Financial Figuring

What is investing? Wikipedia defines investment as the following: “Investment is putting money into something with the hope of profit. More specifically, investment is the commitment of money or capital to the purchase of financial instruments or other assets so as to gain profitable returns in the form of interest, income (dividends), or appreciation of the value of the instrument”.



So what does that mean? We all know what money is, it’s the stuff we carry around in our wallets (hopefully), so what are financial instruments? Specifically they are:

• Stocks,
• Bonds,
• Treasury Bills,
• Mutual Funds,
• Exchange Traded Funds (ETFs)
• Options and other derivatives,
• Property, or
• Currency.

Investing therefore, means that you spend your money and in return you receive one or more of the above financial instruments. ‘Profitable returns’ refers to:

• Interest – this is what a company will pay you for the privilege of using your money. Think of a savings account at a bank. You give the bank your money and they use it to lend to other people and businesses. The bank pays you a small amount of interest for the use of your money.
• Income (dividends) – this is a form of profit sharing. When a company makes a profit, they pass some of those profits back to the owners of the company (some they keep to reinvest in the company to help it grow or survive during down times). As a stockholder you are an owner of the business and entitled to a share of the profits that are distributed.
• Appreciation of the instrument – this refers to the increasing value of whatever it is that you bought. For example, if you bought your home for $100,000 ten years ago and today you could sell it for $150,000 you would say that your real estate (real property) had appreciated by 50% or $50,000 in this example.

This all sounds good, but there is more to consider before you plunk down your money and expect to earn a luxury vacation in Cabo San Lucas. Your education is just beginning and the fun is about to start.

You need to understand what your financial goals are and what your position is on risk management. Your goals may include:

• The need to draw an income from your investments,
• Saving for a vacation or major purchase, or
• Planning for your retirement.

Whatever the case, you need to find out, because the answer will determine how you invest.

Many people believe that the more risk you take with your investments, the more reward you receive. This is true to a certain extent. It is also true that the more risk you take, the more likely you are to lose your entire investment. What we are talking about is called risk management and it is very important to understand. Every person is different when it comes to risk. In general the older you are, the closer to retirement you are, the less risky you want to be with your investments. This is because the older you are, the less time you have to recover from a big loss.

For one to succeed in the stock market on their own, they need to commit to learning and commit to having fun. Yes fun. Investing on your own can be very liberating and very rewarding, but if done in ignorance it can be very dangerous as well. Beginners should scan the business section of the local newspaper and look for names of companies that they recognize. Read those articles and get a feel for what is happening with those companies and how they work. Even Warren Buffet, the greatest investor of all time, doesn’t invest in companies that he doesn’t understand.

I seem to be a little early when I’m trying to call a market top. Like 2 weeks early, and during those 2 weeks my positions are underwater. And I get nervous. Then the market reverses and I’m back in the black. This happened all summer long. I’m kicking myself to hold off making trades since I’m always a little early.



Back in April of this year (2010) the S&P 500 had made a huge run off the February lows, but by the middle of that month I had figured that that was enough and I started buying puts. (Recall that if you buy puts you are hoping for stock prices to fall so that your puts will profit). What happened? Well the S&P 500 kept rising and my puts kept falling in price.

Finally the first week in May occurred and prices crashed in a hurry and I made some very nice profits. But they could have been so very much better.

Again in June I was sure the market was going to drop once again. Once again I started buying puts and once again the market kept rising. Finally, the end of June came along and ravaged stock prices even worse than in May. I realized some profits, but once again it could have been so much better.

Additionally, several of my puts expired in June and the move didn’t occur until after options expiration day. My puts were worthless, even though I had been correct on the direction of the move (in stock price). How frustrating – I was right but I still lost money. This is why most people are scared of options.

What about right now (middle of September 2010)? I feel very certain that we are due for a pull back. Many of the leading stocks are over extended. Most are at or above the top line in the Bollinger Bands. All are way over their 50 day moving averages and hitting resistance levels. October is coming and that has been traditionally a bad month for stock prices.

I started buying puts late last week – and once again the market keeps rising. I had a few September puts that will expire nearly worthless tomorrow, but most of my puts come due in October.

The smart thing to do is to establish small short positions and slowly leg into new positions. This lowers your per unit cost (if you are buying puts and the market still rises) and allows you to fill out your position. As this market extends even further the technical indicators are screaming for a reversal. When it comes it will be swift and steep.

A swift downside move is coming. If you’re chasing stocks higher you’re likely to regret it in the days ahead.

Be careful. Plan your trade and trade your plan

Earning an income from your investments is the goal of many investors, and can ultimately make your retirement planning come true. Depending upon how you work it income investments don’t have to be for only when you retire. Your investments can supply income from day one.



Many Canadians (and others) have used income trusts for this purpose, at least until the federal government changed the tax laws concerning trusts. Now many former income trusts are converting (and in some cases reverting) to corporations before the end of this year when the tax law changes come into effect.

However, that does not mean that some energy trusts that might soon become corporations on or before Jan 1st 2011, won’t be excellent income generators. Specifically, these companies may still generate income for investors through the distribution of dividends, which is still a tax advantaged way to earn income. See the following for more details: Tax Tips.

The following companies (which in no way are exhaustive) should survive the coming tax changes, mostly because they had strong balance sheets, low debt and also their payout ratio (how much they pay to shareholders in the trust disbursements or dividends if a corporation already) was relatively low and therefore sustainable. The companies are as follows in no particular order:

Baytex Energy Trust (BTE-UN.TO) closed last week at $33.68
The trust earns 63% of its revenue from heavy oil in Northern Alberta, but at a comparatively low cost as it pumps the heavy gunk through horizontal drill technology, and does not utilize expensive steam injection. Also involved in Saskatchewan too with Natural Gas. Baytex has a payout ratio of approximately 50% at 18 cents/month = $2.16/yr = 6.41% return annually.

Cineplex Galaxy Income Fund (CGX-UN.TO) closed last week at $20.50
The fund owns movie theatres all across Canada from BC to PQ. Movies were cheap entertainment and so had a good run last year with Avatar and others. Performance has been good and the payout ratio is 59% at 10.5 cents/month = $1.26/year = 6.1% return annually.

Vermillion Energy Trust (VET-UN.TO) closed last week at $35.60. Again another Oil and Gas Company. Approximately 20 000 barrels of oil and 65 million cubic feet of gas under production. The payout ratio is 50% at 19 cents/month = $2.28/year = 6.4% annual return. Additionally Vermillion Energy is seeking a listing on the NYSE which will probably bump up their price as they will gain exposure to more investors.

Brookfield Renewable Power Fund (BRC-UN.TO) closed last week at $20.44. This fund is an electrical generator with hydroelectric damns in BC, PQ and elsewhere. Also becoming involved with wind-farms. Disbursements = 10.833 cents/month = $1.30/year = 6.36% annual return.

Keyera Facilities Income Fund (KEY-UN.TO) closed last week at $26.27. Keyera is a gas “midstream” business. Meaning they are not involved in exploration. They are the middle man – adding additives and transporting to retailers through pipelines and trucks. The payout ratio is 44% = 15 cents/month = $1.80/year = 6.8% annual return.

Crescent Point Energy (CPG.TO) closed last week at $39.98. Already converted to a corporation. Dividend is 23 cents/month = $2.76/year = 6.9% yield

Atlantic Power Corp. (ATP.TO) closed Friday at $12.27. ATP runs electrical power generators mostly throughout the USA and has already converted to a corporation. Dividend is 9.12 cents/month = $1.0944/year = 8.9% annual return. These guys are also currently seeking a listing on the NYSE (see note above).

Penn West Energy (PWT-UN.TO and NYSE:PWE) closed last week at $20.31. Another oil and gas company that has not fully recovered yet from last years crash (and so may have more room to appreciate). With a payout ratio of 54% disbursements are 15 cents/month = $1.80/year = 8.8% annual return.
(Please note that PWT-UN currently occupies a place in my portfolio).

If you are looking for good income generators then the above list is a good place to start. Good luck and remember plan your trades and trade your plan.

Can this incredible bull market continue? That is the question I have been asking myself for the past month. Since the market lows of March 2009 the DOW as been almost new high after new high. Some of the technical indicators are finally showing that a reversal is coming and we are due for a correction.



Bullish Percent Index (BPI) measures the percentage of stocks in a sector or index (in this case the Dow Jones Industrial Average) trading with bullish “point and figure” chart patterns. It’s best used as a measure of overbought and oversold conditions. Take a look at the following chart of BPI:

BPI on the Dow hit a record low of 0 in early October 2008. It was below 9 in late February and early March of 2009, which was the low point in the market as the DOW hit 6500. There has been a steady rise since then to a record high yesterday closing just under 97. This corresponds with a rise in the DOW as well to over 11000. (A rise of approximately 70% in just over a year, which is remarkable)

The standard thresholds for BPI are 80 and 30. Meaning that if BPI is below 30 it means less than 30% of the stocks in the index are trading in a bullish pattern. That’s an oversold situation and suggests the index or sector is vulnerable to a bounce.

Conversely, when a BPI rises above 80, it indicates an overbought situation and suggests the sector or index may be poised to correct. As mentioned above, yesterday it closed just under 97, which means that 97% of the stocks in the DJIA have a bullish pattern in their charts. It almost mathematically can’t get more bullish than that.

An overbought condition by itself isn’t enough to trigger a short sell for the index. Overbought conditions can get more overbought just as oversold conditions can get more oversold. However when a bullish percent index reaches an extreme condition and then reverses, it often provides the catalyst for a good trading opportunity. The key to watch here is the 20 day moving average (currently at 90). If the BPI reverses and drops below the 20 day MA that would be a signal to act upon.

Now combine the BPI with what we learned the other day with the VIX.

The VIX as you may recall is a measure of the amount of volatility in the stock market, based on the number of put and call options that are traded on S&P 500 shares. Essentially as the VIX rises (increased volatility) investors are betting that the market will drop. When the VIX falls investors are complacent and betting that the market will rise. Take a look at the following chart for the VIX for the past 18 months.



Investors were very, very scared in November of 2008 when the S&P500 index hit a low of about 750 the VIX peaked at over 85. Now the S&P500 got worse in March of 2009 dropping below 700, but investors were slightly less fearful as the VIX hovered around the 50-55 level.

Recall our rule of thumb that states:
• When the VIX is between 10 and 15: Sell stocks.
• When the VIX is over 40: Buy stocks.
• When the VIX is over 50: Buy more stocks.
• When the VIX is between 60 and 70: Take out a second mortgage and load up.

As you can see according to our rule with a VIX at 85 in late 2008 was a time to really load up on stocks. But so too was March 2009 with the VIX above 50. You might have been quite nervous from November 2008 to April 2009 but from then onwards you would have been laughing all the way to the bank.

Now let’s look at today on the VIX. With a reading of just over 15 what does that tell us? It is extremely close to time to sell your stocks.



In summary then the BPI is telling us that a reversal is imminent (but not here just yet) and the VIX is also indicating that we should be ready to sell. Can the market continue its climb? Of course, but right now the market is irrationally high and a correction is looming. Just remember the famous saying around Wall Street: “The market can stay irrational longer than you can stay solvent”. Keep an eye on your indicators and set your stop loss orders very tight so you can maximize the profits on this remarkable Bull Run.

One of the best ways to search for great companies to invest in is to identify mega-trends. Once you have picked out the mega-trend, if you are correct, it is fairly easy to select a winning company. The idea here is that all companies in an up trending market niche will do well and so investing in any of them is a good idea. Of course ideally you will invest in the market dominating player within that niche.

There are lots of different mega-trends out there – demographics, internet mobility, infrastructure replacement and US healthcare, to name just a few.



By demographics I mean the aging of the baby boomers. The oldest baby boomers have just hit mandatory retirement age (65 years), and while many chose early retirement 5-10 years ago millions more did not. As the single largest cohort in history gets older and older they will need particular services in quantities never seen before. There are many niches in this area to examine but do not overlook senior care homes and funeral homes.

Internet mobility is the wave of the future. Information when and where we want it is a very attractive service. Any company that can facilitate internet mobility and satisfy this desire will reap large rewards. Obvious choices include Research In Motion (RIM.TO) and Apple Computer (AAPL) with their very popular Blackberry and iPhone, but don’t forget the dominant worldwide player in the smart phone market is Nokia (N). Also in this market niche are companies that supply these winners, software makers that simplify and speed up information transfer. Bluetooth enablers, fiber optic suppliers and manufacturers of network equipment all play an important role.

Infrastructure replacement capitalizes on the massive worldwide government stimulus spending that has been the overwhelming response to the most recent financial crisis. Upgrading transportation systems such as highways, railways and ports are massively expensive undertakings. Companies that have the scale to complete the largest projects will do very well (SHAW), but think also further down the line. Architectural firms, designers and engineering firms that focus in this area will do well. There has been a lot of buzz recently about upgrading the electrical grid in North America. This too will be a financial windfall for companies specializing in this area. Think of the company that will supply new power meters required by the new grid. Every home and business will need one of these new meters.

US Healthcare changes are coming despite all the kicking and screaming going on at the political level. While the final bill has not yet been passed we can speculate on what form it will take. Clearly one of the key drivers in the reform bill is to provide adequate healthcare for all Americans. This will mean something in the order of 40-50 million new consumers of healthcare! While there will be new limits on what insurance companies can charge the simple fact that there will be a huge new supply of customers which will more than offset any restrictions put in place. Health insurance providers will be a winner once the bill is passed. Along with doctors, nurses and hospitals who will all suddenly be flooded with new patients. Medical device companies (BSX) and drug companies (PZR, MRK and JNJ) (don’t forget the generics too TEVA) will also do very well. The healthcare market niche matches up well with the demographics of aging baby boomers, since older people consumer more healthcare products than younger cohorts.

There are others to consider as well. Energy consumption will only increase over the long run and the so called ‘green revolution’ can also provide some financial winners in the near future. The real trick will be to figure out which company will provide that truly essential service or product better than anyone else. But if you start your search within a mega-trend market niche you will have a much better chance of success.

The following excerpt comes from an article by Larry D. Spears who is a contributing writer for Money Morning and if you want to view it in its entirety just click here. I thought it was well written and easily understood, and worthy of being reproduced. Enjoy.

The new OSI-based system (Options Symbology Initiative) officially goes into effect on Friday, Feb. 12, but the CBOE and several other exchanges began providing option quotes in the new format last Monday (Jan. 25).



To give you an idea of the impact this new format will have, let’s assume that the stock of Verizon Communications Inc. (NYSE: VZ) is trading at $29.25 per share. You are interested in playing the stock for a short-term rally by purchasing a March Verizon call option with a strike price of $30.00 per share.

Under the old system, your request for a quote would have involved just four characters – VZCF – with the letters defined as follows:

VZ – The option root: A one- to three-character symbol representing the underlying stock (Nasdaq and OTC issues with four- or five-letter stock symbols had abbreviated option symbols).

C – The designation for the expiration month and the type of option – either call or put. In this case, “C” denoted a March call (whereas a March put would have been designated by the letter “O”).

F – The strike price: The letter “F” indicated a strike price of $30.00 (or $130, $230, $330, etc., depending on the price of the underlying stock). A strike price of $35.00 would be “G.” $40.00 would be “H” and so on up to “T,” which would denote a strike price of $100.00. The letters “U” through “Z” were for fractional option strike prices.

Pretty simple once you got the hang of it – though it did require some interpretation for fast-moving stocks with lots of options and several fractional strike prices.

What about the new system? Well, to get a quote for the same March $30.00 Verizon call, you’ll need to call up this symbol: VZ100320C30.

At first glance, the new certainly doesn’t appear clearer than the old!
VZ100320C30 versus VZCF?

In fairness, though, once you know what all of the characters mean, it really does clarify the quote – if only because it literally tells you everything there is to know about a particular option.

Besides, with most of today’s electronic quote systems and brokerage order platforms, you’ll never have to actually type in the symbol for a given option. You’ll only need to click on the “Option Chain” tab for the stock in which you’re interested and it will provide quotes for all the options, allowing you to select the one you want.

However, so you’ll know what everything in the symbol “VZ100320C30″ means, it’s also summarized in the accompanying info-graphic (see graphic below). But let’s break down this symbol:

VZ – The option root: A one- to six-letter symbol for the underlying security – in this case, Verizon (VZ).

10 – Two characters indicating the year in which the option expires – in this case, 2010.

03 – Two characters representing the month in which the option expires – in this case, March.

20 – Two characters giving the actual day on which the option expires – in this case, Saturday, March 20. (Remember, equity options don’t actually expire until the Saturday after the last trading day, which is almost always the third Friday of the expiration month).

C – A single character indicating the type of option – in this case, a call. (If it were a put option, the symbol would include the letter “P,” instead).

30 – One to nine characters (including a decimal character, if needed) specifying the strike price – in this case, 30, or $30.00 per share.

See, once it’s explained, it’s really not that complicated, at all. And, as already noted, by Feb. 12, virtually every quotation system and trading platform will have revised its tabs and trading tools to reflect the changes. So you should have no trouble continuing to use options to enhance the gains on your favourite investment strategies.

So how does one go about picking a good company to invest in? Some people analyze all the numbers (revenue, sales, profits, earnings per share, P/E ratio and on and on). This is called Fundamental Analysis. Other people look only at the price of the stock thinking that anything worth considering is already reflected in the price. These people are using what is called Technical Analysis and are often looking for patterns in the price charts. Both methods have merits and to be perfectly honest I try to use a bit of both before I make any purchases.



I find that fundamental analysis can convince you that you’ve picked an excellent company but you may end up buying at the wrong time. Once you’ve decided upon a company put it on your watch list, which is just a list of companies that you are interested it and are considering for investment. At this point I would open up a chart and examine the price trends. This can help you discover if the timing is right for your purchase. Keep in mind this is really an art, not a science, you are dealing with expected probabilities not hard and fast rules.

I will post more on both Fundamental Analysis and Technical Analysis over the next couple of weeks, but I think that there is a more (pardon me) fundamental question here. Namely, how do you find a company to begin your analysis?

There are as many ways of doing this as there are investors. One of the best is to begin by looking around your home. What do you use all the time and can’t do without? Does your neighbour agree with you? What about your friends? Do they use the product too? Would you still buy it if you lost your job? OK, who makes it? Now you have a company to investigate.

Often this will produce a company that is huge and a proven winner. Like Proctor & Gamble (makers of every day consumer goods) or Apple Computer or even Wal-Mart. No doubt these are good companies to invest in, but they are already pricy. One way to find a smaller company that has a chance to really explode on the scene is to identify a supplier to these companies.

Just like in the Klondike it was the suppliers to the miners – those people and companies that supplied the picks and shovels – that were the biggest winners. Sure a lucky few struck it rich and drew thousands of people to try their luck, and every single one of them bought a shovel and a pick (and a back up in case one broke out in the bush).

Apple Computer and Wal-Mart are two companies that have already “struck gold”. Shares of Apple more than doubled in 2009. They’ve soared more than 1,000% over the past 10 years. Apple produces the iPod and has sold hundreds of millions since their introduction a few years ago. It is one of the greatest business stories – and greatest stock moves – in history. What do you think happened to the stock price of the company that supplied Apple with the little scroll-wheel feature on the iPod? The company is called Synaptics and its stock jumped from $2 to $40 for a nice little gain of 1,840%

Wal-Mart too has a great story of massive growth. A few years ago Wal-Mart announced that it would put a little tiny radio frequency tag on every single product in every single store. This would help out with managing their supply chain and increase their efficiency and therefore positively affect their bottom line. What do you think happened to the company that supplied those millions and millions of RF tags and readers? You guessed it; Intermec went on a $14 to $39 sky-rocket.

The trick of course is finding out who supplies the critical piece of hardware for the latest must have gadget. But you can do this with a little research at Yahoo Finance and Google, by reading news reports and keeping your ear to the ground.