February 22, 2016
What we’re reading this week
Will congress repeal tax free Roth IRAs?
Michael Kitces at Nerds Eye View takes a look at Roth IRAs and what the future holds for them. Will congress ever repeal thier tax-free treatment? His conclusion is that while it’s possible, it’s not probable. He cites two major obstacles: 1) It would be incredibly unpopular. While congress is not above making unpopular decisions I seriously doubt the democrats or the republicans have the guts to change tax law this dramatically. 2) Eliminating Roth treatment scores very poorly in Federal revenue projections. This because of the 10-year budgeting process the federal government uses to analyze tax law changes. Kitces also looks at potential changes that are much more likely. Namely, introducing an RMD stipulation, the elimination of stretch IRAs for beneficiaries, a cap on IRA account sizes, and the elimination of the back door roth strategy.
JP Morgan Stock
JP Morgan Chase CEO, Jaime Dimon bought $26 million worth of JP Morgan stock two weeks ago stating, “I look at it as just a very good long-term buy.” During JP Morgan Investor Day he was asked about his purchase and responded, “I had a morning where I wasn’t doing anything.” This is a very interesting way to spend a lazy morning and I have to admit that I’m jealous, both of having free time in the morning but also having an extra $26 million to throw at my company’s stock. Other investors aren’t as optimistic though, JP Morgan stock has dropped 17% from January 1st to February 11th in 2016. Following Dimon’s purchase the stock climbed 6% for a nice $2 million return.
Citi and Consumer Debt
The Consumer Financial Protection Bureau took action against Citibank for lying about how much debt people owed the bank when the debt was sent to collections. The infractions took place in New Jersey but that didn’t work in Citi’s favor. Citi was required to pay back $11 million that the debt collection firms (the ones that falsified documents) collected and had to agree to forgo collection on another $34 million in debt they were trying to collect. I know I have stated this before but in consumer finance, two wrongs sometimes make a right. This also reminds me of playing Monopoly, “Bank error in your favor, collect $200.” As a child I was always puzzled by this, as I never remembered making a transaction at the Monopoly bank. The theoretical nature of the windfall was lost on me. Like a good consumer though, I took my $200 and shut up. Sure, lying about the amount of money people owe you is bad, really bad, but shouldn’t people have to pay back their debt…even if the bank’s law firm wrote down incorrect information?
Nasdaq announced they are partnering with Digital Reasoning to monitor trader chats and emails. I, for one, always enjoy reading the incriminating emails exposed in a financial scandal. Especially ones where somebody says “keep this below the radar” or something equally stupid before putting in writing the thing that is meant to be below the radar. What radar are they hoping to avoid, as email is pretty much the main radar that exists? This highlights one of many problems people have with the industry itself. Shouldn’t these firms spend more time (and money) focusing on the systemic problems within the system instead of the emails generated by illegal activity? Policing emails doesn’t stop firms from doing bad things, it just stops them from emailing about it.
Recently a young investor asked me about the investment app Robinhood, which advertises commission free trades with no minimums. The target market is young investors that can’t afford to pay $10 per transaction to firms like etrade or Schwab. There have been some disruptions to the financial services industry the past few years all ranging from good (Betterment) to insane (Stocks Nearby). Robinhood sounds good on the surface but is really more of the same from an industry that seems to only care about taking a client’s money and making it their own. There is a reason young investors can’t afford to pay commissions. A young person, with very little money to invest should maybe not be buying small shares of individual stocks. If you can’t afford to pay $10 for a trade then I have to assume you have $0 in the bank. If you have $0 in the bank, you really shouldn’t be investing at all. In a recent move the firm has found a way to sidestep thier biggest hurdle: a three day wait to trade. Now, the firm will front new users $1,000 to buy stocks immediately. From the article, “if they sell stock, instead of waiting three days for the proceeds to clear, Robinhood will let them reinvest so they can jump on hot opportunities.” I wonder how this went in the brainstorming session:
Robinhood Employee #1: You know how young people with no money trade stocks on our platform?
Robinhood Employee #2: Yes…
Robinhood Employee #1: Well, you know how young, poor, investors often have hot stock opportunities?
Robinhood Employee #2: Not really…
Robinhood Employee #1: Well, we can allow these young, poor, inexperienced investors to take advantage of those hot opportunities by trading on margin!
Robinhood Employee #2: I’m not sure this is a good idea…
Robinhood Employee #1: We can charge them 3.5%…
Robinhood Employee #2: Ok, let’s do it!
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