I have decided to add a non-blog section to the site. It is more dedicated to company analysis (at least for now anyway). I have a “beta” version of a small example of the site. Hope you like it! Click here to see it.
As I was surfing the internet tonight I came across an issue that I had briefly read about earlier in the election system. What I came across was the official website for the “Fair Tax.” If my memory is correct, I recall a president candidate or two running with a major part of their platform being the “Fair Tax” system. According to the site, John Cox, Alan Keyes, Ron Paul and Mike Gravel all supported the Fair Tax. John McCain did not support the Fair Tax. Barack Obama and Hillary Clinton did not give and official answer one way or another. The official website can be found here.
Here is my official view of this proposed tax policy.
Under the Fair Tax system, there is no income tax. If you make $10/hour and work 80 hours during your pay period you will get a paycheck for $800, instead of the tax adjusted amount. The government has to get their money from somewhere though, and the Fair Tax system suggests that they should get it from sales taxes. The Fair Tax systems is actually entirely consumption based. Those who like to spend a lot of money will pay the most in taxes. Those who are savers will be rewarded by paying less in taxes. Compared to the current income tax based system, the Fair Tax would be the equivalent of a 23% income tax. Compared to a sales tax, the Fair Tax system would have a 30% sales tax.
Fairtax.org makes some compelling arguments for why a switch to this kind of system would be a good idea. Their main arguments are:
The people in favor of the Fair Tax feel that too much time money and confusion is spent each year attempting to file taxes. With a flat rate sales tax, this would cover all government expenses without all the confusion.
Some critics argue that the Fair Tax system would eliminate the deduction that is taken on interest payments on a home. Fairtax.org argues that since you will have more take home income this would offset the deduction that you would normally take. They also claim that “With the fair tax, mortgage interest rates fall by about 25 percent (about 1.75 points) as bank overhead falls.” Homes also become more affordable since “first-time buyers save for that down payment much faster, as savings are not taxed.”
The Fair Tax system has created what they call a “prebate.” This is essentially a prepayment by the government to offset the estimated amount of taxes that one would pay on essential goods and services. For example, a household with two adults and two children would receive a prebate of $537/month. This is based on the assumption that they will spend $28,000 on essential goods and services. Hawaii and Alaska oddly enough have a different prebate table, which actually result them receiving a greater amount in prebate money.
Some people argue that the prebate is pointless, and food and medicine items should just not be taxed. FairTax.org responds to this by saying, “the wealthy spend much more on unprepared food, clothing, housing, and medical care than do the poor. Exempting these goods, as many state sales taxes do, actually gives the wealthy a disproportionate benefit.” They also feel that “exempting one product or service, but not another, opens the door to the army of lobbyists and special interest groups that plague and distort our taxation system today.”
Although the system was designed to be free of loopholes, there is one that really stands out to me. The Fair Tax only taxes new goods. The theory behind this is that the item was taxed already when it was first purchased and should not be taxed a second time as a used item. Therefore, people who purchase used goods will not have to pay the tax. This could could have a couple of benefits/drawbacks. Poor people are more likely to buy used than the rich, and therefore will be saving 30% automatically on all used goods. At the same token, used goods could be sold at a 30% premium because it is common knowledge that these items aren’t going to be taxed, and therefore the missing tax gets passed on to the business owner in the form of higher profits. Having no tax on used items is something that would make any environmentalist happy. With a automatic 30% markdown on all used items, it would encourage people to buy used rather that new and would help to reduce consumption and encourage reusing old items.
Having no tax on used goods could have a major negative impact on companies though. Imagine a car manufacturer like Ford. Why would someone want to pay a 30% tax on a new $30,000 car ($9000 in taxes added on). The $30,000 car would actually cost $39,000 after taxes. It is a common theory that vehicles lose 20-25% of their value as soon as you drive them off the lot. At 20% we could conservatively say that the $30,000 car would be worth $24,000 not long after it was first purchased. Let’s say that the value drops by 20% by the end of the first year of ownership. Why would someone want to pay a $15,000 premium for a car that is a year newer? Remember that the slightly used car would not be taxed and the new one would. This would not make any sense at all from a consumer’s standpoint. I think that this Fair Tax system would have a very negative impact on big ticket item manufacturers.
I think one major advantage of the Fair Tax system is that it would help to reduce tax evasion and illegal immigrants. People can definitely evade taxes in this system by buying used goods, but there are times when you have to buy new goods. Food, medicine, motor oil and gasoline are some major items that quickly come to mind. The Fair Tax system would increase the amount of money that is put into the tax system by illegal immigrants. The system would also give a large incentive for illegal immigrants to become citizens. The prebate is given out to “all valid Social Security cardholders who are U.S. residents.” Illegal immigrants would not fall into this category and would not qualify for the prebate. They would be forced to either qualify for citizenship, or pay the 30% tax for food without a prebate.
Overall I think that the Fair Tax system has the potential to be an effective system. It has a few issues with it that could use a little more ironing out, but as our current tax system becomes more an more confusing I could see an increasing movement towards this type of system. For those who are interested in reading more about the Fair Tax, there is a book dedicated to the subject written by Neal Boortz and John Linder.
For a link to the official Fair Tax Act of 2007 – HR 25/S 1025 plain English summary, click here.
I know I wrote a review earlier about my trading account with Optionshouse.com, but I thought that I would add some screen shots to go along with the review.
Many of these screen shots will be too large to fit into the blog properly, so if you click on them you will be able to see the full size version.
This first screen shows the options chain view. In this view you can see the bid, ask, change, volume and open interest. If you click on any of the call or put prices a black box such as this one will pull up and allow you to choose many different trade options depending on what you want to do. The screen is actually much larger, but I wanted to just show a snippet to give an idea of what the chain view looks like. One nice feature of this view is that it refreshes every five seconds and flashes a different color for each option that changed in price during the last five seconds.
The second screen showes the options ticket. This is where you can initiate your trades. It also gives you the choice of either doing one trade at a time, or you can add different legs to the trade as well. A nice feature that is shown on the bottom of this image is that the total cost of the trade automatically updates each time you alter your trade.
In the third screen, you can see the watchlist which is located on one of the sidebar tabs. The watchlist is nice because it allows you to be able to see all of the stocks you are most interested in. One downfall of the watchlist is that it has to be refreshed manually. While this may be a nuisance if you need to have the most up to date quote, I can see how it would put a strain on the site’s bandwidth if it were in real time. Either way, it is still a nice feature.
I will admit to being a terrible options trader, but I can see how this site would be a great trading platform for an experienced trader, especially with the fixed commission structure.
There are many different investment services out there to choose from. Most tend to be geared towards the experienced trader who wants to use limits and stops in their trades. Well Sharebuilder.com is one of the few sites that is geared to a more novice audience. Sharebuilder, which I believe has recently joined forces with ING Direct offers investors to set up up automatic investments that allow them to purchase stocks in whole dollar amounts instead of individual shares. By doing this, beginning investors can invest in partial shares of Google or Apple instead of having to throw down a bunch of cash for a single share.
Through the program, you schedule Sharebuilder to make regular investments in a given stock on a certain day each month or week. One negative thing about this system is that you cannot specify an exact time to initiate a trade. At some point in time during the trading day, Sharebuilder will acquire the shares for you. A good thing about this plan though is that it allows you to make regular investments in a given security. This will allow you to be able to smooth out price fluctuations since you will be investing over a wide range of times.
Sharebuilder also offers some standard brokerage features as well. For an additional price you can make trades in real time just like you would with a more “full-service” broker. They also offer options trading and margin accounts as well.
Don’t you hate it when you find this great stock to invest in only to find out that your available cash balance is too low to make the trade worth it? Well Sharebuilder has a great feature that will easily solve this problem. What they have created is called Express Funding. With Express Funding, you can “place Real-time Trade orders with cash directly from your checking/savings account, eliminating the wait to process your deposit.” It costs $5 to do this, but if you have an Electric Orange account set up through ING Direct the fee is waived.
Sharebuilder has set up three different account types depending on what kind of trader you are:
As you can see, with the advantage plan you are essentially getting trades at $1/trade assuming that you make 20 investments per month. To my knowledge that tops most other brokers out there.
If trading at regular intervals for a cheap price sounds good to you, I would highly advise you to give Sharebuilder a closer look. For a direct link to the site, click here.
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.
I have finally decided to enter the world of margin accounts. When I first began investing, I quickly became one of the world’s best poor performing stock pickers. I somehow always found myself purchasing these promising looking stocks, only to find them dropping like a rock right after I bought them. I have since improved my skills at picking stocks, but I have found myself yearning to profit from my keen ability to choose bad stocks.
To profit from poor performing stocks, one needs to open a margin trading account through their broker. With a margin account a trader can short sell stock, as well as trade options. After looking through the multitude of online brokers I settled on optionshouse.com. I went with these guys because they offered a low fixed rate fee for trading options. They currently charge a flat $9.95 per trade for options on an unlimited number of contracts. Many other brokers will charge a fixed fee plus a per option fee too. With Optionshouse.com, no matter how many options I trade, each trade will be the same fee. They also allow you to buy and sell stocks for a very low price as well. They currently charge $4.95 per stock trade for an unlimited number of shares. I hope to do a more detailed review on optionshouse.com once I have had a little more experience with their site.
For those who don’t know much about margin accounts, here is a quick primer:
The two main things that can be done with a margin account are short selling and buying options.
Short selling is the sale of shares of stock that you do not personally own. The broker essentially borrows the shares from one of its other traders and sells it on your behalf. Then at a later date, you must repurchase the shares and return them to the broker. The strategy in short selling is that you hope that the price of the stock falls so that you can buy it back for less. Look for a more detailed definition in the next issue of the financial word of the day.
When trading options, and investor has a few basic options (no pun intended). Options were created as a hedging tool, but can also be used as investments as well. Look for a more detailed definition to follow later on in the financial word of the day. With options you can choose puts or calls. Puts give you the right to sell and calls give you the right to buy. The curveball thrown in on this strategy is that options are time dated. When you purchase a particular option it comes with an expiration date. If nothing is done with the option before this date it will expire worthless. If you trade it before the expiration you can stand to make some money.
Enough with the definitions already! They will be defined in full living color soon enough!
Today I made my first options trade. I decided to purchase a February 2008 $5 put on JetBlue (JBLU) at $.75 per share. I’ll be honest here, I’m a bit of a chart trader. Take a look at this one year chart for Jet Blue. Their las uptrend was at the very beginning of 2007. It was so early in 2007 that it doesn’t even show it on this graph. Historically, stocks with charts like this typically don’t just recover overnight. With this put placement, I am willing to bet that by mid-February this trend will not have reversed itself. I see Jet Blue trading down as far as $2.50 a share before it starts to see any sort of recovery. 
So we shall see how this all works out. Hopefully well. After just one day my put is trading at $.80 per share…a modest gain of $.05 per share. As a side note: Options are for 100 shares, so this $.05 per share gain turns out to be a $5 gain per option purchased.
As a final note: I am 100% for full-disclosure. Any time I make comments about a particular stock or company, I will state in plain English whether or not I have a monetary stake in the company. This way the reader won’t have to worry about me trying to pump up a stock. I will not however disclose specific monetary figures that are invested in a particular company, since this is not necessary. I will state whether or not I have a financial interest in any of the companies mentioned at the time of the article printing. It is possible that I may buy or sell a stake in the company at some point after the publishing of the article. I plan at some point creating an entire page devoted to what securities I currently own, so that I can be as open with this information as possible.
Additional note on 2/21/2008: Today when I came home from work I found an envelope from Optionshouse waiting for me. Enclosed was my monthly statement, something that I totally did not expect to be receiving from a discount broker like Optionshouse.com. All in all it included a detailed transaction history, a correspondent notice about 1099 forms, and another letter that covered Anti-Money Laundering, privacy policy, a margin disclosure statement, a day trading risk disclosure statement, and an extended hours trading risk disclosure. All in all, I must say that I am very impressed that they sent me all of this. As a final note, their money market account for uninvested cash is paying a lovely 3.64% right now.
Additional note on 3/09/2008: So I am beginning to find out that trading options are a little bit trickier that I had initially imagined. I think I would be better off just shorting stocks. I have no problem picking the ones that are going to go down, it is just that whole time decay thing about the options that is getting to me. Ideally I would like to work with a longer time period, but I can’t justify paying the extra premium for it. On a better note, I have just found my first winning option in Radio Shack (RSH). This company shot up about 22% right after its’ earnings report a week or so ago, but ever since it has been falling. Keep falling Radio Shack, I’m loving it right now!!!