The Big Mac Index takes a look at the Chinese Yuan

18-Mar-2010 | kate | Asia Currency Economics Economy

I am sure that you have all been reading that the US is trying to bully China into revaluing their currency. The US is urging Beijing to loosen their currency controls because they believe an undervalued yuan is aggravating US unemployment and the possibility that the US huge trade deficit is caused by an artificially weak yuan.

The Chinese Foreign Ministry spoke out about the US call for yuan appreciation starting that it is a bad example of protectionism that is detrimental to the recovery of the world economy. “The Chinese currency is not undervalues. We oppose all countries engaging in mutual finger pointing or taking strong measures to force other nations to appreciate their currencies. “

So with two conflicting views on the true value of the Chinese Yuan, let’s take a look at an important currency evaluator, the BIG MAC Index.

The Big Mac Index, which is already known to our avid readers, is based on the theory of purchasing power parity (PPP). PPP states that exchange rates between currencies should equalize the price of a basket of goods across borders, and does so by analyzing the price for basket goods in each country to determine their true value and whether or not the currency is fairly valued.

According to the Big Mac Index, as seen below, the Chinese Yuan is undervalued by 49% as of March 16th, 2010. Another interesting thing to take a look at is the countries whose Big Mac cost more than the $3.58 USD dollars and are supposedly overvalued according to the Big Mac Index for example the Euro which is 29% overvalued.

BIGMAC

source:  The Economist http://www.economist.com/daily/chartgallery/displayStory.cfm?story_id=15715184&source=features_box4

This blog has been prepared by the Retire First Team. The blog expresses the opinions of the writers and not necessarily those of Retire First Ltd. Statistic and factual data are from sources Retire First believes to be reliable but their accuracy can not be guaranteed. This blog is furnished on the basis and understanding that Retire First is under no liability whatsoever in respect thereof. It is for informational purposes only and is not be construed as an offer or solicitation for the sale or purchase of securities. Retire First Ltd. And its officers, directors, employees and their family may from time to time invest in the securities discussed in this blog. This blog is intended for individuals where Retire First Ltd is registered as a dealer in securities.

Retire First is a member of the Canadian Investors Protection Fund.

Commission, trailing commissions, management fees and expense all may be associated with mutual funds. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. A recommendation of any of the mentioned investments would only be made after a personal review of individual portfolio. Third Party research has been used in formulating the writer's opinions.

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Trouble Ahead

08-Feb-2010 | kate | Commodities International Investing Market Outlook Market Strategies Market Theories Stocks

In 1996 copper was being hoarder which led to a price collapse, and predicts that we are going to see this on a much larger scale once again. President of Resolved Inc, a metal trader, believes that a catastrophe is on the way and that copper prices are set to dissolve on rising stockpiles and the unwinding of positions by speculators.

So why does David Threlkeld believe copper prices are going to fall? David says that part of the problem is because of tricky word usage by analyst, so let’s start here.  Demand simply means buying a product while consumption means that the demanded product is being used and is no longer available for use. So instead of looking at market demand, which can meet stockpiling of metal we should be looking at world usage.

In two thirds of the world consumption of copper went down by 20%, but consumption in 1/3 of the world which is China went up 10% as well as copper production in China also went up 10% There is also a theory that so the theory that China is reliant outside copper is incorrect. The country produces 4 million tonnes of copper and uses roughly 5 million tonnes, meaning that they import roughly 1 million tonnes a year.

Anything in excess of that is unsold inventory which remains available to the market and creates a stockpile of inventory which will eventually lead to the market is going to collapsing since the demand will slow down.  Unsold inventory is usually around 5 million tonnes, this year it is going to be a couple extra tonnes a year, meaning that supply is outpacing consumption.  We will find that we need consumption to start outpacing supply so that we can remove the excess capacity on the market in order to stop a collapse in the price of copper, something that Threlkeld sees as unlike and rather is preparing for a slowdown in copper price for the next few years.

This blog has been prepared by the Retire First Team. The blog expresses the opinions of the writers and not necessarily those of Retire First Ltd. Statistic and factual data are from sources Retire First believes to be reliable but their accuracy can not be guaranteed. This blog is furnished on the basis and understanding that Retire First is under no liability whatsoever in respect thereof. It is for informational purposes only and is not be construed as an offer or solicitation for the sale or purchase of securities. Retire First Ltd. And its officers, directors, employees and their family may from time to time invest in the securities discussed in this blog. This blog is intended for individuals where Retire First Ltd is registered as a dealer in securities.

Retire First is a member of the Canadian Investors Protection Fund.

Commission, trailing commissions, management fees and expense all may be associated with mutual funds. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. A recommendation of any of the mentioned investments would only be made after a personal review of individual portfolio. Third Party research has been used in formulating the writer's opinions.

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Santa Claus Rally Coming to Town

21-Dec-2009 | Reggie | Investment Ideas Market Outlook Market Strategies Market Theories

Also known as the December effect, it is a fairly common trend that often occurs near the end of the year after investors are finished their tax loss selling.  With most investors doing the majority of their tax loss selling in November and early December, stocks that were already doing poorly do worse as they face additional selling pressure.  Eventually, selling pressure expires as investors finish their tax loss selling, or run out of time to do so.  The last day for tax-loss selling for 2009 is December 24th.  Once the selling is finished, its likely stocks will rally because of the lack of sellers left in the market and capital being redeployed.

This year is shaping up to be a particularly good Santa Claus Rally thanks to how absolutely terrible the stock market was over the past year.  Unfortunately, many people are still left with losing positions that are likely worth more as tax losses than potential money makers down the road.

Market Historian Jim Stack has crunched the numbers over the years to give us a clear idea of just how effective the Santa Claus Rally has been:

The Santa Claus Rally is a widely recognized truism on Wall Street and it’s actually supported by statistics. Prior to 1970 this rally was a 2-week event, commonly occurring during the last week of December and the first week of January.

Over the last 40 years the pattern has changed. These year-end rallies have been stronger and they’ve started earlier.

Perhaps it was a revision in the tax laws that enhanced this yearly occurrence, or maybe the proliferation of mutual funds with their year-end portfolio shuffling, or it might simply be broader anticipation of the event.

Whatever the stimulus, over the last four decades the average gain from November 20 through the end of January has been +4.2%, which would be an extraordinary +23%, annualized. There are several factors that likely contribute to this seasonal strength.

Whatever the reason, in the last 40 years Santa has rarely missed a beat. By looking at  the performance of the S&P 500 from November 20 through January 31 each year, we note:

  • * Excluding bear markets, only four years resulted in a loss for the period. The biggest decline was in 2002-2003, when a retest of the major bear market bottom caused the Index to drop 6.4%.
  • * Considering the entire 80 years of S&P 500 data, only two years saw a decline of greater than 10%. That occurred in the middle of major bear markets in 1931 and 1969.
  • * Conversely, a number of years have seen exceptional gains. Ten Santa Claus Rallies out of the past 80 years have produced gains in excess of 10%. Five of those hefty rallies occurred during the dismal stock market decade of the the 1970s.

This is definitely a year where we should all be very thankful towards the guy in the big red suit and cross our fingers that history holds true.

This blog has been prepared by the Retire First Team. The blog expresses the opinions of the writers and not necessarily those of Retire First Ltd. Statistic and factual data are from sources Retire First believes to be reliable but their accuracy can not be guaranteed. This blog is furnished on the basis and understanding that Retire First is under no liability whatsoever in respect thereof. It is for informational purposes only and is not be construed as an offer or solicitation for the sale or purchase of securities. Retire First Ltd. And its officers, directors, employees and their family may from time to time invest in the securities discussed in this blog. This blog is intended for individuals where Retire First Ltd is registered as a dealer in securities.

Retire First is a member of the Canadian Investors Protection Fund.

Commission, trailing commissions, management fees and expense all may be associated with mutual funds. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. A recommendation of any of the mentioned investments would only be made after a personal review of individual portfolio. Third Party research has been used in formulating the writer's opinions.

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Locking in Losses is Better than it Looks, You Just Need to Draw A New Picture.

19-Oct-2009 | kate | Market Theories The Wise Investor Uncategorized

Usually, clients want to sell their winners too early and ride the losers straight into the ground, in fact it is so common that it even has a name- the disposition effect. The good news is that professional investors are proven to be less prone to this effect, because we are better able to confront good and bad news and admit errors. Unfortunately, for the rest of the public, they like to hold on to their loser stocks.

We hold on to our loser stocks because the pain of losing money according to behavioral science, is twice as great as making money, so when you buy a stock and it goes up two dollars, you want to sell. If the price goes down, you refuse to take the loss resulting in holding on to losers in hopes of making gain back. In fact, according to one author writing for Forbes, the average investor would rather ride the stock to basically nothing in hopes of potentially, one day, making it back to break even.

According to the disposition effect, investors hate to lock in losses- like one couple whom I just met, who refuses to sell some of the loser items in their portfolio (held at another institution)- because there is always the hope that one day they might break even. I suggested to this couple that if they were always selling well performing stocks and holding on to the losers, what their account might look like in the future? It didn’t take longer for them to answer that their portfolio would be full of loser companies.

I suggested that she try thinking in a different manner, such as realizing that when we end up having to sell a poorly performing company we are it actually free up money to take advantage of better opportunities, and hopefully taking the right steps to growing our accounts.

In today’s market, it is particularly important to drive this point home to investors who have yet to rebalance their accounts to the post 2008 market. There are many well performing companies who shares have experienced tremendous growth over the last year and if your account has yet to see green returns, it might be time to consider selling some of your companies for greener opportunities.

So investors, keep in mind today that when you’re investing you sometimes have to hard nose and sell that company so you can put your money to places where it can provide more promising returns. And better yet, you might be able to take advantage of some tax savings for when you are ready to sell your winning picks in future days.

This blog has been prepared by the Retire First Team. The blog expresses the opinions of the writers and not necessarily those of Retire First Ltd. Statistic and factual data are from sources Retire First believes to be reliable but their accuracy can not be guaranteed. This blog is furnished on the basis and understanding that Retire First is under no liability whatsoever in respect thereof. It is for informational purposes only and is not be construed as an offer or solicitation for the sale or purchase of securities. Retire First Ltd. And its officers, directors, employees and their family may from time to time invest in the securities discussed in this blog. This blog is intended for individuals where Retire First Ltd is registered as a dealer in securities.

Retire First is a member of the Canadian Investors Protection Fund.

Commission, trailing commissions, management fees and expense all may be associated with mutual funds. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. A recommendation of any of the mentioned investments would only be made after a personal review of individual portfolio. Third Party research has been used in formulating the writer's opinions.

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The Big Mac Index

15-Oct-2009 | kate | Currency Economy International Investing Market Strategies Market Theories The Wise Investor

Right now the only thing people are talking about is the economy, and chatter is everywhere. This week people are focusing in on the Loonies mach towards parity, which of course is exciting for Retire First, since it coincides with our recent launch of our foreign exchange department. So with the pleasure to announce our newest venture Retire First Foreign Exchange and the recent rise in the Loonies value, I would like to introduce the idea of the Big Mac Index to our readers.

The Big Mac index is a light hearted method to measure the percentage of overvaluation and undervaluation between two currencies, by comparing the prices of a Big Mac hamburger using the US dollar as the base value. Although certainly silly and not a perfect measurement of currency valuation, the Big Mac index, introduced by the Economist in 1986 does allow us to compare dollar power in over 120 countries around the world.

The premise is that the McDonald Big Mac is a consumer good common to all nation and allows us to compare purchasing power parity (PPP). PPP equalizes the purchase power between currencies for a given basket of goods in one country with a base country, which is in this case the Unite states. Ideally, in efficient markets, identical goods should have identical costs. PPP is arguably the most useful tool for comparing differences in the living standards between nations since it does account for the cost of living and the inflation rate.

Example: Big Mac Index as July 16, 2009 (view all countries)

Country Cost in Local Currency Cost in US Currency
USA 3.57 3.57
Canada 3.89 3.78
Britian 2.29 3.65
Norway 40 7.16
China 12.5 1.8288
Sweden 39 5.63
Japan 320 3.58
Sri Lanka 210 1.8268

Essentially, when using the PPP using the Big Mac theory we should be able to find the exchange rate, which for this theory, is the percentage of under or overvaluation of a currency.

If the US dollar to the Mexican Peso exchange rate is $1 USD to 15 Peso, and a US Big Mac cost $3  it should cost 4.50 Peso, based on PPP as seen below

(45/3) * (1/15)= 1

The Purchasing Power Theory states that formula most always equal one so that arbitrage will not exist, but if it doesn’t hold true and the price of Big Mac in Mexico is 60 Peso, then Mexican fast food owners could buy Big Mac in the US for $3, at a cost of 45 Peso and sell them in Mexico for 60 Peso, pocketing 15 Peso. Well this doesn’t sound appetizing; we have seen this situation in other industries, such as people buying cars in the US and bring them home to sell them for more in Canada.

So what does this have to do with currency valuation? In the above example, if a US Big Mac cost $3 and 60 Peso, there should be a PPP exchange rate of $1 US for 20 Peso, resulting in the peso being overvalued against the US dollar by 33% (20-15/15), according to the Big Mac Theory.

In theory, since an arbitrage opportunity exists above, the action of the Mexican restaurant owners selling pesos and buying US dollars would eventually drive the value of the peso down (depreciate it) and then dollar would appreciate, driving the economy to equilibrium.  That is in theory of course, and in reality the actions of exploiting the Big Mac Index would not be substantial enough to move the exchange rate up or down- but in theory, if the Big Mac Index applied to all goods it would be.

Keep in mind that while the Big Mac index does allow a quick way to value currency with 120 countries around the world, it is only a lighthearted and entertaining way to explore PPP, and does have numerous flaws that should be considered before relying on the index for your currency decisions. But in the mean time, take some time to check out the Big Mac Index and compare the cost of your burger at your favorite travel destinations, and don’t forget to call Retire First for your next currency conversion.

This blog has been prepared by the Retire First Team. The blog expresses the opinions of the writers and not necessarily those of Retire First Ltd. Statistic and factual data are from sources Retire First believes to be reliable but their accuracy can not be guaranteed. This blog is furnished on the basis and understanding that Retire First is under no liability whatsoever in respect thereof. It is for informational purposes only and is not be construed as an offer or solicitation for the sale or purchase of securities. Retire First Ltd. And its officers, directors, employees and their family may from time to time invest in the securities discussed in this blog. This blog is intended for individuals where Retire First Ltd is registered as a dealer in securities.

Retire First is a member of the Canadian Investors Protection Fund.

Commission, trailing commissions, management fees and expense all may be associated with mutual funds. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. A recommendation of any of the mentioned investments would only be made after a personal review of individual portfolio. Third Party research has been used in formulating the writer's opinions.

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