Dizzy Dollar Data

One thing economists and financial reporters love to do is quote numbers.

In recent days, the "collapse" of the US dollar has been getting some headlines. A benchmark of the dollar is called the Dollar Index. It is an index created by the New York Board of Trade. It takes a basket of currencies and compares them to the US dollar. These currencies are "weighted", i.e. some have more effect than others on the index.

The currencies, and their respective weightings are:
Euro 57.6%
Yen 13.6%
Pound 11.9%
CAN dollar 9.1%
Swiss Franc 3.6%
Swedish Krona 4.2%

In theory, the NYBOT dollar index is trade weighted. That is to say the percentage of importance on the dollar index is a reflection of trade with America.

Well, I decided to look up the actual trade figures for last year, 2005.

Here's what I found.

1. America's biggest trading partner was Canada. Almost $471 billion.
2. America's second biggest trading partner was China. About $281 billion.
3. All of Euro based Europe was somewhere over $300 billion.

Since the Euro makes up 57.6% of the index, one would think that we are doing a lot of trade with Europe. In fact, only about 11 or 12% of US trading activity is with (Euro) Europe. Canada, despite being weighted at 9.1% actually partners in 17% of US trade.

China isn't on the index. Neither is Mexico, which did over $270 billion in trade with the US. Korea and Taiwan combined did over $124 billion in trade. Also, you guessed it, NOT on the index.

Sweden and Switzerland, who make up 7.8% of the index did less than $39 billion last year, combined. That is a meagre 1.4% of US trade.

Perhaps the headline dollar index should be weighted to actual trade, not tied to some ratios that the NYBOT decides is reflective of the strength of the currency.

Bottom line is that headline numbers are often misleading. The dollar has fallen against the Euro and the Pound, but is that so bad, considering most of our foreign trade is done elsewhere? Maybe it hurts Europe more than America, particularly for tourism, airplanes and BMW's. Just a contrarian's view.

Simpler Times

At one time, the average American worker would get a job and earn money. He or she would save money in the bank to put a down payment on a house. The money in the bank would collect interest. They would buy a house and plan to have it all paid for in 20 to 30 years. The house would appreciate slightly better than inflation. Many of the companies they worked for provided pension plans. Workers did not have to be concerned with how these plans were invested; they only knew what to expect to be paid after their retirement.

Really sophisticated “investors” might have used some savings to buy securities, such as bonds or stocks. This was done with the help of a broker/advisor. There were a small number of mutual funds available to invest in. Some people bought investment properties with the intention of collecting rent (as opposed to flipping).

These days, there are so many, many choices for the individual, that it has become almost impossible for the average person to make any sense of it all. Many simply give up and surrender their money to multi-billion dollar management firms, which proceed to make outrageous amounts of profit from the management of your money, while your returns wallow in mediocrity.

Starting in January 2007, Pennyjar will be gathering small groups of individuals together to learn and gain confidence in personal finance and investing. These groups are in the form of an "investment club" but they will be much, much more than that. Our first groups will be in the San Francisco Bay area (since that's where we live).

It is important, to us, for people to be fully engaged in the process. For that reason, we will all have some "skin in the game". As a group we will be investing a small amount of money in real investments, be they stocks, bonds or some other product. Let's say, for the sake of argument, that each individual's minimum dollar comitment will be the equivavlent of about one Starbucks latte per week. Not too much, but it will be enough to make it interesting. The collective group of 10 or so members will decide on where the money gets specifically invested.

Pennyjar doesn't stop at being an investment club. We intend to make this process a lot of fun. By design, our meetings will be entertaining. There will also be a significant degree of social interaction. We are not interested in being a group of experts. Frankly, most of the supposed money "experts" are basically full of shit; they just know a lot of jargon and they know how to confuse people just enough so that they will be intimidated to hand over all thier money.

We are just regular people that want to get ahead and we agree that education and knowledge is the best path there. Better than lottery tickets, Amway, Vegas, dot.com stocks, pre-construction flips, and so on.

We are going to help people to help each other gain the knowledge and, we believe more importantly, the confidence to make good decisions. Pennyjar doesn't have all the answers, but we certainly will generate a lot of questions. And we will have a good time in the process.
We promise.

How to pick a stock: The BUD example

In a previous posting I covered how small-fish can buy stocks even if they do not have the $$ to open a brokerage account. The costs are not trivial; Etrade($1,000) and Charles Schwab($2,000). The answer was company direct stock purchase programs. For as little as $25 a month you can buy shares of ANHEUSER BUSCH (NYSE:BUD). How do you know if buying shares of BUD is a wise investment? The short answer is... you don't. No stock picker is right 100% of the time. However you can greatly increase your success rate by applying some basic stock analysis principles and understanding your risk tolerance. Risk tolerance is a way of measuring how you FEEL about risking your money for some reward. Usually a financial planner will asked you questions to help determine you risk tolerance. (or they should). Risk tolerance determines your investment style, conservative, moderate or aggressive. The higher your tolerance the more you are willing to accept some volatility in your investments. At the PennyJar we believe you should never invest any money you cannot afford to lose. Remember our talk about discretionary income?

Let's now turn our attention to analysing aka(understanding) ANHEUSER BUSCH (NYSE:BUD). Let's pretend we know nothing about buying stocks. What would be some of the things we would need to know? Well first what is a stock? When you buy a stock you are buying a piece of a company. Stock gives you partial ownership in a company. You become partners with the company. Your fortunes are tied to the company's success. It only seems logical then that you need to understand the company. Fundamental stock analysis is about understanding the company before you become a part owner in the company. O.K. what would I like to know about the company?

What does it do?
How does it make its money?
Can I go to sleep and know the company will still be there when I wake up?
Is the company profitable? (does it make more than it spends)
Does the company reward the stock holders by paying a dividend?
Who runs the company?
How effectively do the owners spend the stock holders money? Remember companies sell stock to raise money. What they do with this raised money is important to their business and your pockets.
Do we think the stock price will go up or down?

Getting the answers to these questions will help you decide if you should buy BUD.
The best place to look for the answer to our questions is Yahoo Finance. Here is the link to BUD at Yahoo Finance

What does it do? This can be found by clicking on profile link from Yahoo Finance. And here is where we find out that BUD "engages in the production and distribution of beer worldwide". This was not surprise (hopefully). We also find out "The Entertainment segment owns and operates theme parks. The company also is involved in the real estate development business; and owns and operates The Kingsmill Resort and Conference Center in Williamsburg, Virginia".
More I want more.. Let's visit www.hoovers.com to find out more about BUD. From Hoovers we find out that BUD owns a 50% stake in Mexico's top brewer, Grupo Modelo, which makes Corona and Negra Modelo among many other brands.

Let's stop here for now. Please look around the profile link. Can you tell me the name of the CEO and the income of th CEO? How many employees?
To be continued.........

Pardon me I just had a taxable event

Call me crazy, but I recently made an offer on a home in the San Francisco Bay Area. And yes I read the headlines and know there is a decline in the housing market. If you have read my earlier post you know that I am fond of the housing bubble logic presented at patrick.net. The house I made an offer on has been on the market for 6 months. The asking price has dropped $70K over those six months. While I think markets like Las Vegas and Reno will continue to drop in value, I am obviously less confident about bay area prices falling any further. So I made the leap of faith and sold some of my stocks to come up with the down payment. The selling of my stocks is a taxable event. I had to decided which stocks to sell. I basically broke my choices into two categories.
- Losers that I have held for less than a year
- Winners that I have held for more than a year.
Why?
If you've held a stock for at least one year, you're eligible for long-term capital-gains rates. Long-term capital gains are taxed at the 20% rate for most folks, while short-term gains--or gains made on stocks held for less than one year--are taxed at ordinary income tax rates, which range from 15% to 39.6%. In my case I am in the 33% tax bracket. So by selling the winners I have held for a year or more I am saving about 13% in taxes compared to selling winners I have held for less than a year. "begin sidebar" see the potential tax draw backs of day-trading? "end sidebar" I decided to sell the losers I have held for less than a year so that I can claim the losses on this years taxes to help offset some of the gains. If my offer is accepted on the home, I will not enjoy the mortgage interest deduction until I do my 2006 taxes.

Who owns stock

Here at Pennyjar, when we talk about "little fish", we are referring to the middle class in this country. The fact of the matter is that right now in America the rich are getting richer and the middle class is treading water. This is statistical fact.

That said, does it really make sense to point at rich folks and blame them for your own current condition? Rather than blame, my strategy is to ask, "What are they doing?" and then do some of it. Blaming, or being a victim is disempowering. I find it more energizing to take some personal responsibility and change the habits that do not serve me well.

As you can see in the chart below, the top 10% weathiest people in America own roughly 80% of the stocks.

Maybe, if I want to be rich, I should know a little more about investing and stocks.

Maybe I should stop wasting my money on the latest gizmos, fashion trends or bling and put some of that money to work for me.

You think?

NASD tools: Check your Broker & Mutual Fund fees

Here is the quick tip of the day. You can check the license or disciplinary history of your broker or securities firm online by going to the "NASDS BrokerCheck" section of the NASD's website. Here is the link to online broker check. This site is also packed with information such as latest investment scams and a GREAT tool for comparing mutual funds for their cost. This is a MUST see if you own or are thinking of buying some mutual funds. The fees associated with mutual funds eat away at your real returns.

Mortgage con artists

This piece from CNN/Money on mortgage fraud is a MUST READ!

A lot of ordinary, well meaning folks are being taken to the cleaners by sweet talking con men. The government is trying to crack down, but their results are not very good so far.

Your best defense is knowledge.
Understand the con and render the artist impotent.

"Since the housing market started to soar in 2001, mortgage fraud has become the fastest-growing white-collar crime, according to the FBI. Last year crooks skimmed at least $1 billion from the $3 trillion U.S. mortgage market.

Now that the market is slowing, fraud is only rising. As business dries up, there's increasing pressure on lenders, brokers, title companies and appraisers to be profitable. That means loan and title documents aren't scrutinized as carefully as they might be, and courts - many of them so low-tech they resemble Mayberry - can't keep up with the volume of paper.

Then there's the mad rush to sell, particularly by people who paid high prices for homes and suddenly can't afford the mortgages.

It's like a tasting menu for con artists and grifters, so tempting that in some cities drug dealers have turned to mortgage fraud, plaguing lower-income neighborhoods with crooked mortgages rather than crystal meth."

This slideshow gives a summary of some of the common cons, including the "Rent to Steal", "Straw man swindle" and the "Million dollar dump".

Put Your Money Where Your Mouth Is

How many fund managers invest in thier own funds?
According to WSJ article today:

"It has become easier to know this thanks to a rule by the Securities and Exchange Commission that required fund companies, starting last year, to disclose whether fund managers hold stakes in funds they run. This information can generally be found in a fund's "statement of additional information," posted on a fund company's Web site. The data are given in broad dollar ranges -- specifying only if a manager has invested, say, "$1 to $10,000" in a fund, or "over $1,000,000.""

I went fishing to see how easy it is to get this information. I spent almost an hour on two mutual fund websites and scanned through some prospectus looking for disclosure of managers' "skin in the game".

Alas, I failed, miserably. I will return later to the quest.