Investment Progress and Outlook

Despite my own cautions yesterday, the Nasdaq continued to transpire against the Dow and S&P, which prompted me to make a quick profitable trade.

As expected however, the Dow and S&P showed that most investors were awaiting word from the Fed. If there is news that a Fed cuts are stopping, then the market will react quickly and optimistically. However, if the news is that the Fed does not see any end to cuts, then the market will drop quickly. More likely though, the Fed will have a 25 bps cut with not much mention of the continuation of cuts.

I did also make one speculative move. I continue to hold my financial ETF, and I bought 5 Dow Jones Industrial average ETF contracts, in the hopes of positive news from the Fed.

The following is a new tracking sheet for my investments, which will better show my trades. I have also included other brokerage fees and added the prospect of taxes.

Outlook for the Week

After a rough learning curve from late November to January of this year, I have gained some market experience, and have learned that patience is a virtue, especially when acquiring stocks and options.

This week, I am holding off on any major transactions until after Wednesday, when the Fed announces their future policies on rate cuts. Also on Wednesday are large economic indicators, primarily inflation and employment figures.

Barring any unexpected news, I expect Tuesday to be quiet, as the risk is just too high on Wednesday for speculators to take any significant positions.

Items to watch out for this week? USO (United States Oil Fund) and GDX (Gold Index).

Investment Update

I've had some very hectic couple of work days recently, and it's been difficult to spend time on this blog. As promised, I will begin accounting for my investments.

My current investment strategy is split between $2,000 in an interest-bearing checking account and $6,500 in investments.

Those investments will be primarily in ETF index options. My investment goal is a modest 6% a month, which is ample to pay back the initial loan fee of $255, and make some money on the free loan during the next 6 months without much time commitment from me.

Here is my current tracking sheet:

I am keeping track of each of my investments, and as you may be able to decipher, I have already made one profitable trade worth $190, or about 3% return.

I am halfway there to my monthly goal already, and I have yet to begin the first full month of investing.

Market Sentiments

The market continues to feel edgy, erring on the side of optimism. With an expected rate cut coming, but with future rate cuts in doubt, the market is wearing its heart on its sleeve, ready to ride the waves of any surprise earnings releases.

Now that I've been burned a few times by this volatility, I am going to sit back and watch the markets closely today. While I now have the money to implement my trading strategies, I will still err on the side of caution.

Here we go financials...

I was expecting the other shoe to drop today on financials, as more big names announce earnings this week. I had also expected some negative news out of National City as well.

With the announcements made by Bank of America and Nat City, I think we are well on our way to the financial sector recovering from its December-January Bear Stearns slump.

The financial sector itself has depressed for several months, with rising inflationary concerns coupled with sub-prime mortgages. However, after this week, my expectation is that the volatility and negative sentiment for this sector will be over. The major banks have laid their problems all on the table, and while there is no smooth sailing, we should expect nothing in the way of surprises in the near future.

At the same time, the tech sector continues to feel good about itself, still drunk on Google profits, and never-ending Yahoo/Microsoft merger deal.

By Friday, I expect to be purchasing both XLF and QQQQ, the financial and Nasdaq ETF respectively.

Borrowed Cheaply - Day 1

Today marks the official beginning of my borrowed funds. I chose to borrow $8,500 @ 0% APR until November 1, 2008. However, there is an associated 3% balance fee, removing immediately $255.

As soon as the money clears the bank, I will move it into my trading portfolios. I will then track the outcomes of those portfolios and monthly remove money in order to pay the minimum monthly balance on the loan.

I will keep readers informed and up to date about my progress.

Initially, I am thinking of buying 10 Nasdaq Index (QQQQ) July Options @ 48 and increasing my investment in E-Trade (ETFC), if it falls below $4/share again.

Borrowing cheaply to fund investments - Pt. 4

So just as I was about to embark on my plans, another balance transfer arrived, charging 0% until November 2008, and allowing for $11K. I think I will take these checks with me to work tomorrow, and use them for my trading accounts.

Many are wandering what I am going to invest in, here we go:

QQQQ Call Options for July, XLF Call Options for July, and NCC Put Options for May.

I will report back here once I have started making these transactions and start tracking the results of these transactions.

Borrowing cheaply to fund investments - Pt. 3

The final piece of analysis for my cheap loan for investment idea is to consider a classic value-at-risk model. What is the worst case scenario, and could I handle it?

After paying out the 0.50% monthly interest, assuming the very worst, I would need a 28.8% return in the last month to have enough money to pay back the loan + fees and break even.

I think I can accept that. If I become super risk-adverse, I could generate about 2-3% return per month with the possibility of needing to shell out $2,000 at the end of 3 years to pay back the loan.

Borrowing cheaply to fund investments - Pt. 2

After a year of posting, I'm always hesitant in posting my ideas. Primarily, the ideas are met with some mixture of disbelief and outright anger. I don't quite understand why people are not capable of providing some coherent or rational additions to this conversation I'm having with the world. After all, the money I use in my ideas are my own, and I take nothing from any reader who themselves may feel far more risk-adverse than I.

But to answer anonymous questions, and as I stated yesterday, I will be adding the next portion of my analysis today, which is calculating true return I need, post taxes and brokerage costs.

As a starting point, I will use the 4.25% annualized rate from my calculations from yesterday. Short term gains are taxed @ 35% (assuming maximum tax rate). Brokerage fees for me are minimal, but I will say 1 cent per investment dollar.

Therefore: ($8,500 * 99%)*(1+0.65R) = $9,564.11

[translation: (Take Original funds and take out brokerage fees) * (Rate of return discounted by tax rate) and then solve for R to find the break even point for the loan]

where R is the required return for the duration of the 36 months.

R = 21.0%

Annual rate of return to break even is 6.6%.

That rate of return is not that tough to achieve, even just using index funds. However, I will add a third part to it tomorrow that may throw a wrench into this decision: investment funds are declining as I pay interest every month.

Borrowing cheaply to fund investments - Pt. 1

Yesterday I talked about the possibility of using the cheap loans banks have been offering to fund investments. Based on an offer of $8,500 for either a 6-month loan at 0.99% or a forever loan at 6%, with a 3% fee on each, here are the numbers:

Instead of accounting for the "forever" loan, I just assumed a 36-month loan. Taking into consideration the interest rate and fees, choice 1 is clearly the lower costing loan.

However, just because the dollar cost is lower doesn't mean it is actually better. The 36-month lower has a lower required return rate of 4.25% compared to a return rate of 6.78% for the 6-month loan. Risk is increased greatly whenever higher returns are required in a shortened time frame.

While either return rate is doable in a normal stock market, given the current economic environment, I am leaning toward a longer time horizon. The smaller per month payment also allows me to payout of my pocket earlier on, before I've started generating any real investment income.

Tomorrow, I will work out what I need to make in order to make this venture worthwhile.

Risk-based Wealth Accretion

Creating wealth has always involved some combination of risk and luck. This weekend, I had one high luck event and an unrelated opportunity for a high risk event.

My lucky event was that I went to the local casino, threw some quarters into a slot machine, and had it spit out 10,000 quarters. That's $2,500 for those of you without calculators. This is a nice boost to my bank account and to my overall poker fund.

My high risk event came in the form of another "use this check for anything" offer. They are providing me $8,500 at 0.99% interest for the next 6 months, or 6% APR for the life of the loan. Additionally, they will be charging a 3% fee.

While normally I discuss that these fees prevent any good use of the close to free capital, I think the stock market is at a point where I could invest short-term with the funds and make some good returns.

I will be spending the next few days hashing out the details here, and making a decision by the end of the week.

Networth Update - 6 month restatement

Wow, thanks to the watchful eye of a reader, I feel like one of the major banks, and I now have to restate my networth. Apparentally, I had been neglecting to count card #6 in my liability figures. Instead of calculating out exactly the amount for the past 5 months, I have gone back and subtracted $5,500 from each month's networth statements. For this month, I have now corrected to the correct networth. You can see these changes on my linear estimating chart on the bottom of this post.

Month over month, I am still doing the same relative amount of growth in my assets, but of course, I am actually further from my goal than I thought.

My current netorth is -$11,875.79 or -1.19% from my goal.

So rather than being 3 months away from positive networth, I am actually about 12 months away.