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Thursday, February 26, 2009

CDARS: Certificate of Deposit Account Registry Service

CDARS are for lazy investors. CDARS stands for Certificate of Deposit Account Registry Service. Bob Brinker talked about them on his radio show as a way to get around the FDIC minimum.

Here is how they work. Let's say you have $1 million to invest in FDIC-insured certificates of deposit. Today the FDIC insures $250,000 per member institution. If you go to a local bank that participates in CDARS, they can put $250,000 of your money in one of their certificates of deposit you like. Then the CDARS service spreads the remaingin $750,000 between various FDIC-insured banks all over the country, hopfully at a good rate.

What is the catch?

Of course there is ALWAYS a catch on Wall Street. Catches on Wall Street come in the form of added fees! They get the fees by paying you a lower interest rate on the money they invest elsewhere for saving you the time of finding other banks yourself!

Here's an example given by Larry Nusbaum yesterday.
Gibraltar Private Bank & Trust of New York will pay 2.60% on a one-year FDIC-insured certificate of deposit in their bank. If you give them $1 million to invest through CDARS, they will pay you 2%. That means paying them $6,000 a year for the privilege of saving you an hour or two of calling other banks. I am not impressed.
You are much better off surveying the banks yourself and using the money you save on CDARS fees to compensate you for your effort.

The top rates for CDs this week are at Pentagon Federal Credit Union (fondly known as PenFed CU) for 5 and 7-year certificates of deposit that currently pay 4.39% APY.

For shorter term, Corus Bank has a 1-year CD with a 2.93% annual percentage rate.

For online savings, GMAC Bank is paying 2.75% on any deposit over $500.

With rates so low, banks will try to sell you their annuity products. Make sure you read my article "Beware of Annuities."

The table below shows the best CD rates for other terms. If that table is hard to read, then try Very Best CD Rates.

"Highest CD Rate Survey + Current US Treasury Rates"
Rate (APY)
(Click link for Full Rate Sheets)
Daily Savings
Vanguard Prime Money Market Fund
Tax Exempt
2/24/09 0.77%
Vanguard Tax Exempt Money Market Fund
Online Savings 2/24/09 2.75%
GMAC Bank & 2.25% @ HSBC Bank
3-Month Treasury
2/24/09 0.30%
US Treasury Rates at a glance
6 Months 2/24/09 2.60%
6-Month Treasury
US Treasury Rates at a glance
9 Months 2/24/09 2.75%
1 Year
2/24/09 2.93%
Corus Bank 2.90% @ GMAC Bank
1 Year Treasury 2/24/09 0.70%
US Treasury Rates at a glance
18 Months 2/24/09 2.90%
Intervest Bank & UmbrellaBank
2 Years
2/24/09 3.00% UmbrellaBank & 2.95% @ GMAC Bank
2 Year Treasury 2/24/09 0.98%
US Treasury Rates at a glance
3 Years 2/24/09 3.40% Flagstar Bank
3-Yr Treasury
US Treasury Rates at a glance
4 Years
2/24/09 4.15% PenFed Credit Union
5 Years
2/24/09 4.39% Pentagon Federal CU
5 Yr Treasury
US Treasury Rates at a glance
7 Years 2/24/09 4.39% Pentagon Federal CU & 3.50% @ Discover Bank
10 Yr Treasury
2/24/09 2.80%
US Treasury Rates at a glance
10 Years 2/24/09 3.50%
Discover Bank
30 Yr Treasury 2/24/09 3.50%
US Treasury Rates at a glance

With rates so low, banks will try to sell you their annuity products. Make sure you read our article: Beware of Annuities

Wednesday, February 25, 2009

Chart: Consumer Confidence Index At Record Low

Yesterday, the Conference Board, a private not-for-profit organization research consortium baseed in New York, said its monthly "Consumer Confidence index" sank to 25 in February. This reading is a record low level not seen since the measure was first taken in 1967. The graph below, courtesy of Martin Capital, shows consumer confidence plotted for the last 30 years has plunged to new low territory.

Lynn Franco, Director of The Conference Board Consumer Research Center, said in a press release:
"The Consumer Confidence Index™, which was relatively flat in January, reached yet another all-time low in February (Index began in 1967). The decline in the Present Situation Index, driven by worsening business conditions and a rapidly deteriorating job market, suggests that overall economic conditions have weakened even further this quarter. Looking ahead, increasing concerns about business conditions, employment and earnings have further sapped confidence and driven expectations to their lowest level ever. In addition, inflation expectations, which had been easing over the past several months, have moderately picked up. All in all, not only do consumers feel overall economic conditions have grown more dire, but just as disconcerting, they anticipate no improvement in conditions over the next six months."
Related Information:

Tuesday, February 24, 2009

Federal Reserve Chairman Says Recession Should End This Year

In his prepared remarks today, Federal Reserve chairman Ben Bernanke said the recession should end this year. Bernanke said this will require restoring financial stability. Bernanke said this during his "Semiannual Monetary Policy Report to the Congress" given before the "Committee on Banking, Housing and Urban Affairs" in the U.S. Senate in Washington, D.C. It was broadcast mostly live on CNBC. Bernanke said
"The central tendency of their most recent projections for real GDP implies a decline of 1/2 percent to 1-1/4 percent over the four quarters of 2009. These projections reflect an expected significant contraction in the first half of this year combined with an anticipated gradual resumption of growth in the second half."
Bernanke said we need fiscal stimulus:
"To break the adverse feedback loop, it is essential that we continue to complement fiscal stimulus with strong government action to stabilize financial institutions and financial markets."
Bernanke said the recession could end in 2009 with 2010 a recovery year:
"If actions taken by the Administration, the Congress, and the Federal Reserve are successful in restoring some measure of financial stability--and only if that is the case, in my view--there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery."
but (there is always one of those) Bernanke said he expects a FULL RECOVERY to take more than two years:
"The central tendency for the participants' estimates of the longer-run growth rate of real GDP is 2-1/2 percent to 2-3/4 percent; the central tendency for the longer-run rate of unemployment is 4-3/4 percent to 5 percent; and the central tendency for the longer-run rate of inflation is 1-3/4 percent to 2 percent, with the majority of participants looking for 2 percent inflation in the long run. These values are all notably different from the central tendencies of the projections for 2010 and 2011, reflecting the view of policymakers that a full recovery of the economy from the current recession is likely to take more than two or three years."
Read the Full Text of Bernanke's Testimony here.

During the Q&A, my favorite line was Bernanke explaining why we should help others having trouble paying their mortgages, a policy that he admits "rewards bad behavior."
"I fully understand the sentiment. A lot of this goes against American values of self reliance and responsibility... I would give the following example. If your neighbor smokes in bed and sets his house a fire. And you live in a neighborhood of closely packed wooden houses. You could punish him very severely by refusing to send the fire department and then he would probably learn his lesson about smoking in bed. But, unfortunately, in the process you would have the entire neighborhood burning down."
The question was partially in response to Rick Santelli's "Chicago Tea Party in July" Rant video that led to a flood of letters to congress protesting efforts to reduce what people owe who signed legal contracts with banks, often after lying about their income to qualify for the mortgage.

Thursday, February 12, 2009

A Primer and a Forward View on REITs

At the Retirment Advisor, we do not recommend chasing the "hot performing" sectors. This is what typically burns investors. In February 2007, we took up the issue of Real Estate Investment Trusts, at a time when many advisors were advocating that fixed-income investors use them as a key part of their portfolios. We chose not to. Here is an excerpt from our newsletter at the time:

A Primer and a Forward View on REITs

For retirees who are interested in squeezing a little bit more income from their retirement portfolios, Real Estate Investment Trusts (REITs) have historically offered dividend yields that are higher than what longer-term Treasuries have offered, with the additional benefit of them being an inflation hedge (which Treasuries or bonds do not provide).

REITs (based on its benchmark, the FTSE NAREIT All REIT Index) have also performed wonderfully, beating the S&P 500 seven years in a row starting from 2000 (its last year of negative return was 1999). In the current environment, is an investment in REITs still appropriate for retirees?

What are REITs?

Before we go further, let us take a “time out” and discuss what REITs really are. For individuals who want to diversify into real estate but don't want to directly invest in properties or who want to remain relatively liquid, the best way to invest in real estate is through indirect means, such as through buying shares of REITs (they are traded on the exchanges), real estate exchanged traded funds (ETFs), real estate service companies, or mortgage-backed securities. Today, the global REIT market is approximately $750 billion, with the U.S. making up the majority of the
market at $400 billion.

Congress established the framework for REITs in 1960 as a way to allow the public to more easily invest in a diversified portfolio of real estate properties. REITs are essentially companies that own and manage income-generating real estate, such as office buildings, shopping centers, apartments, manufactured homes, and self-storage facilities. REITs are also highly liquid investment vehicles, most of which are traded on the national stock exchanges.

Forward View

As we previously mentioned, the performance of REITs has literally been “on a tear” ever since 2000. The obvious question is: What kind of performance can we continue to expect, and is investing in REITs appropriate for retirees or those who expect to soon retire going forward?

As we mentioned previously, one of the historical advantages of investing in REITs have been the higher dividend yields that were offered relative to what longer-term Treasuries have offered. With the exception of a brief 18-month period from late 1996 to early 1998, REITs have historically provided a yield that were 0% to 3% higher than ten-year treasury yields from 1990 to 2005. Not coincidentally, REITs subsequently lost 18.8% in 1998 and an additional 6.5% in 1999. Since the beginning of 2006, REIT dividend yields have been below those of ten-year Treasuries. In fact, REIT dividend yields are now 100 basis points (1%) lower than ten-year Treasuries – representing the most negative spread in history. In other words, REITs are no longer a good investment for income purposes.

Finally, it is no longer obvious that REITs will provide a good inflation hedge for retirees going forward. No doubt, rental prices will generally rise with higher inflation, but keep in mind that the value of REITs has appreciated tremendously in recent years despite a generally low-inflation environment from 2001 to 2006. In other words, there are many other factors which have a greater impact on the prices of REITs, including factors such as foreign investment, a greater ease of financing deals (given the financial innovations in recent years, such as in the mortgage-backed securities markets), and a generally low interest rate environment. Buyers beware.

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