Daily Investment Interpretations

February 15, 2011

2011-2-15 (Tuesday): First, a few words about the stock market. 
    There seems to be general agreement that it's overbought, and that investor sentiment is quite complacent: Mark Hulbert- Sentiment is high maybe too high, Fund firms are full of bulls. On the other hand, it's been this way for quite q while. There's a great deal of money pressing to get in the gates.
    On the third hand, the markets are a hair-trigger away from a sell signal.
    The markets are down today on disappointing economic reports: Stocks slip. Disappointing retail sales were a part of this picture: Stocks stumble after weak retail sales. Two of the more-subtle reasons that the markets might be depressed today could be the fact that the New York Stock Exchange has been purchased by the German stock exchange, and government-backed mortgages will become a thing of the past, leaving the field open to the private sector. This, says Marketwatch's David Weidner, underscores the way the U. S. is falling behind the rest of the world: Loss for Street prestige. Too much U. S. government? Are we too socialistic? The countries that are eating our lunches are the Chinese Communists and the European socialistic nanny states.
    Nasdaq nears big test: Michael Ashbaugh.
    Stock market futures are up and are rising tonight.  
          
    Returning to the subject of TopStock Portfolios' Daily Decision Stock Trade, One of the benefits of this or any other successful stock trading service is that (1) using this service, we can prosper in falling markets as well as rising markets, (2) we can dispense with all other financial services, and (3) we can spend our time in other ways than following the stock markets. Of course, this requires a little more effort than owning a mutual fund. We have to check our email each morning for the morning stock message and then act on it immediately by buying shares of the stock that Mr. Meiers recommends. We also have to check our email during the day in case Mr. Meiers sends a "sell" signal.
    So how much money can we make? Or more accurately, how rapidly can we grow our money?
    That depends upon whether we're using a retirement account or an ordinary (taxable) account.
Retirement Accounts
    If we're using a retirement account, we're not allowed to trade on margin. We're limited to direct investments in stock. What happens then depends upon how well we can reallocate our money to maximize the fraction of our available monies that is invested at any given time. For example, yesterday, Mr. Meiers had four stock choices in his portfolio. This morning, he sold two of them, leaving two stock investments for the rest of today. My planned treatment of this would be to reinvest the proceeds from the sale of the two stocks sold this morning in the two remaining stocks. But this raises two problems.
    The first problem is that of sales commissions. At leading popular retail brokerage firms such as Vanguard, Scottrade, eTrade, and the Fidelity Group, the trading fee is of the order of $8 a trade for any number of stocks... $8 to buy and $8 to sell, or $16 for a "round trip" buy-and-sell. If you average one of these "round trips" every trading day, your sales fees add up to $80 a week or $4,000 a year. So the first $4,000 a year that we earn on our money is going to go to pay for the investment commissions. In addition, we'll have to pony up the $795 a year that Mr. Meiers' investment service costs. (It's $395 "for a limited time", but the regular price is $795 a year.) That's about $4,800 a year in upfront  costs... pretty steep. By comparison, most mutual funds charge 1 % a year for "management fees", or $1,500 a year for $100,000 worth of mutual funds.
    Second, the popular retail brokerage firms such as Vanguard, Scottrade, eTrade, and the Fidelity Group impose an Federal Reserve three-day rule that says that, unless we're using a margin account (which is prohibited for retirement accounts), after we sell something, we can't have our money for three business days until the sale settles. (In practice, this means four business days because the day of the sale doesn't count. If we sell a stock on Monday, we won't be able to use the money until Friday.) The Fidelity Group gets around that limitation by allowing their customers use their proceeds from the preceding sale to buy equities again immediately (on "good faith") with the proviso that they can't sell their follow-on purchases until the money from the first sale is released (four trading days after it's sold). The problem is that Mr. Meiers might recommend that we sell the follow-on position before the four days are up.
    Is there a way around these problems?
    The answer is "yes". There's a brokerage firm called "Interactive Brokers" that (1) charges 1 a share for a buy-and-sell stock trade. For 100 shares of stock traded once a day, this amounts to $1 a day versus the Fidelity Group's $16 a day. But there's a crossover here. If we're trading more than 1,600 shares of stock, Fidelity, with its flat $8 a trade rate becomes cheaper than Interactive Brokers. And if we're investing, say, $50,000 in a retirement account, Fidelity may be the cheaper way to go.... which brings us to the three-day rule.
    Interactive Brokers has a way of evading the three-day rule for retirement accounts by setting up a limited type of margin account for retirement funds. This limited margin account won't allow us to buy any more stock on margin but it will get us around the three-day rule. We can buy and sell merrily. There's one hitch. The minimum funding level (at all times) for any margin account is $25,000. So it takes $25,000 to open a margin account at Interactive Brokers, and the instantaneous total value of the assets in the margin account must never go below $25,000.
    The full $25,000+ in the account doesn't have to be used for trading. We can use $1,000 of it for investment purposes, and keep the remaining $24,000 earning interest in Interactive Brokers' money market fund. Because of the fact that money should grow relatively rapidly in the Daily Decision Stock Trade service, we ought to be able to afford to start relatively small and grow our money. 

    How fast will it grow? The Daily Stock Trader shows a gain as of today's close of 27.7% in two months, from the inception of the service on December 10, 2010, through February 11, 2011 (last Friday). At that rate, our investment pool would double every six months.
    My calculations, based upon treating all the gains and losses as sequential, would lead to a doubling every two months.  

To be continued.