Which shares to buy now?

[Sunfish]

Had you been writing CCs on FMG last year it would have been good till April this year. You would then have been exercised in May and as it is normal to write the calls just out of the money you would have got just half a dollar of the two FMG rose. Not so good. You would have been exercised again in June and your buy in price on Friday 20th open would have been about $11. You would have written 5 more contracts since without being exercised.

So in the last six months you have Two months of gains for a total of about $1 and combined losses over the other four months of $8. The premiums received less the buy/sell brokerage would hardly be $2 (I'm guessing) so you are 50% down in your bank. Had you simply bought early in the year and done nothing you would be down around 50%.

I have never done this exercise before and did it (as I typed) to test my own ideas, not to prove anyone else wrong. I don't know enough of the details to make this accurate but I think it is an interesting result.

 

[GreatPig]

Wow, a 50% return on gold in 2 mths.
OR
300%pa inflation on the AUD.

Annualising a value based on 2 months of change is not realistic, especially not at the moment when volatility is so high and trends are nothing like linear over 12 months. Also, the figure is not correct, as a 50% increase every two months would be compounded, giving more than 1100% pa.

Hmmm.......cash in those Aussie banks don't seem so safe anymore....

On that basis, neither is any A$-denominated asset, including shares, real estate, or just about anything in this country except certain commodities, particularly precious metals and oil which are priced in US$.

GP

 

[sash]

Sunfish, oc1

I bought into 2 of the banks (WBC, NAB)....yes I know risky strategy. The reason I did that was I felt the central banks around the world would step in agressively to ensure credit flows and liquidity and I also felt that it was in fact the resource stocks that would have the most issues as this relies on consumption. Also, our 4 major banks are among only 4 out 18 banks in the world with AA+ plus rating. Based on the share market today it was resources which fell the most (12%)....the major banks fell on average 4%.

In terms of whether I have lost money...yes I have on paper but because I am writing options taking less profits so my shares are not called. So far so good. On paper I am down about 7K (I bought my shares about 2 months ago at slightly higher prices) but my options premiums have been about 14K. So I am still up based on todays fall.

I am also not worried about my shares being exercised so long as I make a reasonable profit.

I guess time will tell...... So far so good!


Cheers
Sash

Sash, why would you be writing covered calls in this market?

Everything is already way off their peak. If you buy 1000 shares now and then the sun comes out and everything rallies, you miss out most of the gains because you've sold a call. You risk the money but miss the reward.

If your optimism was misplaced and things drop further, your few percent premium won't cover your loss and you are already down 7%.

I've thought about this for some time now and have reached the conclusion that it would work best during long periods of slow market appreciation.

Agree. I stopped this strategy late last year. Sash, i hope you're protected.

 

[WinstonWolfe]

Annualising a value based on 2 months of change is not realistic, especially not at the moment when volatility is so high and trends are nothing like linear over 12 months.

It's a trend I think will last longer than 2 mths GP. I haven't worked out how many extra dollars the US Fed or RBA have injected into their economies, but it must be a lot. And what for? to keep asset prices where the market doesn't want them.

Somethings got to give. I'll stick my neck out and say within 2 years, gold will go over $1500.

Sure there's volatility but in no way is it a non trending market. The trend is down.


On that basis, neither is any A$-denominated asset, including shares, real estate, or just about anything in this country except certain commodities, particularly precious metals and oil which are priced in US$.

Increasingly GP, my investment strategy is from the global perspective. Why keep all your egg assets in one currency basket? not smart for an Icelander....


But why invest in gold when you think its price movement is mainly due to changes in the AUD?

I don't. I think gold's price is a constant.....and fear is pushing the USD and AUD around relative to each other, and down relative to gold...and it is too difficult to take a AUD:USD fx position. Think of gold as a third currency that the other two are weakening against.

You could invest in FX directly, without the added risk of gold price movements. Surely managing one variable (exchange rate) is easier than two (gold price and exchange rate).


GP

If I think gold is going to stay constant while AUD and USD slide down, I am better exposed directly to gold in both currencies.

So I am looking at unlevered positions in both AUD gold (GOLD and ZAUWBA) and USD gold....

and possibly hedging (intermittently) with gold cfd puts in both currencies

 

[GreatPig]

You're too quick - I changed my mind about that last bit. Must edit faster...

I haven't worked out how many extra dollars the US Fed or RBA have injected into their economies, but it must be a lot.

Yes, but on the other side of the coin, those huge losses where billions, if not trillions, of dollars of credit/debt have vapourised must have contracted the money supply. Are they injecting more money than is being lost?

As to gold, I tend to agree with comments I've seen that in the shorter term it could go down (in US$) due to selling to cover cash losses, but longer term up if high or hyper inflation sets in. My thoughts are pretty much as stated by Van Tharp in a recent article of his that cash is good while assets are deflating, then switch to gold when the money machines really start pumping. Marc Faber recently mentioned as well that he thought gold would likely drop in the near term. Apparently he's about 10% in gold and I think 70% in treasuries, even though he thinks the US will eventually go broke.

in no way is it a non trending market. The trend is down.

I very much doubt your 2 month trend for gold in A$ will be sustained over 12 months though, otherwise it would be worth over $14K an ounce in a year.

So I am looking at unlevered positions in both AUD gold (GOLD and ZAUWBA) and USD gold....

Those first two are also my preferred options currently (because they're easy for me), but if there was total economic meltdown such that the issuers of those couldn't be trusted, then holding the physical would be better. I read something a while ago where a gold analyst was questioning whether the Perth Mint actually had enough physical to cover all the IOUs on issue.

GP

 

[Sunfish]

For quite some time now the only good trades I've made are "sells". The only thing wrong with them was that I didn't sell enough.

What is it with shares and beginners? A moth to the flame thing I guess.

 

[Sunfish]

GP. I don't know if all that money vapourised or merely shifted from the impatient to the patient. This is an issue I can't get my head around.

What is more important though is "velocity of money" (another concept I only have a basic knowledge of) but it is easy to understand that if a dollar does the circuit (from a pay-packet to the bank, to a borrower, to a builder, back into the bank to be relent to the employer for his next wages bill) quickly, it is much more inflationary than if it sat in a bank vault because the bank was unwilling/unable to re-lend it.

I reckon that the velocity is dropping markedly and that the new money is to counter that slowing. If they overdo it we get inflation. If they undercook it it's deflation so they'll put more money out there. Bankers only pay lip-service to being inflation fighters. They thrive on it.

 

[Aaron Sice]

Problem with gold is that outside of the value that man places on it for various purposes, it really is worthless (I know it has some special properties that make it useful for specific manufacturing purposes, but it would have these values regardless of whether it was priced at $1 or $1000).

you make it sound like God sets the market rates....

 

[Aaron Sice]

I read something a while ago where a gold analyst was questioning whether the Perth Mint actually had enough physical to cover all the IOUs on issue.

GP

geezus - don't even start....

Sunfish, that term really only applies in a trending bull market. the "impatient" trade for a few weeks, get caught by a correction and sell, bagging the market and share trading. the "patient" just sit and take their money as the dollar cost average over the long term during those corrections.

i don't understand how ANYONE can make money at present unless they're shorting or using options. maybe JB HiFi have been a good example of bucking the trend, but in general, fawgeddabowdit.

 

[WinstonWolfe]

Yes, but on the other side of the coin, those huge losses where billions, if not trillions, of dollars of credit/debt have vapourised must have contracted the money supply. Are they injecting more money than is being lost?

Asset prices haven't started to decline in Australia, yet.....so no loss of trillions. In the USA, house prices haven't come down far enough to absorb all bad sub prime paper. And it is hard to say how bad the paper is because as the economy softens, more people won't be able to service their loans, even alt-A.

The point is the RBA are injecting more money than new economic value created in the economy. Reconcile the relationship between gdp (<5%) and money supply (20%).

As to gold, I tend to agree with comments I've seen that in the shorter term it could go down (in US$) due to selling to cover cash losses, but longer term up if high or hyper inflation sets in. My thoughts are pretty much as stated by Van Tharp in a recent article of his that cash is good while assets are deflating, then switch to gold when the money machines really start pumping. Marc Faber recently mentioned as well that he thought gold would likely drop in the near term. Apparently he's about 10% in gold and I think 70% in treasuries, even though he thinks the US will eventually go broke.

I agree with and respect Van Tharp and Faber. Though I don't agree the two events will necessarily be separate in time. I haven't started into gold yet, and the strategy was to gradually increase my position in it.


I very much doubt your 2 month trend for gold in A$ will be sustained over 12 months though, otherwise it would be worth over $14K an ounce in a year.

It was more a rhetorical tease to those leaving cash in the bank, and not realizing how much it has already declined in a global sense. Those who think that doesn't matter should forget about traveling overseas.

Those first two are also my preferred options currently (because they're easy for me), but if there was total economic meltdown such that the issuers of those couldn't be trusted, then holding the physical would be better.

Definitely agree on that....at least being in the two mentioned you can liquidate at short notice, which is an improvement over property.

I read something a while ago where a gold analyst was questioning whether the Perth Mint actually had enough physical to cover all the IOUs on issue.

GP

I suppose Perth Mint operate on a fractional reserve policy, thinking everyone won't want physical at the same time........though there's no reason why a mint run wouldn't be as nasty as a bank run. But they couldn't rely on gold injections from the RBA.

 

[GreatPig]

Asset prices haven't started to decline in Australia

You looked at the share market lately?

The point is the RBA are injecting more money than new economic value created in the economy.

But is that the only criteria? If inflation is total money supply expansion, as the Austrian school define it, then as long as the amount injected doesn't exceed the reduction due to credit contraction and other means, the net result shouldn't be inflationary - even if GDP stayed the same.

That seems logical to me, although life Sunfish, I find it hard to get my head around this inflation/deflation and money supply thing. And as Marc Faber also mentioned in that recent interview, assets and consumer prices are different animals, and assets can deflate at the same time as consumer prices are inflating (deflate and inflate here used in the sense of prices falling and rising).

I suppose Perth Mint operate on a fractional reserve policy

I don't believe that's the intention. From memory, I think they claim that unallocated deposits and certificates are 100% backed by their working reserve (from a quick look, it says certificates can be against either allocated or unallocated deposits).

The Perth Mint web page for ZAUWBA doesn't mention gold backing for the call warrants, but gives you the warm and fuzzies with their WA government backing . Gold Bullion Securities state that GOLD is a redeemable preference share backed by gold bullion held in trust for all investors (ie. unallocated to the investors, but supposedly held as allocated deposits by them).

GP

 

[The_Bludger]

Some great advise there guys. I think I'll keep pumping my money into the offset account for now. Thanks very much.

 

[WinstonWolfe]

You looked at the share market lately?

I meant property and should have said so......yeah the market is off more than 40%.....and it seems Somersoft can't accept property could go the same way.....personally, I am not ruling out anything. Many are going to find out over the next few years, how critical to free markets credit is....especially in economies where people don't like to save.


But is that the only criteria? If inflation is total money supply expansion, as the Austrian school define it, then as long as the amount injected doesn't exceed the reduction due to credit contraction and other means, the net result shouldn't be inflationary - even if GDP stayed the same.

That is presuming the supply of credit wasn't causing inflation prior to it contracting....and I think it was....asset price inflation....and that seamlessly spilt over into consumer inflation due to treating houses as ATMs. via LOCs etc.......Now we have a situation where the market doesn't value assets at current levels (stocks and property), and the RBA and Govt are doing all they can to pump money into the system to keep those asset prices from falling. It will only fail to work. Asset prices, due to their heavy reliance on credit, cannot be artificially propped up. They are due purely to credit supply, debt serviceability, and sentiment. Take away either of those and they have to deflate.


That seems logical to me, although life Sunfish, I find it hard to get my head around this inflation/deflation and money supply thing. And as Marc Faber also mentioned in that recent interview, assets and consumer prices are different animals, and assets can deflate at the same time as consumer prices are inflating (deflate and inflate here used in the sense of prices falling and rising).

Sure they can deflate and inflate simultaneously. As I say above, Asset prices will come down if you tighten credit (raise rates), if people are nervous about the future and horde cash and stop borrowing (sentiment down), or unemployment goes up (decreased debt serviceability).

Consumer prices will be effected by currency value and major input costs like price of oil and price of finance, especially in a country that is a consumer nation, not a producer. I think the Keynsian argument that inflation is a demand driven thing is erroneous (especially in this era of globalization of production). One economy's domestic demand has little to no influence over the price of imports......nor does it allow for how drought effects supply and prices of agricultural products.

GP

I too am trying to understand money supply better. Some definitions include credit and others don't. I think in this age of converting equity into consumption, the money and credit relationship have to be reconsidered......i.e. in a property boom, if one person sells their house for 100% profit, that 100% profit is now converted into cash, and can be used to buy shares, cars, furniture, holidays, technology etc. Ergo, credit has just become money. Then if you apply the money multiplier effect to credit supply, you can see how credit expands money supply as powerfully as central bank activity.

 

[WinstonWolfe]

Seems Faber now thinks it is time to increase exposure to gold (due to lower interest rates causing higher inflation -> eroded USD).

 

[Sunfish]

I too am trying to understand money supply better.

I'm starting to understand the importance of "velocity". Govs around the world are liquifying their markets as fast as they can but everyone is trying to repair their budgets (privately) or balance sheets (business) so the money isn't circulating as it did.

There are many trillions of dollars of derivative positions which have been written and most of it unnecessary. (Just being busy for it's own sake. Having a bet and picking up fees.) This is being unwound but like water sloshing in a bath tub there are severe market distortions while it is happening. It's too big a task in do in a few months. How many years????

For as long as it takes liquidity will be sucked out of the system.

 

[WinstonWolfe]

I'm starting to understand the importance of "velocity". Govs around the world are liquifying their markets as fast as they can but everyone is trying to repair their budgets (privately) or balance sheets (business) so the money isn't circulating as it did.

Someone should educate Chairman Rudd about the power of money multiplier and velocity. His plan to give away 10Billion just before Christmas is obviously meant to stimulate the retail sector. However, as most retail expenditure is on goods imported from China, much of that 10 bill will change hands once before flowing out of the country.....

Those who don't buy plasmas and xboxes with their $1000 for every child, may prefer to pay down debt (31% of it foreign).....either way both uses dramatically reduce the domestic multiplier effect.

 

[Sunfish]

Being pensioners (never written that before ) we'll get our little bit but it will simply go into our bank, eventually into the market, I suppose.

Does investing/gambling aid circulation? I'll have to think about that.

 

[keithj]

Those who don't buy plasmas and xboxes with their $1000 for every child....

Spend it on cars - the $$ go to Japan, spend it on plasma - $$ go to china, spend it on clothes - $$ go to SE Asia.

Best option is wine & prostitutes - as least the $$ stay local for a bit longer - Chairman Rudd should be encouraging this.

 

[Sunfish]

Best option is wine & prostitutes - as least the $$ stay local for a bit longer

Do you mind if I just spend it at the doctor's and the chemist?

 

[WinstonWolfe]

Do you mind if I just spend it at the doctor's and the chemist?

doctor's either blow it on Mercs and BMers, or send it back to their families in India, Pakistan, wherever....

most pharmaceutical expenditure would go to the UK, USA, and Western Europe.

Maybe we need to revisit as a nation, producing more of what we consume, to optimize the multiplier/velocity curve.......

I've never consumed a prostitute....though I hear many of them are imported nowadays.....Keith, what's your experience?