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For those who feel like the gas tax holiday will be a great thing to have, please take this into consideration. Just because the 18 cent per gallon tax is eliminated doesn’t mean that retailers will necessarily drop prices by a similar amount. In fact, they may turn the gas tax holiday into a gas profit holiday.

Most gas stations make 10 cents per gallon or less in profits. Some just break even on gas. The reason for this is that they use the gas to get you there, and then profit off of the soda, beer and snacks that are in their convenience store. If a retailer could make a few extra dollars on the sale of gasoline they would.

Imagine that a retailer currently earns 5 cents per gallon. When the holiday in enacted, prices should theoretically drop 18 cents per gallon. Imagine that instead prices drop by only 13 cents per gallon. If this happened, there would be an additional 5 cents per gallon in savings that would not be passed on to the consumer. Guess where those five cents go? That’s right, into the pockets of the gas station owners. The gas station just increased their summer gas profits by 100%. Not too shabby. Even if the station dropped it 17 cents, that left over cent would give the station owners an additional 20% in profit for the summer. Once again, not too shabby.

Click on the following link to see what respondents to a CBS poll thought about the proposed gas tax holiday. The results clearly show that many see it as a political stunt to gain favor.

The word of the week for this week is hedge. This word is very important for investors who may have a large position in a stock, and believe that the price of it may start moving in an unfavorable direction.

Suppose that a company owned 10,000 shares of Netflix. They bought the stock 6 months ago at $15/share for a total investment of $150,000. Since then, the stock has doubled up to $30, which gives them the value of their Netflix holdings to be $300,000. Now they would like to continue to hold the stock, but the company predicts that the economy may not be as strong as usual, and this could have a negative effect on the price of their stock. In order to protect against these losses, the company purchases protective puts with a strike price of $30 for June 2008. These puts cost $3/share. Each contract is for 100 shares, and the company purchases 100 of these contracts for a total of (100 contracts x 100 shares/contract x $3/share = $30,000). These options give the company the option, but not the obligation to sell all of their shares at $30 per share before June 2008 regardless of the current market price. If the price of the stock rises, then the options will expire worthless.

Let’s imagine though that by May 2008 the price of Netflix has dropped from $30/share to $20/share. Without the hedging that the company did, the value of their Netflix holdings would be only $200,000. This is a loss of $100,000. With the options, they could exercise them at the $30 strike price for the total value of $300,000. The only cost to them would be the $30,000 insurance policy that they took out. By using the options, the company will sell at a realized value of ($300,000 - $30,000 = $270,000). this is $70,000 more than what they would have had if options were not used.

So as a definition, hedging is essentially an insurance policy that companies take out in order to lock in profits.

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.