Recently in Stocks Category

The Cost of All Those McMansions
I believe there is a correction looming. How big, how bad I'm unsure. This piece raises an incredible point about how so little is spent on IT by the construction industry. This is sort of a well duh, but I guess they don't even have back end systems for inventory of any significance.

Is the housing boom a bubble? As Greenspan has said, it's hard to tell. But what's certain is that housing-driven growth, while creating jobs and lifting wealth, is also distorting the economy, benefiting low-tech commodity sectors rather than the high-tech industries at the heart of America's competitive strength.

New homes are built mainly out of materials, such as wood for the frame and floors, plasterboard for the walls, and fabricated metal parts for plumbing fixtures. High-tech equipment plays a very small role. Even when new homes include cable for broadband -- so-called structured wiring -- the high-tech component accounts for at most 1% or 2% of the entire cost of the home.
[...]
Yet even if there are temporary disruptions, the end of the housing boom may be good news for the overall economy. The U.S. doesn't need to drive growth with ornate new homes and elaborate kitchens with expensive marble counters. Instead, a shift away from housing could free up hundreds of billions of dollars for other, more productive investments.

Update: So I'm doing what I did last year, putting on Line 21 of the 1040
OTHER INCOME: Cash Forex
Then I enter a negative amount to indicate losses.

I spent the weekend working on my taxes. Complicated by the fact that I invested in a number of foreign exchange currency transactions. Basically currency futures.

Unless you're really good, and I mean really good I don't recommend it for anyone. It is too damn easy to lose money fast. It's actually possible to setup a demo account and trade pretend money to see if you like it. Again. I do not recommend you do this unless you're good. And by good I mean that you are trading 100,000 lots consistently and making money. The demos I've looked at will allow you to trade 1,000,000 lots but the leverage you need to do that is at least $10,000 up front of real money. The 1,000,000 makes your profits look outrageous. Don't fool yourself though. The losses can be equally outrageous.

If, and that is a big IF you are making money on the 100,000 or mini demos than I'd say go ahead and try it. Bear in mind that you will be filling tax paperwork. This is where it gets complicated. You can either declare yourself under 'trader status' or you can file the gains/losses against your regular income.

I will list some of the resources I use here. Look for updates later this week.

My advice now is that if you are unsure of the long term value of the dollar to look into a foreign currency denominated account like the admirably written daily pfennig discusses. This removes much of the risk associated with short term fluctuations. But allows you to take a safe long term position you won't be cashed out of due to stops or margin. If the euro dips to 1.26 range I'd say buy in. We'll see the top side of 1.5 in a year or so. This is my opinion. Take it for that.

ForEx trading is risky and a headache on your taxes as I said, this is some of the documentation I've found:

To “elect out” of IRC 988 or not, that’s the question
If you have cash forex trading gains, you will prefer to elect out of IRC 988, to benefit from up to 12% lower tax rates on Section 1256 contracts.
Conversely, if you have cash forex trading losses, you may prefer ordinary loss treatment over Section 1256 capital loss treatment, so you may not want to elect out of IRC 988.
Note that IRC 1256 losses may be carried back up to three tax years, but only against IRC 1256 gains in the prior three tax years. Ordinary losses may offset any type of income.
But, technically, it’s not a simple choice like this at the end of the year.
The rules require that you elect out of IRC 988 on a “contemporaneous basis.” This means that hindsight is not allowed and you must make your decision in advance of the trades’; before you know if you will have gains or losses. Can you bend the rules?
The election out of IRC 988 should be filed “internally”, which means you place it in your own books and records, as opposed to filing it with the IRS.

My opinion on 'electing out' means filing your intent in a sealed letter to yourself that you then post to yourself and never open that letter unless you are audited.

See also:

Futures and Cash Forex

Section 988 was enacted as a way for the IRS to tax companies that earn income from fluctuations in foreign currency exchange rates as part of their normal course of business, such as buying foreign goods. Under this section, such gains or losses are reported and treated as interest income or expense for tax purposes, and do not receive the favorable 60/40 split.

Because forex futures do not trade in actual currencies, they do not fall under the special rules of Section 988. But as a currency trader, you are exposed daily to currency rate fluctuations, hence your trading activity would fall under the Section 988 provisions.

But because currency traders consider these fluctuations part of their capital assets in the normal course of business, the IRS enables you to opt out of Section 988, and thereby retain the favorable 60/40 split for these gains under Section 1256.

Forex Taxes

Many currency traders bend the rules by waiting after the year is over to see if they have any gains from their trading activities. If they do, they claim that they elected out of IRC 988 to enjoy the beneficial Section 1256 treatment. On the other hand, if the sum of the trades from cash forex is not positive, they stick with the traditional Section 988. Since (under the current tax law) it becomes very difficult to disprove whether the trader made the election at the beginning or at the end of the year, IRS has not yet begun to crack down on this activity.

This information is for educational purposes only and should not be construed as tax or investment advice of any kind. Make sure that you consult with a tax professional about your forex taxes.

The Heat Is On: Gold at the nanoscale
wow. Interesting article describes the physical characteristics of gold at the nanoscale.

Bulk gold has a familiar yellow color, which is caused by a reduction in the reflectivity of light at the blue end of the spectrum. However, if we subdivide the gold into smaller and smaller particles, there comes a point at which the particle size becomes smaller than the wavelength of incident light. New modes of interaction between the radiation and the gold become prominent, in particular interactions involving electronic oscillations called surface plasmons. When the particles of gold are small enough, they are ruby red in color. This coloration is due to the gold particles strong absorption of green light, corresponding to the frequency at which a resonance occurs with the gold.

MSN Money - Dress rehearsal for a dollar deluge
is 2005 the year when the housing market finally corrects?

Warts also have sprouted in various facets of consumer lending, such as Capital One (COF, news, msgs), New Century Financial (NEW, news, msgs), Countrywide Financial (CFC, news, msgs), and Novastar Financial (NFI, news, msgs). I expect the sector to see more trouble, which will disable the housing ATM as a vehicle for consumers to spend beyond their means.

MSN Money - That jobs report was no reason to celebrate
wow! contrast this with what Cringely was saying. Bill says

"For close to nine months now, I have been detailing all the inventory and excess capacity that's piled up in that industry. Recently, I've been able to chronicle the slowdown in end-demand that will only exacerbate existing problems in the chip sector, and, at some point, will create an implosion in its stock prices. "

I think this is true. I haven't bought a new processor in better than 9 months. My last hardward purchase was compact flash memory for my pre-christmas purchase of a Canon EOS 20D digital SLR which is the most incredible toy I've ever bought. I'm going to think about this, long term, Bill's analysis is not good for the housing market, short term, Cringely is saying VC funding is going to be thrown at anything that moves so the funds don't have to pay back the management fees they already spent. It was something like 3 Billion dollars if I remember correctly!

"Liquidity seeks an inflating asset (not a deflating asset). When the Fed pumped liquidity into the system to salvage the TMT (technology, media and telecom) sector, that liquidity was redirected toward the residential-mortgage market, thereby extending the housing-market bubble beyond its normal cycle. This price appreciation allowed the consumer to prolong a debt-induced consumption binge (i.e., the consumer drew down the appreciated equity to finance his/her newfound higher standard of living). However, we have now entered a period where liquidity will increasingly be withdrawn from the residential-mortgage market, and thus, we are at the onset of experiencing price deflation in this asset class."

GLD_Exte.pdf (application/pdf Object)

Next week, GLD will debut on the NYSE. The backing for this offering is Gold Bullion. With the current economic outlook, I see further depreciation of the dollar on the world market. A rise in Gold's per ounce value will effect this offering and I see further room for Gold to grow because of the week dollar. Consider while gold may not be inherently more valuable, a dollar can be "worth less", I see a weaker dollar so this is why I'm following this offering...

Proposed Ticker Symbol (Exchange): GLD (NYSE)
Type of Offering: Initial Public Offering of Shares that represent units of fractional undivided beneficial interest in and ownership of the Trust
Initial Filing Date: May 3, 2003
Last amended Filing Date: November 8, 2004
Amount Filed: Approximately $4.5 billion
Shares Filed: 120,000,000 shares
Total Deal Size: Continuous offering
Creation and Redemption: The Trust will create and redeem the Shares on a continuous basis but only in baskets of 100,000 Shares. Creation and redemption requires the delivery to or by the Trust of the amount of gold and any cash represented by the Shares being created or redeemed, the amount of which will be determined based on the combined Net Asset Value (NAV) of the number of Shares being created or redeemed Net Asset Value: NAV, determined by the Trustee at the close of trading on the NYSE on each business day, is the aggregate value of the Trust’s assets less its liabilities (which include accrued expenses). In determining NAV, the Trustee will value the gold held by the Trust based on the London PM Fix Sole Purchaser: UBS Investment Bank (Underwriting $100 million) Specialist: Bear Hunter Structured Products LLC Anticipated Schedule:

11/11/04 Toronto
11/12/04 San Francisco // (San Diego/LA - TBC)
11/15/04 Boston // London
11/16/04 NY (12:30P Lunch at NY Palace) // Paris
11/17/04 Mid-Atlantic // Switzerland
Anticipated Pricing: Week of November 15, 2004

Economic Indicators Calendar - Federal Reserve Bank of New York

Provides the date and time of key economic data releases. When available, links on the calendar direct you straight to the data source (often OFFSITE).

State Street will be marketing agent for gold ETF

Pending regulatory approval, streetTRACKS Gold Trust is slated to trade on the New York Stock Exchange, while the BGI offering would trade on the American Stock Exchange.

Both ETFs will be structured as grantor investment trusts, not as registered investment companies, and the Bank of New York would be the trustee for both.

The ETFs will pay their fees by selling off small amounts of gold bullion that has been traded for ETF shares. In other words, the fractional amount of physical gold represented by each share will decrease over the life of the trust. See full story.

If they are approved, the ETFs will allow ordinary U.S. investors to invest directly in gold bullion.

In 2003 the first gold ETF, Gold Bullion Securities, began trading on the Australian Stock Exchange. It also now trades on the London Stock Exchange.

Stupid Microsoft Tricks Why the Richest Company on Earth Feels it Needs to Cheat By Robert X. Cringely
Combine this with previous info on the EU requiring that Windows Media Player 9 be unbundled from Windows and you have the making of a fierce turf battle for online media delivery, Real and Quicktime suddenly become much more relevant. (See Stream on How Microsoft, on the Brink of Defeat, Could Still Win the Streaming Video War By Robert X. cringely for additional details)

Cringley Says:

"Microsoft handed over the e-mail messages on a disk, and when Burst's lawyers had printed all the messages they filled 140 boxes. That's a lot of messages, but not surprising for Microsoft, where the business culture of the company literally happens on e-mail.

When Burst's lawyers put the messages in order by date and time, they claim to have noticed a peculiar phenomenon. There were literally no messages from approximately one week before until about a month after all seven meetings between the two companies. This meant that either Microsoft completely suspended its corporate e-mail culture for an aggregate period of 35 weeks, or there were messages that had been sent and received at Microsoft, but not divulged to Burst."

Stealthmode Partners E-Zine

A fancy San Francisco law firm has taken the Burst v. Microsoft case on contingency. That’s huge. It means they think the case is a winner. Before it dissolved, the legendary Silicon Valley law firm of Brobeck, Phleger and Harrison was also involved.

See also Burst Message Board

MSN Money - Contrarian Chronicles
31 trillion is a lot of dough...

Sir John also had a few words about debt -- a four-letter word that folks seem not to care about: "Emphasize in your magazine how big the debt is. . . . The total debt of America is now $31 trillion. That is three times the GNP of the U.S. That is unprecedented in a major nation. No nation has ever had such a big debt as America has, and it's bigger than it was at the peak of the stock market boom. Think of the dangers involved. Almost everyone has a home mortgage, and some are 89% of the value of the home (and yes, some are more). If home prices start down, there will be bankruptcies, and in bankruptcy, houses are sold at lower prices, pushing home prices down further." On that note, he has a word of advice: "After home prices go down to one-tenth of the highest price homeowners paid, then buy."

Yowser! Talk about bad news for Boeing.

Pentagon deals death blow to Boeing

According to this article, long-term investing is hype. Profits to be made in down cycles swinging up will not hold well over the life of the investor... Food for thought.

Shares rose at a real average annual rate of just 0.2 per cent during the first three-quarters of the century, even worse than the previous century's trend. During the euphoria of the 1990s, some commentators claimed that twentieth-century stock market statistics were misleading because of major drops in 1928-32 and 1972-74. According to them, one should ignore these two oddball sell-offs for a truer picture of stock market profitability.

The bear market of 2000-2003 eroded support for this theory. In fact, if you take a step back and look at the big picture, the recent downturn reminds us of the existence of a remarkably consistent long-term trend. The simple truth is that stock market prices do not rise all that much over the very long term. Periodic catastrophic declines that destroy years of accumulated profits are the norm, not the exception.

The Observer | Business | Revealed: the great stock market swindle