Double Blind

Don’t let anybody ever tell you that there is no point timing the market – most returns in retail portfolios completely depend on it.

The chart above is 100 minus the implied short term federal funds rate in percentage for December 2010. For June 2009, this is currently 99.795. December 2010 is currently 98.27, implying a rate of 1.73%. This is now an optimistic scenario.

Earlier I scaled out of the position, and I have a snippet of exposure which I plan to trim by the end of summer.

Something I don’t find too surprising, but should reflect a legitimate cost of using reusable cloth bags for packing groceries – bacteria from food products, especially meats, can contaminate bags.

Personally, I always take reusable bags when going to Superstore, but make sure to put in a thin plastic bag (the ones that typically get used for vegetables) when buying ground beef or poultry – the risk of cross-contamination is higher than I would prefer it to be, especially when handling vegetables shortly after.

I’ve never washed my reusable bags.

I think the major concern for stores, when considering plastic bags, is theft. I would highly suspect that customers bringing in their own bags would lead to higher rates of shoplifting.

What is particularly funny is all of the anti-plastic environmentalists that are trying to justify their beliefs by saying that “bacteria builds up the immune system” so we don’t need to pay attention to stories like these. I wonder if any of them had to experience food poisoning before…

Earlier I wrote that ING Direct was offering 3% on a 1-year GIC for RRSP accounts only.

It turns out that it indeed was a screw-up on their part.

The reason I suspect this is because of their new promotion where they will now give you 3% on a 1-year GIC for RSP transfers (i.e. transferring in money from other banks) only.

These sorts of promotions really irritate me, mainly because they are treating incremental customers much more valuable than existing customers. This sort of marketing also applies to most other companies out there – cell phones and cable companies are two good examples. Basically it is a message of “We’ve got your money, so you’re trapped with us now! Hahahaha!” which is quite inconsistent with the message for a company that claims to be “no hassles”. It’s not to the point where I feel like taking my short term money elsewhere, however.

Readers may note that this is sort of an ultimatum game – if they become too ridiculous in devaluing their existing customers vs. offering insane promotions to incremental customers, it would result in existing customers going away for alternatives. Even though offering a huge promotional rate to new customers doesn’t affect me as an existing customer, the resentment really builds up over time, and gets translated into lower customer appreciation – such as how widely word of mouth spreads.

In this low interest rate environment, however, the difference between an institution paying 1.35% on savings vs. 1% on savings is not terribly material, so excess cash really should be diverted toward more riskier ventures, such as the stock or bond market. There really is no excuse for holding cash unless if you are planning a trip to Costco.

The difference between 1.25% and 3% on a 1-year RRSP GIC, however, is huge. 1.25% will double in about 56 years, while 3% will double in 23 years.

I am continuing to reverse my previous trade with respect to short term interest rates; I have liquidated another portion of my prediction that interest rates will be above 1.25% by the end of 2010; I did so at around 1.8%.

The economic crystal ball is starting to scream to me that short term rates are going to be near zero for a lot longer than most people would otherwise expect. The story has changed since I made the initial trade. At most I would expect a short term rate of about 2% by the end of 2010, so I am willing to take my profit and run for cover.

My Grandma is 84 years old. While she isn’t a technological maven, I did teach her how to use the basics of the internet a few years ago, and she can pen out some basic emails and click on bookmarks on the web browser.

She asked me – I’ve been reading all the time in the papers about this “Twitter” thing – what the heck is it?

I froze, trying to think how to explain what Twitter is in plain english.

The techie definition would be “Remember the days of IRC? Just put that over http, and put a 140 character cap on it.”

Another techie definition would be “Twitter is to UDP as what what instant messaging is to TCP.”

If I said either of those, my Grandma would be more confused than ever.

Instead, what I said was the following: “You see my brother using his cell phone to send messages to people all the time? It is sort of like that, except you do it over the internet, and everybody can see the messages you write.”

I still don’t think my Grandmother has a clue what text messaging is about. I don’t think I quite know myself either.

As the whole country knows by now, there will not be a summer Canadian election.

I am happy I do not have to sacrifice part of what is a short Canadian summer season doing campaign work on a federal election.

I am reasonably sure that if Ignatieff pulled the trigger that the Conservatives would have been returned with a minority government and we would have to do this charade yet again. Instead, this charade has been delayed until likely November.

Unfortunately, it means that the summer will be the calm before the storm, and storms need to be prepared for. However, I can at least take a holiday or two in the meantime.

A couple weeks ago I managed to liquidate some long-term debt and my cash position is nearly flat. My portfolio is still mainly in fixed income securities and with little sensitivity to the equities market.

I’m anticipating that the “news” for this summer will be that the economic recovery will take longer than expected (longer than current expectations). This will likely have an adverse impact on the commodity markets. I also think that the equity markets will still be pricing in an economic recovery, but this will involve a lot of localized volatility (e.g. S&P 500 between 850-950). Overall, it will be quite choppy and an index investor is likely to make nothing in this time period.

I don’t want my cash anywhere near this equity volatility and will be patiently waiting. I’m not worried about losing upside in case if I am completely wrong about the equity markets – my debt investments should do appreciate as well (although obviously not as much).

My research goal over the summer is to examine good research candidates on the oil and gas industry. I eventually plan to get some equity exposure there – just not at current prices. While putting some cash into Suncor may seem like the easy option, there are likely better and smaller sized alternatives out there. Given the capital intensity of the industry, this may not be the case, however – I just might have to swallow it and go for the largest capitalization companies.

I’m beginning to doubt my end of 2010 interest rate transaction (where I am predicting that short term interest rates will be above 1.25%) will bear any fruit, so I am looking for a good liquidation point. Right now the markets are predicting short term rates will be 1.8%, which is still profitable. I could have gotten about 2.15% for that two weeks ago.

Right now, however, I’m suspecting that borrowing money to invest (even at 1.75%) will be a losing play with prices as they are currently – loss of principal is worse than getting a zero return.

I drove across the Golden Ears Bridge the day after it officially opened to the public. I drove it from the Maple Ridge side, south to Langley. I was heading east on Highway 1, but diverted away from the Port Mann Bridge – taking the 10 minutes to test the bridge, especially during its current toll-free period, seemed like an interesting thing to do.

Getting on the bridge from the Maple Ridge side is easy – there is a huge on-ramp on the right-hand side of the Lougheed Highway. This ramp leads onto an elevated roadway which resulted in no traffic lights until after the bridge deck. The construction looked very good and the drive was smooth. I took the 200 Street Langley ramp, and encountered the usual barrage of traffic lights.

The construction of the bridge is a winner. It will assist a huge amount of traffic flow from Maple Ridge and Surrey, as these drivers will no longer have to take two bridges (the Port Mann and the nearly finished new Pitt River Bridge) to reach their destinations. People will be able to use the pre-registration option and reduce their tolls to about $3.30, which will enable them to save 30-45 minutes, depending where exactly they are.

There are three negatives of the project worth mentioning.

One is that it will end up severely congesting the 200 Street interchange in Langley, even more than it is currently. The 200 Street interchange has been a victim of its own success, and with the long traffic signal cycles, it is very likely that it will experience significant back-ups north and southbound. A special concern is traffic that is westbound on Highway 1 that wants to use the north-bound offramp on the 200 Street exit – because a signal is required for these cars and trucks to get off the interchange, it is likely to cause traffic backups onto the Highway – never good to happen.

The second issue is that the speed limits on the bridge and the roadway to and from the bridge is set too slow – the bridge deck itself is 80km/h, while the supporting roads are at 70 and 60km/h. All of these limits could easily be 20km/h faster. I highly suspect police will make a fortune on speeding tickets near this bridge.

The third is that the actual location of the bridge is quite west of the soon to be discontinued Albion Ferry. I am absolutely sure there were some studies done on whether the bridge would be more effective in its currently location, or whether the bridge should be built on Glover Road. My guess is that the present location had better benefits to industrial users, and Fort Langley would not have wanted the additional traffic in the area.

The bridge is a fairly good expenditure of $800 million. Of particular benefit will be industrial users (i.e. trucks) that need to get traffic to and fro Maple Ridge and Langley. This will also put some relief on the Port Mann bridge and the Pitt River Bridge.

Whenever high profile people make market calls, it is worthy to pay attention.

June 17 (Bloomberg) — Treasuries fell, snapping a four-day gain, as President Barack Obama said a recovery in the U.S. economy may drive yields higher as appetite for risk returns. Benchmark notes ended the longest rally since January before the Treasury resumes debt sales next week. “There’s going to be money flowing out of Treasuries and people are going to start putting money in other investments that provide higher yields,” Obama said in an interview with Bloomberg News.

Keep in mind that Obama, according to his tax filings released during the Democratic nomination, had little investment income.

So this might signal the bottom in the US treasury bond market, and a top in the stock market. Who knows.

Right now, the cost of “insuring” your portfolio against a 18.5% crash in the S&P 500 by the middle of December 2009 is 3%.

What this means is that if you have a $100,000 portfolio invested in the S&P 500, if you wish to put a “floor” on your portfolio value at $81,500, it will cost you about $3,000 to do so. This is all done with index options.

Protecting yourself down to a $87,000 floor will cost about $4,100. Protecting to a $93,000 floor will cost about $5,800.

The cheaper option, of course, is to sell everything.

I’ve been doing research on what scenarios could profit the most from a market crash – I am starting to believe that this autumn (let’s define this as “beginning of September”) we will start to see some increased turbulence in the financial markets again.

Purchasing volatility futures is likely the easiest way to profit – right now November volatility expectations are around 30%. You can also buy 35% call options at 11% of notional value, and sell the 50% at about 4% of notional, for a 7% spread trade, for the potential maximum reward of 710% of money risked. Volatility futures are difficult enough with respect to timing (they behave very differently than commodity futures where the primary future factors are contango and interest rate concerns). Volatility options are even worse with respect to getting the timing correct. You cannot use standard pricing models otherwise you will lose money.

I also think that gold and related commodities will also get hit as future expectations of economic growth do not pan out. In the longer run, fossil fuel investments will be golden, but what we are seeing right now definitely a speculative run. It is “common knowledge” that commodity prices will rise, thus it is already baked into the market.

I currently have zero exposure to the broad market indicies, and most of my portfolio is in high-yielding fixed income securities.