Free Stock Trades! (Yeah, What’s the Catch?)

Posted On Oct 14, 2019 By Dave Gonigam

  • Brokers fall all over themselves with commission-free trades
  • The dark side of “free trades”… and how to protect yourself
  • New trade war headlines drag on Wall Street — but not Apple
  • Middle East mess: New sanctions threat, U.S troops to Saudi
  • Fed raises more questions with latest repo rescue… bank robber makes the most of his remaining time on Earth… more caption-contest fun… and more!

Maybe you got the notice in recent days from your online broker — no-commission stock and ETF trades from now on.

Interactive Brokers was first to take the plunge. Then came Schwab. E-trade and TD Ameritrade quickly followed suit.

Your editor got the notice on Friday from Fidelity — which handles Agora’s self-directed 401(k) program. (I immediately took advantage and did some minor rebalancing I’d planned to do in a couple of weeks anyway.) At this rate, Vanguard can’t be far behind.

Naturally you might be wondering, “Yeah, so how are these companies gonna make their money? What’s the catch?”

Today, we’ll reveal the catch — and walk you through a workaround.

First, a bit of history to explain how we got here.

It wasn’t that long ago when placing a stock trade worked like so, as described by Davis Ruzicka of our research team: “You had to call up your broker, who would in turn write your order on a ticket, which would then be handed to an errand boy, who would then run it down to a designated floor trader, who would then motion a series of complex hand signals indicating you wanted to buy or sell a certain stock.”

Labor-intensive. Costly. Commissions were how your broker covered those expenses.

Nowadays, of course, “trading is all done with the click of a mouse and costs brokerages like Schwab virtually nothing.”

As time went by, brokers passed along the savings to customers. By last year, commissions accounted for only 7% of Schwab’s revenue. Given the way brokerages are responding to investor demands for ever-lower costs, commission-free trades were only a matter of time.

Still, the brokers stand to take a revenue hit from eliminating commissions. How will they make up the difference?

Well, let’s talk about what’s the big moneymaker for these firms. “The biggest chunk of revenue for these companies actually comes from net interest,” Davis says — “which is the money they earn on the cash you have sitting idly in your account, and fees from asset management.”

In the case of Schwab, net interest accounts for 61% of its revenue.

So let’s talk about that cash you have sitting idly in your account.

The safest form of cash you can hold in a brokerage account is U.S. Treasury bills. Happily, it’s also the highest-yielding form of cash. This morning you can lend your money to Uncle Sam for anywhere between one month and one year and earn roughly 1.6–1.7% interest with zero default risk.

But unless you take proactive steps, the brokers won’t put your cash holdings in T-bills. They’ll put them in a lower-yielding money market fund — or even worse, a “sweep account,” which you can think of as the broker’s own bank.

A typical money-market account earns a paltry 0.18% if your cash balance is less than $100,000. Sweep accounts are even worse, with a yield of as little as 0.05%!

But with a few simple steps, you can put your “idle cash” to work and earn a kinda-sorta respectable rate.

You can plug the money into a T-bill ETF like the iShares Barclays Short Treasury Bond Fund (SHV). But even there, you’re forking over a 0.15% expense ratio.

For absolute rock-bottom cost, you need to buy T-bills without the middleman. Most brokerages let you do so with no trading fees. Just click on the “fixed income” tab instead of the “stocks and ETFs” tab you’re used to using. You might have to hit an additional link that says something like “search inventory.”

There you’ll be presented with a vast quantity of choices — Treasuries, CDs, municipal bonds, corporate bonds. Just look under “U.S. Treasury” and plug in a maturity date at least one month away but less than one year. From there, you’ll be presented with 100 or more choices. But don’t be overwhelmed — as you’ll see, the rates won’t vary that much — pick something on the higher side and go. When it comes time to place your order, remember one bill has a face value of $1,000.

If you keep a fairly sizeable cash position in your portfolio, you can do what I do and buy Treasuries at auction — and instruct your broker to “auto-roll” the proceeds into a new issue whenever the bills mature. It’s a totally hands-off way to make sure your “idle cash” is earning the most you can.

[Ed. note: I recently did a video shoot for Agora Financial sitting in front of a very large pile of cash that was anything but idle.

What we’re doing with that money could be the key to you making a substantial fortune before 2019 is over. And the time to get started is in the next few hours — for reasons you’ll see when you click here.]

To the markets, where Wall Street is chewing on the “trade deal” and channeling Peggy Lee — “Is that all there is?”

Friday afternoon, Donald Trump announced a “substantial phase one” trade agreement with China — with Washington shelving planned tariff increases and Beijing stepping up its purchases of U.S. farm goods. The Dow soared 500 points on the day.

But the details — or lack thereof — seeped out toward the end of the trading day and that gain was pared to 300 points by the close. This morning, “new worries” have “emerged,” according to CNBC — which says the Chinese side wants to talk more before signing anything. At last check, the Dow is nearly flat at 26,840. Ditto for gold at $1,491.

“Despite all the trade war noise, it’s great to see market leaders like Apple outperforming,” says our chart hound Greg Guenthner.

Even though the iPhone 11 is an evolutionary, not revolutionary, product… sales have been much more brisk than expected.

And rumors abound about a new version of the “budget” iPhone SE next year. (The old one was $400, although I scored one as soon as it was discontinued for $250.) “This new iteration does not have a set price yet,” Greg tells us. “But the rumor mill says it will look like an iPhone 8 while featuring most of the internals of an iPhone 11.” Probably no headphone jack, though. Boo.

Too, there’s chatter about an augmented reality headset — perhaps in collaboration with another company, perhaps launching in the first half of next year.

“With the good news piling up,” says Greg, “it’s little wonder that Apple stock is pushing toward new all-time highs.”

Apple Stock Chart

As we write, that chart’s already out of date — this morning, AAPL is indeed trading in record territory at nearly $238. It’s been a mainstay in Greg’s trading portfolio, and it’s a longtime favorite of our income maven Zach Scheidt as well.

The Federal Reserve is now putting some meat on the bones of its plans to continue shoring up the “repo” market.

Friday, the Fed announced it will buy $60 billion a month in short-term Treasuries for the next four months, starting tomorrow. Together with the existing “liquidity injections,” that will easily push the Fed’s balance sheet back to the $4.2 trillion level by mid-January.

Meanwhile, all the unnerving questions that we posed a week ago today remain unanswered — namely which big Wall Street firms are the beneficiaries of this largesse, and why do they need the cash?

To those questions, we add a new one this week — why the urgency? Why couldn’t this latest announcement have waited until the Fed meeting at the end of this month?

With the new “caution” surrounding the trade deal, oil prices are pulling back hard — despite Middle East tensions ramping up further. As we write, a barrel of West Texas Intermediate is down nearly 3% at $53.11.

As Turkish troops sweep further into northeastern Syria, Trump plans to sign an executive order “that would allow for sanctions against any person associated with the government of Turkey,” as The Wall Street Journal puts it.

Or as Treasury Secretary Steve Mnuchin put it, “We can shut down the Turkish economy if we need to.”

As if that would change the policy of the Turkish government.

That’s the whole problem with sanctions, as we said last week — they hurt everyday people while doing nothing to harm the leadership. And yet one White House after another labors under the delusion that sanctions will somehow encourage the masses to rise up and overthrow the regime. If sanctions really worked as advertised, Cubans would have tossed out Castro by 1965.

In the case of Turkey — again, sorry if we’re repeating ourselves from last week, but this is important — sanctions will only push Ankara into the arms of the China-Russia-Iran “axis of gold” that’s pursuing a gold-backed payments network bypassing the U.S. dollar.

Meanwhile, the administration is dispatching troops to Saudi Arabia — which, last time that was done, didn’t work out too well for us.

About 700 U.S. forces have trickled into Saudi Arabia the last couple of years, and now the Trump administration is adding 2,000 more, presumably to help “contain” Iran. We’re not sure how that squares with the president’s declaration last week that “GOING INTO THE MIDDLE EAST IS THE WORST DECISION EVER,” but that’s just us.

In case you don’t remember — hey, it was 18 years ago — the presence of Christian soldiers in the nation that contains Islam’s two holiest cities was Osama bin Laden’s primary beef with Washington and his main justification for the Sept. 11, 2001 attacks.

In addition, part of Washington’s rationale for the invasion of Iraq in 2003 was to get U.S. forces out of Saudi Arabia and into a new country from where they could “project power” in the Middle East. As the Deputy Defense Secretary Paul Wolfowitz put it, U.S. forces on the Arabian Peninsula had “been Osama bin Laden’s principal recruiting device.”

Either no one in the current administration recalls this history… or they do recall and don’t care. Wonder how the 9/11 families feel about that…

When you’re a career bank robber and you’re set to return to prison and you’re already 71… you want to make the most of the time you’ve got remaining on this earth.

And so Michael Jauernik gave a 20-hour statement before his sentencing this month in Hamburg, Germany.

Bank Robbery tweet

“Jauernik started robbing banks in the 1970s and returned to crime throughout his life despite serving several jail terms,” reports The Guardian. “In the 1980s he gained notoriety as the ‘Thursday robber’ after holding up a string of banks shortly before closing time on Thursdays. He said in court he had recently started working as a night porter but had picked up a gun again after finding his pension payments ‘pitiful.’”

This time around Jauernik was sentenced to 12½ years for a series of three robberies between 2011 and this year — including one in which he shot an employee in the stomach.

But a 20-hour statement? “During his prolonged statement,” says a Fox News story, “he reportedly said he was ‘more intelligent and clever than any employee of the criminal police agency’ and bragged about his daily fitness regimen in jail.”

Afterward, the judge said she regretted not cutting him off sooner. Then again, she should’ve seen it coming: “You suffer from a narcissistic personality disorder, which was on display to everyone who followed the main trial,” she told him…

“I agree! There should be a caption contest for the picture of Hank Paulson, Ben Bernanke and Tim Geithner,” writes one of our regulars after we dredged it up again last week.

“That looks like a ‘Who brain-farted?’ look to me. That really captures the, uh… essence of the photo, because if you look closely even Tim Geithner seems to have caught a whiff of something sour, while Ben Bernanke appears to be pretending nothing happened and hoping no one notices.”

The 5: Which raises a profound question: If the brain actually expelled noxious fumes, which orifice would they emerge from?

Best regards,

David Gonigam

Dave Gonigam
The 5 Min. Forecast

P.S. Just want to make sure you’re aware, in case you missed the email earlier…

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