Friday, June 27, 2008

Zenn has the Potential for Disruption in the Auto and Battery Industries

Zenn is a Canadian company that currently makes electric cars and sells them in the US. These cars may soon (calendar year 2008 according to its CEO on a recent BNN interview) be powered by a new type of battery, one that can be recharged in minutes and allow 400Km of travel in one charge, and whose batteries are significantly lighter too (10% of the traditional lead battery weight).

Zenn trades on the Toronto Venture Exchange, ZNN.V and last traded at $4.92.

In the next several weeks, a privately-held and ultra-secretive company named EEStor Inc. will release the results of independent third-party testing of its electrical energy storage unit. These units can potentially be used everywhere, from hybrid cars to laptop computers. EEStor has Zenn and U.S. defence contractor Lockheed Martin Corp. equity and business partners. Lockheed bought exclusive rights to use EEStor's power system for military purposes, while Zenn bought exclusive worldwide rights to the system for vehicles weighing up to 1,400 kg. They say they believe it is the "holy grail" of electric storage systems.

[Edited June 27 10PM to add links and information]

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Wednesday, June 25, 2008

ETF and Index Correlation Study for 2007 and 2008

Following the note on June 13, I performed a new correlation study for several ETFs and Indexes. This study has a new twist. It examines how correlation varies over time.

The study shows the correlation between pairs of symbols. For example, the correlation between gold (through GLD) and oil (through USO) was -.18 in Q207, 0.91 in Q3 07, 0.92 in Q407, 0.73 in Q108, and -.25 in Q208. Numbers close to 1.0 and -1.0 indicate correlation (positive and negative), while numbers close to 0 indicate a lack of correlation.

These numbers are very useful to see the current correlations, to observe correlation cycles, and for hedging and diversification.

These correlation values have been plotted in two different graphs below. Q2 2008 data includes up to June 18. The spreadsheet used is also available for download here.

(Click on images for larger version)

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Friday, June 20, 2008

Turning to GPS To Save Money on Oil

The US Postal Service has 200,000 trucks running daily. A $0.01 increase in gas means $8M extra cost annually. A $1 increase means almost $1B in extra expenses.

The USPS is turning to GPS to optimize routes, and save on gas. Similarly, other delivery and courier companies may - or should - increase their use of GPS.

Companies to watch in the chip GPS space:

Trimble, TRMB
Garmin, GRMN
Sirf Technologies, SIRF

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Thursday, June 19, 2008

Gold's W Formation

Gold may be currently showing a W formation. W formations are typically very bullish. Keep an eye on the right side for confirmation. Click on the GLD graph to expand. Stochastics (below) also show that gold should be moving higher but the fast stochastics are rapidly approaching overbought conditions.

Fundamentally however, I believe gold should be going lower, at least for the early summer. It all depends on the time frame.

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Noront, NOT.V, Currently On Sale

Noront (NOT.v), Fancamp (FNC.v), and McDonald's Mines (BMK.v) have been previously discussed here with potentials for very significant gains. NOT is trading today at 3.30 and can be accumulated at these low prices. Fancamp, on the other hand, is trading at 2.15 and is at a good price to be distributed. These stocks can be easily traded in and out with the objective of lowering your ACB (Adjusted Cost Base).

These stocks are highly speculative and volatile.

NOT: In (30%) at 3.31
FNC: Out (50%) at 2.15
BMK: Holding.

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Sunday, June 15, 2008

Investing in Argentina? This is Not the Best Time.

This is a little note to warn those investing in miners, or other stocks, in Argentina.
Argentinean debt is today higher than in December 2001 when the country declared a default/moratorium. Analyst are warning that a new default may be forthcoming.

In 2005 its debt reached USD$114B, which was 56% of is GNP, or $170B if counting the debt to holders who refused to swaps on the original loans. Martin Krause and Aldo Abram, economists, warn that if Argentinean credibility continues to fall the country will be at serious risk of not being able to meet its financials obligations. The country has lately been raising capital from Venezuela. However, the economists also warn that Venezuela will not be able to to continue rescuing the country (by buying the loans or bonds), so far $6B in bonds in the last 3 years. Argentina has been paying a hefty price (14% interest). In comparison, Brazil pays 5.4% interest on 10-years bonds.

Current Argentinean inflation is at 20%. With the current situation on oil and food prices, this may get far worse.

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Friday, June 13, 2008

Correlation of the Major Indexes and ETFs

I did a correlation study of major market indexes and ETFs. Correlation is a wonderful tool to achieve diversification and for hedging.

The results are quite interesting:

346 trading day study (since Feb 22 2007):

DBA and GOLD: 0.97
GLD and FXE: 0.94
TLT and GLD: 0.90
SKF and DBA: 0.90
EWZ and FXA: 0.97
VIX and SKF: 0.76 (best correlation for VIX)

A number close to +1 or -1 indicates good correlation (positive or inverse). If you are looking for hedging, then buy negatively correlated stocks, or go long and short two positively correlated stocks.

For example, the above shows you that you are not diversified if you buy the Aussie dollar and the Brazilian market!

If you buying USO and need to hedge it for example, then your best for 346 days bet was XLF (-0.92).

You can download a full list for 346 days (since Feb 2 2007) and for 100 days (since Jan 21 2008).

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Tuesday, June 3, 2008

The Perils of Shorting Bonds

It seems that now everyone has jumped on the short bond band wagon, i.e., short selling bonds or bond ETFs (such as TLT), or buying puts on these ETFs, or buying the inverse ETF TBT. The reason is the high inflation in the US that will eventually, perhaps sooner rather than later, cause the Fed to raise rates. Higher interest rates causes a drop in bond prices as the current bonds become less valuable.

Common sense warns that if everyone is on the same side of a trade, it is not possible to make money. Everyone cannot make money. Besides this general concept, John Mauldin mentions a chapter of a book by Luis Gave, "A Road for Troubled Times", in which he discusses the impending fall of the Euro. An oversimplification of the chapter is that since the advent of the Euro some European countries can no longer print money at will. They could print local currency, but cannot print Euros. As a result, their deficits are ballooning out of control. In fact, countries may go bust because they issued debt in Euros, which they cannot print. France's debt to GDP ratio has moved from 35% in Francs to 70% in Euros. These deficits are getting larger. Obviously this situation cannot last forever and something will break. Asian countries' currencies have also appreciated recently. This has caused spreads between countries to increase in Europe (the spreads between the strong countries such as Germany and the not so strong ones such as France or Poland. This increase in spreads causes all kinds of problems for the banks and puts pressure on their balance sheets.

The debt of these countries used to be top notch on the assumption that countries did not go bankrupt. This top notch rating is no more. So the big problem is for banks that invested in this debt, these loans were not marked to market.

Solutions are the elimination or collapse of the Euro (countries stop adopting it) with dire consequences for the European union, or the devaluation of the Euro. A devaluation of the Euro through lowering of interest rates will cause another flight to safety, i.e, to bonds.

How all this works out, and how it affect the US is yet to be seen. So far the ECB has firmly insisted that the rampant inflation is one of its top priorities, so lowering of rates is not being considered. The consequences of raising rates will be nefarious for certain countries. If the politicians have their way, this will not happen. The financial and liquidity crisis that affected the US is only starting in Europe, this time the problems are caused by governments whose debts can no longer be considered at book value. This will cause all kinds of mega loses for the banks.

Gave concludes that the credit crunch has started to make its way into Europe and banks will likely be reporting losses and write-downs, and investors will flee to the safety of bonds. We are in for very interesting times ahead, those shorting bonds should take this into consideration.

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