Zero Percent

Feb 17 2010

At lunch with Phil Thompson last Thursday, the subject of interest rates and cars came up. I had occasionally been thinking about the possibility that for the next couple of years we may be looking at a range-bound market (ie, a nominally flat, non-directional trading-range market contained between identifiable upper and lower bands), in which the principal remaining consumer economic stimulus were the current 0% automobile bank loans. These unnatural loans might last a calendar quarter or two, but that would be about it. If this were to be the case, such a market would probably remain highly volatile and be a stock-picker's, rather than an invest-and-hold period.


It had already crossed my mind that inasmuch as we actually needed a new car to replace a 10-year old one, I could set up a project for the purpose but got sidetracked with travel plans. Later, that lunch became the spark for action. On the weekend, we found and bought a suitable vehicle, 0% down and every penny financed. In the past for this kind of purchase I would write a check on a bank account or draw on our home equity line of credit (HELOC) that was available waiting for the day when I was prepared to use leverage (borrowed money) to go overweight in stocks.

That would cost x% and reduce either cash or available credit. By using the unprecedented (and probably never again to be seen) 0% financing, I did neither. Because this offer contains more opportunity than no cost for the money to buy a car. It also provides the possibility of no cost for the car itself.


Tuesday am (Monday was a holiday) I put the cash purchase value of the car into a particular stock that I already held and was thoroughly researched. This took about a minute for the online cash transfer from a bank account to a trading account, plus perhaps one minute to complete the market execution. Although merged as an asset, I set up separate spreadsheet tracking for the purpose. At the market close today, 1 day later - and we have not even picked up the car - the investment was up the equivalent of 14.4 actual monthly payments. It could be sold now in 60 seconds and paid out to the bank tomorrow morning - returning the original capital in full to myself - but I have 60 months available.


In this experiment, I believe I can reasonably expect not only to get the car, net for free, but to continue to benefit in excess of its contract payout until such time as I choose to sell the stock. The point of all this is that capital, used opportunistically, can achieve specific goals in ways impossible in the past. This is because of the structure of today's financial system and the tools that are now available to anyone who chooses to learn how to use them and who has the personal capacity to manage the "animal spirits" that will join in along the way. Of course, it could all go wrong. However, this is a case where odds are it won't. And never without a plan that goes past the beginning, through to the end.

24 hours later
The US Fed, in its first step towards its unwinding of low rates and super-easy credit, just lowerd its rates by 0.25%. The surprising part is that it was done a half hour after the market close, adding drama. I watched gold start a fast drop in Australia and I expect JIN, which closed at a new high, to sell off first thing Friday morning. Despite this, nothing has really changed that had not already been telegraphed to the market. The nervousness is that by making a move when it is difficult for the market to respond, people may wonder what is coming next. Rates on mortgage backed securities are now starting to push up.

This should not turn the trend in the market. Cool heads should quickly prevail, but a trading sale and quick repurchase might be OK to try in the morning. Lows on news like this usually hit Toronto around 10:30am when the bulk of traders get the news, but it makes the opportunity look pretty tight and easy to wind up on the wrong side. In the AM we'll see how gold and the Euro is doing in London plus the pre-market on JIN in Toronto to decide on trading action if any. In addition, although Chinese New Year was this past Sunday, government officials and key executives will not be back until Monday (Sunday afternoon here). If by chance any positive corporate news was timed for release then, an overzealous trader could easily be caught out of position with no time to act on Monday morning, our time.

Friday Feb 19 2010 9:50am
Attitudes to the Fed rate move last night are tempered. Even when added to the IMF announcement Wed night of more possible gold sales, JIN was only off 17c at the initial low this morning and have recovered to down 1c. A bit of consolidation now would actually be useful and from the market's perspective, the minor effect actually looks pretty positive, especially for a Friday. This means that from a US Treasury perspective the move is likely a failure. Its early, but the event may be a sign that their actions are losing their intended effect.

Could it be? A possible and rare Canadian Government display of backbone:
The WSJ this morning says Jim Flaherty will announce, perhaps today, against the US-sponsored global bank tax concept, instead pushing for better supervision using properly applied existing rules rather than the distortions to which such a tax would undoubtedly lead.

Hard to believe but Canada could actually derail the proposal. This would not endear Canada to politicians (it would eliminate a brand new source of revenue), especially Obama and Brown of the UK, but will likely be applauded by conservative and libertarian economists. If this happens it will be positive for bank stocks across the board.