Fed still likely to pause at the August 8, 2006 FOMC meeting

The weak Q2 GDP report led a lot of people to switch camps and argue for the Fed to pause rather than hike at the FOMC meeting next week. I didn't think the GDP number was that weak, but I retain my position that the Fed is more likely to pause than hike.

The economy has slowed enough that additional hikes are not clearly needed.

The economy is still strong enough that another hike won't kill it or send it "spiraling" into recession.

The economy is also strong enough that even if the Fed "stands pat" and pauses, some further hikes could be needed a few more months down the road.

Although there are so many factors at work, it may be that we can simply use the price of crude oil as a "crude" surrogate for both the state of the economy and inflationary pressure. I would suggest that if crude oil pops up above $80 and stays there going into the August 8 FOMC meeting, a hike will be a done deal. On the other hand, if crude oil retreats closer to $70, a pause will be a no-brainer. Crude oil at $76 to $78 will suggest a higher probability of a rate hike. Crude at $72 to $74 would suggest a higher probability of a pause. The $74 to $76 range is outright "coin flip" territory. Certainly the decision process is nowhere near that simple, but I suspect that my simplistic model won't be too far from being accurate. There are nits such as whether to use "spot" price or front-month futures, or to use the short-term peak futures price, but "headline" or front-month futures (September) are probably close enough.

Where does that leave us today? On Friday, the NYMEX crude oil futures contract for September delivery closed at $73.24 (versus $74.43 a week ago), which is in the $72-74 "no-brainer pause" range. The peak short-term futures contract, June 2007, closed at $77.06 (versus $77.14 last week). Absent significant change this week, crude oil suggests that the Fed will feel reasonably comfortable standing pat with a pause at 5.25%. As long as crude stays below $76, the Fed can pause without too much criticism, but at $76 or higher, the Fed would be feeling the heat and opt to gain more "inflating-fighting" credibility with a hike to 5.50%.

My personal forecast is still for a pause at 5.25%, but that's with an expectation that we could still see some weakening of inflationary pressures (e.g., the price of crude oil) over the coming week. Absent any change in the economy (or oil futures), a pause at 5.25% will evolve into the likely scenario.

I would also note that Fed funds futures are also a decent indicator of what the Fed will do once we're within a few weeks of an FOMC meeting. The September Fed funds futures contract closed at 94.6700, which roughly indicates a Fed funds rate of 5.3300% ($100 minus $94.6700 divided by $100), or closer to 5.25% than to 5.50%. A pause is twice as likely as a hike. I would note that there is a lot of daily and weekly volatility in the trading of Fed funds futures, so it is possibly for the outlook to change over the coming week.

The real "action" in the August 8 FOMC announcement is the tone that the Fed will take on inflation going forward. Hike or pause, I expect the Fed to strike a strong stance on being "vigilant" and ready to pounce with great vigor if they see inflation begin to take flight.

Although much has been made about a presumed 1% to 2% "inflation target" for the Fed, the reality is that 2% to 3% is about "as good as it gets" for the kind of economy and financial system we currently have in America. Sub-2% inflation does in fact occur on occasion, but only in a fleeting manner.

My impression is that once the Fed pauses and considers monetary policy to be "stable", it will be prepared to "hold its fire" if monetary policy is roughly "neutral" (i.e., in the 4.5% to 5.75% range) and one-year inflation doesn't pop too far above 3%. That begs the question of which measure of inflation to use, but in truth it doesn't matter a whole lot. If you want to use headline inflation rather than core inflation, then you simply need to expand the range moderately (say, from 3% to 4.5%) to reflect the nature of volatility due to short-term pricing spikes (e.g., gasoline) that occur no matter what the state of the economy.

-- Jack Krupansky

PayPal money market yield up to 5.00%

The 7-day yield for cash kept in the PayPal money market fund is now up to 5.00% as of July 26, 2006, versus 4.98% last week. That compares favorably with the 28-day Treasury T-bill "effective rate" of 5.01%from the latest Treasury Bill auction (versus 4.95% last week), 5.11% effective rate for a 3-month T-bill (versus 5.05% last week), 5.26% effective rate for a six-month T-bill (versus 5.15% last week), 4.46% 7-day yield in ShareBuilder (versus 4.64% last week), 4.88% 7-day yield in Fidelity Cash Reserves (FDRXX, versus 4.88% last week), or 4.43% 7-day yield in Fidelity Prime Reserves which Muriel Siebert uses for core cash in taxable accounts (versus 4.40% last week. And PayPal does not have any minimums or crazy restrictions even for relatively small amounts of money.

PayPal is looking like a fairly interesting place to store cash for both relatively quick access and a well above average yield. Unfortunately, there are limits to how much money you can "receive" in your PayPal money market account each month.

For T-bills I quoted an "effective rate", which is a calculation of my own based on the discounted auction price for T-bills in the most recent weekly auction. Teasury gives a "discount rate" and an "investment rate" which don't seem to make a lot of sense. My "effective rate" calculation is as follows:

1. Take the auction price, or "discounted price". This is the amount that the investor actually pays to Treasury to buy the T-bill. In exchange, Treasury will return $100 to the investor when the T-bill matures.
2. Subtract the discounted price from the $100 "par price" and round to two decimal places since Treasury cannot actually return money to you in fractions of a penny. That is the "return" that you will receive upon maturity.
3. Divide that return by the discounted price. That is the return as a percentage or "percentage return" over the life of the T-bill.
4. Divide that percentage return by the number of days of "duration" of the T-bill's life, 28 or 91 or 182 days. That is the daily rate of return.
5. Multiply that daily rate of return by 365. That is the (simple) annual rate of return, which I am calling the "effective rate".

As always, please note that these cash placed in these money market mutual funds is subject the the disclaimer that:

An investment in the Fund is not insured or guaranteed by the Federal Insurance Deposit Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund.

In practice, that is not a problem at all, but it does incline me to spread my money arround a bit.

-- Jack Krupansky

The future of plastics

There is a famous scene in the classic movie The Graduate in which Dustin Hoffman's character is offered one word of career advice: "plastics." The field of plastics remains huge and will continue to be a huge part of our lives for many decades to come. But... but... the big challenge facing scientists and engineers and planners is how to redesign plastics and production processes so that plastics and related materials are not so heavily dependent on non-renewable fossil resources, particularly petroleum (crude oil) and natural gas. Plastics have been made from renewable materials in the past, but it turned out that petrochemicals had a lot of benefits as a feedstock. That needs to change, regardless of whether your reasoning is based on high oil prices, a belief in "Peak Oil", or simply a concern that we are overly dependent on the volatile Middle East. How many of us give even a second thought to tossing a plastic fork or Styrofoam box or plastic wrapper or plastic bag in the trash? But the simple fact is that every such act only adds to the future demand for production of crude oil and natural gas.

Nanotechnology also has potential for the reengineering of renewable natural materials into replacements for the plastics that we use (and overuse) today.

So, if you know anybody looking for a bright career future or who has the potential to be the kind of brilliant inventor who could kickstart a new billion-dollar industry, recycle that old advice given to "Ben" in The Graduate: "Plastics", but expand it into "reengineering of renewable natural materials as feedstocks for production of plastics".

Oh, and if you're curious about the kind of processes which could be involved, I'd offer one word: algae.There are plenty of other avenues of pursuit, but bio-engineering of plastic materials has much promise.

And if you'd like to acquire the DVD for this classic film:

Note: I do get a tiny commission if you purchase by clicking on the Amazon link (either the picture ad or the movie name in my text.

-- Jack Krupansky

PayPal money market yield up to 4.98%

The 7-day yield for cash kept in the PayPal money market fund is now up to 4.98% as of July 19, 2006, versus 4.95% last week. That compares favorably with the 28-day Treasury T-bill "effective rate" of 4.95%from the latest Treasury Bill auction, 5.05% effective rate for a 3-month T-bill, 5.15% effective rate for a six-month T-bill, 4.64% 7-day yield in ShareBuilder (versus 4.54% last week), 4.88% 7-day yield in Fidelity Cash Reserves (FDRXX, versus 4.88% last week), or 4.40% 7-day yield in Fidelity Prime Reserves which Muriel Siebert uses for core cash in taxable accounts. And PayPal does not have any minimums or crazy restrictions even for relatively small amounts of money.

PayPal is looking like a fairly interesting place to store cash for both relatively quick access and a well above average yield.

For T-bills I quoted an "effective rate", which is a calculation of my own based on the discounted auction price for T-bills in the most recent weekly auction. Teasury gives a "discount rate" and an "investment rate" which don't seem to make a lot of sense. My "effective rate" calculation is as follows:

1. Take the auction price, or "discounted price". This is the amount that the investor actually pays to Treasury to buy the T-bill. In exchange, Treasury will return $100 to the investor when the T-bill matures.
2. Subtract the discounted price from the $100 "par price" and round to two decimal places since Treasury cannot actually return money to you in fractions of a penny. That is the "return" that you will receive upon maturity.
3. Divide that return by the discounted price. That is the return as a percentage or "percentage return" over the life of the T-bill.
4. Divide that percentage return by the number of days of "duration" of the T-bill's life, 28 or 91 or 182 days. That is the daily rate of return.
5. Multiply that daily rate of return by 365. That is the (simple) annual rate of return, which I am calling the "effective rate".

As always, please note that these cash placed in these money market mutual funds is subject the the disclaimer that:

An investment in the Fund is not insured or guaranteed by the Federal Insurance Deposit Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund.

In practice, that is not a problem at all, but it does incline me to spread my money arround a bit.

-- Jack Krupansky

Will the Fed hike interest rates at the August FOMC meeting?

Yeah, that's what everybody wants to know: What will the Fed do with interest rates in less than three weeks at the August 8 FOMC meeting?

After digesting Bernanke's testimony and the latest semi-annual Fed monetary policy report to Congress, I'll offer my updated view sometime this weekend, assuming I don't spend too much time at the big Microsoft annual company picnic that runs this weekend on both Saturday and Sunday.

-- Jack Krupansky

HSBC offering savings account APY of 5.05%

HSBC Bank USA is offering an APY of 5.05% for online savings accounts, with no minimum deposit, no minimum balance, no minimum term, no fees, and it is FDIC insured. You can conveniently transfer money to and from your non-HSBC checking account and make free withdrawals at HSBC ATMs. Sounds like a great deal. Now, the big question is how to compare a 5.05% APY with rates that are quoted as "7-day yield". A 5.05% APY would correspond to an APR of 4.94% compounded monthly. How to compare that 4.94% APR to the PayPal 7-day yield of 4.95% is not clear to me, yet. It's also not clear how frequently the HSBC APY might change. I don't know how frequently the PayPal yield can change either. What I do know is that in an environment of a rising Fed funds target interest rate or at least an environment where short-term rates are rising to catch up with prior Fed hikes, money market mutual funds (such as PayPal's) will continue to rise for at least a bit longer. The trajectories of special bank rates such as the offer from HSBC are unclear. The PayPal money market is a mutual fund and not FDIC insured.

I am seeing high yields for special CD offers, but they have required terms (e.g., 7% for 7 months), and that doesn't fit my current situation where my cash is in a state of flux. Also, a lot of these specials are intriductory gimmicks and may end up being a waste of your time in the long run.

-- Jack Krupansky

Fed now a little more likely to "pause" at 5.25% in August

There was a greater amount of chatter last week that the economy was slowing and Fed funds futures are now a lot less certain about a high probability that the Fed funds target interest rate will be 5.50% after the August 8, 2006 FOMC meeting. To be sure, futures are still pointing to a hike to 5.50% in August, but with significantly less certainty.

As usual, we have to be careful with the last hike forecast by fed funds futures since some number of market participants are probably buying into it as an insurance hedge on their other investments rather than an outright bet that that is what the Fed will really do. Nonetheless, that is where the futures market was on Friday.

I still lean towards the Fed not hiking in August as I expect that inflationary pressures and economic strength will moderate enough over the coming three weeks to lead the Fed to believe that the the lowest risk path is to "pause" at least temporarily to allow past hikes to finish rippling through the economy.

The June 2006 Consumer Price Index (CPI) will be released before the market open on Wednesday. Of course, people should never place an excess of emphasis on the latest data point in a series, but people will in general "set" their inflation expectations for the coming month on this one report. As usual, the core and headline numbers have a good chance of giving conflicting signals, with the headline number boosted by rampant commodities speculation, and the core number usually indicating that real demand for good and services is a bit more muted than the commodities speculators would like us to believe.

A big problem with a lot of these reports is that they will at best give us a rear-view mirror picture of the economy back in June, but give us little insight into the state of the economy in July, let alone going forward.

Plus or minus a quarter-point will have a negligible overall economic impact on the national economy. "Pausing" would have more of a psychological effect, signalling people that they no longer have to continue to prepare for the pain of even higher interest rates in the months ahead.

Quite a few people are acting "as if" the Fed had already decided to hike by a quarter point to 5.50% in August, thus giving the Fed a free ride and having the psychological effect of an extra quarter-point in place today that actually doesn't exist, yet.

There is still a good chance that inflationary pressures will remain relatively robust over the coming month, in which case the markets and the Fed will likely be persuaded that yet another quarter-point hike (to 5.50%) is the least-risk path. I certainly don't see inflation accelerating over the coming months, but whether it decelerates enough to recede to closer to the mid-point of the Fed's implied target of 1% to 2%, from its current level of around if not above the upper end of that range, is a matter of intense conjecture.

In summary, any Fed action or inaction in August is certainly not preordained, but critically dependent on "incoming data", including official economic reports, private economic reports, anecdotal reports from the regional Fed banks (e.g., the Beige book), commentary by businesses on their sales and investments, and computer forecasting models as well. And ultimately it will be a purely seat-of-the-pants call by the FOMC and the Fed chairman themselves.

Although in some ways it "feels" right now as if a hike to 5.50% is "the right thing", that is partly a matter of driving by looking in the rear-view mirror and using our past feelings as a crystal ball for the future, which is a really bad thing to do. We need to focus much more intently on "the ball" right in front of us and use "incoming data" and other leading indicators to make judgments about the future. If we get even a couple more reports weak reports, we could see people quickly shift to expectations for a definite  pause at 5.25% after the August FOMC meeting.

The retail sales report from last week was touted as being weak, but this is another one of those reports which has two important numbers, the headline number, which was a bit weak, plus the ex-auto number which was reasonably decent. Once again, we have mixed signals, plus the caveat that we shouldn't place too much emphasis in the latest data point in a series.

Since a single quarter-point delta in interest rates isn't that critical, one could argue that the Fed should go for one more hike "for good measure" and to make it crystal clear to people that stomping out inflation is "Job #1" for the Fed. On the other hand, any developing weakening of the economy could just as quickly put the Fed back into the mode of trying to prop up sagging growth.

The growth rate of the Weekly Leading Index (WLI) from the Economic Cycle Research Institute (ECRI) has weakened significantly over the past  eight weeks (from +3.5% to +0.2%), although the actual level of the index has been rising lately and is at it's highest level in a month. A WLI of zero (0.0) would indicate an economy that is running at a steady growth rate, neither accelerating nor decelerating. A WLI fluctuating in a range from +1.5% to -1.5% would seem to be a relatively stable "Goldilocks" economy. Although the WLI growth rate is at its lowest level since a year ago, the index did tick up nicely last week and isn't showing any signs of the kind of persistent weakness (values more negative than -1.5%) that would be seen in an economy that was slowing on its way into recession, but does look a lot like an economy moderating on its way to a relatively stable growth rate. If I were looking at this one indicator alone, I'd say that the Fed could safely flip a coin as to whether to hike in August.

-- Jack Krupansky

PayPal money market yield up to 4.95%

The 7-day yield for cash kept in the PayPal money market fund is now up to 4.95% as of July 13, 2006. That compares quite favorably with the 28-day Treasury T-bill discount rate of 4.81% from last week and 4.54% in ShareBuilder or even the 4.88% 7-day yield in Fidelity Cash Reserves (FDRXX). And there are no minimums or crazy restrictions even for relatively small amounts of money.

PayPal is looking like a fairly interesting place to store cash for both relatively quick access and a well above average yield.

Another grumble about Fidelity: I just visited their web site and the graphic ad touts a 4.89% 7-day yield -- "as of 7/11/2006", but the yield has backed off to 4.88% "as of 7/14/2006". Yes, the ad does say "Click here for current rate", but why don't they simply show you the current rate in the ad itself. Duh! And the rate quoted by the ad need the following footnote (*):

* The performance data featured represents past performance, which is no guarantee of future results. Current performance may be higher or lower than the performance data quoted. Yield and return will vary.

 

An investment in the Fund is not insured or guaranteed by the Federal Insurance Deposit Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund.

 

Before investing, consider the fund's investment objectives, risks, charges and expenses. Contact Fidelity for a prospectus containing this information. Read it carefully.

The warning about your money market funds not being FDIC insured is worth contemplating. CDs can offer decent yields with FDIC protection, but only if you lock your funds in for an extended period of time with hefty early-withdrawal penalties. U.S. Treasury notes are an alternative to CDs. Although they have no fixed early-withdrawal penalty, you may take a "haircut" by selling on the open market where the bid may be significantly less than your principle.

-- Jack Krupansky

Federal individual income tax rates for 2006

For convenient reference, here is the current table of federal income tax rates for single individuals.

Schedule X — Single

If taxable income is  over--	But not over--	The tax is:
$0	$7,550	10% of the amount over $0
$7,550	$30,650	$755 plus 15% of the amount over 7,550
$30,650	$74,200	$4,220.00 plus 25% of the amount over 30,650
$74,200	$154,800	$15,107.50 plus 28% of the amount over 74,200
$154,800	$336,550	$37,675.50 plus 33% of the amount over 154,800
$336,550	no limit	$97,653.00 plus 35% of the amount over 336,550

Tax rates for this and other filing categories can be found in the official 2006 Federal Tax Rate Schedules on the IRS web site.

The big footnote on these tables is what deductions and other "adjustments" you need to make to your base pay or gross income to get your official "taxable income".

-- Jack Krupansky

State income tax rates

If you are moving or considering where you might want to move to or comparing job offers from different states, you might want to check out this table of State Individual Income Taxes.

Some states have no state income tax:

• Alaska
• Florida
• Nevada
• New Hampshire (but they tax dividends and interest income)
• South Dakota
• Tennessee (but they tax dividends and interest income)
• Texas
• Washington
• Wyoming

Alas, a free lunch isn't always free, so you can expect higher sales tax being used to compensate for the lack of an income tax.

Also keep in mind that if you have a pile of cash in tax-free state minicipal money market funds, you may have to shift funds or maybe there won't be a state tax free fund to shift to in your new state, or maybe you get to shift to a tax-free fund when previously you had no tax-free fund available.

-- Jack Krupansky

Link correction: Recent Treasury Bill Auction Results

In a recent post I had an incorrect link for the web page containing the Recent Treasury Bill Auction Results. That link has now been corrected.

-- Jack Krupansky

Lack of realism in retirement planning

There was  a short article by Paul Magnusson on page 22 of the July-August 2006 issue of the AARP Bulletin entitled "Color Me Confident - Why many Americans may be working when they retire". I thought my own retirement planning was in sad shape, but so many Americans are in far worse shape than me. As the article subtitle suggests, many people will have little choice but to continue working well past their normal retirement age. Even worse, a lot of these people simply don't know how bad off they really are.

This article, and another by Jane Bryant Quinn, convinced me that I need to take an even more conservative view than I already have. I need to more carefully think through my assumptions about rates of return, both before and during retirement, and also adjust them and the principle of my nestegg by relatistic expectations of inflation. 

-- Jack Krupansky

My latest monthly ShareBuilder automatic investment executed on Tuesday, July 11, 2006

Tuesday wasn't a good day for Microsoft's (MSFT) stock, but it was the day that my monthly automatic investment through ShareBuilder occurred on Tuesday, so I was able to "buy on the dip." My purchase price end up being only very modestly above the closing price. There was a fixed $4 commission on the purchase. The next automatic monthly purchase will occur on Tuesday, August 8, 2006. My plan is still very modest in size, but I'm already investing fairly heavily in my Roth 401(k) retirement plan and my Employee Stock Purchase Plan (ESPP), plus my monthly payments on back taxes.

The debit to my bank checking account hasn't shown up yet on my online activity statement, but will probably appear on Wednesday as occurring on Tuesday.

-- Jack Krupansky

Retirement financing

As my net worth, including my retirement "nestegg", had shriveled down to less than nothing over the past six years, I had cringed at even the thought of thinking about financing of my retirement. In fact, a few months ago I was resigned to the expectation that a meager monthly social security check was about all I had to look forward to. Since I have contributed enough in FICA over the years to be eligible for a payout, the Social Security Administration sends me an annual letter that says what my monthly check would amount to if I retired at age 62, 66, and 70. The amounts aren't very comforting, but they're not nothing either.

Now that I have a decent-paying full-time job and am putting a fair amount of money away in my Roth 401(k) retirement plan and other savings, it is actually sensible for me to realistically plan for the financing of my retirement. My preconceived notion was that this would be a hopeless task and that even at a maximal rate of savings I wouldn't be able to put away a big enough nestegg over the next 14 years to fund much more than a meager addition to my monthly social security check, but I was wrong. I worked up a detailed spreadsheet that shows that even with a meager annual investment return of 5% (i.e., T-bills), I would have enough saved by age 66 to last me until age 110. That once again assumes a meager annual investment yield of 5% and eating into principle just enough to sustain a payout that combined with social security would be enough to live in a modestly comfortfortable, but not extravagent lifestyle.

My model needs some enhancements, but at least shows that a semi-comfortable retirement is not entirely out of the question.

The additional factors I need to consider are:

• Rate of inflation - real return verus nominal yield
• Potential for raises and bonuses
• Potential changes in Social Security benefit calculations
• Reductions in SS benefits due to higher retirement distributions and investment income
• Life expectancy in the face of progress in medical research
• Potential for lower average investment yield due to any periods of low economic growth or deflation
• The future of housing - how to project my current apartment rent and basic living expenses far into the future
• The future of medical care funding and expenses
• A budget that reflects my likely expenses and how they might differ from my current expenses (e.g., travel and entertainment)
• Modeling of relaistic investment return, until retirement and during retirement
• Whether to model to zero net worth at age 110 or to target a buffer amount of at least five years or target zero net worth at age 115.

My suspicion is that a lot of these factors will simply "net out" and that my current model is about as reasonable an approximation of a future expectation as any mere mortal could hope to achieve.

-- Jack Krupansky

My net worth is finally on the rise

I haven't had the courage to calculate or estimate or even contemplate my net worth since the end of 2000, but now that I have my bankruptcy behind me and a steady (so far) full-time job, it once again feels "safe" to see where I really stand.

Unfortunately, even with a bankruptcy discharge my net worth has been quite negative since back taxes do not get discharged. Ouch.

Although I could channel all of my savings budget to pay off those back taxes ASAP, I have decided to stash away a significant rainy day fund to cover contingencies and any disruption of income and to get my retirement savings plan and budget back on track as rapidly as possible. As a result, it may be another two or three years before I beat those back taxes back down to zero. But, the comfort and security of having that rainy-day fund and a renewed retirement nest egg feels worth the interest payments on the back taxes. I will in fact endeavor to accelerate those back tax payments whenever I have a little extra money, but that's not my top priority.

Only last week did I finally have the courage to put together a spreadsheet with those tax liabilities, my nascent savings and investments, and the rate at which my savings and investments are growing and the rate my back taxes are being paid down.

I was actually pleasantly surprised at the amount of money I've already been able to sock away. The ratio of my assets to liabilities is already up to 44%. There were some factors that pushed my savings up sharply in the past month that won't be repeated, but that is still a great start.

I even calculated the time to break even, when my assests would once again equal my liabilities, thinking it might take eighteen months or more, but it in fact is less than five months. So, by December I will finally be back in the black for the first time since 2002. And this is all simply by "staying the course", simply sticking with my current budget. Of course there may be unexpected setbacks or stock market declines and I haven't fully budgeted any travel in the Fall, but at least it feels as if I am finally back on the right track.

This Friday my Employee Stock Purchase Plan (ESPP) kicks in for the July to September quarter. I signed up for the maximum participation, which is 15% of my base salary. That will net me company stock (Microsoft) at a 10% discount to the market price at the end of the quarter. I'm already getting 15% of my base pay deducted for my Roth 401(k) retirement plan which is matched by other 3% by my employer. My spreadsheet doesn't even include that 10% discount or the 3% match, but it doesn't include the potential for any stock market declines either.

And for the record, I have virtually nothing in the way of physical assets, no home, no vacation condo, no car, no boat (or yacht, yet), etc., other than this one-year old notebook computer, two old printers, and an old Sony PDA.

-- Jack Krupansky

Fed will probably still "pause" at 5.25% in August

Fed funds futures continue to "forecast" a reasonably high probability that the Fed funds target interest rate will be 5.50% after the August 8, 2006 FOMC meeting. As usual, we have to be careful with the last hike forecast by fed funds futures since some number of market participants are probably buying into it as an insurance hedge on their other investments rather than an outright bet that that is what the Fed will really do. Nonetheless, that is where the futures market was on Friday.

I still lean towards the Fed not hiking in August as I expect that inflationary pressures and economic strength will moderate enough over the coming month to lead the Fed to believe that the the lowest risk path is to "pause" at least temporarily to allow past hikes to finish rippling through the economy.

Plus or minus a quarter-point will have a negligible overall economic impact on the national economy. "Pausing" would have more of a psychological effect, signalling people that they no longer have to continue to prepare for the pain of even higher interest rates in the months ahead.

Quite a few people are acting "as if" the Fed had already decided to hike by a quarter point to 5.50% in August, thus giving the Fed a free ride and having the psychological effect of an extra quarter-point in place today that actually doesn't exist, yet.

There is still a good chance that inflationary pressures will remain relatively robust over the coming month, in which case the markets and the Fed will likely be persuaded that yet another quarter-point hike (to 5.50%) is the least-risk path. I certainly don't see inflation accelerating over the coming months, but whether it decelerates enough to recede to closer to the mid-point of the Fed's implied target of 1% to 2%, from its current level of around if not above the upper end of that range, is a matter of intense conjecture.

In summary, any Fed action or inaction in August is certainly not preordained, but critically dependent on "incoming data", including official economic reports, private economic reports, anecdotal reports from the regional Fed banks (e.g., the Beige book), commentary by businesses on their sales and investments, and computer forecasting models as well. And ultimately it will be a purely seat-of-the-pants call by the FOMC and the Fed chairman themselves.

Although in some ways it "feels" right now as if a hike to 5.50% is "the right thing", that is partly a matter of driving by looking in the rear-view mirror and using our past feelings as a crystal ball for the future, which is a really bad thing to do. We need to focus much more intently on "the ball" right in front of us and use "incoming data" and other leading indicators to make judgments about the future. If we get even a couple more reports like the monthly employment report from last Friday which came in somewhat weaker than a lot of people expected, we could see people quickly shift to expectations for 5.25% after the August FOMC meeting. In fact, the employment report was still quite robust, so we can see how critical expectations really are.

Since a single quarter-point delta in interest rates isn't that critical, one could argue that the Fed should go for one more hike "for good measure" and to make it crystal clear to people that stomping out inflation is "Job #1" for the Fed. On the other hand, any developing weakening of the economy could just as quickly put the Fed back into the mode of trying to prop up sagging growth.

The growth rate of the Weekly Leading Index (WLI) from the Economic Cycle Research Institute (ECRI) has weakened significantly over the past  six weeks (from 3.3% to 0.9%), although the actual level of the index is identical to six weeks ago. A WLI of zero (0.0) would indicate an economy that is running at a steady growth rate, neither accelerating nor decelerating. A WLI fluctuating in a range from +1.5% to -1.5% would seem to be a relatively stable "Goldilocks" economy. Although the WLI growth rate is at its lowest level since a year ago, the index did tick up nicely last week and isn't showing any signs of the kind of persistent weakness (values more negative than -1.5%) that would be seen in an economy that was slowing on its way into recession, but does look a lot like an economy moderating on its way to a relatively stable growth rate. If I were looking at this one indicator alone, I'd say that the Fed could safely flip a coin as to whether to hike in August.

-- Jack Krupansky

My next monthly ShareBuilder automatic investment is on Tuesday

My next monthly automatic investment through ShareBuilder will occur on Tuesday. The cash will automatically be debited from my bank checking account on Monday and the purchase (Microsoft (MSFT) stock) will occur "sometime" on Tuesday. There is a fixed $4 commission on each monthly purchase.

The debit to my bank checking account doesn't seem to actually hit until Tuesday.

This investment plan is actually a very small plan, but when you're trying to rebuild your finances after a bankruptcy, every little bit helps.

I may consider switching this plan so that it contributes to a Roth IRA account.

-- Jack Krupansky

Payment for my T-bills debited from my bank checking account Thursday

The payment for the 28-day T-bills that I purchased in my new account at TreasuryDirect was in fact debited from my bank checking account on Thursday, although I was unable to see the debit until today.

It remains unclear whether I can safely roll the T-bills over in August without needed a spare $1,000 in cash in my bank checking account to cover for the next debit which will be covered by the credit for this month's maturing T-bills. Even if the debit and credit occur at the same instant, the bank may require a day before the credit is actually posted against the account. I simply do not know, but I'll probably have an extra $1,000 sitting in the account at the beginning of August anyway. Maybe I need to switch to the Zero-Percent C of I to eliminate this uncertainty, anxiety, and confusion.

-- Jack Krupansky

My T-bills have been purchased

My new account at TreasuryDirect did in fact buy $1,000 of 28-day U.S. Treasury T-bills. It shows as $1,000 in my account, which is the "par" value, even though the purchase price was $996.32. My bank checking account has not yet been debited, but I would expect that to happen within a day or two.

The TreasuryDirect web site says that my "yield" is 4.735% and that my "investment/interest rate" is 4.819%, but those numbers don't make a lot of sense accept that Treasury has some magic formulas to calculate them. What I do know is that since my actual "earnings" after 28 days will be $3.68, the difference between the par value and the discounted purchase price, my "return" for the 28-day period is 0.369%, and if you divide than by 28 and multiply by 365 days in a year, you come up with an annual simple interest rate of 4.815%. That's not great, but I don't feel too bad about it.

My next step is to figure out the simple, automatic method of rolling the balance over month to month. I actually did go ahead and schedule a repeating purchase, that will purchase the same amount every month, but I'm not completely sure that the maturing par value will be credited to my bank checking account in time to cover the debit for the next purchase. I suspect it will work fine, but I have to think it through some more. The alternative is to select for the maturing par value to be placed in my zero-percent C of I account at Treasury and select for the new purchases to be paid from the C of I account. That makes sense for large accounts where the monthly interest is enough to buy additional T-bills, but for a smaller account the interest amount will accumulate for quite some time without earning any interest. I'm hoping that my approach will keep only the purchase price in the TD account and the interest will by transferred each month back into my bank checking account. We'll have to see how this works out.

The fact that I didn't go with 3-month or 6-month T-bills probably indicates my own hesitation as to whether the Fed really is already "paused" or will hike againt at least in August. If the Fed really is paused, the higher yield of the longer-duration T-bills would be more attractive, but if the Fed is going to hike even one more time in August, the longer-term debt simply locks in a less-atractive rate, while the shorter-term debt keeps my options open with a maximum lack of liquidity of 28 days.

-- Jack Krupansky

TreasuryDirect: Where did my order go??

I checked late in the afternoon today and my order in my new account with TreasuryDirect to buy $1,000 of 28-day T-bills had been marked as "Purchase Request Edited". Then this evening I looked again and the order had completely disappeared without a trace and there was no sign of any purchased T-bills either. The system was very slow, so it's possible that there was simply a computer database or communications "glitch". I'll know more tomorrow.

What I do know for sure is that if my pruchase order did go through, I didn't get a vey good deal. I checked the official Auction results and the discount rate was a measly 4.735%, less than what PayPal pays and way below the current Fed funds target interest rate of 5.25%. Even classic 3-month T-bills went for a lousy discount rate of 4.955%. And a 6-month T-bill gets only 5.09%. What this says is that there is incredible demand for this "paper". People can wring their hands all they want about the Federal budget deficit, but the simple fact is that the market is clamoring for a lot more of it.

I hope my order really did get cancelled for some reason (and I'll shift the cash to PayPal), but if it did go through I can certainly live with that 4.735 annual return for one month.

. . .

STOP THE PRESSES!

After writing that preceding story, I looked around some more and found a link for "Pending Transactions" and, sure enough, it shows my order with a confirmation code and issue date (Thursday), so it looks like I will get stuck with this "dog" for four weeks. Treasury will debit my bank checking account for $996.31722 ($996.32??) sometime soon and then credit that same acount with $1,000 on August 3. I'll earn a whopping $3.68 for that month, but that is more than I'm earning in my Siebert and ShareBuilder taxable accounts, but less than what my Roth and PayPal accounts are earning.

But all of this is in the name of an experiment, and it may make sense to keep a chunk of my cash in Treasuries of some form anyway.

-- Jack Krupansky

Getting a credit card after bankruptcy: Wells Fargo vs. CapitalOne

I filed for personal bankruptcy (Chapter 11) last August and my debts (except back taxes) were discharged at the end of November. I was anxious to start rebuilding my credit record, but wanted to let things settle a bit before trying to get a couple of credit cards. I had been deluged with offers of various kinds, most of which involved some sort of excessive "program" fees, but the CapitalOne offers didn't seem to have more than a simple annual fee. My plan was to wait six months and then start with a secured credit card, but then in late March I was informed that my software development contract would be coming to an end by mid-April and I was not very successful lining up replacement work, so the credit card plans fell by the wayside while I focused on lining up income.

I was able to score a full-time employment job offer with Microsoft at the end of April (to start in mid-May), but once again my thought was to let things settle and to make sure I had a solid source of income before playing around with credit.

It wasn't til mid-June after I had gotten my second paycheck (electronic of course) that I finally started talking to my bank, Wells Fargo, about getting a secured credit card. I checked the web site and it did state that you couldn't have a bankruptcy within the past 12 months, but the people at the bank told me that they usually look at the overall banking relationship (including the fact that a had direct deposit) before passing judgment. Alas, the credit people did not approve my application. Even with $300 sitting in a savings account ready to be switched to the security for the card, they still said "No." That seems rather silly to me, but sometimes bureaucrats can be rather narrow and close-minded, even when financially the deal was an absolute no-brainer (100% secured). Here's the kicker: I can get up to a $500 advance on my direct deposit paycheck. How can that make any sense when even a $300 secured credit card is declined?

Luckily, I had also applied to CapitalOne (online rather than one of the mailed offers since I had moved into temp housing and wasn't forwarding my mail yet) and they came through with a Platinum credit card with a decent $3,000 unsecured credit limit and only a $19 annual "membership" fee (they strangely claim that there is no "annual fee", but there is an annual "membership fee") and 14.8% interest rate. So, I'm all set, but still a bit annoyed with my bank. I probably could have gotten a better introductory rate from one of the mailed offers, but I didn't have one at my fingertips at the time. In a few months after I establish a little bit of a record and pay off my balance in full, I'll request a cheaper rate.

In another month or two I'll apply for another card, not because I need it financially, but to add a little beef to get my credit history looking more robust again.

My plan is to pay my balance in a pattern: payoff the first three months in full, pay minimum payment for three consecutive months, and repeat that pattern. And charge up to $250 to $750 per month. And overlap two cards so that I'll always have one card where my charges won't accrue interest, but my credit record will always show that I do have some outstanding balance and am in absolute 100% good standing with payments and limits. There may be some other pattern that is superior, but I think that's a good starting point. Pleas let me know if you think there is a better credit usage pattern. If I get a thrid card, I'd use it lightly and make odest payments every month and keep some balance every month.

-- Jack Krupansky

U.S. Treasury "I Bond" interest rate now 2.41% through October 2006

Last Fall some people were jumping up and down touting how wonderful the U.S. Treaury "I Bond" was since the interest rate in November was a whopping 6.73%. Unfortunately, that nice rate was locked in for only six months and was reset for the six-month May through October 2006 period to 2.41%, which is not so great at all. Even worse, that 2.41% rate is for new purchases since May 1, 2006. The new I bonds have a higher fixed rate of 1.40%, which when added to the six-month inflation rate of 1.01% gives the 2.41% rate. People who bought I bonds in the November 1, 2005 through April 30, 2006 six-month period have a lower fixed rate of 1.0% (which does not change for the 30-year life of the I bond), which when added to the new inflation rate gives a new annual interest rate of 2.11%, which is even less attractive.

To add insult to injury, you cannot redeem your I bond at all in the first year and have to pay a three-month interest penalty if you redeem within the first two to five years.

I bonds are a great idea when we are heading into a protracted period of high inflation, but we are not doing so at this time.

Still, the return wouldn't be a complete disaster if you bought on November 1, 2005 and then sell on August 1, 2006. You would get 3.365% actual total return for the first six months and then forego the three months interest from May 1, 2006 as the penalty, giving you an annualized rate of 4.487% (6.73% divided by twelve months multiplied by six months divided by nine months multiplied by twelve months), which is a bit better than if you held T-bills for that same period. But going forward, continuing to hold that I bond will incrementally lower your return as each month ticks by. It might be better to shift it over to T-Bills. Whether you should sell or not depends on a lot of factors, not the least of which is your forecast for future inflation rate expectations.

The actual rate that you will earn depends on when you purchased the I bond. For example, according to the official U.S. Treasury I Bond Interest Rates table, people who bought I bonds between May 1, 2000 and October 31, 2000 will earn at a 4.62% rate since their fixed rate is locked in at 3.60% for 30 years.

The actual calculation for the "composite" interest rate is as follows:

Composite rate = [Fixed rate + (2 x Infl. rate) + (Fixed rate x Infl. rate)]

For current I Bond purchases, the Fixed rate is 1.40% and the Infl. rate is 0.5%:

Composite rate = [0.0140 + (2 x 0.0050) + (0.0140 x 0.005)]
Composite rate = 0.0140 + 0.01 + .00070
Composite rate = 0.0140 + 0.0107
Composite rate = 0.02407
Composite rate = 0.0241
Composite rate = 2.41%

The inflation rate was calculated by subtracting the Consumer Price Index for all Urban Consumers (CPI-U) for September 2005 from March 2006. The index in September 2005 was 198.8 (1982-84=100) and 199.8 in March, a difference of 1.0 which is 0.503% of the September index.

The essence of investing in the Treasury I Bond is a bet on sistained high inflation. If that's want you believe is likely, I Bonds may be worth considering, but if you feel that inflation is going to be fairly subdued, I Bonds won't have much to offer you. It's your decision, based on your outlook.

-- Jack Krupansky

Fed at 5.25% or 5.50% in August? Probably 5.25%

Fed funds futures currently "forecast" a reasonably high probability that the Fed funds target interest rate will by 5.50% after the August 8, 2006 FOMC meeting. As usual, we have to be careful with the last hike forecast by fed funds futures since some number of market participants are buying into it as an insurance hedge on their other investments rather than an outright bet that that is what the Fed will really do. Nonetheless, that is where the futures market is today.

I still lean towards the Fed not hiking in August as I expect that inflationary pressures and economic strength will moderate enough over the coming month to lead the Fed to believe that the the lowest risk path is to "pause" at least temporarily to allow past hikes to finish rippling through the economy.

That said, there is a good chance that inflationary pressures may remain robust over the coming month, in which case the markets and the Fed will likely be persuaded that yet another quarter-point hike (to 5.50%) is the least-risk path.

In summary, any Fed action or inaction in August is certainly not preordained, but critically dependent on "incoming data", including official economic reports, private economic reports, anecdotal reports from the regional Fed banks (e.g., the Beige book), commentary by businesses on their sales and investments, and computer forecasting models as well. And ultimately it will be a purely seat-of-the-pants call by the FOMC and the Fed chairman themselves.

In truth, a quarter-point one way or the other has negligible impact on the overall health or direction of the economy. Sure, it may have actual effects, but people will adjust and reallocate capital to compensate for it. Besides, there is so much cash sloshing around in the coffers of big companies, that the Fed is not as relevant as it once was.

-- Jack Krupansky

PayPal money market account high yield

One of the things I had been meaning to check into for some time is the fact that PayPal pays a very decent interest rate for cash in your PayPal account. Currently, the interest rate in the PayPal money market account is 4.82%. Not bad.

I went ahead and set up a PayPal account as a test and funded it with a $100 ACH electronic transfer from my bank checking account. The web site says that it could take 3-4 days to complete the transfer (which seems a little long to me).

One of my short-term goals is to have "rainy-day fund" cash spread around a number of accounts for three reasons: 1) in case there is some bureaucratic "problem" with my main account(s) that delays access, 2) in case identity thieves attack my main account(s), and 3) so that I never really see one big number for how much cash I really have and start "thinking" about how to use it -- out of sight, out of mind.

The biggest problem with using PayPal? They are a primary target for phishing spam email, so it will be a real pain to tell whether I have gotten a legitimate alert from PayPal or just bogus email. That means I have to carefully check all those allegedly PayPal emails just to throw most of them away. Fortunately I know enough about email to go in and examine the email source text to see if it really is "phishy".

For now, I'll stick with a modest experiment and then consider expanding it in a few months.

Anybody have any experiences with the PayPal money market fund?

-- Jack Krupansky

Buying U.S. Treasury T-bills directly from the government with TreasuryDirect

Now that short-term interest rates are either at or closing in on their peak, I've been thinking about putting some of my cash directly into U.S. Treasury T-bills. I'll continue to keep plenty of cash in money market mutual funds which are instantly availble via check, debit card, ATM, or a "quick click" electronic transfer, but as my rainy day cash funds begin to accumulate, a fair amont of that cash isn't likely to be needed every day, week, month, or even quarter, so T-bills seem to have some appeal.

The U.S. Treasury offers a web-based program called TreasuryDirect which allows individuals to link an account at Treasury with their bank account, making it easy to buy Treasury debt (short-term "bills", medium-term "notes", or long-term "bonds", or even Savings Bonds) with absolutely no charges, fees, or spreads, and no paperwork.

New Treasury debt is typically offered via "competitive bid", but noncompetitive purchase is available to individuals like me and you who are buying less than $5 million.

I still don't have all the details figured out, but I opened an account online on Sunday and had my local bank stamp a form with a signature guarantee which I had to mail in. I can't do any redemptions until the paper form is accepted, but I can proceed with purchases. I had to give a lot of identification information as well as my bank account and routing number to open the account online. I may have had to file the paper form simply because I used my new Washington state ID number which I just got on Saturday and which may not yet be in the database that Treasury accesses for verifying my information.

In addition to the standard 3-month T-bill (actually 91 days or 13 weeks), Treasury also offers 6-month (182 days or 26 weeks) and 1-month (28 days or 4 weeks) "bills". You can also buy Savings Bonds via Treasury Direct as well.

I went ahead and entered an order for $1,000 of 28-day "bills" just a few minutes ago. That is the minimum order and increment for purchases. The actual price will be a discount from $1000 so that I will get $1,000 at maturity (four weeks from the date of issue) and the actual interest rate would be calculated by dividing the discount amount by the face value "par" amount.

My order will be dated July 7, but I'm not yet sure when my "bills" will actually be issued. According to the "official" Tentative Auction Schedule, the 4-Week Bill is auctioned weekly on Tuesdays with the issue date being Thursdays. 13-Week and 26-Week Bills are auctioned on Mondays and issued on Thursdays. The schedule says that if the auction would fall on a holiday, which is the case for tomorrow, Tuesday, July 4, 2006, the auction will be held on the next business day, which in this case will be Wednesday, July 5, 2006. It may take a week before the actual Treasury "security" shows up in my account, but that's somewhat immaterial since the only interesting event will be when the full face value is returned to my account in cash four weeks from the issue date.

The TD (that's the "official" shorthand for TreasuryDirect) confirmation screen said that I had been assigned to the "7/5/06 issue" ("Requested Purchase Date"), which I suspect means the issue that will be auctioned on Wednesday, July 5, 2006 and will have the "Issue Date" of Thursday, July 6, 2006.

I don't have any cash balance in my TD account, so I believe that Treasury will automatically initiate a debit against my registered bank account upon completion of the auction or on the date of issue. The fine print on the purchase confirmation screen seemed to suggest this, but we'll have to see.

Whether all of these presumptions are correct remain to be seen. Worst case, maybe I have to wait another week.

There is actually a "cash" account associated with a TD account, but they call it a "C of I" or "Zero-Percent C of I" or "Zero-Percent Certificate of Indebtedness". That just means that it is your cash and can be used to purchase Treasury Securities or can be transferred back to your bank account at your pleasure, but otherwise Treasury can do what they want with it until you say otherwise and they don't pay any interest on it. It's basically just a convenience.

I need to find out if there is any automatic rollover so that I can keep my money in T-bills without manually re-purchasing them every 4- 13- or 26 weeks. My order says that the "Maturity Payment Destination" is my bank account, but that may simply be because I used the "Purchase Express" feature which by design has fewer options to sort through.

The other big uncertainty is exactly what interest rate I will get on each auction. It's purely supply versus demand, so if there is a huge demand, the yield will be skimpier and if there is slack demand the yield will be fatter. The official Recent Treasury Bill Auction Results shows the most recent 28-day bill issued on Thursday, June 29, 2006 and maturing on Thursday, July 27, 2006 at a "Discount Rate" of 4.775% and an "Investment Rate" of 4.869% and a price per $100 of par value of $99.628611. Let's see... The price per $100 of $99.628611 means that you would get $.0371389 in "interest" on that $99.628611 investment over 28 days or a 4-week return of 0.373%. Divide that by 28 and multiply by 365 and you would be getting a simple annual interest rate of about 4.86%. That's still well short of the Fed funds target interest rate (5.00% befre the announcement last Thursday), but still a little greater than the Fidelity Cash Reserves rate.

For comparision, the discount rate for the 91-day T-bill was 4.955%, which was only slightly less than the Fed funds discount rate before the FOMC announcement, and the discount rate for the 182-day T-bill was 5.090%. I simply do not know if we can expect the T-bill discount rates to suddenly pop up by 0.25% this week or if they will rise only slowly between now and the August FOMC meeting.

I would note that you would need to have a sizeable amount of Treasuries to compound your interest every period. You have four choices: 1) hold at least $100,000 in Treasuries so that even $1 of interest on each $100 par is enough to buy you another $1,000 of bills, 2) bump up your purchases by enough so that the fresh cash added to the interest is enough for a $1,000 increase in purchases, or 3) transfer the interest back to your bank account and then over to a money market account like FPRXX or FPRXX or BDMXX, or 4) don't worry about the fact that you won't immediately be compounding interest on less than $1,000. I don't like the latter, but it is simpler and less of an issue as you build up your nest egg.

I'm particularly attracted by the thought that there are no middlemen (like Fidelity) taking a cut of my returns. Using the TD web site doesn't appear to be any more complicated than using Fidelity's web site.

I'll start with the 4-week T-bills at first since it only takes a month to get out of them, but I may extend to the 3-month or even 6-month T-bills as I accumulate more cash and have less need for the immediate liquidity of a money market mutual fund.

To be clear, I do not know if this TreasuryDirect thing will really work out for me, but it does seem worth a shot.

-- Jack Krupansky