BitCoin – How I Missed The Trade Of The Year

BitCoin. I first learned about it in October and wrote about it 17 January 2011 in BitCoin – The Best Financial Privacy Is Here … Probably. The article was theoretical not practical. I missed the trade of the year. This was a serious woulda, coulda, shoulda but didn’t moment. I even told a few friends I was going to put in about $5,000. Today with a completely non-levered investment that would have turned into slightly over $550,000 in 8 months. $550,000 in a completely anonymous account with neither a paper or audit trail nor a 1099 and the asset would have been purchased with $5,000 of physical cash. That is one way to vanish some equity.

But there was a lot of risk to be taken in making that initial investment. The risk has since decreased but I still think there is a tremendous amount of upside potential. Perhaps even a thousand percent gain between now and the end of the year. Regardless of what ultimately happens with BitCoin I think you will want to know what BitCoin is and the potential for this new type of technology and its application to monetary science in the Information Age.



BitCoins are merely some computer bits that are limited in amount. The network for their generation is decentralized and bitcoins are transferred between individual’s via the Internet with extremely low fees, they can be used anytime or anywhere, the account cannot be frozen and there are no silly or arbitrary rules such as Know Your Customer, source of funds, limits on amounts that can be transferred or stored, currency controls, etc.

The entire software is open-source. That means anyone can read the code, publish opinions and engage in review within the full view of the marketplace of ideas. There is no centralized individual, entity or organization that pressure can be applied towards to force the disclosure of customer records, freezing of funds, transaction history or any number of other private and sensitive information. This is a serious attack on the fiat currency and fractional reserve banking conspiracy.


The main disadvantage of bitcoins is their being an illusion. In chapter 1 of The Great Credit Contraction I distinguish between money, money substitutes and illusions which can all function as currency. An illusion is a negotiable that promises nothing and has no intrinsic value.  It is like a silver certificate that promises the bearer no silver.  It has value only because individuals are willing to bear the payment risk and other risks of the illusion.  The bearer usually tolerates the risks because their cost is lower than the value placed on the utility derived from the service the currency provides to the market participants.

Consequently, bitcoins have a value history in The Regression Theorem like the evaporating Euro. Bitcoins have no intrinsic value and unlike Euros or FRN$ cannot even be used for their combustible or defecation cleaning properties. But despite this serious disadvantage, which GoldMoney solves, I think because of the decentralized aspect BitCoin may actually be a superior form of transaction currency to GoldMoney. Together and combined with hawala techniques these two currencies almost perfectly compliment each other.



How To Store BitCoins – You can store the bitcoins in your own wallet or with a third party.

If you store in your own wallet then I would recommend Dropbox and TrueCrypt. If you keep your BitCoin wallet on your computer or in the cloud then you may lose the file, have a TrueCrypt file header get corrupted, etc. and the bitcoins would be unrecoverable. Remember, they are like digital cash.

If you store with a third party then an easy way I would recommend is MyBitCoin which is free and much easier to figure out than trying to setup your own wallet and then using tools like TrueCrypt and Dropbox to protect it but I suppose the risk is that they could abscond with your bitcoins.  So all things considered for now I think MyBitCoin poses a small risk of loss.

How To Get BitCoins – A few ideas are that you can use an exchanger, a broker, trade with someone via the Internet or in person or engage in bitcoin mining.

The largest exchanger is MtGox. They exchange hundreds of thousands of FRN$ value of bitcoins for cash and vice versa per day.

If you are interested in using cash then I might be willing to help out with smaller transactions but I am not really that interested. I suppose you will find a way to contact me if you really want to. I would prefer to refer you to someone who I have had a positive experience with but there is always risk. I just know how cautious I am and imagine many of you are likewise very cautious.


BitCoins have sustained a tremendous rally from about $0.25 to over $30.00 in less than 8 months. I missed this perceived risky trade because I was too cautious. After a thorough study I think there is tremendous merit to the BitCoin project and think it deserves some serious due diligence by holders of capital and speculators. I would not be surprised to see a triple or quadruple digit BitCoin price by the end of year. There is some serious speculative potential here. Also, at RunToGold and HowToVanish are willing to take bitcoins as payment for any products we offer.

Please let me know in the comments what you think of this new BitCoin project. Thanks!

DISCLOSURES: Long physical gold, silver, platinum, palladium and bitcoins.

Josef Schachter: Get Ready for a Natural Gas Boom

Josef Schachter Schachter Asset Management Analyst and Investment Advisor Josef Schachter, who provides oil and gas research to Maison Placement Canada clients, is recommending a group of Canadian companies that are maintaining the delicate balance between oil, on which he is bearish, and natural gas, which he believes will soon enrich both producers and investors. In this exclusive interview with The Energy Report, Josef shares some value-priced names he feels are poised for big gains, along with natural gas’ rising price.

The Energy Report: You recently said that if gasoline prices continue to rise we should see West Texas Intermediate (WTI) oil in the low-$70s in the third through fourth quarters of 2011 (Q311–Q411). That represents an approximate 25% decline from current levels. Does that mean that the North American economy will be in trouble?

Josef Schachter: That’s the key. When you get $4/gal. gasoline at the pump, or $1.25–$1.35/liter in Canada, you start seeing demand destruction. If we look at the weekly Energy Information Administration (EIA) data for the week ending June 3, we can see that demand for finished motor gasoline was 9.16 million barrels (Mbbl.)—down 268,000 barrels on the week. And year-to-date (YTD), it’s down 0.3% to 8.956 Mbbl. per week. So, we’re already seeing demand destruction in the States from the handle of $4/gal. In Canada, we’re seeing the same thing; and Europe, of course, is showing much weaker demand. Japan also is showing much weaker demand, and we have the tightening of credit in China. Quantitative easing 2 (QE2) is now out of the way, so the stimulus is gone in the U.S.

There is probably a $30/bbl premium in the price of WTI oil, and 50% of that relates to Middle East issues with about 900,000 barrels per day (bpd) that have been cut off from Libya. If we see the Libya issue resolved in the next three to six months with Muammar Gaddafi going out, that production will come back on and will remove the pressure of the Arab Spring premium. The other 50% is the hedge and commodity funds.

If we see weakness in the economy, the whole commodity board will come down and we’ll see the U.S. dollar rally. We believe oil prices will lose that $15/bbl premium held by speculators in commodities and exchange traded funds (ETFs). The combination of the two could take $30 off the price of WTI oil, which is just around $93.40 today. Remember, when you have weak economic conditions, you trade below fair value. Recall Q109, while the fair value price might have been $50 for oil, we traded in the low-$30s.

TER: You use technical analysis quite extensively in your research reports, more than many sellside analysts. What are the charts telling you?

JS: My background is fundamental. I have an accounting background and am a Chartered Financial Analyst (CFA), so I come at it from a fundamental point of view. But I have had healthy respect and training from the technicians during my +30 years in the business, so I do look at the charts. We were at $112/bbl of WTI, now we’re at $98—and $94 is not that far away. If we break $94 on the charts, then it’s going down and looks like low-$70s. So, I think you must have respect for, and use all of, the disciplines. But I come at it from a supply/demand point of view; and, while the price of oil ran to $112 due to concerns about supply removal in the Middle East, that could be reversed if Libyan production comes back on because it’s a big producer.

TER: With $4/gal. gasoline, we’ve seen oil demand falling in the U.S. But what about natural gas, isn’t the reverse true? At the $4–$5 per-thousand-cubic-foot (Mcf) level, shouldn’t we be using a lot more gas? Isn’t that equivalent to about $1/gal. gasoline?

JS: Yes, we could see natural gas prices triple and still be the fuel of choice. The inventory picture has been high, but that’s coming down. Because of the Haynesville and the Marcellus and everything else, there was a perception that we have a natural-gas glut. We believe natural gas prices will go significantly above $5/Tcf this summer with big air-conditioning demand during the hurricane season. Over the winter of 2011–2012, we think NYMEX gas will trade north of $7/Mcf.

TER: Nat gas is quite a bit higher in Europe and Asia. Is there an arbitrage opportunity?

JS: There is currently no arbitrage capability, in terms of shipping natural gas from the United States to Europe or Asia. Remember, there are costs to do that. If prices in Japan are $10 or $12/Mcf and today we’re trading at $4.35/Mcf for NYMEX July, there’s an arbitrage there; but there are landed costs in building a facility. Cheniere Energy Partners L.P. (NYSE.A:CQP) and other companies are talking about this. It may cost $5/Mcf more to convert that into liquefied natural gas (LNG) and ship it to Japan due to distance, and it may not be enough of an arbitrage to attract the kind of capital needed.

TER: You’re bullish on natural gas and bearish on oil. Do you feel like gas prices will rise at the expense of oil, with investable dollars being redeployed into gas and gas stocks?

JS: That’s what we’ve been recommending to Maison’s institutional clients. If you look at some of the big-name oily stocks, they’ve already come down a bit from where they were. For instance, Suncor Energy Inc. (TSX.V:SU; NYSE:SU) was trading at $47 in February, and now it’s trading at $38. So, there’s been a bit of a haircut there. The big Canadian producer Imperial Oil Ltd. (TSX:IMO; NYSE.A:IMO) was $54 in February, when WTI oil was at $112/bbl, and now the stock is trading at $44.56.

So, we’ve already seen a correction in the oil names, and we think that will continue, especially if we see another $20–$30/bbl come off the price of oil. Gas stocks have done the reverse. At the beginning of the year, Encana Corp.(TSX:ECA; NYSE:ECA) was a $29 stock, and now it’s a $31 stock. That’s not a big move, but it’s gone up versus the oily names going down.

TER: Back in March, the Government of Quebec halted shale gas drilling until a safety evaluation could be completed. This could take up to two years and, with court challenges and environmentalists converging on this area as a battleground, it might take longer. What’s your feeling on this?

JS: There’s a pilot phase that will go on for the next two years. I believe six wells are forecast, two of which are being worked by a joint venture (JV) between Talisman Energy Inc. (TSX:TLM) and Questerre Energy Corp. (TSX:QEC). They’re going to be monitored by the government, which will have people onsite. What the companies will have to do is deal with local people and environmentalists, get approval from the farmers and explain what’s going on. They’re going to measure the methane before and after they start drilling since the companies want to prove that they’re not increasing the amount of methane from their activity. So, the industry has to prove its environmental case.

Quebec has a history of environmental legislation for mines; but in the end, it does approve the mines if they go through the environmental hurdles. I think the case will be the same here with natural gas. Companies might not be able to drill close to Montreal or Quebec City, but that’s the same issue with New York. However, in our minds, there will be activity; it’s just a question of when it happens. Remember also, there’s an election in Quebec in two years; and I believe the government wants to wait until after the election on this issue. So, it’s going to take that two-year window or more.

TER: What are the plays that you’re recommending for investors today?

JS: We like companies in Western Canada, where there are multizone liquids-rich natural gas areas. Oil is in some of the plays like the Cardium Formation or the Doe Creek. So, we like companies like Delphi Energy Corp. (TSX:DEE), Vero Energy Inc. (TSX:VRO) and Galleon Energy Inc. (TSX:GO). We also like some Canadian-domiciled companies dealing with international markets like Niko Resources Ltd. (TSX:NKO), which is in India, Indonesia, Kurdistan, Trinidad, Madagascar and a number of other places.

In the past, we’ve been fans of Sterling Resources Ltd. (TSX.V:SLG), which is in the North Sea, the Netherlands and offshore Romania; however, currently we are on the sidelines due to their ongoing difficulties in Romania. We like WesternZagros Resources Ltd. (TSX.V:WZR), which has just completed a very exciting well, Sarqala-1, in the Kurdistan region of Iraq and will spud another well, called Mil Qasim-1, in July. We like a company in Egypt, called Sea Dragon Energy Inc. (TSX.V:SDX). It has the same management team that was successful with Centurion Energy International Inc., which was acquired by Dana Gas PJSC (ADX:DANA) in 2007. A lot of Canadian-domiciled companies are taking the modern technologies around the world and are doing very well with that.

TER: You mentioned Delphi and WesternZagros, which are your top-two picks. One thing that jumps out at me is that neither of these companies has had spectacular returns. So, is this your contrarian gas play?

JS: Yes. DEE got hurt because of their gas bias, but they always had land with liquids-rich capability. For example, in 2009, Delphi was producing about 15% oil and 85% natural gas. This year, it’s going to do about 27% oil and liquids—and that number will go north of 30% by the end of the year. It’s going to generate over 50% of its revenue from oil and liquids; so cash flow will go up, and production volumes will go from 6,700 boe/d in Q109 to north of 9,500 boe/d by year-end. Delphi is doing the right things, in terms of the mix. It’s going after the liquids-rich capabilities on its land, but the company always has the dry gas sitting in its inventory; so, when gas prices go back to $7–$8/Mcf, Delphi can move those assets. In the meantime, it can increase its net asset value (NAV) and cash flow by going after the liquids. It’s similar to the gold business—when prices are low, you go after your best veins; and when prices are high, you go after your bad veins.

TER: Your target price on Delphi is $4, which implies a 60%–65% return, but I noticed the company’s NAV is $3.78. It sounds like a very conservative target price.

JS: Yes. And that’s because we’re looking for Delphi to trade at a ratio of its cash flows, and we’re looking at it annualizing about $0.60 in cash flow by Q411. The cash flow multiple should be no greater than the proven reserve life index (RLI); and, if you have seven-and-one-half years of proven reserves, you also have probable and possible reserves, tax pools and land value to protect the value for shareholders.

So, we take an approach in which a company’s maximum cash flow multiple should be equal to its proven RLI. However, we didn’t even use that in this case. So, you could argue that we may have an even higher target, but our view is to use a reasonable target that we can see makes sense. Then, if it gets to that target and the company is doing better than expected, we can always review it again and come up with a new target.

TER: Your other top pick was WesternZagros, on which you have a target price of $1.50. That represents a roughly 175% return. What are the risks here?

JS: Well, this is in Kurdistan and now the Baghdad and Kurdistan governments are getting their collective act together, in terms of allowing money to be paid to the players in the area, which makes a lot of sense to us. WesternZagros has a lot of cash on the balance sheet, so it has enough for the next phase of drilling. What we like about the company is that the Sarqala-1 well has tested at 9,444 bpd light, +40-degree oil. So, it may have a massive oil field there. WesternZagros’ biggest shareholders are George Soros and John Paulson. Thus, we have big, international investors that believe this company has a big land spread, very attractive base and has proven that there is light oil on it.

TER: You went to the SEPAC Oil & Gas Investor Showcase in Calgary at the end of May. What was the atmosphere there? What did you hear?

JS: If a company is in natural gas only, it’s not generating a lot of cash flow and not making any money. And if it has any debt, it has problems. So, almost every company was trying to draw attention to itself saying, “Let’s find the liquids-rich or oily stuff and use the new technologies to harvest our lands.” Nearly every company was carrying the flag of “liquids-oily” to draw attention.

From my perspective, they’re doing what they have to do in these tough times. But it is getting easier. The basin in Western Canada is gassier, with small pools where the new technologies will help with the oil recovery. But in the long run, we’re going to need a much higher natural gas price for the industry to be successful—not only to get a cash flow but also to start generating free cash flow and net income. That’s when people can see that it’s not just trading dollars in the industry, but also making real money.

TER: Can the small guys survive?

JS: Again, they’ve got to go get land where the big boys aren’t pushing up prices exorbitantly. That means they will have to go into areas that are not ‘hot.’ Everybody loves the Duvernay or the Cardium, but land prices are rising above $5,000/acre. A little company can’t do that today. So, it must have had the land in inventory that it holds or has farmed in from a big boy. But the key thing is that the company will have to be away from where the big boys are located. Companies like Delphi, Galleon and Vero were buying low-priced land in these hot areas before the big boys come in—and where the little guys now just can’t compete.

TER: That makes sense. Josef, do you have any further thoughts that you’d like to leave with our readers?

JS: Just that we’re cautious right now with QE2 over and with all the country risks in Europe. I think almost everybody agrees that Greece has problems that cannot be fixed. At some point, it will have to face the moment and resolve these issues with haircuts everywhere, which is deflationary. So, if that’s the case, and we have a weaker U.S. economy along with Europe, China and Japan, we think there’s a chance for a severe correction. So, we’re not saying investors should go out and buy things right away, but rather build up their buy lists.

Sometime this fall, the market could have a 10%, or even 30%, correction. I’m not sure which one it will be; it depends upon how serious the problems in Europe become. And, of course, Americans are facing their debt issues. So, if we do see a severe 30% correction, some stocks could go down much more than that; so, you want to be ready to be a buyer. We’re saying if you have oily names right now, sell them and lighten up your exposure. If you have to be exposed to energy, be in the natural gas-focused names, but sit there with some decent cash reserves underweighting the sector and be ready to be a buyer sometime this fall when the pain is over.

TER: Great advice. Thank you, Josef.

JS: Thank you.

After a successful investment stewardship at Richardson Greenshields of Canada Limited (RGCL), and the Royal Bank purchase of that firm, Josef set up his own investment advisory business, Schachter Asset Management Inc. (SAMI) in late 1996. Mr. Schachter has nearly 40 years of experience in the Canadian investment management industry. He was the market strategist and director at Richardson Greenshields, as well as a member of its Investment Policy Committee. He holds the Chartered Financial Analyst designation and is a past chairman of the Canadian Council of Financial Analysts.

Currently, Mr. Schachter and his research team provide oil and gas research coverage to the institutional clients of Maison Placements Canada and presents to, and consults, various industry companies and organizations. Mr. Schachter is a frequent guest on BNN and is regularly quoted in such news and financial publications as the Globe and Mail, National Post and Business Edge—the latter of which awarded Mr. Schachter its “Stock Picker of the Year” award in 2003, 2004 and 2007. He is also a regular on various radio shows including Michael Campbell’s “Money Talks.”

Wanted: International Buyers of Danish Mortgage Bonds

Not too long ago, I compared the Japanese economy to a bumblebee because of the economy’s ability to keep on chucking along even as the government debt/GDP ratio stormed above the 200% mark. I am starting to think that the same comparison might be warranted too in the case of my home country.

One striking aspect of the Danish economy that any economist following the discourse on Denmark must be pondering is that despite the widespread idea that Denmark has a serious productivity problem relative to its peers, it has not yet shown up in the data. Denmark is still running a sizeable trade as well as income surplus which together adds up to a tasty current account surplus.

So what gives and can this situation be maintained?

The reason that I have been forced to think about this was today’s report by Bloomie that the Danish bank and mortgate originator Nykredit announced that it would actively seek to widen its international investor base for covered bonds backed by mortgages of which the bank is Europe’s largest holder and which contributes to making the Danish market for mortgages one of the world’s biggest.

Basically, the problem for Danish financial institutions is that under the new Basel rules, covered bonds backed by mortgages will be treated as less liquid than government bonds (and thus less liquid than is currently the case) and thus Nykredit et al will be left holding way too many of these securities. The problem in a nutshell is this;

Denmark is leading efforts to persuade the European Union to ease liquidity rules set by the Basel Committee on Banking Supervision that the Nordic country says penalize the world’s third-largest mortgage-bond market. While the EU has signaled it may accommodate some of the demands, standards scheduled to take effect by 2015 are still likely to treat covered bonds as less liquid assets than government debt, Engberg Jensen said.

“I don’t think we can totally avoid a haircut” on how banks treat covered bonds in their liquid assets, he said. “I don’t think that we’ll end up with rules where covered bonds and government bonds are equal.” This means “we need to find a broader investor base. We want to be stronger in Europe and we have also started in the Middle East and the Far East. We’ve had investors for many years in the U.S. and Europe.”

Under the new rules, banks must abide to a limit of 40% in terms of how much of the securities portfolio that can be made up by (mortgage) covered bonds which leads to the obvious result that …

“If we get the new rules, most Danish banks will have to restructure to sell mortgage bonds and buy government bonds,” Engberg Jensen said. While Danish banks have relied on the country’s covered bonds to generate liquid assets, lenders in Germany and Asia have room to purchase the securities without breaching Basel’s 40 percent limit, Nykredit estimates. The company wants to sell its bonds to banks in those regions to make up for the selloff it expects to see in Denmark, Nykredit Group Managing Director Karsten Knudsen said in the same interview.

Denmark has a problem here, a big one in my opinion and the only chart you need to look at is the following.

(click on picture for better viewing)

Despite the crisis, Denmark has not delevered substantially and mortgage debt remains a sizeable portion of GDP; 134% by my calculations in 2010. And this is mortgage debt alone and thus leaves out a large private debt burden, all corporate debt as well as a growing government debt.

It is important to understand where Denmark is here. Denmark is like Spain, Ireland and Australia with large a large private debt burden which will only really make itself felt once the government has to assume the final bill (think Ireland here). Now, at this point my compatriots would know doubt file this post under the “one flew over the (…)’s nest” folder as comparing Denmark with the countries made above seem more than outrageous. But try to get the main point here. Denmark’s main debt problem is in the private sector and given the Irish experience, once the sovereign has to plug a hole in the domestic financial system, it is the total debt that matters and not merely the government debt.

Recently, the EU commission issued a report with a stark warning to Danish policy makers that both the size and structure of the housing market with the majority of loans made up by variable interest rate and no-amortisation/down payment (often both in the same loan!) represented a current and future source of instability. The Danish central bank has even suggested to phase out these loans entirely even if it seems that such a proposal has not got political backing in the Danish parliament regardless of the result of this year’s election.

According to Bloomberg, Nykredit and others have noted that they will try to separate the way they funds their adjustable rate mortgage portfolio from their fixed rate portfolio. This is almost hilarious in its uselessness in my opinion since the main problem here is not a flow issue but a stock issue as evidenced by the chart above.

When all is said, I think you should take away the following point from this.

Essentially, if Danish mortgage originators start selling bonds to foreign investors for the obvious rational reason that they need to abide to new capital requirement rules it will mean a defacto deterioration of the current account (not necessarily a problem, just a fact when you sell securities abroad). So, the question is; how willing will foreigners be to finance one of the most overlevered housing markets in the world and at what yields?

When I run the scenario in my head, I end up in a situation where it might be quite difficult to push Danish covered bonds to foreigners at acceptable prices, liquidity will dry up and re-financing will get more difficult. In addition, if yields go up prices (i.e. house prices) will fall and exacerbate the difficulty in pushing the securities since the prices on the underlying collateral (i.e. property will go down).

Now, far be it from me to attempt to put Denmark in a club to which it does not belong but think about it for a minute. The road map for how a Danish government might be forced to issue government bonds and swap them for unsellable covered bonds in order to allow its financial institutions to abide to the Basel rules is an almost sinister way in which the Danish sovereign ultimately may end up being on the hook for the total stock of debt in the society, just as we have seen elsewhere.

Am I seeing ghosts? Perhaps, but consider yourself warned.

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Economic Events on June 24, 2011

At 8:30 AM EDT, the final GDP report for the first quarter of 2011 will be announced.  The consensus is an increase of 1.9% in real GDP and an increase of 1.9% in the GDP price index.  The real GDP estimate is 0.1% higher than the preliminary value for the first quarter of 2011, and the GDP price index is the same.

Also at 8:30 AM EDT, the monthly Corporate Profits report from the Bureau of Economic Analysis will be released.

Also at 8:30 AM EDT, the Durable Goods Orders report for May will be released. The consensus is that there was an increase of 1.0% from April.

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