Saturday, 26 January 2008

Stop flushing your dollars down the toilet: The economics of a high-efficiency toilet set

There are so many ways to save money around your own house. One of such ways is cutting on water consumption and thus reducing your water and wastewater bill. One may argue that it is not much money, but let's look at some simple math before making such conclusions. I will use my family as an example.

I own a house and have three persons in my household, the two of whom are (honestly) not true frugal types. Our average bi-monthly water consumption is around 35 cubic metres (over 9,200 gallons). In my minicipality, which is a part of the Greater Toronto Area in Ontario, the user fee rates for water consumption are C$0.885 per m3 for water and C$0.84 per m3 for wastewater, which amounts to the total of C$1.725 per m3. So for us the average bi-monthly bill for water and wastewater is a hefty C$60.38, which sums up to the annual total of $362. This is something material, so naturally the household's frugal person (me :-)) looks for different ways to reduce this bill as much as possible and use the resulting savings on something else (like investing in good dividend stocks). This post is about reducing one peculiar but virtually unavoidable type of water consumption - it is about saving money which is literally being flushed down the toilets every day in every house.

Back to math: We have three toilet sets around the house and all of them are pretty old models with traditional valve systems and ridiculously low-efficient, large, 15-litre-per-flush water tanks. I adjusted them as much as I could to prevent all 15 litres from being wasted in each flush, but with only a minor success, maybe reducing each flush to 13 litres. Going further down is not really possible since the flush system would not work properly. I actually broke the flushing system in one of our old toilets when I was trying to prevent water from dripping down through an old rubber plug. That was the last drop. After some minor preliminary research, today I shopped (with success!) for a high-efficiency toilet set to replace the broken toilet.

At the end of the day, a high-efficiency-consumption two-piece model with a dual-flush system from a well-recognized brand cost me C$235 at Home Depot. The price included a $19 toilet installation kit, which I bought separately, and a 13% sales tax. A dual-flush system means that you can flush either 3 or 6 litres (0.8 or 1.6 gallons per flush), depending on which of the two shiny flush buttons you press. In terms of its capacity, the model ranks very well and is said to remove 900 g of solid waste per flush. None of us is that "productive" any way, so I adjusted the size of flushes even further down, which was done through an easy-to-use valve adjustment mechanism in a water tank.

Now, let's look at the math of future savings from installing this new toilet: In my calculations, I assume that each person on average does at least five flushes a day. So we spend 15 flushes times 13 litres = 195 litres per day when using old toilets. That's 5,850 litres (5.85 m3) a month, or 70,200 litres (approximately 70 m3) a year. I would also take into account those minor but persistent leaks that happen through old rubber flush plugs, which amounts to, say, extra 3-5% of regular 70K litres and effectively increases the total toilet-flushed water consumption to 72-73 m3 a year. In terms of money, this is roughly C$125 a year, or almost 34.5% of our annual water consumption charges.

The toilet that I replaced is used most often, so let's say it accounts for 50% of our total toilet water use and therefore costs C$62 per year in water-usage costs. Reducing the size of flushes from 13 to an average of 4 litres (the weighted average of 3 and 6 litre flushes further manually adjusted down through a valve adjustment mechanism) cuts the water consumption by 70%, which is equal to C$43 in direct money savings.

The total investment cost of C$235 and the C$43 annual savings give us the breakeven period of 5.5 years and the 18.3% annual return on investment. If you take into account the fact that municipalities generously hike their user-fees well ahead of inflation, the breakeven number will be even smaller and the ROI rate will be growing each year. Say, if the rates on water and wastewater use increase by a conservative 3% a year, then the breakeven period decreases to 5.1 years, and the annual ROI grows annually at 3%. Not bad for a simple investment.

Now, if I lived in the City of Toronto, I would receive the C$75 water-savings rebate available on the model that I purchased, which would cut the cost of investment to C$160 dollars, reduce the fee-growth-adjusted breakeven period to only 3.6 years, and give me the 27% first-year ROI rate growing annually along with user-fees on water consumption! I know that other municipalities in Canada and the States have similar water-saving rebate programs.

If you are planning to live in a house for a while, it looks like a very good investment, with or even without a government rebate. In addition, if you decide to sell your house, then the brand-new, great-looking, and high-efficiency toilets with dual-flush fancy buttons will be one of the marketing highlights that will add value to your house and will help sell it for a higher price much faster. When you are summing up total benefits from installing a low-flow toilet model, you can also take into account some significant personal satisfaction from using a new toilet which does not make dripping and leaking sounds at night and which does not flush a ton of water every time when you take a small pee. Last but not least, you help conserving the environment.

P.S.: I am planning to replace the other two toilet sets in my house during 2008.


This post participated in the Carnival of Personal Finance #137 hosted by the Dividend Guy.

Tuesday, 22 January 2008

Down we go again...

The last week was quite something. Although the statistical data reported during the last week were not that bad (of course, they would not - we have wizard economists and econometricians working for the U.S. government!) and although there were some good spots in reported earnings (like IBM and GE), the markets rushed down in a big-time selloff. A piece of poop news here, a panic-inducing publication there, a cry from some smart-ass guru analyst elsewhere, and here is the outcome - we are going down. Well, this is the rule of the market game, and Bears are enjoying their relatively short-lived momentum of power and truimph. Strong corrective moves, like the one we had last week and will "enjoy" at least for a couple of days this week, are necessary for these greed-driven, overinflated markets (I personally certainly got a couple of good lessons for my greed and ego :-)).

A short-term positive thing is that we are quickly approaching some important support lines and are moving pretty quickly into a deeply oversold territory, so a breakout and a relatively short-lived rally are about to take place. This week looks like a good candidate for this to happen since we do not have any significant stats reported or any planned "public performances" from the top government and Fed officials. Some are even talking about an "emergency" rate cut before the scheduled January 30 Fed meeting, when everybody expects a 50 bps cut. Here in Canada, on January 22, we are very likely to see a 25 bps cut from the Bank of Canada, which will probably help the TSX index recover somewhat from heavy Monday losses or at least slow down in its free fall.

My long-term positions are in minuses these days, but am not very concerned about it. Of course, I probably should have stayed in cash or at least should have sold the positions for some short-term gains earlier, but I view it differently. If you do not actually buy and trade stocks, you will never learn how to do it. So I can say that I am just getting my practical technical experience right now, with small stock positions, at a small price.

I sold my DHI short-term position last Monday for a small 7.3% gross USD profit. Should have sold WFC on Wednesday as well, but decided to hold it a bit longer. Wells Fargo's reported earnings were in line with analysts' expectations and this bank is one of the better U.S. banks (although, to be honest, it carries its share of poop too), so I decided to stick around this stock for a while. If we go too deep down and I can't sell it at my minimum short-term target, then I will just keep it because it will be one of the first financials to break out and lead the rally once the Bear market for banking stocks is over.

Monday, 21 January 2008

What will the Super Bowl Indicator tell us this year?

As we have been watching the stock markets sinking deeper and deeper lately, many investors and traders are desperately looking for market indicators and other magic signs that will tell them about the future market performance. As I was going through the news, I found a pretty funny article about the so called Super Bowl Indicator. The idea behind it is simple enough: if the Super Bowl game involves one NFL team and one AFL team, then the overall stock market performance during the year may be judged based on the outcome of the game. The Indicator says that the stock markets are likely to end up higher at the end of the year of the game if the NFL team wins the game, but are likely to go lower if the AFL team wins. In the past, the Indicator was "correct" in 33 out of 41 outcomes, which means the 80+% success rate, the number which is well above highly questionable predictive powers of the fast majority of so called stock market gurus.

If we are to trust the Super Bowl Indicator's crystal-ball magic, then this year the Bulls will be praying for the New York Giants, while the Bears will cheer for the New England Patriots. The author in the article quite correctly states that the indicator might have gained qualities of the self-fulfilling prophecy phenomenon. I think that in the short-run this can probably work and we may indeed have a rally and a drop in US indexes shortly after the game, depending on its outcome. After all, many traders and investors are football fans... We will see if the Indicator works in just twelve days, on February 3, 2008. Plan your trades accordingly on Monday, February 4th. :-)

Monday, 14 January 2008

Markets: Quiet before the storm?

Aside from a healthy opening jump on IBM's earnings beating analysts' estimates, the markets on Monday traded relatively flat and reminded me a nervous school of curious fish in anticipation of one of the two options. What shall it be, a hungry shark (completely disastrous bank earnings numbers and bad government stats) or some nice food (government stats and banks earnings which are not that bad in comparison with gloomy estimates)? We will find out tomorrow and later this week. It is either going to be a steep ride further down or some short-lived fishing frenzy on selected banking stocks and a small rebound in indexes.

Sunday, 13 January 2008

Questrade allows direct U.S. dollar trades in RRSP accounts

My current brokerage, Questrade Inc., became the first Canadian discount brokerage which would allow U.S. dollar holdings and direct trades in RRSP accounts. You can read about it here or here. It means that from now on you do not have to convert your account funds from Canadian dollars to U.S. dollars and back when you buy and sell U.S. stocks.

The traditional round-trip FX premium for conversion at Questrade is 100 basis points, and this fee is even larger at many other Canadian brokerages. If you choose an option to do your U.S. dollar transactions directly in U.S. dollars that you hold in your RRSP account without FX conversion back and forth in each U.S. stock trade, then the only FX fee you pay is a fixed $5 fee on the day during which a U.S. stock trade occurs. You can do more than one USD trade during this day, but the fee stays fixed. For those individuals who regularly trade large USD positions, this is very convenient because such users were losing hundreds of dollars on the traditional FX conversion premium.

A shameless plug: Just to remind you, if you want to receive a $50 trading-fee credit when you open an account with Questrade, you can apply through a direct referral program by clicking on this link or by citing BEIT as a referral name when completing your application.


Questrade: Open a Questrade Account Online  Start Trading & Investing

Saturday, 12 January 2008

U.S. mortgage lenders are sued by cities: Is it the legitimate way?

One of the things that I was quite surprised to see last week was lawsuits by cities of Baltimore and Cleveland brought about against WFC and other big mortgage lenders on the ground that these banks discriminated against low-income black borrowers by charging them with excessive mortgage premiums and incorporating prohibitively high penalties into mortgage contracts. While the underlying motives why cities decided to do it are very sad, what is surprising (and somewhat amusing) to me was the type and timing of the reaction by bureaucrats to the crisis. In a sense, they remind me a boxer who passively misses numerous blows in the face during the fight time and then decides to fight when the final gong sounds and it is actually too late to do something.

I understand why these cities resort to such desperate measures - nobody likes seeing deserted neighborhoods, falling municipal revenues, higher crime levels, families without homes, and growing social unrest among low-income minorities. But my question is: Where were these city bureaucrats when the banks offered their mortgages to these low-income borrowers? Why did not they complain at that point? Why did they allow WFC and other lenders to offer mortgages to fellows with unstable, low paying jobs? Where were the government officials from all levels of the public hierarchy (local, state, and federal) when this was happenning? I am pretty sure these city officials themselves will not suffer through the crisis and will not lose their union-backed jobs (in the very unlikely case they do, they will get nice severance packages).

I am not trying to defend the banks and mortgage companies. These mortgage and banking guys will do anything to make money, beat their bottomline performance targets, and collect nice bonuses based on this performance. They do not care about social consequences of their actions. The government should have cared about it. Highly-leveraged, low-equity real-estate purchases are very dangerous. They can virtually enslave people for years and some of them for life. Not everybody is fortunate enough to have a well-paying job, but almost everybody wants to own his/her real house. The banks prey on people using this own-your-own-house dream as a bait.

I agree that the banks and mortgage companies should ultimately pay for the consequences of their predatory actions. But the government should punish them not through pathetic lawsuits brought by the cities, but through (1) the legislature that prohibits low-equity real-estate financing and (2) a clear "No" to any multi-billion taxpayer-financed bailout programs, because such programs would never let the banks learn in the hard way what is the true price of the "moral hazard" problem and its consequences.

I very much like it as a long-term value investor when the banks make nice juicy ever-increasing profits and hike their generous dividends every year. As a socially responsible citizen, I will not complain if these increases are more moderate, as long as there are no debt-related crises in the future. Otherwise, we have the legitimate right to put the banks on the list of sin stocks, along with casino stocks and stocks of cigarette, alcohol, and coffee makers and distributors. The addiction promoted by the banks and mortgage sellers is the own-the-house dream, the price for this addiction is life-long financial slavery and personal bankruptcies. This price sounds bad enough for me.

The earnings season kicks off next week

The U.S. markets closed on the sour note on Friday, weighted down by growing worries about the U.S. economy and uncertainty about the upcoming earnings season results. Meanwhile, the S&P/TSX index is kept afloat lately by gold mining and oil stocks.

The next-week announcements that may have an impact on the markets include:
  • Jan 15, Tuesday: Retail sales for December. The number should be relatively flat, but not too bad due to holiday shopping unless there are unreasonable expectations. Canadian cross-border shoppers probably helped improving the numbers by a notch or two. It sounds like every other third or fourth adult resident in GTA has done at least one shopping trip south of the border during December. I did not since I was saving my money. :-);

  • Jan 16, Wednesday: CPI, industrial production and capacity uitlization stats for December. The numbers will probably be creatively adjusted again by US government statisticians-magicians. I personally have low trust in most of these reported numbers because there is so much room for manipulation. However, the markets do take them into account, at least in the very short run; therefore, we unfortunately should pay attention to these fairy tales told us by Uncle Sam, the guy with stained historical reputation;

  • Jan 17, Thursday: Housing starts and building permits in December. If the numbers are too bad, the builders and real estate stocks are going to dip once again to new lows.

A pretty large group of banks is reporting next week, with the notable cases of Citicorp (C) and US Bancorp (USB) on Tuesday, Dec 15; Wells Fargo (WFC) on Wednesday, Dec 16; and Washington Mutual (WM) on Thursday, Jan 17. I am thinking whether I should sell or keep WFC before the announcement. There is a chance that the actual decrease in reported earnings is going to be smaller than analysts' estimates (the $1.4B reserves announcement has been already taken into account), which will allow the stock to bounce up. I will decide on Monday-Tuesday and then act accordingly. As I mentioned in my previous post, my third option is to keep the stock in the long run - it is a very good candidate for a value-investor portfolio.

Wells Fargo is lately being named as one of those candidates for buying one of several beaten down mortgage companies. It is unlikely that highly troubled large financial companies will be alowed into bankruptcy or restructuring. Most likely they either will be bought by large US or foreign banks or will be bailed out by foreign investors (of course, at the very high price which will hurt current shareholders in the longer run). After the talks on CFC and WM, SPF is the next rumor target.

SPF actually looks as one of those highly speculative stock plays that can be bought in anticipation of a buyout. Note my words "highly speculative" which means "high risk." Look at what happened to CFC last week - those who had the stock could have made 50-80% in a day. Those who bought afterwards, got burned. Had the buyout not happened, the stock would have continued its journey into insolvency, which was the high risk of buying it around $4.50. There are always risks associated with highly profitable plays on beaten down former stars, and a speculator who is willing to gamble in such situations should be prepared to lose most or all of his/her money.

Where do we go from there? Small pullbacks are possible next week for a few individual stocks, but the markets in general will likely continue moving into the lower territory. Whenever the markets calm down a bit and are ready to bounce a bit, somebody releases some bad smelling poop news/rumors and down we go again. This coming week there will be plenty of such information as banks report their earnings (many analysts are expecting a disaster) and the government publishes some important statistical numbers.

Well, this is the situation we have right now, and we will have to live through it. These are good times for picking up good stocks at sale prices. Good times to make quick profits on short-term breakouts when the stock bounces back after being heavily oversold on some bad news. Good times for experienced short-sellers. That's how it works - when somebody loses, then there is somebody who gains. If you are smart, you can gain in every situation by anticipating reversals and timely switching your positions or just by patiently waiting. This last thing is something that I still have to master.

Wednesday, 9 January 2008

Welcome to the Bear Market?

The last 7 trading days were definitely interesting to observe. We saw a very healthy selloff sequence. Speculators are becoming increasingly nervious and sell massively at any hint of negative news. I bought shares of Wells Fargo & Co. (WFC) and D.R. Horton Inc. (DHI) on Friday and Monday, respectively. Anticipated a rebound this week because both stocks were oversold and their market sectors (banking and construction services) have been hit hard recently. But a lousy article on CFC (somebody must have paid to somebody to publish it), "worse than expected" numbers on existing home sales (well, da-a-a-h), a couple of analyst downgrades, the "softness ahead" estimate from AT&T's executive, something else, and here we go - the markets continued their journey down.

However, given the evidence of some pretty strong cherry-picking buying on Wednesday afternoon, we still can see a rebound over the next several days - enough for me to make short profits and close the positions, which was my original idea afterall. On the other hand, if that does not happen and we move yet lower, I will not be disappointed either - I bought two good dividend-growth stocks with nice yields, pretty good management, and positive long-term prospects. Wells Fargo is one of the top largest American banks that is not overly deep into the subprime mess. Not quite clean, but also is not like Citicorp, Washington Mutual, or UBS AG. D.R. Horton is one of the better U.S. home construction companies with decent management, which went down very well up to date and will probably not go lower than $6-8 per share in the worst case-scenario. Both stocks got hammered recently by sector weakness and general market selling pressures. I do not mind keeping them long-term if the things get ugly and the prices will not rebound above my target profit levels over the next couple of weeks.

Speaking of falling prices: Yesterday, the closing values of DJIA and S&P500 finally broke down through the neckline of the so called head-and-shoulders (HAS) chart pattern. At last, welcome to the Bear market! When the indexes permanently settle below the neckline support level, we can officially say that the Bear phase has started. Now, there are two short-term possibilities in this situation: The first is the one that I originally anticipated - a short-term bounce for several days, which is enough to make quick 10-15% gains and get out promptly. The second one is the accelerating panic selloff which continues for several more days until the markets temporarily pull back up to or even above the already broken HAS neckline.

The markets rebounded somewhat today, but there is a strong possiblity that the selloff continues for at least several mmore days. If we do not hear any significant negative news and if in his speech on Thursday Bernanke promises a 50 bps cut on the Dec 31 meeting, then there is a good chance of a rebound mini-rally. Otherwise, down we will go.

I will still stick to my long-term dividend-growth strategy, but will also swing-trade an allocated portion of my portfolio funds, as I mentioned in my earlier post. The catch is that I will trade only above-par dividend stocks, the ones which I do not mind holding in my portfolio in the long run - this allows me not to worry about stop-loss positions. I will describe my trading strategy in more detail in the foreseeable future.

The usual disclaimer: I am not an investment advisor, and my rants about the markets and individual stocks do not represent investment advice.

Sunday, 6 January 2008

DJIA-to-Gold Ratio: Is Gold the King?

Chart junkies love plotting and analyzing relationships between different variables over time. Since I keep track of some of the market indicators, I do plotting too sometimes and think the following diagram looks pretty interesting in the light of recent market trends:


The diagram above depicts the historic time series of the year-closing Dow-to-Gold (DG) ratio, which is calculated as the year-closing Dow Jones Industrial Average Index value divided by the year-closing gold price (USD per ounce).

What can one say by looking at this picture? First, we can clearly see the long-term uptrend in increasing tops of this ratio, as well as the long-term horizontal support in the range of 1.5-3. Second, if we look at where we are right now (just past the 2007 value of the DG ratio, which is equal to 15.9), one obvious conclusion is that the ratio is well on its way down to the long-term support line. As the U.S. economy seems to be entering the recessionary stage and as the price of gold soars towards record highs, it is very likely that the DG ratio will respect its historic trend and will continue falling over the next several years.

On the diagram, I plotted the estimated trend in the DG ratio towards 2012. The actual journey towards the long-term support may take less or more than five years and it may be interrupted by short-term stops or even small upward breakouts. Are we entering the Big Recession similar to the ones the U.S. economy experienced in 1973-1975 and 1989-1992? Will the DJIA index and other stock market indexes fall by 20-30%? Maybe or maybe not, because there are so many factors involved.

One thing that I am convinced about is that the real value of the U.S. dollar will continue to fall. What else should you expect when the U.S. money supply currently grows at the annual accelerating rate of 13-15%? The mind-blowing widespread use of consumer and commercial credit, highly leveraged speculation in financial and real estate markets, excessive use of derivative instruments without due understanding of relevant risks, lower international demand for the U.S. currency from foreign institutional players and individuals, largely irresponsible monetary policy, huge public spending on unproductive military expenditures, flawed fiscal policy, growing unpopularity of Americans and of the aggressive American diplomacy around the world, etc, etc... The list of negative factors can go on. With all my due respect to the U.S. currency, it is eventually possible to end up being in a situation like this:


So what is the conclusion from the presented diagram? Looks like it is Gold, not stocks or Cash (i.e., US dollars), which is going to be the King over the next several years. Let's buckle up and enjoy the wild ride.


This post has been published in
Carnival of Personal Finance #134.