Category Archives: Financial

California Minimum Business Fees and First Year Exemption

The question is: do you have to pay any California Business License fees?
If you searched the ca.gov site, and you may find the first year exemption,
http://www.taxes.ca.gov/estpaybus.shtml
it says: “Note: As of January 1, 2000, newly incorporated or qualified corporations are exempt from the minimum franchise tax for their first year of business.”

So it seems that you don’t have to pay the $800 per year business licensing fees.
However this is a English trap, this should mean: the min tax of $800 does not apply, HOWEVER the tax has to be paid based on your business profit.

if we use math, my translation is simply:
final_fees=max_of(min_tax, profit_based_fees)

first year min_tax=0, thus final_fees=max_of(0, profit_based_fees)=profit_based_fees

second and other years min_tax=$800.
So the final tax is final_fees=max_of(800, profit_based_fees)

Halloween indicator

The Halloween indicator is a variant of the stock market adage “Sell in May and go away,” the belief that the period from November to April has significantly stronger growth on average than the other months. In such strategies, stocks are sold at the start of May and the proceeds held in cash; stocks are bought again in the autumn, typically around Halloween. This Halloween indicator is partially related to another well known effect: The January Effect.

 

Though this seasonality is often mentioned informally, it has largely been ignored in academic circles (perhaps being assumed to be a mere superstition). Nonetheless analysis by Bouman and Jacobsen (2002) shows that the effect has indeed occurred in 36 out of 37 countries examined, and since the 17th century (1694) in the United Kingdom; it is strongest in Europe. According to the efficient-market hypothesis, this is impossible.

 

It is not clear what causes the effect. Many supporters of the Halloween indicator suggest that people taking vacations and holidays during the summer months can lead to market weakness. There are exceptions: between April 30 and October 30 2009, the FTSE 100 gained 20% (from 4,189.59 to 5,044.55).  We can not say the Halloween Indicator existed in each and every year. But that’s hardly surprising, since no indicator works all the time. The question is, over progressively longer horizons, does the success rate grew to very impressive and consistent levels (should be much higher than 50%).

 

Most interesting about the effect is that it shows that stock market returns in many countries during the period May-October are systematically negative or lower than the short-term interest rate, which also goes against the efficient-market hypothesis. Stock market returns should not be predictably lower than the short term interest rate (risk free rate).

 

Popular media often refer to this market wisdom in the month of May, claiming that in the six months to come things will be different and the pattern will not show. However, as the effect has been strongly present in most developed markets (including the United States, Canada, Japan, the United Kingdom and most European countries) in the last decade – especially May-October 2009 – these claims are often proved wrong.

 

One study which tests the Halloween indicator in US equity markets found similar results as Bouman and Jacobsen (2002) over the same time period but using futures data over the period April 1982- April 2003 and after excluding the years 1987 and 1998 no longer found a significant effect, leading these researchers to conclude that it was not an “exploitable anomaly’ during that time period in the United States.” Other regression models using the same data but controlling for extreme outliers have found the Halloween effect to still be significant. The original saying is “Sell in May and go away, stay away till St. Leger Day”, referring to the last race of the British horse racing season, however this day is unlikely to be known by non-Brits so it is replaced by Halloween (which in turn is Samhain, about one-eighth year after the equinox).

Money saving tips on home mortgage refinancing.

The steady downward trend in mortgage interest rates in recent years have undoubtedly presented many opportunities to lock in historically low rates. With the downward trend anticipated to continue for the foreseeable near future, there are bound to be more opportunities to refinance into a lower interest rate loan. This article offers a lesser known tip on how to profit from every drop in interest rate.

As any savvy borrower would know, refinancing into a like-kind mortgage product with lower interest rate can lower the monthly payment, but does not always translate into money saved over the lifetime of the new loan. The main reason is that the new loan will usually carry a longer term than the number of payments remaining on the original loan. This reset of payment schedule is what can drive the total cost for the new loan to be higher than the total payments remaining on the original loan!

If the objective is to reduce the monthly expense, then by all means, refinance into the new loan. However do so knowing that the monthly savings come at the expense of higher total cost.

If the monthly amount on the original loan is affordable, then there will always be money saved by refinancing into a lower interest rate loan and continue paying the same monthly amount as in the original loan. This strategy works if the new loan has no pre-payment penalties, no points, and no fees. By paying the same monthly as on the original loan, the additional amount is applied to the principle every month to effectively shorten the length of the new loan. There will always be money saved on this new loan when compared to the original loan. As an additional benefit, the new loan offers the option of paying the new lower monthly payment should the need ever arise. This would not be possible by staying with the original loan.

In conclusion, whenever the interest rate drops, refinancing to take advantage of the lower rate is always recommended as long as the new loan does not impose pre-payment penalties and has no points and no fees. The only downside may be the hassle involved during the loan application process. Whether it is to satisfy a need to reduce monthly expense or to save money over the lifetime of the loan, the benefit of refinancing to a lower interest rate will outweigh every bit of hassle.

Presidential Cycle

Presidential Cycle

As we discussed in the marketing timing strategies, we will spend more time to dig deeper into the Presidential Cycle.

The first year is the weakest of all four years. Higher returns during the last two years of a Presidential term than the first years. The expectation is that as a President takes office he begins to implement his proposals and investors, hunker down waiting to see the results. During the final two years the President becomes more concerned with his re-election and will ‘prime the pump’ in order to secure re-election.

For generations, researchers have sought to make sense of the aggregated behavior. Is there any rhyme or reason behind anything that occurs in the markets or in life? The four-year U.S. presidential cycle is attributed to politics and its impact on America’s economic policies and market sentiment. Either or both of these factors could be the cause for the stock market’s statistically improved performance during most of the third and fourth years of a president’s four year term. The month-end seasonality cycle is attributed to the automatic purchases associated with retirement accounts.

Mark Hulbert of MarketWatch compiled Dow Jones data dating back to 1896 and found the following:

– the third year of a presidential cycle significantly outperforms all others, with average stock market gains of 15.5% compared to 8.8% in the first year, 0.4% in the second, and 4.1% in the fourth year.

– the market performance in the third year of a presidential cycle is not statistically correlated to the market performance of the previous year; in other words, third years have tended to outperform other years regardless of whether the second year in the cycle experienced a boom or a bust

– he also found that there is no significant correlation between stock valuations and market performances in the third year; “On average, third years perform just as well when price/earnings ratios are high as they do when those ratios are low”

Marshall Nickles of Pepperdine University found similar results in his 2004 study.

– historical stock market cycles dating back to 1942 have lasted an average of 4.02 years, which is essentially the same length as a presidential term; a cycle is defined as the time between peaks or the time it takes to go from a peak to a trough and then back to a peak

– stock markets bottomed out only once during the third year of a presidential cycle in data dating back to the FDR administration. The one time the trough occurred in the third year was in December 1987 (Reagan). The average time frame for a market trough was 1.87 years into the presidential term. Markets never bottomed out in the fourth year.

In general, incumbent politicians are more likely to be re-elected and their party remains in power if the economy has been doing well. Basically, satisfied voters have tended to re-elect incumbents. Politicians have tended to fiscal policy to buoy the economy during the campaign season.

January effect

January effect

As we discussed in the marketing timing strategies, January Effect is the oldest and more common accepted ideas. In this article, we expand the topic and look at more details.

Increase in buying securities before the end of the year for a lower price, and selling them in January to generate profit from the price differences.  The “January effect” is that American stocks rise much more in January than in any other month of the year. It is called January effect but now the date may be moved earlier because people are buying the stocks earlier to profit from it. One theory explaining this phenomenon is that income tax-sensitive investors sell stocks for tax reasons at year end (such as to claim a capital loss) and reinvest after the first of the year. The second reason is the payment of year end bonuses in January. Some of this bonus money is used to purchase stocks, driving up prices. The third reason is that may people max out the retirement contribution at the end of a year and contribute to their retirement saving at the start of the year. The January effect may not be always true; for example, small stocks underperformed large stocks in January 1982, 1987, 1989 and 1990.

 

Sidney Wachtel discovered the phenomenon in the 1940s, but it wasn’t until the 1970s that anybody took much notice. Many subsequent researchers have made many refinements and produced several ingenious explanations, usually suggesting that shares are dumped in December in response to tax or reporting requirements at year’s end. The January effect is a challenge to the efficient markets hypothesis. A reasonably bold version of that hypothesis is that you can’t beat the market without inside information. All publicly available information—including corporate accounts, price history, and what month of the year it is—is already taken into account in the market price. January Effect says “buy on Dec. 31 and sell on Jan. 31”, it just shouldn’t yield consistent returns.

 

The history may indicate a very small, inconsistent inefficiency in the stock market. Exploiting a small efficiency may be all it needs for a professional trader. For average Joe, there are many other bigger mistakes he may make. Since January Effect is well known, there may be a very large number of investors making their bets based on the January Effect. Can small number of smart investors make money from mistakes made from a larger pool of average investors? It also won’t take long for all the obvious mistakes to disappear, because they’ve been so exploited. The date of January Effect would keep shifting until you are no longer sure there is such an effect.

 

One closing thought, if I were to start a family of mutual fund or ETF, I certainly would have one for “no-January-effect Russell 2000” , another for  “January-effect Russell 2000”.

 

Even a stopped clock is right twice a day

Even a stopped clock is right twice a day

There are many different ways to predicate stock market.  Some are well known, some are not, but all theories have their true believers. First I will list a few very “reliable rules”. Then I will list a few common but not so reliable ones. For each of the topic below, we will have follow up posts with in depth study and discussions.

Reliable Rules:

Rule #1 Buy low and sell high: everyone knows that, this rule for sure is working, I definitely believe it!

The financial markets are usually efficient. When the markets are not fully efficient, you may benefit from it.

Insider trading:  This is the most effective winning strategy. Most people including theUS government would agree with me on this one. Recently the government sent billionaire Raj Rajaratnam to 11 years in prison. The government rigorously proved that insider trading is profitable, I have no doubt about that.

Market manipulation: bear raid, churning, rumors. Note that market manipulation is prohibited in theUnited States under Section 9(a)(2) of the Securities Exchange Act of 1934.

Not so reliable rules:

I have crafted this statement even before I have posted this article to cover my rear end: “I’ve been getting loads of emails from people who have lost most of their money and are looking for some direction as to what they might consider doing. Yes, I was right/(or wrong), no one could have anticipated the catastrophic event, but exceptional times need exceptional measures. Etc.”

January effect: increase in buying securities before the end of the year for a lower price, and selling them in January to generate profit from the price differences.  It is called January effect but now the date may be moved earlier because people are buying the stocks earlier to profit from it. One theory explaining this phenomenon is that income tax-sensitive investors sell stocks for tax reasons at year end (such as to claim a capital loss) and reinvest after the first of the year. The second reason is the payment of year end bonuses in January. Some of this bonus money is used to purchase stocks, driving up prices. The third reason is that may people max out the retirement contribution at the end of a year and contribute to their retirement saving at the start of the year. The January effect does not always materialize; for example, small stocks underperformed large stocks in January 1982, 1987, 1989 and 1990.

Presidential Cycle: The first year is the weakest of all four years. Higher returns during the last two years of a Presidential term than the first years.  The expectation is that as a President takes office he begins to implement his proposals and investors, hunker down waiting to see the results.  During the final two years the President becomes more concerned with his re-election and will ‘prime the pump’ in order to secure re-election.

Halloween indicator: it is a variant of  “Sell in May and go away”. It is the belief that the period from November to April has significantly stronger growth on average than the other months. In such strategies, stocks are sold at the start of May and the proceeds held in cash (e.g. a money market fund); stocks are bought again in the autumn, typically around Halloween.

January barometer:  it is the hypothesis that stock market performance in January (particularly in theUS) predicts its performance for the rest of the year. So if the stock market rises in January, it is likely to continue to rise by the end of December. Historically if the S&P 500 goes up in January the trend will follow for the rest of the year. Conversely if the S&P falls in January then it will fall for the rest of the year. From 1950 till 1984 both positive and negative prediction had a certainty of about 70% and 90% respectively with 75% in total. After 1985 however, the negative predictive power had been reduced to 50%, or in other words, no predictive powers at all.

Mark Twain: it is the phenomenon of stock returns in October being lower than in other months. The name comes from the following quotation in Mark Twain’s Pudd’nhead Wilson: “October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February.”  The 1929, 1987 and 2008 stock market crashes roughly occurred in October.

Turn of the Month Effect: higher returns around the turn of the month. Turn-of-the-month is defined as beginning with the last trading day of the month and ending with the third trading day of the following month. It is saying that positive returns only in the first half of the month, and the last day of one month and the first three of the next are particularly high. Investors making regular purchases may benefit by scheduling to make those purchases prior to the turn of the month. Nobody knows the reason behind such pattern.

Monday Effect: Monday tends to be the worst day to be invested in stocks. Suicides are more common on Monday than on any other day. Could the effect be caused by the moods of market participants? People are generally in better moods on Fridays and before holidays, but are generally grumpy on Mondays.

Super bowl indicator: This is an indicator based on the belief that a Super Bowl win for a team from the old AFL (now American Football Conference AFC) foretells a decline in the stock market for the coming year (bear), and that a win for a team from the old NFL (National Football Conference NFC division) means the stock market will be up for the year (bull). This indicator has been surprisingly accurate (around 85% correct) over the past years.

Years ending in 5: The DJIA had never had a down year in any year ending in 5. DJIA ended on 12/31/2004 at 10,783 and 12/30/2005 at 10,717, so this trend may have ended with 2005.

Stock Split Effect: before and after a company announces a stock split, the stock price rises. This is momentum effect because a stock split is as result of the stock risen too high. The stock splits are often viewed by investors as a signal that the company’s stock will continue to rise.

Merger Effect: the value of the company being acquired tends to rise while the value of the bidding firm tends to fall.

Bare knees, bull market: The market rises and falls with the length of skirts. In 1987, when designers switched from miniskirts to floor-length skirts just before the market crashed. A similar change also took place in 1929.

Drug Production Indicator: Stock prices and anti-depressant production are inversely related. This indicator suggests that when the market is rising, fewer people need anti-depressant to heal market-induced problems.

Holiday Effect: the general strategy is to purchase stocks one or two days prior to a holiday and sell stocks just after the holiday.

Astrology:  predicting major economic trends as they relate to certain cycles, specifically on the cycles of outer planets; finding the best industry to be in for a particular period of time based on major planetary configurations; identifying the best stocks to own during a particular time period; identifying the best date and time to buy or sell a stock; correlating the Astrological aspect to the movement of stock market in day trading.

Lunar cycle: stock returns are lower on the days around a full moon than on the days around a new moon.

Elliott Wave: it is a form of technical analysis that traders use to analyze financial market cycles and forecast market trends by identifying extremes in investor psychology, highs and lows in prices, and other collective factors. This principle has many believers, however critics says as follows:

Technical analyst David Aronson wrote: The account is especially persuasive because EWP has the seemingly remarkable ability to fit any segment of market history down to its most minute fluctuations. I contend this is made possible by the method’s loosely defined rules and the ability to postulate a large number of nested waves of varying magnitude. This gives the Elliott analyst the same freedom and flexibility that allowed pre-Copernican astronomers to explain all observed planet movements even though their underlying theory of an Earth-centered universe was wrong.