Wednesday, Apr 15, 2009 — 5:51 PM

New Rules for Credit Card Issuers

New rules regulating credit card issuers were approved by the Federal Reserve, the Office of Thrift Supervision, and the National Credit Union Administration. The following rules take effect in July, 2010:

Interest rates can only be increased for new credit cards and on new purchases; a higher rate cannot be applied to old balances.
Credit card issuers cannot apply all payments to balances with the lowest interest rates first.
Customers must be given a 45-day notice for any changes to the terms of the account rather than the 15-day notice currently required.

Rules Aim to Protect Credit Card Users

Tuesday, Mar 31, 2009 — 6:50 PM

Banks Walking Away from Some Foreclosures

Banks are starting to walk away from foreclosures rather than taking possession of low-end properties because the costs of legal fees, repair and maintenance exceeds the value of the property. Oftentimes, when a property sits unoccupied for awhile, vandals do more damage to the property, thereby lowering its value even more. Many municipalities are making the original owners liable for the property, who usually don't know that their bank had canceled the foreclosure process or simply failed to schedule a sheriff's sale until months afterward. Because the original homeowners have already abandoned the properties, and usually don't have the money to maintain the property anyway, some cities have tried to hold the mortgage holders liable, but it is often difficult to find the mortgage holders, since the mortgages were securitized and sold to investors. Nonetheless, the city of Buffalo, New York, for instance, had sued 37 banks in 2008 in an attempt to hold them liable for the property's deterioration.

Source: In Homeowners’ Latest Woe, Banks Are Skipping Foreclosures - NYTimes.com

Sunday, Feb 8, 2009 — 2:07 PM

New Tax Breaks for 2008 and 2009

New tax breaks related to home ownership:
- For 2008 and 2009, first-time home buyers, who is anyone who didn't own a home and claimed a first-homeowner buyer credit within the 3 years previous to the purchase date, can deduct up to 10% of the purchase price of a home if it was bought during April 9, 2008 - July 1, 2009. This refundable first-time homebuyer credit, which must be repaid, interest-free, over a 15-year period beginning the 1st year after the purchase, is limited to $7,500 for couples earning less than $150,000 per year and $3,750 for single filers earning less than $75,000; the credit phases out at $170,000 for couple and $95,000 for single filers.
- Widows and widowers whose spouse has died within 2 years of the sale of their primary residence can exclude up to $500,000 from income. Previously, the limit that could be excluded was the $250,000 limit for single filers.
- There are new residential energy credits for buying and installing solar, wind, geothermal, or fuel cell technologies , but not for more traditional energy-saving materials, such as insulation.
- There is a new standard deduction for state and local property taxes that can be taken on top of the regular standard deduction if the homeowner chooses not to itemize. This standard deduction is $1,000 for couples and $500 for single filers.
New tax breaks not related to homeownership:
- People who itemize can choose to deduct either state and local income taxes or sales taxes for 2008 and 2009.
- Combat pay is entirely exempt from federal taxes.
- Mileage deductions using the mileage rate for miles driven January - June, 2008 :
  - 50.5 cents per mile for unreimbursed business use of your private vehicle. 19 cents for medical or moving mileage.
  - For July - December, 2008:
    - 58.5 cents for business miles . 27 cents for medical or moving miles.
  - The rate for charitable use is still limited to the 14 cents per mile established by Congress in 1997.
A 0% tax rate on qualified dividends and long-term capital gains for those in the 10 or 15% tax bracket.

A Batch of New Tax Breaks on Your Home

Friday, Feb 6, 2009 — 5:42 PM

New Methods of Assessing Creditworthiness

Banks and other credit card issuers are using additional information in assessing the creditworthiness of their customers. While all of them use credit scores, some are searching for additional information on their customers to try to forestall credit problems in these hard times.

Some of the criteria being used as a basis for lowering credit limits or maybe even canceling accounts include home prices in the customers' neighborhoods, the type of mortgage lender being used, and where they shop. According to this New York Times article, American Express Kept a (Very) Watchful Eye on Charges, American Express was even using spending patterns as a additional means to gauging credit risk of its current customers. American Express was evidently compiling a list of merchants who had more than an average share of customers that later had credit problems, then looked for customers who frequently shopped at those sites, causing American Express to re-assess their creditworthiness in light of the other information. American Express stated that it has stopped using shopping criteria for credit scoring, and that its main criteria is the overall debt load of the customer compared to their financial resources. It has also told analysts recently that people with multiple mortgages on multiple residences use to be a good credit sign—now it is considered a red flag. American Express does consider mortgage lenders, which they can learn about from their customers' credit reports, and that credit lines may be affected if the mortgage lender is a subprime lender or if it went bankrupt. Another area being examined for its small business customers is the type of business that the customer is involved in—credit limits may be lowered or even credit denied if it is a type of business that will probably be adversely affected by the current downturn, such as home construction or finance.

Citigroup has stated that it is using some mortgage data, but does not consider specific stores being shopped by customers or the type of merchandise being purchased. Capital One stated that geography is considered, but not spending patterns.

In 2008, CompuCredit, a subprime lender, was cited by the Federal Trade Commission for failing to disclose that customers' credit lines could be lowered if they shopped at particular types of merchants that would indicate that either the customer was under financial stress, such as marriage counselors and repair shops, or that customers did not spend their money wisely, such as bars and nightclubs, pool halls, pawnshops, and massage parlors—although one may find a good bargain at a pawnshop.

Thursday, Feb 5, 2009 — 6:16 PM

Some Interesting Statistics on Hedge Funds

Hedge funds lost on average 18.7% in 2008 according to Hedge Fund Research, Inc, which, along with increased redemptions, decreased total assets managed by hedge funds from $1.9 trillion at the beginning of 2008 down to $1.1 trillion by the end of the year. Even more money would have been withdrawn by investors, if some of the hedge fund managers hadn't prevented them from doing so by invoking gates, which are contractual limits on the amount of money that can be withdrawn within a certain period.

Global macro funds have fared best during the credit crisis, making money on currencies, interest rates, futures, and equities by predicting market trends according to their world economic analysis. These funds gained 5% in 2008, when the S&P 500 lost 40%. However, these funds lagged the market from 2002 to 2007 by an average of 2.7%, which probably accounts for their decreased market share of 11% by the end of 2007. The main benefit of global macro funds is that they do not use leverage, or borrowed money, for their results, which helped them achieve good results in 2008 when almost every other fund was down. The other main advantage to global macros is that asset size is not a concern since the currency market is so huge, and because derivatives are more affected by the price or the value of the underlier. Stocks and bonds, on the other hand, have a much smaller float, and their prices are directly affected by the supply and demand of the security.

At the beginning of 1994, 65% of hedge funds were global macro funds, according to Credit Suisse Group AG's AES subsidiary, while long-short funds were 15%, and event-driven funds constituted 7.4%. Long-short funds make money by buying long or selling short. They increased their market share, to 29% at the end of 2007, after trading costs declined on the decimalization of stock prices and especially after the stock market bubble burst in 2000, advertising that they could make money whether the market was moving up or down. However, they lost on average 28% in 2008. Event-driven funds try to make money by forecasting market movements based on major corporate events, such as earnings surprises or corporate restructurings, and increased their market share to 24%. In 2008, these funds lost an average of 21.5%.

Soros Imitators Reap Riches in Financial Crisis on Macro Funds

Monday, Nov 24, 2008 — 2:30 PM

Oil and Gasoline Prices

From 2002 - 2008, the price of a gallon of gasoline averaged $0.22 more than a gallon of crude in the futures market, and the price of gasoline in the retail market averaged $0.99 more than a gallon of crude in the futures market. The main cost difference is attributed to the cost of refining, with the rest going to distribution, marketing, and taxes. Only 40% of a barrel of crude oil (1 barrel = 42 gallons) goes to making gasoline, while the rest goes to make other products, mostly diesel fuel. The United States does not use much diesel fuel, but the market for diesel fuel is much larger in the rest of the world where it is used to generate electricity and to power industrial production. Because oil is much less volatile than gasoline, it is much easier to store. Therefore, when there is concern about a supply problem in the near future, more oil is bought for storage, but not gasoline, since it evaporates readily. Hence, potential supply problems will cause the price of oil to spike more than gasoline prices.

Oil Is Cheap. Why Is Gas, Which Is Made From Oil, Even Cheaper?

Gasoline Components History - The relationship of the cost components of delivering gasoline to the gas station and the amount charged at the gas pump.

OPEC's Influence on Oil and Gasoline Prices

It is difficult for OPEC to raise oil prices, because of the benefit of cheating to the individual countries. Countries cheat because they have different economies, different needs for money, different projections for future demand, and different production costs—a good portion of it fixed. The Saudis, with a 60-year supply of oil, wants to keep prices relatively low so that the world maintains its dependency on oil; otherwise the world will invest in alternative resources which may eventually reduce the need for oil to a very low level. Iran and Angola, however, need the money, and so, aren't likely to abide by quotas.

OPEC can't directly monitor the output of any single nation, and even if it could, OPEC does not have the legal authority to enforce quotas. Nonetheless, publishing quotas often shapes the expectations of the market, which can drive prices higher at least temporarily, even if production isn't cut to the desired quota.

Can OPEC Force Oil Prices Up?

Wednesday, Oct 22, 2008 — 2:24 PM

Credit ratings for Profit

Rating Companies Put Profits First, Critics Testify - Testimony from top executives and former executives of the credit rating agencies—Moody's Investor Service, Standard & Poor's, and Fitch Ratings—before the House Oversight and Government Reform Committee reveal that the credit rating agencies relaxed their standards to get business, since the originators of structured securities generally chose the rating agency with the lowest standards of credit assessment. The executives explained their faulty rating of mortgage-backed securities (MBSs) by not anticipating the sharp drop in home prices or the restrictive lending environment that followed, and because the historical data and other assumptions that the credit ratings were based upon seriously underestimated the risk.

However, the SEC reported in July that there were conflicts of interest at the firms and that they violated their own procedures to grant top ratings to mortgage bonds—top ratings were necessary to sell the bonds to banks, insurance companies, and fiduciaries, such as pension funds.

Is the testimony from the executives of the credit rating agencies credible? It was clear to many for some years that there was a real estate bubble growing—after all, when real estate prices are rising much faster than people's incomes, how long can that continue? The bubble was created because lending standards had decreased—some would say had passed out of existence—allowing just about anybody to get a loan. Loan originators didn't worry because they were able to pass their credit default risk to the buyers of the MBSs. But since lending standards were declining, then how can you rely on historical data when lending standards were much more stringent?

The Bloomberg article above reports that there were employees who were aware that these MBSs were far riskier than their credit ratings would indicate. Documents from S & P quoted one employee from the structured finance division as saying "It could be structured by cows and we would rate it." Another employee says it all: "Let's hope we are all wealthy and retired by the time this house of cards falters."

Actual testimony: http://oversight.house.gov/story.asp?ID=2250

The revenue, much of it from rating asset-backed securities, of the 3 big credit rating agencies: Moody's Investor Services, Standard and Poor's, and Fitch Ratings.

Bar graph showing the revenue, much of it from rating asset-backed securities, of the 3 big credit rating agencies: Moody's Investor Services, Standard and Poor's, and Fitch Ratings.

Source: Oversight.house.gov: Revenue of Big Three Credit Rating Agencies- 2002-2007

Monday, Oct 20, 2008 — 3:45 PM

Buy Stocks Now!

Jim Cramer Retreats Along With the Dow - What I gleaned from this article is that Jim Cramer is not sure what to do in this market at this time except to sell. I'm not sure, either, except that I think it is a good time to buy stocks. Warren Buffett has already taken my advice—just kidding! If you already own stocks, just hold onto them; else you'll be selling at the bottom. The market is not likely to drop further, and October has traditionally been a volatile month—remember the stock market crashes in 1929 and 1987 were both in October, and we just had another one. Furthermore, the market is frequently down in mid-October, even when there are no crashes. However, it starts to rise toward the end of the month and into November and December, with December being the best month historically for stocks. The market probably isn't going to zoom up, since it will take time for the market to start growing again, however, there is ample evidence that the government intervention is working: the TED spread is now at 2.95, down from a decades' high of 3.65, and the 3-month LIBOR is also down from a recent high—both are indications that credit is starting to flow again, which should certainly help the markets.

Monday, Oct 20, 2008 — 2:41 AM

During the Residential Boom, Almost Anyone Could Get a Mortgage

The biggest problem with asset-backed securities (ABSs) based on loans is that the loan originators can pass the credit default risk onto buyers of the ABSs, and, thus, had more incentive to originate loans to collect servicing and origination fees. This New York Times article, Building Flawed American Dreams, documents the lowering of credit standards to originate more loans:

Creative efforts were used to extend homeownership to low-income applicants.
Homeownership rose from 64% in 1994 to 67.4% in 2000, with major increases in homeownership among Hispanics and African-Americans.
Loan applicants only needed to show 3 years of stable income instead of the 5 that was previously required.
Lenders were permitted to use their own appraisers instead of using those from a government-selected panel, which was previously required, that led to inflated appraisals.
For government-insured borrowers, lenders did not need to interview loan applicants face-to-face nor did they have to have physical branch offices in the loan applicants' community.
Some people got loans with nothing down and no closing costs.
Some homebuilders, who also become lenders in the lucrative mortgage market, were fined by HUD for overstated or incomplete documentation of income, and for charging excessive fees.
September 2004 lending audits conducted by HUD found that 1 in 8 of Countrywide's loans were based on incomplete documentation and verification.

Tuesday, Oct 14, 2008 — 6:23 PM

Monitoring the Credit Crisis by Watching the LIBOR and the TED Spread

The main problem during the current credit crisis is that banks are not lending to each other or to businesses and consumers, but are hoarding cash to stay afloat, to maintain the reserves they are required by law to keep to cover their liabilities, and to try to pay down debt. The governments of the world are trying to thaw the credit freeze by, among other things, injecting liquidity into banks, and by buying an ownership stake.

How well are the governments succeeding? You can monitor their success by watching the LIBOR and the TED spread—the success of the governments' intervention can be measured by how much they decline. You can find more information as well as current quotes here:

Monday, Oct 13, 2008 — 2:48 AM

Margin Risks

Margin Calls Prompt Sales, and Drive Shares Even Lower

During the week ending October 13, 2008, the average stock price plunged 18%, forcing many investors who bought stock on margin to sell, which was probably a major factor contributing to the steep decline. For instance, according to the above article, Aubrey K. McClendon, chief executive of Chesapeake Energy, was forced to sell his entire stake of 33.5 million shares in his company at a price range of $15 - $22 per share. In July, the stock price was above $60 per share. Sumner M. Redstone, the chairman of Viacom and CBS, was forced to sell $400 million of shares in his companies to pay down debt. One senior wealth management executive reported that people with $30,000,000 in their brokerage accounts were wiped out in days.

This illustrates the risks of using margin: you may be forced to sell at the very time when stock prices hit bottom! And since other investors will also be forced to sell in the declining market, the market declines even further. When the stock market starts declining, it is best to sell some stock to lock in gains and to pay off margin; otherwise you will be forced to sell low after you bought high.

Wednesday, Oct 8, 2008 — 12:52 AM

new additional Criteria for Credit Scoring - Behavioral Scores and Mortgage Holders

Source: AmEx rates credit risk by where you live, shop

According to this article, American Express is going beyond credit reports and credit scores to evaluate the creditworthiness of its cardholders by using data on where you live, where you shop, and who your mortgage lender is to gauge your creditworthiness. The predictive value of these additional criteria are measured by the creditworthiness of all people shopping at particular locations or living in particular areas, or by who holds the cardholder's mortgage, and then modifying the traditional credit criteria by these findings, which often results in reduced credit limits or even in the closing of accounts. American Express is referring to its location criteria as a property risk model, and says that the factors that influence that model changes frequently. However, what is purchased is not a risk factor.

Previously, American Express raised credit limits for 80% of its cardholders while lowering the limits on 20%. Using the new credit scoring, or what may be called behavioral scoring, the ratio is now 50%/50%. As an example, those who shop at rent-to-own stores will raise red flags, since people tend to shop at these stores when they are overextended or cannot control their impulse to spend. Because their prices are much higher than at regular stores, shopping at rent-to-own stores is considered indicative of poor money management or poor impulse control.

As for mortgages, a spokesperson for American Express said that only the identity of the mortgage holder matters—it makes no difference if the mortgage holder was an originating lender, or if the loan was purchased in the secondary market. The borrower, of course, has no control over the sale of his loan in the secondary market, so there could be marks against the borrower even if the originating lender is not a subprime lender.

Sunday, Sep 7, 2008 — 2:16 AM

Fannie Mae and Freddie Mac Placed under Regulatory Conservatorship

To prevent turmoil in the financial markets, Fannie Mae and Freddie Mac are placed under a regulatory conservatorship by the Federal Housing Finance Agency (FHFA), which transfers all of the rights and powers of the companies' directors, officers, and shareholders to the appointed conservator. The companies' management will also be replaced, and both companies are prevented from lobbying the government. Mr. Paulson, the Treasury secretary, said that having a public corporation serving a public function is incongruous and cannot continue in its current form, and therefore, the 2 companies would have to eventually be pubic or private companies.

Principal and interest payments on debt will continue, but dividends to shareholders will be stopped. Fannie Mae and Freddie Mac hold or guarantee about 50% of the country's mortgages, and will be forced to shrink their portfolio by 10% per year starting in 2010 to more manageable levels. Each month, these companies bought billions of dollars worth of mortgages, and either sold them to investors or kept them in their portfolio.

In exchange for the bailout, the government will receive warrants to purchase up to 80% of the stocks of both companies for less than $1 per share. The Treasury will receive new preferred senior stock paying 10% annually plus an unspecified quarterly payment. The Treasury Department will create a Secured Lending Credit Facility that will lend money to Fannie Mae or Freddie Mac if they cannot borrow enough in the market to continue buying MBSs.

In Rescue to Stabilize Lending, U.S. Takes Over Mortgage Finance Titans

Monday, Sep 1, 2008 — 4:29 PM

Deficient Disclosures by Municipal bond Issuers

http://www.nytimes.com/2008/08/31/business/31gret.html

As this article notes, many issuers of municipal bonds do not regularly issue financial statements, such as annual financial reports or reports of material changes, such as an impending credit ratings downgrade. Hence, many bondholders are not aware of any trouble that may be developing. According to DPC Data, 1 of 4 nationally recognized municipal securities information repositories, from examinations of filings during 1995 - 2006, 50% failed to file a required financial report 1 or more times, 25% missed 3 or more years of disclosures, and many bonds issued in 2006 had deficient disclosures. The trend of delinquent disclosures appears to be growing. Delinquent exposures seem to increase with the age of the issue, and also for the riskiest municipal bonds, such as revenue bonds. Problem disclosures extends to all size issuers, all categories of municipal bonds, and to all sectors of the country.

The SEC cannot, by law, enforce any action to require disclosure, but can only take action in cases of fraud. Furthermore, the SEC excludes issuers with less than $10 million of outstanding debt from disclosure requirements, and issuers of debt with terms equal to or shorter than 9 months do not have to file an annual disclosure. The SEC does require, however, that no new bonds can be issued unless the issuer is current with the most recent 5 years of required filings.

Some interesting statistics cited:

There were 54,000 municipal issuers with outstanding debt;
25,000 of these issue debt every 2 years.

Monday, Aug 25, 2008 — 12:25 PM

Demutualization Income May not Be Taxable

When an insurance company demutualizes, it pays cash and stock to its former members to compensate them for the loss of their ownership interest. For years, the IRS has taxed the entire amount, claiming that the shareholders of the former mutual fund companies didn't pay for the shares. However, a single accountant, Charles Ulrich, has disputed this claim, correctly pointing out that the shareholders paid for their shares and cash payments with the premiums that they paid to the mutual fund companies. In a rare victory of an individual against the IRS, the courts have agreed with him. The IRS may appeal this decision to a higher court, but, in many cases, it is simply giving refunds to those who apply for it. A policyholder would have to apply for the refund within 3 years of the tax deadline for the year in which the distribution was received. If the IRS refuses the request for refund, and it may for larger refunds, the taxpayer at least extends the deadline for another 2 years with the request.

Thursday, Apr 10, 2008 — 5:36 PM

The Origins of the Subprime Mess

So why did the subprime mess occur? Because many people were overstating their incomes to qualify for mortgages that they couldn’t afford. And how did they get away with this? Because many lenders didn’t bother to verify the borrowers’ income when they could have easily done so.

While many in the lending industry have stated that they were duped by fraud, it turns out that most suffered from their own complacency. According to this New York Times article, A Road Not Taken by Lenders, at least 90% of the borrowers had to sign an IRS Form 4506T, allowing the lenders to verify the income of the borrowers with the Internal Revenue Service, but many lenders did not bother to check, even for stated income loans where the borrower did not have to provide any documentation proving income—hence, the alias for stated income loans, liar loans.

Lenders gave 2 reasons for not submitting the 4506T form: too costly and too time-consuming. The verification cost $20 and takes about 1 business day, so the lenders’ reasons aren’t credible. Why wouldn’t a lender spend $20��a cost that would be passed to the borrower anyway—to secure a loan in the hundreds of thousands of dollars?

Because the lenders intended to sell the loans—and the risk of default—to investment banks to securitize and sell to investors in the form of mortgage-backed securities, CDOs, and SIVs. Meanwhile the lenders make money from upfront fees, such as loan origination fees, points, and servicing fees, and the more loans they make, the more money they make.

Wednesday, Apr 9, 2008 — 12:50 AM

Condo Hotels not such a Good Deal

It seems that condo hotels are a lousy investment, at least for now, for those people who bought at the top of the real estate bubble. Hotels are a risky business because occupancy rates depends on the economy, weather, and competition. Condo hotels allowed developers to transfer some of their risk to investors of the condo units, which may have caused the developers to build more than they would have otherwise, adding too much capacity for an area.

Some investors are saying that the hotel keeps more of the rental money than they should. Other investors are arguing that since condo hotels were primarily an investment, they should have been registered with the SEC as securities, which would make it easier for investors to recoup some of their losses. If the investors could prove that the condo hotels should have been registered as securities, then they would be entitled to get their money back without having to prove fraud or misrepresentation. However, most developers did not promote the condo hotels as an investment, thereby obviating the need for SEC registration, and defeating those investors who are suing to assert otherwise. Some are complaining to the SEC, but the SEC won't take any action unless the developer enticed buyers with projected incomes or occupancy rates.

Monday, Mar 3, 2008 — 5:47 PM

FICO 08

Fair Isaac has altered its FICO scoring model, calling it FICO 08, to hopefully better predict consumer defaults. FICO 08 will continue to have a range 350 - 800, and it will still rely heavily on the amount of debt and payment history. However, FICO 08 will no longer use authorized user accounts in calculating the score. More positive weight will be given to users who have multiple types of credit, such as auto loans and mortgages, in addition to credit card history, while the debt-to-credit ratio—the total debt compared to a user's total credit line—will be given greater weighting—a higher debt-to-credit ratio will have a more negative effect that it did in the classical FICO scoring model. Numerous late payments will also have a more negative impact, while an occasional late payment will have less impact than in Classic FICO. FICO 08 scores should start appearing in the 2nd quarter of 2008. Experian and TransUnion will be using the scoring system, but it is uncertain at this time whether Equifax will be using it.

Independent Real Estate Appraisers

Part of the cause of the real estate bubble and the subprime debacle has been overinflated home appraisals. Many lenders were using their own appraisal units, or subsidiaries or affiliated companies, to appraise properties at higher-than-market values to get loans approved. In the past, lenders would have been concerned about the risks, but, nowadays, with most mortgages being resold as mortgage-backed securities, the risks were being transferred to investors, which lessened the lenders’ concern about risks and increased their focus on profits.

Starting in January, 2009, Fannie Mae and Freddie Mac, the largest buyers of mortgages that are securitized into mortgage-backed securities, will require that lenders use independent real estate appraisers. Also, real estate agents and mortgage brokers will not be allowed to select the appraiser.

Fannie Mae and Freddie Mac are creating an Independent Valuation Protection Institute that will promulgate rules to enforce independent and reliable appraisals, and will accept complaints from both consumers and appraisers as a way to monitor enforcement of the rules by the Office of Federal Housing Enterprise Oversight, the government regulator that oversees Fannie Mae and Freddie Mac.

Saturday, Feb 9, 2008 — 1:22 PM

Raising Credit Cards Rates Even without Changes in Credit Score

The article below details the raising of interest rates on credit cards substantially, in many cases, to more than 25% by Bank of America, even for consumers who paid on time and whose credit score has not changed.

This underscores several important points about getting into deep credit card debt.

These considerations also underscore why you should have a savings account for financial emergencies rather than depending on credit cards, because you never know when your limits will be reduced.

Tuesday, Jan 29, 2008 — 6:18 PM

Mortgage Debt Forgiveness Act of 2007

A new law has been passed that for any renegotiated mortgage or for a foreclosure, any forgiven debt will not be taxable. The law applies to transactions that take place from January 1, 2007 to December 31, 2009. This law applies only to recourse loans—there is no forgiven debt for nonrecourse loans, because the lender must settle for what the property sells for, and cannot go after the borrower for any deficiency.

However, any forgiven debt, also known as cancellation of debt income, will reduce the homeowner’s basis in the property, which will add to any gain by the amount that is forgiven, when the home is sold. The borrower will still have to pay taxes on this capital gain, but it will be at the lower capital gains rate of 5% or 15%, depending on the borrower’s income rather than the usually higher ordinary tax rate on ordinary income that applied to cancelled debt.

There are some limitations to the tax forgiveness. There is a $2 million dollar limit of COD income that can be forgiven, and the law applies only to a principal residence—not vacation homes or investment properties. The exclusion also does not apply if the homeowner refinanced the mortgage, but the money was not used to improve the property.

Taxes on a Foreclosure

Although a homeowner does not receive any money when a lender forecloses on the home, the IRS still treats it as a sale for tax purposes, and the homeowner must pay a capital gains tax on this so-called phantom income, if the sale price is greater than the homeowner's basis in the property. However, if the homeowner lived at least 2 years in the previous 5 years in the home, then he will be eligible for the home sale exclusion rule that exempts the 1st $250,000 of gains ($500,000 for a joint filers) from taxes, which also applies to the phantom income of a foreclosure. A borrower can also avoid paying taxes on the gain if he is insolvent—unable to pay his bills, which generally applies to most people whose homes are foreclosed.

Friday, Jan 4, 2008 — 3:31 PM

Choice A - For Sale by Owner (FSBO)

Here is a great new for-sale-by-owner site, Choice A, for selling your real estate. It is free to list your property, and is very simple to use. If you are looking for property, you can select an area by either city-state or by zip code. However, because this site only recently went live, most of the properties are restricted to Portland, Oregon and Seattle, Washington, but I'm sure that it will expand rapidly. It is easy to survey properties by thumbnails, map, or by a tabular list that can be sorted in numerous ways, such as by price or zip code. I'm sure there will be many more features in the future, but this is a great site right from the get-go. Below are some annotated screenshot snippets that provide more detailed features of the site.

Wednesday, Jan 2, 2008 — 10:57 AM

How Credit Card Companies Take Advantage of People Who Can't Pay Off their Debt

It has oft been said that the reason credit card companies raise interest rates for the slightest delinquency is because of the increased risk. It does make sense to charge people with lower credit scores a higher interest rate when the customer is acquired—higher risk does require a greater yield��but once the customer has been acquired, does it make sense to charge the maximum default rates of 30% or higher, even if someone is only a little late on 1 payment? And if someone is paying late because they have run into financial trouble, jacking up the interest rate to usurious levels would seem to increase the odds of not getting paid at all.

I think the real reason that credit card companies do this is because they can. When people are unable to pay off their credit card debt, even if they are paying their bills regularly, I believe that credit card companies see this as an opportunity to take advantage of such people to reap enormous returns. Otherwise, a better method of reducing risk would be to not allow the customer to make any more charges until the debt has been reduced significantly, or, if the credit card company truly believed that the customer was a real risk, to cancel the account, but allow the customer to continue making payments, using the original interest rate, so that the customer will be able to pay off the account eventually. Cardholders with little debt are rarely charged such rates even if they are late because they could easily pay off the debt and cancel the credit account, which is a risk that most companies don't want to take, considering how much they spend to acquire accounts. This is why people with a heavy debt load get socked with usurious interest rates even if they pay regularly, and customers with little debt don't. So don't go into heavy debt, and let lenders take advantage of you. Besides, lower debt increases your credit score and is simply more prudent.

To help the consumer, the Federal Reserve is proposing a requirement that a 45-day notice of a rate hike be given to the consumer, with the option to cancel the account and pay off the debt at the original interest rate.

A recently introduced Stop Unfair Practices in Credit Cards Act would limit penalty rate hikes to 7% and could only be applied to future credit, not to past balances. The Act would also eliminate the exorbitant fees that card companies charge to pay quickly, and that payments be applied to balances with the highest rates 1^st.

Thursday, Dec 27, 2007 — 2:24 PM

Do State Insurance Departments Really Help Consumers?

Evidently, not too much, according to the Bloomsberg article hyperlinked below. It's to be expected, I suppose, when you consider that the state insurance commissioners generally come from the insurance industry, and return to good jobs there. Furthermore, the National Association of Insurance Commissioners helps the states in writing the insurance laws. And since, according to the article, insurance companies sometimes pay for the foreign travel of state insurance commissioners, the insurance companies must be getting favors in return. That's generally how these things work: I'll rub your back, you rub mine. One may also wonder why state insurance commissioners would need to travel to other countries? A few "reasons" given in this article were that insurance companies need to expand overseas, and that the commissioners were trying to help some foreign governments to set up their own regulatory authority. There is no explanation as to how a state commissioner is going to be able help insurance companies expand overseas, or why the foreign governments who want help in setting up a regulatory authority for insurance in their countries do not pay the travel expenses of the people who are helping them? The other unknown about all of this is why doesn't the federal government regulate insurance companies, since most of the them conduct interstate commerce? A tremendous benefit to federal regulation would be the elimination of a lot of red tape and legal expenses that are no doubt generated by a patchwork of 50 state laws? The United States Supreme Court did rule, in 1944, that insurance was interstate commerce and was within federal jurisdiction. Then the following year, Congress passed the McCarran-Ferguson Act, which returned regulation to the states, with some federal oversight to monitor whether it is all working properly. Now, some members of Congress are, again, contemplating federal rule, but whether it will go anywhere or be any better remains to be seen.

Sunday, Dec 16, 2007 — 3:33 PM

Do Companies that Announce Stock Buyback Programs Outperform the Market?

Researchers have noted that, in the 1990’s, companies that bought back their stock outperformed the market for up to 4 years after the announcement of the buyback program. The most significant reason for this increase is that managers buy back stock when they believe that it is significantly undervalued, and, of course, buying back the stock increases its demand and therefore its price.

However, a recent study by Standard & Poor seems to contradict this commonsensical notion. They found that 320 out of the 423 companies in the S&P Index that repurchased its shares between January 1, 2006 to June 30, 2007 would have done better by taking the money and investing it in an index fund benchmarked to the S&P 500.

The conclusion is that, while most managers don’t try to mislead investors, many buyback programs do not specify how many shares will be repurchased nor the time of their repurchase, and, often, the buybacks don’t occur—and sometimes, the stock buyback program can be bogus, announced to increase the stock price at least temporarily!

The study has found that those managers that heavily use discretionary accruals—which are revenue or expense items that managers have large discretion in deciding when they will appear in the company’s financial statements, and what their value will be—generally perform worse than companies using less discretionary accruals. Managers using discretionary accruals aggressively can only bolster the share price temporarily, because eventually such items will have to appear in the financial statements.

The finance professors who conducted the study reasoned that managers that announced bogus stock buyback programs would be more likely to use discretionary accruals. They conclude that the stocks of companies that announce a buyback program, but don’t use discretionary accruals aggressively, generally outperform the market.

Wednesday, Dec 5, 2007 — 2:48 PM

How Insurance Companies are Increasing Profits by Paying less in Claims

According to this Bloomsberg article (9/2007), The Insurance Hoax, property and casualty insurance companies have been making record profits in the current millennium, even during a time of major natural catastrophes, such as Katrina and the California wildfires, by reducing claims payments. Insurers are offering lowball settlements, and if the property owners refuse, then they take it to court. Central to their method of reducing claims payments is the use of software for estimating the costs of claims. Colossus, developed by Computer Sciences Corporation, estimates the cost of auto accidents, including the cost of pain and suffering, and permanent disability. Xactimate, by Xactware Solutions, Inc., has developed software that estimates the cost of rebuilding a home. However, many are contending that these programs are underestimating the true costs of claims. Farmers Group, a subsidiary of Zurich Financial Services AG, has stopped using Colossus because of a class-action lawsuit that claimed that Colossus was underestimating the true costs of injuries.

Other ways that insurance companies have been reducing claim payouts is by changing policies, with the changes applying retroactively, and altering the engineering reports of the people who had actually inspected the damage. Many of these engineering companies depend on the business from the insurance companies, and, so when the insurance companies pressure the groups to lower cost estimates, they tend to comply.

Saturday, Dec 1, 2007 — 3:26 PM

Charging the Rent or Mortgage Payment with a Credit Card

American Express and VISA are now offering creditworthy customers the option to charge their rent or mortgage payment with their credit cards. American Express started allowing the charging of rent in 2003 and mortgage payments in May, 2007 with a few partners—rental developers and mortgage companies—and has expanded it gradually to 200 cities in 35 states. VISA started offering rental and mortgage payment services in 2007.

While it is a great way to earn reward points, it could also lead to greater consumer debt, and lessen the motivation of users to solve critical financial problems right away. Although the program is currently restricted to the most creditworthy customers, considering the highly competitive credit card business, it may be gradually expanded to the general population.

Friday, Nov 30, 2007 — 12:50 AM

Subprime Mortgages Hurt Structured Investment Vehicles (SIVs)

Structured investment vehicles (SIVs) and securities arbitrage conduits make money by selling asset-backed commercial paper (ABCP), and using the proceeds to buy, among other assets, mortgage-backed securities (MBSs), profiting from the difference between the high interest rate received on the longer-term MBSs, and the lower interest rate paid on the commercial paper. However, commercial paper has a maximum maturity of 270 days, far less than most MBSs, so the SIVs have to sell more commercial paper to pay for the ones maturing. When the MBSs get downgraded because of their load of subprime mortgages, SIVs relying on MBSs get downgraded because of its riskier assets. Thus, even without defaults, it has to pay a higher interest rate for its commercial paper, thus, eliminating its profits or even suffering losses. In extreme cases, it cannot even sell its commercial paper, forcing it to restructure or to turn to its sponsoring bank for financing. For instance, Axon Financial, Cheyne SIV, and OTTIMO Funding Ltd. were recently downgraded and forced to restructure because of their inability to sell their commercial paper in the money market.

Many funds are heavily invested in SIVs because they offered higher returns, and seemed very safe, but as more MBSs and other derivatives based on subprime mortgages get downgraded, the funds suffer as the SIVs suffer losses, prompting massive withdrawals from the funds by investors.

Tuesday, Oct 30, 2007 — 4:15 PM

The Economics of Homeowners Insurance

In the 19^th century, firefighters often were paid, not by tax dollars, but by the owner of the burned property, either out of pocket or by the owner’s insurance company. So firefighters were inclined to fight fires only on property that was insured, or where the owner had the financial wherewithal to pay for their services. To save money, some insurance companies in Richmond, VA gave homeowners plaques to indicate that the property was insured, so that firefighters would be motivated to try to save the property—it was a cheap way to prevent a total loss at least sometimes.

Nowadays, insurers aren’t handing out plaques, but some people, notably the wealthy, still get better services than others. With wildfires raging in Southern California, American International Group’s (AIG) Private Client Group is saving itself money by protecting the homes of the wealthy. AIG has a Wildfire Protection Unit which employs firefighters working specifically for AIG to protect people’s homes by applying the fire retardant Phos-Chek, which is also used by the U.S. Forest Service. However, only those whose homes are worth at least $1,000,000 and pay at least $10,000 in annual premiums get the special treatment, although some people with standard policies also got the special treatment if they happened to be nearby. Many people resent this special treatment for the wealthy, but it makes economic sense for AIG, since saving even 1 home pays for the program, especially since many of these homes are worth 3 to 5 million dollars, or more. While not every home is saved, it stills saves a significant sum of money for AIG.

AIG has a similar service for hurricane-prone Florida. AIG sends pre-disaster consultants to assess well-insured properties for possible damages and sends teams of workers to help restore properties even before claims are filed.

People evidently like the good service. AIG’s Private Client Group started providing insurance in 2000 and has already collected more than $1 billion of premiums.

Sunday, Oct 7, 2007 — 1:11 PM

Credit Freeze for All

Many cases of identity theft rely on stolen social security numbers, which are then used to open credit accounts, often with high balances. The thieves max out the credit lines without any intention of paying back the loans, which leaves the people with those social security numbers on the hook. The identity theft victims then must go through the travails of convincing credit bureaus and creditors that it was not them who took out the lines of credit, and that they were the victims of identity theft.

A credit freeze, which stops the credit bureaus from issuing credit reports to potential creditors, prevents the thieves from getting any more credit with that person’s identity, since almost all creditors require a credit report before they will issue credit or pay out loans. The disadvantage is that the victim of identity theft also cannot get any more credit until he unfreezes his account.

39 states have various laws that allowed consumers to freeze their credit reports, at least to some extent, but now that the credit bureaus see the growing trend, and also see the potential profits to be made by allowing consumers to freeze and unfreeze their credit reports for a fee, all 3 have decided to allow it regardless of where the consumers live. TransUnion was the 1st, while Equifax and Experian will allow it soon—Experian on November 1, 2007. The current fee is $10 to freeze it and $10 to unfreeze it, for each report, except in those states that require a lower fee, and it is free for any victims of identity theft. Therefore, a consumer who is not a victim of identity theft will have to spend $60 to freeze and unfreeze all 3 credit reports. The freeze request can be made by mail, telephone, or email.

Monday, Oct 1, 2007 — 1:55 AM

Updated Forex Statistics

The Bank for International Settlements (BIS) reported results from a survey of 54 central banks that in April, 2007, daily trading of currencies reached $3.2 trillion; USD remains the most important currency in the forex markets today, constituting 2/5 of all currency transactions. Total forex trading has risen more than 71% over 2004 levels—the largest increase since the BIS started doing the survey in 1989. Improving and cheaper technology has augmented the increase. Hedge funds and individual investors represented a significant part of the increase. The use of currency derivatives to hedge risk or make profits has also increased significantly—70% since 2004, with over $2.1 trillion worth traded daily. The largest increase, 281%, was in cross-currency swaps which are used to hedge bonds denominated in foreign currency. Cross-currency swaps are transacted when 2 parties agree to exchange interest payments in different currencies for a specified time. Emerging market currencies now account for almost 20% of all currency trading.

Tuesday, Sep 25, 2007 — 4:09 PM

Fractional Pip Pricing

FXCM has introduced fractional pip pricing for their major currency pairs. So instead of seeing a quote of EUR/USD 1.401/04, you may see a quote such as EUR/USD 1.04014/038. While, theoretically, this should yield some savings to the forex trader, it may be more a marketing gimmick than anything else. It would be very difficult to tell if there were any real savings, because the average spread could be just as wide as before, except that you would be subtracting 5 digits instead of 4. Example: 1.44235-1.41235=1.4423-1.4123=3 pips. And even though there will be many differences of fractional pips, that does not mean that the average is better than before.

Fractional pip pricing would be most powerful on an organized exchange where the best bid/ask prices from all market participants are displayed, and would certainly result in narrower spreads. However, there is yet no organized exchange for currency. While FXCM advertises a No Dealing Desk, where quotes from forex traders is shown to a number of participating banks, I don't know how well this works. Someone would have to do a statistical analysis of spreads displayed by FXCM and competing forex dealers, and see if it results in narrower spreads.

For forex dealers, marketing is the name of the game, and certainly fractional pip pricing does sound good. Of course, 1 or 2 pip spreads that are widely advertised by forex dealers sound good, too. I have used FXCM, and they provide a very good service, but I rarely saw 2 pip spreads, even on major currency pairs such as EUR/USD. It's one thing to advertise such spreads, and another to actually see them and trade them.

Wednesday, Aug 29, 2007 — 1:57 AM

Pay Less Auto insurance for Less Driving

Progressive Corp. and GMAC Insurance are offering discounted rates to drivers who drive fewer miles. GMAC offers the discount of as much as 54% in 34 states, but only with GM cars that have OnStar navigation where mileage is verified by comparing the odometer mileage at the beginning and end of the term. Progressive's TripSense plan is offered only in Minnesota, Michigan, and Oregon, but is available for any car model. The driver must install a small device that will verify mileage, and, to receive the 5% - 25% discount, the driver must download and report their miles.

Wednesday, Aug 22, 2007 — 2:17 AM

Taxes on Cancellation of Debt (COD) in Foreclosure

When a lender forecloses on a home, the IRS treats it as a sale. If the borrower is not personally liable for the debt, such as would be the case for a nonrecourse loan, then the selling price is equal to the price of the cancelled debt. If the borrower is liable for the debt, then the sale price is equal to the canceled debt up to the fair market value (FMV) of the home. If the canceled debt is greater than the FMV, then the difference between the debt and the FMV is treated as ordinary income, for which the lender is required to send a Form 1099-C, Cancellation of Debt (COD), listing the amount of ordinary income. Any unpaid liabilities on the property, such as property taxes, will reduce the FMV of the home and increase the COD. However, if the liabilities are paid by the borrower, then this will increase the FMV and decrease the COD. The lender will also send a Form 1099-A, Acquisition or Abandonment of Secured Property, that will allow the borrower to determine the capital gain or loss from the foreclosure. Taxes must be paid on the capital gain in addition to any ordinary income from the canceled debt that exceeds the FMV of the home in a recourse loan. For a nonrecourse loan, any income is treated as a capital gain equal to the canceled debt minus the adjusted basis of the property—there is no COD income. However, a capital loss from a foreclosure cannot be deducted.

With the recent decline of home prices, many homes are worth less than the amount of money owed on the property, especially for borrowers who took advantage of lax lending standards, and bought with no money down or used inflated home appraisals. Consequently, many homeowners whose homes were foreclosed by the lender may owe a significant amount of taxes.The IRS treats all forgiven debt as ordinary income, even though in the case of foreclosure, the homeowner doesn’t get to keep the home.

If the taxes are not paid for the year the debt was canceled, then the IRS adds penalties and interest to the total tax bill, which can often be tens of thousands of dollars.

Because the lender has some discretion in valuing a home, it can sometimes be successfully argued that the fair market value of the home was greater than the debt, in which case, no tax on COD is due.

Friday, Aug 10, 2007 — 4:26 PM

Buying or Selling Real Estate Online—Redfin and BuySide Realty

Some real estate companies are combining experienced local real estate agents with e-commerce applications that reduce the workload of the agents, which allows these companies to pay the agents less for each sale, which allows the companies to pass the savings to the company's clients.

Right now, Redfin covers the San Francisco Bay Area, Los Angeles, San Diego, Orange County, Boston, and Washington D.C.

Sellers pay a flat fee, either an upfront fee of $3,000 or $4,000 at closing, for those people who don't want to pay upfront, or in those states, such as California, that don't allow payment of an upfront fee. The houses are listed on the Multiple Listing Service (MLS). The seller saves $11,000-$12,000 of the typical seller's commission on the average Redfin home price of $500,000.

Buyers, if they don’t use an outside buyer’s agent, save 2/3 of the buyer's agent's commission that is refunded at closing, which can amount to $10,000 on a $500,000 home. The average commission refund was 1.95% of the purchase price in Redfin’s 1st year of operation.

Buyers can tour homes online and draft an offer online. Redfin handles the negotiations and the paperwork, and gives a 100% satisfaction guarantee.

Redfin doesn’t use dual agency—different agents will be assigned for the buyer and seller of the same property, if necessary.

To find homes, the buyer can use maps on Redfin’s website to zero in on a general area. Homes for sale are represented by small green houses on the map. Selecting 1 of the houses highlights more detailed information displayed in a table and shows a picture of the property. There are also links for much more detailed information for each property. The buyer can use a filter to narrow search results, such as price range or number of bedrooms, etc, and the map can also show what surrounding property recently sold for.

BuySide Realty is another similar service with coverage in more states, but offers its services to buyers, who are refunded 75% of the commission at closing. BuySide agents are members of the National Association of REALTORS.

Monday, Aug 6, 2007 — 2:44 AM

Insurance Scores

Many, if not most, insurers are using insurance scores in determining what premium to charge a customer. Like the credit score, the insurance score is based on information in credit files, but the score is based more on payment history and total debt than other factors that influence the traditional credit score. This is because insurance companies believe that someone in financial trouble is more likely to file a claim. They may get the score from Fair Isaac, ChoicePoint, or they will calculate their own score based on data in 1 or more credit files. However, some companies weigh the score more heavily than others. The Supreme Court decided a case in June, 2007, involving Geico and Safeco, that companies do not need to inform consumers if they are charged higher premiums because of a low credit score.

You can raise your insurance score by making payments on time and lowering your debt load. Although late payments can stay on a report for 7 years, only the last 2 years influence the score, with older information being less important. When shopping for insurance, it doesn't matter much what's affecting your score, since the best way to find the lowest price is to shop around. For more info, see Credit Scores and Credit-Based Insurance Scores.

External Links

Insurance Scores — a brochure by Fair Isaac, explaining the advantages of using credit-based insurance scores for the insurance business.

NAII Statement to the National Conference of State Legislatures — Arguments presented by the National Association of Independent Insurers as to why the state of Michigan should allow the use of insurance scores in helping companies to determine who they will insure and at what price.

Sunday, Aug 5, 2007 — 3:30 AM

Percentage Deductibles Becoming Norm for Damages from Natural Disasters

Many insurance companies are now using percentage deductibles in 17 states vulnerable to such natural disasters as wind, flood, hail, and earthquake—that range from 1% - 15% of the insured value of the home—instead of the traditional dollar deductible, such as a $1,000 deductible, for instance. Percentage deductibles usually result in higher deductibles that help insurance companies limit their losses in a major disaster. For instance, a house insured for $500,000 with a 5% deductible is equal to a $25,000 deductible. Although the deductible is higher, insurance premiums are generally lower with percentage deductibles. However, some states, such as North Carolina and Georgia, don't allow percentage deductibles. Some states give consumers a buy-back option that allows them to have a dollar deductible in exchange for higher premiums.

Friday, Aug 3, 2007 — 2:50 AM

No Market in the Secondary Mortgage Market

Because of the recent fallout from the subprime mortgage market, investors have been very reluctant to buy mortgage-backed securities. Only those loans that conform to the standards of government-sponsored enterprises (GSE), such as Ginnie Mae and Fannie Mae, which are guaranteed by the full faith and credit of the United States, can be sold. Even Alt-A mortgages, most of which are more creditworthy than subprime, are difficult to sell unless they are rated AAA.

Mortgage rates will rise because lenders can't resell their loans in the secondary market, which means they'll have to carry the loans, which leaves less money to lend out for additional loans. Thus, limited supply will raise prices, causing home prices to fall even more than they already have.

Mortgage rate increases will be substantial for nonconforming loans. Usually, the cost of making nonconforming loans is 102% of the loan value, but nowadays 103% is not enough. It is predicted that rates for nonconforming mortgages will be at least 100 basis points higher. Because conforming mortgages have a limit that is lower than many houses in the most expensive areas of the country, it will be more difficult to get loans for more expensive real estate, which will inevitably lead to lower prices.

Wednesday, Jul 11, 2007 — 2:02 PM

Collateralized Debt Obligations are being Downgraded

The credit ratings of certain collateralized debt obligations (CDO) will soon be downgraded in light of the increasing delinquency rate of subprime mortgages. About 40% of CDOs consists of residential mortgage-backed securities (MBS), and ¾ of that consists of subprime loans and home-equity loans, which have a lower lien status. Predictions are being made that CDOs will experience significant losses if home prices continue to depreciate, which is expected to continue at least until 2008.

Much of the subprime trouble was caused by mortgage fraud and falsifications in credit reports. Thus, credit scores, loan-to-value ratios, and ownership status have become less reliable as indicators of creditworthiness, so S&P, which rates much of the CDO issues, is changing its methodology. One change is that higher-rated tranches will need greater credit enhancement to prevent being downgraded if lower tranches in the same issue are downgraded.

A CDO issue divides its MBSs into different tranches, or classes, with different risk profiles. Lower credit-rated mortgages compose the lower tranches, which gives a higher credit quality to the upper tranches. However, all tranches must be sold, or the CDO cannot be issued. Thus, the lower credit ratings of the lower tranches may decrease the number of CDOs that can be sold, which, in turn, will decrease the number of mortgages that can be sold, which will increase mortgage rates for all borrowers.

Monday, Jun 18, 2007 — 3:10 AM

Piggybacking Will No Longer Raise FICO credit Scores

Nowadays, with the help of friends, family, or certain websites, people with poor credit have been raising their credit scores by becoming authorized users of credit cards with an excellent credit history—termed piggybacking.

According to this New York Times article, Ron Totaro, vice president for global scoring solutions at Fair Isaac, has indicated that, starting in September, the FICO scoring algorithm will no longer include authorized user accounts in its formula for calculating FICO scores.

Sunday, May 20, 2007 — 3:27 AM

Global Financial Holidays

GoodBusinessDay.com

Goodbusinessday®.com is a continuously updated source of information on holidays and observances affecting global financial markets—bank holidays, public holidays, currency non-clearing days and trading and settlement holidays affecting exchanges. Data is organized by country, city, currency and exchange. Interactive calendars and one-click search facilities provide the information you need in an instant.

Saturday, May 19, 2007 — 3:04 AM

Forex Scams

Be wary of forex scams. In a typical case, investors may be promised tens of thousands of dollars in profits in just a few weeks or months, with an initial investment of only $5,000. Often, the investor’s money is never actually placed in the market through a legitimate dealer, but simply diverted – stolen – for the personal benefit of the con artists.

The CFTC and NASAA have prepared a list of warning signs investors should watch for before investing in a forex opportunity. The warning signs include:

The regulators also urged those who have recently acquired or have accumulated large sums of cash to be on guard. In particular, retirees with access to their retirement funds may be attractive targets for fraudulent operators. “Getting your money back once it is gone can be difficult or impossible,” Dunn and Borg said.

Investors should make sure that anyone offering a forex investment is properly licensed and has a reputable business history. The public can obtain information about any firm or individual registered with the CFTC, including any actions taken against a registrant, through the National Futures Association (NFA) Background Affiliation Status Information Center (BASIC), available on the NFA website at: www.nfa.futures.org/basic. You can also find out if someone is registered by calling the National Futures Association at 1-800-676-4632.

The CFTC’s Division of Enforcement has established a toll-free telephone number to assist members of the public in reporting possible violations of the commodities laws: 866-FON-CFTC (866-366-2382). If you think that you have been a victim of a forex scam, you can report it on the CFTC’s website, http://www.cftc.gov/enf/enfform.htm, or by mail addressed to the Office of Cooperative Enforcement, CFTC, 1155 21st St., NW, Washington, DC 20581.

Many state securities regulators also have the right under their state laws to take action against illegal commodities investments. Visit NASAA’s website at www.nasaa.org to contact your state or provincial securities regulator.

Friday, May 18, 2007 — 12:19 AM

Stock Buybacks—Manipulating Earnings for a Bigger Post-Buyback Increase in Stock Price

This study found that many companies that buy back a significant amount of their own stock may be manipulating the company’s earnings downward right before the buyback, which is then adjusted upward after the buyback is completed, resulting in better than average performance.

Wednesday, May 16, 2007 — 1:53 AM

Best Time to be Invested in the Stock Market—November to April

The most lucrative months to be in the stock market, according to the Stock Trader's Almanac 2007, is from November to April. Over the past 57 years, the Dow Jones Industrial Average gained only 174.61 points over the worst 6 months of the year, from May to October, but gained a total of 12,850 points over the best 6 months, from November to April. That's almost all of the Dow's gain. (Closing value on 5/15/2007: 13,383.84.)

If you had invested $10,000 in the stock market, but only kept your investments during the best 6 months, from November to April, over the past 57 years, you would have $588,000 today. However, if you had kept your investments in the market for only the worst 6 months of the year, from May to October, the value of your investment would only be $10,341—barely more than you had invested 57 years ago!

Reasons given for the increase in the best months are that people invest year-end bonuses and tax returns, and make 401(k) contributions.

The video did point out, however, that May was the best month, for 13 straight years, from 1985 to 1997, for the S&P 500.

One thing that I have observed is that the 1^st half of May is often good, as it has been this month, but then it starts declining toward the end of the month. I also believe that one could do better by beginning the investment period in mid-October, after the stock market reaches its low point, rather than waiting until November. The stock market usually starts rising toward the end of October, especially after the 3rd Friday of the month, when October options expire, then the rise simply continues into November.

Monday, May 14, 2007 — 1:18 AM

Different Ways to Invest in Currency

Betting on the Buck

There are other ways of investing in currency besides buying the currency itself. Now with the U.S. dollar at historic lows against other currencies, some banks have introduced new products to take advantage of the current currency market. Barclays PLC, for instance, has recently introduced 3 exchange-traded notes (ETNs) that offer investment opportunities in the Euro, yen, and the pound.

Other ways to invest in foreign currency is to buy foreign bonds or stocks, or to invest in currency mutual funds, or bond funds, or to invest in trusts that hold bank deposits in foreign countries, such as the CurrencyShares Euro Trust from Rydex Investments. However, some of these investments may have more risk than the currency alone, since some investments are using leverage, futures, or other derivatives to increase returns, which also increases potential losses.

Other investment vehicles are trying to benefit from the risky carry trade, where futures are bought in countries with a high interest rate and sold in countries with a low interest rate.

The Coming Private Equity Bubble and Increased Default Rates

Private Equity Debt Bubble

A Warning on Risk in Commercial Mortgages - New York Times

Apparently, there is so much money in the fixed-income market, that yields are declining significantly more than the risk, which could be creating a private equity debt bubble.

Why are lenders loosening underwriting standards to make more loans? Because the loans can be securitized, and the risks can be passed onto investors. Commercial mortgages are securitized into commercial mortgage-backed securities (CMBS), and divided into tranches of varying risk, which are then sold to investors. This is how the subprime mortgage market ballooned into the leviathan that it is today—banks securitized the debt and sold it to investors, thereby transferring the risk as well, which freed up more capital to lend even more. With so much money to lend, lenders marketed to borrowers with greater credit risk or lent money to pay bubble-inflated real estate prices, thus creating the current real estate bubble, with the inevitable decline in home prices, and, of course, greatly increased foreclosure rates.

CMBS issues in the last quarter of 2006 were nearly double the previous quarter, and continues to grow. Because of increased competition, underwriting standards have deteriorated, and riskier deals are being made, including interest-only loans, and even negative amortization loans. Although default rates have been low recently, this is bound to change. Thus, buyers of junk-grade bonds should beware.

Sunday, May 13, 2007 — 2:02 AM

REX & company Invests in Home Equity

RealEstateJournal | Product Taps Home Equity Without Taking Out Loan

REX & Company, a small San Francisco real estate investment company is offering homeowners a way to get cash out of their homes by allowing it to invest in the price appreciation of their primary house—not rental or investment properties. When the house is sold, REX would receive a percentage of the increase, and if the house were sold at a loss, REX would get less than what you received from REX for its interest. The amount of money that you would receive would depend on what REX's percentage is in the appreciation of your home. According to its website, REX establishes what it calls the Option Exercise Price, which is paid to the homeowner as 2 payments. The Advance Payment is paid when the homeowner signs the REX Agreement. The Remaining Payment is paid when the REX Agreement ends, in 50 years or when the home is sold, whichever occurs 1^st. (I'm not sure about the details of this, but it seems that the Remaining Payment is not really a payment, unless your house declined considerably in value, since you would then have to pay REX its share of your home's appreciation, which would probably be a lot more than the Remaining Payment. Also, does REX pay interest on the Remaining Payment?)

It is not a loan nor is it a reverse mortgage, so no interest is charged and no payment is required until the house is sold, or the REX Agreement ends. You could get a lump sum payment for up to 13% of your home's appraised value. There are no minimum income or asset requirements, but you do need a FICO score of at least 680. You do not need to pay off the mortgage, and you can terminate a REX Agreement at any time by paying REX the value of its interest in your home. Currently, it is available in only 9 states, but REX is planning to expand in all 50 states shortly.

Monday, Apr 16, 2007 — 2:30 PM

Structured Notes — Equity-Indexed Annuities

Never Lose on Stocks Again -- for a Price

New financial products—structured products and equity-indexed annuities—are being marketed that promise an investor possible good returns, but no losses.

Structured products and equity-indexed annuities are basically contractual derivatives that an investor purchases in exchange for returns based on the terms of the contract, which is predicated upon other financial assets or derivatives. (Structured products are sometimes called structured notes, because they are much like bonds or notes—contracts that promise to pay according to the terms of the contract, and have a maturity date, when the investor will get back the principal.)

Structured products are issued by brokerages and trade on the American Stock Exchange. An example of a recently issued note—a type of note called an indexed-linked note—is the Morgan Stanley Capital Protected Notes (GBI);(Prospectus for GBI). This note derives its value from 3 indexes, equally weighted: the Dow Jones Euro Stoxx 50 Index, the Standard & Poor's 500-stock index, and Japan's Nikkei 225. The original issue date was February 28, 2007 for $10 per share, it pays a small dividend, and matures in 2011. These notes are senior unsecured obligations of Morgan Stanley.

A drawback to the notes is that it is difficult to currently ascertain the liquidity of the products.

Equity-indexed annuities are issued by insurance companies and also have a no-loss guarantee, and are based on stock indexes. However, they have severe drawbacks:

An important caveat for both of these products is that the guaranteed return, like bonds, depends on the financial status of the issuer. If the issuer becomes insolvent, then these financial instruments could become worthless.

Monday, Apr 16, 2007 — 3:39 AM

Futures Contract for Uranium will Debut on NYMEX

Uranium Contract To Debut on Nymex - WSJ.com

Presently, there is no futures contract for uranium, but there soon will be at the New Your Mercantile Exchange. Naturally, this contract will be cash-settled. The demand for uranium has been growing substantially as countries look to nuclear power to replace more expensive oil. Spot price in industry contracts has grown from @22.50 per pound in March, 2005 to $113 in April, 2007, and annual demand has exceeded supply by 50%.

Friday, Apr 6, 2007 — 1:54 AM

The Retirement Savings Contribution Credit—Not the Bonanza that It Seems

As tax time approaches, various articles, on the web and in print publications, detail tips on how to save on taxes. One of these tips often mentioned is the retirement savings contribution credit. If you make a contribution to a traditional IRA, a Roth IRA, certain salary reduction contributions, or contributions to a section 501(c)(18) plan, you, supposedly, may be able to claim a credit for up to $1,000 for a $2,000 contribution, if your adjusted gross income is low enough. That sounds really nice! Put $2,000 into your IRA or Roth account and have the federal government pay for half of that.

However, the devil is in the details, specifically, in the way that the retirement savings contribution credit is calculated. On Form 8880, the form used to calculate the credit, you must take the amount on line 46 on Form 1040, which is the adjusted gross income minus the standard deduction and personal exemptions, then subtract the sum of any foreign tax credit, the credit for the elderly or disabled, the credit for child and dependent care expenses, and education credits. This will yield the maximum amount of the credit. However, because of the income limitations for the retirement credit, subtracting the standard deduction and personal exemptions will yield a tax that is lower than the maximum credit, even if the sum of the above credits (lines 47-50) is zero. And because the amount of the tax is calculated before social security taxes are added, the credit can’t be used to offset any social security taxes.

Wednesday, Feb 28, 2007 — 1:43 AM

Research Tax Laws, Rulings, Procedures, and Related Information

legalbitstream

Saturday, Feb 3, 2007 — 11:54 AM

Employee Stock Options

SEC Clears Market-Based Way To Value Staff Stock Options - WSJ.com

Employee stock options are usually granted to management personnel to attract talent and to motivate them to increase the value of the company, and, therefore, its stock price. Employee stock options give the employee the right to buy company stock after a stipulated period of employment for a stipulated price that is usually equal to the price of the company's stock when the stock option is granted. The recent news about back-dated options involves specifying a date previous to the actual granting of the option, when the stock price was at its lowest, thereby making the stock option grant more valuable, but not accounting for the added expense in financial statements.

Evaluating employee stock options.

Stock options have value, so if a company grants employees stock options, then the company is giving something that has value. If the company sold the options to the public, it would have more cash. By giving it to employees, it is giving an equivalent of cash, and, therefore, it should be expensed on the company’s income statement. However, many companies have resisted this, because it will result in lower reported earnings.

The purpose of evaluating employee stock options is to determine the impact on company earnings such grants have. Previously, many companies, particularly high-tech companies that used them extensively to attract top talent, reported the option grants in footnotes rather than as a compensation expense, which could greatly lower reported earnings. On the other hand, it is more difficult to evaluate footnotes than to compare numbers among different companies. Now that companies are required to expense option grants, they are looking at various ways to determine a value for the granted options.

Various pricing models are used, especially the Black-Scholes formula, which is commonly used to valuate exchange-traded options. The problem with using pricing models is that different companies can use different models, and, thus, it may be misleading for investors to compare the financial numbers of one company with another. A further complication is that a major component of all pricing models is the volatility of the stock, which has to be estimated.

One company, Zions, tried a marketing approach by creating options with similar terms to employee stock options, then sold them to sophisticated investors at a an auction. The options sold for half of what pricing models would have predicted. However, this market-based approach may be flawed, due to the number and sophistication of the bidders, and various other factors.

Is the market value of an Employee Stock Option really a better indicator of the actual expense to the company?

It seems unlikely that the market value of an employee stock option will be equal to its actual expense to the company, for they are not really connected. Companies, of course, prefer the market value if it lowers the compensation expense, and Zion’s experiment would seem to indicate that. Of course, if pricing models yielded a lower figure, then companies wouldn’t even be talking about using the market model, which has its own problems, such as actually issuing the securities and selling them in a bidding auction. The companies just want a lower expense number, which will result in higher reported earnings. It may be better to require companies to use a single pricing model so that investors can compare apples to apples.

Sunday, Jan 28, 2007 — 1:43 AM

Stocks in Margin Accounts Can Lead to Empty Voting and Payment in Lieu of Dividends

NYSE Warns on Margin Loans - WSJ.com

How Borrowed Shares Swing Company Votes - WSJ.com

These artlcles underscore 2 important disadvantages to holding stocks in a margin account, which are often lent out to short sellers, and if they are:

What's worse, the borrowers of the stock, often short-sellers, can vote in the worse interest of the corporation to try to deflate the stock price, and thereby profit from short selling—thus, voting against the interests of the true owners of the stock.

A possible scenario is for a hedge fund, which frequently profits from short selling, is to borrow the shares right before the record date—usually 30 days before the vote, and vote in its own interests. Delaware law, which governs most large companies because they are incorporated in the state, give voting rights to whomever happens to have the stock on the record date. Often, owners of the stock are unaware of the lending, that their right to vote has been transferred to someone else.

Sometimes, because of inadequate accounting, both actual stockholders, and the borrowers, both vote, leading to overvoting, which the New York Stock Exchange has found to be a frequent occurrence in some instances.

Saturday, Jan 27, 2007 — 12:54 PM

Corporate Credit Cards, Credit Reports, and Credit Scores

Green Thumb - WSJ.com

Corporate credit cards are often issued so that an employee can pay and track expenses, and the bill must be paid in full, so there is no accumulation of interest. With a corporate credit card program, either the company takes responsibility for timely payments, or assigns that responsibility to the employee.

If the company takes responsibility, it will generally pay the bill after the employee files an expense report; otherwise, the employee pays the bill.

When the corporation is responsible, then an employee's credit record and credit score will not be hurt if the payment is late. Even when the employee is responsible—43% of the time according to 1 survey—the credit card companies may give the employee an extended grace period. American Express, the major corporate card issuer, won't report the delinquency for at least 180 days past the due date.

However, late payments can result in loss of rewards or require the payment of a fee to reinstate the rewards, or require payment of late, suspension, or reinstatement fees. It may also hurt the employee's relationship with the company, since it not only indicates that the employee isn't very responsible—a quality needed for most jobs—but the company may get less of a refund from the credit card company because of higher delinquency rates.

Wednesday, Jan 10, 2007 — 1:07 AM

Highlights of 2006 Tax Changes

Highlights of 2006 Tax Law Changes

New energy-saving tax credits, expanded retirement savings incentives and new rules for giving to charity are among the changes taxpayers will find when they start filling out their 2006 federal income tax returns.

More information about the changes, summarized below, can be found on this Web site and in various IRS documents, including the instructions for Form 1040.

In addition, some important changes, not covered here, are addressed in separate fact sheets. They include:

New Energy-Saving Tax Credits

Contribution Limits Raised for IRAs and Other Retirement Plans: Special Rules for Military

New Rules for Giving to Charity

Kiddie Tax — Age and Income Changes

AMT Exemption Increased for One Year

Standard Mileage Rates Adjusted for 2006

Inflation Adjustments for 2006

Personal exemptions and standard deductions rise, tax brackets are widened and more than three dozen individual and business tax provisions are adjusted to keep pace with inflation. A complete rundown of these changes can be found in "2006 Inflation Adjustments Widen Tax Brackets, Change Tax Benefits."

Wednesday, Dec 27, 2006 — 6:12 PM

Reverse Mortgages

Making Your House Pay in Retirement - WSJ.com

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)

SEC Slows Flow of PIPE Deals to a Trickle - WSJ.com

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

Market Overview: Foreign Exchange Rates/Currencies, Key Cross Rates and Currency Converter - MarketWatch

Thursday, Dec 21, 2006 — 6:58 PM

Nominated Advisers (Nomads) — Overseers of Small Companies Listed on AIM

Uncertain AIM: A Hot Market In London Has Its Risks, Too - WSJ.com

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

If You Outlive Your Savings… - WSJ.com

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

Specialty consumer reporting agency list

ChexSystems Consumer Website

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.

Monday, Nov 20, 2006 — 2:26 AM

Bond Trading at the NYSE — NYSE Bonds

NYSE Is Cleared To Expand System For Bond Trading - WSJ.com

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

Conditional Orders Tutorial

Friday, Nov 17, 2006 — 4:42 PM

Qualified Dividend-Paying Stock Funds

Going Beyond Bonds Can Pay Dividends - WSJ.com

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

Islamic-Bond Market Becomes Global By Attracting Non-Muslim Borrowers - WSJ.com

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

Global Custodian Banks - WSJ.com

Custodian 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.

Small Firm's Big Goal: A Sea Change in ETFs - WSJ.com

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 1^st 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

Putting the Freeze on Your Credit Report - WSJ.com

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

Company Cards Can Hurt Credit - WSJ.com

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

Tracking the Numbers - WSJ.com

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 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

New Bankruptcy Forms, effective for Cases Filed after October 1, 2006

The following amendments to the Bankruptcy Official Forms are effective for cases filed after October 1, 2006:

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

Wednesday, Oct 4, 2006 — 12:35 PM

CAPS — motley Fool's New Stock rating Forum

Motley Fool Site To Evaluate Gamut Of Stock-Pickers - WSJ.com

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

Paperwork Is a Rising Cost For Car Buyers - WSJ.com

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 Seek To Reassure Investors - WSJ.com

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.

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

Your Portfolio on Autopilot - WSJ.com

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-Bond Supply Builds Up - WSJ.com

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)

WSJ.com - Equity UITs Gain As Alternatives To Mutual Funds

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

WSJ.com - Green Thumb

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

WSJ.com - New Ways to Trade Travel Secrets Online

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

Thursday, Sep 14, 2006 — 5:04 PM

New Bond Ratings of Covenants by Moody's

WSJ.com - Moody's to Expand Debt Evaluation

Leveraged buyouts, which are becoming increasingly common nowadays and which use the cash flow of the target company to pay off debt obtained to buy the company, frequently destroys the credit rating of the target company, hurting current bondholders. Subsequently, many bond indentures are including covenants which protect bondholders in such scenarios. The most common provision is a change-of-control provision that allows current bondholders to get par value for the bonds from the company when there is a change of control. Although covenants are common in junk bonds, they are relatively rare in investment grade issues, where the credit degradation can be greatest.

Moody's, one of the nationally recognized statistical rating organizations (NRSRO), will assign ratings of CQ-1 for the best protection to CQ-3 for the lowest protection to nonfinancial corporate issuers with a credit rating of Ba to Baa. The rating will include an overall assessment of the covenant protection as well as analysts' commentary.

Wednesday, Sep 13, 2006 — 3:37 PM

Virtual Trading Programs

WSJ.com - The Reality of Fantasy Investing

Investors can practice trading stocks, options, futures, and currency with play money. Companies offer virtual trading to advertise their services, and to give investors confidence in doing trades. Some programs require no initial deposit. The investor opens a virtual account and trades, but only using virtual money, to test strategies, and to learn the mechanics of trading. Historical data or delayed market quotes are used to determine account balances, which can be reset to start over. Using historical data to backtest greatly shortens the time for testing strategies.

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.

New Tax Laws for 2006 and Beyond

WSJ.com - Tax Report

Retirement Savings: Increases of maximums that can be contributed to 401(k): $15,000 for people younger than 50; $20,000 for older people, who can also contribute up to $5,000 to their IRA.

Charity: Anyone older than 701/2 can give up to $100,000 of nontaxed distributions from their IRA to qualified charities in 2006 and 2007, which will count as part of that year's required minimum distributions.

Kiddie Tax: The age limit for the kiddie tax has been increased from 14 to 18, which taxes any unearned income, such as dividends and interest, above $1,700 per year at the parents' higher rate.

Energy Tax Breaks: A tax credit, with a lifetime limit of $500, for qualified home improvements that increase energy efficiency, and new credits for hybrid and flexible-fuel vehicles.

Taxes on Out-of-State Municipal Bonds Ruled Unconstitutional

WSJ.com - Tax Report

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.

Friday, Sep 8, 2006 — 5:20 PM

Dogs of the Dow Stock Strategy

WSJ.com - 'Dogs of the Dow' Strategy Proves You Aren't Barking Up Wrong Tree

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.

Wednesday, Sep 6, 2006 — 5:25 PM

Target-Date Mutual Funds

WSJ.com - Tips for Targeting Target-Date Funds

Designed to build a retirement income, target-date mutual funds (also, life cycle or asset allocation funds) are funds of funds—including stock, bond, real estate, and international funds—where the mix of funds becomes more conservative as the target date approaches. Some funds include international and real estate funds to provide diversification from stocks and bonds. The most popular target date currently is 2015-2029. There about 135 life-cycle funds, 100 of them less than 3 years old. Greater than 90% of these funds are in retirement accounts, and the new pension-overhaul bill will probably increase the number of target-date funds.

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.

Expense ratios range from 0.21% of assets for Vanguard Target Retirement 2035 Fund to 1.25% or more, for other funds. Note that these expenses are to manage the target-date fund itself, and do not include the expense ratios of the underlying stock and bond funds.

Tuesday, Sep 5, 2006 — 6:01 PM

Rating Hedge Funds

WSJ.com - Moody's Offers Glimpse Inside A Hedge Fund

Moody's has just issued its 1^st rating on a hedge fund—Sorin Capital Management LLC—giving it a rating of OQ1-, one notch below the top rating of Moody's new rating system that ranges from OQ1 to OQ5, the lowest rating. (OQ = Operational Quality?)

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:

Tuesday, Sep 5, 2006 — 2:22 PM

Quick Profits by Forcing Bond Defaults Because of Late Filing of Reports

WSJ.com - Hedge Funds Play Hardball With Firms Filing Late Financials

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.

So called vulture investors are using this method to take advantage of companies caught up in the options backdating scandals, which has caused their bond prices to drop in the secondary market.

New European IPO Indexes — the Dow Jones STOXX IPO Indexes

WSJ.com - New IPO Indexes To Cover Europe Issues

STOXX Ltd., a European stock-index provider, launched 3 indexes that cover initial public offerings of stocks in Europe, that have a free-float IPO market capitalization between €100 million and €3 billion ($128 million and $3.85 billion).

The Dow Jones STOXX IPO Indexes include IPOs that have been on the market for 3, 12, and 60 months. Each company will be transferred to the longer index as it passes the time limits for the current index. The number of components of each index is necessarily variable, but will not fall below 10.

Monday, Sep 4, 2006 — 2:25 AM

Closet Index Mutual Funds — Active Share Percentage of a Mutual Fund

WSJ.com - Professors Shine a Light Into 'Closet Indexes'

It seems that some mutual funds that are supposed to be actively managed, aren't, but the managers are getting paid fees as if they are.

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.

Saturday, Sep 2, 2006 — 4:06 PM

Hedge Fund Side-Pocket Accounts

WSJ.com - Tracking the Numbers

Hedge funds use accounts known as side pockets to put illiquid investments that are hard to value and sell, and thus to mark to market for portfolio evaluation. However, some of these side-pocket accounts may be used to off-load poorly performing investments, so that it doesn't diminish the published performance of the hedge fund, since the fund managers earn a performance fee that is a percentage of the fund's performance.

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?

Telephone Tax Refund

IRS Announces Standard Amounts for Telephone Tax Refunds

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.

Thursday, Aug 24, 2006 — 3:01 PM

The Perils of Travel Insurance

WSJ.com - The Middle Seat

This free WSJ article covers the perils of travel insurance. Travel insurance pays you the money that you paid up front to book a trip if you must cancel the trip due to an unforeseen illness, for instance, or due to unforeseen events that would make the trip unsafe. Unforeseen is the keyword to remember. Travel insurance will not pay just because you are afraid to go, and it will not pay out if there was a hint of the danger when you bought the policy. Thus, for instance, once a hurricane is named, it will not cover anyone who purchased travel insurance after the naming for that hurricane. Generally, these policies have so many exclusions that you will be lucky to get paid at all. Self-insurance makes more sense here, especially when you consider that airlines, hotels, and other businesses involved in the tourist trade will waive restrictions on rebooking, or even refund your money.

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.

Sunday, Aug 13, 2006 — 4:07 PM

Exchange-Traded Funds Heatmap

ETF Dynamic Heatmap

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.

2 new equal-Weighted Exchange-Traded Funds: QQEW, QTEC

The First Trust NASDAQ-100 Equal Weighted Index Fund (QQEW), started on 4/25/2006, seeks to provide investment returns that closely correspond to the price and yield performance of the NASDAQ-100 Equal Weighted Index. The weight of each security is initially set to 1% and rebalanced quarterly.

The NASDAQ-100 Technology Sector Index (QTEC) is an equal weighted index based on technology companies in the NASDAQ-100 Index. The NASDAQ-100 Technology Index contains securities in the NASDAQ-100 Index that are classified as technology according to the ICB Classification System. Each of the securities is initially set at an equal weight of the Index and is rebalanced quarterly.

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.

Tuesday, Aug 8, 2006 — 5:13 PM

Mystery Shopping

Mystery Shopping — the Essentials

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.

How One Lady Makes Money as a Mystery Shopper

Monday, Aug 7, 2006 — 3:13 PM

Exchange traded Notes

New exchange-traded notes offer alternative to commodities ETFs - MarketWatch

Barclays Bank PLC has introduced 2 exchange-traded notes (ETNs), tracking the iPath Goldman Sachs Commodity Index (GSP) and iPath Dow Jones-AIG Commodity Index (DJP).

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%.

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