US GDP Estimates

Gross Domestic Product (GDP) will be the driver of the stock market on Thursday. Expect to see little movement or volume in the market until the numbers are announced by the FED.
The consensus among analysts is that GDP growth for the third quarter of 2009 should come in around 3%. If GDP comes in above 3% expect the stock market to surge ahead and recover most of the losses on the week. If GDP comes in below 3%, get ready for a bear market correction that could take the stock markets on a wild ride down at least 20%.

The risk seems to be more heavily weighted to the downside. Over the past week there have been numerous economic indicators missing analysts estimates to the downside with the most recent, a lower than expected durable goods shipments on Wednesday morning and an unexpected drop in new home sales.

Even Goldman Sachs (NYSE:GS) has cut there expectation of GDP below 3% to 2.7% as soon as the durable goods shipment was announced to the downside. This announcement followed an onslaught of estimate reductions: Morgan Stanley (NYSE:MS) cut from 3.9% to 3.8%, Bank of America - Merrill Lynch (NYSE:BAC) cut from 2.5% to 2.3%; however, according to marketwatch.com economists pulled still anticipated GDP Growth to come in at 3.5% on average ().

I am currently protecting my portfolio though a number of short positions: puts on (NYSE:SPY) DEC 90’s, and puts on (NYSE:IYR) DEC 39’s.

It will be an interesting day so let’s see what kind of mayhem comes.

Second Dot-Com Bubble Brewing!

     The first Dot-Com Bubble or IT-Bubble was created like many other investment bubbles throughout history—speculators took control of the investments in question. The original Dot-Com Bubble grew exponentially from 1998 thru 2000 and finally reached a peak on March 10, 2000 and burst. This shock had repercussions throughout the world, but the emphasis remained where the bubble had been created, the United States of America.

     The list of Bankrupt companies as a direct result of the bubble bursting was enormous; a detailed list can be found on Wikipedia. The end result of course was only the strongest companies surviving. As a direct result many middle of the road investors managed to wipe out their entire savings.

     Although many lost vast fortunes, others managed to cash out partially before the bubble burst and some of the most successful were simply holders of internet real estate, Domain Names. Canada has a host of internet millionaires and Vancouver was and still is a hot bed for Dot-Com activity. Some of these prominent Dot-com millionaires include Caterina Fake and Stewart Butterfield (Flickr creators), Kevin Ham (the $300 million Domain King), and many others.

The Dot-Com Bubble Already Happened So Good Luck Buying Quality Names for Cheap Right?

Wrong!

     Sure, buying a Latin based Character name such as Canada.com or God.com is not an option for anyone unless they are already multimillionaires, but there is a new opportunity available. On Monday, October 26, 2009 Kelly Olsen of the Associated Press announced from Seoul, South Korea in Internet Set for Domain Name Changes that the internet is set to undergo one of the biggest changes in its four-decade history. It is expected this week that international domain names that can be written in non-Latin script will be approved.

     The Internet Corporation for Assigned Names and Numbers (ICANN), non-profit overseer of domain names, is holding a major conference in Seoul and will be voting on whether to allow internet addresses to be in scripts that are not based on Latin letters. The though is that this will help continue to grow the web by making internet use more diverse allowing domains using characters such as Arabic, Korean, Japanese, Greek, Hindi, and Cyrillic (Russian).

     Peter Dengate Thrush, chairman of the ICANN board stated, “This is the biggest change technically to the Internet since it was invented 40 years ago.” If this change is approved on this coming Friday, ICANN will begin accepting application for non-Latin domain names some time in mid 2010.

Why Should I Care About New Domain Name Characters?

     Remember the first Dot-Com Bubble? If you can purchase highly sought after Domain Names like a translated version of God.com or Money.com or Porn.com…you could make a windfall. How exactly the new domains will be sold is another question. If it happens that you can buy them like regular Dot-Coms, it may be a shot gun approach to who can register a name the fastest. Like a Wild Wild West race for a free stake of Oklahoma lands.

     Although this doesn’t mean we are in for a repeat of the Dot-Com bubble, it does lay the ground work for a repeat of history throughout the rest of the world. Maybe a World Dot come bubble to come after this World Wide Recession.

     If you are smart about these new Domains you could get in and out and make a bundle with a little bit of research.

Top TFSA Investments: Canfor Pulp Income Fund (CFX.UN)

Canfor Pulp Income Fund is one of the strongest forestry companies in Canada with a great balance sheet to make it through this recession and further potential future bumps in the road. This fund was recommended previously on this blog in the article Income Trust Picks for my TFSA
Canfor Pulp Income Fund (TSE:CFX.UN) is involved in the supply of pulp and paper products with operations based in the central interior of British Columbia. The fund was created to acquire and hold a 49.8% in Canfor Pulp Limited Partnership (CPLP). The fund owns and operates 2 Northern-Bleached Softwood Kraft (NBSK) pulp mills and 1 NBSK pulp and paper mill. The mills have the capacity to produce over 1 million tonnes of NBSK pulp and 140,000 tons of kraft paper.

The forestry sector in Canada has been in what some might call a depression for well over 5 years and many smaller outfits have fallen by the way side. The real bread and butter have always been the US Housing market, but NAFTA Softwood Lumber issues negatively affected most Canadian Forestry companies before the World Recession began. As a result, forestry sector stocks such as Cascdes Inc (TSE:CAS), Domtar Canada Paper Inc (TSE:UFX), Catalyst Paper Corp (TSE:CTL), Fortress Paper Limited (TSE:FTP), SFK Pulp Fund (TSE:SFK.UN) have been pounded over and over. Only the strongest have survived and of those Canfor is one of the best. With lumber prices on the rise again and the rumbling of logging trucks heard again throughout BC Canfor looks like a real winner.

Canfor (CFX.UN-T) is currently rated by Thompson Reuters as 8 out of 10 while the Forestry & Paper Sector as a whole is ranked at 6.2/10. There are 9 analysts listed as publicly following the fund and of those 1 ranks it a Strong Buy, 5 a Buy, 2 a Hold, and 1 a Reduce. The current price is around $5.69 with a 52 week high of $6 and a 52 week low of $1.30. Analyst estimates at this point place the fund in a range between $3.25 and $8 with a mean of $5.19. The current dividend is lacklustre at only 2.1%; however, when the company gets back to production there will be a huge spike.

As I made acquisitions in my TFSA I ran out of room for this fund since TFSAs this year only allowed a max of $5,000. Due to the extent of dividend payments I have received to this point in my TFSA I am now ready to add another acquisition to the mix. If the recession does end the US then this fund should do very well. Looking at a 5 year Chart you can see that the fund reached a maximum price around $16. Further, looking at the chart I can see the long term down trend is about to be broken.

For more TFSA picks take a look at the following articles:

• Income Trust Pick: A&W Revenue Income Fund (TSE:AW.UN-T)
• Income Trust Pick: The Brick Income Fund (TSE:BRK.UN)
• Black Gold Income Trust (TSE:WTE.UN)

Google Predicts End of Recession?

Google (NASDAQ:GOOG) has recently been touted in the media for the company’s accuracy in displaying real time infection data for H1N1 (Swine Flu). If you go to Google Maps there is an application that tracks the number of people searching for symptoms for the illness. It’s pretty amazing that the graphical representation of this data in real time has been shown to be spot on with data collected by the world’s health authorities who take over three months to compile, analyze and plot their data. The H1N1 tracker in Google is a huge leap forward for the health crisis management effectiveness in the world and you can even zoom right down to see which parts a single city are reporting cases.
So Google can display where people have the flu, how does that predict the end of the recession?

It doesn’t.

The tool that Google does have however is an intimate understanding of advertisement spending. You see, there have been a number of studies undertaken that suggest that web advertising is a leading indicator of the end of a recession. The other interesting thing about some of these studies is that they also claim that Google Adwords (For Advertising) and Google Adsense (For Publishing) are also laggards to the recession. Basically, businesses turn off their online advertisements last and also turn them back on first.

You may have noticed that Google recently reported the company’s third quarter results and advertising was up. This much cannot be said for rival Yahoo (NASDAQ:YHOO) who reported profits up from major cost cutting while revenues continued to decline; however, that’s another storey. Google on the other hand is predicting even more growth in the coming years as well—in 2004 online advertising was $18 billion and by 2013 is expected to top $87 Billion according to PricewaterhouseCoppers.

Simple ways to tell Ad revenues are likely up:

Method 1) Go on Google Adwords and bid on a set of key words. The interesting thing here is that you can search keywords for specific industries to see if ad spending is up.

For example take the Financial Sector:

Keywords to search: Investment, finance, investment advice, stocks, bonds, etf, mutual fund, insurance, savings account, banking, bonds, forex, etc.

Now track the results over a series of time and you can chart and trend that information to predict stock market movements for a single sector or an index like the S&P 500, NYSE, or TSX.

Method 2) If you are a publisher like I am, take a look at your Google Adsense earnings. Compare your average costs per click (CPC) conversions to determine if your average CPCs are increasing or decreasing. This is another easy way to tell if ad spending is on the rise or fall.

Obviously this is not a full proof method to play the stock market; however, it does present an interesting new tool to add to the tool belt and may help reinforce some market expectations and forecasts.

Give this method a test run and let us know at Investing in Canada what your results are like. It should be an easy system to track with an excel spreadsheet.

The Next Economic Shoe to Drop on the World Economy

Economic Crisis: U.S. Commercial Real Estate is next to put a huge dent in the Economic Recovery.
Everyone remembers the destructive mortgage practices that lead the US Housing collapse that triggered the Global recession. These mortgage products were not limited to Residential properties, many loans were provided using the same teaser rates for Commercial properties and the affects are beginning to emerge.

According to the Vancouver Sun paper, the Obama White House is preparing for the second round of the real estate/banking crisis by attempting to encourage liquidity for refinancing. There are approximately US$3.7 Trillion in outstanding commercial real estate backed loans. The short term outlook is for around US$400 Billion to reach maturity in 2009 and then exploding to US$2 Trillion in 2010 and 2011.

Why is it a big deal that so much US Commercial Real Estate Debt is maturing?
• Commercial Profits are Down

• Vacancies are up

• Cap rates are up

Obviously commercial property profits are down. The retail goods sector has seen the sharpest declines and services are also way down. Retail tenants can not afford the same levels of rent to turn a profit and neither can Office Tenants. With the decrease in profit levels for tenants, landlords must offer better leases to keep tenants in place. Vacancies are also up so the new leases signed are being signed with many sweeteners resulting in much lower lease rates. Further, there is more risk perceived in these properties now so even though interest rates have declined capitalization rates have actually increased in most areas.

The basic way a commercial property value is determined is by estimating the net operating income and dividing by a capitalization rate (risk return required to hold the asset). In its most simplistic form this works out to a formula like this one (Property Value = NOI/Cap). When NOI declines and caps remain stable the Property value drops. When NOI remains stable and Caps increase the Property Value drops. Obviously if NOI declines and capitalization rates increase the Property value will drop even more and this is exactly what has been happening with US Commercial Real Estate.

Given this very basic information, which should be well interpreted by the market, real estate values have dropped so banks will be looking for more equity on their books. Essentially this means you will not be getting a refinanced mortgage with out putting down a significant amount of new equity. This will lead to a massive amount of cash strapped landlords with a cash crunch dilemma. Do they sell at huge losses, take on high risk high interest mortgages, or do they go bankrupt? We have already seen some of the largest commercial REITS cry for help. For example, General Growth Properties (OTC:GGWPQ) is currently under bankruptcy protection. I bought this a few weeks back for $2.82 a share and sold it a day ago for a huge profit: recall the article General Growth Properties Takeover Target. This stock may be running out of steam though; I sold because I am concerned about the Commercial REITs in general.

It is almost surprising that the iShares Dow Jones Real Estate ETF (NYSE:IYR) has rallied so substantially over the past 6 months. Most investors should be well versed in the current crisis of (lower NOIs, higher vacancies, and higher capitalization rates with so many mortgages coming due over the next year.)

I suspect the only thing holding Commercial Real Estate up on the stock market at this point is pure speculation. NOIs will remain lower going forward and capitalization rates are very likely to continue to rise, especially if the FED decides to rein in inflation by raising interest rates in the future.

If you believe like I do that Commercial Real Estate (NYSE:IYR) is due for a major correction, but don’t want to take on the infinite risk associated with shorting a stock, look to a better strategy that contains risk—BUY Put options on IYR. This way your risk is limited to the amount you put down and your potential upside is very large.

I like the Jan 2010 $37 Puts. This has lots of volume and a tight spread.

Canadian Dollar to Outperform US Dollar Over the Coming Years.

The American Dollar is in trouble. Over the past couple of decades the US Government has borrowed and borrowed and now the White House sites on over $11,925,000,000,000 in debt. That’s around $38,834 per person! Take a look at the US Debt Clock. If you scroll down to the bottom you will see that each citizen in the US is Liable for an estimated $348,953 of Total Debt. If you think the US Consumer will be back in their full glory of spending fury any time soon than please explain how this is possible to the rest of the World.
On October 5, 2009 a major rumour that could significantly deflate the value of the US Dollar hit the media. The rumour, some Gulf Arab states were considering using currencies other than the US Dollar for oil trading. The Canadian Dollar responded to these accusations by rallying over $0.01 which is over 1%. If Arab Oil economies do in fact make such a move from the dollar there is huge potential for a nose dive in the US Dollar. This would make US Exports cheap and potentially help revive American production, but at the same time the US is a net importer so a lower dollar will destroy American purchasing power. This would be another stake in the heart of the American consumer.

An American consumer that has to pay more for goods and services will experience extreme amounts of inflation scraping away years of wage increases, and further eroding retirement portfolios. I guess freedom 55 becomes a tall tale.

With the Arab oil rumour in full force during afternoon trading Gold price shot higher. Inflation concerns were the main culprit. This rumour was brushed off by the Arab Oil States, but such a rumour sounds all too reasonable.

If you were an Arab Oil State and concerned about your profits being tied to the US Dollar where would you turn?

Let’s face it, there are only so many currencies that make sense for petro trading: the Euro, the Chinese Yuan, the Russian Ruble, the Japanese Yen, the Canadian Dollar, the Australian dollar.

Some of these currencies can be scratched from the list almost immediately due to their lack of faith from the investing World. Personally, I would immediately remove the Yuan and Ruble from the mix due to my lack of familiarity with the currencies and potential for drastic changes due to government control. The rest I would argue could be a diversified mix of currencies the Arabs may turn to in search of replacing US Dollars.

There is still too much uncertainty in the stock market and currency markets to make a well established prognosis, but it does give you something to think about in the mean time. My personal opinion is that the Canadian Dollar will appreciate over the coming year at the expense of the US Dollar as the American Economy is lucky to limp out of this recession. The other currencies above are also likely to do the same.

Previous Articles about the Canadian Dollar at Investing in Canada include: Is Now the Time to be Investing in Canadian Dollars, Canadian Dollar: How to make money on the increasing value of the Canadian Dollar, GDP Growth, Inflation and the Yield Curve, Strength of the Canadian Dollar

Canadian Big 3 Telecoms Scramble to Defend Against New Rivals

Only offering Neapolitan ice cream in a country as big as Canada is outrageous; so why has it taken so long for more than 3 wireless providers to offer service in Canada? The Big Three Wireless Providers, Bell (TSE:BCE), Telus (TSE:T), and Rogers (TSE:RCI.B) have controlled the CRTC for far too long and are fighting hard not to lose that control.
Last year it was announced that the Canadian Government decided that times have changed and since Canadians have been gauged by Bell, Rogers and Telus for far too long, an auction would be set to effectively allow other companies to offer wireless service in Canada. That auction came and passed and consumers have been waiting well over a year now to see some results. A previous article on this blog, New Cell Phone Competition: What’s in store for Canadian Telecom Giants, announced the new companies that were successful in their bids for wireless contracts and provided the amount they spent on those contracts.

Bell, Rogers, and Telus have not given up their fight to remain masters and have thrown every trick in their CRTC complaint book to the board. The most notable has been the uproar about a private company called Globalive (www.globalive.com). Globalive is thought to be the only real threat to the big 3 as Globalive has the potential to become another national carrier. The Bell, Telus, Rogers oligopoly went so far as to try to force the CRTC to forbid Globalive from operating in Canada for a bunch of insignificant details. To read more about the CRTC’s decisions with reference to this case take a look at ISPs upset with latest CRTC ruling.

The brand name that Globalive is entering the market under is WIND. WIND has a 10 year history of operations in Italy and Greece and has a strong reputation throughout Europe. This should challenge Telus, Rogers and Bell into providing better service in Canada at more affordable rates. WIND is meant to launch in the fall of 2009 so it’s no wonder Bell and Telus recently made a major announcement.

Now Bell, and Telus announced that they will be offering the iPhone starting in November according to an October 5th article in the Globe and Mail titled “Bell, Telus to launch iPhone next month.” This sounds like, looks like and tastes another attempt by 2 of the 3 big wireless providers to lock up some unknowing customers on 3 year deals before some of the new providers can start their major advertising campaigns. If you are not on a contract already then wait it out for a great deal.

If you are an investor in any of the big three wireless providers I warn you one more time, market share is in jeopardy and profits will be cut by price wars.

How to Profit in a Down Stock Market

 There are many ways to profit in a declining stock market, but I want to discuss a method where your downside risk is limited while upside potential profit remains huge.
 The stock market has been in a mid-term up trend for many months now and these stock increases have been fuelled by speculation and greed. There are many reasons why there is potential for a stock market pull back and these have been discussed in previous articles on Investing in Canada: How to Protect Yourself From a Red October, Double Dip Recovery or V Shaped Recovery.

The most effective way to profit from a pull back in the stock market is to implement a very basic options strategy: The Long Put.

Now, this is not your regular old Long Put. I am not suggesting simply buying puts on a stock like (Nasdaq:GOOG) and hoping it tracks the market or drops more than the market; what I am suggesting is a Long Put on steroids. Basically, ETFs have made going long and short the market very affective because many have options capabilities with large volume. Further, leveraged ETFs that are long or short the market allow you to gain an added incentive since there are rebalancing cost for the fund that chip away at the total value.

Some issues that you need to consider before undertaking such a strategy are:

• The duration of time you expect the pull back to occur over

• The size of the pull back

A rule of thumb with options trading is that the longer the duration to option expiry the more you pay; the closer the strike price is to the current price, the more you pay; and the lower the volume in the options traded, the more you will pay.

Now that we have some basic rules I will provide my interpretation of what these rules mean to me today and how I will be executing.

• First, it is a difficult feat to pick the absolute top or bottom of a market cycle so a very short term options contract will not work for me.

• Second, I do not want to pay a tonne of option time premium

• Third, once a pull back begins I do not expect to be able to pick the bottom.

• Forth, when investing in Canada you will notice that options do not get the volume necessary for a tight bid/ask spread so I will look to NYSE, AMEX, or Nasdaq options.

Given this and the fact that I want to be well diversified in my strategy I will buy puts on a market ETF. There are so many different ETFs out there now, but these guidelines narrow it down very quickly.

Although there are not currently any leveraged ETFs that track the S&P 500 my selection is to track this market as it is a good gauge for the overall market in North America.

My selection is to buy puts on (NYSE:SPY), which is an ETF that tracks the S&P 500 and has the seconded highest volume out of all North American ETFs.

The next step is to determine the time duration I am comfortable with. Since the erosion of the option time premium increases exponentially as you get closer to the expiry date and I want a slightly lower priced option I will go for a December 2009 expiry.

Now you go to look for the cost of the various puts for your time frame. The closing price of (NYSE:SPY) was $103 so if I pick a price very near to $103 I will be paying more for being at or near the money and the further down in price I pick the strike price the cheaper the contract will be. You need to balance out your price expectations here against the time frame.

I could conceive of a 15% pull back at this point so something around $87-90 suites me. When scrolling through the DEC put option contracts on SPY I noticed that the $90 strike has large volume and many open contracts. As a result this is the contract I will purchase.

The contract symbol I am referring to is FYSXL.X; the bid is $1.40, and the ask is $1.46. Let’s assume I have to buy on the ask at $1.46 to calculate the break even point per contract that I buy at expiration.

B/E = Strike Price – Premium Paid

B/E = $90 - $1.46 = $88.54

This means that SPY must trade below $88.54 at expiry to make a profit. This is effectively a 14% drop in the S&P500.

Now, that is assuming that I hold onto the contracts until expiry, which I would not recommend. If I sell the contracts at the end of October I will still be able to recuperate a substantial amount of time and risk premium from the contracts.

The great thing about options is that when you buy puts or calls the most money you can lose is the amount you put in and you get to be leveraged 100 to 1 against the stock or ETF index.