banking

[Jim Hinsch]

You guys are so easy

First, you can get intruments in the USA that pay as much, even better than the described investments in the DR. They aren't common because the risk is comensurate. Where? Have you heard of options and futures and all the packages centered around them? Guaranteed high returns. Unless the package goes bankrupt

If you are SO sure, why don't you go borrow a million right now at 10%, turn it into pesos, invest it at 20%, and pay it back next month?

The 20% I refered to was just my experience in the cost of converting between pesos and dollars and back. The Central Bank charges a commission so the spread is unusually large compared to other currencies against the dollar. I'm not sure that's the reason. Maybe somebody experienced in this back and forth dollars to peso to dollars can shed light on whether they've been able to do it at a smaller spread.

I believe those commercial paper investments are just loans to companies, managed by the issuer. Companies fail and so do the isssuers. What is your recourse if you, just you, get ripped off? Say they just keep saying your money is gone, don't know what to tell you? That's part of the big risk in these investments. The letter of the law and procedure in the DR is not likely to give anybody a warm and fuzzy feeling.

Mondongo. Please show me where I told you school is for losers? Formal education is GREAT for many, maybe even most people. For me personally, I can learn faster in an independent study and my "schooling" is perpetual, but I've never mentioned that and it is irrellevant. I said many things, all factual, but never said or implied it was for losers.

Anyway, I expect to hear from several multi-millionaires next month, since all they have to do is secure some loans in the USA, invest it in the DR, then cash out after a few months, right?

Actually, it sounds like it might work. Why aren't you all doing it?

Regarding the tax, American citizens are taxed wherever they earn it and lying about it might not be a prudent risk.

 

[mondongo]

J.H....I spend much time thinking about interest rate/currency/futures/options/forward contracts arbitrage possibilities....BTW I have traded many times in the futures and options markets....there are NO guarantees there...no packages that promise you anything....if you have found them....let me know..cause I want some!!!....what I am SLOWLY trying to figure out is if there is a way to hedge the DR peso....there is no futures market to use....but maybe forward currency contract through some of the big international banks...excpet these are of limited open interest...and I have NOT traded those before....

Jazzcom....try NLY....similar to AXM....but these need to be monitored very closely cause on of the reasons they are doing so well is because of the difference between Mortgage rates and short term Treasury Bills....as long as short term rates remain low...and as long as mortgage default rates are low...then these companies will continue to give 10+% in yield....not to mention the potential capital gains in the underlying stock price...

The DR 20% I am referring to is not the same as above...these are debt obligations that mature in 30+ days....meaning you get your capital back right away and intact....buying a yielding stock takes on additional risk....

J.H....additionally, the point you make about the risk involved in lending money to company (commercial paper) is a valid one. I asked frederic on another thread about the default rate. He does not recall any defaults in the last 10 years...but the last 10 years have been the best ever for the DR economy!...this long winded post leads me to this: to mitigate the risk involved in buying a single compnay C.P.....a good idea would be to set up some kind of DR High Yield bond fund and average the risk over many different companies....don't laugh....THIS WILL EXIST SOON....If I lived there now....I would be on it ASAP...cause not only would you sell to expats and rich Dominicans....you could bundle them and sell internationally for those big International High Yield Funds!!...whew...what a windbag of a post!!!

 

[Golo100]

Things to think about

This discussion must be focused on the idea that investing in commercial paper or short term bank certificates is best reserved for people who live or travel frequently to DR and are well acquainted with our systems and people.

This is not for the amateur investor or tourist who just happened to hear about this good thing. Besides, how can you compare short term liquid instruments to long term yield stuff, where most of the gains and losses are generally on paper?

Much of the interest earned in DR certificates besides being reinvested in the same instruments are used to pay back mortgages and other productive assets.

The portions of the interest used for living expenses and purchasing hard goods is spent well with today's pesos, not tomorrow's devaluated currencies, including the dollar. Certain loans are being paid with lower interest rates in the past and merchandises and services that were provided at lower prices.

It is always a wise thing to control your own destiny as a business. For instance, I bought a beach lot many years ago when I was living in the United States with excess income. The cost of the DR property was $8000 pesos. 10 years later I sold it for $20,000 dollars. The $8000 pesos was paid in ridiculously low monthly payments from the U.S. But the $20,000 dollars($300,000 pesos) I got in DR was no joke. In DR that kind of quick money was very useful and continued to produce more income. My luck was even better because after the sale the lot's beach community went down the tube because they built the Smith & Enron plant there. Even the local hotel closed down.

In another situation, I just took the risk of taking 7 years of leveled income from an annuity which will give me 7 times now until 2009 what I will get 7 years from now. But I have the money now, invest it and control my destiny for the next 7 years, as opposed to an unknown in 2009.

TW

 

[andy a]

How close is a big devaluation?

The main issue here seems to be how close the peso is to a freefall. Since creeping devaluation almost inevitably leads to a massive, sudden, devaluation - how far away is it?

Such a question is very hard to answer of course, but maybe an intermediate term risk assessment is still possible. In the futures markets it's well known that overshoot is the rule rather than the exception. One method of estimating how far a move will carry is to take the expected movement and double it. Since there seems to be the expectation of the peso dropping to 20 to 1, that would be a movement of 2 from where it is now. Doubling it would be 22 to 1. Perhaps that is a reasonable assessment of the intermediate term risk - say 6 months to a year.

If so, a 20% return on peso CD's is not so risky, especially if one invests only what he needs in the DR. Creeping devaluations often go on for years before reaching the edge, enriching investors in the process. Of course one needs to bail out before the big one, but even that risk might be acceptable after earning 20+ percent per year for several years.

One should keep in mind though that when the big one arrives, dollars in the DR (or anywhere else in the world that the big one happens) will be grabbed by the banks holding them, and the depositors will be paid in pesos. Of course the bankers have to save this ace in the hole for the big one - doing it before then would scare off the depositors. Perhaps a devaluation to 30 to 1 would do it.

Concerning guaranteed returns in the futures options markets, it is never guaranteed, but is likely provided:
1. One writes (shorts) the options, and
2. Has deep pockets such that he doesn't have to overextend himself to make a reasonable return.
Of course, the unexpected can and does happen.

 

[mondongo]

Re: How close is a big devaluation?

Concerning guaranteed returns in the futures options markets, it is never guaranteed, but is likely provided:
1. One writes (shorts) the options, and....
Of course, the unexpected can and does happen.

That is not correct advice, andy_a. Writing options in the futures markets is tantamount to playing Russiona Roulette. If you write naked options, then you have LIMITED gains but UNLIMITED risk. This is the absolute worst possbile advice for anyone other than super seasoned proffesional. If you write futures options while holding the underlying commodity, then sell the option, you only protect yourself by the premium you receive from the buyer of the option. This is typically less than 5% of the total value of the underlying contract.....In other words, selling options in the futures markets is almost a guarantee for bankrupcy.

Selling options on a portfolio of stocks that you are going to be holding anyway is a different story. This has less risk but also limits you upside potential.

 

[Escott]

JH... American Citizens have the ability to make 80k offshore taxfree if they are a residence in another country or stay out of the US 335 days a year I believe.

Mondongo... I had tried to buy NLY on the dip but missed it by one penny on my limit order a few months ago. AXM has been doing better by percentage. AXM pays a higher dividend as well. AXM is a buying opportunity today fwiw.

Great thread. Nice info and thoughts being passed that can help us all.

 

[andy a]

Thank you Mondongo, but you surprise me.

Do you deny that professionals scoff at those (typically the public) who "buy" options?

It is a fact that most options, by a wide margin, expire worthless. The figure typically bandied about is 90%, which I think is too high, but without doubt, most of them do.

Perhaps you're even addressing the wrong poster. Someone else had suggested that guaranteed profits were possible in futures and options. I was essentially throwing cold water on that idea and emphasizing that one would have to be well capitalized to try it. Furthermore, any under capitalized novice who tried to trade futures options would not be allowed to by his broker.

If one must be a super seasoned profesional to try it, so be it. What about all those little old ladies so often interviewed on tv during the roaring stock market who said, "...I'm buying for my retirement"? Maybe a little more "investigate before you invest" would have helped.

Furthermore, I said nothing about naked options. You assumed that.

You say, "...selling options in the futures markets is almost a guarantee for bankrupcy (sic)." If that were true, one would simply have to do the opposite to have the same near guarantee of getting rich. In fact, we know that options buyers are the underdogs.

The typical reader of this board has probably already hit the exits, so I will continue preaching to the choir and examine a little scenario. Suppose one were to write a December double in treasury bonds at 111? He would collect premiums of more than $4,500. If December bonds then close on options expiration anywhere between 106-16 and 115-16 (approximately) he would make money - a LIKELY outcome. For reasonable risk assessment, he might investigate to see what has been the biggest historical move in that time frame - and find that it is perhaps 25 full points ($25,000). His collected premium counts, so he could do this in reasonable safety with an investment of $20,000. Is that bad?

Again, thanks to all for the refreshing discussion.

 

[sjh]

the figure that most options expire worthless.. the correct "statistic" is that most people who buy options lose money.....

 

[mondongo]

andy_a.....great post...let me clarify what I meant.

The vast majority of options will expire worthless. Selling well out of the money options will make you a winner nearly all of the time. However, the reason I dont recommend that the average trader sell futures options is that a few limit days in a row could wipe you out. And so what you have is that maybe 9 out of 10 times you will make a little money....1 out of 10 times you will lose a lot. The key to surviving is to have a game plan for that infrequent time that the market goes agains you quickly.

The phycological issue here is that it is easy for the trader to remain calm when he is collecting the premiums for that out of the money option. What happens in real life is that during those rare bad market moves, traders' emotions get in the way and they do not follow their game plan. Some traders just plain hold too long and allow for losses to mount. Other trades sell out too quickly for a loss if there is a sharp move that takes the underlying instrument near the strike price. That is the crux of the matter.

Andy_a....I am not downplaying your idea of making money selling options....It is one of the methods that I will (have) used to trade in the commodity and stock markets....but what I am saying is that in order to make money consistently in all kinds of markets, you have to have Iron Will and set a plan a follow it.

If you don't have a plan....or don't follow the one you have...then trading in highly leveraged securities just accelerates your eventual financial demise.

I have a friend who lost a massive amount of money selling naked options.

A strategy that I WILL employ soon is trading OEX options price spreads. Basically use mainly technical indicators to determine long and short term price trends...wait for a price move that goes counter to the existing trend then sell an OEX spread that lies beyond the nearest resistance point.

 

[andy a]

Thanks Mondongo

Almost since their inception, I've been interested in OEX options. A great deterrent, though, is that they are treated as securities. That causes a nightmare at tax return time - matching trades item by item.

In futures, the brokers sum that up for you - what a relief.

 

[mondongo]

Taxes

I use TurboTax and all my trades through Fidelity are electronically downloaded into TurboTax....great time savings..now if only Schwab would do the same...

 

[Escott]

I am thinking about buying a beach front piece of property, undeveloped, just raw land in the DR. I am not sure what my plans would be but I wouldnt do anything with this in the near future (5-7 years). Perhaps build a house in the future or maybe flip it. Any thoughts about the economic viability of this of an investment? Golo?

Mondongo... First Union/Wachovia does a great monthly statement on transactions started and finished with them. I just give my statements to the accountant.

 

[Golo100]

Jazzcom

Buying beach property while being absent from DR for investment purposes is very risky and full of pit holes. One should only get into this with excess income, or as a hobby. Here are questions you should solve in your mind before you venture into beach properties:

1)How solid is the property title? Are there any hidden mysteries surrounding this land? Was this land ever a part of the agrarian reform or can it become part of one? Are there legal battles concerning successions? For instance, beach properties near Palenque beach are in agrarian reform lands and susceptible to farmer takeovers. Furthermore, due to lack of government support water canals built to bring water are dried up. Livestock and property theft is a daily occurrence. Stay away from Bahia de Las Aguilas and western coast. This is a hornest' nest.

2)Who are your neighbors? If the answer is farmers, peasants, a small town with lots of unemployed people and strong political upheavals, stay away from it.Example:Land in Samana and Bavaro is top risk.

3)How much squattering goes on around the area? The Eastern part of the country is high risk for this. Sand is a very valuable asset. Properties left unprotected can be dug for construction materials. Even our government protected sand dunes are being invaded by sand thieves.

4)Can you afford a watchman for protection? Would you trust a caretaker?

5)Even when buying from developers you must research their background. I know an European(don't want to mention the country) development in Ubero Alto that started flying high with million dollars homes and an ambitious hotel development program and it turned into a bust as the developers were high class spenders. The Dominican engineers were fly by night Jeepeta conmen. I remember their flashy German administrator asking me for a salesman job after it went bust. I used to see this guy in local casinos all the time.

Of course, everything is not bad news. I have gotten lucky with a couple of these type properties, but they were under the administration of the developers, I sold at the right time and bought very cheaply with excess income. Buyers found me. My property was not for sale. They wanted it. I sold it on my conditions, including paying some back maintenance fees, local taxes and legal fees. This is an ideal situation. Plus I was Dominican and knew the territory. I also requested pre-payment in U.S. certified checks verified by my U.S. Bank and receipts for taxes, maintenance and legal fees before I signed over anything.

TW

4)Is the government planning any projects, highways, etc. Remember that when the DR government declares land of public utility it pays below market value or never pays. For instance, the government is just taking over land to expand the Bani highway without compensating owners, or so it seems based on news reports and complaints.

 

[El Jefe]

I have lot on the beach on the north coast...would gladly sell it...it faces south

 

[Escott]

Golo,

I only do things with excess income. Never spend my principal.

If I hired a decent real estate attorney, would that be good enough protection? Of course I would search and insure the title, that goes without saying. I have friends that live there on a daily basis and they can keep an eye out for me.

Can I become a squatter? Sounds like a good business!

Escott

 

[Snuffy]

If someone had only $10,000 USA to invest...what kind of investments here in the DR would yield the highest returns???

I also, would say be very careful investing in Pesos right now. I feel the time is approaching when the peso will freefall. I believe we just recently received a warning shot from the government. The time is now to collect on those pesos and get out. I hope I am wrong.

 

[BushBaby]

I do not know what "The BEST" investment would be but I am getting 14% on US Dollar & 18% - 20% on RD pesos. I only use pesos for my day to day needs for the reasons you mention, although I do NOT believe the pesos will 'freefall', just go to about RD $20 to the US in Feb 2003 & possibly RD $22 by the end of 2003.
I have a lot of faith in the Business & Banking fraternity here & they will NOT allow hippy Hippo go too far before some form of "Strangle Hold" is put on him - it is beginnig now if you look closely at the news. - Stay hopeful & here's to 2004 when a NEW & more sensible lot get in!! - Grahame.

 

[Jim Hinsch]

Mondongo (and others): You didn't answer the question. If you are SO sure, why don't you go borrow a million right now at 10%, turn it into pesos, invest it at 20%, and pay it back next month?

 

[BushBaby]

Hey Jim - Anyone out there that want's to lend me 1 Million (pesos OR US $) at 10%, I'll take it!!!! I'll even take it for 6 months or a year, putting my house in town up as collateral!!
Any Takers??? Heck, I won't even tell the IRS, so it will be Tax Freeeeeee - Grahame.

 

[Snuffy]

BushBaby,

Can you tell me the program you are using to get those percents...bank, etc.

Thanks