Saturday, May 31, 2008

Lose Homes, Pay More Tax!

Think things are bad for people faced with foreclosure? Well, it's worse!

Some of the biggest losers in the real estate slump are not purchasers of mansions they could not afford. They are buyers of second homes — or third ones, for that matter — who are sitting on a tax time bomb.

Many of these people will lose their properties in foreclosure and then stagger into bankruptcy under the weight of a sizable tax bill.

When does light appear at the end of this tunnel?

Friday, May 30, 2008

Is it an Oil Bubble? Steve Chapman and Chicago Tribune

Tribune columnist Steve Chapman disagrees with those who say oil prices will continue to increase:
At the risk of ending up on Pollyanna's Christmas card list, allow me to differ. Oil prices are unpredictable, particularly in the immediate future, and it's easy to think of events that could force them higher—like, say, a war between the United States and Iran. But in the long run, there is every reason to think that the steep, rocky ascent we have been on will give way to a welcome downhill path.

I'm not alone in my optimism. Michael Lynch, head of an energy consulting firm in Massachusetts, told The Associated Press the current price of gasoline "is the peak or very close to it." Analysts at the investment bank Lehman Brothers say we are just as likely to see oil at $80 a barrel as at $200.
His bosses agree with him that prices for oil will drop when the bubble bursts:
Economic bubbles don't widely reveal themselves until they burst. The bubble in technology stocks was apparent to former Federal Reserve Board Chairman Alan Greenspan in December 1996, yet that didn't stop investors from bidding up tech stocks to stratospheric levels for three more years. They were in bubble denial, having convinced themselves that the tech revolution meant the normal rules of supply and demand just didn't apply anymore.

You know what happened.

This leads us to wonder whether there is an oil bubble.

Columnist Steve Chapman argues on today's Commentary page that oil prices are likely to see a significant decline. We're going to agree with him. This has the look of a bubble.
Frugal Ben says:

These prognosticators influence opinion (See the reader comments!) and governmental action, but no one ever keeps track of their predictions. Well, ThriftSlut will! We will see how these predictions look 12 nd 24 months from now!

Thursday, May 29, 2008

Is It An Oil Bubble? Soros vs. Krugman

So who's the better prognosticator?

The investor whose fund made US2.9 billion last year with returns of over 30%?
George Soros, a legendary hedge fund investor, blamed the spike in oil prices – which peaked at $135 a barrel for the first time last week – on investors betting that the cost of oil will continue to rise, in an interview with the Daily Telegraph.

He said that the bubble will correct, but warned that this will not happen until the US and UK fall into a recession.

Or the economist/professor/columnist?
Now, speculators do sometimes push commodity prices far above the level justified by fundamentals. But when that happens, there are telltale signs that just aren’t there in today’s oil market.

Imagine what would happen if the oil market were humming along, with supply and demand balanced at a price of $25 a barrel, and a bunch of speculators came in and drove the price up to $100.

Even if this were purely a financial play on the part of the speculators, it would have major consequences in the material world. Faced with higher prices, drivers would cut back on their driving; homeowners would turn down their thermostats; owners of marginal oil wells would put them back into production.

As a result, the initial balance between supply and demand would be broken, replaced with a situation in which supply exceeded demand. This excess supply would, in turn, drive prices back down again — unless someone were willing to buy up the excess and take it off the market.

The only way speculation can have a persistent effect on oil prices, then, is if it leads to physical hoarding — an increase in private inventories of black gunk. This actually happened in the late 1970s, when the effects of disrupted Iranian supply were amplified by widespread panic stockpiling.
Frugal Ben Says: We will revisit this post in 12-18 months to see if practical experience trumps a priore reasoning from a model.

Wednesday, May 28, 2008

Savers can find it hard to spend

Humberto Cruz wrote in the Chicago Tribune:
The traits that make for good savers, such as preferring to delay gratification and plan for the future, conspire against them becoming spenders, even when they have the means.

Savers don't get much of a kick, if any, from spending. When they spend, they are wired to question whether the money would be better spent on something else—or simply saved.
The column gives some anecdotal data to support this interesting hypothesis.

It would be fun to see if there is formal research which illuminates the matter further.

Thursday, May 22, 2008

Newspapers, Innovation and New Models

Marketplace.Org reports on new models for the newspaper industry by making three major points:
  • Local news primarily belongs on the web
  • The print edition will be a place for analysis, not reporting of details
  • The need for innovation will be unending
Is publishing tons of granular local news on the internet simply the latest way of avoiding the hard decision about which side are you on, which community do you serve? Do the newspapers have the intellectual horsepower to provide good analysis of local events? Will unending innovation grind people down?

Frugal Ben Says: Are there easier ways to make a living?

Investment Money 'Resting'

The headline to a story by Robert Manor caught my attention:
"Investment money 'resting,' but will be wake up when market improves"
He writes:
Wrightwood Capital CEO Bruce Cohen, who believes commercial real estate experts are deep in the dark, is surprisingly upbeat about an industry that seems to be at least a little paralyzed.

"There is absolute clarity and certainty that no one knows what is going on," Cohen said at a conference sponsored by the University of Chicago Graduate School of Business. He sounded optimistic.

No one can say when lenders will open their vaults and make a loan. No one can say when spooked buyers of almost any kind of real estate will come out of hiding. No one can say what, if any, effect the election will have on the market.

Cohen's company specializes in real estate finance and investment in commercial real estate, and it has been involved in hundreds of deals. So that gives him some street cred when he says that the gridlock in commercial real estate sales is not a permanent traffic jam.
Frugal Ben Says:

If you are a speculator, you might want to be chasing profits in commodities right now. But the typical middle-class investor might be best off in cash and CD's at the present, with a few high-dividend-paying stocks thrown into the mix.

There are times when there simply are no good ways to make large returns .

When that's the case, CD's and cash and forget-about-high-returns-for-awhile might be your best option.

Wednesday, May 21, 2008

Shorter Stories, General News for the Wall Street Journal

Shrewd Tribune columnist Phil Rosenthal reports that changes in the content of the Wall Street Journal might accelerate:
Here comes the Sun: Robert Thomson, the 47-year-old Australian whom Rupert Murdoch installed as publisher of The Wall Street Journal in December, was named its managing editor Tuesday. It was an anticipated move that signals more changes to come at the paper, which has embraced shorter stories and more general news since Murdoch's News Corp. took over.
Frugal Ben Says: Fine, that's all we need. Now more than ever, the middle classes deserve extensive, intelligent coverage of investing and financial matters to protect themselves from a government which is owned by the financial industry. So the WSJ is moving to become a USA Today with lousy pictures and no deft writing touch.

It's enough to make a person say that the corporate press has to die in order to make the American institutional press live again!

Tuesday, May 20, 2008

Parents Pay Premium for Organic Baby Formula with Cane Sugar

It's hard for me to imagine that people will pay extra for anything just because it is described as "organic", but what do I know?
Amy Chase started feeding Similac Organic infant formula to her second son, Amos, as soon as he was born in November 2006.

“When I saw the organic at Publix, I bought it, no questions asked,” said Ms. Chase, a self-described “yoga mom” in Atlanta.

Like Ms. Chase, many American parents have rushed to embrace Similac Organic formula, even though it sells for as much as 30 percent more than regular Similac. In 2007, its first full year on sale, it captured 36 percent of the organic formula market, with sales of more than $10 million, according to Kalorama Information, a pharmaceutical-industry research firm. (Similac’s parent company, Abbott Laboratories, does not release sales figures for individual products.)

Parents may be buying it because they believe that organic is healthier, but babies may have a reason of their own for preferring Similac Organic: it is significantly sweeter than other formulas. It is the only major brand of organic formula that is sweetened with cane sugar, or sucrose, which is much sweeter than sugars used in other formulas.
When you read the story, be sure to check the reader comments! A lot of tree-huggers chimed in to tell how appalled they were (I wonder, are these the same people who follow advice to buy and hold?) that corporations would do such a thing! Oh, dear! Others were more realistic:
An "organic" label symbolizes for me the combination of ignorance and "risk-phobia" that seems to have swept America and the West, along with the attitude of brand-obsession. What's so special about the fact that your vegetables grew up on horse crap rather than synthetic fertilizer? It's all the same nitrate, and the natural stuff may actually be more dangerous.

— Brett, The United States of America
Frugal Ben Says:

You got the money and education to be able to afford "organic" and you don't READ THE LABEL? You deserve a fat baby, though the baby deserves better than you!

Monday, May 19, 2008

Free Timeline Templates and Other Productivity Tools

A timeline is often the most effective way to organize information about someone's life, a conference, a work schedule or various other events.

Learn about timelines and how to quickly create them with Microsoft Excel or Open Office Calc. Vertex42.com will link you to scores of free spreadsheet templates to help you increase productivity in other ways.

Other free resources are at Microsoft: Nice Looking Timeline and Other Resources

Also see: http://www.cnet.com/8301-13880_1-9929740-68.html and http://www.cnet.com/workers-edge/

Buy and Hold Investors Screwed Again: Headline Bias

How much kvetching should we do over bad headlines in the media?

This issue is raised yet again by a Chicago Tribune story on how "buy and hold" investors get screwed by following the advice of so-called experts.

In a column which appeared in print and on the Trib website, Gail MarksJarvis did an excellent job of alerting readers to the cyclical nature of investments, the long time it can take to recover from poor market conditions and the lackluster performance of asset allocation funds which are claimed to provide some level of investment protection from long cycles of poor market performance.

Column snippets to whet your appetite:
Investors who thought they could count on the stock market to make up for the mediocre savings they have socked away in 401(k)'s and IRAs are having an awakening.

And it's not a happy one.

For eight years now, the stock market hasn't cooperated. Instead of providing the 15-percent-a-year returns people enjoyed in the 1990s, the market has turned into a Scrooge.

Not only hasn't the stock market lived up to its historical average of 10 percent annual returns, but the benchmark Standard & Poor's 500 stock market index stands significantly lower today than it did at the start of the decade...

"It's a lost decade," said Howard Silverblatt, a senior index analyst at S&P...

There has not been a decade this bad for investors since the Great Depression. During the 1930s, investors lost 5.26 percent on average per year, not including dividends, Silverblatt said.

And the next worst period in history, the 1970s, gave investors a 1.6 percent annual return, he said...And the stock market took more than seven years to recover from the losses...

"The 2000s have been the poster child for diversification," said Michele Gambera, Ibbotson Associates chief economist.,,

An investor who would have assembled a classic portfolio, with 60 percent invested in the S&P 500 and 40 percent in a broadly diversified bond fund that mimicked the Lehman U.S. Aggregate index, would have turned $1 invested on Dec. 31, 1999, into $1.32 at the end of last month, noted Gambera....

Investors don't have to assemble complex portfolios on their own...they can buy target-date funds in which a fund manager combines diverse stock and bond investments in proportions geared to preparing a person to retire on a certain date...

Investors should not assume, however, that those funds will not lose money. While the S&P 500 lost about 17 percent between Oct. 9 and March 17, the average target-date fund geared for people retiring in 2010 lost 7.9 percent, according to Morningstar Inc. For the last eight years, the average 2010 target-date fund tracked by Morningstar has averaged a 3.7 percent return a year.
The print headline did a good job of summarizing the reporter's review of the facts and the conclusions she drew, including material which indicates that even target-date asset allocation funds have their problems:
"Many can't find gains in 'lost decade'"
Unfortunately, her excellent insights were blunted by the editor who okayed the online version of the column headline:
"Diverse portfolios take the edge off a rough market"
Sophisticated readers know that there is an art to writing good headlines that attract, inform and even amuse a reader. They also know that the best headline writer in the world cannot produce a perfect gem every time he or she puts fingertip to keyboard. From this perspective, it's not a profitable expenditure of time for us to carp about headlines that are less than perfect. The writers work under constant pressure to produce quickly and its unrealistic for us to demand a home run every time they walk to the plate.

But when a headline in the financial press spins an article along the lines that favor Wall Street boosterism - a practice that many claim plays an important role in the creation of investment manias - the producer should be called on the carpet.

The truth of the matter is that investors who followed the advice to buy and hold mutual funds or, for that matter, stocks in the last 10 years might require many years to recover from the bad effects of that strategy.

You would never know that from the calculatedly misleading headline on the Chicago Tribune website.

Frugal Ben Says:

In general, don't go postal over bad headlines. Even if the headline is bad, by the time you complain, the matter is such old news that it makes no difference.

At the same time, don't ever forget that our business/financial/economics reporting is a travesty which needs to be reformed!

When you see a headline writer bias the reader so as to deform an honest story into a piece of bubble-supporting Wall Street propaganda, express your discontent!

Here's hoping Gail will track down the person who wrote the headline on her internet story and give them a good spanking!
_____________________

The fun of blogging is learning something new as you post.
Some links to what I learned about headline bias in the media:

Bias by headline:

http://www.media-awareness.ca/english/resources/educational/handouts/broadcast_news/bw_bias_in_the_news.cfm
http://www.google.com/search?num=100&hl=en&safe=off&client=firefox-a&rls=org.mozilla%3Aen-US%3Aofficial&q=bias+by+headline&btnG=Search
http://americandaily.com/article/5327
http://www.tampabayprimer.org/index.cfm?action=articles&drill=viewArt&art=1354
http://thinkingpolitics.wordpress.com/2007/11/13/the-stories-we-are-told-media-bias-in-the-new-coverage-of-middle-east/

Thursday, May 15, 2008

College Grads Fail Test on Financial Basics

Many college graduates enter working years not knowing financial basics

In a survey conducted by the Jump$tart Coalition for Personal Financial Literacy, college seniors answered about 65 percent of personal finance questions correctly: That's a D grade for these academic achievers.

Those kinds of results worry financial experts, who argue that today's graduating classes need to know more about their finances than generations before them, given the loss of pensions and the shifting responsibility for workers to manage their own retirement accounts...

Investing

With the stress of finding a job, paying off student loans and looking for a place to live, investing can be the last thing on a graduate's mind. But financial experts say it should be a priority...
Frugal Ben Says:
  • The best time to save for retirement is indeed when you are in your twenties and early thirties.
  • At least these grads must know something about inflation, even if it is of the grade variety. Since when is 65% a D, not an F?

Tuesday, May 13, 2008

Frugal Ways to Spy on Friends

The Daily Herald reports on new ways to spy on friends:

If you are still relying on Google to snoop on your friends, you are behind the curve.

Armed with new and established Web sites, people are uncovering surprising details about colleagues, lovers and strangers that often don't turn up in a simple Internet search. Though none of these sites can reveal anything that isn't already available publicly, they can make it much easier to find. And most of them are free.

Zaba Inc.'s ZabaSearch.com turns up public records such as criminal history and birthdates. Spock Networks Inc.'s Spock.com and Wink Technologies Inc.'s Wink.com are "people-search engines" that specialize in digging up personal pages, such as social-networking profiles, buried deep in the Web. Spokeo.com is a search site operated by Spokeo Inc., a startup that lets users see what their friends are doing on other Web sites. Zillow Inc.'s Zillow.com estimates the value of people's homes, while the Huffington Post's Fundrace feature tracks their campaign donations. Jigsaw Data Corp.'s Jigsaw.com, meanwhile, lets people share details with each other from business cards they've collected -- a sort of gray market for Rolodex data.

Some people have come across dirt on their loved ones without even looking for it...

SP Times Cutting Business/Financial Coverage

See Frugal Ben's Response in the Comments Section:

http://blogs.tampabay.com/media/2008/05/big-changes-com.html

Monday, May 12, 2008

Florida Housing: 61 Month Supply. Opportunity for Investors?

Mary Umberger reports on a Florida housing consultant who was laughed at in 2004 when he suggested dark days were coming to the real estate market. Now, Jack McCabe says, the time for looking at Florida property might be approaching.

"For buyers of second homes, there are some better deals out there than there have been in the last five years, without a doubt, but you have to heed the caveats," he said.

"You need to know which buildings may be good opportunities and which to stay away from," he said. "Some of these buildings that have been [fully sold out] for less than a year may already have 50 or 60 foreclosures in them."

And those foreclosures are likely to mean migraines for homeowners' associations, as defaulting buyers stop paying dues and may be renting to "suspect" tenants, he said.

Then, of course, there's the matter of how foreclosure sales affect the values of other units in the building.

McCabe suggests that would-be buyers build strong relationships with experienced real estate agents in their target areas to learn the backgrounds of buildings...

"I'd say you're going to see some of your best deals [in some areas] toward the end of 2008 and in the first two quarters of 2009."

He still sees another 18 months before the downturn plays out in Florida. "Then we'll see things level out and supply will come down, prices will have come down and insurance and taxes, correlatively, will have come down," he said.

Some markets in the state are starting to emerge from the tank, he said.

Sarasota and Naples, he said, have always been popular with Chicagoans, who seem to favor the Gulf Coast because it's a relatively shorter drive than the Atlantic Coast. The two cities are still floating in inventory and seeing price declines, but they're nearing bottom, he said.

"Ft. Myers and Cape Coral may be the closest to bottoming out in price now," he said. "In Cape Coral, lots that were $5,000 to $8,000 in 2002 and went up to $50,000 to $80,000 in 2005 are now down to $8,000 to $10,000, though the area has had a lot of foreclosures."

He's not encouraging, however, about his own back yard, South Florida.

"Miami/Dade, it's going to take years," he says, sighing.
Frugal Ben Says:

It's not just the cost of the property that a buyer needs to examine in Florida. Insurance costs are skyrocketing and might never come down while the infrastructures are crumbling and taxes might increase dramatically to repair the outcome of years of neglect.

Sunday, May 11, 2008

Fix Your Slow-Loading G-Mail?

Gmail account was driving Frugal Ben crazy with its slow loading until two fixes were discovered:

How to make Gmail load faster?

Gmail is one of the best web mail services available, and makes a great use of AJAX technology. Probably because of this, Gmail loads slow during login for many people. Here are some tweaks for making Gmail load faster.

Both fixes worked in Firefox. You might want to create a bookmark with the hack-URL right in it to access your Gmail account or, if your home page is set to Gmail inbox, follow the Tools>Options>Homepage path to set the homepage to one of the faster URL's.

Violence in Mexico! Change Vacation Plans?

Gary A. Warner reports on dangers to Americans:

The U.S. State Department has added its big voice to the growing chorus reporting that violence in areas of Mexico near the border with the United States has become so prevalent that travelers need to consider whether they should visit.

The new "travel alert," one step down from the stronger "travel warning," was issued April 14 in Washington. It says:

"Violent criminal activity fueled by a war between criminal organizations struggling for control of the lucrative narcotics trade continues along the U.S.-Mexico border. Attacks are aimed primarily at members of drug-trafficking organizations, Mexican police forces, criminal justice officials and journalists. However, foreign visitors and residents, including Americans, have been among the victims of homicides and kidnappings in the border region."

The alert said recent clashes between authorities and drug cartels "have escalated to levels equivalent to military small-unit combat and have included use of machine guns and fragmentation grenades."
This, on top of the high price of gas, says stay home for the summer?

Saturday, May 10, 2008

Digital Picture Frames, Frugality and Photography

Sign up for a free subscription to The IMAGING RESOURCE DIGITAL PHOTOGRAPHY NEWSLETTER if you want in-depth reviews of photography products, special deals and occasional insights into the art of photography. Here are some excerpts from the May 9, 2008 (Volume 10, Number 10) review of a digital photo frame:
Whenever we have a Pandigital frame here for review, they're an instant hit with visitors...

For the last few weeks we've had a $170 8-inch PanTouch frame here, which is available now at Sears and Wal-Mart. It features a backlit LED screen with a 4:3 aspect ratio (common to digicams and preferred for portraits), 512-MB of internal memory to hold about 3,200 800x600-pixel images (if resized to the frame's dimensions)...

USEFUL FEATURES

The PanTouch series of frames features one big advance over previous Pandigital frames: a patent-pending touch sensor...

The touch controls are designed to substitute for most of the remote control functions, which are disabled when the touch controls are active. After about three seconds of inactivity, the touch control icons fade away. You can activate the touch controls any time just by touching the top right corner of the mat, which is the Home button...

We particularly applauded the inclusion of programmable on/off times (and hence a clock). The frame also includes calendar and alarm clock functions. Calendar mode not only displays the month but runs a slide show, too.
The frame can play mp3-encoded but not iTunes-compatible music (with or without images) through its built-in stereo speakers or its audio-out port to your speaker system. And it can play video you take with your camera, too. As long as it takes AVI or MPEG movies...

The frame can resize and compress images as they are copied to it so you can store more photos in the frame's 512-MB available memory...

If you've got a WiFi adapter, you can also connect the frame to your wireless home network to tap into Picasa, specifically...

DIRTY SECRETS

Like any other digital frame, the PanTouch series suffers from a few issues common to the species.

For one thing, these things just don't show 24-bit (full) color for some reason. They're all 16-bit. Thousands, not millions, of colors...

Then there's the problem of framed art in general. You have a print you love, you frame it and hang it. And it sits unaltered on the wall ready to engage your interest whenever you look its way. It's passive but constant...

A digital frame, however, has an On/Off switch. But why would you leave it on? And that switch, of course, leads to a power supply, which is actually a power brick plugged into a wall socket. So you have this ugly cord to conceal. And why are they all black when so many walls are white?

A digital frame also has a number of viewing modes. It can certainly display a single image just like your framed print. But will that burn that image into the LCD?

And it can run a slide show of whatever images it finds either in its internal memory, an inserted memory card or even some online gallery. But how do you know what you've missed? Do you have to watch it like a television?

In fact, it's easier to think of a digital frame as a television than a frame. You'd never frame a portrait in a horizontal frame with big black bars inside the mat on the left and right sides. But you'd put up with that on a television.

And that is pretty much what Ron Glaz, IDC director of Digital Imagine Solutions and Services, described as the preferred way to view images...

Citing the big challenge as stimulating users "to release photos from the PC," he acknowledged that digital frames are a popular and inexpensive way to view your growing image collection...Card slots and battery power (to hide that cord) were the top deal makers...

If you don't refresh content on the frame, it gets old quickly. That's where the home network and HDTV displays come in. With the network connection cooking, updating content isn't a big deal. Ask anyone with an Apple TV...

But while you're waiting for that home network to be built, these little frames sure are a crowd pleaser...
Near the end of the newsletter are some reflections on the Lee Friedlander retrospective at the San Francisco Museum of Modern Art and the art of Jackson Pollock.
Painting is always a reduction of the complexity we find in nature. Using a lot of color masks that reduction, hinting at the complexity of nature as the eye tries to find a pattern to makes sense of the image.

The problem in photography, which begins with the complexity found in the scene, is a different one. It's the generous art. Its practitioner profits from practicing frugality.
Frugal Ben says:

Enjoy the current newsletter http://www.imaging-resource.com/IRNEWS/

Subscribe at the end: http://www.imaging-resource.com/IRNEWS/subsrvcs/irn-srvs.htm#sub

See home page: http://www.imaging-resource.com/

Friday, May 9, 2008

Shell-out Falter and Other Frugal Developments

Latteconomizing anyone?
...falling home values, skyrocketing tuitions, $4-a-gallon gas (I paid that much for the first time this week) and other gloomy omens have me exhibiting a form of what my grandfather used to call "shell-out falter."

It seems to be going around. Starbucks Corp. recently reported a 28 percent drop in second-quarter profits, and some analysts attributed the decrease to neo-tightwads reducing their consumption of gourmet coffee drinks.

This development prompted me to invent a new term—"latteconomizing," meaning to economize on lattes and other minor indulgences.

I've cut back myself on premium joe as well as impulse tube-steak purchases.

I've also been using more coupons and buying sale items in atrocious bulk.
Eric Zorn says, Tough times call for crafty economizing.

Thursday, May 8, 2008

More on George Soros: Struggling to Reimagine Economics

George Soros was predicting recession when Bernacke and Paulson were comatose.

Today, in an interview with Diane Rehm, he discussed some prognostications about financial markets. He is a shrewd investor who sees the dollar being replaced by commodities and other currencies as a standard of exchange. Because we Americans consume more than we produce, our marketplace preeminence will inexorably decline and have to be shared with other countries who produce more than they consume.

Regarding investments, he sees continued rough times for American investors and advises us to keep cash reserves on hand.

The market analyses and predictions make the interview worth hearing by themselves.

The interview is even more interesting for his thoughts about the metaphors and ideologies that shape economics and finance. Soros is struggling to move investors and politicians away from the economic fundamentalism which makes it impossible for us to competently analyze our economic behavior. That's the good part. Sadly, the philosophy he articulates might not really represent a radical break with the past. Much of it is reminiscent of cybernetics and interactionist sociology from the early and mid-20th century. It is as though he knows something is terribly wrong with economics but he cannot see how to ground the dismal science in its true home, biology.

Good listen! (About 60 minutes. Downloadable)

Wednesday, May 7, 2008

Junk Bonds or CD's for a Widow with Children

More regarding the relative advantages of CD's and bonds for the middle class investor:

Today I came across a response by Gail MarksJarvis to a reader who went for high yield and had second thoughts after the bonds were purchased:
Q: I am worried about holding on to bonds issued by Bear Stearns just weeks before the bailout. Although I bought them for $75,000, my broker told me a few weeks ago they were worth only $68,000. I need all the income I can get because I'm a widowed parent with children's college expenses. I'm wondering if JPMorgan Chase & Co. will honor the maturity if the takeover goes through. The bonds, at 5.3 percent, mature in March 2010. I cannot afford to lose that corporate bond money! -- S.V.
A: JPMorgan has said it will assume Bear Stearns' obligations once the acquisition is complete. And because the deal was negotiated and blessed by the Federal Reserve, it's likely to be finalized. When that happens, it will be as though you purchased JPMorgan bonds, not Bear Stearns bonds.

That should give you comfort. Although no corporate bond is as safe as a U.S. Treasury bond or an FDIC-insured bank CD, your bonds will be significantly safer than they were. Instead of a bond in a company teetering on the verge of bankruptcy, you will have a bond backed by one of the nation's strongest financial institutions--one with a Moody's rating of Aaa3 for bonds similar to yours. That's a strong rating.

Of course, investors lately have come to realize that strong ratings aren't always dependable. After all, Standard & Poor's was rating Bear Stearns bonds AA when the company was on the verge of bankruptcy in March. But typically ratings of A and above are a better sign than if you see B's or C's in bond ratings. If you see corporate bonds rated below A, you should assume there is a fairly strong risk that the company could have trouble paying you what you expect.

For a simple-to-read list of bond ratings see: "What Do Bond Ratings Mean?" at www.aarp.org/money/financial_planning/sessionsix/bonds.html.

Learning about risks in bonds is critical if you want to safeguard your money. Although the rescue of Bear Stearns has made your existing bonds more secure, you should make sure you don't take chances again. If you truly cannot afford to lose money, avoid corporate bonds and stick with safer choices...
Two pages down in the same business section was an ad for a CD which paid 4.50% for a 36 month term, no risk to principal at all. To make an extra $600 a year on each bond, the widow was risking a principal loss of $7000.

Frugal Ben says: Ms. MarksJarvis gave S.V. some good advice in the column, but she neglected to warn her about about getting bad advice from brokers. If S.V. took it upon herself to buy junk and ignored warnings from her broker, she got what she deserved. On the other hand, if she was faithfully following the advice of someone she trusted, she needs to be told to get a new broker: Advising someone in her circumstances to pursue higher yield in junk is unconscionable.

Tuesday, May 6, 2008

For the Middle Class Investor: How to Invest in Bonds (Dinner with Frugal Bill)

A couple of weeks ago, I went to dinner with two of my brothers. We began talking about investments and Frugal Bill said he had recently taken a position in a bond mutual fund. He seemed disappointed when I was less than enthusiastic about this development, so I decided to do some research and write a post to clarify my own thoughts about the matter.

We will be roaming through the subject of bond investing in future posts, so do not expect to find all of Frugal Ben's thoughts about the matter right here.

The first thing you need to know about bond investing is that it is extremely complicated. Far more complicated than the financial press and the mutual fund companies want to admit! When these sources of information represent bond investing as relatively simple compared to investing in stocks, they are misleading you and you are correct to wonder if they do so out of ignorance or from outright desire to deceive. Either way, be careful!

There are basically five ways for the middle class investor to invest in bonds:

  1. Buy U.S. Savings Bonds at the local bank. This is a very safe investment, but a lot of trouble because you have to deal with the paper.
  2. Open a Treasury Direct account and invest in TIPS or other kinds of United States notes or bonds. This is an extremely convenient way to invest for the future with vehicles backed by the United States government. Frugal Ben says: Every middle class investor should have a Treasury Direct account which is used to make sure money needed for known future purposes will be there when it is needed. See prior post.
  3. Buy bond mutual funds. We will examine this later in more detail. Frugal Ben says: Mutual funds for bonds are very tricky. They are not nearly the conservative investments that mutual fund companies would like you to believe they are, but they are somewhat better than nothing.
  4. Buy the bonds yourself through a brokerage. Whether the bonds are corporate bonds, municipal bonds or junk bonds, this is an extremely complicated undertaking wherein you have to know a lot about inflation risks, default risks, recall risks, and all kinds of other risks. If the bond you are buying is a junk bond, all the normal risks are magnified. Buying bonds directly is something that is beyond the expertise of the average investor. Frugal Ben says: Don't do this unless you have devoted a lot of study to the matter.
  5. Invest your money in Certificates of Deposit. That's right, CD's. The kind that are offered by your local bank or savings and loan. Strange to say, few people realize that a CD is actually a bond!
In an earlier post aimed at challenging the folk wisdom which says stocks outperform bonds over the long haul, I showed information from Vanguard which indicated that bond fund investments could have been much less risky than stock fund investments over the past 10 years:

Investments of $10,000 would have grown as follows:
Total International Stock Index $20,527
Total Bond Market Index $17,546
Total Stock Market Index $15,477
Here's an update on that post.

I did some crude research on CD rates for the 10 year period roughly overlapping the same information from Vanguard. First, I looked for information about historical cd rates. That led me to a Federal Reserve webpage from which I was able to construct estimates of what an investor would have achieved if he or she had invested in 6 month certificates of deposit from 1998 to February 2008, roughly the same 10 year period covered by the Vanguard figures reported above.

An investor who used average 6-month CD's to manage $10,000 in this 10 year period would have had $15031 at the end of the 10 years. This is a very conservative estimate of the investor's results. It presupposes that the investor did not shop around for the best rates in his/her area or on the internet and it also presupposes that the investor did not take advantage of higher rates offered for longer term investments. It is quite possible that an investor who searched aggressively for good CD rates of varying durations would have done at least as well and maybe even better than the investor in Vanguard's Total Stock Market Index.

Speculation aside, what can we learn from comparing the CD investment with the others?

On the one hand, $15031 is the lowest of the results cited above. All the investments cited above beat this estimated result.

On the other hand, consider the risk factor. The $10,000 investment in CD's had absolutely no risk of a loss of principal. At any time during the 10 year period, the investor could have gotten back the entire principal plus interest except for the interest for the last 90 days before redemption. In regard to both of the stock mutual funds, the loss of principal for an investor who suddenly needed the money could have been substantial, especially in 2003. An investor who chose the Total Stock Market Index would have taken on enormous risk to principal to earn an additional $446 over the 10 year period.

Frugal Ben says:

As of May 2008, CD rates are nothing to write home about.

Nevertheless, CD's are an extremely safe, dependable, easy-to-understand investment product which frugal investors should not disdain. Using CD's in combination with stock investments can help you preserve what you accumulate. If you have future obligations which you must meet, CD's guarantee that the principal will be there when you need it.

If you have a brokerage account, you can probably buy CD's there. The process is typically very convenient. Rates will be reasonably competitive and you should get a rate exceeding the brokerage's money market rate if you want to park cash and stay out of the stock market for a few months. On top of that, paperwork is very easy.

For the best rates, shop around at your local banks to see what kind of "Manager Specials" they offer! These specials can have rates considerably higher than the normal CD rates. Also check Bankrate.com or other sources for the best rates available on the internet.

It's a pain to constantly search for better rates and roll over your money from bank to bank, especially when you are emotionally attached to an institution. Be ruthless! The end results make the effort worthwhile!

Free File Launching Program Available May 6

Interesting piece of software is being offered at www.giveawayoftheday.com as a freebie.

Download page is at http://www.giveawayoftheday.com/recentx/

The program - RecentX - keeps track of files, folders etc. that you use daily. These become available for almost instant launching. It's like clicking your Start button, then Documents or Programs, but on steroids. This kind of launching is extremely handy if your file structures are complex or you need to frequently visit folders that might be buried deeply in locations like the User folders in Documents and Settings.

You can see reviews at the download page.

Frugal Ben Says:

If you have never downloaded from the site before, exercise discretion.

There is wide variation in quality from one day to the next. Some software is extremely good, other software can be quite bad. If you have a way of installing into a sandbox to test software without changing your primary drive, that's ideal. Naturally, back up your C:\ drive before you install so that you can revert if necessary. Also, not a bad idea to install late in the day, after there are lots of comments that show how the installation process and program worked for others.

Finally, downloads will contain a Readme file with registration instructions. It is extremely important to follow these instructions precisely! Otherwise, you could end up with a 30-day trial version of the program rather than a free version.

Finally, if everything works well and you like the program, backup your C:\ drive again so that you do not lose the freebie if something goes wrong with Windows or other programs and you have to reinstall.