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  • Archive for February, 2007

    Big sell-off

    Posted by ML on 27th February 2007

    Yesterday I wrote a post titled “Caution is warranted” that I didn’t post here because of scheduling and that it contains a link that I know Frugal frowns upon. Since it was posted last night, it wouldn’t have made much a difference anyway.

    Nothing I’m going to say is going to alleviate you losses, I don’t even pretend it will limit your future losses. But I do need to talk about specific actions I took today, if only because I have written about those positions in this blog.

    - TCK Sold at a small loss as it dropped below the 50 dma. I expect there to be a concern over global economic activity such that base metal stocks will likely be under pressure.
    - ITA Sold at a small gain as momentum indicators are rolling over.
    - BG Sold at a gain. Same reason as ITA, but even more extended.
    - NAT It was already oversold going into today. It dropped in the morning but was unscathed in the bigger carnage in the afternoon. Adding back the $1 dividend it would have been at the 200 dma. Hold
    - CanRoys Oil did ok for most of the day. The energy sector had (some) relative strength and I’m a long term believer. Hold

    I day-traded EWM and QQQQ and made a little pocket change. At one point, I wanted to short EEM but no shares were available, so I settled on EWM instead. Overall, I believe the sell-off in China was just a trigger for a market on very loose footing. The durable goods number this morning, for example, was awful. This could be as bad as last May and the potential to be worse since the most recent experience taught everyone to hold through the downturn. In addition to IAI and the home builders, I’ll be looking for more shorting opportunities in the days ahead.

    Although I have been bearish on the economy, I made no concrete bets as top-calling is reserved for the very bright and the very dim. I’m still in the accumulation stage of my investment life and I couldn’t afford to sit the market out. Now that I believe a top has been established, it’s time to get serious about protecting my assets. I cannot sell the asset allocation accounts easily, so I’ll be looking to offset them with put options or inverse ETFs.

    What about gold?

    Spot gold fared well during regular Nymex hours. It clawed back from down $11 to close down only $2. However, once the thinly traded Access market started, it was a one way trip down south. It bottomed just below $660. Around 3pm when the Dow was down over 500 points and many PM stocks were down double digits I actually scooped up a couple of names. The fear was so palpable and the bottom so brief that I couldn’t click my mouse fast enough. Still, I’m not sure if I made the right decisions, I may just trade these shares for a quick bounce. At the end of the day I also picked up some GDX puts for protection just in case. Overall, my faith in gold/silver is unshaken. Although I’m quite aware of the short term dangers, the strength of the metals during regular Nymex hours gave me some confidence.

    In conclusion, my message is that I don’t expect this to be a one-day event and concrete defensive steps need to be taken. Stay tuned and best of luck.

    Posted in Gold/Silver, Investing, Market Pulses, Natural Resources | 7 Comments »

    Update on Real Estate Market Outlook for 2007

    Posted by Frugal on 27th February 2007

    I am really stomping my feet for not taking up the private offer by Euro-Pacific for shorting against low-quality mortgage (required $100K investment). Things have changed so much in just a span of three months. Previously when I forecasted that housing market in California would fall just 5%, it was based on the knowledge of continual lax lending standards from my friend in mortgage business. Due to the recent blow-ups in subprime mortgage companies, and bankruptcies/scaling down in 20+ major lending originators, I believe that the housing market will be falling by more than 5%, possibly by 7% to 8% in California. Note that other regional markets may fall/rise more or less. However, as a rule of thumb, weaker markets tend to fall more. California real estate market should be the one of the stronger market, but also the priciest.

    Here are some recent subprime lender stock casualties:
    NFI, falling 70% in 3 months.
    LEND, falling 20% in 3 months, possibly more very soon.
    NEW, falling 50% in 3 months.

    I think this year in 2007, more real estate agents will go “hungry” and shocked by the time on the market, inventory level, and the price reduction required. It will be possible to see some homes staying on the market for more than 365 days this year or next. For the people who are home shopping in spring & summer, they could face the biggest personal loss when the time reaches fall/winter. Mortgage underwriting standards tightening should kick into effect definitely by the end of summer. Mortgage resetting should also be in full force at that time bringing ever more sellers to the market for anyone who cannot refinance and roll-over under an increasingly tighter lending control. The end result from all of these should be more homes at all price levels, less qualified first-time home-buyers, more failed refinancing deals and short sales and foreclosures. And of course, helicopter Ben Bernanke will probably come in and lower the interest rate by probably 2 notches towards year end I believe.

    For all the people who are waiting for the real estate bubble to burst, your days in victory are coming. I believe 2007 housing fall will be the banner year for first real significant (5%+) year-to-year decline in most real estate markets. And you will have time too to scoup up these deals, or I should say depreciating “assets” possibly in 2008 and even 2009. For anyone whose loan terms are set to resett and go up before 2011/2012, more than likely they are asking for troubles. If you want to refinance, refinance to at least 7 years ARM (in which case, the interest rates may not be much better than 30 years fixed). You don’t want to be like everyone else, going for the easiest refinancing terms (in terms of monthly payment). You have to be different to get away from the “poor house”.

    Don’t buy a house if you don’t have to. By the way, lock in your rent if you could. Don’t be the home-owning fools who are nudged over because your rent has just risen by 8%. Paying rent is not throwing money away; paying mortgage interests (even after accounting tax benefits) on a over-priced over-sized loan is.

    Posted in Investing | 5 Comments »

    Net Commercials – Back to Basics

    Posted by James on 26th February 2007

    Volatility Index

    VIX [ ]
    Commercials were sellers of volatility once again, which for now is telling me that the VIX is not ready to break-out (above 13). And if that is indeed the case I would not expect the stock market to do any major damage on the down-side just yet.

    Broad Markets

    However, even though the VIX is a great indicator as to when volatility is most likely to make a come-back and potentially mark a top in the stock-market, it is critical to understand that price remains the primary timing tool with COT setups. From the SPX chart above it is very clear that since the June/July lows the trend has been UP.

    So what is an uptrend? The classical definition of an uptrend is a price pattern with higher-highs and higher lows. Notice from the chart above that after the SPX bottomed in June, every subsequent low (marked by the blue lines) has been higher than the previous; and similarly every subsequent high (marked by the red lines) has also been higher than the previous.

    So let’s recap, the trend is clearly pointing up. And we all know that ‘the trend is your friend’, so why should we fight it? We shouldn’t.

    That is not to say that there is no reason to worry about this marketing topping, as recent COT data has been clearly bearish. On the other hand, it is a dicey strategy (in terms of risk-reward) to front-run the market. A trend is a very powerful indicator; it shows you the path of least resistance in a particular market. There are exceptions, but usually it does not make sense to guess ahead of time when a market might reverse, instead it is much more prudent to look for reversal signals. Reason being: even though markets may be setup one way or another from a COT perspective, these setups may take some time (a day, a week, a month, more?) to translate into price action. Hence, it makes sense to trade reversals in a market that is setup to reverse. Playing the market before any signals are even present will not yield a high percentage winning-strategy.

    S&P 500 [ ]
    Looking back at the S&P 500 chart above, if this market broke below 1431 that would probably mark the top for this index. A confirmation of this top would come if the SPX subsequently failed to make a higher high above 1458.

    With this idea in mind, let’s look at the other markets.

    Dow Jones [ ]
    The Dow Jones (INDU) looks virtually identical to the SPX. Both charts have a tight up trending channel, so if/when the top is in, the breakdowns should be easy to spot. The most recent-low for the INDU is 12530 and the most recent high is 12780. Similarly with the S&P 500, a break below 12530 would be indicative of a top, and then a failure to move back above the 12780 high would serve as confirmation.

    Russell 2000 [ ]
    The RUT has very significant support in the 800 range, a break and close below this level will be very negative for this index. A confirmation of a top would then come if we fail to move above recent highs at 819. (These highs were broken today, so whatever the new high is, that is the high to go by for future reference)

    NASDAQ 100 [ ]
    The Nasdaq-100 is still struggling to confirm recent-highs made on the other 3 indexes, as they race to new yearly-highs. For all I know the trend for this index may have already reversed as there has been repeated failure to take out the high of 1848 set in mid-January of this year. This non-confirmation cannot continue indefinitely, we will probably see a resolution – either to the upside or downside – within a few weeks.

    As I’m typing, I see that the markets had a big reversal today – to the upside; some are challenging their recent-highs. This confirms this week’s VIX setup in the short-run, and more importantly demonstrates why it is so critical to respect the trend of a price-pattern on a chart. It is the gravity of the markets, and it is a wise practice to adapt to markets…not the other way around.


    Crude Oil [ ]
    Oil has been consolidating for two weeks now, with resistance just below 61 and support at 57. I maintain that this market is setup to go higher, as long as support is not broken at 57. It is important to note that commercials were sellers last week, nothing too major…for now, unless the selling persists.

    Gold [ ]
    Gold has been trading sideways last week, meanwhile commercials were sellers for a fifth consecutive week. This market is setup to decline; I think a break below 665 could mark an intermediate term top. Important note: gold has very strong support at previous reaction-lows: 605, 570, 550 & 540. (This market broke support at 665 today, so quite possibly we just saw a top, as long as we do not move back above this level)


    US Dollar [ ]
    The dollar is starting to show signs of weakness as price breaks below 84.5. The setup remains to the downside.

    Posted in Investing | 1 Comment »

    Being Rich Makes You Smarter??

    Posted by Frugal on 23rd February 2007

    With the latest SEC proposal, it would take $2.5 million in investments instead of $1 million in net worth to be able to invest in hedge funds. I think it would make more sense to require a maximum percentage of networth invested in hedge funds, instead of making such restrictive requirement, which definitely puts the hedge funds out of my reach and many more ordinary folks.

    I can’t agree the following comments more. Instead of policing the greedy corporate executives, SEC has decided to put up more barriers for small guys to reach wealth:

    “You have to be rich to be smart?”

    “I find the idea that the definition of an accredited investor is based solely on a net worth requirement to be repugnant to the principles of equality of all people. Why should the “rich” be allowed a wider array of investment options just because they are rich? This is often just as much an accident of birth as race or sex….I take this proposed change as a direct affront on my ability to take care of my and my family’s future. The approach that you appear to be taking is short-sighted, mean-spirited and represents the easy way out.”

    “The proposed rule changes are discriminatory and anti-Constitutional. We have long since done away with property qualifications for voting, and with other forms of discrimination throughout our society.”

    “If I gave you $2.5 Million would it make you any smarter?”

    With the advent of internet, the average investors are so far ahead of the investors twenty years ago. Maybe SEC should make the structure of the regulatory controls more fitted towards modern investors?

    Posted by “Frugal” at My 1st Million At

    Posted in Investing | 7 Comments »

    Chasing yields: Closed end municipal bond funds

    Posted by ML on 22nd February 2007

    I’ve written about this elsewhere, but if you have already seen Sam Zell’s 2005 Year Eng Gift musical card, you should take a look [Follow the link for 2005 but be sure to check out the others such as 1999. It’s a blast!] It goes like, “Capital is falling on my head…” to the tune of “Rain drops falling on my head…” Mr. Zell is, of course, the Chairman of Equity Office Properties that was very recently the object of a bidding war between the Blackstone group and Vornado. Should he happen to look back upon his own creation just over one year ago he would surely be smiling at its prescience. At the same time, we must keep this in the back of our minds, if one of the smartest real estate investors is selling, what does it say about valuations?

    The central theme of that particular musical card was that abundant capital had been driving down yields at a time the Western world is rapidly aging [and relying on fixed income securities to sustain retirement]. Over the past year, the spreads of riskier corporate and emerging market debt continued to narrow, in no small part driven by the Yen carry trade and other central bank inflationary policies. However, if forced to make an up-down prediction, I would have to bet that yields will continue its southerly trajectory, at least in the intermediate term. My reasoning is again based on the weak housing sector, especially rapidly catering subprime mortgage lending business. Therefore, it’s prudent to examine income generating securities, especially those providing high yields with good risk profiles. This very motivation was behind my recent purchase of CanRoys and NAT.

    So that’s a rather long winded introduction to what I hope a multi part series on high yielding closed end funds. This post will deal with closed end municipal bond funds.

    Closed end funds
    Closed end funds trade on stock exchanges just like ETFs. The main difference is that ETFs are continuously offered such that their prices track the net asset values (NAV) closely. On the other hand, closed end funds have an initial offering where the number of shares is fixed and the price can deviate from NAV to a much greater extent. Double digit percentage premium/discount is not uncommon.

    Municipal bonds and asset allocation
    Municipal bonds are extremely tax efficient. The interest is exempt from Federal income taxes, as well as state income taxes in the state they’re issued. Interest from bonds issued by the local government is exempt form local taxes also. In one of my articles on asset allocation, I briefly mentioned the prevailing notion of putting bond investments in non-taxable/tax deferred accounts and equity investments in taxable accounts. An alternate strategy for high-income individuals is to put equities in tax deferred accounts and use municipal bonds as the bond allocation.

    My own asset allocation
    Real life financial arrangements rarely permit themselves for unambiguous delineation of bonds and equities (monthly review of my detailed holdings). When I got married, my wife and I each had our own 401(k)’s and individual accounts that we decided to keep in addition to starting a joint account. Today each of our 401(k)’s is under its own asset allocation plan. The joint account, which is a taxable account at Scottrade, is used to “plug the holes” in the overall asset allocation. For a while we had AGG, SHY and a foreign bond mutual fund in the taxable account which was about the worst thing one can do tax-wise. I chalk it up to my own procrastination. A couple of weeks ago I finally switched them to closed end muni bond funds NMO and NAD which I’ll describe in more detail below.

    Closed end municipal bond funds
    ETFConnect ( is a great site to do research on closed end and exchange traded funds. It is owned by Nuveen which happens to be one of the biggest muni bond fund managers.

    Muni bond funds can be broadly divided into two categories depending on which municipality issued the bonds. There are state funds that are composed solely of bonds issued from one state. Then there are national funds that include all bonds issued in the US. Dividends from both kinds of funds are exempt from federal taxes because they are derived from muni bond interest. State funds make sense for those large states with high state income tax rates, such as California and New York. Funds for smaller states may have too low a trading volume and too wide a bid/ask spread. Residents in those states or in ones with low state income tax should consider a national fund instead. At year end, the fund manager will provide a breakdown of income attributable to each state; the amount from one’s own state is still exempt from state taxes.

    Below is a screen shot of several national muni bond funds managed by Nuveen in descending order of yield.

    It can be seen that a tax-free yield of 5.2% or above is easily achievable with these closed end muni bond funds. Assume a total marginal tax rate of 35%, they correspond to around 8% in taxable yield. Not too shabby! Astute readers may ask how these yields are possible when, for example, Vanguard’s long term muni bond funds yield only 4%. The answer is: leverage. These closed end funds issue short term preferred shares for approximately 1/3 of the fund’s assets at a lower yield. These shares are commonly purchased by tax-exempt money market funds. The holders of common shares are able to get quite a bit more yield by accepting greater risk. Putting some rough numbers together:

    Preferred shares: 1/3 of assets, yielding 3.45%
    Common shares: 2/3 of assets, yielding 5.1%
    Total assets yielding 4.55% = 3.45%/3 + 5.1% *2/3

    All payments are tax-exempt since they are derived from the pool of tax-free muni bonds. This is just a crude example. See Nuveen’s explanation and comments on volatility and hedging.

    Other things to watch for

    Yield is not the only factor based on which one should make purchase decisions. The principle “you get what you pay for” rings ever true here.

    As mentioned earlier, the price of a closed end fund can deviate significantly from the NAV, depending on how enamored investors are with it. I personally have a hard time buying a bond fund with a premium over 5%.
    Credit quality
    Credit quality is very important especially when the fund is leveraged. I limit myself to average quality of AA or better. The extra 20-30 basis points for NMZ (average BBB rated and 10.2% premium) are not worth it in my opinion. In any credit event, the spread between high and low grade bonds will widen.
    There aren’t a lot of variations in the table above. The average maturity is in the neighborhood of 20 years, with the duration around 5 years. A duration of 5 years means for each 1% change in the interest rate the bond price will change by 5%. Choices for shorter duration closed end bonds are more limited.
    Certain muni bond interest is taxable under the alternative minimum tax (AMT). The percentage of AMT bonds is listed on the details page.

    The volume in these closed end funds are only tens of thousands per day in the best case. So access to level II quotes is important for a good fill. Failing that, limit orders should always be used.

    So how do these funds compare with the much better known treasury ETFs: SHY, IEF and TLT? Here’s a comparison chart.

    The AAA rated NMO appears slightly more volatile than TLT, the long bond ETF. It makes sense because of NMO’s long maturity and use of leverage. Of course, NMO yields a tax free 5.2% compared with TLT’s taxable 4.6%. I ended up picking NMO and NAD for my own accounts, your mileage may vary. But if you have bond funds in taxable accounts or simply want a bigger kick than CDs and savings accounts, these closed end muni bond funds are definitely worth a look at.

    Disclaimer: I’m not a registered investment advisor or a tax professional. The information provided above is believed to be correct but its accuracy cannot be guaranteed. You should consult a professional before making any financial decisions.

    Posted in Investing | 3 Comments »

    How does your FICO score affect the mortgage rate

    Posted by Frugal on 21st February 2007

    I found this quantitative matrix for the lending mortgage interest rate as a function of your FICO score and the LTV (Loan-To-house-Value) ratio. I have saved a copy here just in case the link is no longer available.

    The matrix (in A1) makes total sense to me. If I am a mortgage investor, the mortgage interest rate should be dependent on the risk that I would take, which could be roughly measured by FICO & LTV. Although I don’t really understand the difference between A1, A2, B1, B2 tables, the more important message to take home here is that if your lender is not giving you a better interest rate on a lower LTV, your case is probably adding to his or her bottomline. For a FICO of 700, there is a 0.30% interest rate difference between 80% LTV and 65% LTV. A 0.30% on the mortgage rate can translate into a lot of “current” money.

    By the way, this matrix is from the recently bankrupt ResMae on 2/13/07. This subprime lender was asked to swallow back $300 million loans purchased by Merril Lynch. Time after time, lenders just don’t realize that you cannot make a deadbeat to pay up when he just doesn’t have any money. You can sue and win, but you will simply lose more money in legal fees.

    On the last note, I don’t know whether these lenders who use this matrix has ever thought of the “monetary value” of a FICO score. Anything that you can “quantify” (like a FICO score) you can fake too. Between walking away from a upside down loan worth of $100K and a perfect FICO score, which one would you choose? Despite my strong ethical sense, when $100K increases to one million dollar, I think I may walk away too. If I do that, I would have just “quantified” the monetary value of my ethics/FICO score, worth of a million dollar unpaid debt.

    In reality, you can almost always put a monetary value to everything (sorry to be a little cynical here). But of course, I’m glad that my ethics won’t put myself in this situation of owing 1 million today’s dollar of mortgage in the first place.

    I do hope that the “monetary value” of my ethics will grow bigger as I grow. But I do know for a fact that when given a real choice, the “monetary value” of people’s ethics is smaller than both the creditor or the debtor thinks. At least, I think this applies to me.

    Fremont General just announced that they will not do piggyback loans (80/20). It’s another proof of LTV is a better safeguard than FICO scores.

    Posted in Mortgage, Real Estate | 6 Comments »

    Commercial Selling Continues

    Posted by James on 20th February 2007


    Volatility Index

    VIX [ ]
    Commercials were sellers of the VIX last week, meaning that volatility was probably not quite ready to make a dramatic re-entry into the marketplace. Subsequently, and to no great surprise, the VIX declined (today) to near record lows. However, there is continued evidence of commercial distribution in the stock market; so as soon as the VIX is setup to rally – will probably be a very good indication that a top in the markets is imminent.

    Broad Markets

    Russell 2000 [ ]
    As the RUT broke out to new highs, commercials were selling into strength. This is a classical bearish COT setup in the making. A few more weeks of this sort of selling would setup this index to the downside, which would translate into the much awaited intermediate-term top for the stock-market.

    S&P 500 [ ]
    Commercial selling reemerged in this market as well, which is just another confirmation that commercials are sellers at these price-levels. Total net-commercial position fell to -52 667 contracts, a level not seen since July of 06.

    NASDAQ 100 [ ]
    From the commercial perspective this market looks very bearish. But it is important to note that from the price-chart we are starting to receive a bearish tone as well. The NDX failed to move to new highs over the last week, lagging other major indexes. This is just one more sign of commercial distribution and the formation of an intermediate-term top in the markets.

    Dow Jones [ ]
    And finally, the Dow is setup for a decline as net-commercial position is hitting record lows (aka. selling) while net-large-trader position is hitting record highs (aka. buying). Once more, a classical bearish setup from the COT charts.

    The message from COT data in regards to the stock-market is unanimous; commercials are selling into strength as the market is making new highs. Anybody chasing these highs on the long side is only asking for trouble.


    Crude Oil [ ]
    The COT setup in crude is finally resolving. We saw commercials buy oil, as this market rallied from $52 to $60 per barrel. This sort of behavior is unusual for commercials and is considered very bullish. (Commercials tend to buy weakness and sell strength) Net-commercial position is right around 40,000 contracts, a level not seen since December 2005. Crude started off 2007 with a very volatile trading pattern, which was largely not forecasted by COT data. But then again, markets are markets, and this sort action is just a part of the game.

    In conclusion, this market is setup to continue to rally, I see any weakness as a buying opportunity.

    Gold [ ]
    As gold moves to higher ground, commercials continue to sell. With this in mind, I would expect gold to stall; until we see a correction and/or consolidation during which time commercial buying reemerges.


    US Dollar [ ]
    The dollar has been trading sideways for the last several weeks, and remains setup to the downside as evidenced by the COT chart. A breakdown from the current consolidation level is likely.

    Posted in Market Pulses | 4 Comments »

    Considerations on Taking Up Free Stock Trade Offer

    Posted by Frugal on 19th February 2007

    Similar deal as Bank of America, Wells Fargo is offering free trades for customers having $25,000 in bank accounts.

    I know that $25,000 is probably a lot to keep in cash for many of you, but such offer is quite enticing for me. For the first time, I’m seriously considering consolidating all of my accounts at Bank of America or Wells Fargo. Between the two, I probably prefer Bank of America simply because it has more ATMs near my residence and everywhere else. In fact, this is one of the main reasons that I have not tried out, because I intend to take up the bank offer.

    There are still many details that need to be researched and resolved:

    1. Can I move my stocks to cash or margin, in a margin account?

      This is very important to me. I really like putting my stocks in cash so that no one else can be shorting against it, and increasing the phantom supplies of stocks by borrowing mine. On the other hand, I may have occasional need to move my stocks to margin so that I can temporarily obtain bigger buying power. I very seldom use margin anyway. In the last 10 years, I only get charged margin interests once, and it was because I was not aware that my “cash” was actually from shorted stocks which I could not be using if I don’t want to be charged margin interest.

    2. What’s the bank CD rate, especially 6 month and 1 year terms?

      I normally like to keep about $5000 above the minimum limit before getting charged service fee in the bank. $25,000 is beyond my need. There will be about $20,000 idle cash after my consolidation. The best choice is putting them in CDs up to 1 year. If I do need extra trading cash from these $20,000, I can afford to pay some small trading fee for those period.

    3. Can I count the cash balance in brokerage account towards $25,000?

      I believe at Wells Fargo, you can, but not at Bank of America. Having this feature is convenient for me so that I don’t need to transfer cash around between bank and stock accounts.

    4. What is the trading fee for mutual funds?

      I have a small need for buying mutual funds. Some ETFs just don’t cover my need. Some of my gold funds are also sitting on a 100+% capital gain, and I would need to take a tax bite when I liquidate them for ETFs. Besides, the only ETF that I can swap into is GDX, and I prefer to keep a variety of ETF/funds in my portfolio instead of loading up in a single symbol. Possibly I will need to keep my gold funds separately in FirsTrade accounts where I can still trade without any fees.

    5. What is the trading fee for options & foreign stocks?

      I have my foreign stocks currently in Scottrade account because the fee for foreign stocks is at least $30. Quite expensive, but still cheaper than most of the online stock brokerage.

    The biggest hurdle obviously is getting my accounts all set up and paying all the transfer fees. I am using Izone, Scottrade, and FirsTrade currently for trading. If I do consolidate, I would still keep at least another one so that when one account goes down because of computer/network problems at the brokerage house, I can still trade from the other account. Maybe I could consolidate my bank accounts along with this move. Managing all these accounts and my relatives’ accounts is quite a big job.

    Posted in Banking, Investing | 15 Comments » Update

    Posted by ML on 17th February 2007

    I’ve got some good feed back on my review (Part 1, Part 2) of the online broker with free trades. I was pretty even handed: Zecco does offer free trades as promised and their order execution was reasonable; however, I experienced some problems with withholdings and wasn’t happy with how the reporting was handled. In the end, the withholding was recorded in the monthly statement and it was already forwarded to the IRS by Penson Financial (Zeccon’s clearing firm) by the time I had all my paper works in. This is a big motivation for me to file my taxes as soon as possible this year. I haven’t made further trades with Zecco although the account is still open. I’ll re-evaluate the situation after I get my tax refund.

    In the meantime, Zecco has been making improvements as described below. They cannot come at a better time as the competition for “zero commission” is heating up.

    Zecco now offers IRAs

    This is a new offering from Zecco. Roth IRA, traditional IRA and rollover IRAs are now available. The same free trading applies to IRA accounts as well. I’m still trying to get a clarification as to whether one can own a taxable account as well as an IRA account and get free trading in both. There was a rule that one cannot own more than one account (e.g. individual + corporate) and get free trading in both.

    There is a serious drawback though, in that Zecco is charging an annual fee of $30 for IRAs. While it is not a deterrent for frequent-traders, it will be a big put-off for those who are price conscious and plan to adopt an ETF based index strategy, especially since there are so many other online brokers that offer no fee IRAs.

    Virtual Trailing Stop Orders

    A virtual trailing stop order (VTSO), is a stop order that adjusts as the price of a security moves. What you do is you enter a stop price is placed at a set distance above or below the market price, depending on whether it is on a long or short position. And, the stop price then adjusts as the price of the stock moves, maintaining the set distance. The purpose of this order is to maintain a set level of potential loss at any point in time while allowing for continued appreciation as long as the price does not fall to the stop loss.

    Say you’re long stock ABC which is currently trading at $100, you want to protect yourself from a decline in the stock price, i.e. either protect existing profit or limit potential loss. You could enter a stop order (A stop order is an order that becomes a market order once the stop price is reached. For long positions, it’s a sell order below the current price; for short positions, it’s a buy to cover order above the market.) at $95 which limits potential loss to $5 per share from current levels, any slippage notwithstanding. However, if ABC appreciates to $120 and you haven’t kept up with your stop, you’re now opening yourself to a potential $25 decline.

    This is a concern for those who can’t monitor their stops constantly. Don’t worry, trailing stop orders come to the rescue. Zecco’s implementation is a fixed distance trailing stop. In the above example, you enter a VTSO at $5 (note, not $95! This was confusing giving their interface. See this tread at the Zecco forum). As the stock appreciates, the stop price is lifted, always at $5 below the high after the order was entered. In the above example, when the stock makes a new high at $120, the stop would be at $115. This way, you still benefit from appreciation in the stock, and your gains will never slip away more than the pre-determined amount.

    Trailing stops are best after an extended move when you want to protect your profit. Using a tight stop during a period of consolidation may get you out of the stock prematurely only to see it taking off without you.

    Some online brokerages such as TDAmeritrade implement trailing stops using a percentage off the high. There isn’t a big difference between the two. Granted more sophisticated implementations would also allow a limit order instead of a market order to be triggered, this is still a big improvement from Zecco and I applaud their effort.

    The competition is heating up
    As implied in the opening paragraphs, even “zero commission” is not immune to competition. Previously, I have mentioned Bank of America which offers 30 free trades/month (vs. Zecco’s 40 free trades/month) in a dozen states around the country. One catch is that you have to have $25k in deposit accounts with them. The drawback is that BoA imposes a $50 semiannual “brokerage account maintenance fee” for accounts under $50k, so the deal is not attractive to investors with low account balances.

    The latest contender is Wells Fargo which is offering 100 free trades/yr when the equity in the brokerage account meets a minimum of $25k. There are no minimum deposit account requirements. What sets it further apart is that many no-load mutual funds are also eligible for commission free trades. Trades beyond the first 100 cost $5.95 each which is also reasonable. With this offer, Wells Fargo has leapt to the front of the pack among ultra-low commission brokers in my opinion.

    One of the main concerns with Zecco is how unproven it is. Even though the accounts are FDIC insured, no one knows how long it would take FDIC to respond if a catastrophic event does happen. On the other hand, both Wells Fargo and BoA are 1st class institutions. I hope Zecco can respond to this challenge. Competition can only be good for us individual investors.

    Now for some idle speculation completely unrelated to online brokerage comparisons. If you’re wondering why Wells Fargo suddenly became so generous, or whether HSBC can make any money by offering a 6% interest rate on their savings account, my over-active mind has a theory. It is well known that consumer deposits are among the cheapest financing channels for banks. Is it purely coincidence then, that Wells Fargo and HSBC Household Finance top the list of subprime lenders according to this website? While I’m not suggesting either is going out of business, or their account holders are in any danger (HSBC is something like the #3 bank in the world and Wells Fargo is the highest rated bank in the US), the timing does strike me as a little too coincidental. It is entirely possible that their subprime lending divisions are under pressure and they want some extra liquidity to ensure that nothing “unexpected” happens. Just food for thought.

    Posted in Investing | 4 Comments »

    Tips on How to Make a Million

    Posted by Frugal on 16th February 2007

    Just received March issue of Kiplinger’s Personal Finance Magazine. This is a very good magazine targeted at general public. The article of How to Make a Million gave you the eight tips (only 5 are shown to respect their copyright) and 11 examples of people reaching over a million dollar net worth:

    1. Follow your passion
    2. Seize an opportunity
    3. Exploit your talent
    4. Put in the time
    5. Learn the ropes (be employed first before becoming an employer in the same business)
    6. etc.

    After reading through the entire article, I found out that there are basically two types:

    1. The crawler: save/accumulate and invest/grow their money, given enough time.
    2. The passionate: yeah, somehow some people find their way into their niches. But ALL of them love what they are doing, whether it’s side-business, hobby, or their job.
    3. Got the message? If you are both, the chance of you making to a million will surely increase more.

      If you cannot love what you are doing on a daily basis, you cannot be successful in doing that. Success in what you are doing won’t necessarily bring you a great fortune. But without a success, it is pretty sure that you won’t get to a great fortune. And the other way is obviously taking small steps at a time, saving/accumulating wealth. Given sufficient amount of time, you will get to a big fortune.

      I can attest to you that I’m both. Definitely has helped me to reach a bigger fortune sooner.

      Posted by “Frugal” at My 1st Million At

    Posted in Career/Salary, Frugal Ways | 3 Comments »