Fed will remain paused at 5.25% for the rest of this year and next -- no recession no year

Despite all the chatter about the economy slowing, a potential recession next year, and the Fed needing to lower interest rates next year, my read of the state of the economy is that the underlying economy is significantly stronger than many pundits insist. Housing will moderate a bit more but remain relatively robust, there won't be a recession next year, and the Fed will not feel the need to change interest rates at all for the rest of this year and all of next year. Sure, all of this is subject to change as the global economy evolves, but that's what the current information about the economy is telling me.

Admittedly, GDP could come in relatively weak in Q3, Q4, and Q1, as the moderation of the housing boom gets digested and we had high commodities prices in Q3, but we should see a nice rebound come Spring. I wouldn't be surprised to see one or two of those quarters come in at growth below 2% or even 1%, but even 1% GDP growth for all three quarters wouldn't be enough to get the Fed to ease since the whole point of the rate hikes was to get rid of the excess growth and return the economy to organic growth that isn't based primarily on too-easy money.

As of Friday, Fed funds futures contracts indicate a 0% probability of a further rate hike at the October FOMC meeting and only a 2% chance of a cut. Futures indicate a 10% chance of a cut at the December meeting, a 60% chance of a cut at the March meeting, 100% chance of a cut by the June meeting with a 20% of a second cut as well, and 54% chance of a second cut by the July meeting. I personally don't concur with those odds, but that is how a lot of people are actually "betting." I would simply note that such betting can change on a moment's notice as economic and financial data unfolds.

I suspect a lot of those bets are based on a presumption that the housing sector will seriously collapse and reflect more of a "worry" than a steely analysis. I would note that mortgage rates are still quite low and are driven more by the extreme amount of cash sloshing around looking for a return (in Mortgage-Backed Securities - MBS) than the Fed's monetary policy. Banks are primarily originating and then securitizing home mortgages rather than capitalizing them with money from the Fed. Sure, the speculators, flippers, and and poor credit risks may be driven from the housing market, but that's all for the better anyway, and I suspect that they were never as big a factor as pundits insist. My estimation is that the last of the "weak" hands will be out of the housing market in another three months, by the end of the year.

The simple fact that short-term T-bills are yielding significantly less than the Fed funds target rate (4.90% for a 3-month T-bill, 5.00% for a 6-month T-bill, and 4.62% for a 28-day T-bill versus the 5.25% Fed funds target rate) shows how dramatically the availability of money exceeds the demand for money. It also shows the sterling credit quality of the U.S. Treasury even in the face of so-called "massive" federal budget and national trade deficits.

My recent Fed commentary will probably hold for some months to come.

My view is that the Fed will keep their fed funds target rate paused at 5.25% for at least the rest of the year, and probably for the entire coming year.

It is also my view that there will not be a recession next year, nor even enough of a growth slump to trigger a Fed rate cut.

Upcoming Fed FOMC meetings:

• October 24/25, 2006
• December 12, 2006
• January 30/31, 2007
• March 20/21, 2007
• May 9, 2007
• June 27/28, 2007
• August 7, 2007
• September 18, 2007
• October 30/31, 2007
• December 11, 2007

-- Jack Krupansky

ECRI Weekly Leading Index indicator for future growth weakens moderately and growth rate remains modestly negative but still near flat line

The Weekly Leading Index (WLI) from the Economic Cycle Research Institute (ECRI) declined modestly (-0.29%) and the six-month smoothed growth rate also declined slightly (from -0.8% to -0.9%) and is still relatively near the flat line, suggesting an economy that has leveled out.

A WLI growth rate 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 smoothed growth rate is rather weak, it isn't showing any signs of the kind of persistent weakness (values more negative than -1.5% over a period of time) 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 is succeeding at its goal of moderating the economy to a sustainable growth rate.

-- Jack Krupansky

PayPal money market fund yield rises to 5.04%

Here are some recent money market mutual fund yields:

• iMoneyNet average taxable money market fund 7-day yield was unchanged at 4.73%
• PayPal money market fund 7-day yield rose from 5.03% to 5.04%
• ShareBuilder money market fund (BDMXX) 7-day yield fell from 4.44% to 4.43%
• Fidelity Money Market Fund (SPRXX) 7-day yield rose from 5.01% to 5.02% ($25,000 minimum, or $50,000 minimum to waive the $2 checkwriting fee)
• Fidelity Cash Reserves money market fund (FDRXX) 7-day yield rose from 4.96 to 4.97%
• Fidelity Prime Reserves money market fund (FPRXX) 7-day yield was unchanged at 4.46%
• Fidelity Federal Municipal Money Market Fund (FTEXX) 7-day yield rose from 3.26% to 3.38% or tax equivalent yield of 5.20% (up from 5.02%) for the 35% marginal tax bracket and 4.69% (up from 4.53%) for the 28% marginal tax bracket
• 28-day (1-month) T-bill investment rate fell from 4.72% to 4.62%
• 91-day (3-month) T-bill investment rate fell from 4.94% to 4.90%
• 182-day (6-month) T-bill investment rate fell from 5.12% to 5.00%

Ditto from last week: T-bill yields have been falling over the past month, curiously in-sync with the fall in commodities, suggesting that people have been shifting from commodities to cash in the form of short-term treasuries. I had been arguing for several months that commodities seemed a risky bet compared to super-safe 5% T-bills, so maybe a few other people noticed the same risk and opportunity. But now that a huge part of the hot money in commodities has shifted, maybe T-bills will rise again as traders and short-term speculators opportunistically resume playing commodities again. I would also note that the yield on the 28-day T-bill is significantly lower than the yield on the 91-day T-bill, suggesting that people shifted into T-bills only as a very short-term move, with the intention of moving back out of the T-bills within a month.

I did finally get around to calling Fidelity again, but had to talk to two people to get even a vague answer. It does seem that cash deposited in a Fidelity account will earn the FCASH rate, which was 3.17% (taxable) when I called on Thursday, September 29, 2006. But you can easily transfer that money online into FDRXX or FTEXX or whatever at any time (by doing a trade or a "buy"), but there is no automatic sweep feature. They will automatically "sell" from your money market fund if checks or debits hit your account for more than your FCASH money, but they say they would prefer that you transfer the money back to FCASH yourself (a "sell") since they only do this as a "courtesy". You need $2,500 to get checkwriting for the account and $5,000 to get a debit card, and those minimums are for that specific brokerage account, regardless of the asset value you have in other Fidelity accounts such as your 401(k). Grrrrr... My employee stock purchase plan will make its first purchase in the coming days since today is the end of the quarter, which will give me enough asset value in the brokerage account to get checkwriting, but I'll have to wait another quarter to get the debit card. Then, I may switch my payroll direct deposit to this Fidelity brokerage account and use it as my main "bank" account since I'll earn at least the FCASH interest rate even for money that stays in the account only for a week or two before flowing out to pay normal monthly expenses.

Coincidentally, I had to call my old full-service broker, UBS (which was Paine Webber), that same day for an address change on an old IRA that has an inconvenient ownership of oil and gas limited partnerships from the late 80's and early 90's, and I asked them if they could do any better on the cash that the partnership kicks off every quarter. Currently, the standard interest rate in that UBS IRA is barely more than 1%. It turns out that they have a poorly-promoted "floater fund" which invests in reasonably safe short-term commercial loans (typically 90 days) and is currently paying about 6.1% and is "daily liquid" like a money market mutual fund. I am tempted to re-open a "resource management account" with them, but it won't make financial sense until I have more than $15,000 in cash (6% vs. 5% is a 1% difference and the annual fee is $150 which is 1% of $15,000).

Some short-term CDs from brokerage firms are also looking attractive right now. I see that Charles Schwab has a 3-month CD yielding 5.30% APY. I don't know the details and haven't looked into it myself, but it may be worth checking out. But their 6-month CD has only a 5.15% APY and the 1-year CD has a 5.05% APY. Rates are going to fluctuate wildly over the coming year, but a CD rate is locked in for the term of the CD.

PayPal continues to be a fairly interesting place to store cash for both relatively quick access and a well above average yield. There is no minimum for a PayPal account, no fee for a basic account, and it can be linked to your bank checking account for easy access. Right now I am using PayPal as a savings account, putting a little more money in whenever I get a chance and feel that my budget has some "spare change."

Right now, 28-day T-bills don't feel as attractive for cash that you won't need for a month, since new issues (as contrasted to those they I currently hold) are yielding significantly less than PayPal and Fidelity Cash Reserves.

Please note the disclaimer on Fidelity's web site:

Past performance is no guarantee of future results. Yield will vary.

As always, please note that cash placed in money market mutual funds is subject to 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 around a bit.

T-bills and the cash in your bank checking account or bank CD are of course "protected", either by "the full faith and credit of the U.S. Treasury" or the FDIC. Please realize that you may not get your full principle back if you attempt to cash out early for Treasury securities since you'll get the price on the open market, which is not guaranteed by the U.S. Treasury. You get your full principle only if your Treasury security is held until maturity.

-- Jack Krupansky

PIMCO's Bill Gross on Empty Nesting/Successful Investing and the bond bull market

Take a look at PIMCO's "Bond King" Bill Gross' latest monthly investment outlook commentary for October entitled "Empty Nesting/Successful Investing." Here's one of his main points:

Currently, PIMCO’s best 60/40 bet is a cyclical one that proposes that the Fed is done and ultimately will have to lower interest rates in order to restimulate an asset based/housing led economy that has been its primary growth hormone in recent years. With inflation leveling off at admittedly unacceptable levels and the domestic economy moving towards a 2% real growth rate or less in the next year or so, the Fed at some point in 2007 will be forced to cut short rates. Don’t ask us when or by how much yet. A lot will depend on the evolution of the domestic housing market and the equally important maturation of the global economy sans U.S. consumer imports and perhaps sans hyper investment spending in Asia. We will monitor daily. But with the ongoing uncertainty of why 10-year Treasuries should yield 4.65% in a 5.25% Fed Funds world, we feel more comfortable with the observation that the front-end of the U.S. Curve is only valuing a 40 basis point cut in FF by September of 2007. Like I suggested above, we’re not sure how much it should be but we’re comforted by the fact that in effect we’re only paying a 40 basis point premium in the form of a lower 4.85% yield in order to find out what’s behind Monte Hall’s/Ben Bernanke’s door #2. The U.S. bond bull market, which began almost two months ago, remains in its infancy but the best way to play it is via durations above index and concentrated in the front-end of the curve. Importantly, although other central banks remain focused on raising short rates another 25 or 50 basis points, global bond markets usually follow the U.S. lead and we expect the same pattern this time as well with a mild exception in Japan, and slightly different curve dynamics in Euroland.

I actually don't subscribe to much of his thinking, but it is always useful to read a variety of points of view and then make your own best judgment.

I suspect that PIMCO has already placed its own in-house bets on Bill's investment scenario, so that PIMCO will profit handsomely as everyday investors begin to invest with Bill's advice. I also suspect that Bill has already offered his advice to his institutional investors, so that retail investors will gain only a modest portion of the potential gains, at best. Bill manages enough money and has enough followers than he is capable of creating a self-fulfilling prophesy, at least on occasion.

My main point of departure from Bill's outlook is that I suspect that the housing slowdown will have less of a net negative impact than Bill and friends project and that the economy will do better than Bill projects. GDP will likely slow, but maybe only to the 1% to 3% range at worst over the coming year and certainly not slow enough for long enough to cause the Fed to seek to re-stimulate the economy.

One key point that the "bond bulls" are not admitting in public is that current interest rates are not restrictive, but merely neutral, neither accommodative nor restrictive. The Fed has eliminated the froth, but hasn't damaged the availability of capital for worthy ventures. The world is still awash with cash, not the least of which is all the money that recently flowed out of commodities speculation.

-- Jack Krupansky

Fed will remain paused at 5.25% for the rest of this year and next

Now that we have two consecutive Fed FOMC meetings behind us with no change in monetary policy and inflation has started to taper off, we now have a little breathing room. The economy and inflation will wiggle around in the coming months, but nothing dramatic enough to warrant a change in course by the Fed.

As of Friday, Fed funds futures contracts indicate a 0% probability of a further rate hike and only a 2% chance of a cut at the October FOMC meeting. Futures indicate a 14% chance of a cut at the December meeting, a 40% chance of a cut at the March meeting, 100% chance of a cut by the June meeting, 20% chance of a second cut by the July meeting, and 66% chance of a second cut by the August meeting. I personally don't concur with those odds, but that is how a lot of people are actually "betting." I would simply note that such betting can change on a moment's notice as economic and financial data unfolds. I suspect a lot of those bets are based on a presumption that the housing sector will seriously collapse.

My recent Fed commentary will probably hold for some months to come.

My view is that the Fed will keep their fed funds target rate paused at 5.25% for at least the rest of the year, and probably for the entire coming year.

It is also my view that there will not be a recession next year, nor even enough of a growth slump to trigger a Fed rate cut.

Upcoming Fed FOMC meetings:

• October 24/25, 2006
• December 12, 2006
• January 30/31, 2007
• March 20/21, 2007
• May 9, 2007
• June 27/28, 2007
• August 7, 2007
• September 18, 2007
• October 30/31, 2007
• December 11, 2007

-- Jack Krupansky

Is a recession on the way?

There is a lot of intense chatter and debate as to whether the Fed will be successful at engineering a "soft landing" or whether a significant growth slump or even a recession is in the cards for next year. Even for people who believe that a relatively soft landing is in store, there is the question of whether the Fed may be forced to cut interest rates at least modestly to keep the soft landing from being too hard.

My view is that the Fed will be successful and will not have to adjust interest rates at all over the coming year. The economy is stronger than a long of people give it credit for, speculation in commodities will likely taper off, and the housing sector won't collapse to the extent that many people are suggesting.

There is some amount of historical data that suggests that a Treasury yield curve inversion such as we have now tends to signal a recession within a year, but like all such historical correlations, it can never be used as an absolute guide as to what will actually transpire. In fact, the yield curve is literally all over the map, with inversions only for selected portions of the curve, but not for all portions of the yield curve. In fact, the spread between the yields of the 28-day T-bill and the 30-year T-bond is not inverted. There are a lot of practical reasons for high demand for Treasuries of longer duration, not the least of which is the funding of retirement plans and pensions as "boomers" approach retirement age.

The economy is still in the early stages of recovery from the bust after the boom and will be for several more years. The bad news is that a lot of sectors of the economy are still struggling, but the good news is that with each passing month the economy is incrementally in better shape structurally.

Is a recession coming over the next twelve months? My answer: No.

-- Jack Krupansky

Rolling over my 28-day T-bills from September

Since I purchased my last batch of 28-day T-bills over three weeks ago, it's almost time for them to mature and to roll the proceeds over and buy a new batch on the next weekly T-bill auction on Tuesday using the TreasuryDirect online system. All of this is happening automatically, but I am curious what interest rate I'll get since it depends of the demand at the auction. I'll know on Tuesday afternoon when the T-bill auction results are published.

My current T-bills were issued on Thursday, August 31, 2006 and mature this Thursday, September28, 2006. Their investment rate (uncompounded annual yield) was 5.19%. The interest rates on the 28-day T-bills for the three weekly auctions since then have ben significantly lower at 4.88%, 4.76%, and 4.72%.

If demand is higher, I'll get a lower rate. If demand is lower, I'll get a higher rate. Lately, demand has been much higher as money has flowed dramatically out of commodities, but I suspect that the flows will begin to diminish soon. Still, I am prepared for the fact that I might get a rather mediocre return, in the range 4.65% to 4.90%.

The proceeds from my maturing T-bills will be credited to my bank checking account sometime on Thursday and the debit for the new purchase will hit shortly thereafter. At least that's what happened last time. I have enough cash in my bank checking account to cover any skew in the credit and debit order. The net effect will be that the accrued interest will be deposited in my bank checking account.

-- Jack Krupansky

Where are oil and gasoline prices headed over the next few months?

One of the factors that was stimulating speculation in energy commodities over the past eight months was all of the administration's saber-rattling over Iran and its so-called "nuclear ambitions". But with the election coming up and the Republicans running very scared, the administration is forced to do its best to tamp down market expectations of a military conflict or oil supply disruption with Iran and to assure that consumers don't take their anger over high gasoline prices out on Republican incumbents in the November election.

The administration or even the big oil companies do not control oil and gasoline prices directly, but the administration (with help from Congress) does control foreign policy and does have the ability to either calm markets (driving commodities prices down) or incite them with talk of confrontation that could lead to military action or maybe an embargo or halt to oil exports by Iran (driving commodities prices up).

Without war fears "guiding" the commodities markets up, commodities are likely to trend down. There may be occasional rallies, but the overall trend will be down.

There is a lot of price gouging going on right now in retail gasoline prices. The rule of thumb is that retail gasoline is in equilibrium at about 60 to 65 cents above the wholesale price as indicated by the front-month NYMEX regular unleaded futures contract. The NYMEX price for October regular unleaded futures was $1.4722 on Friday. That implies an equilibrium retail price of $2.07 to $2.12. The AAA Daily Fuel Guage Report indicates that the national average for regular unleaded is $2.417, suggesting price gouging on the order of 39 to 44 cents. We could well see a fair amount of the gouge evaporate over the next six weeks. And the underlying NYMEX gasoline futures could well continue to trend down as well.

-- Jack Krupansky

PayPal money market fund yield up to 5.03%

Here are some recent money market mutual fund yields:

• iMoneyNet average taxable money market fund 7-day yield was unchanged at 4.73%
• PayPal money market fund 7-day yield rose from 5.02% to 5.03%
• ShareBuilder money market fund (BDMXX) 7-day yield fell from 4.45% to 4.44%
• Fidelity Money Market Fund (SPRXX) 7-day yield rose from 5.00% to 5.01%
• Fidelity Cash Reserves money market fund (FDRXX) 7-day yield was unchanged at 4.96%
• Fidelity Prime Reserves money market fund (FPRXX) 7-day yield rose from 4.45% to 4.46%
• Fidelity Federal Municipal Money Market Fund (FTEXX) 7-day yield rose from 3.07% to 3.26% or tax equivalent yield of 5.02% (up from 4.72%) for the 35% marginal tax bracket and 4.53% (up from 4.26%) for the 28% marginal tax bracket
• 28-day (1-month) T-bill investment rate fell from 4.76% to 4.72%
• 91-day (3-month) T-bill investment rate fell from 4.95% to 4.94%
• 182-day (6-month) T-bill investment rate rose from 5.13% to 5.12%

T-bill yields have been falling over the past month, curiously in-sync with the fall in commodities, suggesting that people have been shifting from commodities to cash in the form of short-term treasuries. I had been arguing for several months that commodities seemed a risky bet compared to super-safe 5% T-bills, so maybe a few other people noticed the same risk and opportunity. But now that a huge part of the hot money in commodities has shifted, maybe T-bills will rise again as traders and short-term speculators opportunistically resume playing commodities again. I would also note that the yield on the 28-day T-bill is significantly lower than the yield on the 91-day T-bill, suggesting that people shifted into T-bills only as a very short-term move, with the intention of moving back out of the T-bills within a month.

The Fidelity Money Market (SPRXX) looks quite attractive, but has a $25,000 minimum, or a $50,000 minimum to waive the $2 checkwriting fee.

From three weeks ago: I need to look into what is going on at Fidelity. I hadn't noticed SPRXX before and they used to talk about FCASH, which I no longer see. Maybe they've seen the light and done the right thing, or maybe they've simply confused matters even worse. I'll have to investigate further how they are handling "core" cash these days for a taxable account (which I do not have, yet). Next year, when I have an extra $2,500 in free cash I will consider using a Fidelity account for payroll direct deposit and checks and bills. Since I pay most of my bills (including back taxes) through direct debit from my bank account, I'll have to check into whether Fidelity can handle that. They do have "Bill Pay", but that's different and not what I need.

PayPal is looking like a fairly interesting place to store cash for both relatively quick access and a well above average yield. There is no minimum for a PayPal account, no fee for a basic account, and it can be linked to your bank checking account for easy access. Right now I am using PayPal as a savings account, putting a little more money in whenever I get a chance and feel that my budget has some "spare change." In fact I just "deposited" some money in my PayPal account a few minutes ago.

Right now, 28-day T-bills don't feel as attractive for cash that you won't need for a month, since new issues (as contrasted to those they I currently hold) are yielding less than PayPal and Fidelity Cash Reserves.

Please note the disclaimer on Fidelity's web site:

Past performance is no guarantee of future results. Yield will vary.

As always, please note that cash placed in money market mutual funds is subject to 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 around a bit.

T-bills and the cash in your bank checking account or bank CD are of course "protected", either by "the full faith and credit of the U.S. Treasury" or the FDIC. Please realize that you may not get your full principle back if you attempt to cash out early for Treasury securities since you'll get the price on the open market, which is not guaranteed by the U.S. Treasury. You get your full principle only if your Treasury security is held until maturity.

-- Jack Krupansky

The truth about high oil prices

I've been writing for two years now about how crude oil (and energy and commodities in general) have risen so high not due to "true economic fundamentals" or lack of supply or an excess of demand, but almost purely due to a frenzy of speculation. Finally, after all of those months, of constantly hearing so much mindless chatter about China and India and Iran and how commodities were only going to go higher, finally, the media has noticed what had been going on, and now quite a few traders, speculators, hedge funds, and money managers are admitting that they had placed very large bets on commodities, and now the folly of those bets is coming home to roost.

The recent decline in the price of crude oil, over $2 today alone, certainly catches your attention.

One problem with trying to estimate where the prices of commodities are headed in the coming months is that it is difficult to assess how much of the recent declines was due to short selling rather than speculators dumping long positions. If speculators really have dumped substantially all of their prior long positions, then we could actually see a dramatic bounce any day now. On the other hand, if speculators continue to hold very large long positions, we could see further significant deterioration in commodities prices as those remaining long positions grow increasingly less attractive to hold.

The real bottom line is that we will see plenty of volatility until commodities gradually drift off the speculators' radar, maybe a year from now.

Right now, commodities are offering more in the way of assured scandals than assured profits. Commodities are no longer a "one way trade" destined to move only higher.

The recent 20% decline in the price of crude oil off the July peak is only some of the froth, the weak hands or short-term speculators. It will take more months of mediocre results or even losses before longer-term speculators finally start to throw in the towel.

There is no fundamental reason for crude oil to be above $35 right now. That means there are still many boatloads of traders, speculators, hedge funds, and in-house trading desks at investment banks who are still enamored by the lure of easy money that simply isn't there any more.

There is a fairly decent article on the recent commodities difficulties in the NY Times by Clifford Krauss entitled "Oil’s Rout Outpaces Its Advance", and that was written before even the rout on Tuesday.

There is also an interesting discussion of commodities by Stephen Roach, Chief Economist at Morgan Stanley, entitled "Commodities as an Asset Class" in which he argues that:

For my money, there is far too much talk about the globalization-led commodity super-cycle.  It gives the false impression of a one-way market, where every dip is buying opportunity.  Yet commodities as a financial asset are as bubble-prone as any other investment.  As is always the case in every bubble I have lived through, denial is deepest when asset values go to excess.  That’s very much the case today.   After three years of extraordinary outperformance, denial over the possibility of a sustained downside adjustment in commodity prices is very much in evidence -- underscoring the time-honored sociology of an asset class that has gone to excess.  Meanwhile, China and US-housing-related fundamentals are going the other way -- setting up increasingly tender commodity markets for unpleasant downside surprises on the demand side of the global economy.  The herding instincts of institutional investors could well magnify the price declines -- when, and if, they emerge.  All this suggests there is still plenty of life left in the time-honored commodity cycle.

The wording of his last sentence is somewhat ambiguous and can be read as either bullish or bearish for commodities.

-- Jack Krupansky

Has the price of oil peaked?

Once again, it may or may not be too early to call the end of the recent commodities boom or bull market. Nonetheless, it is quite clear that commodities are in a significant correction off of their recent peak. And with people expecting the economy to cool off a bit over the next year, there would not seem to be any significant fundamental drivers to push commodities to new market highs. Further, with super-safe Treasury securities yielding around 5%, it is difficult to posit a robust investment thesis for putting fresh money to work in commodities speculation.

Still, it is always very difficult to "call" the top of any market.

Given how far commodities have fallen, a classic "dead-cat" bounce is also to be expected at some point. Traders and speculators and diehard commodities bulls will continue to try to push commodities prices back up whenever downwards momentum peters out.

To put the price of crude oil in perspective, the spot price of crude oil is roughly where it was a year ago.

To answer the question, my feeling at this point is that the price of oil has peaked.

-- Jack Krupansky

ECRI Weekly Leading Index indicator for future growth recovers modetately but is still moderately negative

The six-month smoothed growth rate of the Weekly Leading Index (WLI) from the Economic Cycle Research Institute (ECRI) recovered moderately (from -1.3% to -0.9%) after declining for 14 consecutive weeks and then rising for three consecutive weeks, but is still moderately negative, suggesting that the economy may be finally leveling out.

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 smoothed growth rate is rather weak, it isn't showing any signs of the kind of persistent weakness (values more negative than -1.5% over a period of time) 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 is succeeding at its goal of moderating the economy to a sustainable growth rate.

-- Jack Krupansky

Fed will remain paused at Wednesday, September 20, 2006 FOMC meeting and stay on course with 5.25% for the rest of the year and next

It has only been barely over a month since the Fed "changed course" by pausing their long rate hiking campaign, but already this "pause" is beginning to sound like a broken record.

The dramatic decline in crude oil and gasoline prices in recent weeks virtually guarantees that the Fed will continue the pause at the FOMC meeting on Wednesday, September 20, 2006.

As of Friday, Fed funds futures continued to firmly predict that the Fed will remain paused at 5.25% at their September 20, 2006 meeting. October Fed funds futures predict a rate of 5.2600%, or about a 4% chance of a hike and a 96% chance of no hike. Sure, that could change at a moment's notice, but for now is a rather solid, slam-dunk, no-brainer for a continued pause in September.

November Fed funds futures predict a rate of 5.2800%, suggesting only a 12% chance of a hike to 5.50% through November or an 88% chance of no hike. January futures predict a rate of 5.2900%, suggesting a 16% chance of a hike or an 84% chance of no hike. And the odds decline from there. Note that futures less than 45 days out tend to have some chance of accuracy, but further out futures are susceptible to very wild swings and changes in market sentiment and frequently reflect insurance hedges rather than outight bets.

People were chattering less about the chance for a rate cut in interest rates sometime in 2007, with futures suggesting no chance of a cut through February, a 24% chance of a cut to 5.00% in March or April, and an 80% chance of a cut through July, but these may be more of an insurance hedge rather than outright bets.

My estimates are very rough calculations based on Fed funds futures prices. More accurate modeling of fed funds rate predictions based on options on federal funds futures can be found on the the Cleveland Federal Reserve Bank's web page for Fed Funds Rate Predictions. Based on their calculations from Thursday, there is an 92% probability of 5.25% after the September meeting, and an 82% probability of a 5.25% rate after the October meeting. I'm sure that their sophisticated modeling and math is far more rigorous than mine, but the final number is still in the same ballpark and still has the same overall message: no hike at either the September or October FOMC meetings.

My unchanged view is that although the Fed has a strong preference for inflation in the 1% to 2% range, even the 3% range is somewhat tolerable, at least for a a relatively short span of months or maybe even a year. Oil prices are well off their recent peak. Ditto for gasoline. Speculators are still bullish on commodities, but overall, commodities prices have lost much of their upward momentum.

Make no mistake, the Fed would dearly love to push inflation down below 3% or even 2.5%, but by the same token they will not go very far out on the limb to do so.

It may take a number of months or even an entire year for inflation to pull comfortably back into even the low 2% to 3% range, but the Fed has in fact done all of the heavy lifting and now has the luxury of sitting back and watching the fruits of its labors gradually take root.

We saw some moderation of inflation in August and now a huge pullback in energy prices over the past few weeks, suggesting that the inflation reports for the next couple of months should show a trend in the Fed's direction. We won't be out of the woods by any measure before the end of the year since the price level for energy is still high and still pushing costs up throughout the economy, even if that level is trending down.

General points:

• 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 some further hikes could be needed a few more months down the road.
• The economy has a lot more underlying strength than a lot of pundits give it credit for.
• The housing "boom" has certainly waned, but even a moderate softening of the housing sector is not going to lead to a general recession.
• Inflation is likely to start trending down (called disinflation) over the coming months.

For now, energy prices are no longer a large red flag on the inflation outlook. They are still a large yellow flag, but as long as the price of crude oil stays below $75 and unleaded regular gasoline stays below $2.75, the Fed will likely choose to "wait and see".

The hurricane season has been very mild this year to date. You can be sure that traders and speculators and planners will be hyper-alert for storm-related news, so we might not see crude oil futures pull back significantly further until we get well into October. We could also see one or more "technical" pullbacks based of technical analysis by traders and speculators, but they tend to be following by matching rallies, until we finally see an economically-based decline.

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. Bernanke also made clear during his confirmation hearings that he was inclined to stick with the status quo for now and move towards specific inflation targets only over time. So, don't worry about such a target this year and probably even next year.

My impression is that once the Fed pauses for several meetinsg 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.

Before the August FOMC meeting it was not clear whether Bernanke would lean more heavily in the hawkish inflation-fighting direction or in the more dovish growth-promotion direction. The pause at the August FOMC meeting made it abundantly clear that despite being serious about fighting inflation, he prefers to protect growth. Put another way, he probably despises inflation a little less than he despises deflation.

Another factor that cannot be overlooked is that this is an election year, and there is a tendency (but not a hard rule) that the Fed should "lighten up" going into a politically-charged election season and avoid appearing to be helping one party or the other. I personally don't think that this was a major factor in the Fed's thinking or will be in the next two months, but this factor is out there.

My view is that the Fed will keep their fed funds target rate paused at 5.25% for at least the rest of the year, and probably for the entire coming year.

It is also my view that there will not be a recession next year, nor even enough of a growth slump to trigger a Fed rate cut.

Upcoming Fed FOMC meetings:

• September 20, 2006
• October 24/25, 2006
• December 12, 2006
• January 30/31, 2007

-- Jack Krupansky

PayPal money market fund yield down to 5.02%

Here are some recent money market mutual fund yields:

• iMoneyNet average taxable money market fund 7-day yield was unchanged at 4.73%
• PayPal money market fund 7-day yield fell from 5.03% to 5.02%
• ShareBuilder money market fund (BDMXX) 7-day yield fell from 4.46% to 4.45%
• Fidelity Money Market Fund (SPRXX) 7-day yield rose from 4.99% to 5.00%
• Fidelity Cash Reserves money market fund (FDRXX) 7-day yield was unchanged at 4.96%
• Fidelity Prime Reserves money market fund (FPRXX) 7-day yield was unchanged at 4.45%
• Fidelity Federal Municipal Money Market Fund (FTEXX) 7-day yield rose from 3.06% to 3.07% or tax equivalent yield of 4.72% (up from 4.71%) for the 35% marginal tax bracket and 4.26% (up from 4.25%) for the 28% marginal tax bracket
• 28-day (1-month) T-bill investment rate fell from 4.88% to 4.76%
• 91-day (3-month) T-bill investment rate fell from 4.98% to 4.95%
• 182-day (6-month) T-bill investment rate rose from 5.12% to 5.13%

From two weeks ago: I need to look into what is going on at Fidelity. I hadn't noticed SPRXX before and they used to talk about FCASH, which I no longer see. Maybe they've seen the light and done the right thing, or maybe they've simply confused matters even worse. I'll have to investigate further how they are handling "core" cash these days for a taxable account (which I do not have, yet). Next year, when I have an extra $2,500 in free cash I will consider using a Fidelity account for payroll direct deposit and checks and bills. Since I pay most of my bills (including back taxes) through direct debit from my bank account, I'll have to check into whether Fidelity can handle that. They do have "Bill Pay", but that's different and not what I need.

PayPal is looking like a fairly interesting place to store cash for both relatively quick access and a well above average yield. There is no minimum for a PayPal account, no fee for a basic account, and it can be linked to your bank checking account for easy access. Right now I am using PayPal as a savings account, putting a little more money in whenever I get a chance and feel that my budget has some "spare change." In fact I just "deposited" some money in my PayPal account a few minutes ago.

Right now, 28-day T-bills don't feel as attractive for cash that you won't need for a month, since new issues (as contrasted to those they I currently hold) are yielding less than PayPal and Fidelity Cash Reserves.

Please note the disclaimer on Fidelity's web site:

Past performance is no guarantee of future results. Yield will vary.

As always, please note that cash placed in money market mutual funds is subject to 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 around a bit.

T-bills and the cash in your bank checking account or bank CD are of course "protected", either by "the full faith and credit of the U.S. Treasury" or the FDIC. Please realize that you may not get your full principle back if you attempt to cash out early for Treasury securities since you'll get the price on the open market, which is not guaranteed by the U.S. Treasury. You get your full principle only if your Treasury security is held until maturity.

-- Jack Krupansky

ECRI Weekly Leading Index indicator for future growth recovers a little but is still moderately negative

The six-month smoothed growth rate of the Weekly Leading Index (WLI) from the Economic Cycle Research Institute (ECRI) finally recovered a little (from -1.7% to -1.5%) after declining for 15 consecutive weeks (actually it declined for 14 weeks and was level for two weeks before turning up), but is still moderately negative, suggesting that the economy may be finally leveling out.

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 smoothed growth rate is rather weak, it isn't showing any signs of the kind of persistent weakness (values more negative than -1.5% over a period of time) 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 is succeeding at its goal of moderating the economy to a sustainable growth rate.

-- Jack Krupansky

Fed will stay on course with 5.25% for the rest of the year and next

As of Friday, Fed funds futures continued to firmly predict that the Fed will remain paused at 5.25% at their September 20, 2006 meeting. October Fed funds futures predict a rate of 5.2650%, or about a 6% chance of a hike and a 94% chance of no hike. Sure, that could change at a moment's notice, but for now is a rather solid, slam-dunk, no-brainer for a continued pause in September.

November Fed funds futures predict a rate of 5.2850%, suggesting only a 14% chance of a hike to 5.50% through November or an 86% chance of no hike. And the odds decline from there. Note that futures less than 45 days out tend to have some chance of accuracy, but further out futures are susceptible to very wild swings and changes in market sentiment and frequently reflect insurance hedges rather than outight bets.

People continue to chatter about the chance for a rate cut in interest rates sometime in 2007, with futures suggesting a 20% chance of a cut to 5.00% in February, a 44% chance of a cut by the end of April, and a 100% chance of a cut through July, but these may be more of a hedge rather than outright bets.

My estimates are very rough calculations based on Fed funds futures prices. More accurate modeling of fed funds rate predictions based on options on federal funds futures can be found on the the Cleveland Federal Reserve Bank's web page for Fed Funds Rate Predictions. Based on their calculations from Thursday, there is an 89% probability of 5.25% after the September meeting, and an 88% probability of a 5.25% rate after the October meeting. I'm sure that their sophisticated modeling and math is far more rigorous than mine, but the final number is still in the same ballpark and still has the same overall message: no hike at either the September or October FOMC meetings.

My unchanged view is that although the Fed has a strong preference for inflation in the 1% to 2% range, even the 3% range is somewhat tolerable, at least for a a relatively short span of months or maybe even a year. Oil prices are well off their recent peak. Ditto for gasoline. Speculators are still bullish on commodities, but overall, commodities prices have lost much of their upward momentum.

Make no mistake, the Fed would dearly love to push inflation down below 3% or even 2.5%, but by the same token they will not go very far out on the limb to do so.

It may take a number of months or even an entire year for inflation to pull comfortably back into even the low 2% to 3% range, but the Fed has in fact done all of the heavy lifting and now has the luxury of sitting back and watching the fruits of its labors gradually take root.

General points:

• 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 some further hikes could be needed a few more months down the road.
• The economy has a lot more underlying strength than a lot of pundits give it credit for.
• The housing "boom" has certainly waned, but even a moderate softening of the housing sector is not going to lead to a general recession.

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 September 20 FOMC meeting, a hike will be a done deal. On the other hand, if crude oil stays below or near $70, a continued 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 staying paused. 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 October delivery closed at $66.25 (versus $69.19 a week ago), which is below the "no-brainer pause" range. The peak short-term futures contract, January 2008, closed at $72.45 (versus $74.44 last week). Absent significant change over the coming weeks, crude oil suggests that the Fed will stand pat with a pause at 5.25%. As long as front-month crude stays below $76, the Fed can remain paused 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%.

The hurricane season has been very mild this year to date. You can be sure that traders and speculators and planners will be hyper-alert for storm-related news, so we might not see crude oil futures pull back significantly further until we get well into October. We could also see one or more "technical" pullbacks based of technical analysis by traders and speculators, but they tend to be following by matching rallies, until we finally see an economically-based decline.

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. Bernanke also made clear during his confirmation hearings that he was inclined to stick with the status quo for now and move towards specific inflation targets only over time. So, don't worry about such a target this year and probably even next year.

My impression is that once the Fed pauses for several meetinsg 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.

Before the August FOMC meeting it was not clear whether Bernanke would lean more heavily in the hawkish inflation-fighting direction or in the more dovish growth-promotion direction. The pause at the August FOMC meeting made it abundantly clear that despite being serious about fighting inflation, he prefers to protect growth. Put another way, he probably despises inflation a little less than he despises deflation.

Another factor that cannot be overlooked is that this is an election year, and there is a tendency (but not a hard rule) that the Fed should "lighten up" going into a politically-charged election season and avoid appearing to be helping one party or the other. I personally don't think that this was a major factor in the Fed's thinking or will be in the next two months, but this factor is out there.

My view is that the Fed will keep their fed funds target rate paused at 5.25% for at least the rest of the year, and probably for the entire coming year.

It is also my view that there will not be a recession next year, nor even enough of a growth slump to trigger a Fed rate cut.

-- Jack Krupansky

My next monthly ShareBuilder automatic investment (for September 2006) is on Tuesday

My next monthly automatic investment through ShareBuilder will occur on Tuesday, September 12, 2006. 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. This is my fourth monthly purchase for this new dollar-cost averaging investment plan.

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 still haven't decided whether to switch this plan so that it contributes to a Roth IRA account. For now, I would prefer to keep it readily available if for some reason I need to sell it to raise cash for unforeseen contingencies.

-- Jack Krupansky

PayPal money market fund yield down to 5.03%

Here are some recent money market mutual fund yields:

• iMoneyNet average taxable money market fund 7-day yield was unchanged at 4.73%
• PayPal money market fund 7-day yield fell from 5.04% to 5.03%
• ShareBuilder money market fund (BDMXX) 7-day yield fell from 4.47% to 4.46%
• Fidelity Money Market Fund (SPRXX) 7-day yield fell from 5.02% to 4.99%
• Fidelity Cash Reserves money market fund (FDRXX) 7-day yield fell from 4.97% to 4.96%
• Fidelity Prime Reserves money market fund (FPRXX) 7-day yield fell from 4.47% to 4.45%
• Fidelity Federal Municipal Money Market Fund (FTEXX) 7-day yield fell from 3.20% to 3.06% or tax equivalent yield of 4.71% (down from 4.92%) for the 35% marginal tax bracket and 4.25% (down from 4.44%) for the 28% marginal tax bracket
• 28-day (1-month) T-bill investment rate fell from 5.19% to 4.88%
• 91-day (3-month) T-bill investment rate fell from 5.09% to 4.98%
• 182-day (6-month) T-bill investment rate fell from 5.17% to 5.12%

It was interesting that the yield for 28-day T-bills was so sharply lower. That means there was greater demand, possibly due to people pulling money out of the stock market. I wouldn't jump to the conclusion that a downwards trend is now established. It may also have simply been that a lot of people saw the great yields over the previous two weeks and swarmed to the 28-day T-bill, if only for a short-term play.

From last week: I need to look into what is going on at Fidelity. I hadn't noticed SPRXX before and they used to talk about FCASH, which I no longer see. Maybe they've seen the light and done the right thing, or maybe they've simply confused matters even worse. I'll have to investigate further how they are handling "core" cash these days for a taxable account (which I do not have, yet). Next year, when I have an extra $2,500 in free cash I will consider using a Fidelity account for payroll direct deposit and checks and bills. Since I pay most of my bills (including back taxes) through direct debit from my bank account, I'll have to check into whether Fidelity can handle that. They do have "Bill Pay", but that's different and not what I need.

PayPal is looking like a fairly interesting place to store cash for both relatively quick access and a well above average yield. There is no minimum for a PayPal account, no fee for a basic account, and it can be linked to your bank checking account for easy access. Right now I am using PayPal as a savings account, putting a little more money in whenever I get a chance and feel that my budget has some "spare change."

From last week: Right now, 28-day T-bills feel more attractive for cash that you won't need for a month, but there is no guarantee that the interest rate on the next weekly Treasury T-bill auction will be as attractive. The other catch on the T-bills (besides being locked up for 28 days) is that the unit of investment is $1,000, so you have to find some other place to put any fraction of $1,000, including any interest you might accrue.

As always, please note that cash placed in money market mutual funds is subject to 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 around a bit.

T-bills and the cash in your bank checking account or bank CD are of course "protected", either by "the full faith and credit of the U.S. Treasury" or the FDIC.

-- Jack Krupansky

Gasoline prices have fallen dramatically and have further to fall

AAA publishes a web page called the Dail Fuel Guage Report, which gives average national gasoline prices every day ($2.74 for a gallon of regular unleaded on Sunday). Wholesale and retail gasoline prices have fallen dramatically over the fast few weeks. A gallon of retail regular unleaded gasoline is on average about 29 cents cheaper than the recent peak ($3.03). Not everyone has seen the same declines, yet, but further declines are in store since retail prices are still way out of line with wholesale prices which have fallen even more rapidly.

The price of a gallon of regular unleaded gasoline on NYMEX for delivery in October was priced at $1.71 on Friday. The traditional rule of thumb is that retail prices will converge at about 60 to 65 cents above the wholesale price. That means we should be looking at retail unleaded at $2.31 to $2.36, or about 38 to 43 cents below current retail prices.

Think of that 38 to 43-cent "gap" as the amount of "price gouging" that currently exists in retail markets.

Aren't you glad that your elected political leaders are not investigating how both wholesale and retail prices are set?

My view is that prices had been artificially pushed high due to a speculative frenzy of buying by parties who are not the true end users of the futures they were buying. A fair amount, but not all, of that speculative buying has now been "unwound". We could see further rises in speculative buying, especially whenever energy-related news seems bad, but my suspicion is that with interest rates up and super-safe T-bills now yielding over 5%, risky commodities trading and speculation has significantly less broad appeal, especially since a lot of "investors" have gotten burned badly in recent months after commodities had been touted as having "nowhere to go but up."

We still have a major portion of the Atlantic storm season in front of us and Katrina is still a fairly strong memory, but there isn't a lot of reason for energy prices to be rising at this juncture.

-- Jack Krupansky

Satisfaction of Judgment

These are words I never want to have to wait for and hear again: Satisfaction of Judgment.

As I struggled to survive financially back in 2002, 2003, and 2004, I fell behind in tax payments for both the IRS and New York state (and city). I was doing fine on installment plans for back taxes for 2002, never missing a payment. 2003 was not a problem since I had virtually no taxable income. Then I got in trouble in 2004 because I have several months of decent-paying work and I tried to "rescue" my credit record from completely falling off a cliff by holding off on tax payments and using the money instead to catch up on credit card payments. That was a huge mistake, especially since when I did inevitably file for bankruptcy all of the credit card debt was discharged and all of the back taxes remained.

Since I fell behind on taxes in 2004, that put me in technical defaultof tmy 2002 New York state tax installment plan, even though I had made all payments on time. I actually set up a substitute installment plan in early August 2005 to cover both my 2002 and 2004 New York State back taxes, but while I was on the phone with them they noted that a warrant would have to be issued for the 2002 back taxes as part of the process of getting the combined installment plan approved. They gave me a choice: pay the 2002 amount due or the warrant would be filed. I would have paid if I had the free cash, but I was struggling simply to keep my nose above water with my credit card debt. The warrant wasn't really a big deal since nobody was going to arrest me or show up at the bank and empty my account. Yes, it would show up on my credit record, but with all of my credit card debt problems, that was the least of my worries.

Once I had filed for bankruptcy in mid-August 2005, back tax payments were autmtaically suspended, and then I worked out a new installment plan in December 2005.

The warrant does show on my credit record, but otherwise it is simply a minor annoyance.

It has been my intention to completely pay off my New York State back taxes ASAP to eliminate the warrant, but evidently I have paid off enough to cover the 2002 portion of the back taxes. I had actually made some extra payments over the past couple of months as my income recovered with my new job that started in the middle of May.

When I saw the letter head in the mail on Friday I initially assumed that it was another pro forma letter giving my balance or reminding me of the due date. My heart sank when I saw the word "warrant", but then my spirits soard when I saw the word "Satisfaction" and the language that indicated that the letter was actually really good news.

I still have a fair amount of the 2004 back taxes to pay off. but I expect they will be history as well by the end of the year. I am seriously considering paying off the balance before then, but the motivation of eliminating the warrant is now gone.

I hadn't been sure whether the warrant was only for the 2002 taxes or for all outstanding taxes, but this letter lays that anxiety to rest.

I love some of the language, but maybe only because I now have the luxory of being on the good side of the fence. It says:

... it being certified that there is no execution for this warrant outstanding in the hands of the sheriff of any county of the state of New York.

Therefore, satisfaction is hereby acknowledged and the clerk is hereby authorized and directed to satisfy and discharge the same.

"Execution"?? "Hands of the sheriff of any county of the state of New York"?? It makes it sound as if I had been a fugitive from justice and granted an executive pardon. I suppose it might be fun to be a bureaucrat charged with wordsmithing this kind of stuff.

It is difficult to say how long it will take before the warrant disappears from my credit record. I talked about this with the New York state tax people on the phone in July, but the bottom line was that it was difficult to predict but that it shouldn't take more than a few months.

-- Jack Krupansky

Stashing money away

Liz Pulliam Weston has an srticle on MSN Money entitled "10 easy ways to stash away thousands" which lists a bunch of techniques for boosting your savings. I would add my best technique:

• Spread your savings over multiple accounts which don't show up on the same statement. "Out of sight, out of mind" really does work, at least for me.

The money sitting in your checking account will always be "fair game" no matter how disciplined you are. Ditto for a linked savings account that shows up on the same monthly statement.

What you really need is to have your cash stashed in several different locations so that even if you see all the numbers every month, you never see the sum sitting in one place where you can easily spend it or even start thinking about spending it. There is something psychological about seeing a bunch of smaller numbers even if they add up to that larger number.

The other advice I would give is:

Have a detailed monthly budget with plenty of reserves for both regular expenses and occasional expenses that don't occur every month. If you don't do this, you will continually be confronted with "surprise" expenses and always be "wondering" why you can never find money to save. Having such a "tight but loose" budget will also have the psychological effect that you always feel like you need to keep a tighter control over expenses when you see how little is left on the formal budget for discretionary expenses. Once again, "Out of sight, out of mind" rules.

-- Jack Krupansky

What to do with the interest from rolling T-bills

My monthly rolling of T-bills occurred on Thursday. The face value of the maturing T-bills was credited to my linked bank checking account by the TreasuryDirect online system and then the discounted purchase price of the new T-bills was debited from the same account, with the difference being the interest that I earned. Now, the question is what to do with the interest since my T-bill purchase is far too small to buy additional T-bills in units of $1,000 with the monthly interest. I chose to put the interest in my PayPal account which automatically puts the cash to work in a money market mutual fund, regardless of how small the amount is.

T-bills issued on Thursday will pay a 5.19% annualized investment rate. The PayPal money market fund is payying a 5.04% 7-day yield, which is reasonably close to what I get on the T-bills.

I actually deposited a fair amount more cash in my PayPal account beyond the T-bill interest, all in the name of increasing my savings and rainy-day fund. In another month or two I will have enough money saved there to increase my T-bill holdings and earn the higher T-bill yield.

As I accumulate enough cash to buy more T-bills, I intend to buy them for the other three weeks of the 28-day cycle. That will assure me that each week cash will become available if I need it.

-- Jack Krupansky

Fed will stay on course with 5.25% for the rest of the year and next

As of Friday, Fed funds futures continued to firmly predict that the Fed will remain paused at 5.25% at their September 20, 2006 meeting. October Fed funds futures predict a rate of 5.2650%, or about a 6% chance of a hike and a 94% chance of no hike. Sure, that could change at a moment's notice, but for now is a rather solid, slam-dunk, no-brainer for a continued pause in September.

November Fed funds futures predict a rate of 5.2800%, suggesting only a 12% chance of a hike to 5.50% through November. And the odds decline from there. Note that futures less than 45 days out tend to have some chance of accuracy, but further out futures are susceptible to very wild swings and changes in market sentiment and frequently reflect insurance hedges rather than outight bets.

People are chattering more seriously about a cut in interest rates sometime in 2007, with futures suggesting a 24% chance of a cut to 5.00% in February, a 56% chance of a cut by the end of April, a 100% chance of a cut through July, and even a 12% chance of a cut to 4.75% by the end of July, but these may be more of a hedge rather than outright bets.

My estimates are very rough calculations based on Fed funds futures prices. More accurate modeling of fed funds rate predictions based on options on federal funds futures can be found on the the Cleveland Federal Reserve Bank's web page for Fed Funds Rate Predictions. Based on their calculations from Thursday, there is a 92% probability of 5.25% after the September meeting, and an 86% probability of a 5.25% rate after the October meeting. I'm sure that their sophisticated modeling and math is far more rigorous than mine, but the final number is still in the same ballpark and still has the same overall message: no hike at either the September or October FOMC meetings.

My unchanged view is that although the Fed has a strong preference for inflation in the 1% to 2% range, even the 3% range is somewhat tolerable, at least for a a relatively short span of months or maybe even a year. Oil prices are well off their recent peak. Ditto for gasoline. Speculators are still bullish on commodities, but overall, commodities prices have lost much of their upward momentum.

Make no mistake, the Fed would dearly love to push inflation down below 3% or even 2.5%, but by the same token they will not go very far out on the limb to do so.

It may take a number of months or even an entire year for inflation to pull comfortably back into even the low 2% to 3% range, but the Fed has in fact done all of the heavy lifting and now has the luxury of sitting back and watching the fruits of its labors gradually take root.

General points:

• 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 some further hikes could be needed a few more months down the road.
• The economy has a lot more underlying strength than a lot of pundits give it credit for.
• The housing "boom" has certainly waned, but the housing sector is not going to lead to a general recession.

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 September 20 FOMC meeting, a hike will be a done deal. On the other hand, if crude oil retreats closer to $70, a continued 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 staying paused. 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 October delivery closed at $69.19 (versus $72.51 a week ago), which is below the "no-brainer pause" range. The peak short-term futures contract, November 2007 and December 2007, closed at $74.44 (versus $76.41 last week). Absent significant change over the coming weeks, crude oil suggests that the Fed will stand pat with a pause at 5.25%. As long as front-month crude stays below $76, the Fed can remain paused 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%.

The hurricane season has been very mild this year to date, but I said that last year at this time and then Katrina and Wilma came along. You can be sure that traders and speculators and planners will be hyper-alert for storm-related news, so we might not see crude oil futures pull back significantly until we get well into October. We could also see one or more "technical" pullbacks based of technical analysis by traders and speculators, but they tend to be following by matching rallies, until we finally see an economically-based decline.

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. Bernanke also made clear during his confirmation hearings that he was inclined to stick with the status quo for now and move towards specific inflation targets only over time. So, don't worry about such a target this year and probably even next year.

My impression is that once the Fed pauses for several meetinsg 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.

Before the August FOMC meeting it was not clear whether Bernanke would lean more heavily in the hawkish inflation-fighting direction or in the more dovish growth-promotion direction. The pause at the August FOMC meeting made it abundantly clear that despite being serious about fighting inflation, he prefers to protect growth. Put another way, he probably despises inflation a little less than he despises deflation.

Another factor that cannot be overlooked is that this is an election year, and there is a tendency (but not a hard rule) that the Fed should "lighten up" going into a politically-charged election season and avoid appearing to be helping one party or the other. I personally don't think that this was a major factor in the Fed's thinking or will be in the next two months, but this factor is out there.

My view is that the Fed will keep their fed funds target rate paused at 5.25% for at least the rest of the year, and probably for the entire coming year.

It is also my view that there will not be a recession next year, nor even enough of a growth slump to trigger a Fed rate cut.

-- Jack Krupansky

Oil losing steam

Speculation in crude oil and other energy commodities has clearly been losing steam, and this is despite all the zany "stories" that sleazy promoters have been concocting to stimulate inflows into commodities trading and speculation, everything from Peak Oil, China, India, Iran, and even Lebanon. And, the declines have been in spite of some real disruptions of supply, such as BP in Alaska, Nigeria, and Iraq.

Sure, we could see another bounce-back in the price of crude oil at some point, but the simple fact that a super-safe T-bill will earn you 5% takes a lot of wind out of the sails of the speculative promoters that was there eighteen months ago, a year ago, or even six months ago.

The big problem is that a lot of people put money into crude oil speculation over the past three months at price levels that leave them sitting on significant losses. Ouch. That provides a lot of negative PR for the crowd that was claiming that energy prices "can only go up."

It may still be too soon to call the end of the "bubble" in commodities speculation, but the bubble is certainly looking somewhat deflated.

-- Jack Krupansky

PayPal money market fund yield remains at 5.04%

Here are some recent money market mutual fund yields:

• iMoneyNet average taxable money market fund 7-day yield rose from 4.72% to 4.73%
• PayPal money market fund 7-day yield remains at 5.04%
• ShareBuilder money market fund (BDMXX) 7-day yield fell from 4.49% to 4.47%
• Fidelity Money Market Fund (SPRXX) 7-day yield remains at 5.02%
• Fidelity Cash Reserves money market fund (FDRXX) 7-day yield fell from 4.98% to 4.97%
• Fidelity Prime Reserves money market fund (FPRXX) 7-day yield remains at 4.47%
• Fidelity Federal Municipal Money Market Fund (FTEXX) 7-day yield fell from 3.28% to 3.20% or tax equivalent yield of 4.92% (down from 5.05%) for the 35% marginal tax bracket and 4.44% (down from 4.56%) for the 28% marginal tax bracket
• 28-day (1-month) T-bill investment rate rose from 5.17% to 5.19%
• 91-day (3-month) T-bill investment rate fell from 5.11% to 5.09%
• 182-day (6-month) T-bill investment rate was unchanged at 5.17%

I need to look into what is going on at Fidelity. I hadn't noticed SPRXX before and they used to talk about FCASH, which I no longer see. Maybe they've seen the light and done the right thing, or maybe they've simply confused matters even worse. I'll have to investigate further how they are handling "core" cash these days for a taxable account (which I do not have, yet). Next year, when I have an extra $2,500 in free cash I will consider using a Fidelity account for payroll direct deposit and checks and bills. Since I pay most of my bills (including back taxes) through direct debit from my bank account, I'll have to check into whether Fidelity can handle that. They do have "BillPay", but that's different and not what I need.

PayPal is looking like a fairly interesting place to store cash for both relatively quick access and a well above average yield. There is no minimum for a PayPal account, no fee for a basic account, and it can be linked to your bank checking acccount for easy access. Unfortunately, there are limits to how much money you can "receive" in your PayPal money market account each month. For example, I would not be able to move all of the cash in my Siebert taxable account to PayPal in one month. Update: I'm not sure if this is really true since my limit remained unchanged even after I made a deposit for the full limit amount. I'll have to investigate further.

Right now, 28-day T-bills feel more attractive for cash that you won't need for a month, but there is no guarantee that the interest rate on the next weekly Treasury T-bill auction will be as attractive. The other catch on the T-bills (besides being locked up for 28 days) is that the unit of investment is $1,000, so you have to find some other place to put any fraction of $1,000, including any interest you might accrue.

As always, please note that cash placed in 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.

T-bills and the cash in your bank checking account or bank CD are of course "protected", either by "the full faith and credit of the U.S. Treasury" or the FDIC.

-- Jack Krupansky