Published in Barron's
Columns and featured published in Barron's.
Monday, August 15, 2005
Lowering the Velvet Rope
DETERMINED NOT TO BE JUST A BRIDESMAID, E*Trade is hooking up with Harrisdirect. Ameritrade, of course, had previously turned down E*Trade’s overtures, and instead wound up marrying TD Waterhouse.
Both E*Trade and Ameritrade have been intent on bulking up to benefit from the economies of scale they can realize, given the excess capacity of online brokers. And Harrisdirect and TD Waterhouse, both units of big Canadian banks (Bank of Montreal and Toronto-Dominion, respectively), never achieved the size needed to make them competitive with their eventual merger partners, or other leaders such as Charles Schwab. Indeed, according to a research note from First Global, the operations of Harrisdirect were “more or less immaterial” to the bottom line of BMO. E*Trade, however, gets “the high-quality, affluent client base of Harrisdirect.”
Such customers—the sort reading this now—are the Holy Grail of mainstream online brokers, which seek to sell them an array of financial services. One way is to give breaks to the richest, most active clients. An example is Wells Fargo’s online brokerage firm, WellsTrade, which is connected to its banking site at http://www.wellsfargo.com. The site slashed its commissions for customers with a Wells Portfolio Management Account to zip for the top tier.
A PMA includes money-market interest rates, no-fee linked checking and savings accounts, a Wells Fargo credit card with no annual fee, free checks, free online banking and bill paying, overdraft protection and a combined statement that links all accounts.
Most brokers count only brokerage assets in determining the perks accorded to the biggest customers. Wells’ PMA takes into account bank checking and savings deposits, personal loans, credit balances, investments including individual retirement accounts—plus 10% of a mortgage balance with Wells. Counting a portion of your home loan, especially if you live in an expensive real-estate market, significantly lowers the bar for top-tier treatment.
PMA customers with more than $250,000 in total-relationship balances qualify for 50 commission-free online trades per year. Accounts with $100,000 to $250,000 get 50 online trades annually for $2.95 each. After those 50 online trades, it’s the same $9.95 commission paid by the hoi polloi with under $100,000 in balances in their PMA. More than 800 no-load, no-transaction-cost mutual funds also are available at all levels.
The Wells brokerage site is easy to use but somewhat spare in terms of amenities. In our annual review of online brokers ("Speed or Comfort?” March 7), it ranked near the bottom of our list; its formerly higher-than-average fees certainly hurt its ranking. But the new fee structure makes a WellsTrade account very attractive to a PMA customer with a large mortgage who wants to build long-term assets in a cost-efficient manner; for example, with regular purchases of exchange-traded funds.
Back to School: Three interesting resources for students of investing and trading hit my desk this week. One is a book entitled, The Investors Free Internet: How to invest in the U.S. stock market using free information from the Internet, published by Investors Internet (http://www.investorsinternet.com). The 281-page guide tells readers about a variety of free investment sites on the Internet, and how the information on each site can be used. It draws parallels between the business of investing and the operation of major companies. The authors picked their favorite freebies from the 2,000 sites they studied, then put together this guide on how to find, organize, synthesize and use the information available.
The book is can be purchased at its Website, as can a variety of subscription services based on the researchers’ findings. The book is $37.50; subscription services range from free to $29.97 per month.
The second resource is a CD-based course on chart reading and investment research, called InvestorsHelper. The designers estimate it would take about four hours to go through the material provided, after which the student would be prepared to analyze stock-price movements and predict price swings. Topics include charts, trend lines, channel lines, level lines and various forms of moving averages, as well as analyzing income statements, balance sheets, cash-flow statements and other fundamentals.
The lessons on the CD are extremely simple, occasionally a little too simple. If you’re new to the concepts of technical and fundamental analysis, the videos are helpful. There is a heavy focus on stock-price shifts, and how to predict them. InvestorsHelper is available at the company’s Website ( http://www.investorshelper.com) for $29.95. The CD includes a charting package called the Playground; it features the basic technical studies covered in the lessons.
It’s possible to find all of the technical-charting capabilities included in the Playground free at sites such as Prophet.net and Stockcharts.com, along with explanations. The CD does a good job of explaining “how to,” but seldom takes the extra step of explaining “why to.” InvestorsHelper is published by the Boloto Group, which, according to the Website, will be offering $10 trades at its soon-to-open online trading site, Boloto Financial.
Lastly, GAIN Capital (http://www.gaincapital.com) offers an online course for novice currency traders, called “Learn to Trade Forex.” This course, which can be found at http://www.learn-to-trade-forex.com, gives the student 60 days of access to course materials. Along with the program, students receive a demo trading account with $25,000 in virtual funds, allowing them to apply lessons learned.
Analytical Platform Updates: Townsend Analytics has added the Nasdaq’s market-data product, TotalView, to its RealTick trading platform (http://www.realtick.com).
TotalView provides market transparency by showing the complete depth of the Nasdaq market at all price levels, including the aggregated size of all quotes and orders available for execution in the Nasdaq Market Center for each Nasdaq National Market and SmallCap stock. It also includes multiple attributed quotes for each Nasdaq market participant, and net-order-imbalance information for Nasdaq Opening and Closing cross-eligible securities.
TotalView provides very fast Nasdaq order-book information as Nasdaq has made technology investments to reduce TotalView’s latency by more than 75%, to an average of less than 50 milliseconds.
ESignal, which provides streaming, real-time financial market data, news, analytics and decision support tools to professional and individual traders, has added Nymex Direct to its futures-data platform, FutureSource Xtra. A Web-based Java application, FuturesSource Xtra supplies the commodities, financial futures and foreign-exchange trading community with real-time market data, decision support systems and services covering a broad range of markets.
FutureSource builds its offerings from several core features, including streaming real-time quotes from over 50 worldwide exchanges, real-time interactive tick charting, full options coverage and news feeds delivered immediately on demand. Users can add or subtract modules as needed; for a complete list of FutureSource features, as well as an overview of the entire product line, go to http://www.esignal.com/futuresource.
Published in Barron’s August 15, 2005
Monday, August 01, 2005
Day-Trading Currencies, 24/7
CURRENCIES TEND TO BEFUDDLE MOST AMERICANS.
Accustomed to being able to use the same, simple greenback from sea to shining sea, we don’t have the same facility in trading currencies as Europeans, who historically had to swap francs for marks or lira. While the euro has eliminated much of that need, there’s more interest than ever in trading currencies, especially following China’s decision to loosen its tether on the yuan.
Because of the global nature of currency trading, the market is open 24 hours a day, seven days a week, so you can day trade all night long. It’s an extremely liquid market, with daily transaction volumes of $1.5 trillion to $2.5 trillion, and with players ranging from world banks to individual traders.
Since much of the volume is speculative, the spreads vary, which leads to arbitrage opportunities: There is no restriction on short-selling since you’re buying, or going long, one currency when you sell another. Forex Capital Markets (http://www.fxcm.com), which offers online currency trading to institutions and retail investors, states in its “Why Trade Currency?” leaflet that currencies rarely spend much time in tight trading ranges, and have the tendency to develop strong trends. The firm further states that a technically trained trader can identify trends and breakouts that provide multiple opportunities to enter and exit positions. Indeed, currencies tend to have the best-defined trends of any market, perhaps because they aren’t free of governments’ manipulation.
If you’re going to make money trading in foreign exchange, it’s good to have some education and training before you jump in.
You’ll hear the brokers who specialize in forex bang the drum of trading on margin, leveraging a small amount of money to make a huge pile, and so on. Do yourself a favor before following that seductive song: Learn as much as you can before opening an account. As each brokerage service is required to state in its customer information packets, “Forex trading on margin carries significant risk and is not suitable for all investors.” (It’s no surprise that it was the money changers—the biblical equivalent of currency brokers—that Jesus threw out of the temple for turning it into a den of thieves.)
To gain more practical knowledge about currencies, check out “All About...The Foreign Exchange Market in the United States,” published by the Federal Reserve Bank of New York at http://www.ny.frb.org/education/addpub/usfxm/ for some basic information on the structure of the market and the main players.
One way to get into gear is through mock trading. Several online brokers that offer currency trading post trading games, and it’s in your best interest to try out mock trading before you try doing it with real money.
OANDA FXTrade (http://www.oanda.com/), headquartered in New York City with offices in Zurich and Toronto, offers foreign-currency tools and applications as well as foreign-exchange-related content targeted at investors, businesses and travel clients. OANDA’s currency-conversion and localization services cover 164-plus currencies and are available in seven languages. Their mock-trading application is FXGame or fxtrade.oanda.com/fxgame/, and it credits the player with $100,000 in “play” U.S. dollars—and it’s free of charge. It’s a good way to get familiar with OANDA’s platform, and to decide it if will work for you when you start trading real money.
Forex Day Trading (http://www.forex-day-trading.com) provides a good basic introduction to currency trading under its “Education” tab off their main screen. One point the authors make when they discuss taxes is, “Forex traders don’t receive 1099 forms from their broker at the end of the year like stock and futures traders do.” The firm also notes: “Currency traders involved in the forex spot (cash) market can choose to be taxed under the same tax rules as regular commodities [IRC (Internal Revenue Code) Section 1256 contracts] or under the special rules of IRC Section 988 (Treatment of Certain Foreign Currency Transactions). IRC 988 applies to cash forex, unless the trader elects to opt out.”
You can sign up for a 30-day demo account at http://www.forex-day-trading.com/forex-simulated-trading.htm to check out the tools available at Forex Day Trading.
The majority of online forex brokers are market-makers, so they don’t charge commissions on transactions. They make their money on the spreads, and are often taking the opposite side of a trade from yours. Spreads are defined in “pips,” which is a unit of price change in the bid/ask price of a currency. For most currencies, a pip denotes the fourth decimal place in an exchange rate and represents 1/100 of 1%.
FXDirectDealer (http://www.fxdd.com) provides real-time margin-monitoring capability in numerical and graphical format, allowing clients to know where they stand in real time. FXDirectDealer has a charting package with tick charts, and minute, hourly, daily and weekly charts. Chart types include candlestick, tick and bar charts. Bollinger Bands, Moving Averages, Stochastic, MACD and Momentum can also be added. In mid-July, FXDD announced a two-pip spread on the EUR/USD (euro-to-dollar) and nine new currency pairs. The firm says it does not trade against its customers, due to parent-firm Compagnie Financière Tradition’s policies. FXDD allows a 60-day trial of their trading platform, accessible by clicking “Trading Platforms” on their main page.
OPTIONSXPRESS IS ROLLING out futures trading to existing customers, with a subtle “Futures” link added to the selections available under their “Trade” tab. They wrote their own futures-trading interface, rather than borrowing code from a futures house as do most other brokers. Some brokers require you to open a separate account to trade futures, but optionsXpress has figured out a way to allow trading of futures in the same account with stocks and options.
To be eligible to trade futures in an optionsXpress account, an investor must be located in the U.S., have account equity of $100,000, one year of prior futures-trading experience, minimum liquid net worth of $150,000, minimum income of $50,000, and speculation as an investment objective. Existing optionsXpress customers who want to take advantage of this new feature must indicate their interest. Applicants are reviewed on a case-by-case basis, and if approved, can trade financial and currency futures, interest rates, metals, and single stock futures. Commissions are $3.99 per contract plus exchange fees.
ONLINE BROKER NEWS: Ameritrade’s takeover of TD Waterhouse, announced in late June, is scheduled to close by year-end. Joe Moglia, Ameritrade’s CEO, says that he anticipates maintaining the majority of brick-and-mortar branch offices that Ameritrade (ticker: AMTD)will pick up with the TD Waterhouse takeover. One of Ameritrade’s strategies for continued growth is to become a major player in the long-term investor space; its Amerivest subsidiary is evidence of that strategy. Moglia believes that branches are worthwhile for the long-term investor, noting, “We may approach them a little differently because there might be some that don’t make sense.”
Published in Barron’s August 1, 2005
Monday, July 18, 2005
Closing in on Closed-Ends
CLOSED-END FUNDS HAVE FEW FRIENDS. Oh, sure, brokers like them, especially when they get to flog new issues with the pitch that there’s no commission. But they may not tell you that you’re paying a buck for perhaps 92 cents’ worth of underlying assets. And that, after the fund starts trading in the aftermarket, its share price could well head to that net asset value—or lower.
At that point, the critics of closed-ends can carp about what a lousy investment they are. And, to be sure, many are. Some have high expense ratios—higher, in fact, than the 1%-plus that their open-end mutual-fund counterparts levy. And if you don’t buy them during their initial offering (when you’re paying the underwriters, whether you know it or not), you must pay brokerage commissions, as you would with a stock. With many fine no-load and low-cost mutual funds available, plus an ever-expanding array of exchange-traded funds, who needs closed-ends?
Well, sometimes, there are excellent reasons to buy them. The funds sometimes trade at prices below the value of their underlying holdings. Thus, it’s possible to pay 90 cents or less for a dollar’s worth of assets. That’s always been the attraction of closed-ends, and shopping for funds at a discount is one of the oldest investment tacks. And now, various Websites provide ready access to information that used to take a lot of digging, while low-cost online brokers minimize transaction costs.
Closed-end funds issue a set number of shares and trade like stocks and exchange-traded funds. Closed-ends, however, can and do change hands at prices above or below their net asset value. ETFs, in contrast, rarely stray from their NAVs, and open-end mutual funds continually issue and redeem shares at their net asset value. Closed-ends are actively managed, often by the same firms that offer open-end funds, while ETFs are based on some broad market index or a certain sector.
One advantage that closed-end fund managers have over their open-end counterparts is that they don’t have to worry about shareholder redemptions when the market goes south. That makes them more suitable for relatively illiquid asset classes, such as foreign securities. How can you seek out these attractive closed-end funds? One way is to go through Barron’s lists of the funds with a highlighter pen, and take a closer look at those trading at a deep discount. Then there’s the Web. You’d think that the best sites to research closed-end funds would be the same as those for open-ends. But Morningstar (http://www.morningstar.com) no longer does active research on individual closed-ends, although its premium site offers screens based on asset class, returns, premiums or discounts. Just don’t expect detailed writeups like those the firm provides for open-ends.
The Closed-End Fund Association, a trade group, offers the Closed-End Fund Forum. You’ll find its Website at http://www.closedendfundforum.com; it’s worth a look. Forget the dated news and research, but check out the array of useful statistics, which appear on the right side of the home page. Scroll down to find Fund Statistics in the right-hand column. Click on Premium/Discount and, when the table comes up, click the Sort by Premium/Discount heading. Scroll to the bottom of the list to find the most deeply discounted funds. Other handy listings include daily winners and losers, which may present opportunities in this often-inefficient market.
The same trade group runs http://www.closed-endfunds.com, which offers timely press releases from funds and weekly roundups of fund performance, including the biggest winners and losers. The site’s listing of recent initial public offerings is especially useful. That’s not to suggest you chase hot IPOs; in most cases, quite the opposite. Once the underwriting of a new fund ends, it typically falls from its offering price. It’s like buying a car right after it leaves the showroom. Its price is markedly cheaper, even though it’s just as good as new. The losers’ list, meanwhile, might point to some ideas for bargain hunting, but you’ll want to do some research before buying.
Our favorite site for closed-ends is ETFConnect (http://www.etfconnect.com). Notwithstanding its name, it offers extensive current information on closed-ends, as well as on ETFs. The site is run by Nuveen Investments, a leading issuer of closed-end municipal-bond funds, but it plays no favorites.
Look under Closed-End ETFs in the left-hand column, which lets you sort closed-ends based on such criteria as size of discount. ETFConnect has another feature that is a great help to closed-end investors—the Multi-Fund Review, which lets you check out funds by sector.
You can click on an individual fund to see the basic data, including NAV, most recent closing price, biggest holdings and recent dividends. It will also show how much leverage, if any, the fund is using. Leverage can improve a fund’s returns but increase its risk.
There’s also a neat little chart showing the trend in the fund’s discounts. Some have remained at discounts forever, so they might not be a bargain, even at 90 cents or less on the dollar. On the other hand, the fund might suddenly have fallen out of bed for a good reason—say, a dividend cut. By then, the bad news may already be fully discounted in the closed-end’s market price.
ETFConnect also provides links to a particular fund’s own Website, which often is the best source of information. While some funds’ sites may only show marketing materials and recent reports, most of the better ones list the details of the portfolio. ETFConnect can help illuminate a fund’s expenses. A closed-end fund has little incentive to minimize expenses, as might an open-end fund looking to market more shares. Indeed, outrageous expenses may account for a closed-end fund’s discount, in which case a discount may represent no bargain at all.
One other thing to watch with muni closed-ends: the percentage of bonds subject to the alternative-minimum tax, an increasingly important consideration as more investors get snagged by this insidious levy.
Closed-ends also can be researched like stocks, using the tools of your online broker or sites such as Yahoo! Finance (finance.yahoo.com).
One thing to look for is insider buying. Most of the time, it will take the form of small purchases by fund directors. But sometimes, you can pick up more significant trends. For instance, the CEO of a fund complex might be scooping up a closed-end that had dropped to a discount. Last year, Nuveen Investments’ chief executive, Timothy R. Schwertfeger, bought some 35,000 shares of Nuveen Tax-Advantaged Total Strategy Return Fund (ticker: JTA) at about $17 to $18 a share—below the $20 price Nuveen charged the public in the fund’s IPO on Jan. 27, 2004. The fund since has climbed back to within pennies of the initial offering price.
There are also a few firms specializing in closed-end investing. One is Thomas J. Herzfeld Advisors (http://www.herzfeld.com) of Miami, which provides the index at the start of Barron’s closed-end listings each week.
Most of these Websites are free of charge, and include educational content about how closed-end funds are formed and managed. More importantly, they provide a wealth of information for investors looking to take advantage of this often mispriced and misunderstood sector.
Published in Barron’s July 18, 2005
