Archive for December, 2011

I had a few people e-mail me and ask where they could find the 1.75% interest rate on the loan I recently wrote about and to be honest,  I thought it would be really easy but even the web didn’t simplify the search too much.    The first step is to visit your local credit unions in your town and find out what the rate.    For larger cities, the rate should be competitive and you should be able to find one that offers this low rate, for smaller cities it may be more difficult so maybe getting a relative to help you open one in the big city might be an idea.

I typed this in the Bing search engine, “shared secured loan 1.75% credit union” and I got a ton of responses.

Here are just some of the credit unions that offer this low secure loan rate.

Polish & Slavic Federal Credit Union (New Jersey) – Rate between 1.75% to 2.50%

AOD Credit Union (Alabama) – Rate of 1.75% above CD rate.  Note: CD rate is low.

Vantage Credit Union (Illinois) – Rate of 1.75% (variable).

I am not endorsing any of these institutions nor am I validating the rates but simply reporting on what I saw on the web for each credit union.  To be fair though, the rates do vary greatly from credit union to credit union and some of the terms are fixed for a period of time anywhere from 24 months to 60 months while others vary month to month.  It would be great to have a consolidated website that reported the current rates for each credit union similar to what BankRate.com does for banks but I couldn’t find any website that maintains that list, perhaps a niche market for a savvy web-entrepreneur?  I am beginning to think this is one of the best kept secrets out there!   I must have been lucky to have a credit union with such a low rate right off the top!

So what I did was get a fixed rate of 1.75% for a period 36 months which would reduce my student loan from the 6.8% rate it’s at now.    Finally, people are asking me what happens when you take the money out and the answer is you can’t.   At least not take any out if there is a remaining balance or perhaps a portion thereof and I haven’t even considered it because in a pinch you can simply direct the payoff from the secured deposit over to the loan.    Again, this financing framework isn’t probably for everyone especially if you’re living paycheck to paycheck but then again, I’m not writing for that demographic anyway so this shouldn’t be the solution to debt problems for the weary.

 

So here’s something I stumbled upon at one of my credit unions.  I was contemplating taking a loan out to pay off one of my student loans who’s interest rate climbed to 6.9% and homey don’t like to pay interest that high!   I walked in to the credit union and asked for the loan rates and something caught my eye: 1.75% share secured rate!   What is a share secured loan?   Well essentially, you deposit money into a share (savings) account and “lend” yourself that money back at a rate of 1.75 percent.   I was looking at 30k so the difference in interest on 30k @ 6.9% vs. 1.75% is about $2,500 over 3 years.

But now I’m thinking I might be able to move some IRA money into an IRA savings account at the credit union and borrow at 1.75% and pay the remaining balance of my mortgage off which is currently at a low 3.25% interest rate.   Alternatively if I am ever in the market for any kind of loan, why not borrow from myself at 1.75 percent?   I haven’t officially asked if I can do this and that’s my next step on it but it makes perfect sense.

You may be asking why I don’t simply take the money and pay off the loan and avoid all interest altogether and the answer is simple:  reserves.   The money I’m using is essentially emergency cash reserves that I use for emergencies but since I also have secondary reserves at my brokerage account and I still have most of that student loan money in another credit union sitting in cash it makes sense to borrow at nearly negative rates (if inflation is running 3% then borrowing at 1.75% means I’m deflating the debt nicely).

If you’re interested in looking into this strategy I suggest you google “credit union share secured loan” or visit your local credit unions.  Shop around as rates vary and each major city has at least dozens of credit unions.

It seems like an eternity since I started my MBA program and I’ve just completed another semester, at this rate I should be done in 2013 but I can already tell you that having completed about 70% of the program I clearly understand why the global economic crisis arose despite having more Ph.D’s, MBA’s and undergrads in the world today than ever in the history of humanity.

Problem #1 – Normal Distribution fantasyland – Academic professors preach normal distribution theory as the solution to all problems.   There hasn’t been a financial class that I haven’t taken where normal distribution formulas are used to guesstimate what will happen next which is completely absurd when it comes to financial instruments because those numeric valuations are based on human thinking activity, prejudices and greed not innate characteristics such as height, weight, hair color, etc.

Problem #2 – Head in the sand  attitude – Academic professors are under constant pressure to make a name for themselves and their university by coming up with some new theory that will transform the world so the obvious net result is the head in the sand problem where academic theory is justified and rationalized despite the clear and apparent failure of such theory (see problem #1 for example).   I took an international finance class whereby the professor insisted that stock charting, technical analysis, fundamental analysis, etc really worked.   I argued helplessly for the entire semester and ended the argument with a simple question:  if these systems work well for making money then why aren’t you a wealthy billionaire baron?  (Discussion ended).

Note: I’ve read a few articles where well known egghead Ph.D’s were brought in to devise these bundled crap mortgages and if you haven’t guessed by now, normal distribution was used as a basis to guesstimate the default rate.  Hmm…it ended up being completely wrong, how did that happen? (for answer see Problem #2).

Problem #3 – If everyone else is doing it, it must be right.  My biggest criticism and complaint of my MBA program is that it isn’t unique.   I checked around and the curriculum is pretty much the same as most other universities and I think this is a huge failing.   We need to get to a point where more “niche” education is taking place around specialization around certain fields of study but there is wide reluctance to do so and I’m assuming because it’s probably viewed as too risky.  I would love for each university to develop “ecosystems” around specialized learning just how Apple built their iTunes model for music, video and entertainment then simply build on it.   Here are three areas universities should build niche’s around:  energy, health care, technology.

I am personally debating hard whether the investment in time and money has been worth it.   On the one hand, the MBA program has validate much of what I already knew and the confirmation will be the piece of paper I get at the end of the program with “Degree” stamped on it.   On the other hand, I spent a great deal of time doing pointless research largely so professors can find the next big thing (I have no doubt some professors skim off of their students) research and ideas and made too many sacrifices along the way.

 

I have been raking in the cash lately using my favorite system of trading and it seems the trade of a decade…perhaps lifetime is coming in January 2012.   With the European debt fiasco and the upcoming portfolio rollover in January this may be the best opportunity to trade the market.   I am personally biased to a big correction down in the market and I think it’s going to happen in January.    To test my theory I’ve been investing in inverse leveraged ETF’s and selling covered call options but money can be easily made simply buying the ETF outright or even buying the options outright.    To date, I’ve made almost $5,000 selling FAZ covered call options and as soon as December expiry gets close, I’ll likely do another heavy trade.

So how to profit?

Option 1 – Covered calls on FAZ.   As of this writing, FAZ closed at $40.63 and the January $41 strikes are selling for $6.21.   The strategy here is buying 100 share blocks of FAZ and selling at-the-money calls for January.  Assuming the market drops by January expiry (FAZ rises) then you’ll be assigned and keep the premium (16.19%) in a little over 45 days!

Option 2 – Buy FAZ at-the-money or in-the-money calls.  As stated above, the options are trading at $6.21 and with $1300 you could purchase a couple of contracts and if the market tanks these options will be worth quite a bit as FAZ rises.  Money will be made if FAZ rises above $46.21 by January expiry.

Option 3 – Setup a Strangle.   Sell FAZ $36 strike (PUT) for $4.05 and buy the FAZ $41 strike for $6.21 (net cost of 6.21-4.05 = $2.16) which allows you to utilize that same $1300 to buy more for less.  I personally would expect the PUTS to expire worthless (since I’m biased to the market falling which means FAZ would rise) and the calls would be worth more.

For option 3, it goes without saying that you should be well capitalized to be able to take the PUT assignments, meaning for every contract you sell you need to have $3,600 in the bank to absorb the shock.  Also note that leveraged ETFs do swing violently on a daily basis so this strategy isn’t for the faint of heart or cry babies.

Choo….choo!  What’s that sound?  It’s the sound of the money express leaving the train station heading to richville…..you’ll find me giggling all the way to the bank 😉