Money Gripes

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In today’s edition:

 

  • I get grumpy with Money Gripes
  • We head to Market Guy Mailbag and talk about stock analysis

I don’t get mad very often. In fact, the Market Gal jokes that it happens only once a year. However, there are a number of things that leave me shaking my head. Annoyances, pet peeves, really. Some are minor and relate to the use of certain words. For example, I’m not happy with the overuse of the word extreme. Why does everything have to be extreme, or “X”? Even my anti-perspirant is labeled extreme. Incidentally, my uncle Bert really dislikes the phrase pet peeves, so I’m using the word gripes as a substitute. He also dislikes the words, folks and George Bush. Some of my gripes are more substantial, like when my neighbour power-washes her driveway at 6:45am. Other annoyances include lawn grubs, Celine Dion, and the Toronto Blue Jays bullpen.

But nothing gets me more excited, more riled, more peeved, than fees and unnecessary charges. And so with that, I now present a modest list of theMarket Guy’s Money Gripes.

1. White label cash machines

Let me formally introduce you to a buddy of mine, Bouch in Embrun. We went to high school together. We share a fascination for power tools and the financial markets. Naturally, he was one of the best men at my wedding. We’ve been going for lunch together at least once a week for about 10 years. And yet, last week our friendship teetered on the brink of disaster. For Bouch in Embrun was about to commit a transgression of the lowest order. This involved an action so vile, so objectionable that I’m still trying to recover.

The other day Bouch and I were at a fast food restaurant. We were in different lines and about to place our orders. He was out of cash and the restaurant didn’t take Interac. The clerk motioned him over to a white label cash machine. You know, those ATM’s that aren’t affiliated with any particular financial institution? These pests have sprung up in a variety of locations: restaurants, convenience stores, food courts, airports.

Let’s get back to Bouch. He started moving toward the ATM. You know those situations when a friend is about to do something that you know he’ll regret, so you have to take matters into your own hands to save the guy from himself? It reminds me of those action movies when everything heads into slow motion and the action hero is flying through the air, yelling “Nooooooooo!” as the bullets are heading toward his friend? That’s kind of how it went down, only I was lunging from the KFC line, my arm extended full out with a $10 bill, flying through the air to stop him from using a white label ATM.

Why am I so upset about this? Fees. When using these machines, get ready to pay three levels of fees. First off, the owners of the machine charge a convenience fee. There is nothing convenient about a fee. Then you get the Interac network fee. Oh, and don’t forget to include the fee your bank will charge when you don’t use one of their ATM’s. Add it all up and you get a nasty three-fee financial burrito.

So what can we do about it? One option is to take your business elsewhere. Just make sure to tell the establishment why they are losing out on your business. Next, try to limit yourself to using the ATM’s run by your own bank. Why take on the extra fees if you don’t have to? Besides, you’re already being hit with…

2. Bank service fees

I have no problem with the banks making money. In fact, I want the Canadian banks to be strong and competitive on the global scene. I just don’t want to pay for it. Given that most banking packages pay virtually no interest, you are losing money after inflation.

Let’s deal with some of the common excuses people use for not looking for and/or switching to a lower (or no) fee bank account.

a) It would be too much trouble. I’d have to change my bill payments and direct deposits around.

A friend of mine currently pays $20 a month in bank charges. He could easily switch to a no fee account because his banking needs are fairly modest. “It’s a hassle to change things around,” he says. How long does it take to setup new bill payments and direct deposits? An hour? He’s content to pay $240 a year for many years to avoid spending one hour once. Does this describe you? If so, repent now and cleanse your soul.

b) I make too many transactions a month, so there are no packages that fit my circumstances.

Wrong, Pedro! Have a look at President’s Choice Financial’s no fee account (http://www.pcfinancial.ca/). You can bank on the web, by phone, or at any of the over 4000 PC Financial or CIBC bank machines. Did I mention there is also free chequing and you earn points towards free groceries and other items? Let’s review…there are no fees. Go ahead, make 40 transactions a month. Hope you enjoy free.

PC Financial is one of many options. If you maintain a minimum balance of as low as $1000, many of the other financial institutions have a package that can minimize fees. It’s worth spending a few minutes every year to make sure you have the right package for your needs and that you’re not paying any unnecessary fees. If they don’t have a reasonable package, switch and make sure you tell them why.

c) I like having all of my accounts (personal banking, mutual funds, brokerage, etc.) at one financial institution.

I can understand the need to simplify. But is 2 or 3 extra pieces of paper every month (or quarter) really that big a deal if you are saving hundreds of dollars? How much are you willing to pay for less paper?

The thing is, you know I’m right. Just admit it and we can all move on to…

3. Credit cards that offer nothing special

Open up your wallet and have a look at your credit cards. Are you paying an annual fee? Is your credit card offering any perks or points that can be used to get free stuff? With interest rates at historic lows and most cards charging you 19% interest per annum, you better be getting something special. If not, as Elaine on Seinfeld used to say, that really sticks in my craw. But what to do?

A few weeks back I was having lunch with a fellow faculty member, Tim at Carleton (as you can see, so much of my life revolves around lunch). The food was enjoyable enough and the conversation was good. When the bill arrived, Tim decided to make it his treat. Then he pulled out his Canadian Tire Options Mastercard (http://www.ctfs.com/english/optionsmastercard/). That’s when the conversation shifted from good to great. “I put everything on it: Airfares, conference expenses, groceries,” he said. It was like I’d found my twin. Here’s how the card works:

You use the card just like you would any other credit card. But here’s where it gets really fun: Canadian Tire money is added to your card, every time you use it…anywhere you use it. For purchases at Canadian Tire, you get 20% more Canadian Tire money than if you’d paid in cash. Points can be redeemed at the cash for any item in the store, including auto work. That’s right…you don’t have to select items from a catalogue and wait 2 years to save up for a crappy set of binoculars. Just going to Canadian Tire is a wonderful thing, but getting free stuff is more than the pleasure centre of my brain can handle.

The most exciting moment of our lunch occurred when one of us said, “I don’t think I’ve ever actually paid for anything at Canadian Tire.” Maybe it was me, maybe it was him. I’m tearing up right now. Did I mention there is no annual fee? There is also no downside.

If you aren’t very excited about Canadian Tire money (although I find that hard to believe), there are plenty of other options. CIBC has an HBC Rewards card, AMEX has Air Miles, CIBC has Aeroplan, etc, etc.

How many credit card applications arrived in your mailbox this past year? Ten? Twenty? More? This suggests that there is plenty of competition for your business, so take full advantage. There is no excuse for credit cards that offer nothing special. I’ll tell you one thing, though. I’m not placing any of my savings into…

4. Back-end load mutual funds

Also known as deferred sales charge funds. In fact, let’s extend this to all mutual fund fees. I’ll deal with this in another column. I’m already getting too upset and I need to pace myself for talking about…

5. Dramatically rising insurance rates

In the past 5 years, our home rates have increased 86%. In the past 3 years our auto rates are up 67%.

The insurance companies have offered a variety of different reasons for these increasing premiums. These reasons have included, but are not limited to, September 11th, our litigious neighbours to the south, stress, the dollar, the weather, and the law. It’s only a matter of time before we get an explanation based on chaos theory. “Well, you have to pay more to insure your Ford Focus because a butterfly flapped it’s wings in Guam, which changed the tides, which led to a drought, which screwed the farmers, which….” Wait for it, because it’s going to happen. Reminds me of the time Heinz blamed poor ketchup sales on terrorism.

When we first moved into the Market Shack, I wanted to make sure we had adequate home coverage. OK, I’ll be honest. I wanted to make sure we had better than average coverage. OK, I’ll come totally clean. I wanted to have the best coverage possible, the Cadillac package, a coverage that would leave us laughing at fire, water, ice, oil spills, pestilence, swarms of angry bees, and a possible invasion from Quebec. Because you never know, right? Upon learning of my conservative approach, Market Dad remarked, “How many houses in your neighbourhood have actually burned down?” Besides, he knew the cost of being so conservative is way too high.

In fact, the Bank of Canada recently raised interest rates in order to control a surprisingly high level of inflation. Shortly thereafter, they lowered rates because the spike in inflation was based mainly on increasing energy prices and, you guessed it, rising insurance premiums. No doubt you’ve read about the politicians trying to score some points by addressing these issues. So long as I pay less, I don’t really care what they do.

Earlier this year I decided to shop around and found a fair amount of variance between carriers. Even though I switched policies, all that I accomplished was a reduction in the increase, rather than any absolute savings.

Well, that’s what gets me going. What about your money gripes? What really gets you upset? How are you coping? I’d love to compile a list of your peeves. Grumpiness is good at mail@marketguy.ca

Market Guy Mailbag

Let’s shift gears and get back to talking about stocks. More specifically, stock analysis. A loyal reader in Toronto wanted to mention an Internet site that provides free charting software:

I lost the use of my low cost charting software when formats changed in 2000 and have been looking for a good simple to use program ever since. I discovered one recently – Wall Street Analyzer – with good charting capabilities, easy downloads of current and historical Yahoo price data for free or a donation at www.lathuy.com . It has some bugs but these will likely be fixed in later release… it does not run too well in Windows XP. However XP has a compatibility option which allows you to run a program in an earlier version of Windows. I find Windows 98 works fine.

Thanks for the tip! Whenever we are talking about stock charts, we are moving into the domain of technical analysis. This approach to investing uses historical stock price data to predict future movements. In other words, if you know where the stock has been, you can figure out where it’s likely to go. It’s believed that patterns can be identified and clear entry and exit signals provided.

This can be directly contrasted with fundamental analysis, which is primarily concerned with the financial health of the company. This covers things like the balance sheet and the income statement. Want to know more about a company’s debt levels or cash flow? Curious about how well their products are selling? Want to make sure the dividend is sustainable? You need to look at the fundamentals. Fundamental analysis may also consider the dynamics of the industry and the performance of the overall economy. This is the brand of analysis that I focus on.

However, if you have a Scotia McLeod discount brokerage account, they have some nifty technical analysis calculators. All you have to do is type in a ticker symbol and a variety of different technical analyses are performed. You can also search for stocks that exhibit certain technical patterns. The interface is very easy to use and the results appear on a single page. It’s relatively basic, but a good starting point. TD Waterhouse and CIBC Investor’s Edge don’t seem to have these services. In any event, the full service arm of any brokerage should be able to provide this type of information.

I asked the reader if he has any favourite technical indicators and how he uses them in making investment decisions:

Although I stick to fundamentals, I like to time entry and exits with the help of charts…First I look at p/e, yield, growth and then evaluate the prospect using a procedure similar to that found at www.quicken.com, stock evaluator, which has a future cash flow discounter and allot of other good stuff. Then I check the trend shown by the bar charts of price and volume. I have found the simple moving average very useful as it can identify changes in trend. There are a couple of other indicators which I may look at – MACD and SAR – (which I won’t try to explain). Oh yes, also some where in the back of the head there is an awareness of current economic conditions, interest rates, politics etc. In reality I may take the some or all of the foregoing steps in any order and hope for the best. If things work out I thank lady luck. If they don’t I review to see where I went wrong.

Thanks for the great e-mail. Your last two sentences have given me an idea for an upcoming column. Thanks. For now, I should mention that your approach to the fundamentals virtually mirrors that of my own. The Quicken site is very fun and the stock evaluator is a wonderful tool. The site managers have done a commendable job of organizing the output, as it’s very easy to read. The site also generates a one-click scorecard for each stock you specify and the evaluations can be based on either established growth or discount to intrinsic value criteria (i.e., the Warren Buffett approach). I only wish a site like this existed for Canadian equities so that I could reduce some of my legwork.

Only recently have I become intrigued with technical analysis. I like that each indicator provides a very clear-cut decision rule on whether to buy or sell. I think it can be a very useful tool to complement looking at the fundamentals. I really like your strategy of using technicals to help with entry and exit points. Unfortunately, different indicators may suggest different things. I punched Riocan’s ticker symbol into the Scotia technical page and the results were all over the map. However, I suppose the same thing can be said of results based on fundamental analysis. In any event, that’s what makes a market. Remember one thing about this column…the clichés are absolutely free.

For those of you wanting more information on technical analysis, here are three websites that you might enjoy. The first site offers information on a variety of investment topics, while the last two pertain mainly to the technicals.

http://www.investopedia.com/university/
http://www.stockcharts.com/education/what/
http://invest-faq.com/articles/index-technical.html

All this griping and technical talk has left me in need of a vacation. I’m going to Vegas.

The Market Guy is an Instructor with the Department of Psychology at Carleton University. He’s not a professional advisor. He’s just a guy who loves investing and talking about the markets. While in Vegas, the Market Guy and Gal will be staying at the self-proclaimed City of Entertainment, the MGM Grand. Proclaim yourself to mail@marketguy.ca

 

Apple and Me and Music Makes Three

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In this offering to you, the home readers:

  • Market Guy Mailbag
    • Apple Computer
    • The Bootstrap Entrepreneur

Market Guy Mailbag

Letter #1: Ozner in Barrhaven wants to talk about computers and music:

I’m interested in possibly taking a position in Apple Computer (AAPL-Nasdaq). With the recent introduction of their new G5 platform, and OS X software updates apple devotees will be happy, and although they have a very small market share percentage compared to other pc manufacturers such as Dell and IBM their latest inroads into the music file sharing arena seems interesting. In the short time that the Apple Music Store has been in existence they have sold over five million songs. Apple seems to have the recording industry on its side and music pay-for-service file sharing may be the wave of the future. Illegal file sharing options such as Kazaa are coming under more fire and scrutiny from record labels, and copyright law enforcement. I heard recently on MSNBC’s market wrap show that several law enforcement agencies are looking into prosecuting individuals who share copyright music through peer2peer file sharing programs. It may very well be time for a legitimate online music purchasing service. There are services available other than Apple’s, but their policy of allowing the song to be transferred, copied, and played on any device owned by the user is at this point unique. Apple plans to make their service available to all computer users in the near future, as well as internationally (currently it is only available to US Macintosh users). This market seems like it’s ripe for the picking, and these apple tress are definitely producing sweet fruit.

Thanks for writing in, Ozner. Great e-mail. Let’s begin with some background on my dealings with Apple. In the late 1980’s, three things were very clear. One: Miami Vice was over and I was going to have to come to terms, somehow, some way. Two: I really wanted Market Gal to go out with me. Three: Apple was making the coolest computers on the planet and I was definitely interested. After spending the next couple of years drooling over my friend’s Mac, I splurged and picked up an LCII (16 MHz processor, 40 megabyte hard drive, 4 megabytes of RAM). This was followed by an LC575, then a Performa 5200, and finally a PowerMac 7200. This may be gibberish to some, but among Mac users their computers are held in the same regard as a beloved pet. But in the late 1990’s, I angered many of my Mac-devotee friends and switched to a PC. Yes, I had lost faith. And who wouldn’t have? The company was dogged by flagging sales, poorly received products (remember the Newton handheld?), turmoil at the management level, and a public perception that we were watching a repeat of the Sony BetaMax story. I felt compelled to abandon the fruit.

Then along came some positive developments. There was a much-needed infusion of cash provided by none other than arch-rival, Microsoft. Co-founder and creative guru, Steve Jobs (the Apple Jesus) returned to the company. Then along came the iMac, signaling the company’s return to innovation. The coffers started to fill with cash and prospects brightened considerably. So where are we now?

What sound does an Apple make?
As Ozner suggests, there are a number of exciting upgrades and products in the pipeline. And in what can only be considered a coup, Apple successfully developed the most intriguing online music service to date. What makes the site so compelling, is the strength of the music catalogue. Many subscription music services have sprung up over the last few years (e.g., Pressplay, MusicNet, Rhapsody, MusicMatchMX, eMusic and assorted others). You pay a monthly fee that grants you access to a fairly limited number of music files. Apparently there are issues with this business model, as barely 300,000 subscribers have signed on. People aren’t very interested in subscribing to a service that offers so few songs. What about pay-per-track? Although you can buy individual tracks at places such as bestbuy.com, these catalogues are similarly limited and price points can differ greatly from song to song. Contrast this with Kazaa.com, the much talked about heir to the Napster throne, where music fans can download a seemingly unlimited amount of copyrighted music (albeit illegally) for free. Kazaa has managed to entice over 200 million registered users. That’s not a misprint.

Here comes Apple. Armed with an agreement with several of the top music companies, Apple develops a wide catalogue and an interesting pitch: any song you want for 99 cents ($US). What’s in it for the music companies? It provides a chance to test a new business model on Apple’s relatively affluent customer base. Given Apple’s miniscule 3-5% share of the computer market, there is very little downside. Plus, it’s a heck of a lot cheaper for them to sell their music online than to manufacture and move CD’s. What’s in it for Apple? First off, a considerable amount of buzz (i.e., free advertising). The product launch even made the evening news. Second, Apple is very strong in the digital music player space, with their iPod device commanding a quarter of the market. The arrangement with the music companies will keep those digitally hungry Apple customers satisfied and further committed to the Mac platform. Third, the company gets to once again differentiate itself from its competitors.

In the short term, the results have been very impressive. Since the April launch, several million songs have already been downloaded. But will people continue to pay? I teach first-year students and one evening during the class break, many of them were talking about online music options. Here’s what they decided: Free is cheaper than paying $1 a song. If a CD holds 15 songs, that will cost $15. Free is cheaper than $15. And $15 buys 15 boxes of Kraft Dinner. In other words, $1 a song might as well be $10 as song. All they know is that anything more than free is not free. Unethical as all get out, but you can’t argue with the logic. Plus, they usually mention that free music has become somewhat of an expectation. So this is what the music industry (and by extension, Apple) is up against. Appeals to morality and threats of prosecution seem to be falling on deaf ears. Not everyone steals music, but enough do to leave the recording industry in serious trouble.

Fine, but what about the stock?
As always, the essential question is, can we make money here? Well, since January 1st, Apple shareholders and their 36% return have been laughing all the way to the bank (currently trading at $19.85). No way did I see this coming. However, the most important thing for investors is not where the stock has been, but where it’s headed.

Let’s compare Apple’s valuation with that of the 800-lb computer gorilla, Dell (NYSE ticker: DELL). A useful starting point would be to compare their respective price-to-earnings statistics. Have a look at the following table (info obtained from www.globeinvestor.com and First Call):

 

 
Apple
Dell
S&P
This year’s PE
122
33
18
Next year’s PE
70
28
16
Expected annual growth rate (5 years)
10%
15%
11%

Based on expected earnings for this year, Apple is considerably more expensive than Dell. But what about next year? Same situation. Fine, but if Apple is growing at a much faster clip, then perhaps the premium valuation is justified. As the table makes clear, Apple’s earnings are expected to grow at a slower rate than Dell’s. In fact, it’s expected to grow slower than even the S&P 500 index.

Maybe it’s not fair to compare Apple with Dell. I mean Dell’s market share is roughly 6 times greater than that of Apple’s. Perhaps it’s more useful to analyze Apple with respect to a broader range of competitors. Well, even when using this approach, Apple comes out pricey. The technology hardware sector is expected to grow at an annual rate of 11.5% over the next five years and yet trades at a lower multiple than Apple.

Sure, but as we learned during the tech meltdown a few years ago, earnings estimates can be a moving target (watch for Apple’s quarterly results on July 16th, by the way). Perhaps there is some catalyst that will propel Apple forward and justify the current stock price. The online music division? Maybe when they open up the service to international Mac users and even Windows customers, they might have something. But I’m guessing by the time we get to that point, there will be a considerable amount of competition. Needless to say, people in both the computer and music industries are watching this little experiment with great interest.

Maybe there will be a ramp up of purchasing from one of Apple’s traditional markets: education. Demographically this makes sense, with all those baby boom echo children in school (according to David Foot, these are the kids born between 1980 and 1995, to all those baby boomers). However, there’s a big problem with this idea. The overwhelming numbers of state and local governments are in deep financial trouble and hardware upgrades don’t help at election time. Am I missing something here?

What’s the punch line?
Nothing would please me more than to see a stronger Apple. I think their products are easy to use and fun to look at. However, loving the company and its products is not enough for me to purchase the stock. The Apple juice comes at Dom Perignon prices. Sorry, Apple. I have betrayed you once again.

The Bootstrap Entrepreneur
Letter #2: Loyal reader Mike at Brymark Promotions (aka Mike in Kanata) wanted to let Market Guy readers know about an event taking place on Thursday, July 17th. It’s the Exploriem.org First Annual Symposium: The Bootstrap Entrepreneur. The keynote speaker will be Dr. Terence Matthews, founder of Mitel, Newbridge, and March Networks. I couldn’t help but notice that among those also heading to the podium will be Jeff Hunt, owner of the Ottawa 67’s, and Dr. Bruce Firestone, founder of the Ottawa Senators. These guys know how to get it done. The symposium is being held at the Brookstreet Hotel in Kanata (nice digs).

For more information, contact Mike at mike@brymark.com.

The non-member price of admission is $120 plus GST. Wanna get in free? For some reason known only to him, Mike actually likes this column. So he’s making one free ticket available to a lucky Market Guy reader. Just send a note to the Market Guy and I’ll randomly select a winner to receive one free admission. I only wish I could go…damn that full-time job! Well, that’s it. I’m simply going to have to retire early.

The Market Guy is an Instructor with the Department of Psychology at Carleton University. He’s not a professional advisor. He’s just a guy who loves investing and talking about the markets. He’s currently trying to figure out what kind of sprinkler to use on his lawn. So many choices: oscillating, impulse, spike, turret. Geez. Sprinkle a little something atmail@marketguy.ca