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Just wondering what others thought…

It has yet to be released to the public, but was anyone aware that there was a new $5 bill in the works. Technically we should have, because the Federal Reserve first announced the new bill to the public on September 20th, 2007. I actually just found out today from a fellow co-worker. Apparently this bill has been in the works for a long time though. According to the press release by the Fed, “because the $5 bill is heavily used in vending and transit farecard machines, the U.S. government began informing the manufacturers and end-users of those machines about the upcoming new $5 bill more than a year ago, to provide ample time to adjust them to accept the new design.”

If anyone has seen the new bill, they will see right away that it is a fairly large change from the past bill. It even seems to have a bit more going on in it than the new $50, $20, or $10 do. The main reason for the redesign of the $5 was because counterfeiters were bleaching the $5 bill, and then reprinting it to look like the $100 bill. Because the security thread and the watermarks were in roughly the same spot and looked similar at a quick glance, it was easy for counterfeiters to accomplish this.

Here is a great site that gives you a more in depth look at what the new $5 bill will look like, as well as some of the security features that go along with it.

Here is a quick rundown of some of the new security features of the new bill. All of the images were taken from the above mentioned site.

This picture shows some of the new watermarks on the new $5. Notice the number 5 rather than a watermark of the President.

The new security thread will be located on the right hand side of Lincoln’s portrait, instead of on the left hand side where it previously was before.

Notice that on this new bill there is no oval outline of Lincoln like before.

Here we have what the Fed calls the “symbols of freedom.” These refer to the stars and the eagle which will be adorning the background of the bill.

Here is how the new serial number will look. As you can see, it is roughly the same, but will be aligned on the bill slightly differently.

Microprinting on the bill will make it harder for scanners to accurately recreate the design of the bill.

Here are the federal reserve indicators. The G refers to the fed that the bill was issued from.

Here is a unique a potentially controversial new feature for the $5 that other newer bills do not have. The exceptionally large purple five on the back corner of the bill was created for the visually impaired so that they can more accurately see what the value of the bill is. Personally, I think it looks a bit odd and out of place, but I can definitely see how it would help out someone with poor vision.

The $100 bill is slated to be the next US bill to have a redesign.

Don’t go throwing out your old $5 bills just quite yet! There is also no need to bring them into your local bank to exchange them out for new ones. They will still work just as good as they did before.

Here is a little known fact that comes from the previous web site. Did you know that “every U.S. banknote issued since 1861 is still redeemable today at full face value and will continue to be legal currency.” So go ahead and toss those fives back under your mattress. You can pull them back out in 2050 and they will be just as good as they are today!

The word of the week for this week is Volume. When we refer to volume, this is referring to the number of shares that are traded for a stock in a given day. Volume can be a very important indicator of the health of a stock. The higher the volume, the more buying or selling interest there is for it. When a stock has low volume, it means that most people aren’t following it, and there is little interest in the stock. When there is low volume, it also means that the stock is not very liquid. If you wanted to sell/buy it, there may not always be another party to take part in the trade. Another useful tool for dealing with volume is checking how the current volume compares with the average volume over the last 30-90 days. This can give you an idea of whether or not the stock is becoming more or less popular.

Not all companies that trade on the NYSE or NASDAQ are American companies. Some are actually headquartered in a foreign country. Consider the company Cemex (CX) for example. Their company is headquartered out of Mexico. A good portion of their business will be conducted in Mexico, and therefore their payments will be made to them in pesos, the Mexican currency. When they do business outside of Mexico, they will likely be paid in the other country’s currency, which will later have to be converted to pesos.

The main issue with currency risk occurs when a company has to create financial reports for their shareholders. When a foreign company like Cemex creates a financial report for US investors, they list all of their earnings and expenses in US funds, although they are really in Mexican funds. Americans can made better comparisons from one company to the other when everything is in the same currency. The main issue here is that the exchange rate is not always going to be the same. This will create some discrepancies in the financial report that the company gives.

Imagine that in FY 2006, Cemex had total net income of $10 billion pesos. At the time that they reported, the exchange rate was 10 pesos per dollar. This means that on the Annual report to US shareholders, Cemex would report a net income of $1 billion dollars. Now, imagine that in FY 2007, Cemex has a total net income of $11 billion pesos (a 10% increase), but the exchange rate at the end of FY 2007 is 12 pesos per dollar. For FY 2007, Cemex would report a total net income of $.916 billion (a 8.4% decrease). To the Mexican investor Cemex had a great year, but to the American investor the year was a disappointment.

Not everyone invests in foreign companies, but if you are looking into one you should definitely take this into consideration. You could be in for a bit of a surprise if you don’t.

Overview: Target (TGT) is a large nationwide discount retailer. As of the end of the third quarter 2007 they had 1,591 stores nation wide. Of these stores, 210 were Super Targets. Since third quarter 2006, the company has built 97 new stores, an increase of 6.5%. Target has also had an increase of 34 Super Targets since Q3 of 2006. This is an increase of 19.3%. The Target corporation sells just about any type of household product imaginable from clothing to food to electronics. They have also supplemented their income with a strong credit card program. The company’s main competitor is Wal-Mart (WMT).

Review:

The Good: Target is a large well known company that is not going anywhere. They have a strong balance sheet and provide quality products to consumers. Target is a brand that consumers have come to know and trust for their everyday shopping needs.

Although Target competes with Wal-Mart, there are many people who despise Wal-Mart and have no problem paying a tiny bit more at a company that they feel has a better image. Many people feel that Wal-Mart exploits their workers and have other questionable business practices. Target makes a natural option for those who are opposed to shopping at Wal-Mart.

Their credit card program has been growing. Target currently offers a Target card through Visa. In comparing the 9 months ended for 2006 with 2007, the credit card contribution to earnings before taxes grew from $374 million to $463 million, a 23.8% gain. The company’s earnings before taxes as a whole for 9 months ended 2007 was $2,959 million. This means their credit card operations attribute to 15.6% of their total earnings. In contrast, credit card contributions to earnings before taxes were only 13.9% of total earnings. A strong credit card program like this means that they don’t need to rely solely on selling a ton of thinly margined items to turn a profit.

Within the company’s credit card business they have been highly effective in receiving their payments. As of Q3 2007, only 3.8% of accounts were over 60 days past due, and only 2.6% were over 90 days past due.

The company has had a share repurchase program in place since 2004. This is good for shareholders, because when the company retires shares of stock, they own a larger portion of the company. This will also help to boost earnings per share. In 2004 they initially declared they were going to repurchase $3 billion worth of shares. This number has grown to $8 billion in stock. To date they have repurchased $90.7 million shares of their stock for a total of $4.646 billion. This leaves about $3.3 billion left in repurchases.

Target pays a decent dividend which is currently yielding 1.05%. The past three quarters they have paid out $.14 per share.

The stock has slid from a recent high of $67.57 on October 5th, 2007 to its’ current price of $53.40. This is likely due largely in part to the fact that the economy didn’t have the strongest holiday quarter and investors have factored that into the stock’s price. Wal-Mart recently reported better than expected sales data which helped to push Target’s price up $1.18/share today. This good news from Wal-Mart comes at a convenient time for Target. Their Fiscal year for 2007 ends February 3rd, 2008. This means that that company should be releasing their annual report somewhat soon. Over the past few months the company has reaffirmed to investors that they should be meeting analyst expectations.

The Bad: The economy will play a large part in how Target performs over the long haul. They appear to have weathered the economic downturn fairly well, holding their stock price within the $60 - $65 range in 9 of the last 12 months, although the stock definitely took a turn for the worse when a lot of the negative economic news was starting to come out.

Although their credit card business has provided them with a boost in income, their net write offs as a percentage of average receivables increased from 4.8% for the 9 months ended 2006 to 5.7% for the 9 months ended 2007. The total net write-offs for each period increased from $215 million to $296 million, an increase of 37.8%.

A continued decline in the economy could create potential problems for their credit card program. If more and more people cannot repay their debts, then the company may have to write off even more bad accounts.

Rising costs of producing goods may cause the company to decrease margins in order to stay competitive with other companies, or increase prices to a point that consumers no longer want to buy their goods, or buy in less quantities.

Opinion: The main hindrances to Target’s growth are its’ increase in write-offs through its credit card program, and the fact that the economy has been going down the drain lately. They can’t really do a whole lot to turn the economy around, but they can affect bad debts and write-offs to a degree. If the economy is bad, they should make qualifying for their card a bit more difficult. If people with low credit scores typically have iffy payment history in a good economy, imagine what they will be like during the not so good times. If they are going to give credit to a barely qualified applicant, they should give a very low initial limit to therefore reduce the amount that these risky borrowers can default.

With Wal-Mart’s recent earnings surprise, it is possible that Target could follow suit, although they have been stating all along that they should be meeting and not exceeding analyst expectations. Either way this is good though considering the state of the economy. Now might be a good time for the company to reduce their rapid expansion. The economy is probably not ready for additional Target stores.

Rating:

Market Sector: The retail sector has been fairly weak as of late. I don’t really foresee that changing any time soon. Wal-Mart reported an earnings surprise, so that gives me a bit more confidence for this sector, but I am still a bit sketchy about how it will fare in the slower upcoming months.

Potential: This company is not going to be your four-bagger stock. Their price has tailed off over the past few months, but it could be due for a resurgence if good news is reported. Based on past trading history, it appears that it has hit a bottom of $50/share. Their lowest close was $48.08 on 1/4/2008. During that period, it spent a total of six trading days closing below $50. It closed below $50 three additional times, with the last being on 1/17/2008 at $49.94. Since its’ low on 1/4/08, the stock has gained 11%. $55 would be the next hurdle for it to get over, which I don’t really see happening in the near future, but this discounted price could be an excellent time to get in on this solid company. A return to $60 would be a nice 11% gain in addition to the dividends received.

Risk: There is a high risk that the economy could continue to fall and the company may not continue to grow as fast as investor expectations. This could lead to a sell-off and a reduction in price. It is fairly likely that this could happen over the course of the next few months. This could create excellent buying opportunities for this company at a discounted price. At a P/E of 15.64, which is slightly lower than Wal-Marts, I feel that anything below $50 is a great bargain.

Conclusion: 3.2 Target is a solid and sound company with a loyal customer base. The company has continued to expand operations, as well as participate in a large stock repurchase program. They also have a decent dividend to boot. The only thing keeping me from giving this company a higher rating right now is the fact that the economy is in such a worrisome condition. Poor economy = reduced consumer spending = reduced earnings for Target = depreciation in stock price. The short term outlook for this company might not be blue skies and rainbows, but over the long term an investor should benefit nicely with this stock in their portfolio.

The word of the week for this week is short sale. A short sale takes place when an investor feels that a stock will drop in value. When an investor shorts a stock, they are selling shares of stock that they do not own. They hope to later buy back the shares at a lower price and return them to the broker. In order to short sell, one must create a margin account with their broker. This can be a very risky investment since the potential loss is unlimited.

Here is an example of a short sale. On January 2nd, 2008 an investor feels that shares of AAPL (Apple) are overpriced at their closing price of $194.84. He initiates a short sale of 100 shares through his margin account with his broker. His account will be credited with ($194.84 x 100 shares = $19,484). On February 19th, the investor repurchases the 100 shares at the closing price of $122.18/share. This costs the investor ($122.18/share x 100 shares = $12,218). His profit over this 1 1/2 month period of time is ($19,484 - $12,218 = $7,266) even though the price of AAPL dropped by over $72!

To see a growing list of past words of the week, click .

This weekend my girlfriend and I went down to Portland, Oregon to visit some friends. It is always nice getting away from all the hustle and bustle of Seattle and going somewhere different. Portland is a nice city that seems to be quite a bit smaller than Seattle, but is not lacking in any of the amenities of a larger city. One of the main draws for people to the Portland area is the fact that Oregon does not have a sales tax. According to Taxadmin.gov, there were only five states that had no sales tax as of 1/1/2007. Those states were: Alaska, Delaware, Montana, New Hampshire and Oregon.

The sales tax in Seattle is roughly 9%. When we go down to Portland, we like to take advantage of the fact that there is no sales tax. I got to thinking on the way down that there is probably a decent population that drives from Seattle to Portland and back in one day just for shopping. These people have no other reason to visit the city (ie: visiting friends/family, sightseeing etc.) They only make the trek to save some money. I started to think about how much money a person would need to spend in Portland so that their tax savings would equal what they spent on gas to get there.

The trip from Seattle to Portland is roughly 175 miles. This would make the round trip (175 x 2 = 350 miles). Let’s also assume that the car being used is fairly economical and gets 30 miles to the gallon and gas is $3.10 a gallon for regular (which it currently is in our neck of the woods). It would take the car (350 miles/30 mpg) 11.67 gallons of gas to make the whole trip. At $3.10/gallon, it would cost (11.67 x $3.10) $36.16 to make the trip. In order to save $36.16 in taxes, one would have to spend ($36.16/.09) $401.77. At this spending level, you would be no better off than shopping in Seattle. Anything spent over this amount, and your trip would be a success. If you spent any less than this amount, then it would actually cost you more to shop in this tax free environment. If you decided to carpool with a friend, then you would only have to spend half as much to break even.

Let’s take a look at a chart that shows how much you would need to spend based on the mileage of your car in order to break even.

Obviously, the worse the gas mileage, the more you would have to spend on goods to break even. Here is something else to think about. The lower the differential between tax rates, the more you would have to spend to break even. Lets go back to the 30 MPG example. Imagine if the tax rate in Seattle was only 6%. Here is how much you would have to spend. 350/30 = 11.67 gallons of gas x $3.10/gallon = $36.16 to make the trip. Now, we divide $36.06 by .06 rather than .09, and we get $601. With a change of only 3 percentage points, a consumer must spend almost 50% more to break even!

The lesson learned in this story is that although tax free purchases may sound good on the surface, you must spend a lot to make the trip worth it.

I have attached to this post a graph I created in Excel that shows how as MPGs decrease, one must increase their spending to make the tax free savings worth it.

I was at Barnes and Noble earlier today when I came across a “new” book written by Suze Orman. Now when I say that the book is new, I mean that it is new to me. The book has actually been out since March of 2005, so it is actually about three years old. Nevertheless, the information that is inside does not really change from year to year. For those of us who do not know who Suze Orman is, she writes articles for Yahoo! Finance and also has her own show on CNBC called the Suze Orman Show. Her specialty is personal finance.The book that I found was called The Money Book for the Young, Fabulous & Broke. The book is geared towards the younger generation who is in their twenties up until their early thirties. It is most directed to those who have accumulated a pile of debt going through college, and now that they are out they are struggling to make ends meet with a low paying job, high cost of living and endless debt. Even if you aren’t hopelessly in debt, a younger person can find this book to be especially beneficial. In this book, Suze covers a variety of topics over the course of 10 chapters and 360 pages.

Here is a summary of the table of contents:

1. Know the score (Credit scores)
2. Career moves
3. Give yourself credit (Get the most out of credit cards)
4. Making the grade on student debt
5. Save up
6. Retirement rules
7. Investing made easy
8. Big ticket purchase: Car
9. Big ticket purchase: Home
10. Love and money

The thing that I really liked about this book when I was browsing through it was how simple the author makes things seem. Suze puts all her points into really simple terms that people can relate to and understand, even if they have never taken a finance class before. If you or someone you know is going through a financial rough patch, this could be really helpful to get them to understand where the best places would be to put their money. Currently you can buy this book for only $6.25 at Abebooks.com

Credit card companies have a lot of competition for your business. Often, they market gimmicks in hopes that you will join their card. 8.9% introductory rate for 6 months they say! That works out great for the 6 months, but then they bump you up to 26% or something crazy like that. Not fun at all.

Yesterday I got a credit card offer from Fidelity that was very intriguing. They offered a 0% introductory fixed APR for cash advance checks and balance transfers until April 2009! That is 13 1/2 months away! This is a great opportunity to make a nice riskless profit. What I could do is apply for the card. Once I am approved, I can write a cash advance check to a bank and open a CD with it. For a 1 year CD the average rate is somewhere around 4% right now. For every $1000 that I am approved for I can make a free and riskless $40! That means if you are approved for $10,000 you can earn $400. This sounds great, but there is one catch though. In the offer they state that there is a 3% cash advance fee. You still stand to make a profit though. The riskless profit would be 4% - 3% = 1%. So for every $1000 you will make $10 risk free! Disappointing I know, but imagine if rates were at 6%.

Just something to think about for when rates go back up again.

Trading stocks can be tricky business. Just when you think that now is the time to get into a stock it goes down, and as soon as you decide to sell it goes up. I think we’ve all been there. The problem with trying to “time” the market yourself is that there can be a lot of human emotion involved. If a stock is just off its 52 week high, it can be easy to hang on to it thinking that it will rise back up to where it was. As the stock continues to drop, the investor continues to hold thinking again that it will go back up.

One of the best ways to try to time the market is by developing a strategy of when to get in and when to get out and sticking with it. A carefully devised plan is useless if you don’t stick to it. The website TradingSolutions.com
thinks that it may have come up with a system that can predict peaks and valleys in a stock’s trading pattern. In fact, they their system can predict price movement in forex, futures, mutual funds, and options. They say that by using neural networks, which is a way to analyze trading patterns in stock price data, they can predict the best times to be in and out of a stock. The company says that “a more effective way of using neural networks is to model what the best possible trading strategy would have been in the past and apply that strategy to your current trading.” Seems simple enough right? The user can even choose between over 250 different functions and technical indicators in order to sift through historical data, which will then be used to project the future.

The nice feature of their program is that you see how trading on a certain function or technical indicator would have performed over a certain period of time. By using this, you can see whether or not a certain stock trades in predictable patterns. On their website they give a great example of how trading based on their program can produce phenomenal results. One case study they use is trading Wells Fargo from 1/31/2007 - 1/31/2008. Throughout the one year period, the TradingSolutions system showed great results. If an investor had used the buy and hold strategy over this time period, they would have had a return of -5.10%. Using the TradingSolutions system, the return would have been +132.68%. This is probably a fairly extreme example, but it shows what their system can do.

Take a look at the following charts to see how these trades were executed.

The first chart shows all of the trading suggestions over the one year period. The second chart shows how the stock performed over the course of the year. The red chart shows the buy and hold strategy. The green chart shows the TradingSolutions strategy.

One thing to keep in mind though is that using this system requires that the stock be actively monitored and actively traded. In the Wells Fargo case study, the stock would have been traded 32 times over the course of the year, which averages out to about one trade every seven days. Assuming $10 a trade, that is $320 in commissions for the stock for the year. If you have a decent amount of money invested into the security, then it won’t matter too much, especially if you are getting a +132.68 return.

The system promises to be a miracle worker, but it doesn’t come cheap $995 will get you the most basic version that updates its’ buy/sell advice at the end of the day. For another $1000 you can see the buy/sell advice in real time. Don’t hang your heads just yet though, because TradingSolutions offers a free 30 day trial of their software. Feel free to check it out and see what kind of software some of the “big boys” may be using, and in the meantime it may give you a few decent trade suggestions in the process. Here is a link to the free download.