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Wednesday, Dec 27, 2006 — 6:12 PM
Reverse Mortgages
A reverse mortgage is a nonrecourse loan made to a homeowner, where the lender pays the homeowner either a lump-sum payment or periodic payments, usually monthly, that is based on the equity in the house, or approves a line of credit that the homeowner can draw on at any time. The amount received is proportional to the borrower’s age and inversely proportional to the prevailing interest rates, and depends on the geographic location and the value of the home. (For an estimate of what you can get, check out the AARP's Reverse Mortgages Calculator.)
Reverse mortgages allow older homeowners to receive cash, while still living in their homes. The loan is repaid when the homeowner dies, or when it is sold. If the lender fails to receive the full amount of the loan with interest, then the lender must accept the loss. Any equity left over is returned to the borrower, his estate, or to his heirs.
The disadvantage of reverse mortgages is the substantial fees, which can include an origination fee for up to 2% of the home’s equity, not the lower loan amount; and up to 2% of the loan amount for the mortgage insurance premium.
Most reverse mortgages, about 90%, are insured by the Department of Housing and Urban Development (HUD) with a Home Equity Conversion Mortgage (HECM).
In addition, borrowers for all federally insured mortgages, and most privately insured mortgages, must take counseling about reverse mortgages to ensure that they understand the risks.
Loans insured by HECM cannot exceed a certain amount regardless of the value of the house—$362,790 in urban areas and $200,160 in rural areas. Jumbo reverse mortgages exist for more expensive homes, but these are privately insured, and have higher fees, including an interest rate that could be up to 2% higher than for a federally insured loan.
Reverse mortgages have been surging, with half of all such loans issued within the past 2 years. With baby boomers retiring, this number is expected to increase rapidly, which will increase competition in the marketing of reverse mortgages, thereby lowering fees and costs.
HUD is also trying to lower origination fees and mortgage insurance premiums. Ginnie Mae announced in October, 2006 that it will package reverse mortgages as securities, which will help to lower interest rates on the loans by reducing the risk for lenders.
Wednesday, Dec 27, 2006 — 5:05 PM
private Investment in Public Equity Securities (PIPES)
Private investment in public equity securities (PIPES) are unregistered securities, which can be stock or convertible debt, issued by small-cap, high growth companies that are sold in a private placement to institutional investors at a 5% - 15% discount to the issuer’s common stock. The company then tries to register the PIPES with the SEC so that they can be sold to the public by the original investors. PIPES allow a small company—which cannot get loans or more traditional financing because the company is too small, unproven, or too heavily in debt—to avoid the time and expense of a public offering, and receives immediate cash.
Although PIPES have surged recently, the SEC has significantly slowed the registration of these securities because of the risks, which include insider trading and the significant dilution of the common stock, which can lower stock prices. Often, the number of shares issued as PIPES is more than the number outstanding, so the SEC has been reluctant to register more shares than 33% of the public float—the number of shares held by the public, to prevent significant dilution and the consequent undermining of the common stock price.
The SEC is also leaning toward treating the resale of the securities as a more heavily regulated primary offering rather than as a secondary offering. The SEC may provide more information, in 2007, as to when the resale of PIPES can be considered a primary offering or a secondary offering.
Tuesday, Dec 26, 2006 — 4:22 PM
Currency Exchange Resources
Displays quotes for current foreign exchange rates for the world's major currencies, that is updated continually. Includes a currency converter, news about the currency markets, and provides
cross rates for the U.S. dollar (USD), the United Kingdom pound (GBP), the Euro (EUR), and the Japanese Yen (JPY). Also has basic, advanced, and interactive charts that displays the exchange rates over time.
Thursday, Dec 21, 2006 — 6:58 PM
Nominated Advisers (Nomads) — Overseers of Small Companies Listed on AIM
AIM (Alternative Investment Market), launched in 1995, is part of the London Stock Exchange for new companies, that requires less money and less disclosure to get listed than it does on an American exchange, leading to more new companies being listed than for the New York Stock Exchange and NASDAQ combined. Half of AIM’s 1600 companies have listed since 2005, with almost 300 companies outside of the U.K. 90% of the companies have market values of less than £100 million (about $197 million).
To get listed on the London Stock Exchange, the Financial Services Agency of Britain reviews listings to prevent fraud, much as the SEC reviews listings for new companies before they can offer shares to the American public. AIM uses nomads, instead.
Nominated advisers, or nomads, who typically work for a stock brokerage, reviews the company’s documents to learn about management, financial controls, and growth potential, to decide if it should be listed on AIM. If approved, then companies must pay an annual fee of $7,595 to the exchange, and $40,000 to $100,000 to their nomad. To contrast, the annual cost of an NYSE listing ranges from $38,000 to $500,000, and NASDAQ, $21,225 to $75,000.
Once listed, the nomad provides advice on handling news and is supposed it ensure that the company is serving shareholders well. Because many nomads tout the companies under their watch, they have a vested interest in presenting the company in the best possible light, making any information they provide about the company suspect. The London Stock Exchange has 14 people monitoring nomads and any unusual price movements in any stocks. An external committee handles any discipline deemed necessary. If a nomad, who cannot sanction the company for violations, has any qualms about its company, the nomad is required to contact the London Stock Exchange.
There are a few conflicts of interest in using nomads as overseers. If a nomad resigns, for instance, trading of the company stock is halted until a new nomad is found. Another conflict of interest arises because the listed company can dismiss its nomad, whose brokerage would lose the fees paid for nomads, which could cause nomads to overlook irregularities.
In general, companies listed on AIM have not done well. The FTSE AIM Index is down slightly, compared to the 16% growth in the Russell 2000 Index, which is composed of companies similar in size, for the same period.
Pink Sheets, LLC, is planning a similar service in the United States, referring to the nomads as the Designated Adviser for Disclosure, or DAD.
Monday, Dec 18, 2006 — 12:00 AM
Longevity Insurance
As people live longer, there is a danger that they will outlive their income. At least 20% of people aged 65 will live at least another 30 years. Longevity insurance is like a single-payment deferred annuity that is typically purchased by the annuitant around retirement age to receive guaranteed monthly payments for the rest of the annuitant’s life, starting at around age 80-85. It differs from a deferred annuity in that the payment schedule is determined at the time of purchase, whereas the payouts of a deferred annuity are determined when the payments start, and will vary depending on how well the invested money performed. Thus, one advantage of longevity insurance is that the annuitant knows exactly how much she’ll be getting, but the disadvantage is that the payout remains the same even if the markets do well over the years.
The main advantage is the much larger payouts of longevity insurance over a deferred annuity for the same investment—more than 4 times greater—which is possible because most people will die before receiving any payout, leaving more for those who survive. If the annuitant dies before receiving any payments, then the insurance company keeps the money. Another advantage is that since the payout is known, estate planning is easier.
Because only a few insurance companies are offering this coverage—MetLife, Hartford, and the New York Life Insurance Company—costs are high, especially the sales commission, which can be as high as 5%-7%. And although some options can be added, such as a death benefit, inflation protection, or a return of premium, this can greatly increase the cost. Also, the inflation protection doesn’t start until the payouts start—inflation until then is not covered.
Tuesday, Nov 21, 2006 — 10:10 AM
Specialty Consumer Reports — ChexSystems
Credit reports have information regarding payment history and amount of debt, and is requested by potential lenders before lending money. However, there are many other types of reports that cover gambling, checking accounts, employment, insurance, medical information, rental information, and mortgage financing. This short article has a good list of these reporting agencies, along with toll-free phone numbers. You are entitled to 1 free report per year from each.
ChexSystems is one of the specialty consumer reporting agencies covering how people manage their bank accounts. ChexSystems relationship with banks is the same that lenders have with credit reporting agencies. Banks get these reports on anyone opening a new bank account, but they also send information about current customers, to add to the database.
The above site allows you to check your report at ChexSystems, if they have a report on you. However, they do not display the information online. You have to call, and provide the information to their automated voice system, and then they mail you your report in about 5 days. The site has a sample report that details what is covered.
The ChexSystems Consumer Report may include any debts owed to a bank, writing checks without sufficient funds, and returned items. Major sections include:
- Reported Information includes any mishandling of accounts, such as bounced checks, unpaid debts, or returned items. This information is kept for 5 years.
- Inquiries Initiated By Consumer Action includes completing any applications to open a bank account, or applying for a credit card or a loan. Also included are any inquiries that you make to receive your own report. This information is available anywhere from 90 days to 3 years.
- Inquiries Not Initiated By Consumer Action are inquiries that have not been initiated by you, but by a member of ChexSystems service with a permissible purpose, such as your current creditors or bankers, creditors looking for pre-approval candidates, and potential investors. Like credit inquiries in credit reports, this activity is only reported to you, not to others.
- Retail Information includes accounts with returned checks or certain collection accounts. However, ChexSystems gets this information from the Shared Check Authorization Network (SCAN), who, in turn, gets this information from retailers and other businesses. (SCAN: Attention Research & Resolution, 7805 Hudson Road, Suite 100, Woodbury, MN 55125, 800-262-7771)
- History of Checks Ordered is a record of check orders placed within the last 3 years.
- Social Security Number Validation validates the number by specifying the year and state that the sequence of digits first became available.
- Drivers License Number Validation compares the number with the requirements of the issuing state.
- Drivers License Number Verification is provided by some states to ChexSystems that shows the name and date of birth of the person to whom the license was issued.
Monday, Nov 20, 2006 — 2:26 AM
Bond Trading at the NYSE — NYSE Bonds
The New York Stock Exchange Group, Inc. has received approval to list bond issues of all NYSE-listed companies on its exchange. The SEC has granted the NYSE an exemption to the rule that required that each bond be registered before it could be listed on an exchange. Exchange-listed bonds would have the more competitive bid/ask pricing system over the usual best-efforts approach where a bond broker would call 3 dealers to get the best price among them, even when there could be thousands of other dealers in the bonds—at least a few of whom would almost certainly have better prices. An exchange-listed bond price would aggregate all prices available for the bond into the best ask/bid price in the same way that stocks and options are listed.
The NYSE Group is also currently seeking SEC approval for a new fixed-income trading exchange that will be called NYSE Bonds.
Stock and Option Conditional Orders Tutorial
This is an excellent tutorial about the different stock and option limit orders that can be placed on E*Trade, including
trailing stops,
hidden stops,
contingent orders,
bracketed,
One-Cancels-All,
One-Triggers-All, and
One-Triggers-OCO (
One-Cancels-Other) orders. It not only explains how each order works, but also shows how to implement the orders using either E*Trade's website, or the Power E*Trade Pro software.
Friday, Nov 17, 2006 — 4:42 PM
Qualified Dividend-Paying Stock Funds
Dividend-paying stocks generally don't yield as much as bond funds, but they do have a greater potential for capital appreciation, and with qualified dividends, the top tax rate for the dividend income is 15% for most investors, and only 5% for people in the 2 lowest tax brackets. As an example, Goldman Sachs Growth and Income Fund is currently yielding about 1.5%, but its gains, with stock appreciation, through October 31, 2006 is 17.84%.
Because funds of other countries pay higher dividends than in the United States (S&P 500 average: less than 2%), many stock funds buy qualified foreign stocks paying 5% to 7%. Alpine Dynamic Dividend Fund, for instance, had a yield of 12.6% through October 31, and a total return of 14%.
The preferential tax treatment, which will expire in 2010 unless renewed by Congress, applies only to dividends paid by many United States and foreign companies, not to cash distributions earned through other investments of the mutual fund, such as earned interest, even if the fund holds mostly qualified dividend-paying stocks. The mutual fund will designate which earnings are qualified dividends on the Form 1099-DIV.
Qualified Dividend Holding Periods
In general, to qualify for the lower tax rates, the taxpayer must hold the dividend-paying stock for at least 61 days during the 121-day period beginning 60 days before the ex-dividend date – the first date that the buyer will not be entitled to receive that dividend. This same condition applies to qualified dividends paid out by mutual funds—the shareholder must have owned the mutual fund shares for a 61-day period that included a payment of dividends.
A similar holding period exists for preferred stock dividends attributable to a period exceeding 366 days. This holding period is at least 91 days during a 181-day period beginning 90 days before the ex-dividend date.
Mutual funds, other regulated investment companies, and real estate investment trusts that pass through dividend income to their shareholders must meet the holding period test for the dividend-paying stocks that they hold in order for corresponding amounts that they pay out to be reported as qualified dividends on Form 1099-DIV. Investors must then meet the test relative to the shares that they hold directly, from which they received the qualified dividends that were reported to them.
Thursday, Nov 16, 2006 — 7:37 PM
Islamic bonds
Shariah is the law of Islam and it bans usury and interest payments—consequently, it also bans bonds. So that Muslim countries can benefit from international investment, and so international investors can invest in projects in Muslim countries, variations of the typical bond have been financially engineered to work somewhat like bonds, but still be compliant with Shariah—thus, they are called Islamic bonds.
One such structured product is the lease-back, or ijarah, structure. If a company wanted to raise money to build a plant, for instance, using this method, it would set up a special entity specifically for this project that would buy the plant. Investors would lend money to the special entity, in return for lease payments, in lieu of interest, for the term of the deal. At the end of the term, the principal is returned to investors, and the project becomes the property of the company.
Another way to avoid paying interest, at least in name, is to form a joint venture called a musharakah. The joint venture partners buy Islamic bonds and receive a percentage of profits over the term of the loan.
Malaysia has used the deferred payment sale principle of bai' bithaman ajil. A bank buys an asset on behalf of a customer, then sells it back later for a profit. However, bai' bithaman ajil, is not acceptable to the Middle East, which has a different interpretation of Shariah, so Malaysia has been promoting financial structures that are globally compliant and can be included in the global Shariah stock indexes. Standardization also helps to reduce the cost of developing and marketing Islamic bonds.
To gauge the safety of Islamic bonds, the Islamic International Rating Agency has developed the credit-rating Shariah Quality Ratings.
Wednesday, Nov 8, 2006 — 2:59 AM
Custodian Banks — Actively Managed Exchange-Traded Funds
Custody banks provide custodial services, which includes trade processing and clearing, and fund accounting and administration, for investment companies, brokerages, and institutional investors. With companies becoming more global, custodian banks have expanded their services to include foreign-exchange trading and securities lending. A global custodian bank can help with the different regulations and accounting practices in other countries, as well as currency conversion. Custodian banks are also handling different assets, including derivatives, real estate, and private equity.
The main reason why ETFs are not actively managed is because the fund manager would have to reveal what he is buying or selling, thereby allowing traders to trade ahead of the ETF company for greater profits and at a greater cost to the company. This article is about a company trying to circumvent that problem to create the 1st truly actively managed ETF. The solution to the problem was not revealed, however. However it will be done, it will certainly increase expenses above the typical ETF.
Saturday, Nov 4, 2006 — 10:54 AM
Credit-Freeze Laws
Many states are enacting laws, to prevent identity theft, that allow consumers to freeze access to their credit reports without their explicit authorization, which extends to almost any anyone wanting access to someone else's credit report, including credit card and cellphone companies, although consumers may have to pay a fee ranging from $5 to $20 to each credit reporting agency that issues a credit report, and another charge to unfreeze it, which can take up to 3 business days.
Half of the states have passed or are considering passing credit-freeze laws. Kansas, New York, Oklahoma, Utah, and Wisconsin have recently enacted credit-freeze laws. California was the first, but some portions of its law have been struck down by an appeals court, which affects only California, but challenges are likely elsewhere, as more states pass it, and enough time passes to mount challenges. 5 states allow only identity-theft victims to freeze access to their reports, and some states allow victims to freeze their accounts without paying a fee.
The big disadvantage for the consumer is that credit and other services that depend on credit checks may be more difficult and time-consuming to get.
Naturally, the finance and retail businesses oppose credit-freeze laws because of the burden on them. They argue that a consumer can place free, 90-day fraud alerts on their credit file, which requires the business requesting a credit report to verify the identity of the consumer. However, consumer advocates argue that fraud alerts are rarely effective.
Friday, Oct 20, 2006 — 12:55 AM
Company Credit Cards can Hurt Authorized users' Credit Scores if Paid Late
Many people, as authorized users, have company credit cards to pay for business expenses. Sometimes the people pay the monthly bills themselves, and sometimes, especially for smaller businesses, the company pays the bill. However, an authorized user's credit score can suffer if the card payment is late, even if the company pays the bill.
The Risk of a Large Value for Goodwill on a Company's Balance Sheet for Stockholders
Goodwill is an intangible asset, the value of which is recorded on the acquiring company's balance sheet as the difference between what it paid for the acquisition and the acquired company's fair market value, or book value.
Goodwill of a Company = Purchase Price - Book Value of Company.
Goodwill is no longer amortized, but, to comply with FASB Rule 142, Accounting for Goodwill and Intangible Assets, it must pass an annual impairment test, to determine if the goodwill is still worth what was paid for it. If not, then it has to be written down, which will diminish stockholder equity, and may trigger covenants on any debts that the acquiring company has issued, and thus, imposes a risk for current stockholders. Such is the current case with Expedia, as is illustrated by the above article.
Friday, Oct 13, 2006 — 12:58 AM
New Bankruptcy Forms
The following amendments to the Bankruptcy Official Forms are effective for cases filed after October 1, 2006:
Official Form l, Voluntary Petition
Form | Committee Note |
Exhibit D to Official Form 1, Individual Debtor's Statement of Compliance with Credit Counseling Requirement (new)
Form | Committee Note |
| Interim Bankruptcy Rule 1007 (Lists, Schedules, Statements, and Other Documents; Time Limits) |
Official Form 5, Involuntary Petition
Form | Committee Note |
Official Form 6, Schedules of Assets and Liabilities
Summary of Schedules | Committee Note |
Official Form 6D, Schedule D
Form |
Official Form 6E, Schedule E
Form |
Official Form 6F, Schedule F
Form |
Official Form 6I, Schedule I
Form |
Official Form 6J, Schedule J
Form |
Official Form 6, Declaration
Form |
Official Form 9, Meeting Creditors Notice
Form | Committee Note |
Official Form 9G, Chapter 12, Individual or Joint Case
Form |
Official Form 9H, Chapter 12, Corporate Case
Form |
Official Form 9I, Chapter 13 Case
Form |
Official Form 22A, Statement of Current Monthly Income and Means Test Calculation (Chapter 7)
Form | Committee Note |
Official Form 22C, Statement of Current Monthly Income and Calculation of Commitment Period and Disposable Income (Chapter 13)
Form | Committee Note |
Official Form 23, Debtor's Certification and Completion of Instructional Course Concerning Financial Management
Form | Committee Note |
Director's Procedural Bankruptcy Forms for October 2006
Amended Director's Procedural Form 104, Adversary Proceeding Cover Sheet, and Form 210, Transfer of Claim Other Than for Security, will be effective as the bankruptcy courts implement CM/ECF Release 3.1. Most bankruptcy courts are expected to have implemented Release 3.1 by October 17, 2006. New Director's Procedural Form 202, Statement of Military Service, and amendments to Director's Procedural Forms 240, Reaffirmation Agreement; Form 271, Final Decree; and Form 281, Appearance of Child Support Creditor or Representative, were effective on August 1, 2006. The forms are available at http://www.uscourts.gov/bkforms/index.html
Form 104, Adversary Proceeding Cover Sheet (10/06)
Form | Instructions |
Form 202, Statement of Military Service (new)
Form |
Form 210, Transfer of Claim Other Than Security (10/06)
Form | Instructions |
Form 240, Reaffirmation Agreement
Form |
Form 271, Final Decree
Form |
Form 281, Appearance of Child Support Creditor or Representative
Form |
Wednesday, Oct 4, 2006 — 12:35 PM
CAPS — motley Fool's New Stock rating Forum
CAPS is a free stock-rating forum just introduced to the public by the Motley Fool, that rates stock pickers from individual investors to big brokerages, research boutiques, and stock-picking mavens like James Cramer.
Participating investors predict how a particular stock will do compared to the S&P 500 over a specific interval of time. They are then rated in proportion to how correct their predictions were, and how the returns fared against the index. A participant is assigned a rating after predicting the performance of at least 7 stocks.
Individual stocks are also ranked, using a 5-star metric, by the participants. Only participants that have a rating can influence the rating of a particular stock, and the effect on the stock's rating will be proportional to the participant’s rating.
To rate the predictions of Wall Street firms and famous mavens, the Motley Fool relies on data provided by Briefing.com for analysts’ recommendations, and compares them to actual performances.
Thus, individual investors can see how well they’ve done compared to the big boys, and how well the big boys actually do.
Wednesday, Oct 4, 2006 — 2:15 AM
High Documentary Fees for Car Buyers
Many states are passing laws that allow car dealers to charge higher prices for the paperwork involved in selling a vehicle, such as preparing registration, titles, and license plates. Currently, 30 states have no caps on such fees, allowing dealers to add on charges that were not advertised or negotiated. Such fees, often called documentary fees, or doc fees, average $400 to $700 in states that have no fee caps, and in some states, there could even be a sales tax on top of the fees.
In many states, these fees don’t even have to be disclosed, and oftentimes, the amount charged is considerably greater than the amount of work warrants. In many cases, the customer only has the chance to see the fees just when signing the contract, when many customers would be reluctant to negotiate or question further, or worse, yet, they would just sign the contract without reading it.
Car dealers argue that higher fees are necessary to comply with the Gramm-Leach-Bliley Act that requires dealers to have a plan to protect customers’ privacy and to implement it. Other laws require that dealers check customers to see if they are listed as potential terrorists, and dealers must be able to verify that such checks were done. However, it is difficult to see how these would significantly increase costs.
Other fees that may not have been explained or negotiated in advance, or included in the documentary fees, include vehicle prep fees, for cleaning and inspecting the vehicle; finance markups for handling the financing, which may be up to 3% of the loan amount; and dealers often add large markups to extended warranties and accessories because customers rarely shop around for these items. Extended warranties, in particular, are rarely worth any price, because they only cover what is not likely to fail, and rarely cover things that are far more likely to need repair.
Hidden fees, of course, have always been an effective way for a seller to increase profits without having to advertise, or even mention the fees, in advance. An effective way to eliminate the fees is to turn the tables. At the closing, the dealer is expecting the customer’s signature on the sales contract, so the customer can demand that the fees be rescinded, or he won’t sign the contract. That should force most car dealers to deal.
Tuesday, Oct 3, 2006 — 5:30 PM
Destination Clubs
Destination clubs allow members to vacation at a variety of properties at various places in the world—like time shares for several properties, but without the ownership or the maintenance. Large refundable deposits, sometimes to $3 million dollars or more, are required in addition to annual dues to cover operating expenses. The deposits are used to purchase the real estate, which helps to protect members' deposits. The company profits by taking some of the deposit as income and from real estate appreciation. Some companies give their members a stake in the real estate and to some of the appreciation, and, thus, are sometimes known as equity clubs.
However, the companies that run these clubs are unregulated, and people could lose their hefty deposits if the company goes bankrupt, especially if the company rented properties instead of buying them, as Tanner & Haley Resorts did. People would be wise to investigate the company thoroughly before depositing any money, and to make sure that the company is buying real estate with the money. Avoid companies that refuse to provide financial statements or cannot provide verification of the company's ability to refund deposits. To protect members, Ultimate Resort is putting deposit money into a trust and makes the members secured creditors, and Quintess is planning on making members secured creditors to the real estate, and is giving members access to its quarterly, audited reports. In both cases, if the company does go under, the members claims will only be subordinate to the mortgages on the real estate.
Find out more about fractional ownership here: Luxury Fractional Guide - Info on Fractional Ownership Real Estate and Fractional Vacation Ownership
Monday, Oct 2, 2006 — 3:16 PM
There is an unusual way to improve someone's credit score by making that person an authorized user of a card where the legal owner of the account has a long and good payment history with that card. The reason why this works is because Fair Isaac—the company whose algorithm for determining credit scores, called the FICO score—treats the entire payment history as if it was the authorized user's own credit card. Thus, this is a good way to quickly raise the score of children who are starting to use credit, or for family members or friends emerging from bankruptcy.
The disadvantage for the legal card owner is that the authorized user might run up excessive charges on the credit card, especially since the user has no legal obligation to pay the bill. However, it has been suggested that this can be prevented by making the person an authorized user, but not giving him a card or the card number so that he can make charges, although what is to prevent an authorized user from learning the account number by getting a copy of his credit report? Nonetheless, it will still improve the authorized user's credit score.
There are some websites, such as Seasonedtrades.com and Creditlaunchers.com, that charge $1,000, or more, for this benefit. These websites also offer other credit services as well, although I don't know if they would be in the best interest of those seeking to rebuild their credit. Indeed, advertising the raising of credit scores may simply be a way to attract credit seekers to their other services. To pay so much money to raise one's score is a good indication that the person is not financially wise, and thus, is bound to have a lower credit score eventually, anyway.
There is also a disadvantage for the authorized user. If the legal card owner would stop making timely payments on the card—for instance, maybe he suddenly became hospitalized—this would negatively affect the credit rating of the authorized user.
The credit rating of the authorized user has no effect on the legal owner's credit record or rating, since it is the owner who is liable for the card. Note, too, that, although this can improve someone's score, especially someone with little credit, it will not overcome a generally negative credit history.
Saturday, Sep 30, 2006 — 1:50 PM
Program Trading using Quantitative Strategies
Program trading is allowing the computer to trade stocks in your account according to some algorithm that someone has conceived to hopefully make money automatically. Naturally, program trading is predicated on the fundament of
technical analysis—that profits can be made simply by observing patterns in market activity that can forecast future price movements. The most sophisticated of these can trade stocks, options, and currencies in the same portfolio.
Program trading was restricted to big investors, but several brokerages are now offering program trading software for small investors. TD Ameritrade Holding Corp. is planning on providing automated trading to its customers very soon. Fidelity Investments provides Wealth Lab Pro software where investors can program their own algorithms based on historical data and 600 market indicators, or choose from about 1,000 quantitative strategies already programmed into the software. TradeStation claims that investor interest is high and growing. Interactive Brokers provides forums where program traders can exchange ideas for new algorithms, or provide their ideas to new investors. Some brokerages are offering a less risky strategy by simply sending alerts based on preset market parameters. Most brokerages prudently allow only active investors with a substantial minimum in their accounts to program trade.
Naturally, the brokerages like program trading, because computers trade without worrying about how much money the trades are costing the investor in brokerage commissions. Other risks to the investor include the possibility that the trading algorithm will have significant flaws that may only come up in unusual market conditions, especially since it is impossible to test this kind of software under every possible scenario, but these flaws could cost the investor a significant amount of money, for which the investor will be legally liable. This is especially true for new algorithms being submitted by other investors in forums.
Alas, program trading, like technical analysis, and throwing darts at a list of securities, only works some of the time for the lucky few. Since program trading doesn't take into account company fundamentals, it is, by necessity, based on historical patterns, and if one can profit by simply repeating past strategies, then we can all be rich by simply following the most successful algorithms. But this can't work, because trading doesn't create new wealth—it only transfers wealth from 1 trader to another, so in any given trade, somebody wins, but somebody else has to lose, although it may not be immediately evident who is who.
There is one group, however, who will be consistent winners with program trading, and that's the brokerages, as they reap the increased commission income that comes with program trading.
Wednesday, Sep 27, 2006 — 12:14 PM
Catastrophe Bonds
Catastrophe bonds (frequently shortened to cats), first marketed in the 1990’s in response to Hurricane Andrew and the earthquake in Northridge, California, are issued by insurance companies to cover catastrophes such as windstorms in Europe and earthquakes in Japan, but the majority cover hurricanes in the United States. It is a means by which insurance companies can transfer their risk. Reinsurance is not readily available for such disasters, and, in the event of a disaster, insurance companies get their money faster from catastrophe bonds than they do from reinsurance. Another advantage of bonds over reinsurance is that the issuer can get coverage over several years.
The risks of catastrophe bonds are hard to assess because their ratings are often based on a model portfolio rather than actual risks, which, in any case, is very difficult to forecast.
Catastrophe bonds are attractive to investors because, since it is possible to lose the entire principal from a disaster, they pay very high yields, and they don’t correlate with stocks or even with other bonds, thereby providing diversification.
Monday, Sep 25, 2006 — 12:59 AM
Unit Investment Trusts (UITs)
Unit investment trusts are fixed portfolios of a particular asset class that were created to effect some particular investment strategy. They are like closed-end mutual funds, and registered under the Investment Company Act of 1940, but their holdings are published and cannot be changed. The majority of UITs held municipal bonds, but equity UITs that hold stocks and other securities are becoming more numerous.
They have a maturity date. In a bond fund, the maturity date is the date the bonds mature. Equity UITs have a specified maturity date that is determined by the strategy being pursued. For instance, there are UITs that use the Dogs of the Dow strategy, which is to buy the highest yielding stocks of the Dow Jones Industrial Average, and hold them for 1 year. Then sell them, and buy the stocks with the current highest yield, which involves rolling 1 UIT into another. Defined Asset Funds (also, Equity Investor Funds) are another of example of UITs—offered by Merrill Lynch, Salomon Smith Barney, Prudential Securities, Morgan Stanley, and UBS/Paine Webber Defined Asset—that invest in a particular class of securities, such as blue chips, REITs, or utilities. Sometimes the securities are screened from a particular index in the hopes of outperforming the index. Some UITs have specialized holdings, such as companies that are likely to be acquired, or that focus on renewable energy, or they might hold a particular type of security, such as preferred stock.
Investors in the unit investment trusts have an undivided interest in the principal and income of the portfolio, and can redeem their shares to the issuer for their net asset value.
The disadvantages of unit investment trusts are the high fees and the complete lack of any real performance history.
UITs are usually sold by brokerages, which charge a commission. There is often a front load and a back load, as well as ongoing management fees. Some UITs also charge 12b-1 fees to market their shares.
Because of the funds short lifespans, the funds' issuers frequently use back tests to substitute for actual performance history, which uses historical data to arrive at a performance value. Thus, the issuers argue that if the UIT had existed in the past, this is how it would have performed. The problem with this misleading yardstick is that, as oft been said with investment strategies, the past is no indicator of future performance, and, often, the composition of the UIT is selected so that a high performance record can be constructed. Even the beginning and end dates for the historical record are selected to maximize the historical gains.
Wednesday, Sep 20, 2006 — 2:19 AM
Travel Abroad Cheaper
You can find cheap flights out of the U.S. at farecompare.com and other such sites, but foreign websites can generally find less publicized routes and cheaper fares from one foreign location to another, such as azworldairports.com for finding the websites of foreign airports. Many of these pages are in English.
Get Better Travel Information from Fellow Travelers and Locals
New social networks, like TripAdvisor, Tripmates, Gusto.com and RealTravel.com, are springing up that allow people to get information from people who have already traveled to their desired destinations, and from people who live there. Registration and profiles are required. For greater effectiveness, profiles should contain info about destinations and participated activities to allow others to judge the quality of one's information.
IgoUgo.com, started in 2000, has added the means for social networking to posted travel journals. Readers contemplating going to a destination can read the journals of others who have been there.
Although these sites can be a good way to meet people, it is probably wise to meet them first before planning a whole trip with them, just in case the real person does not quite resemble the online persona.
Monday, Sep 18, 2006 — 5:53 PM
10 Tips to Make more Money at your Current Job
Here’s a good list of 10 tips for improving your compensation at work.
Work smarter by finding out what the company actually values, then making sure that your bosses know about. Bigger pay raises every year lead to much bigger salaries later.
Strive to earn whatever bonuses the company offers, or even surpass what the bonus requires for a possibly bigger bonus. When getting a job, try to negotiate a larger bonus for a slightly smaller salary.
Get financial advice to further increase what you are already getting.
Learn about any special awards that can be earned outside of one’s duties, such as bring in new business or a new hire.
Lower your tax withholding to the point where you are not getting a refund at the end of year; otherwise, you’re giving Uncle Sam a free loan.
Get any matching money for a 401(k) plan by investing the maximum amount that your employer will match.
Take advantage of any flexible-spending accounts, where a certain amount is deducted from your paycheck that can be used to pay with tax-free dollars for special expenses, such as commuting, parking, and child-care costs. The money is received back, tax-free, when receipts for the expenses are submitted. However, don’t deduct too much, because any unused portion is forfeited.
Get a greater pay raise by doing more, or doing something within the company that pays more.
Exchange benefits for more money. If you are covered by your spouse’s health insurance, for instance, then forfeit the health insurance for more pay. After all, a company’s main concern is your overall labor cost. It matters little if it goes for benefits or pay.
Take advantage of any other benefits, such as tuition reimbursement, matching donations, gym memberships, or discounts on other items.
However, virtual trading simulations are limited because there are no real emotions involved in the trades, which often moves the investor to make unwise choices. It may also build unwarranted confidence, either in one's ability or in certain strategies. While backtesting can be done to quickly test strategies, they don't reflect current market conditions, and, thus, may lead to losses in real trading. Some virtual trading companies mentioned in the article: CyberTrader, Fidelity (Wealth-Lab Pro), FX Solutions, optionsXpress, and Scottrade.
Kentucky's Court of Appeals has ruled—and the Kentucky Supreme Court has declined to review it—that a state cannot tax the interest on out-of-state municipal bonds any differently than in-state issued bonds because it violates the U.S. Constitution's Commerce Clause. The state's taxing authorities say that it will reduce the ability of the state and its municipalities to raise money for public interests, but I don't see how that would necessarily follow. In fact, it might lower their costs because there would be a larger market for their bonds.
The Dogs of the Dow strategy is to buy the 10 blue chip stocks of the Dow Jones Industrial Average (DJIA) that have the highest dividend yield (=dividend/stock price), and holding them for about a year, then repeat, if desired. Often, these are stocks that have suffered price declines in the previous year, thus raising their dividend yields. The Dogs have done well this year, with total returns of 21% versus 7.9% for the DJIA. Last year, however, the Dogs lost 5% versus a gain of 1.7% for the DJIA. This strategy would probably work better if some analysis was done to determine why the Dogs have become dogs, and is their status going to change. Such an analysis would probably involve changing the time frame as well. Nonetheless, since they do pay dividends, at least the shareholder is getting paid while holding onto the stocks, and, of course, there is simplicity in following the naive strategy that may work more often than not.
More than 80% of the money in target-date funds is managed by 3 mutual-fund giants: Fidelity Investments, Vanguard Group, Inc., and T. Rowe Price Group, Inc.
Some example asset mixes: Vanguard funds start with a 90% stock and 10% bonds mix; at the target date, the mix becomes 50%- 50%. Barclays LifePath funds start with the same mix but end up with 35% stocks and 65% bonds at the target date. Details of any fund can be found in its prospectus.
Ratings depend on operational risk, not risk of default or rate of return, and thus, to determine this risk, Moody's examines the following in rating a hedge fund:
A standard indenture requirement is that bond issuers must send quarterly and annual reports to bondholders by a specified time, about when it files those reports with the SEC. Most companies have 60 days after the missed deadline to file the reports. Failure to do so is a technical default.
Now that bonds prices are lower because of higher interest rates, a quick profit can be made by buying bonds at a discount, forcing a default which forces the company to pay par value for the bonds immediately, or pay a fee or offer better terms to bondholders as compensation.
Antti Petajisto and Martijn Cremers from the Yale School of Management have quantified how much a mutual fund really mirrors an index by comparing the components of an index with the holdings of mutual funds, as reported to the Securities and Exchange Commission. The active share of the fund is a measure of the overlap between an index and the fund's holdings. The more the fund differs from the index, the greater the active share. A closet index fund is defined as one where the active share is less than 60%—the smaller the percentage, the less actively managed it is.
It was found that funds with an active share greater than 70% beat their benchmark index by 1.39%, but those funds that closely mirrored the funds returned 1.41% less because of high fees. It was also found that the bigger the fund became, the more it mirrored the index.
This is just yet another reason to be wary of hedge funds. Because there is little regulatory oversight, there seems to be a lot of fraud or fudging with these accounts. Just recently, it was reported that some hedge funds were actually Ponzi schemes—a pyramid investment swindle—where the hedge funds were reporting stunning, but fictitious, returns, paying out high returns to early investors to attract more suckers money into the fund. Eventually, it collapses into lawsuits by the swindled, who even try to get the money back that was paid out to early investors.
I often wonder why people invest in hedge funds. They don't seem to do as well as many well regulated investments, so why take the risk?
In general, anyone who paid the long-distance telephone tax will get the refund on their 2006 federal income tax return. This includes individuals, businesses and nonprofit organizations. The 2006 return is usually filed during 2007.
The standard amounts are based on the total number of exemptions claimed on the 2006 federal income tax return. The standard amounts are $30 for a person filing a return with 1 exemption, $40 for 2 exemptions, $50 for 3 exemptions and $60 for 4 or more exemptions. For example, a married couple filing a joint return with two dependent children (for a total of 4 exemptions) will be eligible for the maximum standard amount of $60.
To get the standard amount, eligible taxpayers only need to fill out one additional line on their regular 2006 return. The IRS is creating a special short form (Form 1040EZ-T) for those who don’t need to file a regular return.
The standard amounts are based on actual telephone usage data, and the standard amount applicable to a family or other household reflects the long-distance phone tax paid by similarly sized families or households. Those who paid the long-distance tax on service billed after Feb. 28, 2003 and before Aug. 1, 2006 are eligible for a refund.
Only individuals can use the standard amounts. Alternatively, individual taxpayers can choose to figure their refund using the actual amount of tax paid.
Details on requesting the telephone tax refund will be included in all 2006 tax return materials and on irs.gov.
Though businesses and nonprofits must base their telephone tax refund on the actual amount of tax paid, the IRS is looking for ways to make the refund process easier for these taxpayers. The IRS is considering an estimation method businesses and nonprofits may use for figuring the tax paid.
One good reason to buy travel insurance is for medical coverage outside of the country, since many health insurance policies do not cover treatment outside of the United States, or may not cover you in a particular country.
This is a nice ETF Heatmap on the NASDAQ website that is updated every minute during market hours. Market trends can be quickly discerned over the course of the day by simply observing the color changes—green ETFs have increased in price during the day, and red ETFs have declined. The greater the intensity of color, the greater the percentage change. Mouse over any of the 100 rectangles, and it will give you detailed information on that ETF. The map can be sorted into the biggest percent changes, either ascending or descending, or it can be sorted by ticker symbol. Click on the rectangle for a detailed InfoQuote, or right click it to get a submenu, that includes menu items for news, company financials, real-time filings, stock charts, options, and extended trading quotes.
I think equal weighted indexes should grow faster than indexes weighted by market caps, such as the NASDAQ-100 Index Tracking Stock (QQQQ), simply because smaller companies have a greater potential for growth. This will not always be true for short periods, but should be true over a longer period of time since there are always diseconomies of scale that prevent large companies from growing even larger, especially at a fast pace. It will be interesting to see how these ETFs compare over time.
Mystery shopping is not, however, the ideal job that many probably envision at first. The pay is low—sometimes all you get is compensation for the shopping. You work as an independent contractor, and if you are working for many different companies—which you will have to do to have steady work—record keeping and figuring taxes can be onerous. To make decent money, you must organize your shopping so that it can be done serially. You may have to do things you don't want to do, such as demanding a new room at a hotel. One thing you probably won't like too much is taking notes while at the site and writing the report online for the company later on.
Qualifications include being able to write well, with accuracy and detail, using correct grammar. In fact, the better your reporting, the more likely you will get assignments. Anyone can apply to be a mystery shopper, but only those who can write well and are reliable will be chosen repeatedly. You do have the right to reject assignments, however.
The assignments, often sent by e-mail, typically tell the shopper what she will be doing, when the job must get done, and the approximate pay, which can vary. You may only get reimbursed for the cost of a meal at a restaurant, while shopping at a department store might pay $10 to $50 per assignment.
Shoppers usually pay for travel to and from assignments, but can make $500 to $1,000 per month on 20 assignments.
These ETNs are 30-year senior debt securities listed on the New York Stock Exchange that will pay the return of the commodity index minus fees of 0.75%. They do not pay any interest and the unknown principal, if you can call it that, that the holding investor will receive at the end of the 30 years when the ETNs mature is what the chosen index returned plus what was invested.
The investor is basically lending his money to Barclays to be used in investing in commodities rather than buying an interest in the fund as he would with an ETF.
The main advantage of these commodity ETNs over commodity ETFs is that there, presumably, will be no taxable events for the investor as long as he holds the ETN—if the IRS accepts this, which it hasn't yet. Because commodity ETFs buys futures contracts which have a limited lifespan, the contracts have to be continually rolled over as the time remaining on the current contracts decreases, potentially generating capital gains taxes for the investor. ETNs avoid this because the investor is lending his money, not taking an ownership stake.
Although I can't say I completely understand these new securities, they seem to be like zero coupon bonds, with the principal at maturity being whatever the commodities fund based on its chosen index returns over the 30 years, plus what was invested.
However, investors with zero coupon bonds must pay taxes on them by calculating the amount of interest accrued on them each year, even though they don't receive regular interest payments. (More info about what the IRS calls original discount issues.) The IRS might pass a new rule regarding ETNs that is similar to its treatment of zero coupon bonds. The IRS likes its money! We, too!
Because ETNs are notes, their price in the secondary market will be dependent on the credit rating of Barclays, which is excellent now, but what about 10 or 20 years from now?
Unlike bonds in general, however, I don't think interest rates are a risk, except as far as interest rates affect the prices of commodities, because ETNs don't actually pay interest, nor do they have a specified principal. Their prices will be more determined by the return of the commodities index that the ETN is based on, since Barclays is promising to pay at maturity, whatever the chosen index returned during the term of the note, minus their fee of 0.75%.
