Retirement planning

Now that my net worth is finally back in the black, albeit only barely, I can once again focus some attention on retirement planning. Since I am 52, early retirement at 62 is just ten years away. Retirement at 65 is 13 years away, and a worst case retirement at age 70 is still only 18 years away.

I had wanted to make a solid stab at my revised financial model this weekend, but I got into other things and also realized that some of the key questions are not so easy to answer in a robust manner. Meanwhile, my 401k and employee stock purchase plan are on autopilot and accumulating value in excess of 30% of my gross salary each year.

The key questions or assumptions that I need to nail down to refine my retirement financial model are:

1. What age will I retire at? That's when my asset accumulation ends and my drawdown begins.
2. What age would I like to retire at?
3. What criteria should I use for deciding when to retire?
4. Will I be able to work part-time during retirement? What level of income could I expect?
5. What lifestyle will I be able to afford in retirement?
6. What will heathcare cost me in retirement?
7. What will housing cost when I retire? Will it grow at, faster than, or slower than inflation between now and deep into my retirement?
8. Should I plan on buying a house or condo to live in before I retire, or would it be wiser to accumulate financial assets and rent?
9. What rate of inflation should my financial model assume, both before and during retirement?
10. What rate of return should I plan for on assets before and during retirement?
11. What asset allocation mix should I presume at various stages up to and then during retirement?
12. Given my age and the fact that I am essentially starting over, what additional level of investment risk can I realistically take on?
13. How long can I expect to live? How much risk am I taking if I model my asset drawdown to hit zero when I turn 105? Should I model it to 110 or even 120 to be really safe? How can anybody really know the answer to this type of question?
14. How do I project social security benefits during retirement, particularly inflation? If I have my current benefit estimates from the SocialSecurity Administration, how do I model them out to my retirement age and during retirement?

I'm currently thinking that a rate of return of 4% is reasonably conservative. Warren Buffett used to talk about a long-term expectation of 7% with 3% inflation, netting 4%.

My main retirement plans are Roth, so I won't have any income taxes to pay. I have stock and cash that is in taxable accounts, so that needs to be discounted by taxes (and inflation).

I am currently assuming that I will work full time until age 70. That puts me in the most financially secure position, but I'm not sure I'll be able to last that long. Maybe I might enjoy life more reiring at age 65. On the other hand, maybe I can arrange my career to be more satisfying in those outyears.

There are plenty of retirement planning tools out there (e.g., MSN Money Retirement Planner), but it isn't clear how dependable they are. After all, it is always garbage in, garbage out. So, the catch is not the model, but the paramaters, such as future inflation, rate of return, and life expectancy.

-- Jack Krupansky

Trajectory for housing demand

Now that the bloom is off the housing boom, the big question is how deep a retrenchment there will be, how long it will take, and how long before housing gets back to a steady but non-boom pace. Some people believe that the retrenchment is complete, while others insist that it has hardly begun. My view is that it is very difficult to tell, but it could be several more months before we hit bottom and begin to expand again.

Mortgage rates are still quite reasonable and there is lots of money sloshing around the financial system looking for a productive home, and financig mortgages remains financially attractive.

Demographics are still in favor of a continued expansion of demand.

The recent slump may simply have been a combination of speculators losing interest and a peaking of mortgage rates which cut into demand.

Mortgage rates are in fact cheaper than during the peak this past summer. This factor alone could boost demand in a noticeable manner.

Any additional pullback in prices will also begin to attract demand after the next few months.

My best estimate at this stage is that housing demand may taper off moderately more through January or February or March and then start to pick up a bit in the April, May, June timeframe. It won't be a new boom, but at least strong enough to not be a drag on the economy. Housing could well be a moderate drag for the next month or two, but begin to flatten out before rebounding in the Spring.

-- Jack Krupansky

Low interest rates to continue for at least a year and probably indefinitely

Despite the fact that the Fed has raise the fed funds target interest rate up to 5.25%, it is market forces which determine longer-term interest rates. Many loans and mortgages are at least indirectly linked to the market yield on the 10-year Treasury note, which on Friday was only 4.67%. According to Freddie Mac, the average 15-year fixed mortgage was only 6.10%. That is up moderately from 5.69% a year ago, but still a very decent rate, and down moderately from the July peak of 6.44%.

Banks and "lenders" no longer actually finance mortages themselves, but simply originate them, collect fees, and then sell the mortgages to be packaged into mortgage-backed securities (MBS) which are purchased by investors. As long as the rate of return on an MBS is significantly greater than the yield on the 10-year Treasury, investors will continue to flock to MBS. And, every increment of downwards movement in the 10-year Treasury yield increases demand for MBS, and an upwards move in MBS price pushes its yield lower, enabling consumers to get cheaper mortgages.

There are many reasons why Treasuries remain very attractive investments, not the least of which is the fact that quite a number of "boomers" are rapidly approaching retirement age and incrementally shifting assets from stocks to fixed income investments. Treasuries are very attractive for that purpose. Sure, other higher-yielding investments can be found, but a core of zero-risk Treasuries is a great foundation for most portfolios.

There is also a lot of anxiety about the stock market and the economy, which both increase demand for "safe haven" Treasuries. The sagging of the recent commodities bubble has also led to a shift of assets into safer Treasuries.

Quite a number of notable commentaters are very convinced that the economy will be very weak next year, possibly even with a significant recession. This mentality also causes a shift into safe Treasuries, especially with an expectation that the Fed will be forced to lower its fed funds target interest rate, possibly from 5.25% to 4.75% or even lower. Such a possibility attracts a lot of bond speculators who seek to make a quick profit in such a shift of rate expectations.

My view is that the economy will be just fine this Winter, next Spring, and next Summer, but the anxiety about the future will persist and that will keep rates down.

In fact, I believe the anxiety about the future will persist to some degree until the day when the Detroit automakers, the airlines, the phone companies, and even domestic manufacturers are all back on track and exhibiting strong revenue and profit growth. Needless to say, that prospect is probably at least three to seven years in the future, but the implication is that we will have nagging anxiety about the strength of the economy holding down interest rates for much of that period.

The recent episode of inflation was induced by a combination of the housing boom and rampant commodities speculation, but both factors are now behind us. Contained inflation expectations are one of the keys to holding down long-term interest rates, and it looks like we will have such contained expectations for years to come, and next year with a high degree of certainty.

-- Jack Krupansky

So-so GDP report for Q3, but not so bad

Despite the negative reaction, the Q3 GDP report was actually quite reasonable. Sure, it came in somewhat weaker than predicted (1.6% vs. 2.2%), but was still well within the range that could and should have been expected. The housing slowdown was bound the hit eventually, and now a big chunk of it is now behind us.

I should have published my own estimate, but I didn't because it was such a wide range as to look ridiculous. I had been prepared for a report as weak as 0.75% and as strong as 2.50%. The midpoint of that range was 1.625%, which would have been almost spot on.

As far as Q4, I suspect it will be another fairly weak quarter, but we could see the first hit of a rebound. I forecast a range of 0.25% to 3.25%, with a midpoint of 1.75%, which would be a very modest improvement, but nonetheless both believable and moving in the right direction.

The good news is that the weakness of this report takes some of the pressure off the Fed to hike rates any further and pushes longer-term interest rates downwards, helping to keep interest expenses down for both businesses and consumers.

Note that this was simply the "advance" report, made with incomplete and estimated data, with two revisions to follow as more data becomes available. GDP tends to be revised upwards.

-- Jack Krupansky

Fed will remain paused at 5.25% until at least 2008

My overall assessment of Fed monetary policy remains unchanged:

My view is that the Fed will keep their fed funds target rate paused at 5.25% for the rest of the year, and for all of 2007.

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.

The weak GDP report scared a lot of people into believing that the Fed will have no choice but to cut rates by a quarter to a half point next Spring or Summer, but don't believe it. GDP is a rear-view-mirror report, and says nothing about the economy today or in the coming months.

As of Friday, Fed funds futures contracts indicate a 0% probability of a further rate hike at the December FOMC meeting and only a 2% chance of a cut. Futures indicate a 6% chance of a cut at the January meeting, a 30% chance of a cut by the March meeting, a 96% chance of a cut by the June meeting, and a 100% chance of a cut by the August meeting. Futures also indicate a 52% chance of a second cut by August and a 100% chance of a second cut by December 2007. I personally don't concur with these 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, not to mention commentary and sentiment, unfolds. Further, the "betting" on any last Fed move is usually more of an insurance hedge than an outright bet, more of a "just in case I'm wrong" kind of "bet". Finally, Fed funds futures are not a very reliable indicator more than 45 days into the future.

-- Jack Krupansky

ECRI Weekly Leading Index indicator flat, suggests stable economy ahead

The Weekly Leading Index (WLI) from the Economic Cycle Research Institute (ECRI) was unchanged (vs. +0.54 last week) but the six-month smoothed growth rate rose modestly (from -0.5% to -0.1%) and remains relatively near the flat line, suggesting an economy that has leveled out.

The WLI is now 12 weeks past its summer low and the six-month smooted growth rate is now nine weeks past its summer low.

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 remains somewhat weak and will likely remain so for the next few months, it isn't showing any signs of the kind of persistent and growing 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. Goldilocks might not be completely happy with the current state of the economy, but she should be. Ditto for NYU Professor Nouriel Roubini. Sorry Nouriel, but Professor Ben Bernanke has it right this time.

-- Jack Krupansky

Fidelity saga continues

I am continuing to transition to using my Fidelity brokerage account as my main "bank" checking account.

I actually used one of the checks this week.

I received the debit card and used it as a credit card to pay for dinner last night. I don't intend to do that regularly since I prefer to use the "float" of my credit card, but it's nice to know that I have this option.

I may use the debit card for a cash withdrawal at an ATM, but that will incur a couple of bucks in fees. Once again, I simply want to know that I have the option. Actually, I can't do it today since I don't have a PIN yet.

I paid a utility bill electronically using the routing and account number from the checks. I hadn't been sure that would work, but it does.

I switched my ShareBuilder account to use my Fidelity checking as my "bank". I initiated a small transfer from ShareBuilder to Fidelity as a test. I'll know by Tuesday if that works. Also, "core" cash in Fidelity is currently earning a little more than in ShareBuilder's cash fund (tax-free equivalent of 4.49% versus 4.44%). I'm not sure if this transfer will work since it is money flowing into the checking account number from outside rather than from Fidelity as is usually done.

I did switch my Google AdSense advertising account to use my Fidelity checking as my "bank", but so far the test transfer to Fidelity has not shown up. There is a good chance that this will work, but there is also a fair chance that it won't. I personally don't know anybody who transfers money this particular way (electronically into a brokerage checking account). My ShareBuilder transfer is essentially the same test.

On Tuesday I'll adjust my company payroll direct deposit to direct most of my income into the Fidelity brokerage account, with a fraction continuing to go to my real bank account until I get all of my electronic payments switched.

Another remaining item is TreasuryDirect for managing T-bill investments. I should be able to use the routing and account numbers for my Fidelity checking fine, but I need to get a form signed by a bank officer before money can be disbursed to my checking account. I don't know how to do this yet since I don't deal with the real bank that Fidelity uses for checking (UMB in Missouri). Also, I may be able to do T-bill investments directly through Fidelity.

More to come as the saga continues.

-- Jack Krupansky

PayPal money market fund yield rises to 5.03%

Here are some recent money market mutual fund yields:

• iMoneyNet average taxable money market fund 7-day yield remains at 4.72%
• 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 remains at 5.01% ($25,000 minimum, or $50,000 minimum to waive the $2 checkwriting fee)
• 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 remains at 4.45%
• Fidelity Municipal Money Market fund (FTEXX) 7-day yield rose from 3.18% to 3.23% or tax equivalent yield of 4.97% (up from 4.89%) for the 35% marginal tax bracket and 4.49% (up from 4.42%) for the 28% marginal tax bracket
• Fidelity Tax-Free Money Market fund (FMOXX) 7-day yield rose from 3.12% to 3.17% or tax equivalent yield of 4.88% (up from 4.80%) for the 35% marginal tax bracket and 4.40% (up from 4.33%) for the 28% marginal tax bracket
• 28-day (1-month) T-bill investment rate rose from 5.04% to 5.15%
• 91-day (3-month) T-bill investment rate fell from 5.07% to 5.12%
• 182-day (6-month) T-bill investment rate rose from 5.13% to 5.17%
• Charles Schwab 3-month CD APY remains at 5.19%
• Charles Schwab 6-month CD APY remains at 5.21%
• Charles Schwab 1-year CD APY fell from 5.15% to 5.05%

T-bill yields are continuing to rise, suggesting that much of the mass exodus from commodities is over and that people are starting to redeploy their "cash" out of T-bills.

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."

28-day T-bills once again are a rather attractive for cash that you won't need for a month, since new issues are now yielding more than PayPal and Fidelity Cash Reserves. But, these rate fluctuate significantly from week to week.

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 and savings accounts or bank CDs 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 are only assured of getting your full principle if your Treasury security is held until maturity.

-- Jack Krupansky

Comparing 7-day yield and APY

Money market mutual funds typically quote a 7-day yield, but bank accounts typically quote an APY. Alas, they are not the same.

The 7-day yield is the simple annual rate (actually an annualized simple daily rate), which varies from day to day, but is averaged over a 7-day window. There is no compounding in that rate, so it actually doesn't tell you how much you will earn if the rate remained unchanged for a year. Note: the actual calculation of the 7-day yield is rather more complicated, but the point is that the number is an annualized simple rate. The fund expenses are taken out of the underlying earnings when the 7-day yield is calculated.

Bank APY or annual percentage yield is the effective rate when a simple rate is compounded, typically on a monthly basis.

So, to compare a 7-day yield and an APY we simply need to add in the compounding to the 7-day yield or take it out from the APY.

In Excel, the formula I use to calculate APY from 7-day yield is:

=(1+A1/12)^12-1

The formula I use to calculate the 7-day yield (or simple annualized interest rate) is:

=(POWER(1+A1,1/12)-1)*12

Note: the yield would be expressed as a decimal fraction, so 5.05% would be expressed as 0.0505.

The assumption is that compounding is on a monthly basis, which is how my brokerage and bank accounts credit interest.

Here are some sample yields that I have recently run across:

• 2.96% 7-day yield = 3.00% APY
• 3.00% 7-day yield = 3.04% APY
• 3.45% 7-day yield = 3.50% APY
• 3.50% 7-day yield = 3.56% APY
• 3.93% 7-day yield = 4.00% APY
• 4.00% 7-day yield = 4.07% APY
• 4.44% 7-day yield = 4.53% APY
• 4.45% 7-day yield = 4.54% APY
• 4.50% 7-day yield = 4.59% APY
• 4.75% 7-day yield = 4.85% APY
• 4.89% 7-day yield = 5.00% APY
• 4.90% 7-day yield = 5.01% APY
• 4.94% 7-day yield = 5.05% APY
• 4.97% 7-day yield = 5.08% APY
• 5.00% 7-day yield = 5.12% APY
• 5.02% 7-day yield = 5.14% APY
• 5.03% 7-day yield = 5.15% APY
• 5.05% 7-day yield = 5.17% APY
• 5.07% 7-day yield = 5.19% APY
• 5.09% 7-day yield = 5.21% APY
• 5.10% 7-day yield = 5.22% APY
• 5.15% 7-day yield = 5.27% APY
• 5.20% 7-day yield = 5.33% APY
• 5.25% 7-day yield = 5.38% APY

Final note: You cannot simply compare two investments based on the quoted yields since the terms of the investment may be different. For example, a money market mutual fund will tend to vary from month to month (or even day to day), but a CD will be fixed for the full term of the CD. CDs are also notorious for introductory "teaser" rates which then fall significantly to "normal" rates for subsequent investments. Or, the bank may require you to have a minimum balance in checking and savings account which pay very low rates before they'll offer you the CD at the higher rate.

I just transferred some cash from my bank account to PayPal which has a 7-day yield of 5.03%, which is equivalent to an APY of 5.15%.

-- Jack Krupansky

Rolling over my 28-day T-bills from October

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 at 1:00 p.m. on Tuesday afternoon when the T-bill auction results are published.

My current T-bills were issued on Thursday, September 28, 2006 and mature this Thursday, October 26, 2006. Their investment rate (uncompounded annual yield) was a skimpy 4.62%. The interest rates on the 28-day T-bills for the three weekly auctions since then have been progressively higher at 4.68%, 4.87%, and 5.04%.

If demand is higher, I'll get a lower rate. If demand is lower, I'll get a higher rate. Last month, demand was much higher as money was flowing dramatically out of commodities, but I suspect that the flows have mostly subsided and in fact reversed as people redeploy cash. I suspect that this week's auction for the 28-day T-bill will come in between 4.85% and 5.25%.

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 the last two times. The net effect will be that the accrued interest will be deposited in my bank checking account.

Since I am hoping to use my Fidelity brokerage account as a "bank" account, I need to investigate whether this will work out for TreasuryDirect. One issue is that there is a paper form that a bank officer must sign and then you have to mail it in to the U.S. Treasury. I'll have to inquire whether Fidelity is prepared to do this. Alternatively, I can continue to use my old bank account, or I can investigate buying T-bills throgh Fidelity.

-- Jack Krupansky

Status quo at the Fed FOMC meeting: remain paused at 5.25% and the economy continues to cruise along at a modest pace

My overall assessment of Fed monetary policy remains unchanged.

Just about everybody expects the Fed to remain paused at the FOMC meeting on Wednesday, to continue to express mild optimism about the enconomy, and to continue to express guarded concern that inflation still hasn't retreated enough even though they believe that ultimately it will subside.

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 0% chance of a cut at the December meeting and a 4% chance of a hike. Futures indicate only an 8% chance of a cut by the March meeting, a 30% chance of a cut by the June meeting, and a 76% chance of a cut by the August meeting. But there is no longer any hint of a second cut. I personally don't concur with these 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, not to mention commentary and sentiment, unfolds. Further, the "betting" on any last Fed move is usually more of an insurance hedge than an outright bet, more of a "just in case I'm wrong" kind of "bet". Finally, Fed funds futures are not a very reliable indicator more than 45 days into the future.

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 for all of 2007.

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

Positive net worth at least

My net worth finally moved into the black this week. I still have a pile of back income taxes to pay the IRS on an installment plan, but I have accumulated enough assets that my debt to asset ratio is now less that 100%. Barely. It's 99.7%. My net worth right now is a whopping $74. But that's still a lot better than a year ago before my credit card debt was discharged in my bankruptcy filing.

Actually, I'm a little better off than my spreadsheet bottom line indicates. My net worth spreadsheet includes my current credit card balance which I intend to pay in full every month, as well as a reserve amount which is a hypothetical expense that I assume may be needed at any time (e.g., travel, a new computer, furniture, etc.)

I finally paid off my New York back income taxes this week, out of my rainy day fund. This will free up a modest level of cash flow that I can apply to either accelerating the paydown of my back federal taxes, or to beef up my rainy day fund which was moderately depleted by the payoff of the New York taxes.

I'd like to up my contributions to my Roth IRA, but it's a tradeoff with the interest I pay on back taxes and the comfort "value" of having a larger rainy day fund.

At least I have options now and a little more flexibility. Before, I only had my nose above water and only some of the time. Now, I feel like my entire head is above water.

-- Jack Krupansky

Buying a house

As my financial situation gradually begins to stabilize, the prospect of actually buying a house begins to seem almost a realistic expectation. Not that I am actually seriously considering such an action, but at least it is starting to become an imaginable possibility.

The idea first popped into my head when I was reading so many accounts about how the housing boom is imploding and housing prices beginning to decline. That suggested that at some stage somebody might be so desperate to sell or to finance a mortgage that even I might be considered for a home mortgage.

So, I am sitting here today wondering if a year from now the purchase of a home might be a realistic scenario. Yes, it might be, but I'm not going to spend significant effort to pursue it.

A number of "planets" would have to come into alignment before I would considering "buying":

1. Be in my new job long enough to feel that it is secure and that I am unlikely to consider moving on to another geographic area for employment. Steady, reliable income is essential to "committing" to a mortgage.
2. My net worth far enough into positive territory that I feel financially "secure", and not "worried" on a month-to-month basis.
3. Pay down my back taxes, either completely or far enough that the balance and monthly payments are a non-issue.
4. Have enough of a lead on retirement savings that I feel that diverting resources to owning and maintaining a home will not put my retirement finances at risk.
5. Have a large enough "rainy day" fund to be able to handle expected and even unexpected contingencies. Home ownership will require an even larger rainy day fund.

It's quite possible that a year from now I might be "there", but I suspect it could be more like two years before I have enough money in the bank and investments to feel truly comfortable becoming a homeowner.

For the record, I have been a homeowner in the past, twice, back in the late 1970's and early 1980's. I simply concluded that the "joys" of owning a home weren't for me.

If I were to consider "buying", I'd be more likely to get a condo than a house, and in downtown Seattle rather than out in "The Burbs".

But even all of these assumptions could go out the window if the right opportunity came along. For example, it's quite possible that if the housing boom melts down rapidly and deeply enough, there could be enough fire sales that I could well become a prime candidate and targeted for buying, even with my somewhat shaky finances.

It's difficult to recall that three years ago I was financially in very dire straights, but today my financial picture is so much brighter.

-- Jack Krupansky

ECRI Weekly Leading Index indicator improves, suggests stable economy ahead

The Weekly Leading Index (WLI) from the Economic Cycle Research Institute (ECRI) rose moderately (+0.54 vs. -0.58% last week) and the six-month smoothed growth rate rose modestly (from -0.8% to -0.5%) and remains relatively near the flat line, suggesting an economy that has leveled out.

The WLI is now 11 weeks past its summer low and the six-month smooted growth rate is now eight weeks past its summer low.

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 remains somewhat weak and will likely remain so for the next few months, it isn't showing any signs of the kind of persistent and growing 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. Goldilocks might not be completely happy with the current state of the economy, but she should be. Ditto for Professor Nouriel Roubini. Sorry Nouriel, but Professor Ben Bernanke has it right this time.

-- Jack Krupansky

PayPal money market fund yield holds at 5.02%

Here are some recent money market mutual fund yields:

• iMoneyNet average taxable money market fund 7-day yield remains at 4.72%
• PayPal money market fund 7-day yield holds at 5.02%
• ShareBuilder money market fund (BDMXX) 7-day yield rose from 4.44% to 4.45%
• Fidelity Money Market Fund (SPRXX) 7-day yield rose from 5.00% to 5.01% ($25,000 minimum, or $50,000 minimum to waive the $2 checkwriting fee)
• Fidelity Cash Reserves money market fund (FDRXX) 7-day yield remains at 4.97%
• Fidelity Prime Reserves money market fund (FPRXX) 7-day yield remains at 4.45%
• Fidelity Municipal Money Market fund (FTEXX) 7-day yield rose from 3.08% to 3.18% or tax equivalent yield of 4.89% (up from 4.74%) for the 35% marginal tax bracket and 4.42% (up from 4.28%) for the 28% marginal tax bracket
• Fidelity Tax-Free Money Market fund (FMOXX) 7-day yield rose from 3.01% to 3.12% or tax equivalent yield of 4.80% (up from 4.63%) for the 35% marginal tax bracket and 4.33% (up from 4.18%) for the 28% marginal tax bracket
• 28-day (1-month) T-bill investment rate rose from 4.87% to 5.04%
• 91-day (3-month) T-bill investment rate fell from 4.98% to 5.07%
• 182-day (6-month) T-bill investment rate rose from 5.08% to 5.13%

T-bill yields are continuing to rise, suggesting that much of the mass exodus from commodities is over and that people are starting to redeploy their "cash" out of T-bills.

From three weeks ago: 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.

I transferred $2,500 of parked cash from ShareBuilder to my Fidelity brokerage account and then did a "buy" of Fidelity Cash Reserves (FDRXX). That is the minimum initial purchase for that fund. I can now buy in $250 increments. ShareBuilder was only yielding 4.45%, so now I'll get 4.97%.

From two weeks ago: I have begun the process of shifting to the use of my Fidelity brokerage account as a "bank" account. Last week was the end of my first quarter in my company Employee Stock Purchase Plan, so a small pile of Microsoft (MSFT) stock (purchased at a 10% discount) appeared in the associated brokerage account at Fidelity. It was enough to put me over the $2,500 checkwriting minimum, so I submitted the check signature form to request checks. I still have a ways to go before I have $5,000 in assets to qualify for the debit card. I'm not going to shift my payroll direct deposit until I have that debit card to use in ATMs or as a charge card. I did initiate a small transfer from my bank (Wells Fargo) to verify that link was working. It took two days for the money to be fully credited to my Fidelity account. I don't know why they take an extra day other than to steal that one day of float from you. I also switched my core cash fund from FCASH to Fidelity Municipal Money Market fund (FTEXX). In the 28% margin income tax bracket the 3.24% 7-day yield is equivalent to 4.50% taxable. That's far short of the 4.98% yield for Fidelity Cash Reserves (FDRXX), but better than the 3.17% FCASH yield (week before last) and not bad for the cash that will flow in and out of my account on a bi-weekly basis once I switch my payroll direct deposit. It is annoying that you can't switch your core cash selection directly online, but at least you can use the instant messenging chat feature to "talk" to a rep online to do it.

Updated: Some short-term CDs from brokerage firms are also looking attractive right now. I see that Charles Schwab has a 3-month CD yielding 5.19% APY. I don't know the details and haven't looked into it myself, but it may be worth checking out. Their 6-month CD has a 5.21% 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. Note: CDs are quoted as a compounded yield which would be equivalent to a somewhat lower non-compounded annualized rate that you might get on a money market fund or Treasury.

No change: 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."

28-day T-bills once again are a rather attractive for cash that you won't need for a month, since new issues are now yielding more than PayPal and Fidelity Cash Reserves. But, these rate fluctuate significantly from week to week.

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 are only assured of getting your full principle if your Treasury security is held until maturity.

-- Jack Krupansky

Using my Fidelity brokerage account as a bank account

I'm now a couple of steps closer to using my Fidelity brokerage account as my main "bank" account.

Last week I requested checks and I just received a confirmation letter that assures me that "the checks are in the mail." Once I have checks with their routing and account numbers, I can start arranging electronic payment of things like my utility bills.

I had parked a pile of cash in my ShareBuilder account back in June. That was my main "rainy day" fund. I have since stashed away more cash so that it was finally time to decide what to do with that parked cash. I used a chunk of it to pay off my back New York income taxes, as I had originally intended. I left a modest chunk in ShareBuilder, simply to keep more cash "out of site, out of mind." The rest I just transferred from my bank account to my Fidelity brokerage account.

I now have enough money in the brokerage account to meet the minimum asset requirement to get a debit card from Fidelity. They have a $5,000 asset minimum. I'll be able to use the card for ATM withdrawals and to use it as a credit card for purchases. Actually, I'll continue to use my CapitalOne credit card for purchases, but I'll now have a "backup" card so that I'm not so critically dependent on one card.

I also have enough cash in the brokerage account to make an initial "buy" of the Fidelity Cash Reserves money market mutual fund (FDRXX) which pays a fat 4.97% 7-day yield. That's equivalent to a 5.08% APY. A bank "teaser" APY of 5.05% is comparable to a 7-day yield of 4.94%.

I left a little money in "core cash" which will earn 3.06% tax-free (FTEXX), which is equivalent to a 4.24% taxable yield (at the 28% marginal tax bracket). That's not as good a yield as FDRXX, but much better than any checking account that I know of. I'll move excess cash to FDRXX whenever possible, but money that comes in at payroll time and is destined to flow out for monthly expenses will at least earn a semi-decent rate of return without me lifting a finger.

The next big step will be to shift my payroll direct deposit to this account, but I want to accumulate some more cash before I do that since the I still have a lot of payments that I make electronically from my current bank account (Wells Fargo). I'll want to try out the checks and debit card and switch a few of my smaller electronic payments over to Fidelity before making the big leap. It's easy enough to transfer cash from my bank account to the Fidelity account. I might split my direct deposit and divert enough to Fidelity so I can move the bulk of my electronic payments to my Fidelity account. This is a little more complicated than I'd like it to be, so it may take a month or two to get it finalized.

Ultimately, I'll probably keep my bank account because it does occasionally have uses, such as fee-free ATM withdrawals. I use minimal cash these days, but I still need to get a little cash each week. Once I have my Fidelity "bank" account fully up and running, I'll look around for a true bank that I can use for my real-world banking, as minimal as it is.

-- Jack Krupansky

Paid off my New York back income taxes

I finally bit the bullet and paid off the remaining balance on my installment plan for my New York back income taxes (state and city). I actually had the cash back in June, but first I wanted to build up my financial reserves, including a reasonable size "rainy day" fund.

As of last week my net financial worth finally came back in the black. Even after paying off my New York back taxes, I still have a fairly large pile of back income taxes that I owe the IRS on yet another installment plan. I had made the decision to bulk up my savings, incuding my "rainy day" fund and 401K retirement plan, at the expense of paying down the taxes quicker. Having cash in the bank or assets you can liquidate gives you a lot more comfort and flexibility than if you had less debt and no cash to cover unexpected contingencies.

My default intent is to apply my old budget for New York installment payments as "extra" payments on my IRS installment plan. I might also direct some or all of the payment to further bulk up my "rainy day" fund, especially since it is a little too light after paying off New York.

It turned out that I had made enough extra payments to New York over the past six months that I was well ahead of where I thought I was. I decided to apply that "excess" as a contribution to my Roth IRA (not to be confused with my company Roth 401K). That's not quite a rainy day fund, but since I'll keep it in cash for now, it's close enough and gives me a little greater confidence about my retirement planning.

-- Jack Krupansky

Oil and gasoline futures in a trading range

Oil and gasoline futures have been in a trading range for the past two weeks, bouncing up and down, unsure whether to bounce back up towards the mid-$60's or dive towards and below the mid-$50's. This range trading could continue for quite some time, and may include some dramatic corrective spikes up and down before the trend continues downwards.

The bulk of the speculative commodities frenzy is probably now behind us, but there are still plenty of diehard commodity bulls who will try to push the market higher whenever they sense that selling peters out on a short-term basis as it inevitably does.

-- Jack Krupansky

Nouriel Roubini is wrong: lower oil prices are good news for the U.S. economy

Professor Nouriel Roubini does correctly make a number of cogent arguments in his blog post entitled "Confusing Cause and Effect: Why Lower Oil Prices is [sic] Bad News for the U.S. Economy", but he also commits at least a few significant errors, so that his conclusion is not supported once his errors are stripped away.

The essence of the dedate is whether the decline in oil and other commodity prices is due to a reversal of a speculative commodities bubble or a dramatic reduction in real demand. The latter would support his conclusion, the former would not.

Put simply, he does not do a good job of eliminating speculation as the causal factor. He mentions it, but only pays it lip service and in a disparaging manner. Further, he fails to offer evidence of a reduction in demand for commodities. Since he has done neither, he has no supportable justification for his conclusion.

By definition, lower commodity prices are good for any economy. By definition. Lower costs leave consumers and businesses with more disposable income. What Professor seems to have intended was to argue a different thesis, such as whether falling commodity prices are a indicator for the strength of an economy, but he didn't state that or anything similar as his thesis.

He somehow has trouble recognizing that over the past two years or so almost all commodities were in the grips of a speculative frenzy, with hedge funds, investment banks, and all manner of promoters leading the charge. The prices of commodities futures are a major factor in the pricing of the comodities themselves, but do not directly indicate real demand for the commodities themselves. As speculators bid up futures prices, prices of the commodities go up as well. We have seen quite a number of reports even in the general as well as financial media that have recognized the eye-opening levels of speculation over the past year. This was like the stock boom in 1999 and the recent housing boom. As the saying goes, a rising tide lifts all boats. Roubini's biggest error is that he seems to believe that real economic demand is the only tide and that he refuses to recognize the "tide" effect that speculation can have in market "booms", whether it be stocks, real estate, or commodities.

My most serious complaint is that Professor Roubini commits the cardinal logical sin of confusing correlation and causality. He states:

... whenever the US and the global economy has experienced a recession oil and commodity prices sharply fell at the outset and during such recession as low global demand leads to lower commodities demand ...

It may well be true that such a correlation can be established, but correlation never automatically implies casusality. For causality, we need to identify a causal mechanism and demonstate that it holds under all conditions. Roubini's statement has the form of an immutable "law", but the data doesn't seem to support such a law-like relationship. The simple fact is that commodity prices have significant volatility and not all instances when "oil and commodity prices sharply fell" were immediately followed by a recession. The simple test here is whether oil prices have fallen sharply below their typical price during the main body of the business cycle, and the answer is clearly no. Now, if oil were to fall below $20, it would be a different story, but oil at $60 is down sharply only from a short-term speculative peak, not from "normal" oil prices in years past.

Shame on Professor Roubini for presenting such a weak argument. Okay, it was merely a "blog" post, but still, I expect an economics professor to think and express himself in a much more credible manner.

I would suggest that he investigate techniques for filtering out the effects of speculation so that we can look at how much of the price of a commodity is due to real demand and how much is due to speculation by parties other than the true end users.

-- Jack Krupansky

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

My overall assessment of monetary policy remains unchanged.

Market perceptions of Fed policy remain volatile. In fact, last week we saw a dramatic reduction in bets on rate cuts next Spring. The primary contributing factor was public commentary by Fed officials who expressed concern that inflation remains higher than they would prefer. Also, people felt that the economy was a bit stronger than the pundits had been leading them to believe.

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 0% chance of a cut at the December meeting and even a 2% chance of a hike. Futures indicate only a 10% chance of a cut by the March meeting, a 54% chance of a cut by the June meeting, and a 76% chance of a cut by the July meeting. But there is no longer any hint of a second cut. I personally don't concur with these 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, not to mention commentary and sentiment, unfolds. Further, the "betting" on any last Fed move is usually more of an insurance hedge than an outright bet, more of a "just in case I'm wrong" kind of "bet". Finally, Fed funds futures are not a very reliable indicator more than 45 days into the future.

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 for all of 2007.

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

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

The Weekly Leading Index (WLI) from the Economic Cycle Research Institute (ECRI) fell moderately sharply (-0.58% vs. +0.99% last week) and the six-month smoothed growth rate fell modestly (from -0.6% to -1.0%) but remains 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 somewhat weak and will likely remain so for the next few months, it isn't showing any signs of the kind of persistent and growing 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. Goldilocks might not be completely happy with the current state of the economy, but she should be.

-- Jack Krupansky

PayPal money market fund yield falls from 5.05% to 5.02%

Here are some recent money market mutual fund yields:

• iMoneyNet average taxable money market fund 7-day yield remains at 4.72%
• PayPal money market fund 7-day yield fell from 5.05% to 5.02%
• ShareBuilder money market fund (BDMXX) 7-day yield remains at 4.44%
• Fidelity Money Market Fund (SPRXX) 7-day yield fell from 5.01% to 5.00% ($25,000 minimum, or $50,000 minimum to waive the $2 checkwriting fee)
• 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 fell from 4.46% to 4.45%
• Fidelity Municipal Money Market fund (FTEXX) 7-day yield fell from 3.24% to 3.08% or tax equivalent yield of 4.74% (down from 4.98%) for the 35% marginal tax bracket and 4.28% (down from 4.50%) for the 28% marginal tax bracket
• Fidelity Tax-Free Money Market fund (FMOXX) 7-day yield at 3.01% or tax equivalent yield of 4.63% (down from 4.95%) for the 35% marginal tax bracket and 4.18% (down from 4.47%) for the 28% marginal tax bracket
• 28-day (1-month) T-bill investment rate rose from 4.68% to 4.87%
• 91-day (3-month) T-bill investment rate fell from 4.89% to 4.98%
• 182-day (6-month) T-bill investment rate rose from 5.01% to 5.08%

T-bill yields are rising again, suggesting that much of the mass exodus from commodities is over and that people are starting to redeploy their "cash" out of T-bills.

From two weeks ago: 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.

I transferred a small amount of cash from my bank account to my Fidelity brokerage account and tried to "buy" the Fidelity Cash Reserves mutual fund (FDRXX) to get that 4.97% yield, but was informed that there is a $2,500 minimum for that fund. For now, that cash will earn a 4.28% equivalent yield (at a 28% marginal federal income tax rate) in my "core" cash fund which is the Fidelity Municipal Money Market fund (FTEXX). Once I get that $2,500 minimum, I'll be able to "buy" more with a $250 minimum.

From last week: I have begun the process of shifting to the use of my Fidelity brokerage account as a "bank" account. Last week was the end of my first quarter in my company Employee Stock Purchase Plan, so a small pile of Microsoft (MSFT) stock (purchased at a 10% discount) appeared in the associated brokerage account at Fidelity. It was enough to put me over the $2,500 checkwriting minimum, so I submitted the check signature form to request checks. I still have a ways to go before I have $5,000 in assets to qualify for the debit card. I'm not going to shift my payroll direct deposit until I have that debit card to use in ATMs or as a charge card. I did initiate a small transfer from my bank (Wells Fargo) to verify that link was working. It took two days for the money to be fully credited to my Fidelity account. I don't know why they take an extra day other than to steal that one day of float from you. I also switched my core cash fund from FCASH to Fidelity Municipal Money Market fund (FTEXX). In the 28% margin income tax bracket the 3.24% 7-day yield is equivalent to 4.50% taxable. That's far short of the 4.98% yield for Fidelity Cash Reserves (FDRXX), but better than the 3.17% FCASH yield (week before last) and not bad for the cash that will flow in and out of my account on a bi-weekly basis once I switch my payroll direct deposit. It is annoying that you can't switch your core cash selection directly online, but at least you can use the instant messenging chat feature to "talk" to a rep online to do it.

Updated: Some short-term CDs from brokerage firms are also looking attractive right now. I see that Charles Schwab has a 3-month CD yielding 5.19% APY. I don't know the details and haven't looked into it myself, but it may be worth checking out. Their 6-month CD has a 5.21% APY and the 1-year CD has a 5.10% APY. Rates are going to fluctuate wildly over the coming year, but a CD rate is locked in for the term of the CD. Note: CDs are quoted as a compounded yield which would be equivalent to a somewhat lower non-compounded annualized rate that you might get on a money market fund or Treasury.

No change: 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 are yielding somewhat 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 are only assured of getting your full principle if your Treasury security is held until maturity.

-- Jack Krupansky

OPEC output cut

There is a good chance that OPEC will in fact cut its output target for crude oil. Nominally that is a bullish signal for petroleum-based energy products, but traditionally, there is some amount of "cheating" by OPEC member producers, especially when oil prices are fairly high and producers are worried that prices may fall further in the near term.

Yes, the price of crude oil and gasoline could well pop up a bit on any news of an OPEC production cut, but prices are just as likely to resume their decline within days or a few weeks.

Prices are doing a bit of consolidation at current levels, but consolidation is never an indicator of the emerging trend.

-- Jack Krupansky

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

My overall assessment of monetary policy remains unchanged.

Market perceptions of Fed policy remain volatile. 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 6% chance of a cut at the December meeting, a 46% chance of a cut by the March meeting, 100% chance of a cut by the June meeting with a 4% chance of a second cut as well, and 36% 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. And, the odds declined somewhat since last week.

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

Supply and demand are not the cause of the oil and gasoline price roller coaster

An editorial in the NY Times entitled "Roller Coaster at the Pump" wrongly asserts that "As long as the demand for oil and gasoline grows faster than the ability to produce and refine them, the slightest shocks to supply will keep sending prices rocketing higher." Other than the oil embargo of 1973, we haven't experienced a "shock to supply" which was the cause of sharply higher energy prices. The Times does correctly refer to the role of speculators and hedge funds ("But to speculators, volatility means the potential for big profits, so hedge funds and investment banks pile in to make bets, bidding oil futures up to unnatural highs and making the market even more unstable") but almost in a mocking tone of voice as if to give such speculators a "free pass" to manipulate prices.

The editors of the NY Times should learn how to read the weekly petroleum inventory reports put out by the Department of Energy where for many months the overall assessment has been that "Total commercial petroleum inventories ... remain well above the upper end of the average range for this time of year."

Further, the editors at the NY Times need to educate themselves and their readers about something called the Strategic Petroleum Reserve (SPR) which has over 680 million barrels of oil in storage just in case we do actually see a supply disruption, such as Hurricane Katrina.

The "roller coaster" simply has not been due to either an increase in real demand nor a reduction in real supply. Why the Times suggests otherwise is incomprehensible and flat out unjustified.

Shame on the NY Times for once again allowing the speculators (and the Wall Street firms that enable, encourage and aid and abet them) off the hook.

Underlying energy prices may indeed trend up gradually in coming decades as demand gradually rises and supply gradually falls, but the roller coaster that is with us now has had nothing to do with either supply or demand or the long term outlook for supply and demand. Supply and demand for energy futures and other speculative instruments, yes, but real demand by real users of energy products, no.

Maybe the editors at the NY Times did have good intentions to promote alternative energy sources and more efficient transportation and heating and cooling systems, but for the editors to hitch that argument to the speculative "roller coaster" was a very bad idea and shows a careless insensitivity to the needs and budgets of real consumers.

I only wish that the editors would assign more reporters to ferreting out the truth and extent of speculation in commodities and the extent to which everyday consumers are seriously harmed so that a bunch of deep-pocket Wall Street firms can line their own pockets.

-- Jack Krupansky

GM still unlikely to declare bankruptcy

Despite its dire financial situation, I continue to firmly believe that GM (GM) is exceedingly unlikely to declare bankruptcy. Yes, I believe that they will have to go through a truly radical restructuring in the coming years and five years from now won't even remotely resemble the old GM any more, bankruptcy won't be a part of that restructuring process.

Nonetheless, there will continue to be people chattering as if bankruptcy was just around the corner, but mostly those people are trying simply to talk down the price of the stock and bonds so that they can personally profit financially from trading on negative sentiment that they themselves are helping to promote. In some cases they are short-selling, and in other cases they are buying on the dips and profiting from the enhanced volatility for range-trading.

Ditto for Ford (F).

-- Jack Krupansky

New kid on the block: Charles Plosser as president of the Philly Fed

One of my favorite activities over the past five years has been to attend the semi-annual meetings of a group of economists called the Shadow Open Market Committee (SOMC) as a non-member public observer. As the name suggests, the group meets to discuss monetary policy. The meetings are usually held in April/May and October/November in Washington, D.C. at the Cato Institute, one of the leading Washington "think tanks". I just happened to notice on Friday that the lead co-chair of the committee, Charles Plosser of the University of Rochester, was recently appointed to be the new president of the Federal Reserve Bank of Philadelpha. I'm sure this is a great new opportunity for him and he is certainly qualified for the position, but it does leave the future of "The Shadow" a bit up in the air.

Charles made his first public speech as president of the "Philly Fed" last week, entitled "The Economy, Inflation, and Monetary Policy." Basically, he lays out his model for how the Fed should approach monetary policy. He offers three principles:

1. "price stability is and should be the primary focus of monetary policy."
2. "a credible commitment to price stability is an essential part of effective monetary policy."
3. "monetary policy cannot control output or employment in the short-run, but it should respond to changing economic conditions."

That second principle is excruciatingly vital and has been a frequent topic of discussion at the SOMC meetings. It simply is not enough to do the right thing, but the Fed also has to be believed by the markets, investors, businesses, workers, and consumers to be doing the right thing for the long term. People make decisions about investments, contracts, and purchases based on what they perceive inflation might be years from now.

Based his three principles, Charles assesses "our current circumstance" and has three conclusions:

1. "there is a significant possibility that inflation rates will remain above those consistent with price stability for some time."
2. "this prolonged period of relatively high inflation runs the risk of undermining public confidence in our commitment to price stability, thereby raising the cost to the economy of restoring price stability."
3. "the overall economy is likely to return to its potential growth rate in 2007."

He certainly comes down as a "hawk" on inflation. While quite a number of economists and pundits are calling for Fed rate cuts in 2007, Charles takes the opposing position and states that "the predominant risks ... are on the inflation side" and that "maintaining the current stance of policy, or even firming further, may be in the best interests of the economy’s long run performance." That does not mean that he is absolutely firmly committed to raising interest rates, stating his position that "the Fed must keep a careful eye on the pace of economic activity and be prepared to adjust its policy in either direction."

This is all consistent with positions that Charles and the rest of the Shadow Open Market Committee have staked out over the years.

That said, I don't happen to agree with all of the hawkish tone of his outlook in the sense that I believe that there are enough market forces coming down the pike that will likely lead to disinflation. I agree that there is a risk that inflation might pop up, but I happen to worry a little more that business spending might be a little too weak. Besides, one only has to look at the droopy tail of the Treasury yield curve to see that despite what commentators might suggest, true investors are willing to invest as if they do in fact believe that inflation is expected to be reasonably low in the years to come despite being higher than desired in the near term.

I do have to admit that even if my outlook is correct and inflation does moderate over the next two years, the "inflation hawks" do an invaluable service by helping long-term investors believe that they can depend on the hawks to come down very hard on inflation if for whatever reasons it does happen to break out.

In any case, it is good to hear a crisp new voice in the public debate, especially one that I have some background with and some experience interpreting over a number of years.

-- Jack Krupansky

Costs of warfighting to boost the economy in 2007

Cleaning up and recovering from the "civil quagmire" in Iraq is going to be an expensive process over the next couple of years, and that spending will give the economy a boost during that period.

An article in the NY Times by Thom Shanker and David Cloud entitled "Rumsfeld Shift Lets Army Seek Larger Budget" makes clear that military spending will need to rise to cope with the problems in Iraq. The article notes that:

... the wars in Iraq and Afghanistan would require $17.1 billion in extra spending for 2007 just to repair and replace tanks, Humvees and other gear. Money to repair and replace equipment is expected to be $13 billion in 2008 and the next five years.

And I am sure that this is probably only the tip of the iceberg. I'm sure military pay and benefits will have to rise significantly in the coming years to recruit, attract, and retain service members.

Even if the "civil quagmire" in Iraq ended today, dramatically higher spending would be needed for a number of years, simply to recover and "reshape" our military forces.

This is certainly an expense that we wished would never have been incurred, but the reality is that this spending will occur, if not even more as the extent of the need becomes even more apparent.

-- Jack Krupansky

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

My next monthly automatic investment through ShareBuilder will occur on Tuesday, October 10, 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 fifth 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.

So far, the return has been quite good, with a total gain of 15.3% over four months even assuming the whole investment amount had been invested for the entire period. But, rule number one is "Easy come, easy go", and we should not  "book"gains or losses over short periods of time.

-- Jack Krupansky

ECRI Weekly Leading Index indicator for future growth recovered sharply but growth rate remains modestly negative but still near flat line

The Weekly Leading Index (WLI) from the Economic Cycle Research Institute (ECRI) rose sharply (+0.99% vs. -0.34% last week) and the six-month smoothed growth rate rose modestly (from -0.9% to -0.6%) 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 somewhat weak and will likely remain so for the next few months, it isn't showing any signs of the kind of persistent and growing 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. Goldilocks might not be completely happy with the current state of the economy, but she should be.

-- Jack Krupansky

PayPal money market fund yield rises from 5.04% to 5.05%

Here are some recent money market mutual fund yields:

• iMoneyNet average taxable money market fund 7-day yield fell from 4.73% to 4.72%
• PayPal money market fund 7-day yield rose from 5.04% to 5.05%
• ShareBuilder money market fund (BDMXX) 7-day yield rose from 4.43% to 4.44%
• Fidelity Money Market Fund (SPRXX) 7-day yield fell from 5.02% to 5.01% ($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 4.97 to 4.98%
• Fidelity Prime Reserves money market fund (FPRXX) 7-day yield was unchanged at 4.46%
• Fidelity Municipal Money Market Fund (FTEXX) 7-day yield fell from 3.38% to 3.24% or tax equivalent yield of 4.98% (down from 5.20%) for the 35% marginal tax bracket and 4.50% (down from 4.69%) for the 28% marginal tax bracket
• Fidelity Tax-Free Money Market Fund (FMOXX) 7-day yield at 3.22% or tax equivalent yield of 4.95% for the 35% marginal tax bracket and 4.47% for the 28% marginal tax bracket
• 28-day (1-month) T-bill investment rate rose from 4.62% to 4.68%
• 91-day (3-month) T-bill investment rate fell from 4.90% to 4.89%
• 182-day (6-month) T-bill investment rate rose from 5.00% to 5.01%

From two weeks ago: 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.

From last week: 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.

I have begun the process of shifting to the use of my Fidelity brokerage account as a "bank" account. Last week was the end of my first quarter in my company Employee Stock Purchase Plan, so a small pile of Microsoft (MSFT) stock (purchased at a 10% discount) appeared in the associated brokerage account at Fidelity. It was enough to put me over the $2,500 checkwriting minimum, so I submitted the check signature form to request checks. I still have a ways to go before I have $5,000 in assets to qualify for the debit card. I'm not going to shift my payroll direct deposit until I have that debit card to use in ATMs or as a charge card. I did initiate a small transfer from my bank (Wells Fargo) to verify that link was working. It took two days for the money to be fully credited to my Fidelity account. I don't know why they take an extra day other than to steal that one day of float from you. I also switched my core cash fund from FCASH to Fidelity Municipal Money Market fund (FTEXX). In the 28% margin income tax bracket the 3.24% 7-day yield is equivalent to 4.50% taxable. That's far short of the 4.98% yield for Fidelity Cash Reserves (FDRXX), but better than the 3.17% FCASH yield (week before last) and not bad for the cash that will flow in and out of my account on a bi-weekly basis once I switch my payroll direct deposit. It is annoying that you can't switch your core cash selection directly online, but at least you can use the instant messenging chat feature to "talk" to a rep online to do it.

From last week: 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).

I am still seriously considering a UBS Resource Management Account (RMA), despite the $150 fee. They do have a lot of interesting services, including ATM fee reimbursement. I am concerned about the potential for identity theft these days, so I plan to keep my assets distributed among multiple financial service providers. I can split my payroll direct deposit among multiple "banks", so I may use Fidelity for some of the bigger expenses and UBS for daily credit card use. UBS offers both an American Express and a Visa credit card. The benefit of the UBS Visa credit card is that you get up to a month of float and the charges are debited near the end of the month rather than the next day as with a traditional debit card such as offered by Fidelity. Financially, that may be moot since Fidelity will pay a significantly higher interest rate for cash sitting idle in the account. At least that's my current read. I still haven't made a decision yet and may wait until I get the Fidelity account fully operational with direct deposit and electronic transfers for paying bills online.

Updated: Some short-term CDs from brokerage firms are also looking attractive right now. I see that Charles Schwab has a 3-month CD yielding 5.25% APY. I don't know the details and haven't looked into it myself, but it may be worth checking out. Their 6-month CD has a 5.26% APY and the 1-year CD has a 5.00% APY. Rates are going to fluctuate wildly over the coming year, but a CD rate is locked in for the term of the CD.

No change: 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 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

Positive double-whammy effect of falling energy prices

I'm not surprised at the actual decline in energy commodities, but it is nonetheless a welcome and pleasant process. The really good news is that we will experience a positive double-whammy effect from falling energy prices: the removal of an inflationary pressure and the addition of a stimulus to consumer spending.

The Fed is going to come out smelling like a rose on this one, with disinflation over the coming months coupled with sustained consumer spending even in the face of a moderating housing market. This will be quite a Goldilocks economy over the coming year.

Meanwhile, way too many people, especially "The Bears" and "The Bond Bulls" will get caught leaning way too short on stocks and way too long on bonds and betting way too heavily that interest rates are going to decline next year.

Two big unanswered questions for the coming year are: 1) where will the commodities bulls put their money now that the commodities bull market is "broken", and 2) where will hedge funds deploy their capital now that most of their pet strategies are rapidly crumbling into mediocrity.

-- Jack Krupansky

Where are oil and gasoline prices headed?

Given the steep decline of energy commodities prices in recent weeks, it wouldn't be surprising to see a moderate "dead-cat" bounce before we see a continuation of the underlying trend. In fact, it is quite possible that such a bounce could last for days or even weeks before energy commodities embark on their "next leg down."

And since the Republicans are running scared this election season, the administration will take great care not to "scare" commodities markets into spiking upwards with foreign policy saber-rattling in a manner that would further embitter consumers as they decide who to blame in the coming elections.

There is still a fair amount 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 November regular unleaded futures was $1.56 on Friday. That implies an equilibrium retail price of $2.16 to $2.21. The AAA Daily Fuel Guage Report indicates that the national average for regular unleaded is $2.32, suggesting price gouging on the order of 11 to 16 cents. We could well see a fair amount of the gouge evaporate over the coming weeks. And the underlying NYMEX gasoline futures could well continue to trend down as well.

-- Jack Krupansky