With the tax-credit deadline looming, our reporter decides whether to jump in now or bide his time.

My wife, Christina, and I watched last year as home prices in Washington, D.C., seemed to bottom out, bummed that we couldn’t take advantage of the generous federal income-tax credits for first-time buyers because we didn’t have enough money for a down payment. Then the credit, which is worth up to $8,000, was extended to first-timers who have a home under contract by April 30.

It’s never a good idea to make a life-changing decision based on a tax credit. But we’ve been talking about making the leap from renters to owners for a while, and we did a gut-check to gauge our commitment. Are we ready for the extra expenses? Yes. In the months since the tax credit was extended, we have put aside enough to cover a down payment and closing costs. Our jobs — and income prospects — are stable. We have good credit and no debt. Can we stay put for the next five years and make a home purchase worthwhile? Sure. Washington has a stable job market and plenty of opportunities for fun.

Our first step was to get preapproved for a mortgage. I thought finding a lender would be the hardest part of the journey, but it turned out to be a snap. We are preapproved for up to $400,000 by two lenders, one of which took less than three hours to decide. We wanted to be conservative in our budget and figured we could afford to pay $3,000 per month to cover the mortgage, insurance, taxes, utilities and maintenance. That’s 25% of our monthly income. The nut we have now will cover a Federal Housing Administration mortgage, which requires a 3.5% down payment, and closing costs. The longer we wait, the more we will have for a down payment.

The search. Just one problem: Although the median home price in D.C. is $306,200, the townhouses on Capitol Hill, where we rent, cost $800,000 — way out of our price range. But we’re committed to staying in D.C. because we enjoy city living and want a short commute to work. To get a three-bedroom home, we’ll have to buy in an up-and-coming (that is, gentrifying) neighborhood. Or we’ll have to settle for a two-bedroom condo if we want to be downtown near a Metro station.

Our home search was initially scattershot. Dots of homes in our price range freckled the Google map, and we perused the online listings. We attended a half-dozen open houses, mainly condos, in several neighborhoods. Most places we looked at had been renovated during the boom with hardwood floors, stainless-steel appliances and granite countertops. However, the condos seemed small for the price and, in some cases, poorly built. The seller’s agents were friendly, but we didn’t know whom to trust.

Paralyzed by the number of choices, we recruited a buyer’s agent. A buyer’s agent usually splits the commission of a sale with the seller’s agent, which worried us because we felt the agent would have an incentive to keep the price high. Ultimately, we decided an agent has more reasons to do right by us than not because the agent is obligated to help us get the best price. Plus, a 10% drop in a home’s sale price would barely dent the agent’s commission, and all commissions would be disclosed.

Colin, the eager agent we picked, has focused our hunt. Using an online service called ListingBook.com, we narrowed the catalog of 300 properties that fit our requirements to a list of 30 homes. It will take time to sort through the housing haystack, and we’ll probably miss the deadline for the federal tax credit. (My feeling is that the credit may have jacked up home prices anyway and, once it expires, prices will drop. Some of the homes on our list have already fallen in price over the past few weeks.) The consolation prize is that D.C. has its own $5,000 first-time buyer’s tax credit (you can’t get both credits). And mortgage rates are still cheap. I think time is on our side.

From Kiplinger’s Personal Finance magazine, May 2010

Owning their home free and clear would give this family more cash to cover tuition expenses.

Our Reader

Who: Rachel Aptekar, 46
Where: Davis, Cal.
Question: Should I use spare income to slash mortgage debt or invest in a 529 plan?

A part-time biology instructor at two colleges, Rachel earmarks $12,000 a year for her family’s future. Her top priority is to save for college for her three children — a commendable goal, but more complicated than it seems. In fact, her solution appears to be to do something unexpected.

Rachel is considering two options: Burn the family’s mortgage by 2013, a year before Laura, 14, graduates from high school, or invest $1,000 a month in college-savings accounts for all three children (including Dylan, 12, and Wesley, 10). With a state-sponsored 529 college-savings account, earnings are tax-free if used for tuition, books, school fees, or room and board.

Retirement is key. Rachel and her husband, Christopher Cassels, first need to review their retirement savings. When college bills come due, kids and their parents can use current income or scholarships, or they can borrow. But you can’t get loans to fund retirement. Christopher, 44, a county government supervisor, contributes to an investment plan for public employees and to a Roth IRA. An extra boost from Rachel would help shore up the family’s retirement security. Plus, Rachel and Christopher could withdraw their Roth contributions tax-free and penalty-free at any time for any purpose, including education.

But there are exceptions, and Rachel and Christopher are that rarest of couples who could own their home free and clear before their children are out of their bedrooms. They have a 15-year loan at a fixed rate of 5%, and they figure the house is worth about $400,000. If Rachel whacks away at the principal with full force, the mortgage stands to be paid off by 2013. Their monthly cash flow would be vastly improved, and they’re not worried about losing a tax break by paying off a mortgage early. They don’t get any tax benefit from paying mortgage interest now because they use the standard deduction — at $11,400 for 2010, it’s bigger than all their itemized deductions combined.

The college angle. The formulas for how much parents are expected to pay for college differ between public and private schools. The federal formula, which governs federal financial aid and public-college awards, does not consider home equity. Many private schools do factor it in, however, so a paid-off house is a disadvantage. Money in a 529 plan can also restrict aid.

Nevertheless, the family should still qualify for some assistance because there will be two, and possibly three, siblings in college at the same time, all being financed on a middle-class income. That situation will count in their favor when it comes to financial aid, especially if the children apply to public colleges.

Bottom line: Rachel should lean toward extra mortgage payments. If all else stays the same, she’ll eventually have $12,000 a year, plus the thousands the couple conserve by not owing on a mortgage, to cover college costs or expand retirement contributions. Less debt equals more flexibility.

From Kiplinger’s Personal Finance magazine, April 2010

Use our state-by-state guide to 529 plans to choose the right one for your student.

The college hunt is a parade of choices. Private or public. In-state or out-of-state. On-campus or off-campus housing. But when it comes to saving for school expenses, one choice is a clear winner — a 529 savings plan.

Taking advantage of one of these state-sponsored plans is a no-brainer. A 529 plan shields your investments from federal income taxes, gives grandparents an easy way to boost their grandkids’ college fund, and barely dents your chances for financial aid. And more than half the states sweeten the deal with a state income-tax deduction or credit. Investors have flocked to 529 savings plans. Assets grew from $11 billion in 2002 to $119 billion in 2009, and the average account balance is $12,000 — about one year’s tuition at a public university.

Take the tax break

You don’t have to invest in your state’s plan, but if your state gives you a tax break, it’s often best to stay close to home. Thirty-four states plus the District of Columbia offer state income-tax benefits for 529-plan contributions. Five states provide a tax benefit regardless of which state’s 529 plan you pick. Alabama uses a stick rather than a carrot: It doesn’t tax distributions from its own plan, but it levies a tax on distributions taken from other states’ plans. See our picks, state by state.

With any 529 plan, your savings grow free of federal income tax. Distributions escape federal income tax altogether if you use the money to pay for qualified educational expenses — mainly tuition, fees, books, and room and board (you can use 529 money in 2010 to pay for a computer, but that perk is set to expire at the end of the year).

The accounts are flexible. If Junior doesn’t want to go to college, you can transfer the funds to another family member and preserve the tax benefits. Or you can withdraw the money and pay income tax and a 10% penalty on the earnings. Unlike other education-savings programs, 529 plans allow families to participate regardless of income, and the states set a high ceiling on contributions (usually up to $300,000 per account).

Don’t worry that a 529 will cripple your chances for financial aid. The federal financial-aid formula counts 5.6% of parent-owned accounts as part of the expected contribution to college costs — a relatively painless hit compared with the 20% assessment on student savings.

Go the direct route

You can buy a 529 plan directly from each state or through an adviser. We prefer direct-sold plans because they don’t charge commissions or adviser fees like adviser-sold plans do. You’ll have to pay administration and investment-management fees with any 529 plan, however. Most states offer several investment tracks, which range from conservative to aggressive. More than 60% of investors put their 529 money on autopilot by choosing age-based portfolios, which automatically shift from stock funds to bond funds and cash as the student approaches college age.

Picking a plan is a bit more complicated if you live in a state that doesn’t offer a 529 tax break. Depending on what you’re looking for, go with one of five plans that rise to the top of our list:

Low fees. We like the index portfolios in the Illinois direct-sold Bright Start College Savings Plan. The portfolios, which include mostly Vanguard funds, charge rock-bottom fees, which range from 0.20% to 0.22%.

Ready-made portfolios. Ohio’s CollegeAdvantage 529 plan offers great choices from Vanguard, Pimco and GE Asset Management, as well as certificates of deposit from Fifth Third Bank.

Low risk. Savers who shy away from stocks should check out the Michigan Education Savings Program. It has an option that guarantees principal and doesn’t charge an annual fee.

Varied menu. Fund pickers can benefit from the direct-sold College Savings Plan of Nebraska, with its selection of 20 funds from American Century, Fidelity, Pimco and Vanguard. The wide assortment does come with higher fees; the most expensive fund option costs 1.64% annually.

Adviser-sold fund. If you feel more comfortable going this route, the Virginia CollegeAmerica plan is a standout among adviser-sold 529s.

The drawbacks

The plans do have a number of drawbacks, but there are ways around them. You can change your 529 investment choices only once a year, which can hurt (or help) if you’re tempted to tinker. One alternative is to go with a set-it-and-forget-it option, which does the tinkering for you.

Like just about every other investment, 529 plans took a big hit during the recent bear market because they turned out to be riskier than expected. As a result, a number of states, such as Colorado, Kansas, Utah and Wisconsin, have added bank CDs, FDIC-insured savings accounts, U.S. Treasuries and money-market funds to their investment lineups.

As for fees, expect them to fall as assets grow and managers vie to attract more customers. Last December, Fidelity cut management fees in half for its index portfolios and by one-third for its actively managed portfolios for five direct-sold 529 plans it runs. The Utah Educational Savings Plan, one of the lowest-cost 529 plans, reduced fees on some investment options in February.

From Kiplinger’s Personal Finance magazine, June 2010

Disney Imagineer Joe Tankersley helped design Epcot Center’s The Great Piggy Bank Adventure, a game that aims to make personal finance fun.

Why tackle finance? Did the great drywall-hanging adventure not pan out?

We wanted to take personal finance away from being a job or a task and make it something that makes people think, Hey, I can do that. It’s one of the great things about games. When guests do well at our game, they’re motivated to go home and take on the real-world version.

How do you start The Great Piggy Bank Adventure?

The game is designed to be played by a family. First you set a goal. Then you get a piggy bank and step through a portal into a land populated with oversize piggy banks. Your piggy bank moves from the physical world to a virtual world at each of four stops, the first of which is a savings game. You use your piggy bank to collect as many coins as you can as they fall from the sky. The second stop is the inflation race. You pilot the piggy bank, which is in a hot-air balloon, away from the inflation monster.

Does the monster look like Ben Bernanke?

It actually looks remarkably like the Big Bad Wolf. If you’re caught, it will gobble up your coins and spit them out as smaller coins.

What happens next?

The third stop is about diversification, which is essentially a hide-and-seek game. You get a bunch of coins and your job is to stash them in different places. The more you spread out your coins, the less chance the inflation monster will get all of them. At the final stop your bank hops on a scale and tells you how well you did.

How successful is the game?

We believe an exhibit is successful if we start a conversation. With this exhibit, we were surprised by the number of families who went through it repeatedly. I just watched a mother with her 5-year-old daughter play the game for a third time. That’s a home run — when we can get a guest to delay doing all the other fun things in the park and do the exhibit again.

How long will the game be available?

We started working on the project with T. Rowe Price, its sponsor, in spring 2007. The exhibit opened in May 2009 and is on a three-year contract. But we expect it to last a long time because the topic is never outdated.

From Kiplinger’s Personal Finance magazine, May 2010

He spent days sitting through free seminars to become a super trader. Lesson number one: It’ll cost you.

Admit it: You’ve been tempted. You’ve seen the infomercials for trading systems that will teach you how to master the markets. Sign up for a free seminar in your area and you’re on your way to wealth and freedom. Ordinary people just like you are earning thousands each month. Why not join the club?

With visions of early retirement dancing in my head, I decided to take the plunge, or at least the initial part of it. I would attend the free seminars of three big trading-education outfits: Online Trading Academy, BetterTrades and Profit Strategies. I wanted to see whether these outfits delivered on their promises to help people become successful traders. Here’s what I found.

“Respect your capital”

The first rule you learn at the Online Trading Academy (OTA) is not to trust Wall Street with your money. “Wall Street has trained us to be buy-and-hold investors,” the instructor, Chris, told me and the two other students attending the Power Trading Workshop at the company’s offices in Vienna, Va., a suburb of Washington, D.C. (OTA also has offices in the United Kingdom, Singapore and Dubai, as well as in 29 other cities in the U.S. and Canada.) This is a bad thing, Chris said, because the market goes up, down and sideways. And when it heads south, as it did during the 2007-09 bear market, buy-and-hold investors get crushed. OTA’s mission was to teach the likes of me how to make money regardless of what the market does.

How, you ask? Through the power of technical analysis. Technical analysts study past data — primarily a security’s price and trading volume — to predict the future. They look for patterns to find reliable signals of when to buy or sell financial instruments, such as stocks, options, futures and foreign currencies. The process involves studying a menagerie of indicators, such as candlestick charts, Bollinger bands and something called the stochastic oscillator. Technicians care little, if at all, about fundamental analysis — the examination of, say, a company’s earnings and balance sheet or of general economic conditions.

Technical analysis has both passionate critics and ardent adherents. For example, an October 2009 study by New Zealand’s Massey University found that of more than 5,000 strategies that employ technical analysis, none produced returns in the 49 countries where researchers tested the strategies beyond what you’d expect by chance. However, scores of traders, including billionaire Paul Tudor Jones, say the discipline helped them amass great fortunes. So I tried to keep an open mind.

But a debate about technical analysis was not part of the program at OTA. Instead, the seminar quickly evolved from a round of Wall Street bashing to a pitch to enroll in the company’s $4,990 Pro-Trader class. The seven-day course would show “how to treat your capital with respect,” Chris said. He added that some of the academy’s students had doubled their money in three months after taking the Pro-Trader class. Once I paid tuition, I could retake the course as often as I wanted. And if I used one of the six discount brokers that partnered with OTA, I would earn rebates on commissions up to the cost of the classes I took.

Overall, I left my free OTA seminar less than satisfied. I wanted to learn how to trade and all I got was a sales pitch. It was time to hit the road.

“Who likes money?”

I drove to the Hilton Airport Hotel in Norfolk, Va., to attend the Financial Freedom Expo, sponsored by BetterTrades. About 30 would-be zillionaires, mostly baby-boomers, sat in a cavernous ballroom. Men outnumbered women two to one.

BetterTrades’ presentation was the most lavish of the three seminars I attended. At the front of the room a large projection screen was draped in velvety purple curtains. Tables displaying neat rows of BetterTrades DVD box sets surrounded the screen. I felt like a contestant on The Price Is Right, especially after I met the expo leader, Steve, who was tall, tan and likable — just like the game show’s Bob Barker. Steve fired up the crowd with questions such as “Who likes money?” and “Who would like to make more?”

For Steve, successful trading was a matter of identifying support and resistance levels for a security. Look at a stock chart. If you draw a line that hits multiple points where the stock price bounces back from a low point, it is known as a support level. The line drawn on the chart that hits multiple points where the price peaks is known as a resistance level. Under technical analysis, a stock trader wants to buy at support (low) and sell at resistance (high). Sounds easy, but it’s difficult to know where the support and resistance levels are until after the fact.

With the class wrapping up, Steve had a special offer for me. For just $3,995, if I acted now, I could attend the two-day Market Essentials seminar coming to Norfolk. The first five people to sign up would get free bonus training materials. Steve said I had nothing to lose because if BetterTrades’ strategies did not earn me three times what I spent on tuition within six months, the company would refund my tuition or train me free of charge for up to a year until I mastered the program. (His offer did not take into account how much capital I would put up.)

Despite the guarantee, I wanted to know more about what I was going to learn in the class and what kind of return I could realistically expect to earn. Profit Strategies gave me a glimpse of what to expect.

“Work your tail off”

Profit Strategies (PS) takes the total-immersion approach to education, kind of like throwing you into the pool to force you to learn how to swim. That’s how I felt during PS’s free Active Investor Methods class at the Hilton Miami Airport. The two-day course, which had about 40 students, mixed beginners with trading veterans. We skipped the introductory material and jumped right into trading strategies.

The instructors, Mike and Jay, detailed several complicated systems. One moment we were discussing how to use a spike in a stock’s one-day trading volume to predict whether the price would rise. The next moment we were reviewing how to construct an “iron condor,” a strategy of buying and holding four different options with different strike prices. Between the presentations, Mike and Jay flogged PS’s eight-week courses on various trading systems, each of which cost $3,495. Students in the course would meet with the instructor online once a week for class and to review trades. “Only a limited number of seats left,” Jay said.

The audience had the opportunity to pepper Mike and Jay with questions. A newcomer asked them what kind of return one should expect to earn from trading. Mike said that a 5% monthly return sounded reasonable. That works out to 80% annualized.

All the seminars I attended were quick to point out that individual results will vary. And there’s the rub. Because the performance of individual traders is not public, you have no way of knowing how well these trading programs work. Sure, the seminars present testimonials from their top earners, but you don’t know how well the average student does. Studies show how tough it is to succeed at trading. In 1999, for example, at the height of the day-trading craze, the North American Securities Administrators Association studied the accounts of day traders. Only 11% consistently generated profits, and 70% sustained losses that wiped out their accounts. None of the seminar com-panies monitors the success rate of all their graduates. Says Judy Hackett, BetterTrades’ marketing chief: “We can only track the satisfaction of our customers, and we have lots of very happy customers.”

Students who have succeeded with these systems swear by them. Jeffery Kronenberg, a 30-year-old former life-insurance salesman, says he is able to support himself in New York City using the skills he learned at OTA. He has been a full-time trader since October 2009 after taking a class last May. “You have to work your tail off,” says Kronenberg, who typically gets up at 6:30 a.m. on trading days and works until the markets close at 4 p.m. “They will teach you, but you’ve got to really want it,” says Abba Genes, 26, of Mount Vernon, N.Y. He adds that the skills he acquired from BetterTrades allow him to earn about $1,000 a month to supplement his income as a concierge. Genes, who trades three hours a day in the morning, plans to become a full-time trader after he completes college. He says it took months before he learned how to generate trading profits. Meanwhile, big early losses nearly wiped out his account.

The seminar instructors I met said they made a good living from trading. But it’s impossible to know whether they are successful traders or just great salesmen. The trading-education industry does not have a good track record when it comes to sales practices. Seminar promoter Teach Me to Trade shut down in the U.S. after the Securities and Exchange Commission filed a 2008 complaint against two of its salespeople. The SEC alleged that in Teach Me to Trade seminars the pair claimed to be successful traders, but they actually earned their millions from commissions selling seminars rather than from trading. In December 2009, Investools paid $3 million to settle an SEC complaint that two of its salesmen misrepresented themselves at seminars as expert traders.

As I completed my journey, I couldn’t help but wonder why those who possess the magic formulas for successful trading would give away their secrets — even if they did earn $4,000 or so per customer. After all, if you can earn 80% a year, why would you run the risk of seeing the effectiveness of your strategy diminish as more and more people started using it (a common occurrence in investing)? That aside, what’s clear is that if you decide to learn how to trade from any of these companies, you will need to have faith that your instructors know what they are doing and that you can convert their knowledge into winning moves. The odds will be against you.

Why it’s hard to trade and win

High costs. Most trading programs charge more than $4,000 for their workshops and tutoring packages. In addition, trading generates a lot of commissions, usually $5 to $9 per stock trade at the typical discount broker.

Too much time. It can take years of practice to earn trading profits consistently. Even if you are not trading on a daily basis, you will have to dedicate several hours a week to studying charts and related data.

Potential losses. Trading can lead to huge investment losses. This isn’t for widows, orphans and those with weak stomachs.

Tough competition. Financial firms have better trading tools than you do. High-frequency trading systems utilized by professionals make it harder for individual traders to succeed.

From Kiplinger’s Personal Finance magazine, March 2010

Fund companies are tinkering with these one-stop retirement plans after their bear-market beating.
From U.S. senators to government regulators to shell-shocked investors, everyone, it seems, is drawing a bead on target-date funds for producing such rotten results during the 2007-09 bear market. These funds were supposed to be simple solutions for retirement saving: You picked a fund with a date close to your anticipated retirement. As the date approached, the fund would adjust the bond portion of its portfolio to become more conservative and protect returns.

But that’s not exactly how it worked. Take 2010 funds, for example, which were designed for investors at or near retirement now. On average, those funds lost 34% of their value during the bear market. That was still better than the 55% drop in Standard & Poor’s 500-stock index, but it was a big hit for investors in the critical first years of retirement.

And because each family of target-date funds has its own mix of assets — and follows its own so-called glide path when shifting to more-conservative investments — fund performance varied considerably. For instance, the worst-performing 2010 fund, Oppenheimer Transition, had 66% of its portfolio in stocks, plus a big bond holding that tanked. As a result, it posted a decline of 54%. But Wells Fargo Advantage Dow Jones Target 2010 had just 25% of its assets in stocks. It lost only 19% during the same period (see the table below).

Full disclosure

Those results prompted the U.S. Senate, the Securities and Exchange Commission and the Department of Labor to pile on with hearings investigating the use of target-date funds in retirement plans. Let us be upfront about where we stand: We have always liked target-date funds and still do, even when they invest aggressively (within reason) in stocks. Some lawmakers have pushed for regulators to establish asset-allocation guidelines for the funds. We disagree — that’s a job for fund managers. But investors do need to know what’s in these funds and how best to manage them as part of their overall investments.

That’s especially true because target-date funds are popular default options in retirement plans. If you don’t choose your own investments in a 401(k) plan, for example, your employer may deposit your contributions into a target-date fund. Congress permitted this with the Pension Protection Act of 2006, and since then the number of plans that automatically funnel 401(k) contributions into target-date funds has more than doubled. According to Vanguard, one of the three largest providers of target-date funds as measured by assets, the percentage of plans it manages that use these funds as default options grew from 42% in 2005 to 87% in 2008. Fidelity, another top target-fund sponsor, experienced a similar pattern in the plans it manages.

And target-date funds may blossom into something even bigger because younger workers are more likely to own them. Casey Quirk, a consulting firm, projects that money in target-date funds will grow 11-fold, to $2.6 trillion, by 2018. The firm assumes that target funds will attract 80% of the new money going into retirement plans over the next decade. At the end of 2008, 43% of retirement-plan participants in their twenties owned these funds, up from 29% in 2007, reports TD Ameritrade. That compares with just 22% of savers in their sixties.

But many investors don’t understand how target-date funds work. A recent study by Envestnet Asset Management and Behavioral Research Associates found that only 16% of investors had even heard of target-date funds. Of that group, 62% thought they would be able to retire when the fund reached its target date, and 38% thought their fund had a guarantee.

Target funds were designed to be the only investment you’d need for retirement. But people rarely use them that way. Only 19% of investors put as much as 80% to 100% of their assets in a target-date fund, according to a survey by AllianceBernstein.

And there’s another sticking point: A fund’s glide path doesn’t necessarily stop when you expect it to stop. Instead of ending in, say, 2010 or 2030, all of the major target-date funds continue to increase their bond allocations decades after the target date. “If it’s a 2030 fund, the glide path should end in 2030,” says Michael Case Smith, target-date portfolio manager at investment firm Avatar Associates. Fees also remain a concern. Some sponsors charge a management fee on top of expenses levied by the underlying funds in the target-date portfolios.

The right balance

Nearly 50 fund sponsors offer target-date funds, but three dominate the business. Funds from Fidelity, T. Rowe Price and Vanguard account for 80% of the $229 billion invested in target-date funds as of September 2009, according to Financial Research Corp. These three sponsors generally provide diversified portfolios with low fees. But there are significant differences among the trio:

T. Rowe Price: Most aggressive. Managers at T. Rowe Price are unabashed about investing heavily in stocks to guard against the risk that investors will run out of money in retirement. The company’s target-date funds hold as many as 17 other Price funds — including Kiplinger 25 members T. Rowe Price Mid-Cap Growth and T. Rowe Price Emerging Markets Stock. Funds that are furthest from their targets start out with 90% of their assets in stocks. They continue to hold about 60% in stocks when they hit their mark.

By comparison, Fidelity and Vanguard funds have 50% of their assets in stocks at their target date. Even 30 years after the target date, the Price funds still have a 20% stake in stocks. Meanwhile, Vanguard reduces its stock holdings to 30% after eight years; Fidelity’s timetable is 15 years.

Those numbers actually understate the aggressiveness of some target-date funds. T. Rowe Price’s 2010 fund holds 16% of its assets in high-yield, or junk, bonds, which are similar to stocks in terms of risk (Fidelity’s 2010 fund has a 20% stake in junk).

T. Rowe Price has no plans to change its strategy. Even though its 2010 fund fell 39% in the bear market, the fund had recovered most of that ground as of November 6. “We are staying the course,” says Jerome Clark, manager of T. Rowe Price’s retirement funds. “Having a higher stock allocation, even in retirement, defends against inflation and the risk that you’ll outlive your money.”

Vanguard: Lowest fees. We agree that stocks will perform well over a long period of time, and that’s why T. Rowe Price’s target-date funds are among our favorites. But what if you don’t want more than 70% of your assets in risky investments when you’re ready to retire? In that case, Vanguard funds are a solid choice.

Vanguard Target Retirement funds use a portfolio of five index funds plus actively managed money-market and Treasury inflation-protected securities funds (but no junk bonds). “It was the funds’ broad diversification that enabled them to avoid the worst of the market losses,” says John Ameriks, head of investment counseling and research at Vanguard. The 2010 fund lost 33% in the bear market and returned 0.7% annualized over the past three years through November 6.

And expenses are rock-bottom. The funds charge an annual fee of 0.18% or 0.19%, the lowest in the category.

Fidelity: In the middle. Fidelity’s Freedom funds, which debuted in 1996, are the largest family of target-date funds as measured by assets. They invest in a portfolio of Fidelity funds (but not Kiplinger 25 members Contrafund and Low-Priced Stock). Stacked up against T. Rowe Price and Vanguard, the Freedom funds are in the middle — not quite as aggressive as T. Rowe Price nor as cheap as Vanguard, but still attractive. The Fidelity 2010 fund lost 37% in the bear market but gained 3% annualized over the past five years through November 6. Fidelity also offers Fidelity Advisor funds sold through advisers, but they’re more expensive than the Freedom funds and their track records aren’t as good.

Unlike T. Rowe Price and Vanguard, Fidelity has altered its approach to target-date funds as a result of the market meltdown. In its 2050 funds, it has reduced its investments in U.S. stocks and boosted its allocation to international stocks from 20% to 30% (compared with Vanguard’s 18% and T. Rowe Price’s 23%). It also added funds that invest in TIPS and commodities. Fidelity recently launched a series of target-date funds with an underlying portfolio of index funds. For now, those funds are available only in retirement plans.

Some target-fund sponsors are trying completely different strategies. Putnam, for example, uses an “absolute return” approach in its ten Retirement-Ready funds. That means that over three-year periods the funds will try to generate returns that average one, three, five or seven percentage points per year above the inflation rate. But those returns aren’t guaranteed. With annual expenses between 1.25% and 1.34% and short track records, it remains to be seen whether the Putnam funds can deliver.

Schwab, on the other hand, has ramped up the stock portion of its 2040 fund from 79% to 91%, while scaling back stocks in its 2010 fund from 52% to 43%. “We really needed to reduce stock exposure in the years approaching the target date because that’s when our clients are most vulnerable,” says Daniel Kern, portfolio manager of the Schwab Target funds. “They have the most money at risk, limited earning power remaining in their careers and the highest level of anxiety.”

What you can do

When the dust settles, expect to see more disclosure about how funds invest after they hit their target date. Also, more firms will experiment with guarantees. For instance, Prudential offers products that allow retirement-plan participants to invest in target-date funds with guaranteed minimums of lifetime income. Prudential’s guarantee comes with a 1% annual fee in addition to the 0.59% expense ratio the target-date funds charge. Other firms, such as AllianceBernstein, are developing similar products.

But even these aren’t perfect. “With guaranteed options, there are concerns over cost and portability,” says Eric Endress, an analyst with CBIZ Financial Solutions who reviews target-date funds for plan sponsors. Guarantees cost more. Plus, most investors move their assets out of employer plans once they retire, so they end up paying for income guarantees they don’t use. Investors would also lose the guarantee if they rolled their accounts over to another firm.

In the meantime, you can ease your mind about your target-date fund by peeking under the hood. Morningstar now rates 20 families of target-date funds, and its Instant X-Ray tool gives you a clear view of your holdings and how much you have in stocks and bonds. In addition, the major fund sponsors provide details about their glide paths and asset allocations on their Web sites. And at www.djindexes.com, you can compare target funds’ performance against that of the Dow Jones Target Date indexes for free.

It’s also possible to cut the risk of your target-date fund by moving 10% of your retirement contributions into a high-quality bond fund or a stable-value fund, if your company retirement plan offers one (see Stable Funds in Chaotic Times). That’s not a bad move if you are within ten years of retirement and want less volatility. But you have to strike a balance between the risk of losing your principal and the risk of running out of money before your retirement ends.

Bottom line: All the fuss over target-date funds will mean little to most investors. As the markets recover, the debate sounds a lot like Monday-morning quarterbacking. Know what’s in your target fund and view it in the context of your overall assets. If you want to make drastic alterations to your fund, best to find another target fund that suits you. Or roll up your sleeves and build a portfolio of no-load funds from scratch.

From Kiplinger’s Personal Finance magazine, January 2010

Some exchange-traded funds have stopped issuing shares as regulators consider limits on commodities investing.

Call it collateral damage. Efforts by regulators to curb speculation in the futures markets have created unintended consequences for investors in commodity-oriented exchange-traded funds and notes. Few of these products actually hold physical stuff. It would be impractical for managers to store barrels of crude oil or bushels of corn. Instead, most ETFs and ETNs use derivatives, usually futures contracts, to simulate the returns of a commodity or commodity index.

The use of futures has made large ETFs and ETNs targets for regulators. The mess started on August 19, when the Commodity Futures Trading Commission revoked exemptions from limits on the futures positions of two ETFs: PowerShares DB Agriculture (symbol DBA) and Powershares DB Commodity Index Tracking (DBC). The commission expressed concern that the funds’ positions in the futures markets for grains had grown too large.

The commission’s action caused a stir among other commodity funds and notes. Fearing tighter limits on more futures positions, some sponsors stopped issuing shares. By doing so, their ETFs became similar to old-fashioned closed-end funds, which issue a fixed number of shares, then trade on exchanges.

One attribute of closed-end funds is that their share prices can trade above or below the value of a fund’s underlying assets, or net asset value per share. Because some ETFs stopped issuing new shares even as demand for commodity investments remained strong, the prices of a few ETFs have risen above their NAVs. For example, at its September 8 closing price of $10.28, shares of United States Natural Gas (UNG), one of the ETFs that had suspended issuance of new shares, traded at a 19% premium to its NAV.

Four other exchange-traded products stopped creating new shares: United States Oil (USO) and iShares S&P GSCI Commodity-Indexed Trust (GSG), both ETFs; and PowerShares DB Crude Oil Double Long (DXO) and iPath Dow Jones-UBS Natural Gas Subindex Total Returns (GAZ), both ETNs. Unlike an ETF, which buys the underlying futures contracts, an exchange-traded note is essentially a bond that promises to pay a return identical to the futures plus interest on cash collateral for the contracts.

The sponsor of one exchange-traded note that suspended shares is throwing in the towel. Deutsche Bank has announced that it will redeem all outstanding shares of its PowerShares oil ETN, which seeks to return twice the change in a crude-oil index on a daily basis. On September 9, Deutsche Bank will give investors cash equal to the NAV of each share they hold. Investors who purchased shares at a price above the ETN’s NAV will see that premium erode, although it’s still possible for them to make money if the price of oil rises during the time they hold the note. The ETN recently had $426 million in assets.

The CFTC is expected to decide position limits for exchange-traded products by the end of September. “We don’t have specifics of what those limits will be,” says John Hyland, chief investment officer of United States Commodity Funds, which sponsors the oil and natural-gas ETFs. “We assume that large commodities ETFs will have to own fewer commodity futures contracts than they own today.”

Meantime, don’t buy an ETF or ETN that sells for a big premium over the value of its assets. You can find information on premiums and discounts at Morningstar and ETFConnect.

Steep premiums on the funds and notes that have already suspended or may suspend issuance of new shares are likely to dissipate when the commission makes its decision. And some of those sponsors might follow in Deutsche Bank’s footsteps and liquidate their products. It’s best to wait until the smoke clears so you can get a better look at the commodity-based ETFs and ETNs left standing.

From Kiplinger.com

Keeping it light is Fox’s strategy for challenging CNBC.

Fox business network takes fluff to a whole new level, even by the standards of cable news. Watch the channel’s Happy Hour show and get business tips from the Mannheim Steamroller band’s Chip Davis from a bar in New York City’s Waldorf-Astoria hotel. Or listen as America’s Nightly Scoreboard rates the chances that a new book by comic Sacha Baron Cohen (better known as Borat) will succeed.

The sugar-sweet programming seems designed to make the “medicine” of real business news more palatable. Fox Business executives say the channel wants to broaden its audience beyond those viewers who would regularly watch CNBC and the geekier Bloomberg Television. But how are breathless interviews with British celebrity chef Nigella Lawson or the Naked Cowboy, a New York City street performer, any different than the pablum that permeates the rest of cable news?

Fox Business, which launched October 15, excels at promoting itself and the products of its parent company, News Corp. Money for Breakfast, the channel’s morning show, ran a sappy segment about how the New Orleans cop show K-Ville — which runs on the Fox network — has boosted the Big Easy’s economy. It’s as if you’re watching a commercial for business news instead of actual business news.

Frivolity often gets in the way of a good TV story. When U.S. Treasury secretary Henry Paulson gave a revealing speech about U.S.-China economic policy in October, CNBC and Bloomberg covered some of Paulson’s remarks live. Meanwhile, Fox Business ran a piece about the business of college football’s Bowl Championship Series.

Don’t expect Fox Business to revolutionize the format. On weekends, it’s the same old infomercials for get-rich-quick schemes and other junk you find on CNBC. “We decided we couldn’t boil the ocean,” says Kevin Magee, executive vice-president at Fox Business. “So we attacked Monday through Friday first.”

Yet watching Fox Business reveals at least one gem: The Dave Ramsey Show. Ramsey, already a popular author and radio-show host, prods his viewers to shed their debts and save more.

And Fox Business has a better stock ticker than its competitors. The ticker identifies the company, stock symbol, share price, gain or loss, and the sector of the economy to which the stock belongs. That makes it more useful than the whirl of data that blazes across the bottom of the screen on CNBC and Bloomberg.

In time, Fox Business may grow up. Many of CNBC’s best anchors were recruited from the ranks of the Wall Street Journal, and News Corp. was on course to complete the purchase of Dow Jones, the Journal’s parent company, in late 2007. But Fox Business doesn’t have carte-blanche access to Journal staffers until 2012 because of a preexisting pact between CNBC and Dow Jones. After the kinks are ironed out, let’s hope Dow Jones veterans can add a degree of class to a network that seems to think it can lure viewers only with fluff.

From Kiplinger’s Personal Finance magazine, January 2008

A deluge of e-mail come-ons puts gullible investors at risk while the government does little to stop it.

Promoters of penny stocks typically pitch these high-risk investments as if they were valuable real estate, like oceanfront property. With little money down, you can make a quick-and-easy profit. But in reality, penny stocks are more like swampland. And now, thanks to spam, the muck is spreading at an alarming rate, and efforts to stop it have so far been as effective as ordering the tide not to come in.

You probably trashed an e-mail message last December touting Goldmark Industries. A spam campaign predicted that investors would earn spectacular returns. One e-mail, which forecast the stock would gain 1,077%, said, “Watch GDKI [Goldmark's symbol] soar on Wednesday, Dec. 20!”

Maybe you didn’t bite, but many others did. On December 19, the day before the spam campaign began, Goldmark closed at 17 cents a share. Nine days later, when the spam barrage ended, the stock closed at 35 cents. Those who held the stock before the e-mail campaign doubled their money. Investors who bought at the top lost their shirts. The stock closed at 6 cents in mid April.

If you think we’re talking about chump change, think again. The Securities and Exchange Commission says spam campaigns promoting Goldmark and 34 other stocks that the agency recently suspended from trading for ten days robbed investors of tens of millions of dollars. And those 35 are just a few acres of the swamp. The SEC estimates that 100 million stock-spam messages are sent daily. Postini, an e-mail-security company, says the volume of spam that hypes stocks has grown 120% in the past six months, and that about one-fifth of all spam is stock-related. (On April 13, the SEC suspended trading on three more penny stocks that it suspected were being manipulated through spam campaigns.)

Spam attacks

Spammers never let facts get in the way. Take an e-mail about Goldmark sent last October, before the campaign cited by the SEC. The note claimed that Goldmark, which says it produces and distributes hip-hop music, films and TV shows, had struck a deal with rap impresario Sean “Diddy” Combs. A Combs representative says the claim was fiction. None of the firms whose stocks were suspended, including Goldmark, acknowledge involvement in the spam campaigns.

People behind those campaigns have a big edge over those who buy on the hype: They know when the spam will end. A well-executed spam attack can produce triple-digit gains in a matter of days. Because of a December spam campaign, for example, the stock of Apparel Manufacturing Associates rose from 6 cents to 45 cents in just five days. It was among the stocks later suspended by the SEC.

Almost all stock spam is illegal. That’s because these e-mails violate the Securities Act of 1933, which, among other things, bars paid promoters from touting stocks without disclosing the details of their compensation. Spam that doesn’t allow you to opt out of the e-mail list (and most stock spam does not) also violates the 2003 CAN-SPAM Act, as well as state anti-spam laws.

You may have noticed that your spam blocker is letting more stock touts through. That’s because spammers have become more sophisticated. The e-mails you open look ordinary, but many messages are in the form of digital images that spam filters can’t read. And spammers avoid detection by using computer viruses to infect vast networks of computers, which then disseminate millions of e-mails.

Stock spam would wither without a healthy supply of junk-company shares, of which there is no shortage in the U.S. Most of these low-priced, thinly traded stocks are found on the Pink Sheets and the OTC Bulletin Board. NASD, the self-regulatory body of the brokerage industry, runs the OTCBB, and stocks quoted by this service must register with the SEC. That cuts down — but doesn’t eliminate — the number of stocks that can be manipulated. The Pink Sheets, a private company, permits stocks that don’t file with the SEC to be listed on its service.

NASD won’t venture a guess at the number of OTCBB stocks involved in penny-stock spam. Cromwell Coulson, chief executive of the Pink Sheets, estimates that 10% of the more than 4,800 stocks that trade on his service are easy marks for spammers because the companies provide little or no financial information. The Pink Sheets has stopped quoting prices for the 35 stocks the SEC suspended as well as shares of more than 300 companies about which the company has received spam-related complaints from investors.

Draining the swamp

Suspending trading may help drain the swamp — although how effective the tactic is remains to be seen. Other methods of dealing with the surfeit of stock spam are shutting down or prosecuting promoters, educating investors, and flagging stocks that are ripe for manipulation.

Although illegal e-mail touts are generally untraceable, other markets have developed ways of stopping criminals from pumping up share prices. For example, the free-wheeling Vancouver Stock Exchange was long home to many penny stocks that were subject to “pump and dump” schemes. But in the late 1990s, Canadian regulators began requiring executives and promoters of small-company stocks to register their promotional activities and submit to background checks.

As a result, Canada eliminated the most egregious penny-stock scams, says Martin Eady, director of corporate finance at the British Columbia Securities Commission. Regulators crack down hard against those who violate the rules. In November 2005, for example, the commission suspended Ray Dabney, president of Xraymedia, after he admitted to sending out 22 false news releases about the company. Several Xraymedia directors serve on Goldmark’s board, and the two companies share the same Vancouver address, according to filings with the Pink Sheets. Xraymedia was the subject of a 2003 spam campaign, according to Spamnation.info, a Web site that tracks penny-stock spam. Shares of Xraymedia are quoted on the Pink Sheets. Although barred from the Pink Sheets, Goldmark shares may still trade if a broker is willing to sell them to investors (few are).

Because markets north of the border are unfriendly to stock scammers, they focus their efforts on Canadian companies that trade in the U.S., where they face fewer restrictions, says the Pink Sheets’ Coulson. Eady estimates that more than 660 companies from British Columbia are quoted on the OTCBB and the Pink Sheets but don’t trade on a Canadian exchange. Canadian regulators are considering even tougher measures to restrain their home-grown stock scammers, Eady says, even though most investors ripped off by their spam live in the U.S.

Not all spam involves Canadian companies. Coulson believes that groups of scammers based in Florida, Nevada and Texas hype many U.S.-based companies that are the subjects of pump-and-dump campaigns.

As a practical matter, prosecuting spammers isn’t easy. For a promoter’s claims to run afoul of the SEC, the law states that a “reasonable” person would have to believe a touter’s claims are true, says Donald Langevoort, a Georgetown University law professor and a former SEC special counsel. But because most reasonable people would not believe the claims, the law doesn’t view many of these assertions as illegal, he says. The SEC says it knows who orchestrated the spam campaigns behind some of the 35 stocks it briefly suspended. But as of mid April, the commission hadn’t lodged complaints against any of the perpetrators.

What’s needed next

The best way to protect investors is to keep reminding them of the dangers of acting on e-mail touts. Over the past three years, NASD has issued six alerts about stock spam on its Web site, but the gullible continue to be taken in. “Only investor education can have a real effect,” says Langevoort.

There may be a better solution than education: identifying stocks that are ripe for manipulation. Coulson plans to label Pink Sheets stocks suspected of being involved in pump-and-dump schemes with a skull-and-crossbones on the Pink Sheets Web site. He has also proposed that the SEC require more information about promoters who legally tout stocks. An SEC spokesman says the agency is reviewing Coulson’s proposal but adds that the commission doesn’t have the power to impose Canadian-style rules without congressional action. Congress hasn’t considered any legislation to limit penny-stock spam or restrict stock promoters.

Meanwhile, stock spammers mock efforts to impede them. On March 11, only three days after the SEC announced its crackdown, a flood of spam touted United Environmental Energy (UTEV) as a “HOT NEW SEC APPROVED STOCK FOR YOUR ATTENTION!” The spam asserted that United was not a “Pump&Dump” stock. Over the next four days, the shares rose from 5 cents to 40 cents, then quickly fell to 10 cents. The Fort Lauderdale, Fla., company, which does not file financial statements with the SEC, says it was not involved in the spam campaign.

PAID TO TOUT

It’s legal, but so what?

Not all touting of penny stocks is illegal. Jonathan Lebed runs a legal tout business. On February 5, he signed a contract to promote the stock of mPhase Technologies, receiving 400,000 shares as compensation. In return, he sent out dozens of e-mail messages to his thousands of readers. A February 8 e-mail said mPhase stock “is going to the MOON and NOTHING will hold it back!!!!!!!!!!!!!!”

Hyperbolic e-mails of this sort essentially create a self-fulfilling prophecy. In this case, mPhase shares, which trade on the OTC Bulletin Board under the symbol XDSL.OB, rose from 16 cents at the start of the campaign to 27 cents in just 11 days. In mid April, the stock traded at 15 cents.

As a teenager, Lebed gained notoriety as the youngest person ever prosecuted by the Securities and Exchange Commission. The SEC accused him of racking up hundreds of thousands of dollars in profits by visiting Internet chat rooms and talking up “micro cap” stocks he owned. Lebed negotiated a settlement in which he did not admit wrongdoing but agreed to forfeit $285,000 in profits plus interest. Now 22, he says he wants to help good companies find investors. His service reaches 5,000 people who have signed up for his e-mails. Every e-mail discloses the stock and cash payments he receives on behalf of a “third party.” That’s all he needs to do to stay legal.

Calculated risk: A safe approach to penny stocks

Penny stocks get the greed glands going — with good reason. It’s a lot easier for a 10-cent stock to double or triple in no time than it is for a $100 stock, even though price, by itself, is not a measure of value. But penny stocks — defined by the Securities and Exchange Commission as those that don’t trade on Nasdaq or on an exchange and sell for less than $5 — are generally far riskier than higher-priced stocks. If you’re still tempted by low-priced stocks, here are some ways you can avoid being ripped off.

Look for the financials. Tiny companies don’t have to file audited financial reports with the SEC. If a company you’re interested in doesn’t file, stay away. Financial data for most penny stocks touted in e-mails is either crummy or nonexistent.

Check the market value. Not all low-priced stocks are small companies. If a company’s market value (share price times shares outstanding) is $50 million or more, chances are it’s legit. Among the stocks recently recommended by the Turnaround Letter, a newsletter with a superior stock-picking record, five traded in mid April for less than $5 but sported market capitalizations of $218 million and up. The best known: Gateway, the computer maker, with annual sales of $4 billion and a market value of $848 million. It traded at $2.23.

Don’t bet the ranch. Use only a small portion of your money to dabble in penny stocks and buy only if you can afford to lose 100% of your investment.

From Kiplinger’s Personal Finance magazine, June 2007

Full-page ads promoting this small retailer’s shares are running in major business magazines. Investors beware.

Guangzhou Global Telecom has made a big splash in its brief life as a U.S.-traded stock. Shares of the small Chinese retailer started trading here on May 15 with an opening share price of $1.75. In little more than two weeks, Guangzhou soared 51% to close at $2.65 on May 31. Is it the latest hot company from China? Or is its rapid rise just due to hot air? While you decide, we suggest you hold on to your wallet.

Full-page advertisements that appeared in BusinessWeek, Forbes and Fortune make Guangzhou Global Telecom (symbol GZGT, quoted on the OTC Bulletin Board) sound like a major player in the world’s most populous country. They say that Guangzhou has partnered with China Mobile, China Unicom and China Telecom, and that its “major carrier partnerships account for nearly $50 billion in revenues.” Readers are encouraged to buy Guangzhou’s stock because it will “fuel your portfolio for explosive growth.”

Expect to see a lot more Guangzhou Global Telecom ads. Its advertising firm says similar ads are scheduled to run in upcoming issues of The Economist, Institutional Investor, Money and SmartMoney magazines, as well as other issues of BusinessWeek, Forbes and Fortune. We rejected the ad in Kiplinger’s Personal Finance and on Kiplinger.com because the claims made in the ad could not be substantiated and because our inquiries raised more questions than they answered. In fact, the more we looked at this new stock, the more our eyes burned.

How to hype a stock: As the promoter, you first order up the advertisements. In the ads, you refer people to a so-called third party to attest to the company’s virtues. To be that neutral party, you create an online newsletter. As its editor, you install someone whose existence as an actual person cannot be verified. Then you begin trading the stock, accompanied by almost daily press releases that create a drumbeat of optimism.

Many other penny-stock promoters have trod this path. It’s the audacity and intensity of the promotion of Guangzhou Global Telecom that sets it apart. John Pentony, publisher of StockGuru.com, says he has never seen stock promoters advertise in major national business magazines. The promotion also seems unusual to Cromwell Coulson, chief executive of the Pink Sheets, a quotation service that lists thousands of penny stocks. “Business magazine ad selling must be pretty soft if they are taking those ads,” he says.

NASD, which runs the OTC Bulletin Board, would not comment on the Guangzhou promotion, but says investors should be wary of stock promotion in general. “Investors have to use exceptional caution when investing in stocks advertised in magazines and fliers because they might not disclose all the material facts that would be important to the decision,” says Cameron Funkhouser, NASD’s senior vice-president of market regulation.

What we noticed in particular about the advertisement was that it refers readers to a Web site called GrowthStockGuru.com. And it quotes the publisher of Growth Stock Guru, Aharon Bronfman, as saying “Companies like GZGT will be discovered and their valuations will skyrocket.” Go to that Web site, however, and you discover that Guangzhou Global Telecom is the only stock it promotes — one reason being that the site went online only days before the stock began trading. The timing can make you suspicious about Bronfman’s claim that three other penny stocks had soared after being discovered by the Web site. (By the way, we searched numerous public and private databases for his name and came up with a blank, meaning that Bronfman has been invisible during the 15 years he claims to have been in the investment business.)

Then we come to learn that the buyer of this small fortune in advertising was not Guangzhou Global Telecom. Richard Yan, a Shanghai consultant who claims to speak for the company, denies it has any involvement in this ad offensive. Rather, the ad agency placing the ads, Mediabids, says the ads were paid for in advance by Growth Stock Guru. In addition to the magazine ads, Growth Stock Guru mailed an expensive glossy eight-page brochure prospecting for Guangzhou investors. Growth Stock Guru, in turn, says it was paid to promote the stock and place the ads by Eminiar VII LLC, which describes itself as a non-controlling shareholder of Guangzhou Global Telecom.

Aggressive promotion aside, is the company worth $2.65 a share? Guangzhou’s filings with the Securities and Exchange Commission show a small company that sells cell phones and accessories — not a national telecom titan as implied by Growth Stock Guru. Guangzhou earned less than half a penny per diluted share last year — $220,373 on $12.8 million in sales. What about those billions in sales from carrier partners? Well, the company apparently does sell China Mobile, China Unicom and China Telecom cell phones and accessories in its stores, and those companies do have billions in sales. But there are no billion-dollar deals between those big China telecom companies and Guangzhou mentioned in SEC filings or on the company’s own Web site.

Guangzhou Global Telecom has eight stores in the city of Guangzhou and 40 employees. Guangzhou plans to grow by expanding to other parts of China and offering more services, such as games and ring tones, Yan says.

Guangzhou Global Telecom stock is wildly expensive, and yet the hype behind this tiny company is creating a tsunami of trading. Of those 53 million shares, all but 13 million were held by insiders at last word. Yet on May 31, more than 9 million shares, or 70% of the “float,” changed hands, as the stock advanced 10.4%, to $2.65 a share, putting its price-earnings ratio based on 2006 earnings at more than 500. The company has the chutzpah to forecast its own profits for 2007, 2008 and 2009. Even if you took its 2009 forecast at face value, you’re still looking at a P/E of 90 two and a half years from now, based on those fully diluted shares.

We keep bringing up all 53 million shares for a reason. After all, why spend all this money to advertise in business publications? What’s in it for the advertiser, Growth Stock Guru, or Eminiar VII LLC? If this promotion plays out in the classic manner, more and more of those 40 million shares that are sitting on the sidelines will be parceled out to naive investors at higher and higher prices. The trading volume on May 31 suggests that this process is well under way. When all shares owned by the promoter have been sold, the stock will have no support, and then it’s bye-bye bubble. (See The Truth Behind Penny Stock Spam.)

In sum, this is a small company with a scant financial record, a massive advertising campaign and an expensive stock. For any serious investor, Guangzhou Global Telecom raises more red flags than a Communist Party parade.

From Kiplinger.com