Finally: An Idiosyncratic Website

July 29, 2008

I’ve put up a small web page that collects a few short introductory notes, mostly about mathematical concepts that arise in finance. I wrote them mostly to clear up my own understanding, but if anyone else is interested … here they are:

IdOp’s Arcana

At this time the topics touched on are:

  • Bond duration,
  • Relation between geometric and arithmetic weighted averages,
  • Sharpe’s index arithmetic,
  • The Gordon equation,
  • Personal view of stock valuation.

The last two have been mentioned previously on this blog. In particular, the Gordon equation (GE) note was substantially revised in May, 2008, a little over 2 years since originally posting v1.01 of it. In reviewing what I’d written before, it was clear the math was ok, but I hadn’t achieved the goal of totally de-confusing the stated assumptions. There was a lot of forest, but still a few trees. It’s amazing how one can become numb to the deficiencies in something after you stare at it for a while, so the 2+ year break helped.

I’ve now revised the necessary areas. Changes deal mainly with the conditions under which the GE is exact, in particular the possibilities once earnings/valuation has been added to the picture. The clarity seems mo’ bettah now; hopefully it’s 99.9% forest. There are a few other small additions/changes as well, including a trivial derivation of a GE for short time.

Any new note additions may possibly be posted on this blog.


That Other Tax Promise

November 22, 2006

There’s been much discussion about the Tory decision to tax income trusts, which may now be water under the bridge. The promise not to tax trusts was one part of their election platform, but another important one for investors was the promise not to tax capital gains that were re-invested within six months, which has dropped off the radar compared to the furor over trusts.

Most terrestrial life forms saw that the original capital gains proposal (vague as it was) was unworkable. (As an aside it’s interesting to compare this bald-faced political promise to the trust promise which, though widely believed at the time (including by me), now appears similarly ill-conceived.) A few weeks ago, FinMin Jim Flaherty came as close as I’ve seen to admitting the original proposal was flawed. Glad he’s on board with that one, but where does it go from here? JimmyJoBillyJohnBob will give his economically frisky update tomorrow, and although no measures are expected to be announced, he’ll have to at least briefly genuflect in this direction. So it may be a good time to revisit the topic.

One proposal has been the Mintz–Wilson Capital Gains Deferral Account (CGDA), which would tax various incomes earned on investments in the account, but delay tax on cap gains. I’m not entirely sold on this one; some top-of-the-head problems with it:

  • It discriminates between dividends and capital gains, which at a basic level are essentially the same thing (a dividend is a potential capital gain which was paid out instead). This would create a tax disincentive against paying dividends — Unlevel Playing Field City, AZ (aren’t we tired of that phrase by now?). One could get around this by tax-deferring the dividends too.
  • Incomes in the account would be taxed. Fine, it’s only a CGDA after all. But if you withdraw those incomes, it would make taxable a portion of any realized capital gains in the account. In effect you’d be forced to pre-pay some of your deferred taxes when taking out already-taxed money. Maybe you could try to get around that with the complexity of extra bookkeeping.

At any rate I think that idea needs more critical thought, hopefully others can point things out too. Also, alternate proposals are needed. Here’s my offering:

  1. How about “pulling a Goodale” and starting a public consultation on this? That shouldn’t hurt the markets, since there is a strong potential for improvements. It could also earn the Torys a brownie point with disgrunted trust investors for looking “humble and open”.
  2. Capital gains on securities should be tax-free. OK, dream on, but this is the clean and fair solution, since such tax is either double taxation or a waste of effort. Not to say that double taxation is categorically a bugaboo, but here this seems a reasonable view and it may be a viable political selling point (same argument was used re dividend tax changes), and that’s useful in an overtaxed world.
  3. How about Roth (Tax Prepaid) Savings Plans? This idea has been around a long time, and exists in the US. (A cynic would say having these would level the Canada/US playing field just like the trust-tax exemption for REITs did; “All o’ Dubya’s chillun got REITs” :) ) Unlike 2, this wouldn’t eliminate the basic problem of money locked into high cap gain investments. Or, if you delayed the tax on something placed into a RothSP, it would make taking money out messy again. Of course, it’s not clear how the CGDA would work in this regard either: if the governmentt weasled out and didn’t delay the cap gains tax upon entry (defeating much of the original intent) then I think the RothSP could be superior.

What’s Your Value?

June 11, 2006

I use a definition of stock valuation which may not be new (I doubt it is), but it does seem to be little known or overlooked. To dive right into it, it says:

Valuation = time needed for future Earnings to add up to
                [ Price - {(tangible) Book value} ]

While not perfect, it's a first step in assembling the relevant pieces in an attempt to unify and improve upon the usual valuation ratios.

The motivation behind this is not difficult and can be found here:

value.ps (PostScript file),

or here:

value.pdf (PDF file).

—-

"I'm lookin' for one new value … but nothin' comes my way"

Iggy Pop, New Values, (1979).


The Crack From Behind (part 8)

May 28, 2006

Let’s take a look back at what happened to gold during the past week. The daily closes in U$ are:


23 May 673.70
24 May 637.50
25 May 648.50
26 May 651.00

(Unfortunately I don’t have Mon 22 May’s close close at hand, as it was a holiday in this neck of the woods.) One can see the recent bottom around 24 May quite clearly. That lowest close is U$ 92.50 from the recent top. Not bad at all in the predicted 70 — 100 U$ range! This pretty well covers the time period of 10 business days from the start of the crack. I’ll only return to this again if something worthwhile develops.


Crack Ho! (part 7)

May 19, 2006

Gold was down at one check over U$ 24 this morning, and stayed down. Bigtime. Closes for Fri 19 May ’06:

Gold: U$ 657.50,down U$ 23.40
XGD:TSX: C$ 74.00, up C$ 0.20, up 0.27 %

Target achieved (Crack ho!): From an intra-day high of U$ 730 last week, even to the close today, the drop is U$ 72.50, already within the predicted range of U$ 70 — U$ 100. Hopefully we’ll get some more, but it doesn’t matter.

Gold is toast? (Cracked wheat?): Will it stay down, or re-test the previous highs as conventional wisdom would suggest? I wouldn’t be surprized to see it go up near there, but I wouldn’t want to predict it. Hey, one week on the money (with no money), what more do you want?

I should also apologize for this rapid-fire, daily series of postings single-mindedly focussed on such a dully glittering topic. It’s been a good experiment, and I may return to it once or twice as needed, in the longer run, to tie up loose ends. But not every day. After all, better to quit when ahead, not a crack-head.


Crack Back (part 6)

May 18, 2006

Gold was down, then flat and finally back down again today. Closes for Thu 18 May ’06:

Gold: U$ 680.90, down U$ 10.90
XGD:TSX: C$ 73.80, down C$ 1.35, down 1.80 %

Not necessarily the big hit desired either today or tomorrow, but no small potatoes and quite promising. A couple of these would do quite nicely instead. Compared to yesterday, it does look like it’s still trying to hang in there, but with less conviction because the action is on the downside rather than upside. We’ll see how it goes tomorrow.


Crack-down (part 5)

May 17, 2006

When I checked the markets this morning, gold was up over U$ 18. A little later on it was already down from there, up only about U$ 2. In the end, the closes for Wed 17 May ’06 were:

Gold: U$ 691.80, down 1.10
XGD:TSX: C$ 75.15, down C$ 2.45, down 3.16 %

At one point in the afternoon gold was down around U$ 9, so it seems to have come back some. Still, with a downward swing of U$ 27 or more, it looks like the short-term bounce is playing out. We need to see at least one heavy hit in the next 2 days, and it’ll be well on its way. Here’s hoping!


Cracking Up (part 4)

May 16, 2006

Closes for Tue 16 May ’06:

Gold: U$ 692.90, up U$ 7.80
XGD:TSX: C$ 77.60, down C$ 0.80, down 1.02 %

Short-term bounce anyone? It could be, but we need to see it heading back down within a day or two, and dropping another 35 to 60 U$. Stay tuned.


Crack Splitting (part 3)

May 15, 2006

Gold more than doubled last Friday's loss today. Closes for Mon 15 May '06:

Gold: U$ 685.00, down U$ 26.80
XGD:TSX: C$78.40, down C$ 6.38, down 7.53 %

From an intra-day high of U$ 730 Friday, to an intra-day low of U$ 678.60 today, the drop was U$ 51.40. Looks like the crack has begun, right on schedule. But we're not all the way there yet. Will need at least another U$ 25 from today's close to get down to the "predicted" levels. There's still a week or so to get there, with the likelihood of a short-lived bounce sometime real soon. Dive, DIVE, DIVE!


Crack Spotting (part 2)

May 13, 2006

Closes for Fri 12 May '06:

Gold: U$ 711.80, down U$ 9.70
XGD:TSX: C$ 84.78, down C$ 2.94, down 3.35 %

Gold was first up a few dollars intra-day. A promising start, but nothing to get too excited about yet. Could be just profit-taking at the end of a very strong week. The next 2 to 10 days may prove more interesting, though.