Tax Is A Four Letter Word

Golden Exuberance
Gold prices have surged in recent days, with the price pushing up above $1000 per troy ounce, and close to its all time high. I have expected strength throughout 2009 and so have been looking for a rise like this, which is why I took a fairly signficant position back in January. Additionally it has served as a useful hedge against both inflation and my substantial US dollar holdings.

As of this morning I took the decision to realise my gains - a fairly modest 12% but not bad over 9 months. I am not alone in believing the recent rises are unsustainable, as this article on gold prices from the Daily Telegraph outlines.

"London's leading gold forecaster has advised clients to liquidate holdings of gold and silver until the latest speculative fever abates."

I still adamantly believe that inflation is a near certainty in 2010 and beyond, as this is the easy way for politicians to offset the enormous debt that all the government support has lead to over the last year. As such I will be watching the gold price carefully over the coming months, with an aim of buying in once there is a fall back. On that note, I have continued to be surprised by the strength of the wider market recovery since March - it seems to have gone beyond rational, and a correction is necessary.

Investors seem to have become inebriated on the 6 month returns, a classic sign a bubble is forming that will surely deflate once institutions take a cold look at the economic fundamentals in the coming dark months of autumn.

Addendum: just logged back in today (Sep 18) and noticed this video linked to the right under CNBC: Commodities also discussing gold stocks losing their lustre which is worth a watch.

Capital Gains
Inevitably a significant question for any investor is when to realise profit (or loss - the latter is equally important). Like all investment decisions, that should never be taken rashly and certainly never based on emotion.

With GGP up around 600% now since bankruptcy, and for me around 300%, I am sitting on an unrealised profit of around £250,000 (approx $400,000) at present. You might think I would also contemplate cashing in, however I consider this investment between 6 and 24 months away from reaching fair value. Additionally realising a gain of that level requires careful planning, so I am beginning to look at ways of reducing the tax level payable. Sorry Gordon, I am already 'contributing' enough to the UK's recovery.

On the subject of GGP, its spectacular rises in recent days will also likely see a correction back soon enough, although the upward trend should continue. It has been fuelled partly by the wider market reassessing the firm as a value prospect, institutional buyers returning and crucially the belief that existing shares have a significant chance of retaining value.

That has been helped by further comments on Bloomberg by David Simon of Simon Property Group yesterday, describing SPG as a "logical buyer" of General Growth Properties assets. Limited asset sales at the right price are in everybody's interests here so a deal with some of the major REIT's is looking increasingly likely to be announced over the coming months.

Deleveraging GGP is important, and is rather like selling a holiday home to reduce the mortgage on a main house: it might seem a shame, but ultimately is the route to being financially healthier in years to come through lower debt. Of greater significance to me however is this news that the US Treasury has taken on board the significant criticisms of the tax rules that penalised those seeking to manage distressed debt.

Of course, this was cited as a major factor in the inevitability of General Growth Properties needing to restructure within Chapter 11. The removal of this sends a powerful message to the credit markets that renegotiating in these times is not just possible but expected. That benefits all REIT's, but also GGP for those loans in the joint venture SPE's that are outside bankruptcy.

It also benefits General Growth by providing further evidence that equivalent extension deals will be being agreed on the wider market when included in the restructuring plan and submission to the court. I would be surprised if we did not see GGP's share price at $8/share or higher by next spring based on the current news and developments.

Political Posturing For The Cameras

The politically self-serving vitriol from politicians of all sides continues on Evil Banker today. With Average Man On The Street convinced that every aspect of his current woes are down to overpaid bankers, it provides politicians with the perfect excuse to continue deflecting their attention from the real questions.

Both Brown and Cameron are continuing to spout populist soundbites, for the primary purpose of further exploiting this to their own advantage while pandering to their support base. Of course that is hardly surprising given that this is what 90% of modern politics is all about.

However the reality is that both political parties can sit there making demands of the banks all they like, but they have less leverage when it comes to negotiations than you might think - not least because the country needs successful banks. Additionally the UK government has no actual stake in Barclays and HSBC, they just borrowed funds. And both will happily give them the two fingers and quietly threaten to rebase abroad should there be any sort of meaningful attack on their competitiveness, such as enforcing salary rates.

Even Sir Fred Goodwin, the former CEO of RBS dragged in front of the camera's for some token contrition today, and who made the biggest mistake of all in his ridiculously overpriced takeoever of ABN Amro, had to point out the truth by saying: "..if bankers felt they were not paid enough, they would leave."

And here lies the crux of this particular issue. Bankers salaries are already falling, and falling fast. Banking is a capitalist system that is a hell of a lot more efficient at setting pay levels than the public sector - take a look at politicians and civil servants. Banks are busy laying off thousands of people, most of whom are not rich, just hard working victims like those in other areas of the economy. The banks are cutting back discretionary bonuses now, and new joiner wage packets on thousands more bankers lucky (or good) enough to find work. In short, the industry is busy doing precisely what is being asked of it in terms of reassessing the worth of its workforce.

Interfering with that process by enforcing lower than current market rate salaries for some banks is a ridiculous idea. All it will do is begin an immediate talent drain from those with salary caps, and increase the competitive advantage of the others. Unless this could be imposed at the industry level, which it cannot, this idea of playing up to populist opinion for the cameras will ultimately damage Britain's two weaker banks even more significantly in the long run.

It's like this other meaningless drivel by Gordon Brown that people should waive bonuses. All well and good Gordon, but how about you lead by example? If we work out how much you have cost the country from just a couple of decisions, I'd say you should pay every penny you ever earn on the lecture circuit once we get the chance to boot you out in two years time.

Let's not forget that Gordon sold off a large part of the country's gold reserves 11 years ago, which is estimated to have cost the country over £5bn. His other decision 11 years ago to abolish tax credits on pension funds, bleeding £5bn a year from pensioners, has lead to an appalling funding deficit, with companies being forced to plug that each year from profits - an effective tax - all while the demographics mean ever more pensioners are needing money.

All I can say is, go right ahead Gordon. You can't touch me, and having just written you a £35,000 cheque for capital gains last year, you can fuck right off if you want to try and tax me further. There's plenty of places in the world I can choose to work, and if you don't see net contributors like me as an asset, then you'll soon find out - sadly it will be to the detriment of Old Blighty.

More Baracking Gets A Reaction

I am a firm believer in the need for regular, institutional change at the highest level; you only have to look at how power corrupts over time, or leads to grotesque complacency of the worst kind. For examples in politics, you need only think back to the detachment from reality of Margaret Thatcher towards the end, or New Labour now, and of course George W Bush for the last.. 8 years. Okay he's a special case but you take my point.

With institutions such as banks, that complacency (and in some cases corruption - you know who you are Bernie), has had longer to fester right up to the top. As we all know, it has been spectacularly laid to bare in the last year, what with the problems requiring vast government bail outs to save many financial institutions. A recent point of major angst with the politicians and public at large are the continuing ramifications from the presumption of bonus payments as some kind of right by many at the top of those banks which have performed worst.

One point on that is to note that some are indeed contractually guaranteed - particularly the rainmakers that bring in vast sums for a bank and could walk to a competitor in a second. However, that is a small percentage of the overall pot so it is not an excuse.

However an interesting development today was Barack Obama's latest announcement that all banks that have received bail outs will need to cap executive pay to a mere $500,000. I think that I can safely disclose that we are one of the 90% of banks that have received some kind of financial package from a government. The reaction here at the bank has been impressive - faced with the prospect of having their pay limited to such trifling levels, the order has come from the very top to immediately investigate ways to pay back the government.

It is hilarious how the moment executives at the top find the trough being emptied, they're squealing with indignation and looking for ways to get their snouts back in. So let me see - your priority is helping fund all those businesses suffering as a direct result of the systemic failure of which you have to accept a proportion of responsibility? No, it seems to be working out how to squeeze internally through the coming cull, or externally via recalling loans, to ensure we remain fully independent of the US government.

Away from the subject of bonuses, it is interesting to see that momentum is building up through the press for the strong case of investing in gold as a good option for 2009. I continue to recommend placing significant funds into a gold ETF and moving some away from Sterling and the US dollar this year, but the linked article gives a good summary with some options.

Otherwise I have found out some interesting office rumours from a recent night out, as well as confirming whether I am to be included in the coming job cuts. Both can wait for another entry.

Investing for a Recession (Part II)

Having outlined how I have made some useful money from the recession to date, it would be worth now moving to my current main investment at present, so that there is some context when I update on this going forwards.

Apart from putting a proportion of my funds into a gold ETF, which is an excellent hedge both against recessionary worries, a devaluing dollar and future inflationary concerns from all the quantitive easing taking place, I have also placed a significant sum into something that is much less obvious in these turbulent times: US commercial property.

You might think that is insane, and is totally contrary to what everybody else is putting their money into at the moment. But part of investing is looking for value, and sometimes that means looking beyond the conventional wisdom. I have bought into something called a Real Estate Investment Trust (REIT) - these are essentially US commercial property companies, which by and large have plunged by enormous amounts in the last 6 months.

As such, several are rumoured to be on the verge of bankruptcy, and one in particular is down a staggering 97% since the summer of 2008. When you factor in a fall of that magnitude, you have to start looking at the price and ask why, and whether this is rational or fueled by other factors. The underlying reason is the credit crunch, combined with investor fear of a Chapter 11 bankruptcy filing.

To give some background here, REIT's have by and large used a previously acceptable business model, whereby they were highly leveraged and routinely took out large levels of debt to increase their asset base and buy up more property. They then serviced this debt, steadily paying it off while periodicially refinancing this - without problems in a normally functioning credit market. Of course, everybody now sees US property as having been in a huge bubble, and all associated loans as necessarily toxic. As such, suddenly some enormous commercial property companies are on the brink of bankruptcy - including the particular REIT I have invested in called General Growth Properties (GGP).

To put it into context, GGP is the second largest mall owner in the US. That is not an insignificant statistic in itself, and should it fold there would be enormous ramifications for the US retail sector, not to mention a political backlash. I would actually not mind if it did file for Chapter 11 within the next few weeks, for reasons summarised well in this Reuters article.

Estimates suggest that GGP's assets exceed liabilities on the balance sheet by several billion dollars already. Additionally it has no problems servicing its actual debts, just refinancing them. In effect the problems of GGP are not with solvency, as with normal bankruptcy risk, but liquidity - this is a direct result of the banks own liquidity issues that have made them more risk averse.

What is most interesting with GGP is also that the balance sheet is not fully marked to market, which means that if its assets are valued at today's prices instead of when purchased there will be a change. Many properties on its books were bought years ago and have never been revalued, so it is reasonable to expect many will be worth more than marked, even with the current woes of the US property market. As such, assuming GGP were to go bust, what does that mean for ordinary shareholders? Normally it is a disaster and means no money, but in this case it should mean that the US courts would order the banks to agree refinancing terms, after which GGP would emerge out on the other side without that perceived stigma. Meantime the shares will continue trading on the stock exchange.

Since the Reuters article, all indications are that GGP will not file for Chapter 11 however, with its banking consortium of lenders bending over to give multiple loan extensions (including one over the weekend through to mid-March). There are many factors at play in whether full refinancing of the loans due in 2009 will take place - that is what would remove the market risk of bankruptcy that has so severely depressed the share price.

The main sticking point for lenders is several billion dollars of loans that are currently unsecured (i.e. have no assets backing them up), which are due for refinancing. Understandably the banks want assurances they would have some collateral to offset should GGP go under at a later date, and at present the unsecured loans are not acceptable to them. As such GGP is looking to either sell assets to pay those off, or negotiate terms. Both are possibilities, but at this stage it is unclear which is the more likely.

Another factor is the recent extension of uses for the Troubled Asset Relief Program (TARP) by Barack Obama, to now explicitly include money for Commercial Real Estate. This bill has passed through congress, and the campaign is continuing - again it provides political pressure on the banks to lend and not push under a company as significant as GGP.

Once terms are agreed, or GGP manages to sell off a number of assets to enable refinancing, I expect there to be significant upwards movement on the stock price. I have gradually increased my long position on GGP from $1.61 down to $1.03 in the last 2 months, although it is worth adding that a recent sell off last week on fears ahead of the loan deadline (prior to extension again) lead to a sharp fall back to around 55 cents a share. As of yesterday, GGP's share price bounced up 30% on the news of the loan extension, and is now currently at around 80 cents a share as I type.

So I am sitting on an unrealised loss at present. Since I bought into this REIT in December, the share price has risen by 80% at its peak, and fallen by 50% from where I entered at its lows. I turned down the chance to cash in a £50k profit in early January because I am more interested in the bigger picture here. That's how trading works - I have a strategy which does not include day trading this stock, because I do not know when the news will be announced that will make the crucial difference.

To give you an idea of the potential rewards at stake here, if the share price were to rise back to just $3.50, where it was in October, I would make in the region of £150k from the trade.

I should add a cautionary note that this is considered a speculative play. I am speculating on the most likely outcome based on extensive research - what makes this unusual is that there appears to be significant upside regardless of whether GGP files for bankruptcy protection or not. To me the share price of GGP is significantly undervalued, and at some point the market is going to realise that.

Most people are not prepared to accept this level of risk, and that is entirely right, although it is worth pointing out that you can take a zero off the figures and it could easily be you making (or losing) these amounts. In my case, if everything goes as well as I expect, I could make over £1 million from the trade. Admittedly that is unlikely and would require me holding for a couple of years. I am looking at cashing in £250k as a more realistic profit, but it gives you an idea of how risk vs reward works in the markets.

I will keep you updated on the progress of this particular hot potato in the coming months. Anyway back to work.

Investing for a Recession (Part I)

One of the key rules of investing at any time is to be flexible in your approach, and not assume that whatever has worked well in the past will necessarily continue to do so in the future.

I am not going to lie: I failed to call the timing of the stock market downturn, but did see it coming. In fact, I called it too early, as after the effective collapse and nationalisation of Bear Stearns in mid-2007, my constant research through economic forecasts was enough to lead me to conclude that storm clouds were gathering and a major correction was coming. So I liquidated all my positions, and sat on mostly cash in my trading account - earning zero interest as I needed it available at short notice in case trading opportunities came up.

Another key investing rule is patience - one that amateur investors all too frequently fail to show as they get excited by a short term fluctuation in a stock price. I was patient for 6 months, as I sat there watching global indicies continue their inexorable rise upwards, and eventually I snapped and made a couple of investments in March 2008. I won't go into details of those as they are not important, but suffice to say that given the unrelenting speed of the market falls from May onwards, I am sitting on losses from those in excess of £50k.

You might whince, but another key to investing is to only invest what you can afford to lose, and while I am not happy about it, it makes no material difference - and I am happy with them both as long holds. More importantly, I have learned a very important lesson for future investing. Learning from your mistakes is the single biggest investing rule of all - and in this case it was that when all the logic points to something happening, it will do.

So by October, when all the fun had kicked off with Lehman Brothers, rather than joining the collective panic gripping many of my peers at the banks, I realised we had reached a wonderful opportunity to start making a large amount of money back from this crisis. Shorting is one, much maligned means of doing this, which is not what I do. On that note, let me say that shorting is needed for valid trading strategies (e.g. hedging), despite the criticism about naked short selling of the banks, which is for nothing other than the pursuit of speculative profit - that is an area more difficult to justify.

Instead I have been much more traditional in my approach - taking long positions (buying) stocks at a lows, and then selling them soon afterwards. The key is that what panic brings to the markets is enormous volatility. I assessed the reality of the fall out by giving it some context. Nothing like this had happened in our lifetimes - it was a cataclysmic shock that would obviously lead to enormous falls in the markets. Therefore key was to not be remotely optimistic and instead look at your worst case scenario expectations on prices and exceed them.

I recall listening on a tedious conference call at work, while idly watching the share prices of all the major banks in freefall. The two of particular interest were Morgan Stanley and Goldman Sachs at that time, due to their status as investment banks. The markets were voting with their wallets in their lack of confidence in this particular business model, and both had fallen a staggering amount in recent days. But no downturn is smooth with stocks, and in this case I had already watched GS hit a floor at $120/share and rally back upwards sharply for a couple of days, before rapidly plunging again.

As such, I watched as GS breached the psychologically important $100 mark and decided it was clearly about to drop off a cliff, despite it already being down 20% on the day. Sure enough, a moment of panic ensued as it moved down below $90/share, and I set a limit order to buy $150,000 of stock at $79/share. The stock suddenly plunged and touched a low of $77/share before spiking upwards above $90/share by the end of the day. I had an unrealised profit of $20,000 in 10 minutes. I also reasoned that based on previous rallies, all those shorting the stock would now be rushing to cover their positions, which creates a short squeeze that drives upward pressure.

Sure enough the next day, GS rose up above $120/share as I had expected, and I immediately sold out. And as I expected, the stock hovered there for a couple of days before plunging and I believe eventually hit a low in the $50/share range - it is somewhere around about $80/share as I type. It is worth noting that as I realised that £40k profit, I liquidated a bad investment from several years ago. Rather than panic or give up on it, I decided to hold and turn a negative into a positive - in this case it became a useful offset against my gains by reducing the amount I will have to pay in capital gains tax. In effect, I had recovered a large percentage of my losses from the market.

I repeated that trade further down with one of the other banks soon afterwards, and then stopped trading in them because I no longer had a strong view on what direction prices were moving and whether or not the downward trend was ending. My considered opinion was that they had further to go when later quarterly results were reported, and so it seems to have panned out as after rallies before Christmas they have plunged again.

However when you cannot decide where you think a stock is going to move, it important to not trade in it. I locked in my gains, and by December had turned £60,000 of spare change into £140,000. Where am I investing now? Two places. Most important was that I had deliberately chosen to trade in US banks throughout the process, because I had known from various research that historically Sterling was overvalued and long-overdue a downward correction.

My analysis concluded that an imminent recession in the UK would eventually fuel a correction in the GBP-USD exchange rate, especially given that the US was ahead in the economic cycle and already in a recession. Sure enough, with money tied up in dollars during the trades, I made considerable sums from the fall in the pound from October to December with so much money held in dollars. I then decided that since I was no longer sure about the direction of banking stocks (or most others), from researching likely directions of currencies in 2009, both sterling and the dollar were likely to continue their falls against other currencies.


As such, with a new policy of 'quantitive easing' on the horizon (aka governments printing money), that meant it was an easy decision to take a large stake in a gold ETF (exchange traded fund) in December 2008. This is effectively like buying shares that are linked to the price of gold in USD. Sure enough, with the pound falling further, I am currently sitting up 35% on my investment to date, and recommend that anybody debating what to do with their money for 2009 use the current minor sterling rally versus the dollar (as I type we are at around $1.43 to £1) and buy into a gold ETF on the London Stock Exchange for 2009.

When governments start printing money in the way they effectively are with all this debt, it will eventually stoke inflation later this year. That should lead to an increase in the price of gold, and makes it a good play until later in the year when it will be worth exiting.

You might be starting to get a taste for what investing is all about from the above outline of my investing activities since October. It is about completing your own analysis, taking into account historical statistics to give perspective, and looking ahead to do your best to assess what is logically going to happen next. If you don't know then do not do anything, but if you do think something is going to happen (such as house prices falling another 20% in the UK) then why sit around holding it?

Next time I will explain what I am doing with the majority of my money in 2009 at present.