The Kenora March Palette

9 March 2008

Earlier this winter, a couple who live a few miles away cleared a snowmobile trail through the bush near our home. They use it very rarely, so it is not always firmly packed. However, Susan has been running her dog team along the trail so that I can go running there.

This trail runs the ridge above our little corner of Middle Lake, northwest of Kenora, Ontario. It has been an absolutely beautiful run all winter long, and now, with the recent heavier snow accumulation, its appeal has become dramatic.

This is a very challenging run, as the deep snow requires lifting my legs high, and then swinging them forward to plunge into the snow a pace ahead. Also, the variable and slightly sliding surface creates quite an ankle workout. My heart rate averages 135 beats per minute without even trying, and with a little extra effort, I can easily extend my heart rate into the 140s and 150s.

So it is an exceptionally fine workout amidst some of the most dramatically beautiful surroundings that nature can offer.

On days such as today, my mind begins to drift to the question of how we could introduce these colours into our home, so as to reflect more directly what is all around us, particularly at this very beautiful season of the year.

Of course there is the white snow as a backdrop. And the snow reflects the blue of the sky, as well as catching the rose-pink and golden tones of the evening sun. In the foreground are the off-whites and beiges of the birch and poplar trees, and everywhere in the background are the red-brown tones of tree bark and leafless branches. In the mid-ground, if you will, the subtle and unobtrusive brown-green and sage-green tones of fir, spruce and pine needles predominate. To the attentive eye, glints of silver can be spotted on tree bark and branches. It is a muted but rich and understated palette.

These are assuredly the colours that I want to keep around me in our home.

Join with Susan and me in appreciating the subtle hues of the Kenora March palette.

The Kenora palette series:

The Kenora March Palette: 2009

The Kenora Palette: After the June Rain

The Kenora May Palette Erupts into Green Tones, but also into Unexpected Hues

The Kenora Palette in May

The Kenora March Palette
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The Real Dow Crash: The Dow Versus the AMEX Gold Bugs Index (HUI)

5 March 2008

I have written recently about the decade long crash of the Dow Jones Industrial Average in gold terms.

Recently, another chart came to my attention that is even more dramatic. Originally posted by Goldrunner on Gold-Eagle, this chart is worthy of further thought.

It turns out that from November 2000 through today's date, the venerable Dow has already lost 92% of its value against the Amex Gold Bugs Index (stock symbol HUI). Here you can see the Dow's November 2000 top in HUI terms.

For those of you who aren't invested in the precious metals markets, the message is somewhat clear. Most of the damage - in Dow terms - has already been done. That is, the Dow is unlikely to go to zero, so something considerably less than 8% remains to be shaved off the Dow in HUI terms.

However, there is another side to the story. If you reverse the chart, the HUI has outperformed the Dow since November 2000 by 1154%.

Thinking in these terms, it is very likely that gains of another few thousand percent may still be possible.

So perhaps it is not too late for Dow investors to alter their focus.

Here is the riddle of the sphinx for March 5, 2008.

Knowing what the past decade has taught us, why exactly would anyone invest in the Dow in the first place?

First High End Fractional Ownership Property Enters the Resale Market

3 March 2008

The first topline luxury fractional ownership property from the building boom of the first half of this decade has now reached the resale market.

SmartChoice Timeshare Realty has entered its first listing for the second-generation shared-condominium style fractional ownership units now being offered by Four Seasons Hotels and Resorts.

And the listing is a prize - a 4-week per year shared interest in the four-bedroom, 4300-square foot penthouse villa at Four Seasons Residence Club, Punta Mita, Mexico (near Puerto Vallarta).

Such offerings at the very highest end of the market are obviously not for everyone, but the implications are worth taking note of.

More such listings are likely to emerge as the years wear on, and this reinforces the principle that the resale market will in many cases be the best place to make your purchase.

If you're interested, we have completed three purchases (and a resale) through SmartChoice, and their service is the best available.

I have addressed the broad topic of fractional ownership in a 2005 post. Click here for more information.

Note (10 August 2008): Either the same or a similar property is now listed on Redweek.com. Click here for information about the listing of thie 4 bedroom - 4 bathroom penthouse property in Punta Mita.
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What Google Could Do Instead...

2 March 2008

I have been posting regularly about the weakness of Google's advertising-based business model against the backdrop of a looming consumer-led recession.

I do have a modest proposal for what Google could do instead.

Interestingly, Microsoft clearly views Google as a competitor, as evidenced by its recent (to me almost incomprehensible) bid for Yahoo! - which is another great company with a weak business model - and that offers an interesting clue.

Microsoft (I think accurately) perceives the prospect that Google could some day horn in on its milk-and-honey business of what I call digital manufacturing. That is, Microsoft is a hugely profitable behemoth because it is able to sell its digital products at a huge premium because every computer user (both individual and corporate) requires both operating systems and software programs to run on those systems.

There can be no secret that there is one defining difference between Google's so-far free software products, and Microsoft's premium-priced software products. Microsoft has from the beginning been unable to create either an operating system or software running on its operating system that works.

By way of contrast, everything that Google produces works smoothly, reliably, intuitively and gratifyingly.

What a contrast between these two companies.

My modest proposal for Google, therefore, is that it take seriously the prospect of competing head-to-head with Microsoft in the lucrative business of digital manufacturing.

Here is the strategy.

Though Google could easily make a better operating system than Microsoft, I think taking Microsoft on at this level to start would be expensive and risky. After all, there is also Linux to compete with, as well as the Apple operating system.

Instead, let Google start with an office suite to take on Microsoft Office - a product which has devoured countless competitors, but which to this day remains quirky, unreliable, crash-prone, and infinitely irritating to use.

Our experience to date with Google software has already taught us that anything which Google produces is simple, effective, powerful, reliable and pleasant to use. Google, if you will, is the un-Microsoft.

I have no doubt that once Google has produced an office suite (or, perhaps more simply still, a word processor which works reliably and satisfyingly), the market for Microsoft Office will literally evaporate.

Once Google has established dominance over Microsoft in the area of office suite software, let Google then move in to replace Microsoft's fluky and infinitely hateful Windows operating system.

Face it, Microsoft is not even competing in the critical business of customer satisfaction. Have you ever tried to get technical assistance with a Microsoft product? It is massively expensive and frustratingly difficult to do so!

Technical assistance with Google products is much less an issue, plainly because they work. Google software simply does what you want it to do, every time. No technical assistance really needed!

Microsoft is outperforming Google today not because it makes better products. With respect to quality and user experience, the two companies do not even play in the same league.

Rather, Microsoft is outperforming Google because it has a better business model.

Microsoft sells digitally-manufactured products to a captive audience. Google gives away beautiful, enjoyable software to an audience that need only permit Google's advertisers to occupy a small amount of peripheral screen space.

Believe me, once Google redefines itself as a digital manufacturer, producing first of all desktop, laptop and server software, and then its own operating system, Microsoft will (thankfully) be relegated to the scrapheap of history - and I will then be writing about how BHP Billiton will in one decade achieve a market capitalization equivalent to 100 times that of Microsoft (the so-called "evil empire" of the software world).

And Google?

With this business model, it could potentially match BHP Billiton dollar for dollar on its way to a $2 trillion market capitalization!

An Early Update on Google versus BHP

28 February 2008, 10 May 2010, 8 April 2011

On only October 10, 2007, I wrote that two companies with then approximately equal market capitalizations could differ by a factor of perhaps 100 over ten years' time.

It is only 4-1/2 months later, so a progress observation may be premature. However, there are already interesting observations to be made.

On October 10, 2007, I compared BHP Billiton (BHP), the world's largest mining company, with an unimaginable store of physical mineral wealth still buried "in the ground" in multiple locations around the world, to Google (GOOG), an innovative company which I really like, but which I consider a will o' the wisp investment with a fragile income stream based on the thin reed of "click-based" internet advertising.

I asserted that if Google falls in market capitalization and BHP rises in market capitalization, each by a factor of ten, then BHP will have 100 times the market value of Google in ten years' time.

On that day, BHP was valued by the market at $230 billion, and Google was valued at $182 billion. If you think I'm being unfair to Google in equating it to BHP in initial value, consider that in early November 2007, Google did reach a market capitalization of $234 billion - at which time its stock price had soared to $747.24.

BHP reached its so far best levels at about the same time as Google, in late October 2007, when its stock traded at $86.74 per share, placing its market value at that time at $244 billion.

Both stocks are down now, but, as per my prediction, Google is already down considerably more than BHP.

If I am right, BHP will continue to rise and GOOG will continue to fall, until eventually BHP will be recognized as having the market worth of 100 "Googles."

Where are we today?

BHP closed on February 27, 2007 at $75.01 per share, with a market capitalization of $210.59 billion, down modestly (13.5%) from its early November 2007 all-time highs.. Google closed yesterday at $472.86 per share, with a market capitalization of $148.18 billion, down 39.3% from its late October 2007 high of $244 billion. (Note that Google's Tuesday low of $446.85 per share - representing a market capitalization of $140.04 billion - had already taken it down $94 billion from its maximum market valuation - that is, Google has been losing about $1.5 billion per day in market value since mid-November!)

If my analysis is accurate, of course, Google's so-far 39% fall will be only the beginning of a long decline into the 21st century. Only an additional 51% need be lopped off of Google's maximum market capitalization to reach the levels I have suggested as a modest ten-year price target.

Again, I don't bear ill will towards Google. I just don't see the company as having great leverage to the market based on a business model of generating profits on a long-term basis by selling internet advertising to display to individuals who use the company's innovative products.

In short, at its present $211 billion market capitalization, BHP is a company that is on its way up for many years, and probably many decades, to come. Could BHP be a $2 trillion company in ten years' time? Maybe.....

And Google? On the move as well, but downwards in a secular trend for as far as the eye can see....

Could Google be a $20 billion company in 9-1/2 years' time? It's not hard to imagine. $20 billion is still quite a rich valuation, and Google might struggle to maintain its market worth at this level through the likely trials and tribulations of the next ten years.

Disclaimer: I do not hold shares of either Google or BHP Billiton, nor do I trade in either stock or its options or its futures in any way. This statement, however, does not preclude the possibility that I may do so in future.

10 May 2010: Here is a brief update on the BHP-Google contrast. The chart below is a ratio chart, showing the value of BHP stock, divided by the price of Google stock.

There can be no argument, I think, that the trend is clear. BHP is obviously outperforming Google. However, BHP is weak at this time for two reasons. (1) Both BHP and Google are negatively affected by the Greek crisis and the associated European contagion. (2) The Australian prime minister has proposed to add an additional and onerous 40% production tax on all Australian mining companies. This idea is so ludicrous (is Australia truly ready to become a pariah nation along with Venezuela, Bolivia or Zimbabwe?) that I do not think it will ever be enacted as legislation. However, the uncertainty is certainly exerting a downward drag on Australia-based BHP at this time....

8 April 2011: OK. Google is back up to a market capitalization of $186 billion (from $148 billion on February 28, 2008). Looking good. However, BHP has now soared from $211 billion to $282 billion.

The differential now makes BHP worth 50% more than Google. Honestly, I don't WANT Google (who is my free blog host) to lose 99% of its valuation relative to BHP. But so far, the trend is as predicted, though a long way from plus 10x and minus 10x....

But there are 6-1/2 more years to go. So, let's keep watching!

All posts on this topic:

Revisiting BHP and Google at Year Four

An Early Update on Google versus BHP

Google versus BHP Billiton - Part II

Meet Me Here in Ten Years' Time: BHP Billiton vs. Google
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The Structure of S&P/TSX Global Gold Index (SPTGD) Uplegs

February 27, 2008

Adam Hamilton recently published a formative piece on the Amex Gold Bugs ("HUI") Index, entitled "HUI Upleg Structure." Mr Hamilton develops several theses, some built on his earlier work, which has examined HUI leverage to gold. Foremost among his ideas is that the market price of gold mining stocks, as represented by the HUI index, continues to be leveraged positively to gold, the underlying commodity which the miners produce.

Mr. Hamilton also notes that HUI uplegs generally see two primary downtrend corrections while maturing, the first of these usually starting around the 63rd trading day (about the end of their third month). In his view, the function of these downtrends is to function as "a safety valve to prevent popular greed from growing too extreme before an upleg nears maturity."

Most importantly, Mr. Hamilton concludes that HUI uplegs see 47 to 60% of their gains in their final two months. Thus, only investors who hold on to the end are fully rewarded.

Of particular interest, Mr. Hamilton notes that the current gold surge is clearly the strongest of the 2000-present gold bull market, and also that the current HUI upleg has in fact demonstrated the strongest first stage of all of the (now four) "massive" HUI uplegs to date.

I could tell you more, but of course it makes more sense for you to read the article for yourself.

Here is the rub for Canadian investors.

No one has attempted a comparable analysis of the (so far comparatively underperforming) S&P/TSX Global Gold (SPTGD) Index. Unfortunately, I lack the sophisticated charting tools that Mr. Hamilton has available, so it is not possible for me to undertake a similar analysis here.

But let me perhaps offer an introduction to the topic of upleg structure (and leverage) for Canadian gold investors.

Let's begin with charts of the four uplegs of the SPTGD, which I discussed in greater detail on January 27, 2008.

Here is chart number one for your delectation:

The first SPTGD upleg, which occurred prior to the rapid escalation in value of the Canadian currency, has so far demonstrated the greatest gains for Canadian gold stock investors. This 19-month-long upleg started out at a humble value of 83.97 in October 2000, and proceeded to advance 178% to 233.08 in May 2002.

By the way, the HUI has outperformed the SPTGD from the very beginning to the present. It is one long outperformance on the part of the HUI, and currency differentials alone do not explain it. (The HUI has most dramatically outperformed the SPTGD index since the Canadian dollar initiated its long climb, which happened to begin in about January 2003.)

Strikingly, SPTGD upleg one shows no sign of the dramatic correction periods which Hamilton observed in all of the HUI uplegs, though a series of minor, or "soft" corrections, enduring no more than two months, can be seen.

Suffice it to say that Canadian investors who were shrewd enough to ignore the internet craze and purchase gold mining shares in 2000 have had no regrets since that time. They have been amply rewarded for their initiative, insight, independence and timely action.

Let's now look at SPTGD upleg number two:

Please note that in this preview article, I am ignoring the intervening downlegs, which, as Hamilton points out, tend to bleed off excess positive sentiment even in the strongest of bull markets.

From a starting value of 137.02 in July 2002 (representing a 41% decline from the peak value of the previous upleg), SPTGD upleg number two in fact climbed only slightly higher than upleg one, to a value of 244.47. This was also a brutal and unruly upleg, with three sharp, severe and dramatic corrections, the third of which in March cruelly took Canadian gold stock investors back to where they had started 8 months earlier, in July 2002. The discerning Canadian gold investor could have sat out this ugly but ultimately rewarding upleg!

However, for those who were late to the party, upleg two certainly provided another chance to get into the game, with a 78% gain (I bought my first gold stocks in June 2003, which, as is often the case with beginner's luck, happened to be an exceptionally fortunate time to buy).

SPTGD upleg number three returned to the gentle, steady climbing pattern of upleg number one, as can be seen below:

Upleg number three advanced through a series of gentle, upwardly rolling minor corrections which exceeded one month in duration on only a single occasion, for a 122% maximum gain from May 2005 to May 2006. This was a slow, steady, and rewarding upleg which I remember fondly as a fully invested Canadian gold stock investor at the time.

I recall seeing a greater than doubling in our personal portfolio value from its previous correction low during the advance of this particular upleg, and, save for upleg one, upleg three remains the best one-year period for Canadian gold stock investors since the 2000-2002 upleg.

Note that upleg three started from a value of 166.76, and rose to a very respectable 369.72.

The correction preceding this upleg was a relatively modest but very extended and grinding 32% sideways correction which persisted for a brutal 17-1/2 month period, discouraging many Canadian gold stock investors, who watched the US dollar price of gold climb steadily while Canadian gold shares could muster only a 32% decline!

Without going into a level of detail which is beyond my present purposes, let it suffice to be said that the downleg from May 2006 through August 2007 was another horrendous one.

From a high of 369.52 in May 2006, the SPTGD plummeted in three vicious corrections to a numbing low of 240.42 in August 2007, revisiting the SPTGD peak value of a full 5 years and 3 months earlier, in May 2002.

Let me say that another way. Canadian gold stock investors could have sold everything in May 2002, and done nothing for over 5 years, until buying back at the same prices in August 2007! American HUI investors still saw their investments double (from the 2002 HUI high to the 2007 HUI low) during that same period. It was not a good 5 years to be a Canadian gold stock investor!

Nothing corresponding to the inglorious May 2006 through August 2007 SPTGD correction can be seen in the HUI, which handily outperformed the SPTGD during this period, even accounting for the plunging US dollar!

Now, let's look at the current upleg in the SPTGD index, which, as mentioned, started at a modest 240.42 value in August 2007.

Of course, we are not yet done with the current upleg. As of January 14, 2008 (its peak so far), upleg four has advanced as much as 59% from its August 2007 low. This can be compared to a 72% gain in the HUI during the same period.

Certainly the current upleg has seen one dramatic advance followed by a sharp correction in the December-January period. However, the January low has so far held, and the index is presently advancing along with gold, which in Canadian dollar terms has surged from $679 to $969 during the same time frame following August 2007, for a 43% gain, upleg-to-date.

What does the future hold in store for the SPTGD index?

Well, the Canadian dollar is now at parity with the US dollar, and I think we will more or less stay there for some time to come, as currency markets need to digest the Canadian dollar's 65% gain from January 2002 through today's date. This means we shall most likely see the true test of the SPTGD against the HUI on equal terms over the next few months. So far, the HUI has been the clear winner, and 2008 will tell if any change in that trend may possibly emerge.

Please allow me to close by agreeing with Mr. Hamilton on several points.

Our present analysis of SPTGD upleg structure shows that Canadian gold stocks, similarly to those constituting the HUI, clearly see their best gains in the final two months of their uplegs. Even sizable intermediate losses can be recovered simply by holding through to the end of the upleg. That is, one must allow the upleg to finish its course, and impatience is of no benefit to any investor. Another pattern that is very clear in the structure of SPTGD uplegs is that there are often significant corrections just prior to the final upleg surge. It would be particularly onerous to sell on these final plunges in the SPTGD, as the darkest hour is very typically just immediately before the dawn for SPTGD investors.

The duration of SPTGD uplegs has so far been 19, 15 and 12 months. Thus it seems probable that our present 6-month upleg is far from maturity, as there could be a further 6 to 12 months to go, and the duration would simply be typical.

Given that gold's present upward momentum is its strongest in the present bull market to date, it is reasonable to expect that if the value of gold shares continues to leverage the price of gold, then gold shares could be considerably higher than they are now in 6 to 12 months' time.

And of course, a note of caution must also be sounded. With gold's stronger than usual run to date, greater and sharper than typical corrections are also very likely. And any lasting downdraft in the price of gold will be sure to wreak considerable damage in gold stock valuations. So some quite powerful corrections are probably quite likely between here and the next peak in Canadian gold stock prices.

Perhaps the most satisfying aspect of our present situation is that we seem still to be in the relatively early stages - at least nowhere beyond the broad centre - of the current SPTGD upleg.

SPTGD upleg four may not unfold in the way that we would most desire (events in investing seem designed regularly to unnerve even the most savvy investors), but there are nonetheless likely to be further very satisfying gains in the SPTGD index in the months ahead!

Investor Words

26 February 2008

Yen Carry Trade: (Def) A specific example of a currency carry trade, where an investor will exchange a specific amount of Japanese Yen for another currency with a higher interest rate, and then will invest the new currency in hopes of earning more interest than could have been earned with the yen.

Have you ever been dumbfounded by the plethora of terminology that accompanies our ever more innovative (and ever more distorted) global financial marketplace?

Are you just looking for a way to preserve and grow your savings for retirement without being punished for engaging in the activity of saving by the artificially-low trendsetting interest rate policies of the international central banks?

In that case, you need Investorwords.com!

This site will sort the meaning from the jargon, and guide you well in interpreting the ever-more confusing language of the increasingly leveraged, manipulated and dangerous international markets.

And, if the language still confuses you (not to mention the concepts!), just buy and hold gold or silver. You will always be OK if your investment time frame is two years or greater.

Thank You Richard in Bellingham

21 February 2008

Richard in Bellingham is a full-time investor. He authors a blog entitled "The Resourceful Bear Blog."

His bearish take on the broad markets, and his affinity for gold, are similar to my own perspective.

Richard collects and compiles several articles and links per day to illuminate the machinations of the bubble economy that we presently inhabit. He adds his own comments to spice things up.

He was sufficiently gracious to cite my article yesterday (Saville's Thesis Accords with Hunt's Thesis - Serendipitously) on my probably more than transient alliance with Steve Saville over the influence of inflation on precious metal markets.

As Richard was kind enough to refer to my work, I shall cite his also.

Visit the Resourceful Bear Blog here.