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Investing ideas and projections

Refinance Your Home – Part 4… Make Some Money!

This time around, we’re going to cover my favorite reason to refiance your home… to make some freakin’ money!

In this case, we’re not actually creating a new mortgage, we’re just pulling some money out of the equity you have built up on your mortgage over time.  Why would we want to do that?  Because your home mortgage is going to be some of the cheapest money you will ever have access to.

But wait, isn’t that risky?  What are you supposed to do with money that you’ve borrowed at a rate of 3.5-5%?

Well, beat that rate of return, for a start.   But don’t worry… I’m not suggesting putting that cash into stocks or anything.  That implies a great degree of risk.  Last thing we want is a 20-40% chance that some or all of the money you pull out of your mortgage is going to go up in smoke.

So what do we do with the cash?  If you’ve been reading this blog for any period of time, you know that we’re big fans of “Fed Watching”.  The American Federal Reserve is the world’s largest bank, and they’re charged with making sure that the American (and to a smaller extent the world) economy doesn’t accidently jump off the top of a skyscraper.  Sometimes, that means they end up bailing out asset classes like US bonds, or their current kink, mortgage backed securites.

As long as the world’s largest bank is snapping up mortgage backed securities, they are pushing up demand as well… which effectively places a backstop on the price movement of these securities.   There would need to be a hell of a housing crash before these securities start going down in value.

The best part?  The interest rate you collect can often be over 7%.   Pay 3.5% interest to your bank, collect 7% from other people’s home mortgages owned through securities backstopped by the world’s largest bank?   Sounds sexy, doesn’t it?

Hurry Up, Damnit! I Need to Get to Work! Fast Food Investing

Thought: As people are ever-increasingly fearing for their jobs in the US, it strikes me that those still hanging on are now doing much more work (to take up the slack from the downsized positions), and spending more time in the office in general. Fear of getting the axe would do that to you, I’m told. (I don’t actually know. I’ve never really worked a “real job”.)

If they’re spending more time in the office or bringing their work home with them, that means less time for everything else… like cooking. I would expect that in tough times, cheap, fast food becomes more and more popular. Which makes fast food probably a sector to invest in that would outpace the market. I don’t think the sector would be a world-beating sort of play, but it should deliver good steady growth for some time to come. If everyone wants to stay on the Big Mac Express, no reason why I shouldn’t be getting a piece of the fares.

Nuclear Power… back in fashion already?

Apparently the Canadian prime minister has decided his hands dirty. He was off in China negotiating a deal to increase the amount of uranium exports to China. Now obviously nuclear power has been getting a bad reputation as late, with many small European countries claiming that they will be reducing the nuclear component of their energy portfolio and some eliminating it altogether however most of these countries were very small on the nuclear world stage to begin with. China on the other hand is quite the opposite.

Judging by the number  of nuclear power plants now under construction in China, which is more than the amount currently operational there’ll be quite an increase in demand for Canadian uranium in China in the years to come.  Plus, given the beating that nuclear power is taken of late in the public relations department, this sector looks like it could be a sound long-term investment.


Quick note: Although the new sources obviously biased (which can easily be spotted by the claim of “unbiased, independent news”) the source can easily be verified by any number of articles in the business press and as soon as the Prime Minister of Canada is mentioned as lead negotiator that’s just a story that’s too big to lie about.

An Idea for Cash: Get Outta Town?

No matter how well you have most of your money working for you, you should always have some money sitting around for day-to-day expenses.  Not only that, but you really should have an emergency fund that holds at least three months (preferably six) of living expenses in case of, well, and emergency,   Job security isn’t what it used to be.  In fact, for many of us, job security isn’t.


But the question is, what do we do with that cash?  Should we just leave it sitting in a chequing account in a currency run by a government severely below the curve in budget and trade deficits collecting next to no or no interest?

Well, we could, and since we’re not talking about our entire nest egg, (hopefully) it’s not that big of a deal if we do.  However, I have a low-risk, low-reward idea that will add a few percentage points of return onto the money you have just sitting around.

Remember that the main factor in inflation by the creation of money.  If country A produces money faster than country B, then one unit of currency A will generally go down in value relative to currency B.  There are other factors of course, but this is the biggest.

Why don’t we want to be in USD?  Because while almost every country in the world runs a budget deficit, the US runs the largest deficit in the world on an absolute (number of dollars) basis, and is always right near the top when it comes to deficit per capita.  Which means they’re printing up money (causing inflation to shrink the value of their debt) at a faster rate than pretty much anyone else to make up for the shortfall.  Which also means that there are very few currencies that don’t increase against the dollar.

Let’s take the value of the USD vs another troubled currency, the Euro.  It’s no secret that the Euro has seen it’s share of difficulty lately.  Greece has defaulted, Ireland is on the verge of doing so, Spain and Italy are having to make drastic cuts in their standards of living.  But from 9/11 when America single-handedly financed two wars simultaneously, to 2008, when the “Euro Crisis” first came into the public eye, it was a march straight up for the Euro.  And even since then the Euro, one of the worlds most troubled currencies, is managing to keep it’s ground against the dollar.

Now what happens if we look at a currency that’s very stable?  Like the Swiss Franc? Observe.  Planes hit buildings, America goes to war again.  (and again, and again, it seems), and the CHF (franc) takes off.  In fact, the value of the franc has very nearly doubled since that fateful day.

Canada’s has done almost as well.  Australia has more than doubled.  Starting to see a pattern here?  It’s not everyone else that’s going up.  These countries all run deficits as well.  It’s America’s currency that’s going down.

In fact, the problem covers a lot more than the cash sitting in your bank account.  But that’s a start for now.


But if you go to the bank and open a foreign currency account, you may not be able to open an account in the currency you want, and you’ll definitely take a big hit (often more than 2%) on exchanging your money from one currency to another.

One solution you can use is to invest your money into a foreign currency ETF or open a forex trading account.  I’m not suggesting you get into active forex trading, as 90% of the people that get into that game come out losers.  But you can get an account, shift your savings over to it, and put it into a different currency far cheaper than you could at your local bank.   Using an ETF exposes you to a management fee (or MER), but you can  move your money there much more easily than opening a forex account.

Also, you can expose yourself to short-term bonds from other governments.  While the Canadian and Australian economies are on pretty much the same track (straight up, because they rely on natural resources that have to be harvested locally rather than industries whose labor can be outsourced), the US and Canadian gov’t short term bonds pay less than a percent, while Australia’s pays upwards of 4%.  Try getting that in a Citibank savings account.

Covered Calls: How Do They Work?

Last time we talked about what kind of strategies we can take in a sideways market, and here’s one good option, the covered call.


One of your rights as a stock owner is the right to sell your stock at any time for the current market price. The selling of this right to someone else in exchange for cash paid today is called “covered call writing”. What this means is that you give the option buyer the right to purchase your shares prior to the expiration date of the option at a predetermined price, known as the “strike price”.

The “call option” is a contract agreement giving the buyer of that option a legal right, without obligation, to buy a set number of shares of the underlying stock at the “strike price” at any time prior to the expiration date. When the seller of the call option is the owner of the underlying shares then the option is deemed “covered” because the owner is able to deliver these shares without having to purchase them on the open market at as yet to be determined – often higher – future prices.



To secure the right to purchase shares in the future at a predetermined price, the seller is paid a “premium” to the seller of the call option. A “premium”is the fee paid in cash by the buyer on the date he purchases the option. The seller keeps this money regardless, whether the option is exercised or not.



Selling a covered call allows you to exchange some of your stock’s future upside for money in your pocket today.

To illustrate, you purchase your stock at $50 per share with the idea that it will go up to $60 within a one-year period. Plus, you’d consider selling at $55 in six months time, aware that you are sacrificing any further upside but satisfied with this profit for the short term. This is a situation where you might find it advantageous to sell a covered call on your stock position.

Upon examining the stock’s option chain, you locate a six month call option at $55 selling for $4 a share. This $55 call option could be sold against your shares, purchased at $50, which you hoped to be able to sell at $60 within 12 months. By doing this you would be obligating yourself to sell these shares within the designated six-month period if the stock reaches the $55 price. This would leave you with the $4 per share premium and the $55 per share from the sale, a total of $59 (a return of %18) for the six-month period.

Conversely, should the stock fall to $40, for example, you will have a $10 loss based on your original position. However, the $4 option premium from your sale of the call option, which you keep, offsets the total loss, making it only $6 per share instead of $10.



Scenario One

Shares go up to $60, and the option is exercised

January 1

You buy XYZ shares at $50 January1

You sell XYZ call option for $4 today
Option expires on June 30, exercisable at $55 June 30

Stock finishes at $60; option is exercised because it is above $55. You receive $55 for your shares. July 1

Total Profit: $5 (capital gain in the stock) + $4 (premium collected by you from sale of the option) = $9 per share, or 18%


Scenario Two

Shares drop to $40, and the option is not exercised

January 1

You buy XYZ shares at $50 January 1

You sell XYZ call option for $4 today
Option expires on June 30, exercisable at $55 June 30

Stock finishes at $40; the option is not exercised and expires, worthless, because the stock has finished below the strike price. ( Why would the option buyer still want to pay $55/share when he or she can purchase it in the market at the current price of $40?) July 1 Total Loss: -$10 + $4.00 = -$6.00, or -12%. You may sell your shares for $40 today, but you keep the $4 option premium.


Selling a covered call option is a good way to offset downside risk or to increase upside return. However, it also means that you trade the cash you get from the option premium today for any upside profit beyond the $59 price per share, including the $4 premium. That is to say, if your stock finishes above $59, you end up worse than if you had merely held the stock for the six months, But if your stock ends the six month period at any point below $59, you end up ahead of where you would have been without selling the covered call.


For as long as you maintain the short option position, you must hold onto the shares, or else you’ll be holding what is known as a “naked call”, which, theroetically, could have unlimited loss potential should the stock go up. Because of this, if you choose to sell your shares before the option expires, you will have to buy back the option position, costing you extra money plus some of your profit.