because its 99% natural gas production.

Natural gas prices in Canada are very low and not very profitable.

However, Paramount has reduced their pay out to $0.10 per month ($1.20 per year) which results in a greater than 15% yield.

According to BMO research Paramounts "all-in" payout ratio is under 100% (all-in means cash distributions plus capital expenditures to maintain production) which means this trust is sustainable and high yielding.

If natural gas prices do recover then investors will see a nice capital gain. BMO's target price is $10 per unit. If paramount gets to $10 within a year then investors are rewarded with a total return of 40% (15% yield + 25% capital gain).

Now thats investing for income!

Please do your own due dilligence.

The Spending and Investment Wave Propelled by Demographic Trends-Corporate Cash Machines

2007-10-10T20:00:00.000-05:00

Harry S Dent has an article on their web site titled "The Spending Wave" (Click here to read the whole article) where he expects that US stock Markets will begin to decline starting in 2010.

He goes on to say;

"We are forecasting that the U.S. economy (and the global economy) will continue to boom into around 2010 before experiencing an extended slowdown into 2023. Stock prices are likely to peak by late 2009 or 2010 and then bottom around late 2022 or so. The Dow could reach 25,000 and the Nasdaq could surpass its old high above 5,000 before the end of the decade when this boom ends. Investors should be moving back into equities, and businesses should be investing in marketing, technology and productive capacity ahead of the final stage of this boom. But conversely, investors should be moving back into defensive fixed income investments as we approach 2010, and businesses should attempt to maximize market share by 2010 and not over-invest in capacity in the late stages of this next boom. "

and went on to say;

"In fact, businesses should decide whether to cash out and sell around the end of this decade, or use their dominant market share positions gained in the boom to further increase their dominance and/or buy-out their competitors in the bust – thereby preparing for the next boom to come from the echo boom generation from 2023 into around 2050. Europe and most of the developed world will follow us into this next demographic downturn. But Asia will still be booming for years and decades to come after the initial crash that is likely to set in between late 2010 and early 2013. Sectors that benefit from older consumers, like health care, will also boom after the initial crash in stock prices. "

I agree with Mr. Dents premise on demographic trends however, I think the markets will change to suit the new trends. I think the following will happen;

1) Stocks will begin increasing dividends as investors demand income over growth. This explains why income trusts became so popular so quickly. Company's will turn into "Cash Machines"

2) Investors will demand tax changes that make dividends tax deductible to a corporation but fully taxable in the hands of the investor (retiree) just like interest payments. This will drive stock valuations up.

3) Workers will continue working past 65 years old thus slowing the propensity to sell stocks.

4) Corporations will find creative ways to satisfy investor requirements of investing for income.

5) Home prices will be under more selling pressure than stocks as retirees cash out to pay for living expenses and purchase income producing assets such as stocks.

My strategy is to keep on acquiring income producing assets so that I can enjoy a rich life with passive income.

Hedging Our Bets on Investing for Income Between Credit and Inflation Risk

2007-10-09T19:40:00.000-05:00

Condensed Version of
HEDGING OUR BETS
by Roger Conrad
Editor, Utility & Income
October 9, 2007

Income investments come in all shapes and sizes. But all have one thing in common as far as we’re concerned: We’ve got to buy and hold ‘em to get the most out of them.

Part of that is axiomatic. You can’t collect the distributions unless you stick around for them to be paid. Individual bonds are the exception because they accrue interest as long as you hold them. But as far as stocks, Canadian trusts, limited partnerships, income-paying funds, preferred stocks or anything else goes, you’ve got be in there on the ex-dividend dates or you won’t get paid.

Ironically, the most important reason income investors need to buy and hold is capital appreciation. A healthy, growing company will increase its dividend over time, and its share price will follow. If you’re trading, you won’t get that gain unless you’re very, very lucky.

Buying and holding, of course, isn’t without risks. For income investors, there are basically two: credit risk and inflation risk.

The former has been on investors’ minds this year. And virtually anything perceived as having too much debt—or too unorthodox a capital structure—has taken hits.

There are two ways to protect your portfolio against credit risk. One is by sticking only to high-quality, growing companies and shedding anything where the business fundamentals are weakening. The other is to diversify broadly, both in terms of individual stocks you hold and across market sectors.

When the markets are universally panicked about recession or a credit crunch, big institutional money will pretty much sell off anything that doesn’t have the word “Treasury” in it. And that’s exactly what happened on the worst days over the summer.

The key in a market like that is to avoid the real blowups, i.e., the companies that are really in trouble. This time around, that was basically financial companies that had gotten in really deep in the mortgage market and/or collateralized debt obligations. As JP MORGAN CHASE’S $5.5 billion writeoff announced today illustrates, there are still some landmines in this area, though that stock is actually up today.

In contrast, damage to most other income investments in recent months was largely because of guilt by association. Limited partnerships (LPs), for example, were walloped by concerns about their debt structures and whether or not they’d be able to access capital markets. Both fears have proven largely groundless, at least for the best quality LPs. As a result, money is starting to flow back in and shares are recovering.

The lesson: If you avoid the blowups in an environment of elevated credit risk, your losses will be short-lived. In fact, such times are golden opportunities to buy high-quality income stocks cheaply.

THE GREATER RISK NOW IS INFLATION - ESPECIALLY IN THE USA

The bottom line is, if you pick your stocks carefully, diversify well, shed holdings that weaken business-wise and are willing to be patient in downturns, you can make your income portfolio pretty much foolproof against credit risk.

Guarding against inflation risk, however, is a whole other matter. Income-oriented investments are especially vulnerable to inflation because they’re valued to a large extent on the basis of yield. Rising inflation pushes market interest rates higher, which makes those yields worth relatively less. As a result, income-oriented investments sell off to a point where yields are again attractive.

During the 1970s, Treasury bonds were among the absolute worst investments to own. Credit risk was zero.

But every incremental increase in inflation made investors demand a higher yield to compensate for the erosion of principal. And by the time inflation peaked in the late ’70s and early ’80s, bonds issued at the lower rates of the ’60s had lost most of their real value.

We haven’t had a real inflation problem in the US since those bad old days. We have, however, had occasional flare-ups that have wreaked havoc on everything from REITs to utilities.

In each of the past five years, we’ve had a spring or summer spike in interest rates, as investors have anticipated faster growth and higher inflation. The benchmark 10-year Treasury note yield spiked, and income investments across the board sold off. Each time—including this year—rising rates sowed the seeds of their own reversal, sparking worries about the economy and ultimately sending them lower.

As we move into the fourth quarter, rates are down and credit worries are receding. As a result, income investments are starting to recover their summer losses. That rally should continue throughout the fourth quarter. Utility stocks, for example, have had a positive fourth quarter in 35 of the last 40 years.

After that, however, the future gets considerably cloudier. With the Federal Reserve apparently willing to do whatever it takes to avoid recession, credit risk is no longer the primary concern. Rather, it’s inflation. And the more money the Fed and other world central banks pour into the system now to bail out the likes of JP Morgan, the greater the risk.

One way income investors can protect themselves against inflation is healthy growth. Not even companies that can grow dividends reliably and robustly have historically been able to hold their share value in the face of rapid inflation. But they do a credible job with moderate inflation, if for no other reason than investors need to get their income from somewhere.

How bad can inflation get this time is the $1 million question. And as is always the case with market economics, that’s impossible to forecast.

What we do know, however, is there are investments that pay moderate income and actually do very well in inflationary environments. By adding them to already diversified portfolios, we can cut the inflation risk to our overall portfolios.

What I’m talking about are metals and other vital resources. Over the past five years or so, many of the raw commodities—from copper to zinc—have doubled and tripled in value. The primary reason is global growth.

Not since the ’70s has the world seen such robust, synchronized economic growth. And unlike then, the US isn’t the only driver of growth this time around.

We’re still the most important economy. But China, Japan, Europe, India and the Middle East are also driving things. That makes this growth wave a lot more durable than the last one. In other words, a US recession would no doubt slow things down, but it wouldn’t derail global growth as it did in the early ’80s.

Metals and other raw commodities are the essential fuel for global growth. And the faster and more universal growth is, the greater the strain on supplies. Already, we’ve seen Russia plant its flag on the North Pole, while China and Europe are snuggling up to African dictators and the regime in Iran. And that’s only the beginning, as competition for scarce resources grows.

Eventually, every commodity cycle ends. Ever-rising prices induce consumers to change their habits and develop alternatives, even as they incentivize new discoveries. The process, however, can take years and even decades before the supply/demand balance shifts back in favor of consumers, and it’s never entirely painless.

One of the hallmarks of a top in a commodity cycle is breathless speculation that supplies are truly running out. I’m not hearing any of that now in the financial media.

In fact, the buzz is largely about how the commodity bull has reached unsustainable levels and that its days are numbered. This is in stark contrast to what’s happening in the market place, and the disconnect likely points to a lot more ahead.

Commodities and vital resources are good inflation hedges for one major reason: They represent hard value. Gold, for example, has been a global store of value for millennia. When US inflation undermines the value of paper money, gold holds its own—mainly by surging in US dollar terms.

The best way to play a boom in commodities and vital resources is to buy stocks of the companies that produce them. For one thing, gains are leveraged. For example, a company producing copper at a total cost of $1 a pound will see its earnings double if the metal moves from $2 a pound to $3 a pound—a 50 percent gain in the metal itself. And good companies are always growing, providing a rising base of earnings.

I’ve already been talking about high-yielding energy bets like Canadian trusts, Super Oils and combination utility/producers for some time. We’ve seen some staggering profits in these over the past five years or so. And until we see the factors that ended the ’70s energy bull market in abundance—greater conservation, switching to alternatives (not biofuels), new conventional reserve discoveries (not from oil sands or extreme deepwater drilling) and a global recession—we’re going to see a lot more gains.

The takeover offer for Canadian trust PRIMEWEST ENERGY TRUST by the ABU DHABI NATIONAL ENERGY CO—which was at nearly a 40 percent premium to the pre-deal price—is a pretty clear value alert for that sector. And whether it means takeover for the likes of other strong trusts like Enerplus Resources or Penn West Energy Trust or not, it does add up to big gains ahead for the best trusts, in addition to their high distributions.

Energy is only one resource that offers income investors an inflation hedge.

Picked up 1,000 Shares of Verenex Energy Today

2007-10-09T09:22:00.000-05:00

I picked up 1,000 shares of Verenex Energy today at $13.08 per share.

It only trades on the TSX under the symbol VNX-T.

How I Lost it All in the stock Market

2007-10-09T07:37:00.000-05:00

This is a reprint of a letter sent to us in 2003. Its as relevant today as it was then.

-----------------------------------------------------------------------

February 2, 2003

To: investingforincome.com

From: DRG

Finally someone agrees with me or better me with them!

I have been playing around in the marked for more than 25 years. I made some I lost some . I lost my whole house on a stock (Abacus) of a company who was building the Edmonton shopping mall. At the recommendation of my broker who was very friendly to me (he bought me coffee quiet often) I borrowed as much money as I could to buy the said stock.

Now, he worked for a reputable brokerage house, so I felt fairly good about my investment. I had 2000 shares @5.00 a piece. Thats what my house was worth in the early 70's. My broker told me he knows the people who were running the company, don't worry. Well the stock kept sinking and sinking. I questioned him (over another cup of coffee) what is the meaning of all of this. O, all stocks fluctuate up and down, he said. I figured, he should know, he is the "professional", and I don't know anything. When they dropped to 40 cents I asked him: "Don't you think I should buy some more, after all that is a excellent stock , is it not"? He hesitated and said, "well, I think, you got enough, lets not become greedy". I got him to buy me another 3,000 @ 45 cents, anyway. What a good average I had achieved, I was so proud of myself.

A little while after that, I turned on the TV and I heard the word Abacus.-- Close to bankrupt.-- I was sick, and yes I lost the whole works. I paid my house off a second time and left the market alone until 15 years later. In time the broker had been ?invited to court?, but left the country instead.

O'how I missed my coffee. I had to think of retirement and managed to get a couple houses to rent out. A friend told me about income producing stocks (units). I have never looked back since. I borrowed again from the bank, a house worth. As of today my holdings are $ 250,690 and I got paid at for January 2003 a total of $3,470. That is twice as good as getting rent, even after paying almost a $1,000 to the bank, and the interest to the bank is deductible. No houses to fix up, no painting, no complaints.

Sure I still have some property, diversification is good, but as far as income is concerned, you can't beat the income funds. When I got your e-mail (from a friend) about the different recommendations I was glad to see that those were exactly my choices for the last three years. It feels good to see that I finally got paid back from the school of hard knocks. I hope it lasts for a while.

DRG

Freehold Royalty Trust is Another Buy and Hold Security that Yields 11.70%

2007-10-08T14:56:00.000-05:00

Freehold Royalty Trust - Symbol: FRU.un on the TSX

My 12 month target is CDN $16.00 /unit

Freehold Royalty Trust is roughly 65% weighted to oil, which will protect it from variation in natural gas prices.

It has a Low level of foreign ownership and a strong balance sheet.

Its presently trading at $15.39 per unit. It pays a $0.15 distribution per month ($1.80 per year) which results in a yield of 11.70%.

You won't get rich with this one but you won't go broke either.

The Yield fits nicely into our investing for income strategy. I feel this is a buy and hold type of security.

I don't own any units at this time.

Arc Energy Trust is a Great Buy and Hold Income Producing Security

2007-10-08T14:40:00.000-05:00

ARC Energy Trust - Symbol: AET.un on the TSX

My Target is CDN $22.50/unit over the next 12 months

ARC's assets are diversified throughout the Western Canadian Sedimentary Basin and production is balanced between oil and natural gas.

One of the more attractive investments in the Canadian royalty trust sector due to asset quality and longevity, an experienced management team and reasonable valuation relative to the peer group. Arc is a favourite of the institutional investors.

Arc has small production growth potential with Carbon Dioxide flooding in the old fields. I suspect that some of the "socially responsible" and "green" funds may use this as a rationalization to acquire units.

Arc Energy trust is trading at $21.70 and pays $0.20 per month ($2.40 per year) yielding 11.6%.

I don't have any units at this time.

Why Baytex Energy Trust is One of My Top Picks

2007-10-07T11:49:00.000-05:00

While Baytex’s Q2 financial results were impacted by higher costs and lower realized heavily oil prices, we were encouraged by the solid production numbers. In particular, development of its Seal heavy oil asset is progressing well.

Unlike some other operators in the area that are having inconsistent results from new wells, all of Baytex’s Seal wells continue to meet expectations. The lack of infrastructure is constraining major development at the property due to high transportation costs, but infrastructure investment by other operators appears to be ramping up.

I believe that as development of Seal progresses, further value will be attributed to the asset and reflected in the trust’s unit price. Furthermore, the Seal heavy oil reserves could he worth over $40 a share to a major Oil company like Shell.

In the meantime Baytex is paying out $0.18 per month ($2.16 per year) for a yield of just under 12% while you wait for the big buyout offer.

Now that's investing for income at its best!

Can I generate $15,000 per Month Income?

2007-10-05T13:26:00.000-05:00

Can I generate $15,000 per Month Income?

On November 1, 2006 I had major losses from the Canadian Government's about face decision to tax income trusts. I stayed up night after night worrying. Have any of you stayed up all night worrying? Have any of you had insomnia positions that threatened your sleep that destroyed your relationships and eroded your self-esteem? I have and I can tell you right now that holding and hoping is a recipe for disaster, both financially and personally.

I finally sold out on November 15, 2006 and reinvested my remaining funds in SDT.Un and EIT.UN. These are still my largest holdings.

Just because my income investments got clobbered does not mean that the underlying investment philosophy of investing for income is wrong.

I plan on rebuilding my income portfolio and I plan to share my experience with you in the coming months and years.

My Goal is to generate $15,000 per month income net of intererst costs and taxes.

Stay tuned.

Top Pick Verenex Energy VNX-T Presently Trading at $12.30 with a 2008 target of $18

2007-10-05T11:53:00.000-05:00

Verenex Energy (VNX-T) is 45% owned by Vermilion Energy Trust(VET.UN-T). They are drilling in Libya. Drilled 2 wells so far. The first one flowed 10,000 BOE a day and the second flowed 20,000 BOE.

Verenex hit an all time high in August of $17.63 but has pulled back considerably since the ORCA well drilled by Bordeux Energy (BDO-X) off the coast of France (they had a 30% interest) came up dry.

I normally only accumulate dividend paying stocks and stay away from risky stocks such as Verenex because its purely an oil exploration play in Libya. However, they have struck oil and I expect that in in 2008 Verenex will also become a production company too. Once this happens it will attract different investors and valuations.

I feel that it will reach $18 by the end of 2008.

I picked up 2,000 shares.

Please do your own due dilligence before acquiring any securities.

Natural Gas and Oil Prices Showing Unexpected Strength

2007-10-04T20:05:00.000-05:00

Crude Oil

After 4 days of losses, crude roared back to move into positive territory. Backs were even stronger up $1.70+ in most terms. Products were also up sharply. There was not a lot of bullish news to prompt the move though the USD was marginally weaker. Rather, this appears more technical in nature: the market tested but held support just under $79.00 which has encouraged funds to jump back in for a move higher again.

Natural Gas

Today's 57 BCF injection was bullish vs. expectations that were largely around 65 BCF. Beyond that, the trend of injections has been supportive: since 2000 the average injection for the past six weeks has been 73 BCF, this year we have average 56 BCF. We remain near all time records but have been losing ground. Meanwhile, with the weekend looming and a (weak) storm in the Gulf some more strength may be in order. Liquefied Natural Gas imports have slowed to under 1 BCF per day. if this keeps up natural gas prices should continue to strengthen.

Goldman Sachs on the Marginal Price of Oil Being Over $70 Per Barrell

2007-10-03T10:07:00.000-05:00

Last night I picked up comments on the Investors Village CWEI board comments on the latest Goldman Sachs report on oil. I felt I should share this report with you. If Goldman Sachs is right then our income investing philosophy will be rewarded because some of the largest dividend paying investments are related to the oil and gas industry.

However, I caution readers on Canadian Oil and Gas Trusts because they are more sensitive to Natural gas prices (except Canadian Oil Sands Trust) and unless the oil:gas ratio improves along with the rising price of oil then the Canroys will continue to struggle.

The Goldman Sachs report talks about a lot of the issues we've discussed. Most interestingly, they believe that the long-term price of oil is determined by the marginal cost of oil production. Marginal cost is defined as the average of the highest cost (or bottom quartile) producers. Their study concludes that marginal costs are now close to $70/bbl. Furthermore, there are no more than 4 million b/d of current production that have a cost greater than $70/bbl, meaning 4 million b/d of extra capacity costing under $70/bbl to bring the long-date price down.

The report is the best I've read. It is the most technical, most numbers based. I've included a couple quotes below. I think oil is going down over the next few days as the dollar has a little bit of a rally here. If it goes down enough, I might add to my already significant positions in preparation for what could end up being a long, hard winter.

Excerpts from the report;

"In July, we argued that a significant increase in Saudi Arabian, Kuwaiti and UAE production by the end of the summer was critical to avoid prices spiking above $90/bbl this autumn. Last week, OPEC announced that it would increase production by only 500 thousand b/d by November 1. We believe that this will be too little, too late, baring an outright collapse in demand, and now expect inventories to draw to critical levels this winter."

"Despite only modest demand growth this past year, anaemic oil supply growth, due to disappointing non-OPEC supply increases and OPEC production cuts, has pushed the market into a significant deficit, which pushed the oil forward curves back into backwardation, creating the first cyclical bull market since 2003 that will likely carry into 2008."

"The current structural bull market, or investment phase, has entered its sixth year; however, the industry has added very little new, low-cost, production capacity as it has run into technological and political bottlenecks that will likely take years to resolve, supporting our view that the investment phase will likely last another five to 10 years. Further, costs have continued to rise, pushing marginal costs closer to $70/bbl, leading us to raise our 5-year forward WTI forecast to $70.00/bbl from $67.50/bbl... "

"Crude oil production during these summer months was nearly 1.0 million b/d below the level a year ago, while demand was averaging more than 1.0 million b/d higher than the level a year ago. This sharp imbalance prevented the normal seasonal build in inventories and has even set the stage for a third quarter draw on stocks, which is a rare event typically associated with significant winter spikes... "

"Net, we now expect inventories to decline by 1.5 million b/d during the fourth quarter versus a seasonal norm of 0.5 million b/d, which will likely cause prices to spike above $90/bbl this winter as inventories are drawn down near critical levels. It is important to emphasize that the current market deficit is being driven more by supply shortages than by excess demand, which is why upside price risks are so high despite significant economic growth concerns. We estimate that during the fourth quarter, demand growth would need to be 1.0 million b/d below our forecast, nearly 1.25%, to create a balanced market with a normal fourth quarter draw of 0.5 million b/d... "

"Given the inability of non-OPEC producers to significantly expand conventional production, we have argued for some time that oil at the margin is no longer pricing conventional oil but rather non-conventional oil such as synthetic crude oil, renewable fuels, and synthetic fuels... "

"1. The energy, water, and labour bottlenecks in the Canadian tar sands are severe and will likely prevent significant scaling up of the supplies at an oil price of $70/bbl, while a substantial change in Canadian policies in order to incentivise the use of nuclear power in tar sands production, and facilitate immigration of much needed foreign engineers appears unlikely in the near term;

"2. The nationalization of the Orinoco belt assets by Venezuela has led to a sharp decline in non-conventional output and no further foreign input of capital;

"3. Biofuel production has substantially driven up agriculture prices, pushing the subsidized cost of many of these fuels anywhere from $65/bbl to $150/bbl with a further scale-up likely to push agriculture prices even higher and hence raise biofuel production costs;

"4. ExxonMobil abandoned its gas-to-liquids (GTL) project due to high costs, the Sasol GTL plant in Qatar has run into technical problems in the ramp-up phase, and the Shell GTL project is significantly over budget, all of which suggest that GTL is off the table at an oil price of $70/bbl...

"If OPEC wishes to push the long-dated oil price down, it would need to offset almost all of the high cost production. However, as the group only has 2.0 to 3.0 b/d of spare capacity at most, it cannot displace the high cost production that supports the long-dated oil price. Instead, it can only control inventory levels, which ultimately controls curve shape..."

"Over the past five years, volumetric exports from the (Gulf Cooperation Council) region have been flat as demand growth has absorbed all of the supply growth..."

"If Saudi Arabia, UAW, and Kuwait ramp production up by 1.0 million b/d, the world would be left with very little spare capacity, which is politically dangerous for the GCC countries as they would have less of a negotiating position that the spare capacity provides, and would be economically dangerous for the consumer countries."

Canada Under Seige: Thanks Harper and Flaherty

2007-10-02T14:01:00.000-05:00

The Trust tax hoisted onto Canadians is facilitating the transfer of our wealth from Canadians and hard working Americans who invested in our income trusts.

We at investingforincome are not just a bunch of malcontents about getting screwed by our government. But everyone is getting screwed. What is really sad is that part of the reasoning behind the "Tax Fairness" was that our American friends were benefting from the trusts and they called that "tax leakage". Our reflex anti-Americanism has resulted in our wealth being transfered to an Arab government.

Below is a copy of Diane Francis's BLOG on this issue. If you click the title of this post you will be taken to her BLOG.

---------------------------------------------------------------
By Diane Francis

Canadian policies are facilitating the buyout of Canada. Canadian energy trusts are bought with 100% financing borrowed from foreign lenders or entities. Interest payments are made from Canadian cash flow which used to be distributed to trust unitholders and taxable.

The interest payments to foreigners are also exempt from the 15% withholding tax. This means that taxable cash flow has become tax-free mortgage payments to buy energy assets.

Abu Dhabi pounced first and in months will be the biggest oil company in the land, financed in this way by taxpayers. To boot, not one share of its oil entity in Canada, TAQA North, can be owned by a Canadian under Abu Dhabi law.

Harvest Energy Trust Recommended by Change Wave

2007-09-30T19:18:00.000-05:00

Change Wave investments has put out a buy recomendation on Harvest Energy Trust. Click the title of this post and it will take you to the video interview.

What is interesting here is that they believe some of the Canadian Energy Trusts will start converting to the US Master Limited Partnership (MLP) structure.

I have written about this in previous posts and I quoted from a research paper written by UBS.

I plan on sending out this report to my email subscribers some time next week. If you want a copy please sign up on our list at www.investingfforincome.com.

I will be following this issue closely over the coming months.

Don't Underestimate the USA

2007-09-29T01:22:00.000-05:00

Max Whitmore: Inflation? Who Said Inflation?!

The Fed did their thing last week and there was a torrent of words from every corner of the globe about how they had: (1) done exactly the wrong thing; (2) done exactly the right thing; (3) went weak-kneed and gave in to Wall Street; (4) Wall Street failed to get the Fed to do its bidding; (5) Bernanke is a rooky and is making rookie mistakes; (6) Bernanke did a brilliant job; . . . and on and on!!

The only sure thing most agreed on was that the Fed took action to get the confidence of the investing and banking business and to overtly assure the investing public that it was ready to do whatever was required to make sure that the country did not experience undue hardships and possibly a recession. (Bernanke believes that recession is the outcome of bad management, not an inevitable economic outcome no one can control.)

Today, seeking to apply every available tool of good management, the Fed uses just about every type of high-tech computer program available (and many programmed by their own staff) to “run scenarios” that help predict recession or other undesirable economic outcomes if no preventative action is taken today.

Then, a study of these undesirable outcomes is made to see just what different types of present actions “plugged in” to the program might help prevent or mitigate these undesirable outcomes down the road. This computer “looking forward” study helps the Fed to zero in on just what the best action might be today.

It is from these “looking forward scenarios” that the action on the Sept. 18 was framed. The FOMC statement alludes to just this technique. For example, here are some of the key phrases of the FOMC statement of Sept. 18: “Today’s action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time.”

I believe it was the use of the above mentioned computer programs that led the FOMC to lower rates as much as they did. I do not recall any time in the previous 18 years of the Greenspan Fed that the steps taken were to “forestall” disruptions, as was clearly noted in the FOMC statement.”

Note that the phrase “to promote moderate growth over time” was spelled out, too. In my opinion, this was to salve the frayed nerves of investors worldwide. I think it also was to address the inevitable inflation questions.

The FOMC statement then directly addressed inflation in the next paragraph, again in my opinion, to pre-empt criticism some would level at it as a result of the drop in rates. They said: “Readings on core inflation have improved modestly this year. However, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully. ….The Committee will continue to assess the effects of these and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.”

They obviously felt it was necessary to cite the moderation of core inflation to clearly tie the reduction of rates to the goal of promotion of long-term growth. But, they also added that they would be “carefully” monitoring the situation regarding inflation “to foster price stability“. To me this paragraph really was the basic purpose of the entire FOMC statement. It is inflation that now has everyone on pins and needles!

I find it most interesting that inflation is the one outcome that everyone seems to expect. I think I would be fairly accurate if I said that ALL the articles I have read addressing the FOMC action are unanimous in predicting or fearing that inflation was the next outcome. There can be no other outcome they believe. Well, I don’t believe those predictions for a minute. The last thing that usually happens is what everyone expects — the last thing!!

In my view, this is akin to the world believing that interest rates rule the world’s economic health. I have said over and over that it isn’t interest rates, it is money supply. Read my last 3-4 articles again and you will see why.

Basically, because Bernanke’s research papers and essays about the Great Depression — research covering periods as far back as the 1890s — over and over clearly spells this out.

Additionally, he also points out on page 250-51 of his book “Essays on The Great Depression” his take on inflation. In his words, “Theory suggests instead that inflation will be determined by current and expected money supply and demand.” This statement is made as part of an argument about unemployment in the Depression, but clearly again makes the case that control of the money supply is a better control device that any other for inflation.

My own view on this matter goes to a simpler way of stating the situation. Inflation due to a lower value of currency — a condition typically precipitated not by actual conditions but by fear — requires (1) that import levels remain the same, but at higher prices and that (2) internal production capacity of the country is either at or very close to full capacity or that the ability to produce goods to replace the higher cost imports (but at a more competitive price than the imports) is lacking for any variety of reasons.

My own expectations are that imports will substantially moderate in the next 12 months. U.S. buyers of imported goods will find it more competitive to buy USA goods instead of imports. This condition will exist, in my opinion, because this country is a sleeping giant, as Admiral Yamamato of Japan, once observed. If you wake it, it will beat you at every turn.

I see this country going on a production binge not seen in many years. I look for exports to soar, production for our own consumption to flourish, and for the huge foreign investments made by many U.S. companies to become the proverbial albatross about their necks.

I have no way of knowing if Bernanke senses this same scenario, but I would be surprised if he didn’t. The loss of hundreds of billions, several trillions, of our sovereign wealth over the last 30 years occurred because we let it occur.

As a nation, we did not, primarily for political reasons, combat the unfair positioning of many nations against us on the economic playing field. These countries set their currencies — especially China — well below our dollar and used low paid sweat labor to produce goods to sell to our nation at prices we just could not match under such circumstances.

Now, the lower dollar is biting our competitors back in a big way. To continue selling to us, they must sell production at a loss, as the peg of their currencies to our dollar now is having negative consequences for their economy. How long will they do that?

That depends on how serious they think we are in fighting back. We have just seen the biggest increase in U. S. exports in decades during the past 19 months. For the first seven months of 2007 (August numbers not included yet) the U.S. is running at an annual rate of $1.6 trillion (annualized) in exports, versus an annual rate of $1.44 trillion in 2006 (Jan-July 2006 $822 billion vs. Jan-July 2007 $915 billion). That is a handsome +11 percent increase over last year and with the dollar favoring us even more in world markets recently, I expect we might even challenge the +14-15 percent gain year-over-year. (Source of data is U.S. Census Bureau, Foreign Trade Div.).

All this export increase means more and bigger paychecks landing in U.S. households. Now add to this higher income from what I think will be a huge increase in U. S. production for U.S. consumption — at prices better than those offered by imports — and I just don’t see inflation. Instead, I see healthy economic expansion, likely well above our long-term rate of expansion of 3.5 — 4 percent per year.

To have inflation, we would need (1) a Fed not keyed on “carefully” watching inflation and using money supply to moderate it — but our Fed is “carefully” watching — and you need (2) an American business community that passes up the golden opportunity of competing with imports on its own home turf (and winning this time) — but, that too, will never happen!!

Will I be right? I think so. But, I expect that the argument will rage on for the next 6-10 months as investors start an “inflation watch” and slowly come to the realization that the stock market has it right so far.

Stock index prices are climbing and not because of anything except an overall investor consensus that the Fed is right on target. To me my Super Chart Keyline now becomes the front line of this terrific battle. I will be watching it with baited breath. It should be a fascinating few months!

God Bless America

2007-09-25T17:49:00.000-05:00

"LET'S BE PERSONAL" Broadcast June 5, 1973 CFRB, Toronto, Ontario

Topic: "The Americans"

The United States dollar took another pounding on German, French and British exchanges this morning, hitting the lowest point ever known in West Germany. It has declined there by 41% since 1971 and this Canadian thinks it is time to speak up for the Americans as the most generous and possibly the least-appreciated people in all the earth.

As long as sixty years ago, when I first started to read newspapers, I read of floods on the Yellow River and the Yangtze. Who rushed in with men and money to help? The Americans did.

They have helped control floods on the Nile, the Amazon, the Ganges and the Niger. Today, the rich bottom land of the Misssissippi is under water and no foreign land has sent a dollar to help. Germany, Japan and, to a lesser extent, Britain and Italy, were lifted out of the debris of war by the Americans who poured in billions of dollars and forgave other billions in debts. None of those countries is today paying even the interest on its remaining debts to the United States.

When the franc was in danger of collapsing in 1956, it was the Americans who propped it up and their reward was to be insulted and swindled on the streets of Paris. I was there. I saw it.

When distant cities are hit by earthquakes, it is the United States that hurries into help... Managua Nicaragua is one of the most recent examples. So far this spring, 59 American communities have been flattened by tornadoes. Nobody has helped.

The Marshall Plan .. the Truman Policy .. all pumped billions upon billions of dollars into discouraged countries. Now, newspapers in those countries are writing about the decadent war-mongering Americans.

I'd like to see one of those countries that is gloating over the erosion of the United States dollar build its own airplanes.

Come on... let's hear it! Does any other country in the world have a plane to equal the Boeing Jumbo Jet, the Lockheed Tristar or the Douglas 107? If so, why don't they fly them? Why do all international lines except Russia fly American planes? Why does no other land on earth even consider putting a man or women on the moon?

You talk about Japanese technocracy and you get radios. You talk about German technocracy and you get automobiles. You talk about American technocracy and you find men on the moon, not once, but several times ... and safely home again. You talk about scandals and the Americans put theirs right in the store window for everyone to look at. Even the draft dodgers are not pursued and hounded. They are here on our streets, most of them ... unless they are breaking Canadian laws .. are getting American dollars from Ma and Pa at home to spend here.

When the Americans get out of this bind ... as they will... who could blame them if they said 'the hell with the rest of the world'. Let someone else buy the Israel bonds, Let someone else build or repair foreign dams or design foreign buildings that won't shake apart in earthquakes.

When the railways of France, Germany and India were breaking down through age, it was the Americans who rebuilt them. When the Pennsylvania Railroad and the New York Central went broke, nobody loaned them an old caboose. Both are still broke. I can name to you 5,000 times when the Americans raced to the help of other people in trouble.

Can you name me even one time when someone else raced to the Americans in trouble? I don't think there was outside help even during the San Francisco earthquake.

Our neighbours have faced it alone and I am one Canadian who is damned tired of hearing them kicked around. They will come out of this thing with their flag high. And when they do, they are entitled to thumb their nose at the lands that are gloating over their present troubles.

I hope Canada is not one of these. But there are many smug, self-righteous Canadians. And finally, the American Red Cross was told at its 48th Annual meeting in New Orleans this morning that it was broke.

This year's disasters .. with the year less than half-over… has taken it all and nobody...but nobody... has helped.

ORIGINAL SCRIPT AND AUDIO
COURTESY STANDARD BROADCASTING CORPORATION LTD.

(c) 1973 BY GORDON SINCLAIR
PUBLISHED BY STAR QUALITY MUSIC (SOCAN)
A DIVISION OF UNIDISC MUSIC INC.
578 HYMUS BOULEVARD
POINTE-CLAIRE, QUEBEC,
CANADA, H9R 4T2

The Dirty Little secret About the Prime West Energy Energy Trust Buyout by the Arabs

2007-09-24T20:06:00.000-05:00

Today an Arab country bought out Prime West Energy Trust for a 30% premium. The dirty little secret is that Prime West will now become a "private" flow through entity and will not be subject to a the "Trust Tax".

This is absolutely insane and I am amazed how our media and the public are so naieve that they cannot see what hyprocisy this tax is.

Remember, the "Tax Fairness" policy was designed only to Tax publicly traded Trusts.

This is patently unfair.

Ironicly, the Canadian Minster of Finance sometimes advertises the tax fairness plan on this blog. What a Croc!

Unloved Natural Gas

2007-09-22T16:29:00.000-05:00

Contrarians should consider investments in the natural gas sector.

After a mini-mania in 2005 as hurricanes temporarily crushed supplies, natural gas prices have settled into a broad trading range and have disappeared from many investors’ radar screens. Sentiment has been extremely negative in the past 18 months, similar to the environment early in the decade, even though prices are well above the levels seen in 2001. Industry investment plans have been steadily pruned, which should ensure inadequate supplies down the road given the relentless uptrend in demand. Thus, the contrary call is to be bullish from a long-term perspective. Temporary weather and hurricane effects aside, we expect prices to grind higher in the coming years.

Article taken from BCA Research

Dividend Investing

2007-09-21T21:15:00.000-05:00

Why dividends are important.

Dividends set a floor price – Dividend stocks tend to trade within their yield range, and rarely do they yield much higher than Treasury bill.

Dividends account for over half of the long-term real return – If you own 100 shares of BMO and receive 4% of dividends, you can DRIP your dividends to buy another 4 more shares. If you keep up the DRIP for 20 years, you’ll have a handsome 219 BMO shares in your portfolio. Even better, some Canadian corporations offer 5% discounts through DRIP.

Companies with long-term track records of stable and raising dividends show quality of the managements – Managements show commitment to shareholders by improving fundamentals and sharing profits.

Dividends cannot be manipulated like earnings – Dividends are real hard cash in your lap. Earnings can be faked by creative accounting.

A stable stream of dividends reward investors even during market down turn – Management pays you to wait even during market setbacks.

Dividends are more tax efficient than regular incomes and capital gains – In British Columbia, if you can make $66,000 in dividends, you pay $0 tax. In regular incomes, you pay $16,880 in taxes. In capital gains, you pay $5,097.

You can safely spend your dividends without harming your portfolio – If you think in terms of income streams instead of portfolio size, you can consume 100% of your dividends without hurting your portfolio. If instead you go for capital gains, consuming your capital during a depressed market will harm your portfolio immensely.

Receiving dividends are passive – Dividends and increases are given to you each quarter automatically without any action on your part. On the other hand, to receive capital gains, you must monitor the share prices continuously.

High dividend paying stocks have historically out-performed low-yield stocks – In David Dreman’s Forbes column (April 2004), he cited that between 1970 and 2003, the top fifth highest yield stocks returned 14.5%, while the lowest fifth returned only 8.8%.

Dividends are more predictable than capital gains – Suppose BMO averages 10% over the long term with 4% in dividends and 6% in capital gains. In a given year, you can count on seeing the 4% in your brokerage account, but the 6% capital gain is less dependable.

Your investment return depends on the company’s fundamentals, not the market’s temperament- You may think a business is wonderful and its stock is outrageously undervalued, but if market doesn’t share your excitement, your effort won’t bring you fruition, and you’re needlessly squandering away precious time. On the other hand, if dividends and dividend increases are your investment objectives, you don’t need the market’s blessing to celebrate. This is one fundamental advantage of dividend investing. When you buy dividend-paying stocks, there’s a strong linkage between your analysis and your reward, and this linkage isn’t compromised by market psychology.

Dividend investing forces you to think in a healthy frame of mind in terms of buying low - I bought Harvest Energy Trust last year. I bought it again this year. I will buy it next year, and possibly for the next 20 years. Why would I want my initial purchase to rise at the expense of penalizing my next 20 purchases? The next time you see dividend-paying stocks tumbling down, please come and give me a high-five.

Max Whitmore: They Are All Watching The Wrong Numbers

2007-09-15T12:43:00.000-05:00

Below is a newsletter written by Max Whitmore. I find his writings different then all the gloom and doom you hear about.

-------------------------------------------------------------------------
Whitmore: They Are All Watching
The Wrong Numbers

So, the wait for next week's FOMC meeting begins. And the power of the suspense is like nothing we have seen for years! Will the FOMC group lower rates or leave them unchanged? Will they change the FOMC statement implications? Will it be bullish or bearish? Will the Fed bail out the "bad guys?" Will we go into recession? Will my new suit be back from the cleaners in time for me to go to next Saturday's wedding?

Oh come on!! This is all bordering on the silly! Most of the questions that are being asked are superfluous to the real question before the nation. That real question is, "Are we seeing the beginning of a major decline in the stock market."

All the other questions are of little importance. If the market buyers have lost confidence, they should be exiting the market by the millions. Are they? Hardly! Will they? Well, that one requires a bit more examination, so let's look at this last question and see what really solid information we can glean from what is going on.

First of all, the major money investors are not running away. Yes, we are seeing a correction. That is as sure to happen in the stock market every now and then as it is that they will ring the opening gong at the NYSE every weekday morning at precisely 9:30 a.m.

I have shown you many times in the last six to seven weeks that my SUPER CHART KEYLINE is still well below the current market activity. As I write this column on Sept. 11th, my KEYLINE for the DOW closed at Dow 12,017 and the KEYLINE for the S&P at S&P 1369. The actual Dow closed today at 13,308, above my KEYLINE by 1,291 points!! The S&P closed today at 1, 471, above my KEYLINE by a huge 102 points!

Now, you may ask, is this final proof that we will not see what I term a Major Market Reversal — in this instance a crossing below my KEYLINE for six weeks in a row. The answer is clearly no. But, the KEYLINE has only been crossed up and down a total of 16 times since 1963. It crossed UP the KEYLINE in June 2003 at DOW 9120. The S&P crossed up at 988. With current prices so far above the KEYLINE, it only tells us that any near term reversal is clearly not in the card for many weeks, so long as some sort of totally unexpected political or societal event does not intervene. The financials DO NOT call out any danger at this point at all.

OK, you ask, why are so many financial writers suggesting a huge collapse is near? Why are some even predicting a recession? To be honest, I just don't know. What they read as indications of such a disaster is beyond me. All I do is read charts. Charts are dispassionate, absolute, totally uninfluenced evidence of what EVERY investor is thinking today. At the end of each day, ALL these investors have made up their minds that things are either very bad, very good, or somewhere in between those two opposite poles. At the moment, it is clear they do not see a market collapse in the near term — a period I usually define as three to five months.

Understand this. The market as a whole cares little for what the just released data says. Yes, they do respond to monthly employment data and such, but be clear that this constant release of data requires a CLEAR TREND to be emerging before a TREND in the stock market occurs. The current stock market TREND is still UP or the selling would be far greater and my KEYLINE would clearly be in the process of being challenged. Today, it is a long way from being challenged in any way.

So, what does the coming FOMC meeting really mean? Isn't that where I started when we began the column today?

Well, to me it means this. The world of investors (but not all) are watching the interest rates as if the financial world will rise or fall on what happens to interest rates. How far from the real truth this is. Oh my, how far!

Do you really what to know where the market might go in the next three to five months? Then, I would point you to this Web site: http://www.federalreserve.gov/releases/h6/Current/. What's there? Well, in Table 2 a bit down the list (look at the "week average" column under M-2) you will see that the data released the week of Sept. 6 shows that for the week ending August 20, the M-2 increased from the week before by a total of about $48 billion.

It also shows that the M-2 money supply for the next week ending August 27 increased by $65 billion, ASTOUNDING!!! I do not recall any such HUGE two week increase for all the years I have been in this business. It may have happened, but I can't recall it and the data I can get hold of as I write this does not go back to 1967, the year I began my stock market career. Folks, it is all about MONEY SUPPLY — MONEY SUPPLY — MONEY SUPPLY!!

What so astounds me is that the Fed has just kicked in $112-113 BILLION to the money supply at a time when it seems to be conservatively approaching the interest rate question and sending all the pundits off on a wild goose chase about where interest rates are going and thus where the economy is going. Want to really know where the economy is going? With what the Fed just did, it is about to get a kick in the pants that will send it into a HUGE stock market rally and a huge prolonged economic boom!

Do I sound a bit over the top to you? Well, believe me I am standing on the most solid ground there is — the words of Dr. Ben Bernanke himself, the Fed Chairman, the one guy who can make it all happen.

Take a moment and read this quote from his book published in 2000. The title of the book is "Essays on The Great Depression." On page 34 under the paragraph heading titled "3. Conclusion" line 3 to line 7 of this paragraph reads: "Comparative studies of a large set of countries have greatly improved our ability to identify the forces that drove the world (my bold) into depression in the 1930s. In particular, the evidence for monetary contraction as an important cause (my bold) of the Depression, and for monetary reflation (my bold and note: meaning adding money to the economy) as a leading component of recovery (my bold), has been greatly strengthened."

Today, this is precisely what is going on — Reflation! Notice that Dr. Ben never mentioned interest rates as even a consideration of being important. To be fair, he does suggest in one of the later essays that confidence of the population in the steps being taken to improve or stabilize an economy is important, too. In other words, if the money supply goes up, but no one wants to use it, there can be problems.

While some writers suggest that is happening now, I need only look at the chart to see that, so far, that is NOT happening — not even close!

So, what is the bottom line for me? Simply this. Corrections like this one, with charts remaining strong, are the time to accumulate good stocks at bargain prices. I called for a MAJOR BUY last week and stand by that call. I said that only if the SUPER CHART KEYINE were broken to the downside would I change that call. After all, I can't see more than the current chart shows and it usually is a look into the future of three to five months, as I said above, and every now and then even as far as six to eight months. Right now, my opinion is that the three to five months look is what I am seeing.

So, go ahead and read the doomsayers if you want. But, do do this. Watch the charts, too. When the major averages begin to break major supports (we are a LONG way from this at the moment) then get concerned. Want to protect your portfolio cash until you know if I am right? Well, you might use stock index's (short selling or puts) to "freeze" your portfolio values (I wrote about that three weeks ago). Or if your not sleeping well at night, go to 80 percent cash and just wait.

The other 20 percent? Well, half in bonds, which I see continuinge to climb, and the other half into big cap major corporations (again, see last week's column — I suggest defense and major consumer goods types).

You know, all this seems to me to be the fulfillment of a very old Chinese (no pun intended here) proverb my good friend uses now and then, "May you live in interesting times." Boy, you couldn't ask for more interesting than these!!

So, that's all for this week. Hope your coming investment week is a good one. Meanwhile, you keep in touch. I do! See you next week.

Trust Sector Offers Upside With MLP Convergence

2007-09-13T10:32:00.000-05:00

The Canadian Income Trust sector offers upside with MLP convergence.

The following is an excerpt from a UBS report issued in June 2007.

If you want a copy of this report then please add your email address to our list at www.investingforincome.com.

The report will be made available in upcoming mailing.

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Assuming that a trust signals its intent to convert to an MLP sometime this year,we believe there should be further upside for Canadian investors. We are forecasting a one-year total return of 16% for our coverage universe, which includes the average cash yield of 11.0%. Our valuations incorporate premiums for the MLP conversion, biased toward those trusts with NYSE listings and higher proportions of U.S. ownership.

In the absence of our MLP thesis, the stocks appear fully valued today, reflecting an appropriate premium for the income relative to conventional E&P peers. Based on our net asset value analysis, we estimate that the trusts in our sector are discounting commodity prices of US$50-55 per boe, which compares to the 2008 forward strip of US$61.50 per boe.

These commodity prices imply the sector trading at 110-120% of their blow-down net asset values (i.e., a discounted cash flow reflecting the production of only existing booked reserves), which we believe is appropriate based on our conservative NAV analysis.

Will Canadian Trusts Convert to US Master Limited Partnerships?

2007-09-12T12:40:00.000-05:00

The following is an excerpt from a UBS report issued in June 2007.

If you want a copy of this report then please add your email address to our list at www.investingforincome.com.

The report will be made available in upcoming mailing.

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MLPs expected to be a catalyst for the sector. We believe that sometime this year, a Canadian trust will announce its intention to convert to an MLP, which should trigger a positive re-rating of valuations.

In our view, the government will be forced to respond in one of three ways, each of which should be good for investors. First, if the government does nothing, most trusts will be forced to convert to the MLP model in order to remain competitive, which should be positive for valuation.

Second, if the government chooses to invoke the GAAR, the structure may be rejected, although we are unsure on what grounds this might be possible. However, it would further highlight the valuation disparity between the two sectors and, we believe, should contribute to further convergence in valuations.

Finally, the government could choose to alter its proposed “Tax Fairness Plan”, in order to encourage Canadian trusts to remain in Canada. We believe that the government would be reluctant to lose a $60+ billion sector with more than 1.0 million boe/d of production—roughly 25% of total Canadian production. As such, we would place greater emphasis on the latter two options, although the issue is really one of politics.

Will the government back down? The jury is still out on this issue (and we have no special insight), but in our view the first conversion announcement will force the government to respond. This should further focus the market’s attention on this alternative structure and the disparity in relative valuations, which should be good for investors.

In our view, the most likely candidates to announce conversion could be Harvest Energy Trust, Pengrowth Energy Trust, or Provident Energy Trust (not under coverage, which already owns a majority stake in the Breitburn Energy Partners MLP in the United States).

COT (Committment of Traders) BLOG

2007-09-10T14:30:00.000-05:00

There is an excellent BLOG on the Committent of Traders Reports titled the "COT BLOG " that I suggest you follow.

The link is:

http://cotstimer.blogspot.com/2007/09/cots-loooove-nasdaq.html

Canaccord on Crescent Point

2007-09-07T15:44:00.000-05:00

Crescent Point Energy Trust (CPG.UN : TSX : $19.26)
Buy - Target: $22.00
Bruce McDonald

Comment: More of a good thing; Crescent Point announces $400 million acquisition of Innova to consolidates Bakken play.

Crescent Point announced its agreement to acquire all the issued and outstanding shares of Innova Exploration Ltd. (IXL : TSX : C$6.19-HOLD) for $360.1 million. Including assumed net debt of $39.9 million, total consideration to be paid is approximately $400 million.

We estimate thetransaction to be 5% accretive to 2008 production per unit and 7%accretive to 2008 cash flow per unit. On a debt-adjusted basis, the transaction is
only 2% accretive to cash flow. However, we believe the acquired Bakken play asset is world class. While Crescent Point is using almost all of its 2007 "safe harbour" room, which limits its future growth, the Bakken asset presents above-average growth prospects from inventory prospects.

Under the forward strip, pro forma the Innova acquisition, Crescent Point shares are currently trading at 7.0 times 2008E EV/EBITDA, above the smaller cap trust average of 6.4 times, but warranted given Crescent Point's longer RLI.

We maintain our BUY recommendation and 12-month target price of C$22.00. Our target price is based on a 2008E EV/EBITDA target multiple of 7.8 under the forward strip, above our smaller cap trust average target multiple of 7.2 given Crescent Point's distribution stability and large prospect inventory.

Income Investing with Max Whitmore

2007-09-05T20:05:00.000-05:00

Whitmore: Buy — Buy — Buy!

Last Friday at about 8:15 am, the stock markets of the world were hit by a lighting bolt! The Fed lowered the discount rate without warning. The S&P, trading on the Globex markets (a 24 hour market) went straight up 72 points in less than 1 minute! Is that unusual you ask? Well, in all my 40 years in this business, I have never seen ANYTHING, and I mean ANYTHING like it!!

I do remember in 2003 when the Fed intervened (of course they denied it, but the charts proved otherwise) and the S&P rallied for over 32 points in 25 minutes. I had never seen anything like it at that time, either. It was engineered to hurt the bears who had taken nearly total control of the market direction.

And hurt it did. It took two more such Fed interventions over several months, but the bears finally gave up. Those bears realized that the Fed had more money and time than they did. The four-year rally from 7100 to 14,000 was the huge upshot of that Fed action.

In the last ten years, commodities — like platinum, oil, and uranium — have been outperforming every other investment. And according to our experts, the boom has many, many years to go. In this free Special Report from the editors of Financial Intelligence Report you'll discover the five best commodities to invest in now . . . and our top five commodity investment funds for 2008. PLUS, why the 1,870% increase in the price of uranium in the last six years is just the beginning, and how much longer commodity expert Jim Rogers (author of Hot Commodities) thinks the commodity boom will last.

The Charts Still Say "Up"!

I have been telling you in my columns for months, often in the face of severe opposition, that the charts DID NOT say it was time to bail out. They DID NOT say that the credit problems overhanging the market were a crisis. A problem, yes, but a crisis, absolutely not!

And the charts further said that we had, as of last Wednesday, still a long way to go to break this huge uptrend that began because of the Fed action in 2003. I put it all in the column last week, plus my Super Chart Keyline to show you why I held my position so firmly.

Now, look, I am just an average guy that over the years has specialized in the creating and reading of stock charts. Like a landscaper, plumber, or painter, I have learned a craft and learned it well. But, I also learned that in any profession you had better know who the masters of the art are. And, I further learned, if they were in positions of power that could affect your work, you better listen carefully to what they say.

Well, in my business, there is only one individual with honest to gosh, real, true power. That individual is the Federal Reserve Chairman, whoever he or she might be. The Fed Chairman is, without a doubt, the most powerful and thus influential person in the world of finance today. And we all live in a world of finance today, don't we?

Bernanke Knows These Waters

Over 17 months ago, Alan Greenspan, then the retiring Fed chairman after 18 years at that post, turned the reins over to a much younger man, a one Dr. Ben Bernanke, Ph.D., a professor by trade, but a proven monetary genius, in fact.

Now, I don't recall if I have ever written that someone is a genius in any column before this. I don't think so. That word can so easily be misused. But, I do not hesitate to tell you that Dr. Ben is just that. I have read his incredible thesis on what is today called the "Great Depression" and not only does he dissect it into understandable segments, but he then critiques those segments and shows exactly what caused the Great Depression. It was the Fed!

Now, I won't bore you with all the details, you can get his book and read it for yourselves. But, stripped down, he pointed to the real estate collapse of 1927 as the initial shock that lead to the final shock called the "Crash of '29." He pointed out that the entire mess could have been AVOIDED!

[Editor's Note: Bernanke Reveals Fiscal Crisis Ahead.]

The problem was that, after the stock market crash in '29, the Fed dropped the money supply level — after all, the economy was slowing down and no one needed the money, did they? And for the entire decade of the 1930s, until a war forced them to do otherwise, the Fed held the money supply in tight rein. It nearly killed the economy, not to mention the country.

I have never for an instant doubted that the strange coincidence of a housing problem in our day, with the possibly of it leading to our own present-day market collapse, was NOT lost on Dr. Ben.

He has been pumping in enough cash to the economy in the last year to choke a horse, as they say. U.S. money growth is running at roughly +12 percent year-over-year, and today this money is providing the grease to clearly restart the frozen credit markets.

But, Dr Ben saw that was not enough. Confidence was being threatened. And if confidence failed (Dr. Ben wrote about this danger years ago in his thesis) then everything might just collapse.

So, last Friday, he stepped in and lowered the bank discount rate by a half percent and said in effect that the Fed was absolutely ready to do all things necessary to keep the wheels of commerce humming, including the housing market sector.

Still Calling Dow 12,500 Bottom of This Correction

When I wrote last Thursday, "I believe that the 12,500 area will hold up as the key support over the next 4-6 weeks," I had in mind that the Fed had a true genius at its helm.

It was no minor thing that Dr. Ben decided to take the step he did on a Friday. Had he waited, the weekend might have generated a financial disaster on Monday. He understands that timing is everything in the markets and the time to cut off a disaster was ripe.

He wrote years ago that confidence lost is only very, very slowly regained. Better to step in now, I figured he would reason, not later. He did. I expected this or something like it from reading his book!

Okay. The deed is done, but what does it mean? Well, it means this: Every major investor in the world knows that the U.S. is 37 percent -38 percent of the entire world's economic activity. That is just a short 12 percent from being HALF of the entire world's economic activity!

We remain, by far, the biggest gorilla in the china shop, and when the most powerful economic individual in the most powerful economic country speaks and says "Enough!" absolutely everyone is carefully listening and starting to make major appropriate adjustments.

Looking Forward Six Months

Here is what I expect to happen over the next 5-6 months. Europe will begin to DROP their interest rates. We will drop our interest rates to at least 4.25 percent, possibly even 4 percent by year end.

The dollar may slide a bit more; making us even more competitive in world markets with our products (I told you weeks ago that I am firmly convinced its drop is an "engineered" move).

[Editor's Note: Cash in on Dollar Slide. Make 25% to 50% in Six Months.]

And I expect the manufacturing sector of this country will begin to rapidly rise like the potential colossus it is in response to its new position as lowest price, best quality supplier of all sorts of goods. Read the headlines all over the world. Quality is now as important as price to just about every buyer!

I expect that the outcome of the lower rates, higher export environment for the U.S. to set off the coming huge three to four year rally I told you about in an earlier column (see my column of May 18 in MoneyNews.com archives for more details).

This rally, I believe, will carry us to the 19,000-20,000 Dow level. When we look back, we will find the rally's takeoff level began right in this time period.

I expect that the international markets, up until now threatened with higher rates, will begin to respond to their lower rates, just like ours. In short, today's Fed action has been a "sea change" that will result in one of the biggest economic worldwide booms we have ever seen.

But, what about the "crisis" in housing and credit you ask? I believe time will show that this problem, while no small potatoes, proved to be only a blip on the radar screen of the huge coming boom.

Don't misunderstand me, however. There will be some pain for many in the markets in the next three to four months, especially for the ones responsible for its creation. That is as it should be.

But, it will quickly fade. If you lived through the 1987 "crash" you know by looking back at the long term chart that that "crash" is but a blip on the charts, despite all the pain it caused at the time.

The bottom line today is that, like the 1987 crash and even the savings and loan problems in the early 1980s, this "subprime" problem will also be quickly forgotten in the light of the coming huge expansion.

[Editor’s Note: Sir John Templeton Was Right. Get His Latest Insight on Housing and Markets.]

What You Should Do Now

My advice to you is to quickly, say over the next two to three months, develop a strategy for your portfolio that will take advantage of this coming boom. Understanding that the growth I am talking about is at least 50 percent in the Dow, find those industries you think will benefit most and get on their coattails fast.

Be wise in your choices by recognizing how much risk you can tolerate because of retirement needs and family obligations, but be a BUYER!! This is going to be a really fun ride. Not straight up, of course, nothing is straight up, but up nevertheless, BIG!!! BUT . . .

Oh, yeah. And what if I am wrong? Well, I won't be so long as we do NOT break the Whitmore Weekly Super Chart Keyline to the downside (See the Keyline chart in last week's column, which is available in the MoneyNews.com archives).

That line is now at the Dow 11,895 level as of the close on Friday (Aug. 17). Hold it and we make our Dow 20,000. Break it and all bets are off and I will tell you what needs to be done if that unlikely event were to occur.

But, it is still an 8 on my 1-10 scale that the Keyline holds all the way to the Dow 20,000 mark. But, so long as my Keyline holds, by 2010, I expect to see Dow 20,000! As Phil Rizzuto used to say, Holy Cow!!

Well, hope your coming investment week is a good one. In the meantime you keep in touch. I do! See you next week.

The Time is now for Oil & Gas Trusts

2007-09-04T20:28:00.000-05:00

I will be picking up oil and gas trusts over the next month because I think the lows are in for the year.

The gassy trusts are a real value at these levels because nobody wants them with Natural Gas storage full and prices in the low $5 area.

Remember, be fearful when everyone is greedy and be greedy when everyone is fearful.

I am still hanging with my portfolio

2007-09-03T19:30:00.000-05:00

I sold 10,000 SDT.UN and 2,000 HTE.UN during this last correction in order to raise cash.

I am hanging on right now because the valuations in the oil and gas sector is compelling.

I am considering loading up on natural gas Trusts because they are so beat up.