Year: 2010

Message to investors: Stay out of the USA

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The Globe & Mail tells us that Conrad Black has just been sent a 70,000,000 (on 116,000,000 income!= 60% tax rate) bill from the IRS. This is as he is about to have his felony conviction overturned by the US Supreme Court.  Judging by the comments section, the readers of the Globe & Mail are ok with this.  But supposing Black paid his taxes as a Canadian resident, there is no way that he would owe any taxes in the states, because the rates here are higher, and Black, who shouldn’t have to file personal tax for his income by virtue of being neither or a resident nor a citizen of the US, would be in any case entitled to the foreign tax credit, which is a dollar per dollar tax deduction for taxes paid in another country (in this case Canada).  Canadian taxpayers should be furious because this is a blatant attempt to steal their tax dollars.  If Black is required to pay in the US, he would then file amendments to his Canadian tax and get a refund from the Canadian government.  No!  I presume that the money has already been collected and spent here by the Canadian federal and provincial governments.  The IRS is not entitled to a penny.  In any case, the message from the IRS to foreign investors is clear:  keep your money and your butts out of the US lest we imprison you and send you an exorbitant tax bill.  My investments are all in Canada as a result of the current investment climate in the US.  It is not an investor friendly region anymore.

Note:  Black’s defense is that he wasn’t a US citizen or resident during the period in question.  A few others related to the same case have been sent very large bills:  Forbes comments:

McCallum [attorney for Radler] said U.S. tax jurisdiction extends only to U.S. citizens, permanent U.S. residents with green cards and people from other countries meeting a “substantial presence” test, generally defined as spending 183 days or more a year in the U.S. McCallum said a U.S.-Canada tax treaty specifies “tax-breaker” criteria to be used in identifying a sole country for taxing jurisdiction.

So the case will hinge upon whether Black stayed longer than 183 days during the years in question (i.e., more than half of the year so that the US has more claim than any other country).  It would appear to me that Black’s case is one of competing jurisdictions and that the CRA better make sure that they don’t get ripped off by the IRS.

Staying clear of certain countries

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News that First Quantum’s mineral rights in Congo have been overturned is hardly surprising.  Personally, in my investments I try to steer clear of highly volatile regions where war, bribery and theft are more common than sound business practices.  The other day I sold my shares of Centerra Gold because the coup in the Krygyz Republic, where CG has a huge percentage of its NAV, created too much volatility for my liking.   Nor would I ever invest in Venezuela with its kleptocratic dictator, Chavez.

First Quantum’s mistake was taking on too big a risk–as long as the governments in Africa remain corrupt and violent, investors need to be wary and not stick their necks out no matter how lucrative the deal may seem to be.  Africa’s riches, gold, uranium, diamonds, and oil, are indeed tempting and lucrative.  Indeed, the more lucrative, the more you have to be worried that the corrupt government will want to rescind their contract, so that they can get a bigger piece of the action–or in the case of Chavez, all of the action!   This is what happened to Kosmos Energy in Ghana. If it happens in “safe” places to invest like Australia and Alberta, how much more is it going to happen in volatile regions like Congo.  Australia recently announced a 40 per cent “profit” tax on mining companies (the latest is that the government may relent on that plan).  Alberta has repented of its increased royalty structure on oil and gas in order to try to get things back the way they were before when oil companies found the province attractive for new investment.

When in Chad, I stayed in an “air conditioned” house of a Exxon employee.  The air conditioning worked about 2/3s of my stay. The rest of the time you bake because Ndjamena is in the desert.  My friend said that he was in charge of a 24 hour plan, planned to the minute, to evacuate all Exxon employees in case of an outbreak of violence in the country.  A few short months after my visit, rebels stormed the city of Ndjamena and thousands of refugees fled across the river into Cameroon.  The rebels later fled, even though they were on the brink of successful coup, and the refugees returned a few days later to pick up the pieces of their lives.  Why, for heaven’s sake, would you want to send your employees to a country like that?  The Chinese and Koreans are finding that there are still plenty of places to invest their billions of dollar right here in “safe” Canada.  I say “safe” because no place is immune to kleptocracy and war.  It is just that some regions present far less risk than others.

USA debt 13 trillion

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Congratulations to Barack Obama and the Congress led by the Democratic party.  You have now increased USA debt to 13 trillion (by this coming Tuesday).  That’s $41,900 per man, woman, and child.  That is higher than the per capita income.  Since the democrats took control of Congress after 2006 election, the US National debt has increased from 8.67 trillion to 13 trillion.  That is a 50% increase, or $14,000 per capita.  Well, debt was a bad thing at 8.67 trillion.  Why?  Because US government debt is bad debt. At the household level, it is equivalent to consumer debt–debt that is spent and afterward you have nothing to show for it nor any income coming in as a result–all you have is increasing costs due to interest payments.  It is stupid debt.

The April USA deficit and buying gold

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The Obama administration borrowed $82.69 billion in April, 2010.  That’s about $8.90 per day per every man, woman and child in the USA.  In my humble conservative opinion, such deficits have led and will lead to the devaluing of the US dollar, particularly because the Federal Reserve is keeping interest rates at artificially low levels.

What is the investor to do?

Gold hit a new high $1241.25 yesterday.  Gold may decline in the short term but it is experiencing a secular bull market because of the inflation of all paper currencies.  I don’t buy gold because I don’t have a safe place to store it and I don’t want to pay an army to guard it.  I’ve instead traded gold mining stocks.  At my discount brokerage, the commissions are lower than for buying and selling gold bullion or coins.   I’ve had a lot of success averaging down and selling off a little at a time as the prices improve.  My best buy was WGI (Western Goldfields), which later became NGD (New Gold), on October 23, 2008, at 88 cents; my ngd is up 183% over my average cost price.

In the last few weeks, since I learned about trading options, I’ve been selling near the money put options of abx and gg (Oct, Jan’11, Jan’12 contracts). If current trends continue, these contracts will all expire worthless (even the ABX put Jan’12 at $45) and I will simply keep the premiums.  When doing this, it is important to reserve sufficient cash or credit to buy the stock at the strike price.  But even if assigned, the purchase of the shares becomes part of the averaging down strategy.  So for example, the $45 January 2012 put on Barrick Gold paid me $8.90 premium.  The average cost price (after commissions) of the shares if assigned then is $36.29–a 22% discount off the current $46 market price.