Investor Brain

Saturday, May 17, 2008

New Tools for New Cost-Basis Reports

IT WON’T BE LONG BEFORE CONGRESS MANDATES THAT YOUR BROKER tell the Internal Revenue Service the exact cost basis of securities you’ve sold. The move, designed to help pay for new federal programs—such as those aimed at the housing crisis—will not only increase scrutiny on investors, but likely sharpen a budding competition between two software companies that make tax-aware portfolio-management software.

The House Ways & Means Committee recently passed the Housing Assistance Tax Act, which includes a cost-basis reporting measure that could bring in $8 billion in tax revenues annually. “You do things to help housing, and you have to pay for part of it with cost-basis reporting,” says Stevie Conlon, tax director at investment-software specialist GainsKeeper. Ways & Means’ passing a bill with that provision puts it on “an express train to passage.”

If passed, the law would require tighter cost-basis reporting for positions that are closed in 2009. The compliance dates would be Jan. 1, 2010, for stock, Jan. 1, 2011, for mutual funds, and Jan. 1, 2012, for debt and other instruments. Investors are supposed to report the cost basis for their sales now, but the new measures would tighten scrutiny and impose penalties for mistakes.

Given all the headlines about subprime mortgages, Conlon thinks there’s a high likelihood the measure will become law.

Cost-basis reporting was also a funding mechanism in the farm bill that has a May 16 deadline for passage. Only one bill can legislate it, so the existence of two makes new, stricter rules that much more likely.

Conlon says, “There is likely to be pressure from different groups in the financial industry to make some changes, especially from mutual funds.” For instance, she expects that effective dates could change, as well as what kinds of holdings—for example, stocks, commodities, derivatives—the new reporting requirement will cover.

WHATEVER ITS EVENTUAL SHAPE, the measure will further stir a new rivalry. For years, the only game in town was Conlon’s employer, GainsKeeper, published by Wolters Kluwer. It comes in several versions. Earlier this year, upstart Maxit was rolled out by publisher Scivantage. Intriguingly, a cofounder of GainsKeeper, Cameron Routh, was hired away by Scivantage last year, leading to a fierce marketing war and behind-the-scenes legal kerfuffles.

GainsKeeper was first offered as a Web destination. Customers signed up for an account, then imported their brokerage transactions. Now the firm offers an enterprise application to brokers that integrates with their Websites, allowing clients to use GainsKeeper while logged into their accounts.

GainsKeeper is integrated into online brokers like TDAmeritrade, Scottrade, E*Trade Platinum and ShareBuilder, where customers get it for free. OptionsXpress clients can set up a GainsKeeper account for $24.95 per year, while at Zecco, it costs $24.99 every six months. This summer, Firstrade is expected to offer it, too.

Other firms offer a link to the retail version of GainsKeeper. These include Schwab, Fidelity, thinkorswim, Siebert, Interactive Brokers, AB Watley, ChoiceTrade and E*Trade (for customers who don’t qualify for the Platinum level of service). Using the retail version requires a customer to export transactions to a file that’s then imported into GainsKeeper.

Maxit doesn’t have a consumer version, although its enterprise application is integrated into several newer brokerages. It’s now offered free to customers of TradeKing and Just2Trade. Options- House is in the process of making Maxit available; it expects to roll it out over the summer. Other brokers are expected.

Why does any of this matter to brokerage clients? With the potential for hefty penalties, filing a correct tax return is more important than ever. And GainsKeeper’s and Maxit’s tools help traders reduce taxes, and calculate statistics such as return on investment. It’s also important for frequent traders to correctly identify and report wash sales. Their ability to track ticker-symbol changes and stock splits, is helpful, too.

A company that chose Maxit says it was impressed with how its system reads database files, making portfolio updates in close to real time; GainsKeeper’s methodology involves converting several files, sometimes leading to a reporting delay.

The nitty-gritty of how the two programs deal with the transaction files is most important to the brokers. One executive said that the overall cost (purchase plus operating expenses), ease of integration, and functionality were important to his firm, which opted for Maxit. But GainsKeeper still has more brokers. And their rivalry should aid traders as well as brokers.

Published in Barron’s, May 11, 2008.

Thursday, May 15, 2008

Schwab's Active Trader survey Overlaps with TradeKing's

It’s a trend—active traders think the market is going to go sideways, but believe the worst of the bear attack is over.  The following is a press release I received yesterday from Schwab.

Oh and the Electronic Investor written by Yrs Trly is finally back in print this week.  The text will be posted here on Saturday though it can be seen now on the Barron’s Online site even if you are not a subscriber.

SCHWAB STUDY FINDS ACTIVE TRADERS ARE OPTIMISTIC ABOUT THE MARKET DESPITE RECENT VOLATILITY

SAN FRANCISCO, May 14, 2008 – After one of the most volatile quarters in recent history, Charles Schwab today released details of the Charles Schwab Active Trader Sentiment Survey designed to take the pulse of nearly 500 individual investors who trade frequently. Among the findings: 

- Nearly half of the respondents (49 percent) were 55 years or older.
- 76 percent expect the S&P 500 to rise or trade sideways in the next six months.
- Eight-in-ten respondents intend to maintain or increase the number of trades they make in the next six months.
- Four out of ten traders surveyed now regularly trade options, 95 percent of which expect to maintain or increase their options trading during the next six months.
- Half of the respondents view volatility as an opportunity in the marketplace.

“Traders are still very engaged with the market and are finding opportunities despite a difficult environment so far this year,” said Richard Levine, vice president of Schwab Active Trader. “These sophisticated, experienced investors have the ability to trade in up and down markets.  We remain committed to helping traders be successful in all market environments by offering powerful trading tools, knowledgeable trading specialists and educational seminars on everything from stock selection to risk management.”

Trader education has become particularly relevant with the growing popularity of options trading among active investors seeking out more sophisticated options strategies.

In fact, the Schwab survey showed that 75 percent of traders who incorporate options in their portfolio do so with the goal of generating income or hedging for risk management. Only one-in-four traders indicated that market speculation was the leading reason to trade options.

“The findings of the survey reveal that investors are starting to embrace options as a way to help protect their investments and potentially profit in an unstable market,” said Randy Frederick, Director of Derivatives at Charles Schwab.  “Active traders are taking the right steps to become informed investors, and they are taking advantage of more advanced tools and strategies.”

Survey Methodology

Survey data were derived from nearly 500 active traders and investors based on responses collected during February and March of this year. The data was analyzed by Directive Analytics and has a statistical accuracy of + or – 4.4 percent at 95 percent confidence level.

Wednesday, April 30, 2008

Survey Says: Bearishness Subsiding, Uncertainty Increasing

According to a press release issued today by TradeKing, a late April survey of 3,000 equities and options traders that they conducted indicates that bearish sentiment is receding. Just 23.9 percent of active traders described themselves as either “bearish” or “very bearish”, down significantly from 48.3 percent in January.  At the same time, 46 percent of surveyed investors (42.9 percent of options traders (OT), 50 percent of equities traders (ET)) indicated a “neutral/not sure” position in their market outlook for the next three months, the highest level of uncertainty reported in the past four quarters.

(The following is a blatant rip-off of the TradeKing press release.)

The survey also showed that oil prices, the U.S. dollar and interest rate changes persist as top market triggers investors are watching. However, nearly 38 percent of OT and 40.7 percent of ET listed oil as their number one “potential trade trigger” to be watched “intently”, ranking it the top concern among investors.

The in-house survey was conducted April 22-25, 2008, via email to 3,000 TradeKing clients, with an estimated 95% confidence level.  The survey results were segmented into two client groups: those who trade “options only” with TradeKing and those who trade “equities only.”

“The results from our April survey seem to indicate that, although investors remain cautious, they feel the worst developments in some areas of the economy may have passed,” said Don Montanaro, CEO of TradeKing. “TradeKing investors are starting to move on from the subprime mortgage woes and focus on how oil prices might impact industry and consumer spending over the next few months. With a surprising number of clients reporting ‘better than expected’ investment returns this past quarter, they see there are still opportunities to win in a volatile market.”

On the personal finance front, active investors indicated they are responding to the current volatility in the market by adjusting investment strategies, trimming energy costs and household budgets, and considering more foreign investments.

—Twenty-nine percent of OT, 34.7 percent of ET reported adjusting to the new economic conditions by “trimming ... energy consumption”;

—Thirty percent of OT, 21.3 percent of ET are “switching investment strategies to respond to recent market volatility more effectively”;

—Twenty-one percent of OT, 21.8 percent of ET are “considering foreign investments to balance out the falling dollar”;

—Twenty-one percent of OT, 21.3 percent of ET are “trimming ... household budget spending”;(2)

—Twenty-two percent of ET respondents also favored “‘buying on the dips’ to lower my cost basis on some long-term holdings.”

In addition, the majority of respondents who will be receiving the one- time economic stimulus tax rebate said they plan to use the funds to either pay down personal debt (credit card, mortgage, student loans, etc.), or invest in the market.

(1) The Reuters/University of Michigan consumer sentiment index, April 2008.

(2) See recent New York Times article reporting on how consumers are cutting household costs, http://www.nytimes.com/2008/04/27/business/27spend.html?_r=1&scp=1&sq=recession+diet&st=nyt&oref=slogin
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