Profiting From Investment News

I read an email today that mentioned China (who is already the planet’s largest coal consumer) claims it will need an extra 80 million tons by next January. India is also estimated to need an extra 120 million tons, and most other Asian countries are expected to increase demand by 7%.

According to Kevin Kerr, “Coal prices are going much higher than I thought. Keep an eye on those diesel prices too, they are already creeping up. These two markets are going to surge this summer, absolutely.”

Since I like to take advantage of investment opportunities whenever I come across them, I placed an order to sell PUT option contracts on James River Coal Company (JRCC). Its essentially a long position on the companies stock, which has nicely trended up 50% in the past several months.

If the order is executed tomorrow (the order was placed after hours) I get a net credit of $195/contract. By september, if the stock trades above $8.05, I'll have made a profit. My maximum profit is $195/contract and it occurs at stock prices over $10.00. If the stock drops below $8.05 I will either have to buy it or sell my option before expiration date at a loss. But I'm bullish on the stock so the loss would be smaller than actually buying the stock outright.

If the stock stays at the same $9.50 price, I'll still make $145/contract at expiry. Both my upside and my downside are limited, but I think there's a great chance I'll make more money selling the puts with a lower risk than by buying the stock outright. Plus for each contract instead of putting up nearly $1000, I'm collecting $195 instead. It does use up my margin limits, but it does mean I don't need to pay interest on the amount, since I'm not borrowing any money.

Of course you manage the risk here by not betting the farm. If the stock moves against me and my option moves against me 50% (ie, I'm down $100/contract) I'll close out my position. Since this total draw-down is only 0.33% of my portforlio, it doesn't give me ulcers. And while the total profit is only 0.66% of my total portfolio and isn't exactly an earth-shattering return, its a 2-1 risk-reward scenario that I'm comfortable with.

If the stock goes BK overnight and I lose the max $805 per contract, it still only 2.66% of my portfolio, which is a bearable loss. Remember, risk management will determine whether you succeed or fail in the long term.

New BMW Concept Car Unveiled

The BMW just unvieled it's new concept car, and its rumored to be the new 8-series. Very nice!

The CS feels like an evolution of that philosophy with sharper edges and swoopier surfaces all around. Underhood we’ll find a 6.0-liter V12, which is essentially the M5 5.0-liter V10 with two extra cylinders. That’s a nice modular motor for BMW if that ends up being the case, with 10-cylinder, 12-cylinder, and V8 versions used across the Motorsport models

Ok, who wants to buy me one?

How Do Your Investments Stack Up Against Schiller

If any of you remember Robert Schiller, of Irrational Exuberance fame, he thought tech stocks were overvalued and now he thinks real estate is over valued too.

According to an interview, he stated that between 1890 and 1990 the after-inflation return for real estate was ZERO!

This is not really surprising because real estate has to be affordable in the long run otherwise people are priced out. Since 70% of the population owns a home as opposed to being homeless, in the long run, homes have to have stayed affordable! Right now places like California seem unaffordable and they will correct until they are. (They'll probably over-correct until they're insanely cheap too).

So what is Schiller investing in right now?

I'm probably a little over 60 percent in stocks, almost all of it outside the U.S. I have a lot of cash. And I've been reducing my exposure to real estate. It may be at the end of a cycle.

Most of my stocks are outside the US too. My 401k has 60% of it invested in foreign stocks. The rest is divided over mid-cap & large growth and value funds.

In my brokerage account, the mix is a little different. According to TDAmeritrade's Instant XRay tool (which shows you what your portfolio would look like if it were a mutual fund), my asset allocation is

High Yield - 7.33%
Hard Assets - 61.11%
Slow Growth - 12.83%
Classic Growth - 17.63%
Aggressive Growth - 0.58
Speculative Growth - 0.51

Of course I have a smaller more speculative account at Interactive brokers too which comprises mainly of a Japanese REIT (which I bought on the Tokyo Stock Exchange), an Argentinian REIT, and a bunch of speculative long calls and short puts.

Foreign Stocks - 70%
Speculative Growth - 30%

How does your portfolio stack up?

Are Stocks A Better Investment Than Real Estate?

According to this article in Money Magazine, stocks are a better investment, based on a study taking in account the years 1978 to 2004.

While there are some valid points favoring stocks over real estate, I think it was a one sided arguement.

Why choose a period where the stock market did very favorably? According to Gary Burtless, the real return on stocks since 1885 using a 15 year trailing return is only 6.3%.

I would assume real estate to keep pace with inflation or around 3-5% per year over the same time period. So on the surface, stocks do seem superior to real estate.

However there are certain benefits to investing in real estate that have to be considered.

1. Leverage
You can get in with only 10% down, sometimes even less. In stocks, the best you can do is 50% down. The higher the leverage, the more you make if you're right. (The converse is also true!)

2. Tax Savings
You can defer paying taxes on the profits indefinitely using 1031 exchanges. Not only that, you can use phantom depreciation losses to deduct upto $25,000 from your regular income. With stocks,
you can deduct actual losses but only upto $3,000 of regular income.

3. Ease of Understanding
While investing in real estate is more difficult per se than stocks, this is an advantage. It helps keep the novice investors out, and keeps prices inline with valuations (well except in the recent past where everyone become an investor!).

With so much money chasing stocks in 2000 and so many execs lying about company performance, tech stock prices saw incredible appreciation. Many of them tanked 90-100%.

A 90% drop in real estate prices is difficult to imagine. Not only that, you always know if a property is fairly valued or not.

If the rent doesn't cover your holding costs even after you put down 25%, you've probably overpaid for it. Thats a very simple rule of thumb! Unlike in the stock market, you can't hide behind fancy accounting in rental property!

Conclusion:
Listening to the popular press will usually never help you in the long run. However, I think it boils down to investing in what you know. There are people who've made incredible amounts of money in the stock market. But I think these people make money in all asset classes without playing favorites.

For example, Warren Buffett has invested in foreign currencies, commodities and even a manufactured home-builder (and along with it real estate) apart from his stocks.

I also know a few people who make money day trading for a living. Even these people invest their excess profits in real estate! If you can trade stocks, you can definitely understand real estate calculations.

For most people who know nothing about investing and don't want to know, investing in stocks is the easiest way to invest. It may not be the best but its the easiest and most likely the only way they'll ever invest at all.

But I don't think the two classes are mutually exclusive. I've made incredible amounts of money in real estate, which wouldn't have been possible with the stock market. But now, I'm moving some of my profits in stocks and commodities because I think the easy money in real estate is gone.

I think you should invest in anything that makes sense. Don't get married to any stock, properties or any particular asset class. There's a season for all investments!

Here's a good post on looking for investment ideas and the basics of investing in real estate

Free Online Tax-Extension Filing

Don't forget to file your extensions today if you haven't done your taxes. You have until midnight to get out the extensions. Most Post Offices are open until then today.

If you're really lazy, you can file it online and if you're really cheap (like me) you can file it for free!

Just go to Tax Act Online to file the extension for free. Make sure you click all the way through to the 'Submit' button at the end.

Several companies like Intuit are charging for this service. So its nice of the people at Tax Act to make it free.

Also when it comes time to file the taxes, there are several companies that will efile for free if your AGI is under $52,000. Make sure you go to IRS's website to find out which ones offer that deal.

How many of you do your own taxes?

Why Inflation Is Bad

When the Fed prints more currency notes (to pay for the war and the interest on all the T-bills we've dumped on the rest of the world) it devalues each existing dollar in circulation. This is an inflation in the money supply and its bad for us in the long term.

Here's a quote from Ron Paul's home page explaining why.

The greatest threat facing America today is not terrorism, or foreign economic competition, or illegal immigration. The greatest threat facing America today is the disastrous fiscal policies of our own government, marked by shameless deficit spending and Federal Reserve currency devaluation. It is this one-two punch-- Congress spending more than it can tax or borrow, and the Fed printing money to make up the difference-- that threatens to impoverish us by further destroying the value of our dollars.

The Fed’s inflationary policies hurt older people the most. Older people generally rely on fixed incomes from pensions and Social Security, along with their savings. Inflation destroys the buying power of their fixed incomes, while low interest rates reduce any income from savings. So while Fed policies encourage younger people to overborrow because interest rates are so low, they also punish thrifty older people who saved for retirement.

The financial press sometimes criticizes Federal Reserve policy, but the validity of the fiat system itself is never challenged. Both political parties want the Fed to print more money, either to support social spending or military adventurism. Politicians want the printing presses to run faster and create more credit, so that the economy will be healed like magic- or so they believe.

Fiat dollars allow us to live beyond our means, but only for so long. History shows that when the destruction of monetary value becomes rampant, nearly everyone suffers and the economic and political structure becomes unstable. Spendthrift politicians may love a system that generates more and more money for their special interest projects, but the rest of us have good reason to be concerned about our monetary system and the future value of our dollars.

Finally a politician who understands how inflation caused by government sanctioned counterfeiting is bad for the us and is willing to tell the truth about it. Gasp, is there really an honest politician? I'd vote for him!

Utah Economy Strongest in the Nation

According to the Deseret News,

Utah's economy is the single strongest state economy in the nation, according to one Utah economist. And the single strongest sector within that economy is construction.
It's growing so fast that many construction companies say they can't hire fast enough to staff the jobs they've got on the docket. It's growing so fast that, according to some general contractors, projects are being delayed or redesigned to suit the available labor pool.
It's growing fast, and though the pace may slow to a trot instead of a frothing gallop, industry watchers say Utah's construction market will continue to see healthy growth for years, perhaps decades.

Thats good news, if its true. Where there are jobs, there's a demand for housing and home prices should continue to stay strong. I've been investing in Salt Lake City for just over 2 years and so far its been a very good ride.

Fight Global Warming By Chopping Down Trees

Its true. Here's a quote from the Economist magazine.

A climate model suggests that chopping down the Earth's trees would help fight global warming

.

Actually to be honest, while they did make those findings, they concluded that its better to replant the rain forests around the equator instead of at the higher latitudes. Anyway you can read the rest of the article here.

Its got nothing to do with money, except that you shouldn't blindly believe anything you here or read. Especially if theres a politician involved!

Last Chance To Get In On A Zero-Risk Investment

I've been wanting to send in the paperwork for the Everbank Marketsafe Japanese REIT CD for nearly a month. Since I used my Coporation's 401k and Profit Sharing Plan (PSP) to invest, I had to open a business account and fill out extra Trustee paperwork, in addition to supplying a copy of the original 200 page 401k & PSP documentation.

Anyway, I got it all filled out and signed by the co-Trustee (my wife) and fedexed it to Everbank. April 17th is the last date to get in on this investment.

If you think the Yen is going to appreciate against the dollar and Japanese Real Estate is going to appreciate, its worth a gamble. This CD is FDIC insured and has no downside risk! You can read more
about it at Wealth Building Lessons.

Since I'm investing through my PSP, I don't need to worry about taxes. If you want you can invest in a ROTH IRA at Everbank too!

How The Tax System Really Works

Got this humorous email today. Enjoy.

Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:

The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.

So, that's what they decided to do.

The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve. "Since you are all such good customers," he said, "I'm going to reduce the cost of your daily beer by $20. "Drinks for the ten now cost just $80.

The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free. But what about the other six men - the paying customers? How could they divide the $20 windfall so that everyone would get his 'fair share?'
They realized that $20 divided by six is $3.33.

But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to drink his beer. So, the bar owner suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay.

And so:

The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2 instead of $3 (33%savings).
The seventh now pay $5 instead of $7 (28%savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 (22% savings).
The tenth now paid $49 instead of $59 (16% savings).
Each of the six was better off than before.
And the first four continued to drink for free.
But once outside the restaurant, the men began to compare their savings.
"I only got a dollar out of the $20,"declared the sixth man.
He pointed to the tenth man," but he got $10!"
"Yeah, that's right," exclaimed the fifth man. "I only saved a dollar, too. It's unfair that he got TEN times more than I!"
"That's true!!" shouted the seventh man. "Why should he get $10 back when I got only two? The wealthy get all the breaks!"
"Wait a minute," yelled the first four men in unison. "We didn't get anything at all. The system exploits the poor!"

The nine men surrounded the tenth and beat him up.

The next night the tenth man didn't show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn't have enough money between all of them for even half of the bill!

And that, boys and girls, journalists and college professors, is how our tax system works.
The people who pay the highest taxes get the most benefit from a tax reduction.

Tax them too much, attack them for being wealthy, and they just may not show up anymore.
In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.

15% of California Home Sales are Foreclosures

According to the Central Valley Business Times, California foreclosure sales neared $2 Billion in March.

“Foreclosures sold at auction now account for 15 percent of all home sales in California and continue to rise,” says Sean O’Toole, CEO and founder of Foreclosure Radar. “This isn’t just a story about failing subprime lenders and their customers. At the current pace, foreclosures will be a significant part of the real estate economy. A fact which bears close scrutiny even in areas that are not yet affected.”

Sounds like home prices in California aren't going to keep on going up forever. Also, check out QuiggleMe.com, an interesting blog about the mortgage industry and all its evils from a seemingly honest (gasp) mortgage broker.

Friday Update

Last year I signed up for an HP beta testing program. Didn't hear anything until Wednesday. They wanted to know if I was free on Thursday evening for a brief wireless installation test for they're new wireless printer/copier/scaner. I said sure and spent an hour trying to install it while 2 of their techies watched me and made notes. Long story short, I made a $100 and got to mess around with a photo printer for an hour. very cool!

Last year I made $400 for spending an hour and a half at Intuit's HQ while some guy watched me prepare my taxes (or atleast attempt to prepare them) using an online version of Turbo Tax.

Some of these testing programs pay really well!

After having funded my wife's Roth IRA I decided to put some of the money in a Precious Metal Fund, UNWPX. Its owns both stocks and ETFs and has a somewhat have fee (1.7%) but I think the sector will continue to do well this year and so it should be good for $2k worth.

Here's a shout out to all the other bloggers who've sent me traffic in the past 2 weeks. They're all great sites and I strongly urge you to check them out if you already aren't reading them.

Boston Gals Open Wallet
Budgeting Babe
2 Million
Live Learn Invest
DINKs Finance
My Open Wallet
In Cashflow We Trust
Making Our Way
Money Living
Lazy Man & Money
Consumerism Commentary
The Divdend Guy
Wealth Junkie
Wealth Building Lessons

Happy weekend everyone!

Vonage is Screwed

Vonage has lost a case against Verizon over patent infringement. In a ruling today, its no longer able to market it services to new customers.

According to Vonage's lawyer, the ruling comes as 'a bullet to the head'! Vonage's stock (ticker: VG) closed at $3.38 on thursday. The markets were closed today, but I expect them to sink like an old router on Monday!

Surprizingly the CEO, Jeff Citron, who was fined $22 million by the SEC and banned from trading securities when he ran Datek for scapling retail investors, hasn't sold any of his 42 million shares.

Maybe he knows something we don't?

Opened a Roth IRA in 10 Minutes

I've been trying to open a Roth IRA for my wife for 2006 contributions at Zecco for a few weeks now.

Initially I couldn't open their stupid .fdf file. Finally I gave in and updated my adobe acrobat to the latest version in order to open it, filled out the paperwork, printed it all out and asked the wife for a copy of her drivers license.

She didn't have. She's lost it and isn't going to waste time at the DMV until after tax season is over. Bummer, without it Zecco will not open an account. Unfortunately tax season ends on 17th April this year, which is the last date I can make a 2006 contribution.

Total time wasted in this activity has been about 4-5 hours. This involved filling out the online application 3 times, calling customer support and being placed on hold for 30-45 minutes (and then giving up), emailing them, printing out the forms and then shredding them.

Instead I decided to go with TDAmeritrade. I currently have all my accounts with them and they have excellent customer service. They also sent me a free 2 GB Ipod when I asked them!

I went online and in about 10 minutes, the account was setup and funded via ACH.

Zecco may have free stock trades and ETF trades but it has significant drawbacks.
1. There is no customer support.
2. There is no technical support.
3. Too much paperwork to signup.
4. They charge you commissions for Mutual Funds.
TDAmeritrade has a TON of mutual funds that are no commission and no load. They also waive the minimum purchase amounts for most of them too.

I think Zecco is definitely over-rated. Besides that, TDAmeritrade gave me free trades for 45 days and a free copy of Money!

Also check out this post about Ben Stein's Rule of Retirement Investing.

Negotiating A Job Offer

Money & Such has a good post on Negotiating a Job Offer.

I tried telling my wife that she should always counter the job offer, regardless if she's fresh out of college and that every one of her friends got identical job offers.

She refused saying that her professors were against it and that it would look bad and create the wrong impression about her. Long story short she later found out that some of her classmates, while getting the same salary, did however get an extra thousand bucks as a sign-on bonus!

She was really pissed. It wasn't the fact that it was a thousand dollars, but rather the fact that a salary is a measure of her self-worth. She graduated with a summa cum laude and she really felt short-changed.

Nothing is ever set in stone. If a salary is the most they can give, they'll tell you so. Just don't be a jerk about it and you won't have the offer rescinded on you!

Earning Money Online

I read a really interesting post today on Earner$ blog aboutmaking $200 every day.

The first half of the post is just a reference to 'earn money online' which links to his site. This is a just a blatant (but clever) way to fool the search engines to rank his site higher for the search 'earn money online'. The reason many bloggers (John Chow Dot Com included) convet this phrase is because a lot of people search for this term and if you're ranked highly on a search engine for it you get a lot of 'organic' traffic which results in a lot of ad revenue.

However, later in the post he comes to the real meat. Basically you sign up for an affiliate program that pays upto $300 per signup and then find off-line ways to promote it. One way he suggests is buying an ebook package with reseller rights, adding your affiliate link to each ebook and selling it for next to nothing. It will spread virally and eventually you'll have people signing up using your affiliate ID at $300 a pop!!

Sheer genius!

Sub-prime Lender Woes Unfold.

New Century Financial has filed chapter 11 and announced its laying off 3200 workers, or about 50% of its workforce.

Its based in Irvine, and I would expect a lot of laid off staff to be in Irvine too. I wonder how that will affect the housing market there? Since Irvine is home to a large majority of sub-prime lenders, how will the sector meltdown affect property prices? I have a cousin there, who I met over the weekend and we saw the movie "300" on IMAX (yes, it was awesome!) so I'll be keeping an eye on the that market.

Also a quick look at New Century's website shows that the Irvine branch is still hiring programmers, accountants, underwriters and loan officers, so I think it hasn't been updated and probably won't be be since their website guys probably got canned too!