The Social Marginal

Got this in my email last night, pretty neat opportunity for current E*TRADE members…

As you know, the past few months have been challenging for the financial services industry.However, there is some good news. E*TRADE FINANCIAL Corp. has recently received a
$2.5 billion capital infusion from one of the world’s leading investment firms. This is a clear vote of confidence, solidifying the ability to deliver the value you have come to enjoy—today and into the future.

To celebrate this strategic transaction and thank you for your continuing loyalty, we are declaring Wednesday, December 19, 2007, as E*TRADE Customer Appreciation Day. Find out more >>

For a full 24 hours eligible stock, options and futures trades entered at E*TRADE Securities will not be charged a commission.¹ We hope this gives you a convenient chance to evaluate your investments, balance your taxable gains and losses, or capitalize on trading opportunities prior to year end.At E*TRADE, nothing is more important to us than our customers. We thank you for your ongoing faith in us, and look forward to serving you for many years to come.

Well, ING seems to be the first major online-only high yield bank to react to the fed rate cut and cut the rates on their ING Direct Orange Savings account from 4.20% to 4.10% in light of the .25bp cut from the two days ago.  I’m surprised the cut was that small to be honest, I was assuming they’d cut to 4%, but good for them for being competitive.  ETrade’s Complete Savings account is still at 5.05% for now, but I’m sure they’ll cut it in the near future to correspond with the rate cut.

It’s noon and the market has regained about half of what it lost after the fed rate cut announcement yesterday afternoon.  Everything in my portfolio is up from what it was at Close on Monday, so I can’t complain.  It should be interesting how the rest of the year plays out given everything that has happened yesterday and today.  I know I’ll be watching attentively.

Evening Update: Well, the Market closed only 41 pts up from yesterday.  Insane rollercoaster ride today, gives you a headache watching it.

So it looks like the issue with Wall Street and the Fed yesterday was that they didn’t drop the discount rate like Wall Street was expecting.  New announcements however this morning seems to have clarified their plan (see more details here) and it looks like stocks are set to open up high again today and hopefully shoot up past what we lost after the announcement yesterday prior to closing.  The market has been like a vomit inducing rollercoaster the past couple months, oi.

Well, the fed came through with the .25bp cut that everyone on Wall Street was expecting, and what did they do?  Run home with their money.  DJIA was down almost 300 points by the end of the day following the announcement, after an impressive rally prior to it.  Sometimes you just can’t predict WTF is going to happen.  Oh well, at least my portfolio wasn’t hit too badly, and I’m sure the market will rebound over the next week anyways.  After looking at all of the factors though, I don’t think this is going to do much, if anything, to aid the housing market as it was intended, so basically it was just an indecisive pile of nothingness.  Greenspan may have had his problems, but at least he wouldn’t have been this indecisive.

Sitting here patiently on my massage chair waiting for the 2:15 EST meeting of the feds to determine how much or how little they want to screw the greenback to artificially boost the market and revitalize real estate.  Actually, I’ve had the opinion that the rate cuts were, all and all, negative, but the more research I do, the more I see that the long term ramifications, while they have the potential to destroy our economy, also have the potential to help it.  At least higher rate cuts means more contract stability for me so I can continue to bring in the money, but at the same time, the whole idea of these constant chain cuts makes me feel dirty somehow.  Maybe I should just break down, give in, and refi the house once they drop another 50 basis points.  I’m going to be floored if they drop more than 25 basis points today though, I don’t really know how the market will react (a 25 basis point drop is pretty much factored into recent gains as it is).

I have found what I believe to possibly be one of the neatest devices created in recent years, the Amazon Kindle.  Over 80,000 available titles from launch and they include many books on my ‘to read’ list as well as available subscriptions to many magazines and periodicals which I enjoy reading. 

I sat next to someone on the plane with one of these this past weekend and the screen is extremely easy to read without a backlight and it’s extremely light and looks very easy to carry/handle with one hand and still flip the pages.  Now only if they were actually in stock.  Oh well, I guess I’ll be waiting.  Once I finally do get my hands on one of these suckers though, I’ll definitely have to write an over-opinionated review of it.

Prosper is an interesting beast.  It’s easy to lose money or break even and it’s just as easy to make a better return than the 5.05% you’d make right now in a Savings Account through E*trade or various other online banks if you just employ common sense.  I’ve found that the best method of investing on Prosper (at least to me) to be small  bids ($50) on as many loans as possible, avoiding the temptation of super-high returns on the lower credit grade individuals.  Sure, you’ll still have your lates and defaults from individuals with higher credit grades, but they’re much lower than the lower credit grades promising higher interest rates and with small bids spread out across a multitude of loans, you’ll minimize your risk further and likely end up with a higher overall ROI as opposed to going for those tempting high interest rate loans.  If you use the link below, you can get a $25 bonus if you sign up as a lender.

It’ll be interesting to see how the concept of Peer to Peer lending plays out in the upcoming years.  Of course, as with any type of investment, do you own comprehensive research on it prior to making a decision.

Here’s a great post that wraps things up nicely by “suicideducky” on the Prosper Lender Forums:

Hello MMM, I have been a Prosper lender for about 8 months now, with my first loans originated in May of 2007. I started my account with just $500 and have been very satisfied with my experiences here so far, having added substantially more to my portfolio in recent months. Here are my thoughts on being a new Prosper lender, and things you might consider in your decisions to lend. In short, this post is to encourage that you familiarize yourself with Standing Orders, or “SOs” before you activate them; this (hard-earned) experience comes from being one of many who have suffered defaults on loans I’ve funded and what it taught me.

Just for the record, I’m a big fan of SOs, but they are a tool just like a hammer, and if your finger/dollar gets in the way, you can smash yourself just as easily as your intended target… but lost dollars don’t heal so quickly as a bruised thumb.

When I found Prosper.com (I was referred by my brother) I quickly determined that I would be able to pull down 25%++ ROR annually, and promptly set my SOs to begin bidding on the loans with the highest ROR I could find - which also, of course, were the highest risk loans posted. SOs can be learned very effectively just by going to the Lending/Standing Orders/Create New SO link and reading the qualifications listed there; it’s very self-explanatory - perhaps deceptively so for new users. The pitfall for me was in failing to click the Preview link (to see what listings matched my criteria) before setting the order active… after all, didn’t I just set what I wanted?!

…and so, on the eve of my first bidding, I found myself leveraged out more or less completely in bids on 4- to 7-day distant loans (which meant that my money was locked into the bid, and couldn’t be used for other bids with shorter remaining duration - or better/safer terms) that were not heavily bid upon (which meant they had a lower chance to be fully funded by expiration), and which were requested mostly by high-risk borrowers (D or below). To my great relief, most of these early bids were outbid by others or did not get fully funded, and I ended my first round of bids with only a few of the potentially catastrophic D, E & HR rated borrowers - and thankfully none of the NC loans I’d bid on in hopes of making 30%.

The valuable lesson I learned during this time is to set my SOs conservatively. That is, if you think some Ds or lower are a good risk (and some risk is ok in a portfolio IMO, if it’s selectively and intentionally chosen as speculation), bid on those loans directly and in person, or set a very low total to invest in those more risky borrowers via SOs. There will always be opportunities to speculate on ’sub-prime’ borrowers as there will never be a shortage of them, so don’t rush to do so; wait for the terms you like. Set your SOs to bid on solid loans at rates you will be happy with, and then adjust based on what you have bid. You can always go bottom fishing when you have 15 mins to kill before the wife gets home/your TV show is on/etc.

There is also a new feature available, called Portfolio Plans, which sets a batch of SOs for you based on your selected level of risk (high, medium, low, very low). I find that the PPs leave something to be desired based on my risk tolerance and priorities and so don’t use them, but if you just want a portfolio of ‘low risk’ and don’t have time or want to learn SOs, they’re a great alternative - and you have the assurance that you won’t be bidding on things you didn’t intend to based on your risk tolerance.

As a stock and options trader in the US markets, I have found that an average annual ROR of 20% is well within reach of most persons who are willing to accept risk, buy and sell sensibly, do their homework, and pay attention to current events, but with Prosper I’m currently seeing an average ROR of almost 19% (including some C, E & HR loans, granted) without having to do any homework at all. As my present bids are all on B or higher rated listings I expect that ROR to adjust down to about 13%-14% as the riskiest loans mature and I continue to lend at my current rates (exclusively AA, A & B borrowers).

In short, Prosper.com is the closest thing I have found to a ’sure thing’ to widely exceed the Rule of 72 with the least amount of labor-intensive research required, and the lowest risk assessment I have encountered in any investment vehicle to date… but you MUST test your SOs before you jump in with both feet, or you’re just throwing darts and taking what sticks.

Lastly, when you do begin your lending, I strongly suggest that you lend only $50 per loan for the first few loans, even if you have a significantly higher amount of capital to invest. $50 is the minimum allowable bid (I don’t think there’s a maximum, but not sure about that), so if you start like I did with $500, you will be able to bid 10% on each of 10 loans. There’s nothing worse than holding 10 loans for $50 each, and 1 for $500, and having the $500 loan you thought was a sure thing default on you… thus depriving you of half of your investment capital. After a few bids at $50 you’ll feel confident and be in a good position to consider increasing your bid amounts based on your own situation. Just remember, even AA borrowers default sometimes.

Best luck to you MMM - here’s hoping you Prosper in 2008!

sd

GE (General Electric) - While they took a recent dip due to a reported loss in their financing division (which accounts for ~13% of their yearly revenue), it will likely rebound on that account and continue to gain due to their alt energy research and being one of the few companies pumping out actual product in the industry.  They also have their traditional power/medical/etc products which continue to do well.  They are an extremely diversified company and their dividend continues to rise, currently over 3%.

SATC (Satcomm) - They make fuel cells and some other alt energy products and have a great Research division, this is definitely akin to buying futures in the company.  They have some contracts on the horizon that could cause this stock to rocket upwards.  It is relatively medium to high risk though, the upside is that it trades in the $1-$2/share range right now.  I’m holding this one long term.

INTC (Intel) - They are the leader in the microprocessor area now, basically dominating it with little to no competition from AMD anymore.  They’ve expanded into producing a good percentage of microprocessors for Cell Phones and PDAs and are now looking to expand into Ultra Portable PCs for hospitals to use bedside (Medical is a 2 Trillion Dollar a year industry).  This stock has nowhere to go but up in my opinion.  Good stable investment and at a good price right now.

Welcome to the newest useless blog on the web.  My opinion means nothing, but I’ll give it anyways.  I’ll be discussing general societal trends and absurdities with a dash of my financial opinions mixed in, so pretty much anything I want.  I’ll try not to go too far down the hole.

I’m sure you’ll pick up on my general attitude on everything under the sun in due time.