Happy 2006

This is our last posting of 2005. We wish all our readers a very happy and safe new year! We sincerely thank all of you for your continuous support.

Yield Curve & Mortgage

What is 'Yield curve'? Simply Plot today's yields for various maturities of U.S. Treasury bills and bonds on a graph against years of their term and you get today's yield curve. A normal curve is one that increases from shorter to longer term -- which agrees with our intuition of what the yield should be.

On Tuesday, however, the bond market saw the yield curve invert between the key 2-year and 10-year maturities for the first time in 5 years [To look at yield curves, visit StockCharts.com. Today's curve is staying normal] . As you know by now, an inverted yield curve occurs when short-term bonds pay higher interest rates than longer-term maturities.

Obviously, this happens when long-term investors decide to settle for lower yields even though the short-term investment is so much less risky, thinking that rates — and the economy — are going even lower in the future. They're betting that this is their last chance to lock in rates before the bottom falls out.

Many experts believe it's signaling a slowdown in growth. They have history to support that observation: This unusual event has foreshadowed the last six recessions, although not every instance of inversion was followed by recession. This has influenced many aspects of the financial world this week -- stock trading, economic projections and financing decisions at the nation's banks that find themselves challenged by higher short-term borrowing costs and less payout on longer-term loans. It's highly likely that this sentiment was instrumental in the fall of both Dow and Nasdaq in this last week of 2005.

And it influenced mortgage market too. Here are details of mortgage market:
According to Freddie Mac's weekly report, the 30-year fixed rate averaged 6.22%, down from 6.26% last week. Last year at this time, the 30-year averaged 5.81%. The 30-year rate will average 5.87% in 2005, nearly in line with 2004's 5.84% average. The average 15-year fixed-rate loan was 5.76%, down from 5.79% a week ago. The rate compares to 5.23% at this time in 2004.

Five-year Treasury-indexed hybrid ARM (Adjustable Rate Mortgage) averaged 5.79% this week, down from last week's 5.82%. One-year Treasury-indexed ARMs averaged 5.15%, down from last week's average of 5.22% - about 1% higher than what it was one year back.

PRF: New Style Index

PowerShares Capital Management was on a flow throughout 2005. One after another .. they continued to launch new and innovative Exchange Traded Funds (ETF). On Monday they introduced another ETF that challenges traditional notions on index investing.

Its name is PowerShares FTSE RAFI U.S. 1000 Portfolio (PRF) and is listed on the New York Stock Exchange. This newest ETF from Powershares is based on a controversial new "fundamental" indexing strategy pioneered by Robert Arnott, chairman of Research Affiliates and editor of the Financial Analysts Journal. In 2004, Arnott published an academic paper that was critical of most traditional benchmarks prevalent in the indexing market, which weigh companies by their market capitalization. Arnott's opinion was that indexes formed in this way get over-exposed to overvalued companies, especially during periods of 'irrational exuberance' (thanks, Mr. Greenspan for this phrase). The prominent example is the S&P 500 index which, during the bubble days of late 1990s, got dominated by highflying growth and technology companies whose stocks were driven by some sort of madness. When rationale came back to investors, the index (which thus far was considered a safe heaven) suffered quite a lot.

PRF, on the other hand, tracks the performance of the top U.S.-based companies whose fundamental factors (i.e. sales figures, price-to-earning ratio, cash inflow, dividends) -- would determine the weighting in the index.

At the same time PRF has kept a low expense ratio of only 0.6%. On Monday it made its debut at $50. Yesterday it closed at $49.63.

Ethical Will

Well ...you have finished your financial planning and now you also have a legal will and a living will. Great! But not yet! They are not going to let you finish that 'what to do' list. From their bag comes out another estate planning tool -- the so-called ethical will.

Lawyers and financial advisers are seeing more and more interest in ethical wills, documents that stipulate the general life guidenes you'd like your heirs to follow. If you want your kids to attend college, if you want your kids to avoid drugs or to be religious, you may scribble your wish into this. Ethicalwill.com is a site that can give you more information about this.

The concept of ethical will is not new. The Hebrew Bible first described ethical wills 3000 years ago (Genesis Ch. 49). References to this tradition are also found in the Christian Bible (John Ch. 15-18) and in other cultures.

Ethical wills have no legal validity but its business is gaining more and more ground throughout USA. Of course, imparting a legacy of values doesn't come cheap. Consultation fees average around $350. So, we think a much better option would be to avoid the fee and simply tell your heirs about your values by spending some quality time with them -- it's a much more rewarding option. Verbal communication is always better than written document, especially if the latter does not have any legal value.

Permanent Insurance

Continuing our weekly posting on life insurance ....
[Our past postings: Life Insurance in general, Term Insurance]

Our today's topic is Permanent Insurance which includes whole life, universal life and variable universal life policies. You may consider these policies, if you need protection for life but also want to build cash value on a tax-deferred basis for a variety of financial goals. The Whole life policy have been the most popular form of permanent insurance but universal life and variable universal life have increased in popularity in recent years because of the increased flexibility they offer to policyholders. Today we discuss only Universal Life policies.

If you want permanent insurance, but have many financial commitments that require flexibility in meeting premium payments--such as mortgage payments, paying down debts or funding a child's college education--universal life (UL) may be for you.

With universal life, you control the amount and frequency of your premium payments and can choose between two death benefits options (within certain limits). The first, the level death benefit option, simply matches the policy face amount (the amount stated in the policy that's paid in case of death). The second, the increasing death benifit option, equals the face amount plus any accumulated policy cash values.

Policyholders can take loans against these cash values at any time. You may also take withdrawals (district from loans), generally after the policy's first year. Obviously, since cash values accumulate tax deferred, earnings, if any, become taxable only upon withdrawal. (Remember, though, that any withdrawals and/or unpaid loans will reduce the death benefits.) These features make Universal Life attractive for the long-term accumulation of assets which can then be used for different financial goals.

Home & Mortgage

The Office of Federal Housing Enterprise Oversight reported yesterday that the average home prices rose 12% in the 3rd quarter compared with a year ago, down from the 13.4% year-over-year rise in the 2nd quarter. Average prices rose 2.9% in the 3rd quarter vs. the previous quarter.

Inflation, as measured in a consumer-spending report released Thursday, was up 1.8%, excluding food and energy costs, in the past 12 months, the smallest gain since March 2004. This could be a factor for the decline in long term fixed rate morgages this week.

According to the weekly report from Freddie Mac, the 30-year fixed loan averaged 6.26%, down from 6.3% last week. Last year at this time, the rate averaged 5.75%. The average for the 15-year fixed-rate mortgage was 5.79%, down from last week's 5.85% but up from 5.18% at this time in 2004.

On the other hand, Adjustable-rate mortgages (ARMs) which are quite sensitive to Fed's short-term rate hike, were higher in the latest week after stabilizing in the past few weeks. The 5-year Treasury-indexed hybrid ARM averaged 5.82% this week, up from last week's average of 5.78%. The 1-year Treasury-indexed ARMs averaged 5.22%, up from 5.15% last week and 4.17% last year.

With rising interest rate, ARM is slowly but surely loosing its ground in the refinancing market, thus taking away with itself the flurry of activities we observed there in last few years.

Travel & Dollar

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.

PEY & DVY: For Dividend

Barclays Global Investors (BGI) is a big powerhouse in the business of Exchange Traded Funds (ETFs). In November 2003 they launched an ETF : "DVY". Its performance benchmark is the Dow Jones Select Dividend Index which invests in 50 of the highest dividend paying stocks (non-REIT) in the Dow Jones U.S. Total Market Index. DVY does not invest in REITs (real estate investment trusts), because of the unpredictable nature of their dividend distributions.

A company can be considered for the index if it has been paying dividends for five years and has a high payout ratio (dividends in relation to earnings). The reduction of tax (to only 15%) on dividend income by Bush administration fuelled a strong growth and popularity of this ETF among both individual and institutional investors. In our past postings we discussed another such ETF: "PEY", PowerShares High Yield Equity Dividend Achievers Portfolio. PEY seeks investment results that, before expenses, generally correspond to the price and yield performance of the Mergent Dividend Achievers 50 Index. The Index is comprised of the 50 highest yielding companies with at least 10 years of consecutive dividend increases.

The Wheaton, Illinois-based PowerShares is rather a new player in ETF world but this year they have launched quite a number of new ETFs (Many of our past postings discussed their products). PowerShares' PEY could produce a higher yield, although with 50 stocks in its portfolio, it has more risk from less diversification as compared to 100-stocks' portfolio of DVY. Another difference in investment strategy is: PEY weights stocks by dividend yield, whereas DVY allocates its assets among stocks based on the absolute size of the dividend.

Kids' Space

Many of us ignore the importance of teaching ideas and concepts of personal finance to our kids but it is a crucial part of their development and growing up as a responsible individual. If they cannot manage their personal savings and planning for their future, just a good education may land them on a good job but they may fail to utilize that advantage of having a good job.

There is no hurry, of course. But you may slowly start ... probably as they enter Middle School or may be during this vacation .... The following websites may assist you in your endeavor:

Moonjar : Moonjar's moneyboxes were created as a tool for children and families to incorporate strong financial values and practices into their daily lives. Moonjar moneyboxes are used in homes and schools around the world.
RichKidSmartKid : (Provides a wide range of tools for such lessons)
KidsBank : (A good internet resource for learning about money and banking),

If you'd seriously consider having professional help in teaching your child about money, you may enroll them in local finance or business camps for kids at TheMoneyCamp which offers programs for kids and for adults at several locations nationwide. For an Internet-based "camp," visit TeachingKidsBusiness whose sessions are based on the book "Kids' Guide to Business" by Jeff M. Brown.

Hi Yield Savings Account

In past few months, we have seen rise in rates of term deposits, as Fed continued rising its short-term interest rate. Still we feel it is not time yet to go for purchasing a long-term (more than 6 months) Certificate of Deposit (CD) and lock in your money. Rather than doing that, you may put your money to work in one of the following accounts with lucrative rates and enjoy high yield and security of your cash, while always getting access to it:

HSBCdirect.com is giving 4.25% in Money Market Account with minimum deposit of $1 only.
PayPal.com's money market account currently has a yield of 4.12% with no minimum.
Emigrant-direct's rate (which was leading until recently) for savings account is 4.00% with no minimum.
MyBankingDirect is giving 4.10% in Money Market Account with minimum deposit of $5000.
Ing-Direct's rate is 3.75% with no minimum.
MetLife is giving 3.50% in its Money Market Account with minimum deposit of $5000. They are also giving $50 bonus for new accounts.
AmboyDirect is probably trying to give high interest but its conditions (e.g., initial $5000 earn no interest, etc) are so complicated and confusing that we felt it's better to avoid it. If you wish to try to understand what they are trying to say, please check it yourself.

[Note: MyDollar has no connection whatsoever with the above-mentioned banks. We are giving such information only because we think this would be useful to our readers]

Weekly Commentary

Today the Commerce Department reported that the U.S. current account deficit narrowed by 1.0% to $195.8 billion in the 3rd quarter, as companies collected payments from foreign insurance companies for hurricane-related damage. Economists did not expect this. This is the 2nd straight quarter of a narrowing deficit after the current account reached a record $198.7 billion in the 1st quarter. Still the deficit amounts to 6.2% of gross domestic product and remains to be a cause for alarm for the future of our economy.

Gold futures are on the rise once more, last trading up $1.50 at $508.10 an ounce. On Monday, the contract touched a 25-year high of $543 an ounce (a 27.2% gain from May 11 when we advised our readers to accumulate gold), rallying on strong physical demand and inflation fears.

The dollar weakened against the euro which was quoted up 0.2% at $1.1988. The dollar, which has endured a decline this week due to strong signals from the Federal Reserve that its program of rate increases is nearing an end, last was down 0.2% at 116.16 yen.

The 30-year fixed-rate mortgage averaged 6.3% for the week ending Thursday, down from last week's 6.32%. Last year at this time, the 30-year rate averaged 5.68%. This is the 3rd consecutive week of decline for this mortgage rate. The average for a 15-year fixed-rate mortgage this week was 5.85%, down from last week's average of 5.87% but higher than last year's 5.11%. Adjustable-rate mortgages (ARMs) edged lower as well this week. The 5-year Treasury-indexed hybrid ARM averaged 5.77% this week, down from 5.78%. One-year Treasury-indexed ARMs averaged 5.15% this week, down slightly from last week when it averaged 5.16%. At this time last year, the one-year ARM averaged 4.18%.
[Source of mortgage data: Freddie Mac's weekly mortgage report]

Credit Card: Survey Says ...

In its 2005 credit card survey, the San Francisco-based nonprofit advocacy group Consumer Action examined the pricing policies of 146 cards from 47 issuers. Here are some findings which might interest you:

Annual Fees: The majority of cards (68 percent) don't charge annual fees. Of those that do, the average is $43.27.
Late fees: About 95% of cards carry late fees. The average late fee is $27.46.
Penalty Rate: 79% of issuers impose a penalty rate when cardholders are late with their payments. The average penalty rate has gone up to 24.23%, from 21.91 percent in 2004.
Over-the-limit fees: Again, 95% of cards have them and the average is $30.18, with a high of $39.
Bounced check fees: If your payment check bounces, 89% of banks surveyed will charge you an average fee of $28.61, with a high of $38.
Universal Default Rates: Even though you have a perfect record with a credit card company, your rate may get jacked up because something happened in another area of your financial life (like falling credit score, late payment on a loan or other obligation, bouncing a payment check on another account, too much debt, too much available credit, getting a new credit card, or even inquiring about a car loan or mortgage). You get to pay what is called universal default rate. About 45% of card issuers impose a universal default rate. The rates can be as high as 35% (at
Merrick Bank). The 2nd highest rate of 29.99 percent is imposed by Citibank, Bank of America and Providian.
Rewards: When it comes to rewards – e.g., airline miles, cash back, points for merchandise or gasoline -- the number of cards offering them has increased to 36% from 23% last year.

PXN: Nanotech Portfolio

Nanotechnology (Read the posting in our sister website, 2Physics) is the talk of the day in scientific world but it could not yet gather enough momentum in financial market. Most of the stocks of the Nanotech industry lack a solid financial guideline and good level of visibility ahead and so most of these are too volatile and do not seem to be good bets for average investors.

Powershares ETF (Exchange Traded Fund) , PXN may be a good choice for those who are keen to be in this field and reap the harvest after a few years, while averaging out risks and gains of investing in individual companies.

The ETF is based on the PowerShares Lux Nanotech Portfolio which seeks to replicate, before fees and expenses, the Lux Nanotech Index. The index tries to identify a group of companies involved in developing, manufacturing and funding nanotechnology applications. Companies may be involved in one or more stages of Lux's nanotechnolgy value chain frameworks:
Nanomaterials, Nanointermediates, Nano-enabled Products and Nanotools. The modified market-cap portfolio is rebalanced quarterly and reconstituted quarterly.

Yesterday PXN closed at $17.43.

Term Insurance: 2 Types

From last Monday we started our weekly posting on various kinds of Life insurance because we felt that many of us just do the 'buying' part of the life insurance but continue to carry the misconception that we are well protected. Today we discuss 2 different types of Term Insurance.

Annual Renewable Term: These policies provide a level death benefit you can renew each year (until about age 80) without a medical exam. Annual renewable term insurance is best suited for people with short-term coverage needs because the premium generally increases each policy anniversary. Despite this, annual renewable term is normally the most affordable type of life insurance.

Level Term: These types of policies provide a level death benefit, and may be suitable if you have a young family and need affordible protection over a set number of years. Unlike annual renewable term, where premiums increase annually, level term premiums remain the same throughout the level premium period. Typical terms periods include 5, 10, 15, 20 and 30 years.

Fed & Mortgage

Federal Reserve's next meeting is on next Tuesday and we can expect the Fed raising its target lending rate to 4.25% from 4%.

According to Freddie Mac's weekly report, the average mortgage rate rose this week after declines in the previous two weeks. This is possibly in anticipation of Fed's next move.
The 30-year fixed loan averaged 6.32% in the week through Thursday, up from last week's 6.26%. Last year at this time, the 30-year rate averaged 5.71%. The average for the 15-year fixed-rate mortgage this week was 5.87%, up from 5.81% last week and 5.14% a year ago.

Short-term ARMs (adjustable-rate mortgages) have been rising in lockstep with the Fed's 12 rate hikes since June 2004. Five-year Treasury-indexed hybrid ARMs averaged 5.78%. The one-year ARM averaged 5.16%. This is at more than a full percentage point above where it stood one year back. ARM was a main factor in fueling the real estate market that had a great run in recent years. With its rates increasing and approaching the Fixed-rate, we can expect declining activity in all sectors of real estate market -- home purchase, refinancing etc.

According to Freddie Mac economists, the house-price appreciation is returning closer to its historical average over the next few years, leaving behind the double-digit gains of recent years. National price appreciation will average just over 11% in 2005, matching 2004. It will grow by 8.3% in 2006 and slow to 7.6% in 2007.

Value Line ETF

Powershares is a relatively new player in ETF market but every month they are adding new Exchange Traded Funds (ETF) in their product line. Yesterday they inaugurated another called the PowerShares Value Line Timeliness Select Portfolio (PIV) which will enable individuals to invest effortlessly in the stocks ranked highly by the Value Line Investment Survey.

Value Line constructs its Timeliness rankings so that there are always 100 highest-ranking stocks in its portfolio. Every week it makes changes to this group. So an individual trying to follow exactly the Value Line ranking system would need to construct a big portfolio and undergo lots of transactions.

PIV will be constructed out of the 50 stocks from this group of 100 that also have Value Line's highest "safety" and "technical" ranks. Furthermore, PIV's portfolio will be updated quarterly. The less number of stocks take away some of the advantages of diversification but less frequent transactions will add more value to PIV by keeping its expense ratio low.

PIV ended its first day +0.01 up at $15.60.

New Retail Sector ETF

Despite high oil price, the holiday shopping season started with a bang during Thanks-Giving weekend. Walmart and others are reporting higher level of sales than last season. At this time some of you may like the idea of investing money on stocks of retail sector. The best time to invest in retail sector is in summer but still there's time. And if you are the one who does not believe in individual stocks and are always looking for diversification, an Exchange Traded Fund (ETF) might be just right for you.

The Wheaton, Illinois based PowerShares Capital Management introduced a new retail-sector ETF in October. It is called PowerShares Dynamic Retail Portfolio (PMR) and it departs significantly from traditional index-based mutual funds of this sector. It attempts to identify top-performing stocks by screening for fundamental growth, timeliness, valuation and other risk metrics. Its top holdings from the consumer discretionary sector include J.C. Penny Co. Inc. (JCP) , Bed Bath & Beyond Inc. (BBBY), Gap Inc. (GPS) and Nordstrom Inc. (JWN). The Kroger Co. (KR) is one of three consumer-staples holdings in the fund. It also holds three industrials companies including Adesa Inc. (KAR).

No one stock accounts for more than about 5% of the portfolio -- which is a very good buffer against the uncertainties associated with all individual stocks of this sector. Despite being an active portfolio, it has a low expense ratio of only 0.60%. Yesterday it closed at $16.27.

Life Insurance

Life Insurance is an essential part of our life but many of us are completely unaware of its pros and cons. We pay our premiums and feel secure but we do not find time to check exactly what benefits we are entitled for. Starting from today, every week we will have a posting on 'insurance' and we will try to cover various aspects of it.

There are two basic types of life insurance. Term insurance protects you for a limited, specified period of time, while permanent insurance combines a death benefit (the proceeds the beneficiary of a life insurance policy receives upon the death of the insured) with a savings component. Especially during your younger years, term insurance generally offers the higest death benefit for the premium. It also allows you to convert your coverage into payment insurance during what's known as the conversion period.

Permanent insurance comes in various forms, including whole life (also known as ordinary life), universal life, variable universal life and several kinds of survivorship life. All of these policies combine a death benefit with an accessible savings, or cash value, component that you can use for a variety of financial goals. Because permanent insurance is designed to provide lifelong coverage, it usually requires higher initial premium than do term contracts for the same amount of coverage.

Frequently, both permanent and term life policies offer an accelerated benefits option that enables you to receive your death benefit early if you become terminally ill, and a waiver of premium rider, available at an additional cost, which automatically pays your premium if you become totally disabled. (certain restriction apply to both of these options).

We will elaborate on these various kinds of insurance products in our future postings.

Weekend commentary

Since July the payroll expansion has not been better than today's report on job growth. It has added 215,000 new jobs. This is a great news to retailers for the upcoming holiday season. The unemployment rate was steady at 5%.

Today Gold for December delivery fell $1 to $501.50 an ounce on the New York Mercantile Exchange, after tapping an 18-year high of $504.50.

Today the U.S. dollar turned lower (by 0.1% at 120.33) against the Japanese yen, falling sharply off its highs, on reports that Treasury Secretary John Snow said the Group of Seven will discuss the weakening yen at their meeting this weekend. Since the end of August the dollar had gained about 9% vs. the yen.

The benchmark 30-year fixed-rate mortgage fell to 6.26% from 6.28% a week ago. This is a decline for the 2nd week. Last week's decline was the first in three months as rates had risen up to that point in step with rising Treasury yields. The 15-year fixed loan was unchanged at 5.81%. The one-year ARM (treasury-indexed adjustable rate mortgage), rose to 5.16% from 5.14%. The five-year hybrid ARM increased to 5.76% from 5.75%. [source for mortgage data: Freddie Mac weekly report]

One must note the important trend here -- the gap between long term fixed rate and ARM is reducing thus leading to a declining popularity of ARMs among home-buyers and owners.