We are taking a break

We regret that due to unavoidable reasons, we need to take a break. We'll not have regular weekday postings in next two weeks. Regular postings will resume on April 10th. In the mean-time, you may go through our past postings on various topics of interest. We suggest that you use the search box on top to search for past postings on topics of your interest (e.g. 'mortgage', 'ETF', 'Gold', etc...)

Mortgage Rate Dipped

Long term mortgage rates dipped for second consecutive week as several market indicators this week seemed to point to less of a threat of inflation. The short-term rates, however, rose in reaction to a recent speech by Chairman Bernanke, of the Federal Reserve Board, that hinted at even further rate hikes this year. The Federal Open Market Committee (FOMC) is meeting next week (Monday and Tuesday) and will probably hike the short term rate by 25 basis points.

According to Freddie Mac's weekly report, the benchmark 30-year fixed rate mortgage average fell in this week ending Thursday to 6.32% from 6.34%. Last year at this time, the 30-year FRM averaged 6.01%. The 15-year loan also fell slightly, to 5.97% from last week's average rate of 5.98%. A year ago, the 15-year rate averaged 5.56%.

The 5-year Treasury-indexed hybrid adjustable-rate mortgages (ARMs) averaged 5.96% this week, with an average 0.7 point, up from last week when it averaged 5.93%. A year ago, the 5-year ARM averaged 5.36%. The 1-year Treasury-indexed ARMs averaged 5.41% this week, with an average 0.7 point, UP from last week when it averaged 5.37%. At this time last year, the one-year ARM averaged 4.24%.

India Going Strong

Today U.S. stocks ended higher (Dow Jones Industrial Average ended at 11317) as stabilizing long-term interest rates, strong Morgan Stanley earnings and a labor deal at General Motors Corp. lifted the Dow Jones Industrial Average to its best level in nearly 5 years.

It is also noteworthy in these days of global investment strategy that only yesterday at the opposite end of the world the Indian Stock Exchange benchmark Sensex also touched an all-time high of 11,001.

India is enjoying a great bull market for quite some time now. It only took 29 trading sessions to reach the 11,000-mark from 10,000 level, the shortest possible time for covering 1,000 points. Positive budget proposals, robust economic growth, expectations of higher than 8% GDP growth and last but not the least, first roadmap to be announced by the Reserve Bank of India (RBI - equivalent of our Fed) on capital account convertibility by July'2006, cleared the decks for the Sensex to cross the 11,000-mark.

The unprecedented bull run started on May 6, 2003 when the Sensex was at 3,001.21 level. In took just 67 trading sessions to cross the 4,000 mark and touch 4,026.27 points on August 19, 2003. We covered the timeline on the rise of the Sensex through Indian stock market history in our past posting of November 29, 2005 when Sensex touched 9000 mark. The Sensex reached the 10K-mark on February 7, 2006 -- within about 2 months and 1 week.

The Bombay Stock Exchange (BSE) Sensex comprises of these 30 stocks: ACC, Bajaj Auto, Bharti Tele, BHEL, Cipla, Dr Reddy's (RDY), Gujarat Ambuja, Grasim, HDFC, HDFC Bank (HDB), Hero Honda, Hindalco, HLL, ICICI Bank (IBN), Infosys (INFY), ITC, L&T, Maruti, NTPC, ONGC, Ranbaxy, Reliance, Reliance Energy, Satyam, SBI, Tata Motors (TTM), Tata Power, Tata Steel, TCS, and Wipro (WIT).

The Companies with names in red ink are traded in USA as American Deposit Receipt (ADR). All of them had great performance since their launch in US market.

Dollar Rising

The dollar moved away from a recent 7-week low versus the euro and firmed against other currencies on Tuesday after Federal Reserve Chairman Ben Bernanke offered upbeat comments on the US economy. Bernanke said late on Monday the economy should keep growing at a brisk pace even if the housing market slows, but the dollar failed to receive a significant boost as Bernanke offered few new clues on how much more the Fed would raise rates.

US producer price index figures, due tomorrow, are expected to be down 0.2% on the month in Feburary. The dollar was up around a quarter percent at $1.2137 per euro, off last week’s seven-week low of $1.2207. It was up 0.3 percent at 1.2956 Swiss francs and up 0.4 percent at 116.75 yen. Trading volumes in Asia were thinner than usual with Tokyo markets closed for the Spring equinox holiday. The New Zealand dollar extended recent losses to hit a 21-month low of US$0.6210, bringing its loss this year to nearly 9%.

The yield curve on U.S. government debt inverted on Tuesday, with yields on two-year notes rising above those of longer-maturity debt in the aftermath of Bernanke's speech. The yield on the benchmark 2-year Treasury note rose 8 basis points to 4.726%. The yield on the benchmark 10-year note added 6 basis points to 4.713%. The price of the 10-year note fell 7/16 point to 98 5/16.

The Fed is largely expected to raise interest rates by 25 basis points again from the current 4.5% when it meets next week, but investors are now less certain rates will move to 5% in May following benign inflation data last week.

Ultrashort Funds

Ultrashort funds typically own a variety of investment-grade debt from government agencies, corporations and mortgage issuers with an average AA credit-rating. Because these bonds will mature soon, ultrashort funds are less sensitive to interest-rate movements that can badly affect longer-term bondholders. The principal of such funds fluctuate, unlike a money-market fund, but the fluctuations tend to be minor. It's a low-risk option for getting a rate higher than conventional savings account or Certificate of Deposits (CDs).

Prices of such a Bond typically fall when rates rise. Both 1994 and 1999, for instance, were punishing years for bonds. Rising rates pushed intermediate-term bond funds down 4% on average in 1994, and the group lost 1.3% in 1999. But ultrashort funds, with their ability to renew themselves, rode the rising-rate trend to post average gains of 4.4% in 1994 and 2% in 1999.

Because they offer low-risk income, ultrashort bond mutual funds should be considered along with money-market funds and bank certificates of deposit (CD) as a good option to keep your cash for a short time. Look for low expense ratio funds. A few names are: Fidelity Ultra-Short Bond Fund (FUSFX), Payden Limited Maturity Fund (PYLMX), Schwab YieldPlus Fund (SWYPX), Vanguard Short-Term Tax Exempt Fund (VWSTX).

Mortgage Rate Down

Last week the mortgage rate was pushed up when financial markets were trying to hedge against the potential build up in inflation. However, several market indicators this week seemed to point to less of a threat of inflation, and that allowed rates to drift a little lower just like it was doing throughout February.

According to Freddie Mac's weekly report, the benchmark 30-year fixed rate mortgage average fell in this week ending Thursday to 6.34% from 6.37%. Last year at this time, the 30-year FRM averaged 5.95%. The 15-year loan also fell, to 5.37% from 6%. A year ago, the 15-year FRM averaged 5.47%.

The 5-year Treasury-indexed hybrid adjustable-rate mortgages (ARMs) averaged 5.93% this week, with an average 0.7 point, down from last week when it averaged 6.03%. A year ago, the 5-year ARM averaged 5.31 percent. The 1-year Treasury-indexed ARMs averaged 5.37% this week, with an average 0.8 point, down from last week when it averaged 5.45%. At this time last year, the one-year ARM averaged 4.20%.

Retirement Funds with ETFs

Today we talk about 3 new funds from the New York-based asset manager J. & W. Seligman & Co. Inc. : Seligman TargetETFund Core, TargetETFund 2015 and TargetETFund 2025. These funds have combined two of the hottest trends in investing: exchange-traded funds (ETFs) and "target-date" retirement funds. ETFs, which are indexed baskets of securities that trade on exchanges like stocks, have blossomed into a $250 billion business in the U.S. alone. Target-Date Funds ( See our past Posting on this type of Funds ) allocate a portfolio to broad asset classes such as stocks and bonds, reducing investment risk as the retirement date approaches. Assets in these securities jumped 65% to $43.9 billion in 2004.

The Core portfolio of these Seligman funds have 55% in stocks, 35% in fixed-income, and 10% in real estate investment trusts (REITs). Within the equity allocation, 30% is in U.S. large-cap funds, 5% in midcap, 10% in international large-cap and 10% in dividend-focused funds. Seligman says the new mutual funds overcome one of the main obstacles of building portfolio of ETFs and rebalancing it over time. Although ETFs have low expense ratios, investors must pay brokerage commissions to buy and sell shares. ETFs' cost advantage is diminished when contributing small amounts on a periodic basis.

Investors will have to pay for that convenience, however. Including fee waivers, expenses for Class A shares of the three new Seligman funds are 1.09%, for example, with a maximum sales charge or "load" of 4.75%, according to the prospectus. The average expense ratio for a U.S.-listed ETF is 0.42%, according to investment research firm Morningstar Inc.

SEP-IRA for Small Business

SEP stands for Simplified Employee Pension. This is a special type of IRA plan that allows an employer to make contributions toward his or her own (if self-employed) or employees' retirement. The SEP essentially functions as a low-cost pension plan for small businesses.

The SEP-IRA enrollment process is also very simple. It's a 2-page application process. The employer needs to complete Form 5305-SEP. The employee completes the IRA investment application usually supplied by a mutual fund company or some other financial institution which will hold and manage the funds. The best part is: nothing needs to be filed with the IRS to establish the SEP-IRA or subsequently. Unlike many other retirement plans SEP does not require IRS annual returns. Any investment earnings grow tax-deferred until withdrawn.

Some other facts about SEP-IRA: Employers can contribute a maximum of 25% of an employee's eligible compensation or $44,000 (for 2006 Tax year), whichever is less. Employees are able to exclude from current income the entire SEP contribution. The money contributed to a SEP-IRA belongs to the employee immediately and always. If the employee leaves the company, all contributions also leave with the employee.

Investment in 2nd Home

Before the changes in the rules of capital gains, many people did not purchase a second home until they had sold their primary home. That was the rule of the day. That's the way they could roll over any gain and avoid a high tax bill. The changes in capital gain taxes now allow couples to pocket a $500,000 gain (For singles, it is just the half - $250,000) on that primary home.

If you want a place to vacation in now and move to later, try to locate a well-populated area with good healthcare facilities and a job market and also a good school district. You may not need the last criteria for your retired life but a good school district is always associated with greater appreciation of your home value.. Also, if you choose an income-tax free state, that can put about 10% of your income back to your pocket after you move.

Last tip: If you live in your second home at least 2 of the last 5 years, you will again be able to get the same capital gain tax break if you wish to sell. These 2 years need not be consecutive. For example, you could live in your house for a year, rent it for two, move back in for another year and rent it again the year before you sell and qualify for the tax break.

Target retirement 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.

Jobs & Mortgage

Today the Labor Department reported that U.S. nonfarm payrolls increased by 243,000 in February. Average hourly earnings increased by 5 cents in February to $16.47, up 0.3%. The unemployment rate was at 4.8%.

With all these good news for the American economy in hand, the Financial markets are beginning to think that the Fed will hike rates three more times this year, instead of two. This is putting upward pressure on mortgage rates too. The reports on stronger-than-expected gains in manufacturing and service industries are also fueling speculation on higher mortgage rates.

The long-term mortgage rates turned rather sharply up this week after 2 weeks of decline. The 30-year fixed rate has reched its highest level in over two and a half years. According to Freddie Mae's weekly report, the 30-year mortgage had a national average of 6.37%, up from 6.24% a week earlier, and the highest level since Sept. 5, 2003 when it averaged 6.44%. Last year at this time, the loan averaged at 5.85%. The average on the 15-year mortgage was at 6%, up from last week's average of 5.89%. A year ago, the 15-year averaged 5.38%.

The 5-year Treasury-indexed hybrid adjustable-rate mortgages (ARMs) averaged 6.03%, up slightly from last week's 5.97%. A year ago, the five-year ARM averaged 5.22%. The 1-year Treasury-indexed ARMs averaged 5.45%, down from last week's average of 5.34%. At this time last year, the one-year ARM averaged 4.24%.

New Stock on the Street

photo courtsey: NYSE

Today was a historic day at Wall Street. For last 213 years, New York Stock Exchange (NYSE) was owned only by its members (Currently there are 1366 of them). After the exchange completed its merger with Archipelago, it decided to go public as NYSE Group Inc. and today it debuted in its own exchange with the ticker symbol NYX.

So, the chief executive officer, John Thain rang the opening bell today morning and was joined on the exchange's podium by NYSE Group Chairman Marshall Carter and Catherine Kinney and Jerry Putnam, co-chief operating officers. Jerry Putnam had been the chief executive of Archipelago.

At the end of the day the stock was up +15.75$ to close at $80, a gain of about 24.5%. Should you buy this stock at this level? Our advice is to avoid it for the time-being. The valuation is not clear and it seems there is lot of hype here. Many people will, of course, make money out of the volatility that would follow due to a lack of clear picture but usually these people are those who have lot of money and put only a part in this risky game (Keep in mind what John Thain said today: "As a practice, the NYSE Group won't be providing earnings forecasts to Wall Street analysts").

If you have limited resources, it's better to watch its movement from outside. You can be sure some expert managers of your mutual funds or ETFs would surely buy the stock at a well-researched opportune moment of time.

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.

Home & Mortgage

The relatively higher level of interest rates has slowed home sales in recent months, even though house prices still grew at a double-digit annualized pace during the final quarter of 2005. Nationally, home values increased 13% from the 4th quarter of 2004 through the 4th quarter of 2005, up from the 12.1% growth seen over the four quarters ended in Dec. 2004. The Mountain states showed the strongest home-value appreciation in the U.S., followed by the Pacific region.

This week the mortgage rate inched slightly lower again (this was 2nd week of decline). According to Freddie Mac's weekly report, the 30-year fixed mortgage is at a national average of 6.24%, down a little from 6.26% a week earlier. Last year at this time, the loan averaged 5.79%. The average on the 15-year mortgage, a popular refinancing option, was unchanged at 5.89%. A year ago, the 15-year averaged 5.33%.

The 5-year Treasury-indexed hybrid adjustable-rate mortgages (ARM) averaged 5.97%, up slightly from last week's 5.96%. A year ago, the 5-year ARM averaged 5.17%. The 1-year Treasury-indexed ARMs averaged 5.34%, down from last week when it averaged 5.32%. At this time last year, the one-year ARM averaged 4.14%.

Vanguard's SmallCap Fund

Vanguard, the biggest U.S. fund firm said it filed a registration statement with the Securities and Exchange Commission for an actively managed mutual fund investing in small U.S. companies. It is to be called 'Vanguard Strategic Small-Cap Equity Fund'. The mutual fund is expected to be introduced in the market in the second quarter pending regulatory approval. Computer-driven models will be used to make quantitative decisions in order to sift companies with attractive growth prospects but having good valuations.

It may be noted that small-cap stocks have consistently outperformed large-cap and mid-cap rivals with double-digit returns since the 2000 U.S. market downturn. Vanguard already offers Vanguard Explorer Fund (VEXPX) which has a market capital of $11 billion but some investors may shift their preference to the new fund now because of the large asset base of VEXPX, a fact many people point out as a cause of concern regarding the mobility of a mutual fund.

Initial investment minimum for the new fund will be $3,000. The expense ratio would be only 0.40%. Note that because of the difficulties in tracking small cap companies, usually the expense ratio for such funds is quite high. The average small-cap blend fund levies an expense ratio of roughly 1.5%, according to Morningstar Inc. But Vanguard is dedicated to follow its founder, John C. Bogle, a true gentleman who always preaches the effectiveness of keeping the expense ratio at a low level.