January 14, 2010 – United Nations Headquarters, NY - global financial leaders gathered to address climate risk concerns and how they impact current and future investing decisions. Co-hosts, Ceres has produced a final report on the summit that does a great job of summarizing the elements that were discussed during the conference. Click here to view the report.
Roth IRA conversions are a hot topic for 2010. Many investors are heading straight for the punch bowl by converting all of their IRAs in the quest for “tax-free for life”. However the question of whether a Roth IRA conversion is suitable is very much circumstance specific and requires thoughtful (and sober) analysis first.
Roth Conversions in summary
For a primer on Roth IRAs, please click here.
The law currently allows for IRA owners to “convert” up to 100% of their existing tax-deferred accounts (traditional IRAs, rollover IRAs, SEP IRAs, SIMPLE IRAs, etc.) into a tax-free account, also known as a Roth IRA. Once a regular IRA is converted to a Roth IRA, no taxes will ever be owed on any future investment earnings or distributions. However, every dollar that is converted will be taxed at today’s ordinary income tax rates.
Anyone with an IRA is eligible for the conversion as there are no restrictions on age, income or marital status. Conversions are irrevocable, except as noted later in this article.
What’s unique about 2010?
2010 has generated Roth conversion fever for two reasons:
As it’s Earth Day, it only seems fitting to review investment opportunities that can positively impact a cleaner, greener future for the planet, our children and environment we share. One such area that is seeing an explosion of funds focusing on this space is the ETF (Exchange Traded Fund) landscape. This area has held up extremely well during these tough economic times and has seen solid investment inflows to green and clean technology companies. In fact, during 2009 this sector was the only private equity industry that showed a net gain in flows over previous annual numbers, and in terms of total investment clean energy has increased by 230% to $162 billion in 2009 over 2005 figures. Part of the appeal is that there is such enormous opportunity in so many different areas. Could this be a repeat of the .com boom of the 90s and early millennium?
A significant difference from the tech decade, however, is that while many of those start-ups were founded on ground breaking technologies, there is more stability within the world of alternative energy. For one, it is not just start-ups that are pushing the advancement forward. Large and established companies that have worked in the power industry for decades are recognizing the need to diversify their operations to keep up with the inevitable switch to more sustainable fuel and energy sources. A good example of this has been in the Natural Gas industry. No matter what your opinion on the fuel as a possible intermediate, cheaper, lower emission substitute (see earlier post), the recent acquisition of a number of natural gas producers by giant oil companies has clearly shown they will not allow the investment opportunity to pass and at worst will make a very safe hedge to their existing operations. Other firms focused on infrastructure and power delivery see opportunity in improving efficiencies within the distribution markets, not only at the corporate level, but within households and through smart grid system technology.
With so many different ways (and different scales) to invest, it only makes sense that investment vehicles are growing in number to support the demand and variety of nuances within the marketplace.
Outlined below is a summary of the current key funds in the ETF world and the areas they focus on.
Click here to read the full interview on Seeking Alpha
SeekIng Alpha (SA): In your portfolios currently, how are you allocating among different asset classes?
David McMillan (DM): At the beginning of 2009 our biggest concerns came from a number of directions. We wanted to ensure that if the declines of the previous year continued we would be protected on the downside from further drops in portfolio values. We also needed to ensure that if we saw a dramatic recovery we could participate and generate respectable returns. It was the classic problem of trying to have low risk with solid growth, and in one of the most challenging economic periods of our time. As active managers, it wasn’t enough for us to sit on the sidelines and hope that a recovery would erase some of the losses that 2008 delivered. This led to holding a diverse mix, heavily weighted in fixed income investing, including treasuries, inflation protected bonds, corporate bonds, international bond funds, high yield bonds, commodities, and limited number of domestic and international equities (particularly in the green and clean technology areas). This saw us outperform our market benchmarks with lower risk levels. We had seen numerous opportunities within the fixed income space, and they didn’t fail to deliver. Even the higher risk fixed income investments were more attractive than most equity positions from a risk-return standpoint.
Disclosure: Caledonia and/or its principals currently hold(s) position(s) in TBT
With 2010 now officially upon us, we turn our attention to what the rest of the year has in store for us. The investment world has been full of surprises over the past 12 months and it will be interesting to see how things unfold over the remainder of the year. One thing can be certain, this will be no ordinary year, and it is our bet that we will see the making of some dramatic economic shifts that will require very careful planning to avoid significant portfolio shocks. Here is the rundown of some of the key areas we will be watching closely.
Interest rate hike:
While there is still a lot of debate (and outright arguing) by the deflation vs inflation camps, it seems that we are seeing more of a swing toward at least one interest rate raise coming during 2010. The overzealous stock market recovery, a likely (though small) improvement in unemployment numbers, commodity appreciation and a very real need for the government to inflate its way out of the enormous debt burden will all be drivers.
For reference, here is a chart that shows the historical Fed Funds rate since the 1950s and how infrequent the periods of ultra low effective rates are. Read more…
A standard incandescent bulb will use almost five times the energy of an LED bulb, a German study concludes. On its face this hardly seems significant since it’s well known that an LED is about five times as efficient as an incandescent bulb from a use standpoint. However this study, conducted by Osram, looks at energy efficiency from a life cycle standpoint. This is important since it refutes the notion that the efficiency of LED bulbs is compromised by an energy intensive production process. In fact, the study finds that the primary energy used in the manufacture in an LED is less than 2% of the total energy consumed over the life of the bulb. Compelling stuff. Even mainstream media such as the NYT has been quick to publish the results.
However a closer examination of the study is revealing. While 2% may sound impressive and further the study highlights how the energy consumed in manufacture is actually less than that of an incandescent, it’s important to understand the assumptions. While it may be true to say an LED is 35% more efficient to manufacture than an incandescent, this calculation is based upon a 25,000 hour versus a 1,000 hour expected life. That a factor of 25.
Blog Action Day ’09 is today October 15th and was created as an annual event that unites the world’s bloggers around an issue of global importance. This year the focus is climate change and it is only appropriate that we provide a post on the topic and join the other 10,000 blogs, 153 countries and over 13million people already contributing. If you have a blog or any social media presence and would like to participate visit Blog Action Day 2009.
With that in mind, you might wonder what this has to do with investing and managing money at Caledonia. Individual and institutional investors need to be concerned about climate change and climate policy as this has a direct impact on the global economy as well as individual assets. As global investors, we manage portfolios that invest in a cross section of assets, companies, sectors and markets. Risks such as climate change that threaten to disrupt the global economy are significant risks that investors have to manage. Beyond the larger issue at play, investments will be affected by regulatory, fiscal and consumer based pressures as the problem worsens and will have implications that affect risk and performance of a wide range of assets. This is why we joined forces with some of the largest financial institutions in the world in signing a 2009 Investor Statement for a Global Agreement on Climate Change. In the next few weeks we will be able to publish the completed document for review. Read more…
Natural gas has garnered a lot of attention in recent weeks and months as we have seen a glut of supplies in the US and globally that has driven prices down to multi-year lows. Stores will reach levels approaching 3,800bn cubic feet by the end of October, its highest ever, on the back of a fall in industrial demand and a US summer that has been relatively cool and damp and kept energy consumption lower. Supplies are also increasing as new discoveries are continually made, such as the huge Gorgon field in Australia which received big investments from Chevron, Royal Dutch Shell and ExxonMobil in September to the tune of $43bn, with more on the way if the prospects continue to look good. The Gorgon field could provide 4% of the world’s LNG, which is the liquefied version of the gas, that can be more easily transported to far away locations. Read more…
Here is a great short video describing the life of William Kamkwamba and how (with no educational background), he learns to educate himself and provide his family with valuable resources in poverty stricken Malawi.
With so much economic news to consider these days, it is easy to find yourself struggling to keep on top of even the basics when it comes to your personal finances. Here is a short checklist of things to review to ensure you are on track with the essentials and help get you through this tough patch.
1) 401k
With many 401ks reduced to 201ks after the last 16months of market activity, plenty of people have become complacent with their assets in these retirement plans, and are content to ride the recent wave of market activity. Consider taking a closer look at your options to protect against an even more catastrophic loss in the event we see a second recession follow the last. If such were to become as deep, or deeper, than the recent downturn, you would be looking at decades of working years to re-inflate the once healthy nest egg. Laying up and waiting for an established trend to form is the safest play, and getting some advice on your fund options will pay big dividends.
2) Cash Holdings
Cash is king when we see market volatility on this kind of scale. Having the ability to buy when stocks and funds are crushed near all time lows can give you a once in a lifetime buying opportunity, particularly if your investment horizon is a long one. The danger lies in the timing, not trying to predict the lows and essentially catch a falling knife. Be patient and wait out the uncertainty, even if it means missing out on the early part of a new trend. Moving in and out of the market is a surefire way to reduce your overall wealth, as the majority of people get whipsawed by buying high and selling low. If you are getting most of your information from the media – watch this Peter Schiff video as a reminder of why you shouldn’t believe the majority of what you hear or see in the press.
3) Emergency Fund
Not enough people consider this important reserve until it is too late. Building up a safe, liquid cash position enables you to be flexible when critical life changing events occur, such as losing your job, covering health care costs, making emergency home repairs, etc. Being able to weather six months to a year provides enough buffer to get back on your feet.
