Wealth Pathfinder » Investing

admin — Sat, 08 May 2010 20:09:34 +0000

It has been a while since I posted about commodities so I thought an update would be helpful.

First we have the following graph showing the relative size of the actual commodity and futures/derivatives about the commodity. As you can see, the futures market exploded over that last few years. This is why I say that the historical returns and lack of correlation of the commodity market is a thing of the past. At this point there is so much investment money (as opposed to hedging money by commodity consumers) going into this market that its correlation and volatility are going to rise substantially.

Furthermore, contango (when future prices are higher than spot prices) is going to be much more common than in the past which creates a drag on performance. To see how bad this can be check out the following chart which shows spot oil prices versus an OIL ETF which is using futures. The difference in performance is because of contango in oil future contracts.

So at this point, I reiterate my recommendation to look elsewhere for alternative investments. Unless you can time the bubble properly (and who can promise that?), this will probably not provide investors what they were hoping for.

Source: http://www.creditwritedowns.com/2010/05/the-commodities-con.html

Household Equity Holdings

admin — Wed, 31 Mar 2010 19:25:42 +0000

I’m not sure how accurate the numbers are for actual percentage holdings, but the relative changes that have occurred over time should be fairly accurate. If you were to plot PE10 on this graph you would find a VERY high correlation. Unsurprisingly, as people become more fearful of stocks, they own less and drive the PE10 ratio lower.

Given the economic shock we are going through, fear clearly hasn’t taken hold yet. If another recession hits in the next year or two, I would expect this to get worse.

Checking Accounts

admin — Mon, 22 Feb 2010 18:26:10 +0000

Late last year the bank I had my personal checking account with was taken over by the FDIC and sold to another bank. FYI, the transition from a customer perspective was seamless. The new bank is now changing the terms of the account prompting me to shop around again.

I thought I would share some of my findings. First there are the features you might care about

interest rate
free checks
atm reimbursement
nearby full service branch (e.g., notary)
remote deposit (scan check at your computer)
online bill pay
download into Quicken
minimal hold times for deposits
fees

As you might expect, no institution excels at all of these.

A new form a checking that has arrived in the last few years is reward checking. These often have requirements of direct deposit, electronic statements, a certain number of debit card transactions each month (e.g., 10-15/mo) and sometimes a HELOC. In return for meeting these requirements they will pay 3% to 5% interest on your checking. They typically have a limit of $25K to $50K that you can deposit and earn this interest. For example, locally we have Aloha Pacific FCU which offers 4.5% on checking balances up to $50K if you have all of the following (direct deposit, estatements, HELOC, and 10 debit transactions each month). For very disciplined souls who can keep close to the maximum balance in the account, these can be a good deal. Tracking the 10 debit transactions each month is the deal breaker for me, making it too high maintenance.

The flip side are accounts that have minimal requirements. Below are some that have good reputations online. Of course it is always useful to check out your local credit unions as well. Hopefully the table below will retain its formatting. If you know of other good banks let me know!

Bank	Special Requirements	Interest	ATM Reimb	Free Checks	Rem Dep	Loc Brch	Bill Pay	Quicken Dir	Out Wire	NSF Fee	Stop Pmt
Ally	None	.5% < $15K; 1.15% >= $15K	yes	yes	no	no	yes	yes	$20	$9/day	$15
Everbank	$1500 initial dep	1.14% < $25K; 1.43% >= $25K	yes	no	yes	no	yes	yes	$25	$30 + $3/day	$30
USAA	Related to service member	0.10%	yes	yes	yes	no	yes	yes	$20	$29	$29
NFCU	Related to service member; $1,500 min bal	.5% < $10K; .75% < $25K; 1% > $25K	yes	yes	partial	???	yes	yes	$14	$29	$15
Alliant	PTA member + direct deposit	1.75%	no	no	yes	no	yes	yes	$30	$29 + $10/day	$29
Schwab Bank	Must have brokerage acct.	0.52%	yes	yes	no	???	yes	yes	$25	$25

New PIMCO 1-3 Yr Treasury ETF

admin — Tue, 16 Jun 2009 20:02:01 +0000

Pimco 1-3 Year U.S. Treasury Index Fund (TUZ) will have an expense ratio of 0.09%. This compares favorably to iShares Lehman 1-3 Year Treasury Bond ETF’s expense ratio of 0.15%.

This is the first of seven ETFs that PIMCO has in the pipeline. I am esspecially looking forward to the ETFs that allow greater maturity management with TIPs.

Pimco 3-7 Year U.S. Treasury Index Fund
Pimco 7-15 Year U.S. Treasury Index Fund
Pimco 15+ Year U.S. Treasury Index Fund
Pimco Broad U.S. TIPS Index Fund
Pimco Short Maturity U.S. TIPS Index Fund
Pimco Long Maturity U.S. TIPS Index Fund

Source: Pimco Launches First ETF; Files For Six More

Schwab Cuts Index Fund Fees

admin — Tue, 12 May 2009 23:02:39 +0000

It is nice to see Schwab has finally followed Fidelity in cutting the fees for its basic index funds.

Schwab Equity Index Fund	Expense ratio
Schwab S&P 500 Index Fund (SWPPX)	0.09%
Schwab Total Stock Market Index Fund®(SWTSX)	0.09%
Schwab 1000 Index Fund® (SNXFX)	0.29%
Schwab Small-Cap Index Fund® (SWSSX)	0.19%
Schwab International Index Fund®(SWISX)	0.19%

Source:

Lower Schwab Funds Expenses

Tax Free Money Market Alternative

admin — Mon, 20 Apr 2009 00:03:28 +0000

With tax-free money market funds paying well under 1% (Vanguard’s Tax-Exempt Money Market is currently paying around 0.61%), it is hard to find a place to park cash if you are in a high tax braket. You can still find high yield savings accounts that pay around 2%, but that interest will be fully taxable and you need to stay under the FDIC limits (remember they go back down to $100K at the end of the year) because it is often the banks that are stretching themsleves that offer the best rates.

Enter variable rate demand obligation municipal bonds (i.e., VRDO Muni Bonds). These are long dated municipal bonds (typically 30 to 40 years) that have variable interest rates and, unlike auction rate secruties, they have a put option each time the interest rate resets which provides guaranteed liquidity that auction rate securities did not.

PowerShares created a VRDO ETF in November 2007 (PVI). It has a 0.25% expense ratio, pays monthly dividends and is currently yielding in the 1.6% to 1.8% range. Over the last year the share price has remained remarkably stable only varying a few cents above and below $25/share. The one exception was on Oct 10, 2008 when intra day trading pushed the share price down a few dollars, but by market close it was back to $24.88 and by the close of the following day it was back to $24.97 and the day after that it was at $25.

2.5% from GMAC Bank

admin — Fri, 20 Mar 2009 03:30:51 +0000

With banks and money markets paying virtually nothing these days finding good places for short term cash is a bit tricky. Even most of the traditional high yield savings accounts have gone under 2%. Currently GMAC Bank is offering 2.5%. As of 2008, GMAC Bank is FDIC insured and has full access to treasury liquidity programs, so it is considered pretty secure these days. Even in the worst case, FDIC normally get money back to investors within a day or two of taking over.

Market Valuation Update

admin — Tue, 03 Mar 2009 18:36:09 +0000

After the rundown we have had over the last two weeks, I find it useful to take a step back and check on how current valuations measure historically. I should reiterate that I don’t believe that I have the ability to time the market. And for me, these valuation exercises are about assessing risk so that I don’t expose my client’s to more than their plan can handle while trying to capture world economic growth.

PE10 (i.e., using real earnings averaged over last 10 years) is currently at 12.16. As you can see in the following graph this is below the historical average (16.3) but not yet below the level typically achieved in previous long term down turns (<10).

So clearly there is still room for prices to fall. In fact, the S&P 500 would have to fall into the 500′s to drop the PE below 10. This brings me to the next graph produced by Doug at dshort.com.

The great depression line is tracking the Dow while the other three track the S&P 500. I love two things about this graph. The first is how it demonstrates how much risk is still potentially waiting below the surface. Second, I believe it illustrates the difficulty of discerning the bottom. After each bounce off a new low it is extremely difficulty to tell whether the rally it a true one or not. Looking at this graph you can see a sucker rally of over 40% gains before plunging again to new lows.

To end on a positive note. Demand in many durable goods has gone way below their normal replacement rate. This means demand is at unsustainably low levels. Regardless of how the economy is doing they will have to come up from their current levels as these items wear out. This means if the economy stays bad, durable good categories will still improve over the next few years. And if the economy improves, durable goods could see quite a pop in demand.

To see this effect in car sales Calculated Risk provides this graph showing the total number of registered vehicles in the U.S. divided by the sales rate – and gives a turnover ratio for the U.S. fleet (this doesn’t tell you the age of the fleet). As you can see it is currently over 25 years which is unsustainable.

Too much risk in your portfolio?

admin — Thu, 05 Feb 2009 18:52:51 +0000

The following graph comes from a recent morningstar article that reiterates how markets don’t follow normal distributions but instead follow a log-stable style distribution (i.e., distribution with fat tails). What I like about this graph is that it highlights the fact that even over very long periods (e.g., 50 years), you still have over a 4% risk of more than a 50% loss over that period.

If you have a hard time fathoming how that could happen, just look at Japan. It has now been over 20 years since the Nikkei peaked at around 39K. It is now under 8K.

What this means is that if a 50% loss to your equity investments would be catastrophic to your goals, you need to revist your risk exposure. After all, the risk of dying for people under the age of 60 is generally less than 1%, but it is still considered prudent to buy life insurance. A 4% risk of catastrophic failure is too high to leave unaddressed.

Of course, this requires understanding what is catastrophic. For some it might mean having to sell the house and move in with their children for support, while for others it could just be a significantly diminished lifestyle (e.g., no travel, no/less dining out, etc).

High Yield Savings and Checking

admin — Mon, 26 Jan 2009 18:32:39 +0000

Many of the high yield savings accounts (e.g., Ing Direct, Emigrant Direct, and others you can find at bankrate.com) have lowered their yields to around 2.4%. Interestingly, Emigrant Bank has created a new entity called Dollar Savings Direct that currently offers 3.5%. As far as I can tell it is identical to Emigrant Direct except for the higher rate. My guess is that this is an attempt at attracting new money while not having to pay the higher rate to existing accounts.

As money flows in I would expect this rate to slowly drift down to match the Emigrant Direct rate. It recently dropped from 4% to 3.5%. So it bears monitoring. These accounts are FDIC insured

If looking for a checking account, Imperial Capital Bank offers iChecking that is currently paying 2.85%. I have been using them personally for a few years now and have had no problems (other than no local branch of course).