On 40-year mortgage

The 40 year mortgage (our past posting ), for years a niche product, is finally set to have a strong presence in the mainstream mortgage market. With interest rates expected to rise, and with property values soaring on the coasts, the 40-year loan might make homes affordable to a few middle-income buyers.

Its chief competition was interest-only loans which, too, were a kind of niche product until home prices began zooming in many parts of the country about three or four years ago. Now, interest-only loans occupy a big chunk of the mortgage market in high-price cities as buyers hunt desperately for ways to afford more expensive houses. But with rising interest rate the advantages of having an interest-only loan are also vaporing away. The only hope the new homebuyers can have is a slump in price which many people are expecting to happen soon.

Although the 40-year mortgage is not set to outpace the conventional 30-year, many professionals believe it will have a place among necessary loan solutions offered by lenders.

India's Sensex hits 9000

Usually we avoid repeating the same kind of topic in our successive postings. But the run that Indian stock market is having over the last few years is worth all the attention of US investors. Yesterday India' benchmark Sensex index crossed the magical figure of the 9000 mark and touched a life-time peak of 9000.32 points at mid-session on frantic buying spree by Foreign Institutional Investors (what Indians love to call FIIs) and Indian institutional and individual investors. FIIs continued to remain the major buyers on hopes that the India’s economic condition and the corporate fundamentals would continue to be strong.

For our readers who are not so much aware of the Indian market, here we present a short introduction to Sensex and a timeline of its spectacular achievements. The benchmark index of Indian stock market, Sensex was first compiled in 1986, is a 'Market Capitalisation-Weighted' Index of 30 component stocks representing a sample of large and financially sound companies: ACC, Bajaj, Bharti, BHEL, Cipla, Dr Reddy's, GACL, Grasim, HDFC, HDFC Bank, Hero Honda, Hindalco, HLL, ICICI Bank, Infosys, ITC, L&T, Maruti, NTPC, ONGC, Ranbaxy, Reliance, Reliance Energy, Satyam, SBI, Tata Motors, Tata Power, TCS, Tisco and Wipro.

Here is the timeline of its landmark achievements:
1000 (July 25 1990): Touched the magical four-digit figure for the first time and closed at 1,001 in the wake of a good monsoon and excellent corporate results.
2000 (January 15, 1992): Crossed the 2,000-mark and closed at 2,020 followed by the liberal economic policy initiatives undertaken by the then finance minister and current Prime Minister Dr Manmohan Singh.
3000 (February 29, 1992): Surged past the 3000 mark in the wake of the market-friendly Budget announced by the then Finance Minister and current Prime Minister Dr Manmohan Singh.
4000 (March 30, 1992): Went past the 4,000-mark and closed at 4,091 on the expectations of a liberal export-import policy. It was then that a major financial scam hit the markets and Sensex witnessed unabated selling.
5000 (October 8, 1999): It took 7 years for Sensex to repair the damage from the scam before it crossed the 5,000-mark after the BJP-led coalition won the majority in the 13th Lok Sabha election (BJP is now the major opposition party) .
6000 (February 11, 2000): The infotech boom took the Sensex past the 6,000-mark and hit and all time high of 6,006.
7000 (June 20, 2005): News of the settlement between the Ambani brothers (Heirs of Reliance Industries) boosted investor sentiments and the scrips of RIL, Reliance Energy, Reliance Capital and IPCL made huge gains.
8000 (8th September, 2005): More and More interest from foreign investors and Sensex crossed 8000 mark on brisk buying by foreign and domestic funds in early trading.
9000 (28th November, 2005): You know by now why.

We feel India has lot to give to US investors in years to come. The advantages of India are manifold: (i) Good democracy and free press and media, (ii) Thriving middle class which is embracing consumerism, (iii) English-educated knowledgable workforce, (iv) Existence of mature financial and regulatory institutions, (v) The urge among Indian youth to show to the rest of the world that they really matter.

Riding Indian Tiger

On last Saturday, the benchmark for Indian stocks, the Bombay Stock Exchange's Sensex 30 Index reached an all-time high of 8900. It's having a multi-year run upwards despite the slump in US market in last few years and US average investors in India's ADRs (American Depository Receipts) are enjoying their ride on this quite strong Asian tiger. If you do not like to take the risk of investing in individual companies, you may consider one of the following 5 funds that invest in India:

1. Matthews India Fund (MINDX) from Matthews International Capital Management. This no-load fund was launched on Nov 1 at a price of $10. Last Friday it closed at $10.61. Its expense ratio is 2% and minimum investment is $2500 for non-retirement and $500 for retirement funds.
2. Eaton Vance Greater India Fund (ETGIX). This carries a 5.75% initial sales charge, or load. Expense ratio is high 2.77% and minimum investment is $1000.
3. Oppenheimer Developing Markets Fund (ODMAX). Again a good choice for diversification. The fund is based on various developing countries in all continents. Its expense ratio is 1.52%. This again carries a front load of 5.75% and minimum investment is $5000. The fund invests 15.5% of its total asset in India. Other major countries in its portfolio are South Korea (19.9%), Brazil(19%)
4. Matthews Pacific Tiger Fund (MAPTX). It's an Asian regional fund (no load) and thus provides better diversification. This fund has about 7.6% of its assets invested in India, whereas 32.4% is in China. Its expense ratio is 1.32%.
5. Matthews Asian Technology Fund (MATFX). This no-load fund invests 7.7% of its assets in India, whereas 20-25% in other single countries like Japan, Korea, China. Its expense ratio is 1.49%.

$ : Holiday Travel Tips

If you are going abroad in the forthcoming holidays, here are 6 tips for getting good exchange rates for dollar:

First for credit cards and checks:

1. Before you go abroad, check out what fees your credit-card company will charge you for international transactions.
2. For traveler's checks, try to exchange them at a branch of the bank that issued them.
3. Check the back of your ATM card or credit card for symbols of international ATM network companies like Cirrus and Plus. If those are on your card, then your cards will be accepted at their international ATM networks. You can get very good exchange rates --sometimes even the best rates -- simply using your credit card or debit card.

Then for actual Forex dealing to be done by you:

1. Foreign exchange dealers in USA tend to charge more than those in other countries. So, it is better to make most of your exchanges at your destination country.
2. Change only enough money for your immediate expenses (i.e. taxi fare, coffee and snack, tips, etc) either in USA or at your port of entry to the country you are visiting. Some of the worst exchange rates are usually found at airport and train-station booths.
3. The best rates are usually found at banks and post offices. For example, in France, you will get the best rate with almost no exchange fee at La Poste. The worst are hotels and the "tourist" exchange bureaus found on every street of Europe.

Dividend Is Always Good

Every quarter when dividend from various companies get posted to your account, it always gives a good feeling. Dividend paying Exchange Traded Funds, like DVY and PEY received lot of attention from investors in recent times. Mutual funds that care for 'dividends' have different kinds of approaches: Some just aim for high yield: T.Rowe Price Equity Income (PRFDX) is one such fund that tries to search for inexpensive but safe (relatively speaking) stocks with above-average yields. Some other mutual funds look for growth and income: like Fidelity Dividend Growth (FDGFX) which looks at dividends to be a good sign for a company's financial growth and an indication of its strong cash reserve.

The reduction of tax (to only 15%) on dividend income by Bush administration fuelled a strong growth and popularity of dividend-paying stocks. One caution is that not all stock or fund dividends qualify for the low rate of 15%. A stock must be held for 60 days before and after the payout date by you or by your mutual fund for the dividend to qualify for the low tax rate. In 2004, for example, only 86% of the dividends paid by iShares Dow Jones Select Dividend (DVY) whose current yield is about 3%, qualified for the lower rate.

You must also check the expense ratio of these dividend-yielding funds. Expenses silently consume your money and nullify some of the advantages of a dividend-yield. So, avoid any fund that has an expense ratio of more than 1%.

Weekend Commentary

On Thursday, crude oil for December delivery slipped $1.55, or 2.7% to stand at $56.34 a barrel to end at the lowest price for crude since mid-June in New York Mercantile Exchange dealings. A week ago, crude price was at $57.53.

The dollar rose to 119.17 yen from 118.73 yen on Thursday, and the euro also fell, down to $1.1685 from $1.1745.

The Metal Market is going up and up. Today early morning Gold for December delivery reached $489.20 an ounce, its highest level since 1987, and was last trading up $1.20 at $488.10 an ounce. Read our recent posting on gold investment. Meanwhile, platinum futures added $7.10 to $989.50. The contract on Thursday reached $1,000 for the first time in more than 25 years, before closing lower. December silver was last up 3.3 cents at $8.14 an ounce.

Benchmark long-term mortgage rates were little changed this week, having climbed without pause for more than two months. The average rate paid on a 30-year fixed loan was 6.37% in the week through Thursday, up from 6.36% last week and 5.74% a year ago. The average for a 15-year fixed-rate mortgage this week was 5.90%, up from last week's 5.89% and last year's 5.15%.

One-year Treasury-indexed Adjustable Rate Mortgage (ARMs) averaged 5.2% this week, up from 5.12%. At this time last year, the one-year ARM averaged 4.17%. Five-year Treasury-indexed hybrid ARMs averaged 5.86% this week, up from last week when it averaged 5.81%.

We are observing the following important trend in Mortgage market: Currently the difference between the 30-year fixed-rate mortgage and the one-year ARM rate is the narrowest it has been since November of 2001. The ARM is thus rapidly loosing its charm among home-buyers.
ARM is a riskier option which is usually sought for initially low monthly payments but vulnerable to rising interest rates after first few years.

[Source of Mortgage data: Freddie Mac weekly report]

Four Q&A on ETFs

Which are the 5 most highly traded Exchange Traded Funds (ETFs) ?

1. The S&P 500-tracking SDPR 500 Trust (SPY)
2. The Nasdaq 100 Trust (QQQQ)
3. The small-cap iShares Russell 2000 (IWM)
4. The Energy Select Sector SPDR (XLE)
5. The Diamonds Trust (DIA), which tracks the Dow Jones Industrial Average, DJIA.

Which are the ETFs for investment in Gold?

[Read our past posting for details on this]

1. StreetTracks Gold Trust (GLD)
2. iShares Comex Gold Trust (IAU)

How many ETFs were launched in 2005?

Total 29 funds were launched on U.S. exchanges so far in 2005. The ETF business raked in $28 billion in fresh cash, according to Morgan Stanley.

Can Mutual Funds invest their money in ETFs?

Mutual funds also use ETF as an investment tool to gain more diversity but they are prohibited from investing more than 5% of assets in a single investment company.

'Life-Cycle' Funds

Target retirement funds are also known as life-cycle or target maturity funds. The rule is very simple to understand: As an investor approaches retirement, these funds take less risk with stocks and put more money into conservative bonds. In retirement, these funds put most of the money in income-producing bonds. U.S. fund companies like Fidelity Investments, T. Rowe Price Group, the Vanguard Group and Charles Schwab & Co., among others, have launched versions of the life-cycle strategy.

Nowadays the earliest retirement funds mature in 2010, with others offered in 5- or 10-year increments up to 2045. In general these funds have been well-received, even though most of these are not much more than a year old and performance records are short. Not all life-cycle funds are alike. Some funds take more risk than others. The trade-off is straightforward: Stocks can provide a larger retirement nest-egg but are more volatile -- especially smaller-capitalization shares. Bonds are relatively stable and safer but lack stocks' long-term punch.

Vanguard Target Retirement 2025 Fund (VTTVX), for example, emphasizes on growth and income, whereas T. Rowe Price Retirement 2020 Fund (TRRBX) allocates almost 80% in stocks - a more aggressive approach than the Vanguard fund's 60% allocation to stocks. Fidelity Freedom 2025 Fund (FFTWX) invest 64% in domestic and 11% in international equities.

Foreign Investment & ADR

It is a good practice to own some foreign stocks thus lowering your risk with diversification and increasing your return. Investors still need to do their homework well on any country and company in which they wish to invest. However, ready access to such research is sometimes very hard to get. Lower dollar in recent months have been favorable for some of the stocks, but if the dollar starts strengthening itself for an extended period, investors may find themselves in troubled water.

American Depository Receipts (ADR) have been a popular investment tool in recent months. The bulk of these listings are from Europe, though emerging markets are increasing in representation. ADRs from China and India have been very popular and successful investments. We can tell you so many names which have consistently produced good return, but, as you know, we always hesitate several times before investing in any individual stock.

If you think it is too tough to do research and keep track of these foreign companies, our suggestion is to go with one of the Exchange-TradedFunds (ETF) that track U.S. ADRs. The BLDRS funds, offered by Nasdaq and the Bank of New York, include BLDRS Emerging Markets 50 ADR Index (ADRE) , BLDRS Developed Markets 100 ADR Index (ADRD) , BLDRS Europe 100 ADR Index (ADRU) or the BLDRS Asia50 ADR Index (ADRA).

Weekend Commentary

U.S. light crude oil for December settled at $57.80 a barrel on the New York Mercantile Exchange yesterday. That was good news for consumers and the market but not for oil stocks (The Amex Oil index lost 3.4% -- down 32.97 to 944.79 -- with all 12 of its components dragging down).

The dollar gained versus other currencies, remaining near two-year highs against the euro and yen.

Gold rose 20 cents to settle at $467.70 an ounce. Read our Monday's posting on Gold.

The 10-year Treasury note yield, the common reference for longer-term mortgage rates, neared its high of the year at 4.68% reached on March 23. It drifted below that mark this week. Yesterday's bond rally lowered the yield on the 10-year note to 4.56% from 4.65% late Wednesday. Bond prices and yields move in opposite directions.

The benchmark 30-year fixed rate has risen without pause in 9th straight week. It averaged 6.36% in this week. That's up from 6.31% last week and 5.76% a year ago.

The average for a 15-year fixed rate mortgage this week was 5.89%, up from last week's 5.85% and last year's 5.16%.

Short-term adjustable-rate mortgages (ARM) remain at their highest since early in 2002. One-year Treasury-indexed ARMs averaged 5.12% this week, up from 5.09%. At this time last year, the one-year ARM averaged 4.16%. Five-year Treasury-indexed hybrid ARMs averaged 5.81% this week, up from last week when it averaged 5.76%.

[Mortgage rate source: Freddie Mac weekly report]

Everbank's CD

Foreign Currency CD? Never heard the name? That's a rather new kind of investment vehicle devised by Everbank based in Jacksonville, Florida. Certificate Deposits or CDs are usually referred to as a safe haven in the ever-changing world of investment and are quite popular with retired people who do not wish to take a chance with their hard-earned money at a late stage of their life.

All you need to do in CD investment is just putting your money in for a fixed term, earning a set rate of interest and knowing exactly how much you'll get back at the end of the term. Everbank CDs do not fall in this stereotype. These CDs could pay you back much more or much less. That's because the Everbank CDs are bets on the value of the dollar. At the time of purchase, you select an investment amount ranging from $2,500 to $20,000 and also pick the currency or a mixed bag of currencies that you want to invest in. Everbank then purchases government bonds issued by the country or countries of your choice. These bonds pay a set rate of interest, but the real return or loss comes from the exchange rate.

At the time of maturity, if the currencies you bought are comparatively stronger than the dollar, you can make much more profit than just the interest. As we may be aware, in recent months, some world currency CDs have paid 20 to 30% annual returns. On the other hand, if, during the investment period, the value of the dollar rises, you could end up with less than what your initial investment was.

We feel, if you are interested in forex or foreign investment, it's better to do that directly through foreign currency trading or by buying foreign stocks, ETFs or mutual funds. Everbank CDs sound too risky to us.

Construction Loan

You can take construction loan for building your home from ground up or to perform some major upgrade. Unlike usual mortgage loans, construction loans are treated as story loans, which means that the lender has to know the story behind the planned construction before they issue
a loan to you. That is the reason why it's not going to be as standardized as mortgage loans which are underwritten to Freddie Mac or Fannie Mae guidelines.

Construction loans typically require interest-only payments during construction and become due upon completion. Completion for homeowners means that the house has its certificate of occupancy. Often, getting approved for a construction loan can be tricky. In many cases, two loans are required--one for construction and one for permanent financing. Usually you will have to pay closing costs on both loans, not to mention the extra paperwork, time and hassle involved. That is why many borrowers opt for single-close Construction-to-Permanent Loan that combines both construction and permanent financing into one loan.

Another variable in construction loans is how much of the project-cost the lender is willing to lend. If you already own the land, then that can be considered as equity on the loan and gives you lot of advantages.

Gold !

Gold had a very good run up in summer. On 11th October it went as high as 477.20$ an ounce. That was a 11.8% gain from the level of$426.9 on May 11 when we advised our readers to accumulate Gold. But since then it has started coming down and whenever it's going up it's finding new lower peaks. On Friday Gold price closed at 455.10$.

We do not recommend buying Gold at this point. Whatever strength Gold will find now would have some seasonal effects behind that from the typical pre-christmas buying spree from jewelry manufacturers. But at some point of time and most probably before the new year starts we can expect the per-ounce price to ease back to a level of $440. But there is a possibility that it might challenge $500 again in 2006 summer and fall.

There are a few reasons that'll keep Gold price aloft in months to come. One is limited future mine suply and another is growing demand from India and China. Yet another reason is the huge US trade deficit and budget deficit which might create a very significant problem for the dollar over the long haul. In the short term the inflation risk from higher oil and commodity price would also work in favor of a high Gold price.

Our point is -- with changing political and economic scenerio it's very hard to do market timing but considering various factors that we can see, it's a good idea to hold some Gold in your portfolio (preferably thru streetTRACKS Gold shares ETF -- Symbol: GLD). If the price goes down to $440 level or lower, it would be good to purchase some more with a long term view.

Weekend Commentary

On Tuesday the Federal Reserve raised its short-term lending target for a 12th time since June 2004, taking it to 4%, its highest since mid-2001 and indicating that more hikes can be expected in next meetings. The Fed continues to view inflation as the biggest risk to the economy.

As a result treasury yields rose. Yesterday the 10-year government note was down 10/32 at 96 24/32, shaving more than $2.50 per each $1,000 worth of securities at face value. The note was yielding 4.65% and neared the year's high of 4.68% set in late March.

The 30-year loan had an average rate of 6.31% for the week through Nov. 3. This is the highest since it reached 6.32% in mid-June 2004. The rates were at 6.15% last week and 5.7% a year ago.

The average for the 15-year fixed-rate mortgage was 5.85%, up from last week's 5.69% and last year's 5.08%.

One-year Treasury-indexed Adjusted Rate Mortgage (ARMs) averaged 5.09%, up from last week's rate of 4.91%. This is the highest since March 29, 2002, when it was 5.11%. At this time last year, the one-year ARM averaged 4%. Five-year Treasury-indexed hybrid ARMs averaged 5.76% this week, up from last week when it averaged 5.63%.

Light sweet crude for December delivery was recently down 68 cents at $61.10. It closed at $61.78 a barrel on the New York Mercantile Exchange Thursday, up $2.03, as prices made their biggest one-day gain in over six weeks.

Yesterday the dollar pared gains before bouncing back. It was flat against the euro at $1.1941 after turning lower on the report. Against the Japanese yen, dollar edged up 0.2% to 117.57.

Yesterday Gold futures saw early gains fade. The benchmark December contract was last down 30 cents at $461.60, off a morning high of $465.70.

[Mortgage information source: Freddie Mac weekly report]

CD Investment Update

On Tuesday Federal Reserve increased the short term interest rate by 25 basis point to 4.0%. With rising inflation and oil price close to $3 a gallon, we can expect the Fed to continue this hike in its next two meetings to be held on December 13 and January 31 respectively.

Over the last few months we observed that the short-term yields on money market funds and CDs (Certificate of Deposits) also continued to benefit from these hikes in Federal Reserve's rate and now even long term rate is also trying to catch up as we are seeing in long-term mortgage rates that underwent continuous hike in last 7 weeks (see last Friday's posting).

With more possible rate hikes in line, it is a wise policy not to lock in your cash in long-term CDs. Short-term CDs, especially with 6-month maturities seem to be the best opportunity to take advantage of rising yields. If you donot even want to lock in your money, you may still enjoy a good 4.0% APY by putting it in NY-based bank Emigrant-Direct by simply opening a savings account. No minimum deposit is necessary. The Ing-direct bank also offers similar account but with 3.4% APY.

If you will still consider a 1-year CD, the 'Raise Your Rate' CD offered by IndyMac Bank could be a good choice. You need to put minimum $5000 and the yield is 4.5% APY. Advantage is: They allow One-time rate increase feature which may be exercised by you at any time during the term whenever you feel it is prudent to do so. The entire balance will begin earning the higher rate (available at that time) from the day following your request. The original maturity date will remain unchanged.

Few Points on Credit Cards

Usually credit card issuers are generous to consumers with high credit
scores. If you have high score, you may negotiate with creditors for better
rates. If your credit score is not high enough now to get better rates, you
may continue to pay your bills consistently, bide your time, and ask again
after your credit rating has improved. Remember, if you do not ask, you
do not get it.

Your local Credit unions may often offer charge cards with favorable
terms. To see whether you're eligible to join any credit unions, visit
the Credit Union National Association.

If you have a complaint against a credit-card issuer, you may contact your
state attorney general. Visit the website of National Association of
Attorneys General to locate your state attorney general. You may also
complain to the Office of the Comptroller of the Currency (OCC).
Visit OCC's consumer page.

FolioFn's ETF Portfolio

Pentagon Federal Credit Union represents 650,000 active and retired members of the armed forces. The credit union has $8 billion in asset. Now the online discount broker FolioFn Inc. is providing its investment services to the Union offering nine ready-made "mini folios" of exchange traded funds (ETFs) tailored to an investor's tolerance for risk and investment goals, the company said.

The FolioFn long-term aggressive mini-folio, for instance, puts 90% in stocks and 10% in less risky bonds. Specifically, the portfolio has 30% each in Vanguard Total Stock Market Vipers (VTI) and iShares Russell Midcap Index (IWR); 15% each in the broad-international stock iShares MSCI EAFE (EFA) and iShares Cohen & Steers Realty Majors (ICF) ; and 10% in iShares Lehman Aggregate Bond (AGG). The short-term conservative model stashes 90% in the bond ETF and 5% each in the U.S. total-market and midcap funds.

The portfolios are more customized than so-called target-date funds, which only take into account an investor's projected time until retirement. Taking one example, a 25-year old might be saving up for the short term to buy a house, while another person the same age may be investing with longer-term retirement goals in mind. To determine their investment profile, members of the Pentagon credit union complete a short questionnaire before selecting one of the mini-folios. From there, participants can own a mini-folio for $5 a month with no minimum investment. The $5 charge covers five trades a month, although it doesn't include the fees charged by the underlying ETFs. The average expense ratio of the ETFs in the long-term aggressive mini-folio, for example, is 0.23%.

FolioFn's subscription service available to the public charges investors $19.95 a month, or $199 a year, which includes 200 monthly trades and access to "ready-to-go folios" of stocks and ETFs that can be further customized.