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Possible Deal in Washington

July 31, 2011 Leave a comment
Possible Deal in Washington

"White House" by Damian Brandon on freedigitalphotos.net

Hooray!

It seems as though there might be a compromise in Washington if the leaders of both parties invoke their silver tongues and persuade their colleagues that this compromise is the right thing to do.

I am monitoring the asian markets and the U.S. futures right now and it looks like peopel are scrambling to cover their shorts. That is the only action that makes sense at this point. The debt ceiling hasn’t been raised and there is absolutely no reason to buy stocks at this point. There is reason to cover a negative bet because the odds for a compromise just went up. If someone has well positioned enough to take on a long position on Friday, I would sell into the rally on Monday. I am willing to bet that some negative news will come out and allow you to buy those shares back lower if you absolutely believe a deal will be done.

First Half GDP

We saw some extremely weak first half GDP numbers last week. What’s the deal here? Was the end of stimulus a brick wall? The stock market is telling us either no or it doesn’t care. What do I mean by that? Well, we are about 6% from the 52 week high in the S&P. What this tels me is that the market either believes that GDP will rise in the second half, or another round of stimulus is coming. Lets look at a few sector ETFs to get a better idea of how those sectors have performed lately. The Retail HOLDRS Trust (RTH) is around 5.4% from its 52 week high. The Oil Service HOLDRS Trust (OIH) is around 6% from its 52 week high. The Vanguard REIT ETF (VNQ) is around 3.7% of its 52 week high. The SPDR Select Sector Technology ETF (XLK) is around 5% from its 52 week high. The PowerShares Dynamic Food and Beverage ETF (PBJ) is around 4.3% from its 52 week high.

This isn’t an exhaustive list, but it gives a pretty good snapshot of the big picture. There are no signs that we should panic at this point. People are shopping, the oil complex is fine, commercial real estate is fine, technology is fine, and people are going out to eat. I am keeping an eye on many of the major sector ETFs for lower highs and lower lows. Until those trends show themselves, I won’t worry too much about the GDP numbers.

Hope

Lets keep hope alive. Please raise the debt ceiling and avoid an unprecedented default by this great country.

Categories: Investing

LendingClub Trading Platform Reflections – July 2011

July 29, 2011 Leave a comment
LendingClub Reflections - July 2011

"Jump" by frederico stevanin on freedigitalphotos.net

Look before you leap!

That’s my main reflection at this point in time. The LendingClub Trading Platform is nothing like the basic LendingClub Platform. You aren’t able to get in at the ground level and lend money directly. You are only able to trade notes that are listed on the trading platform, which is a secondary platform. Let me brain-dump some pros and cons.

Pros

  • At least I get to participate in peer to peer lending through a secondary market
  • I get to see the payment history of existing notes before I invest
  • I get to see the credit history graph of a borrower before I invest
  • I am able to go back and review the original listing
  • Notes that are bought are seamlessly transferred from the Folio platform to the LendingClub platform

Cons

  • New notes being sold at par are rare finds
  • Notes that are at a discount usually have payment issues
  • You end up paying more than the remaining principal on notes most, if not all, of the time
  • The same threat of default is there
  • You will probably get less percentage yield than someone who was in at the ground level of the same loan
  • There aren’t as many high quality notes available on the secondary market since most people want to sell their riskier notes

I wouldn’t hesitate this to someone who is already familiar with buying and trading bonds. There are similarities and if someone knows how to trade bonds, then they can figure out how to invest in the LendingClub secondary market. For those who have experience in the stock market, that experience is not enough. There is a lot more math involved here and people misprice their notes left and right. I can’t tell if they’re shady or just uneducated. I’ve seen prices as high as double the remaining principal. Why in the world would you buy a note that will never pay you back 100% of your principal?

Verdict So Far

I haven’t had any defaults so I still have a positive outlook on this income stream. So far I have received the first payment from 13 of 27 notes. The rest are upcoming and I am hopeful that there won’t be any missed payments. I’ll write a more detailed article later on about how everything has gone in the month of July. The fact of the matter is, I still haven’t broken even with my what I spend on buying the notes. I am probably a month or so away from breaking even. I’ll elaborate on what I mean later for those who have no clue what I am talking about.

I maintain that the LendingClub Trading Platform should be looked into by those who are knowledgable about investing in bonds. For everyone else, I would suggest that you hold off and learn as much as you can through my articles.

Categories: Investing, LendingClub

Debt Ceiling

July 24, 2011 Leave a comment
Debt Ceiling

"3d Person and Debt" by renjith krishnan on freedigitalphotos.net

It is Sunday night and I am looking at the United States stock market futures. The outlook is gloomy and I fully expect us to gap down on the open in all indexes. The fact that there wasn’t a deal done to raise the debt ceiling is spooking all investors. If you are to invest in the stock market then you have to be wary of the mass perception. It doesn’t really matter if you believe the non-deal is really a big deal to the United States economy at this point. If enough people panic, the market will go down. If you know for a fact there’s no fire, but people stampede for the exits, then you’re still trampled.

I suspect gaps down will be bought by those who don’t believe that this is a big issue for the United States economy. I can’t say either way because I don’t know the effects. I am willing to bet that the majority of people who are in the stock market don’t understand what a non-deal really means either. Keep a close eye on your television because I know people are going to come on and try to explain things that they don’t fully understand.

My hope is that some sort of deal is made and the debt ceiling is raised. If the debt ceiling isn’t raised, then I guess the government can’t borrow anymore and certain programs are going to have to shut down. There goes that Social Security that people talk about. I am not relying on that program and I hope everyone else in my generation has taken the warnings seriously. Start your own IRA’s if you don’t have a retirement plan at work or even to supplement as a secondary retirement account.

I worry about my father who is nearing retirement age. Maybe Social Security payments will be halted, Medicare and Medicaid policies slashed, and FHA loans stopped. I just talked myself into forming an opinion now. There has to be a deal. No one wants to be part of the Congress that made it so critical government programs were halted, slashed, and stopped. It is human nature to kick the can down the road, as far down the road as possible.

The real deadline is something like August 2nd. There is approximately one more week for action.

Categories: Investing

LendingClub Note Selection – Payment to Paycheck Ratio

July 21, 2011 Leave a comment
Payment to Paycheck Ratio

Screenshot from lendingclub.com

Please note that I have read some other articles after the writing of this article that covers the same subject under different names. I don’t claim to have invented the “Payment to Paycheck Ratio”, I just used it before I read any articles that talked about similar topics.

I pay very close attention to what I call the “Payment to Paycheck Ratio” when searching for a suitable LendingClub note to invest in.

Think about it. The basic necessities of life come before paying off a debt. What would be your choice if you had to choose between food, shelter, or paying off a debt one month? For this reason, I do not invest in borrowers whose payments are a large percentage of their monthly salary. My theshold is 10%. This means if someone makes $5,000 a month, I will consider investing in a note where the borrower has to pay up to $500 a month. Anything more and I have to read the fine print.

The screenshot above shows an example of someone with a validated monthly income of $6,667 per month. Their payments are $275.72 per month so that equates to about 4%. I would consider investing in this note, and it is actually a note that I am currently invested in.

This rule that I follow is a tool to mitigate risk. Just because this ratio is over 10% does not mean the note is a bad one or will become a bad one. I am attempting to find higher quality notes by using this parameter. The other side is true as well. Just because the note meets my constraint, that does not mean it is a good note or will pay to maturity. There are many other factors that can make even a 4% Payment to Paycheck ratio fail, such as high rent or high expenses.

Categories: Investing, LendingClub

LendingClub Portfolio Composition

July 18, 2011 Leave a comment
LendingClub Portfolio Composition

Screenshot from lendingclub.com

I had spoken about risk mitigation in my introductory post about LendingClub and I want to expand on that topic here. My research revealed to me that LendingClub screens their applicants fairly well and only a small percentage actually are approved to borrow on the site. Most of my research has been studying their SEC 10-K and 10-Q filings. Most people don’t know about these reports, but they contain important financial information and insight on how the company operates. Since I am an experienced stock market investor, I comb through SEC filings regularly as one of my research tools.

Mix Up the Risk

Another article about diversity. Oh boy, when will people stop talking about this subject! Never. Some believe diversity is the “only free lunch.” I know diversity is an important tool in risk mitigation. I have included my current composition chart on LendingClub by Grade. As you can see, I have invested in as many Grade A notes as I have in Grade D loans. I wanted to strike a balance of higher returns and lower default rates so I decided to go with a dumbbell type composition. Actually, I take that back. The truth is I messed up at the beginning and didn’t quite do enough research so I ended up investing in a lot of lower grade notes that resulted in a huge hit to my principal.

I’m trying hard to bulk up my portfolio with more A Grade notes bought at par. I can’t seem to find any good ones selling below par, which is to be expected. I can only assume that the people who sell high grade notes at par need the cash in the near future or believe their note is riskier than its original grade. You have to be careful and review these carefully!

A balanced portfolio consists of all types of notes. You can easily make modifications by investing heavier on A Grade if you want to be more risk adverse. The opposite is true if you want to take on more risk. There is no magic formula. It all depends on how much risk you want to take on, which really depends on how much risk you can afford to take on. Let me remind you. Only invest money at LendingClub that you can afford to lose, similar to investing in the stock market.

Interesting Information

A scan of the latest 10-Q filing revealed that the current default percentage of A2 through A4 notes are actually lower than A1 loans. The actual numbers are below.

  • A1 – 0.83%
  • A2 – 0.52%
  • A3 – 0.68%
  • A4 – 0.53%
  • A5 – 1.08%

There was also an interesting correlation with the percentage of notes 30+ days late. The actual numbers are below.

  • A1 – 4.00%
  • A2 – 0.00%
  • A3 – 0.76%
  • A4 – 0.33%
  • A5 – 0.68%

My theory behind this is that many A1 Grade borrowers are new to borrowing and end up defaulting because they miscalculate how much they can safely borrow. A high credit score can mean very little borrowing has occurred in the person’s lifetime. A lot goes into calculating how much a person is able to borrow and people who have not borrowed before miss many of the factors.

I find it interesting that the A1 Grade notes are actually the second riskiest A Grade notes, behind A5 Grade notes, according to the most recent “default” percentages that the 10-Q shows. The A1 Grade notes actually have the worst “30+ days late” percentage of all the A Grade notes!

Are you scratching your head? I am!

Categories: Investing, LendingClub

LendingClub Payments Received

July 14, 2011 Leave a comment
LendingClub Payments Received

"Dollars and Cents" by posterize on freedigitalphotos.net

I have received payments on 4 of my notes and they have all been on time so far. I have not invested fully yet because I wanted to wait until a few rounds of payments came through before I continued. Let me reiterate at this time that notes priced higher than their remaining principal should not be bought unless you are sure you want to take that chance. Read up on the mistake that I made, which could cost me 3% on the principal of my purchased notes right of the bat.

As of right now my loan status is as follows:

  • In Funding (0)
  • Issued & Current (11)
  • Late 16 – 30 Days (0)
  • Late 31 – 120 Days (0)
  • Fully Paid (0)
  • Default (0)
  • Charged Off (0)

I’ll get into percentages later when there is actually something worth while to report on! My thoughts right now on this lending platform is mixed. It seems like a really good way to help other people and make a bit of money by way of interest payments. I guess I am anxious because I already got blindsided right off the bat. It was my own fault of course.

We’ll see what happens as time progresses.

Categories: Investing, LendingClub

Should You Invest in the Stock Market?

July 9, 2011 Leave a comment
Should You Invest in the Stock Market?

"Traders" by Vlado on freedigitalphotos.net

Every young professional wants to be in the stock market and there isn’t much of a barrier to entry. Brokerages make the application process easy on purpose since their profits come from volume. They don’t care if you make or lose money, just that you trade a lot so they get their fees!

1 – Not a Game

The stock market is not a game like Monopoly where there are set rules. I don’t view the stock market as any type of game at all. You’ll hear talking heads on television use terms like “gaming” a market, but all that is ridiculous. If you jump in with the mindset that you’re playing a game like at a casino, you are going to lose all of your money. That brings me to the next poing.

2 – Don’t Go All In

You should only invest amounts of money that you are able to lose without a negative impact to your future. Another way to say this is that you should only invest what you can afford to lose. Each person’s definition of what they can afford to lose is different.

3 – Know Your Term

Do you want to be a short term trader or a long term investor? Each type of stock market participant has a different set of research that they have to do. In general, short term stock traders look at fundamentals as a side note, while long term investors are heavily swayed by fundamentals. On the flip side, shot term stock traders generally look for technical cues, while long term investors look at technicals as a side note. In other words, short term traders think strong fundamentals are nice, but focus on technicals and news flows. Long term stock investors think technical support is nice, but focus on the fundamentals of a company. Most of us should be in the long term camp. I don’t care how nimble you think your trading skills are. If you don’t know the tricks of the trade, you will be at a disadvantage. Short term trading also requires a lot of time and attention so if you don’t have a job and are willing to learn, you might have a shot. If you hold a full time job like I do, please think twice about being a short term stock trader.

4 – No Emotions

Check your emotions at the door when you enter the stock market. Emotions make people buy high and sell low. They see a stock skyrocketing so they want to catch the wave. Most of the time that happens to be close to the top. On the flip side, they see a stock trending down so they want to limit their losses. Most of th etime that happens to be close to the low! The right way to do it is to set levels and valuations that you are comfortable with and you have to have knowledge to do that. You have to look at balance sheets, cash flows, listen to conference calls, and the like. You cannot watch some TV, read some articles, and decide to invest in a particular stock. Guess what, that is another form of following your emotions. Emotions are just bad news when it comes to the stock market. View the talking heads on TV are nothing more than salesmen.

5 – Diversify

Do not put all your money into one stock. Listen, I know that it is hard not to look at a stock that is ramping higher and not jump on board. All it takes is one news event to take stocks down hard. Say you invested a fifth of your money in one of those high flyers, a fifth in a stable consumer staple with a dividend, a fifth in an energy stock, another fifth in a technology stock, and your last fifth in a retail stock. Your portfolio is now diversified and won’t be hit as hard if some bad news comes out about your high flying stock. It would take something like a recession to hit all 5 of those sectors at once and we just experienced one.

The bottom line is that consistency in the stock market requires a lot of time and effort. If you are okay with 1 or 2 hours a day of research for each stock you own or want to buy, then you can check that box off. You also have to be like a robot and not hit the buy or sell butons because of your roller coaster emotions. You need to have conviction in your decisions and learn from all mistakes. You need to only invest money that you can afford to lose.

I’ll be following up with a post about how to start and set up an online brokerage account. If you think you are ready, then please subscribe to receive an e-mail when my next article is posted.

Categories: Investing