Investor Brain

Saturday, December 19, 2009

Social Investing Doesn't Quite Click

IF YOU BELIEVE YOU’RE AN INVESTING GENIUS, you most likely already have a system to choose your trades. If you’re not an investing genius, a site called kaChing, which styles itself as “the Web’s largest marketplace for investing talent,” is there to help you out.

KaChing (http://www.kaching.com) lets you scroll through a list of investing “geniuses,” and choose one or more to track. The site features “Unparalleled Transparency,” which includes a genius’ complete trading history, performance chart, return breakdown, portfolio composition, risk metrics and published research. Geniuses each have a personal message board where you can ask for more details.

What you do on kaChing is browse its list of investment advisors and choose a few you’d like to emulate. Open an account, deposit some money, and then, in theory, sit back and watch your portfolio grow. You invest a minimum of $3,000 with each genius you choose to follow. Each genius sets a management fee, which ranges from 0.25% to 3% of assets; 1/12 of that annual rate is charged for each month you follow a particular advisor. In addition, when a trade is executed on your behalf, you pay approximately two cents per share transacted.

You can also follow a genius, or even another kaChing member who is not an investment advisor, and just get e-mail alerts when they make a trade or post research.

The account you fund is held at Interactive Brokers (http://www.interactivebrokers.com), but the funds can only be used for your kaChing activities. In this space earlier this year ("New Ways to Manage Your Portfolio,” Aug. 24), we discussed a site that uses a similar social-networking strategy: Covestor Investment Management (https://cv.im) also uses Interactive Brokers, though its customers can also trade through TD Ameritrade (http://www.tdameritrade.com).

KaChing launched in October, and we were treated to a demo of the site at the time. Your humble columnist has been struggling to figure out a way to cover this particular product ever since, mostly because the firm’s marketing efforts are, in my opinion, off-putting.

It focuses on negative talk about mutual funds, a stance shared by kaChing’s competitor, Covestor. That’s not what I consider the most compelling reason people would want to sign up. (I’m not crazy about the site’s name either, but my age bracket is not the site’s target market.)

It was on Twitter, where one of the people I follow helped me put it all together. Bob Brinker, author of The Brinker Fixed Income Advisor newsletter (brinkeradvisor.com) tweeted, “Both Covestor and kaChing are so close to a great product—but just miss it. Wonder who gets it right first. Big market for the winner.” I called Brinker and we talked over our issues with both sites.

Brinker is a potential genius on kaChing, but says he isn’t likely to participate because he doesn’t want all of his recommendations to be public. Brinker finds the idea of having Covestor or kaChing act as the custodian for his customers’ funds very appealing for legal and regulatory reasons. Yet he’d prefer they were set up so that only people paying to invest with him could see what he’s doing in real time. Brinker says, “I understand the need for the clarity, but I don’t think someone who isn’t paying me should know what I’m doing.”

He also believes that the winner in this space will tailor it to investment-newsletter writers with solid long-term results, and that the firm will also let the customer choose his or her own broker. Investors who are looking for an expert to follow should be focusing on the longer term; month-to-month gains should not be the immediate goal, he says.

Like me, Brinker is annoyed with the attacks on mutual funds—charging them with cheating customers. Sure, some extremely high-fee, mediocre-performing funds deserve to be criticized and exposed—as Barron’s often does—but not the entire business. For its part, a Covestor spokesperson says its marketing message seems to resonate with customers.

I do believe there’s a place for services like the ones provided by kaChing and Covestor. But I think they are selling themselves short by focusing their marketing efforts on denigrating mutual funds. I appreciate how kaChing spells out exactly what it is you hold in your portfolio when you choose a particular genius. It would be helpful, too, if investors had transaction costs spelled out for them before they pulled the trigger on a trade.

SO LONG TO FLAT PRICING: OptionsHouse (http://www.optionshouse.com), which has featured flat-fee pricing for stock and options trades, is changing part of its fee structure to reflect changes in the way exchanges operate. George Ruhana, CEO of Options-House, detailed the new fees for us.

Stock-trade pricing will remain the same, at $2.95 for any transaction up to 50,000 shares. But options pricing of $9.95 for any number of contracts ($14.95 for any multi-faceted trade) is going away. In its place, customers will be able to choose from one of two pricing structures.

For those who trade in relatively small lots of options contracts, one choice is $5 for up to five contracts; anything over five contracts is $1 per contract. In this tier, spreads are $10 for any number of legs (or different options symbols traded) up to 10; it’s $1 per contract for more than 10 contracts.

Those who trade large blocks will be more interested in the other pricing structure, which is $8.50 plus 15 cents per contract. Both price structures would cost $10 for a trade of 10 contracts. Spread trading is $12.50, plus 15 cents per contract.

New customers will be asked to choose a plan when they sign up for an account. These prices aren’t locked in, though; customers can switch plans every 24 hours, to go into effect the following trading day.

MORE ABOUT BONDS: The BondDesk Group (http://www.bonddeskgroup.com) has relaunched its Website, and it has a variety of articles, along with data of interest to retail investors. Click on “Individual Investor” on the left-hand side of the main page for resources about bond-investing strategies and building bond ladders. You may also find the data on yields and most-active trades helpful.

Published in Barron’s, December 14, 2009. 

Saturday, December 05, 2009

First-Rate Online Bond Analysis

BONDS HAVE ENJOYED A BIG SURGE IN interest from individual investors since the credit crisis. And they’ve been getting more attention from online brokers, too. The latest to add new fixed-income research capabilities is E*Trade, which just released a spiffed-up version of its Bond Resource Center

Among the new tools are a graphic representation of a bond search, added fixed-income portfolio analysis, and an updated bond ladder tool. E*Trade has attached these proprietary tools to its inventory of bonds, which is supplied by BondDesk, an electronic bond marketplace aimed at retail investors.

I found the Fixed Income Portfolio Report extremely useful and unusual in the online brokerage world. The tool lets you see all the bonds you hold in E*Trade accounts from several different perspectives, giving you an in-depth understanding of your fixed-income holdings. “Portfolio analysis is generally excellent for equities but not so good for fixed income,” says Liat Rorer, E*Trade’s vice president of investment products. “This tool is a step toward fixing that weakness.”

Any E*Trade account that you have that contains fixed-income securities, which include bonds, notes and CDs, shows up in the portfolio report account list. You can look at each account individually, or analyze all your E*Trade accounts as a group.

THE FIRST PAGE OF the report displays a summary of your fixed-income holdings. The next page contains pie charts with credit-rating summaries and types of bonds (corporate, municipal or Treasury) that you own. The next page details the maturity and duration of your holdings, in both graphic and tabular formats, so you get an idea of when your bonds are set to expire and what their sensitivity is to changes in interest rates. Your cash-flow summary—plus detailed data showing your income, month- by-month—helps monitor what your bonds are paying. The final page is a cash-flow analysis that’s broken out into taxable and tax-free income. The report wraps up with several pages of fixed-income definitions.

The sort of detail this E*Trade product offers would be very helpful to any investor trying to rebalance a fixed-income portfolio. At most online brokers, you virtually have to oversee your holdings by yourself, so we applaud this new tool.

Rorer says that E*Trade struggled with how to make the bond-search function more investor-friendly. The search tool itself wasn’t changed—you still have to pick out the types of bonds, the maturities and the range of yields you want. But once the results of the search come up, you can generate a graphic showing all the possible purchases by maturity on the X axis and by Yield to Worst, or the lowest potential yield possible on that bond, on the Y axis.

You can highlight an area on your graph and zoom in, which is helpful when your search generates several pages of bond listings. If you click on a single point of the graph, you get the details about that particular bond. The graph function helps you avoid outliers.

The bond ladder builder is designed to narrow the range of possibilities without making an absolute recommendation on what exact bonds to buy, according to Rorer. You select the type of bonds you want, the maturities you’re looking for, and the time frame of your overall ladder. (A bond ladder comprises fixed-income securities that mature sequentially at regular intervals so that the investor can get relatively steady returns with lower risk and more liquidity than other strategies.) For instance, you could build a ladder with AA+ corporates that starts with the first security maturing in two years, the last in 10 years and the rest maturing every two years over the interim period. The results are grouped by the date the bond matures.

Within each maturity group, the top five bonds are displayed by yield. As bonds are selected for your ladder, the coupons show up in a bar graph at the bottom. You can smooth out your income streams if you’re putting this together to generate monthly income.

If you click on “Preview order,” you get an order ticket. When you’re setting up a ladder, you have to accept the price that is displayed; you can purchase each bond individually if you want to negotiate price.

E*Trade extends agency pricing to its customers, so there is no markup on the price of the bonds. There is a $1 per bond commission with a maximum levy of $250; Treasury-bond purchases are free.

FIDELITY HAS REORGANIZED and added several features to its Stock Research Center. The goal of the redesign, according to Fidelity’s Franklin Gold, is to make the center an idea-generating tool that also allows investors to take action. It’s organized along four different themes: what stocks are moving, which ones you want to search for, which ones people are talking about and what experts think about them.

Most of these subjects are addressed by third-party research providers like Alacra and FirstRain. Fidelity has packaged its research results and made all of them easy to view on a single page.

In addition to showing the most actively traded stocks, you can now see the stocks that other Fidelity customers are trading most heavily. The top four buys and sells are on the main page; you can also look at the complete list by clicking through. The list is ranked by the total number of orders placed, not shares traded. A horizontal bar gives you an idea of the buy/sell ratio of various stocks among Fidelity customers.

Other tools summarize what’s being discussed by financial reporters and bloggers all over the Internet. For instance, Alacra Street Pulse captures comments on companies by sell-side, credit and industry analysts along with influential bloggers (including Barrons.com’s Tech Trader Daily writer, Eric J. Savitz), to let you see what key opinion leaders have to say about a particular company.

FirstRain searches for items of interest to investors, and through its semantic engine, categorizes and tags them. In the Fidelity Research Center, these items are categorized under the broad topics Energy, Consumer, Money Matters, Eye on the U.S. Economy, and Technology. You can then drill down into subcategories, which change daily, depending on what’s being discussed online.

Published in Barron’s, November 30, 2009. 

Saturday, November 21, 2009

TradeMonster's Friendly Options Play

TRADEMONSTER, AN ONLINE BROKERAGE THAT caters to options traders, has introduced a new analytical feature called tradeLAB. Barron’s got an early peek at the new tool, which will be available on tradeMonster’s Website Nov. 16.

Skip Shean, a vice president at the firm, explains that the device takes three complex pieces of information about an options strategy—the underlying stock price, implied volatility and time to expiration—and distills them for less sophisticated options traders. This fledgling investor most likely has an opinion about the underlying security—bullish, bearish, or neutral. TradeLAB will then show the prospective trader whether an options transaction selected—either from the site’s strategy menu or its spreadMaker tool that helps create strategies—would be profitable if the stock pick turns out to be correct.

“The intent is to arm our customers with better, more actionable information to analyze a position and decide whether or not to place the trade,” Shean says,

Like most of the tools on tradeMonster’s site (http://www.trademonster.com), you can get to it from anywhere in the application, including the positions screen, the quotes window, or even an order ticket, before you push the Send button. There are also links from spreadMaker and adjustTrade ("Hardly a Lazy Summer for Brokers,” Aug. 10). Once you’ve popped a tradeLAB window open, the Analyze button loads the strategy you’re considering into tradeLAB.

TradeLAB has two components, a snapshot analysis of how the trade could look at expiration, and a spectral analysis, which shows a range of possibilities from the date of the trade through to expiration.

There are tools similar to the snapshot analysis on most options-trading Websites, although tradeMonster’s version makes key events (such as ex-dividend dates and earnings dates) easier to view. You can change the purchase price or the implied volatility of the strategy to see how that affects your profit possibilities.

The spectral-analysis feature is obviously where tradeMonster has focused its proprietary work. In spectral analysis, tradeLAB lays out the characteristics of a strategy in a way that makes the possibilities much easier to understand. The initial display is a standard candlestick chart, showing pricing in the recent past. The chart then extends into the future to show a color map of the characteristics of your strategy and how it will perform in any scenario.

The spectral chart is color-coded, so that deep green is a 50%-plus gain and deep red a 50%-plus loss, with lighter shades of green and red in between. When you point your mouse cursor to a particular point, tradeLAB shows what the exact gain or loss is. The chart style can be changed. You can display the earnings dates or blow up the entire chart to see a more detailed view. You can also alter the volatility forecast, using a drop-down menu box that lets you pick from the 30-day average, 52-week high or low implied volatility, or any possible volatility you enter yourself to see how the strategy responds.

Shean says that tradeLAB hammers home the effect of volatility on a trader’s potential profits. “Being able to change the volatility forecast and immediately see how it affects the profitability potential of a position helps people take it to the next level of understanding,” Shean observes. “We think it’s a really revolutionary tool.”

The spectral chart is made up of multiple calculations for every trading day in the forecast, so there’s a lot of number-crunching going on. All the analysis performed by tradeLAB is done on your local machine, not tradeMonster’s server, which should keep the site from bogging down when trading volume is high. Once you’ve tweaked the options strategy to your specifications, hit the Create Order button in the lower right corner to generate an order ticket. (Fees are $7.50 per stock trade; options fees begin at 50 cents per contract with a $12.50 minimum.)

This very interactive and graphical tool allows a trader to stress-test a position, and assesses the potential profitability of a trade under a variety of conditions. TradeMonster officials doubt that they will make tradeLAB available for hypothetical, or paper-trading, use; you will have to fund an account to use it.

Another feature just added to the tradeMonster site is the ability to detach windows, which allows the user to separate out, say, a favorite chart or watch list, from the overall platform and run it independently. That capability can come in handy for those using multiple monitors. Shean notes that the platform behaves like a downloadable software system, but in fact is accessible through your Web browser. “Every time a customer logs in, they have the latest version and they don’t have to download any patches or reconfigure their system. It runs on any browser or any operating system, as long as it has the [Adobe] Flash plug-in,” he says.

When tradeMonster was launched a year ago, I expressed some reservations about its survival, given the stock market’s gyrations. Shean says the privately held company, a unit of optionMonster, turned a profit in early October, a milestone it didn’t expect to reach given the headwinds in late 2008 and early 2009. It looks like tradeMonster will be around for a while yet.

CAN’T WAIT FOR NEW YEAR’S: Retail investors surveyed during the last week of October by online broker TradeKing (http://www.tradeking.com) believed that an economic recovery won’t happen until next year. TradeKing conducts a quarterly survey of sentiment; this time around, 47% of the respondents described their market outlook as “neutral” or “not sure.” The firm says those are the highest readings for those sentiments since the survey began in July 2007.

U.S. unemployment claims continue to be the top trade trigger for both equities and options traders, with 41% of those surveyed saying that this is their primary concern. U.S. housing, consumer spending and interest rates tied for second, at 30%. These concerns knocked quarterly earnings from the No. 2 spot in the prior quarter, falling sharply from 36% to 27% in the most recent survey.

The two most popular sectors for long investments are energy, registering with 58% of respondents, and technology, with 47%. And what are the most prevalent short-selling sectors? Transportation and travel topped the list, followed by finance and retail.

“One thing is certain: Uncertainty dominates right now,” says Don Montanaro, chairman and CEO of TradeKing. “We see at TradeKing how investors’ bullishness comes in the form of very specific moment-in-time opportunities, but the overall sense is that the market could go either way on any given day until we see some solid trending data signaling long-term recovery.”

Published in Barron’s, November 16, 2009.