Tuesday, February 08, 2005


The long bond has moved from 4.6% to 4.4% in no time flat. A few trillion dollars are at stake. The bond market is supporting the stock market. The oil price is trading below $45. The declining oil price is supporting the stock market.

This morning, airlines, semi-conductors and the NASDAQ are market leaders. No, the stock market is not in high gear. In fact a measure of volatility, the vix index, is at a 30 year low. It is slightly below the level reached in 1995 when the market was starting to shift gears. The market may not hit another gear for weeks or months but if I were you I would keep my seat belt fastened.


The Schwab (SCH) online brokerage company is playing a good game of "Tit for Tat". The firm discovered that customers are not willing to hang around paying premium commissions to get "value added" services offered by SCH. The firm cut its commissions for accounts of $50,000 or more from $29.95 to $19.95 in November. This week the firm cut these commissions to $12.95.

SCH is trying to find a price higher than the price charged by AMTD and ET that customers will pay without bothering to move. The most common mistake made by new businesses is to offer a cut rate price which is is foolish. A good game of "Tit for Tat" is the correct way to set prices. If your company offers good products and good services, you can charge at least as much as the next guy. If you are smart, you will often get away with charging a little bit more.

In the example above, if SCH had lowered its price to the $9.95 charged by AMTD and ET, AMTD and ET would have been forced to respond. Pretty soon all three firms would be doing trades for a price such as $7.95 and all three of them would see reduced profits.

The market has pounded AMTD. I think the pounding is over done. AMTD has not been forced to lower its price. The company has continued to grow its business. It has gained market share in two ways; organic growth and by continuing to buy little firms. Full service firms are the ones who are charging hundreds for $10 services. AMTD, ET and SCH can all continue to take market share from the full service firms. ET is my favorite in the group. I suggest investors should put a half position in ET and half in AMTD.

The next big move in stocks will bring in the "little" traders--the bread and butter for AMTD and ET. SCH will continue to offer "value added" services. Of course AMTD and ET do the same thing but they do not require $50,000 accounts to get the lowest price. Ironically, I trade with BrownCo where a $50,000 account is required and where the cost per trade is $5.

One can learn a lot about investing by learning how to win at games. Tit for Tat is a simple game but it requires finesse to win. Another game investors should study is called The Prisoners dilemma. As far as I know, I still hold the game record at UNC-Chapel Hill. In a controlled game where 9 players shared winnings of $90, I took home $86 and change.

Often times the winning move in a game is all but intuitive. The volatility index is currently very low which implies a bad time to buy call options. Last week I bought options and yesterday I bought more. The values have moved up. Options can move very quickly and gains can disappear in an instance. Today the options are up 17% in a dull market. One of the old market sayings is "never sell a dull market short". I have my seat belt fastened and am ready to shift shift into third gear.