Picking up Nickels

Monday, October 26, 2009

Fixed-income outlook for 2010 and beyond

I was reading about the plight of savers at the Bank Deals Blog last week and was sadly reminded about how much interest rates have dropped over the past two years. While I can certainly understand how savers like me are disappointed about current fixed income rates, I was particularly disappointed by the amount of misplaced anger demonstrated by commenters there. One particular anonymous commenter seemed to make a few posts pointing the finger at President Obama followed up by more anonymous posts agreeing with himself.

I was moved to leave a comment there indicating that the beginning of the recession as well as the cuts to the FOMC target rate resulting in the current near-zero level all occurred
before Obama even took office, but obviously that was not well received. The first thing that anti-Obama sentiment made me think of was this humorous political cartoon by Mike Luckovich of the Atlanta Journal-Constitution:

That being said, I stand by the assertion that I made in my comment on the Bank Deals Blog:

It is sound monetary policy to lower interest rates to help facilitate an economic recovery. When the cost of borrowing is low, economic activity is generated by businesses and individuals buying vehicles, equipment, real estate, etc.

During the recession of 3/2001-11/2001, the FOMC lowered the federal funds rate from 5% to 2% to do just that. While one can argue that they kept low rates in place far too long (helping pump up the housing bubble), the resulting low savings rates were accompanied by low auto and home loan rates that stimulated a lot of economic activity.

With that in mind, let's check out what happened to my savings rates during the previous recession lasting from March 2001 until November 2001. For data, I'm using the interest rate earned on my E*Trade (formerly Telebank) Money Market account during that time:

As the above graph shows, the 4.69% rate I was earning when the recession began in March 2001 quickly collapsed along with the FOMC target rate as both stayed pathetically low for about three years after the recession ended in November 2001.

This data pretty much shows that interest rates were lowered during the last recession as a way to stimulate borrowing, which ultimately leads to increased economic activity. I certainly took advantage of that low rate environment (as well as other incentives) to buy a new car and refinance my mortgage to the 5.375% fixed rate mortgage that I still have today. And no, that wasn't President Obama's fault either. :p

Now let's look how rates fared during the current recession using the ING Direct Orange Savings rate during that time. However, we don't know if we're out of the current recession yet, so I am making the assumption that we are still in a recession until we know otherwise:

Once again, we can see a precipitous drop in the ING Direct rate and the FOMC target rate once the current recession began in December 2007. The worrisome part is that with a near-zero FOMC target rate (represented as 0.25% in my graph), the interest rate on the ING Direct account could potentially drop quite a bit lower before rates stabilize. Even worse, we could be looking at low rates on our savings accounts through late 2012 if the game plan from the previous recession is any indication.

As a saver, I think that we're looking at low rates on our money for quite some time. There may be a few opportunities here and there (particularly inflation-indexed ones like TIPS and I Bonds), but I fear that those opportunities will be far and few between.

Thursday, October 15, 2009

September CPI-U numbers released: Pass on October 2009 I Bonds

The U.S. Bureau of Labor Statistics released the September 2009 Consumer Price Index (CPI-U) inflation data this morning, which increased by 0.06% last month.

As I have mentioned many times before, now is one of the best times to consider purchasing I Bonds. The reason for this is that we now know what the rate of return for October 2009 I Bonds will be for both the first and second six month periods, which is important since I Bonds must be held for 12 months before they can be redeemed.

Using the CPI-U data from March 2009 (212.709) and September 2009 (215.969) (courtesy of inflationdata.com), we can calculate the variable rate for the second 6 month period for October 2009 issue I Bonds:

That would mean these bonds would earn a rate of 0% (using 0.10% fixed & -5.56% variable) for the first 6 months and 3.17% (combined 0.10% fixed & 3.07% variable) for the second 6 months. With a pathetic 0% composite rate and 0.10% fixed portion, this is not an attractive investment when compared to the 1 year CD @ 2.25% APY currently being offered by ING Direct.

As expected, October 2009 I Bonds are not worth considering at this time. It is worth re-evaluating I Bonds in late November 2009 though, since it is possible that even moderate increases in inflation will make I Bonds more attractive than one year CDs with 2% yields. I personally will be waiting until late April 2010 before considering an I Bond purchase.

Tuesday, October 13, 2009

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Monday, October 12, 2009

October 2009 Financial Asset Roundup

Here are my current financial assets as of the market close on October 9th, 2009:

Asset Sep 2009 Oct 2009 Change
Checking 474 297 -177
Money Market 30,857 27,971 -2,886
Savings Bonds 20,612 20,695 83
Treasury Bills 0 0 0
CDs 120,680 130,605 9,925
Brokerage 86,601 78,851 -7,750
401k 80,130 82,936 2,806
Roth IRA 32,405 33,314 909
SEP IRA 184,252 188,409 4,157
529 Savings 38,799 39,735 936
Total Assets $594,810 $602,813 $8,003

The S&P 500 index continues to hover around yearly highs as it has risen 2.62% since the last update:

(chart courtesy of msn.com)

Is the recession over? A bunch of economists seem to think so, although we're looking at a slow recovery. In other shocking news, unemployment hit a new 26 year high of 9.8%.

Crude oil has risen to around $74 per barrel as hope for an economic recovery (and a rise in demand for energy) continues. It has certainly been nice to see gasoline dip below $2.50 per gallon, but that could change soon if this run on oil continues.

As for money moves, my driveway paving project is finished (yay!) and paid for (boo!). I ended up rolling my Penfed 6% APY CD that matured last month into a HSBC 2.00% APY 12 month CD and last week opened a ING Direct 2.10% APY 12 month CD in anticipation of my E-Loan 4.36% APY 12 month CD maturing later this month. I also took advantage of the buoyant stock market and sold my position in computer maker Hewlett Packard Company (HPQ) as it recently rose to a 52 week high.

And finally, as I struggled to tally my assets with the newly upgraded Fidelity Full View (a Fidelity-branded Yodlee clone) this morning, it finally dawned on me that my financial assets have exceeded the $600k level and finally eclipsed my previous peak from December 2007. I still have a way to go to recover from the $36k worth of SEP IRA contributions I've made since then, but hitting $600k in assets is still a nice psychological barrier to break through.

Thursday, October 01, 2009

My experience getting my driveway repaved: Part 4

This is Part 4 of my series on getting my driveway repaved, where I summarize the last stage of this project.

As of Part 3, I had been waiting for the paving contractor to return and apply the top coat of asphalt to my driveway. I was initially told that they would return in two weeks, but I ended up waiting four weeks (despite pestering them for status updates) for the work to be completed.

The last phase of this project began as abruptly as the previous one. On 7 AM one morning, the small army of men and heavy equipment returned with a dump truck full of asphalt.

In the picture below, the foreman (a Yankee closer Mariano Rivera doppelganger) mans the paving machine used to apply the top coat of asphalt while an equipment operator with a striking resemblance to Wall Street yakker Zachary Karabell follows with a vibrating paving roller:

After about 90 minutes of work, a 1.5" asphalt top coat had been laid and compacted and the job site was cleaned up. Other than the fact that we were told to keep off the driveway for three days until the asphalt had hardened sufficiently, we were done!:

Now that this is over, I have to say my biggest frustration with this project (other than the cost) was the amount of time it took from start to finish. It certainly wasn't easy to get the owner of the paving contractor on the phone to coordinate things, but I'm guessing that he is legitimately busy since he still hasn't stopped by to get the rest of the money that I owe him. :)

So what have I learned from all this?

  1. Get multiple quotes and remember that the lowest price isn't necessarily the best way to go. Also, see if you can score a discount by paying cash.
  2. Do your homework. Ask for referrals from friends, family, and neighbors. Check contractors out with the Better Business Bureau, building inspectors, state licensing organizations, etc.
  3. Be prepared to wait. I signed a contract one month after requesting quotes, had the work start one month later, and had the job completed one month after that. Even though the housing bubble has popped, getting contractors to stop by and return my calls wasn't always easy.