Retail gasoline prices finally ticked down again

I finally saw a tick down in the retail price of gasoline on Sunday after rising steadily for over a month. One day is not enough to indicate a trend, but I suspect that prices rose into the high-traffic Thanksgiving holiday period, and may now pull back again, at least a little.

If nothing else, the persistently high level of gasoline prices strongly suggests that the economy has some serious strength behind it even if not to the level of outright booming.

I am tempted to up my estimate of Q4 GDP growth to 2.5% from 1.7%, especially in the face of fairly strong Thanksgiving weekend retail sales.

-- Jack Krupansky

Will a simple three-fund investment model work for you?

There is an interesting article on MarketWatch by Jonathan Burton entitled "Three mutual funds that end the guesswork - Simple, low-cost stock and bond portfolio has been high achiever." I suspect that some people would be quite happy with it, while others may be rather disappointed, but at least it is an approach that everybody can consider and then accept, reject, or adapt as meets their own investment situation. The essence of the approach is as follows:

... the formula is easy enough: One index fund to cover U.S. stocks, another for the international markets and a third for the U.S. bond market. Together, this trio has rivaled U.S. stock returns over one-, three- and five-year spans, and with more stable returns year to year than the broad market.

The one thing you have to be very careful about is projecting an impression about pass financial results out into the future. We went through an atypical bull market followed by an atypical bear market, and now there is little clarity about the nature of the stock and bond markets in the months and year ahead.

-- Jack Krupansky

Watershed time for evolution of economic forecasting

The next eighteen months are shaping up to be quite a watershed period for the evolution of economic forecasting. For over a decade there has been this incipient low-grade "battle" between the open-minded innovators who rally around the fact that "This time it is different" and the traditionalists who rant that "No, things never change" and fall back on "historical patterns" as their rigid guide to the future path of the economy. My own view is the same as for any situation where the warring parties have staked out extreme positions: The truth is frequently in the middle.

The truth today is not that everything is the same or that everything is different, but that some things are the same and some things are different. The trick is to discern which factors have changed and which factors remain the same, and to watch as those balances shift over time.

As much as the traditionalists might want it to be, the economy is not a clock-like machine with extremely predictable behavior, but there are broad themes that do wax and wane over time, albeit without any strict clock-like frequency. Further, the manifestation of any given factor may be dramatically different from peiod to period.

The traditionalists argue two distinct prospects: 1) that there must be economic consequences to the "bursting of the housing bubble", and 2) those consequences must be very extreme. The first prospect makes perfect sense, but the great confidence of the traditionalists in the latter makes little sense. What is their primary argument for the latter? Simply: It has always been that way. It is difficult to say with certainty how the traditionalists have gotten so hung up on this desire to project an idealized version of the past far out into the future. There is usually a tone of anger to their insistence on this prospect, suggesting that some internalized source of fear is overwhelming their otherwise rational thought processes. Whatever, it is a very bizarre phenomenon. Be very careful not to get caught up in it.

As much as the traditionalists insist that there will be a profound slowing of the U.S. economy next year, there is little in the way of true economic fundamentals that could support that prospect. The economy is not a clockwork machine in which the slowing of one component dictates that all other components must also slow in a coordinated manner. Rather, the economy is an economic machine in which equilibrium is dynamically shifting on a constant basis so that resources freed up by a waning in one area can in turn fuel growth in other areas.

Not even the "best" of economists can truly begin to fathom the deep complexity of the U.S. economy, let alone the global economy. Economies are not clockwork machines produced by intelligent design, but rather are complex systems driven by evolution and the constant emergence of new businesses, new markets, new demographics, new processes, new products, new services, new ways of using resources, new technologies, and new forms of equilibrium. The traditionalists are true dinosaurs in their inability to grasp the concept of emergence and dynamic equilibrium. Even the more open-minded economists struggle mightily trying to understand the evolution of the economy.

The evolution of the equilibrium states of the U.S. economy over the coming year will humble all economists, primarily the traditionalists and their blind obedience to the clockwork guidance of historical patterns, but the more innovative economists as well who still do not fathom the true potential of evolutionary dynamic systems.

I suspect that a year from now economists will continue to utilize the same "meaures" of the economy as they do today, but I also strongly suspect that more than a few of the leading-edge economists will finally begin to ponder how to better measure the forms of dynamic equilibrium states and processes that are rampant throughout our economy.

-- Jack Krupansky

Fed to hold a steady course at 5.25% until at least 2008

For now, my overall assessment of Fed monetary policy remains unchanged:

My view is that the Fed will keep the 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.

I tentatively say "for now" because I am half-convinced that the Fed may in fact feel the need to make another hike in the Spring (March or May). To my way of thinking, it all depends on what happens with energy commodities. Prices of oil and gasoline futures are still quite elevated, albeit off their Summer peaks, and this constitutes an ongoing source of inflationary pressure that continues to propagate throughout the economy. If prices of energy commodities resume their decline, the Fed will be able to remain paused for all of 2007. But if energy commodities prices do not continue to fall, the Fed may have little choice but to hike to 5.50% in March or May. Another 20% decline is needed by March. If we don't see crude oil back down in the mid $40's and unleaded retail gasoline under $1.80 by April, expect a Fed hike to 5.50% at the May FOMC meeting. Based on economic fundamentals, we should see the prices of energy commodities come back down to Earth, but unfortunately there is simply so much free cash sloshing around seeking "some action" and a lot of speculators are simply unable to resist the urge to try to run commodities prices back up since "it worked before." My view is that there is a fairly good chance that prices of energy commodities will recede in the coming months, but it may be too soon to bet too heavily against the speculators. My finger is on the trigger, but for now I'll retain my belief that the Fed will remain paused for at least another year.

Although the moderation of the housing boom will indeed hold back the economy over the next couple of quarters, the Fed seems to agree with me that this is to be expected and not an indicator of a coming recession. A lot of people are desperately funneling money into bond funds in response to an expectation of well below-par economic growth, and this is depressing Treasury yeilds and causing an inverted yield curve, but this is ultimately indicating only below-par growth (e.g., 1% to 2.75% rather than 3+%) for the coming six months. Yes, there is a lot of anxiety, but anxiety itself is not a reliable indicator of a particular outcome.

As of Friday, Fed funds futures contracts indicate the following probabilities for changes in the Fed funds target rate at upcoming FOMC meetings:

• December: 0% probability of a hike and a 2% chance of a cut
• January: 6% chance of a cut
• March: 36% chance of a cut
• May: 78% chance of a cut
• June: 100% chance of a cut and a 4% chance of a second cut
• August: 100% chance of a cut and a 38% chance of a second cut
• December 2007: 100% change of two cuts and 36% chance of a third 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 and evolves. Like it or not, the economy proceeds more through Darwinian evolution than "intelligent design." The Fed (and Wall Street) can influence the evolution, of the economy, but not control it as if it were a clockwork machine. Predicting the precise or even general impact of any Fed action or inaction is quite literally a fool's errand. 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, studies have shown that Fed funds futures are not a very reliable indicator more than 45 days into the future.

What the Fed funds futures market tells us clearly is that the Fed is most likely to leave rates unchanged at least through March.

I also note that as of the November 10, 2006 edition of the UBS As We See It - Market Viewpoint report, UBS Wealth Management Research was forecasting a Fed funds rate of 4.00% by the end of 2007. That would be five quarter-point cuts. They are also forecasting 2% GDP growth for 2007. Obviously I do not concur, although I welcome their alternative perspective.

The bottom line here is that the Fed won't move through January, and any speculation about Fed moves further down the road are simply wild guesses based on contrived stories about a hypothetical future economy that happens to have a mind of its own.

-- Jack Krupansky

No semi-cheap hotel rooms for New Years Eve weekend in New York City

I made two more attempts to use Priceline to try to get a hotel room for New Years Eve for my two-week trip to New York City at the end of the year. On Thursday I made seven bids that "proved" that I couldn't get a room in Manhattan for $175 or less (or $160 for even a 1-star "hotel"). Today I made seven bids that "proved" that I couldn't get a 3-star hotel room for $200 in midtown Manhattan or even a 2-1/2-star room for $180 anywhere in Manhattan.

On my next "pass" I'll try $200 for a 3-star in midtown west (I forgot that area this time), and then $220 for a 3-star in the rest of Manhattan.

I am still prepared to bid up to $300, but I am reluctant to leave very much money on the table.

Travelocity shows me a Holiday Inn Express in Manhattan for $371 on each of the two nights (Saturday and Sunday). Priceline shows the Ramada Inn East Side (1-star) for $269, the Ramada Plaza New Yorker (2-star) for $299, the La Quinta Inn (3-star???) for $304, the Comfort Inn Chelsea (2-star) for $329, The Roosevelt (3-star) for $329, Holiday Inn Express (2-1/2-star) for $370, and my preferred Millenium UN Plaza (3-star) for $429.

I plan on holding off my bidding for the other nights of my two-week stay until after my credit card statement date of 12/10 so that I don't have to pay until February. I'll also have to decide which nights I might stay in Atlantic City.

-- Jack Krupansky

Oil and gasoline prices remain in a trading range as of 11/25/2006

Crude oil prices continue to remain within a fairly narrow trading range, hovering below $60, continuing to reflect market uncertainty as to whether the next major move is to the upside or the downside. This trading range scenario is not inconsistent with the possibility that crude oil may rally moderately at some point in the not too distant future, even as there is also the possibility of a further withdrawal of speculative capital from the commodities markets causing a significant decline in prices.

Crude oil futures prices are in contango (rising as you go out in delivery date) through December 2008, so we could see crude tick up each month for quite some time as each front month expires and the next month becomes the front month. For example, if there were absolutely no change in prices, crude would jump from $59.90 to $61.35 on December 20, 2006 as trading of the January contract ceases on December 19 and the February 2007 contract becomes the front month for trading. That's a $1.45 jump. Similarly, there is a $1.02 jump from February to March futures ($62.37). And so on up to a peak of $68.66 in December 2008. Then, futures go into backwardation (declining prices) all the way out to December 2012 ($65.91). All of this is subject to dramatic change, even on a daily basis.

In short, I am prepared to see a moderate rise in oil prices in the coming months, but I would not bet against declining oil prices either, especially if economic growth continues to be modest and the commodities markets continue to hemmorage capital as frantic speculators grow increasingly weary of anemic returns.

I would also note that since gasoline prices remain at a fairly high level, the vast majority of car and truck buyers will be very keen to raise their personal energy efficiency. This will be a slow evolution, but the per-capita consumption of energy (at least in the developed countries) is likely to trend down for the forseeable future.

I would also note that the mentality of short-term commodities traders is compatible with the people who are loudly proclaiming that the economy is falling off a cliff due to the so-called "housing recession" and that a full-blown recession is coming in 2007. I don't concur with that outlook, but nonetheless many people do and that could lead to additional downwards pressure on commodities futures.

Overall, I expect crude oil prices to remain in a relatively narrow trading range of $55 to $65 for the next few months, unless we see a wholesale exit of the commodities speculators.

-- Jack Krupansky

PayPal money market fund yield holds steady at 5.03% as of 11/24/2006

Here are some recent money market mutual fund yields as of Friday, November 24, 2006:

• iMoneyNet average taxable money market fund 7-day yield rose from 4.72% to 4.74%
• PayPal money market fund 7-day yield remains at 5.03%
• ShareBuilder money market fund (BDMXX) 7-day yield fell from 4.46% to 4.45%
• Fidelity Money Market Fund (SPRXX) 7-day rose from 4.98% to 4.99% ($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 4.96%
• 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 3.28% to 3.29% or tax equivalent yield of 5.06% (up from 5.05%) for the 35% marginal tax bracket and 4.57% (up from 4.56%) for the 28% marginal tax bracket
• Fidelity Tax-Free Money Market fund (FMOXX) 7-day yield rose from 3.25% to 3.26% or tax equivalent yield of 5.03% (up from 5.00%) for the 35% marginal tax bracket and 4.54% (up from 4.51%) for the 28% marginal tax bracket
• 4-week (1-month) T-bill investment rate rose from 5.24% to 5.25%
• 13-week (3-month) T-bill investment rate fell from 5.09% to 5.07%
• 26-week (6-month) T-bill investment rate fell from 5.15% to 5.14%
• Treasury I Bond composite earnings rate (semiannual compounded annually) for new I Bonds is 4.52%, with a fixed rate of 1.40% and a semiannual inflation rate of 1.55% (updated November 1, 2006, next semiannual update on May 1, 2007)
• Charles Schwab 3-month CD APY remains at 5.14%
• Charles Schwab 6-month CD APY remains at 5.16%
• Charles Schwab 1-year CD APY fell from 5.10% to 5.05%

Note: APY yield is worth somewhat less than the same 7-day yield. See my discussion and table for Comparing 7-day yield and APY.

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 or even your brokerage 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." The PayPal 7-day yield of 5.03% is equivalent to a bank APY of 5.15%.

4-week T-bills once again are 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, this rate fluctuates significantly from week to week. The rate is locked in for four weeks once you buy the T-bill at the weekly auction, but you can't predict what rate you will get at the next auction since it is based on supply and demand. This week I got lucky on my 4-week automatic re-order and got a full 5.25% yield, although it is only for 27 days since the Thanksgiving holiday shifted the issue date by a day.

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. (or Treasury "calls" the security or issues an offer to repurchase).

-- Jack Krupansky

Will the dollar continue to fall against the euro?

I'll do my best to stay out of the guessing game regarding foreign exchange trends, but I did see this enlightening passage on MarketWatch.com:

... Marc Chandler, global head of currency strategy at Brown Brothers Harriman, said while "momentum suggests there's scope for additional near-term losses, the risk is the dollar bears are getting ahead of themselves."

"There is reason to suspect that as full liquidity returns, the bears will have a more difficult time," he said. The weakness in the dollar over the past few days "appears to be speculatively rather than fundamentally and spread driven."

"Rather than jump aboard what appears to be a southbound dollar express, traders might be better advised to take some profits and wait for the next train," he said.

Currency analysts from BNP Paribas said exporters may have been forced to buy euros after having reduced hedge positions over the past year.

There is a lot of betting that the European Central Bank will be raising interest rates over the next few months, in parallel with speculation that the U.S. will be lowering interest rates, as well as a "belief" that the U.S. will suffer a "hard landing." How much of that "story" that actually comes to pass if of course yet another guessing game, and the betting is likely to be quite volatile in the months ahead. That is of course great news for traders who profit from volatility, but pure heart-burn for investors who depend on a trend.

Of course, most of the "action" on Friday is while so many U.S. market participants are off enjoying the long weekend.

-- Jack Krupansky

Investing with T-bills

A reader posed the following questions concerning investment in U.S. Treasury T-bills via TreasuryDirect:

1. How does the C of I account work?
2. How can I automatically reinvest rather than having the money make the trip in and out of the bank?
3. What is signaled by the fact that in recent Treasury auctions the 4-week T-bill yield has been higher than the 13-week and 26-week T-bill yields?

Here is my response:

TreasuryDirect needs a place to "park" your cash both before a Treasury bill (or note or bond) is purchased, and after it matures. You have two choices: 1) park the cash in your own bank account, where you might earn some interest, or 2) park your cash in the C of I account, which earns zero interest.

The C of I is a "free" convenience that lets you invest in Treasuries without the government knowing who you do banking with.

There may be some other esoteric benefits to the Zero-Percent Certificate of Indebtedness, but I haven't heard of them, yet.

Note that if you use the C of I for "funding" purchases and have an automatic re-repurchase order for T-bills, the "interest" on your T-bill will accumulate in the C of I without any compounding. That is a great way to "donate" money to the government!

My plan is to transfer the T-bill interest from my low-interest bank account to my higher-interest Fidelity brokerage account so that I get some degree of compounding.

If your 4-week T-bill investment is large enough, around $250K, the monthly interest would be enough to purchase another $1,000 of T-bills, so you could get compounding by simply upping your purchase amount each month. If you had $120,000 in 4-week T-bills, you could up the purchase by $1,000 every other month, but you wouldn't earn any interest on the T-bill interest for the odd months. These numbers assumed a 5% investment rate.

TreasuryDirect allows you to "schedule" purchases a long way into the future. To automatically re-order T-bills as they mature, you simply schedule the same order for as long a period as you desire. You can't simply say "until further notice", but you can specify a fairly large number.

Unfortunately, TreasuryDirect does not maintain a single order as being a repetition, but actually queues up a long list of distinct orders that can be managed separately, so if you enter a large repetition count you will have to do a lot of deletes to get rid of the orders if you want to change your schedule or amounts. Scheduling for a year may make sense since you should review your investment plan annually anyway.

After selecting "Buy Direct" and then "Bills", the "Buy Direct >> Treasury Bills" web page has a section entitled "Purchase Frequency". Select "Schedule repeat purchases", enter "Number of Repeat Purchases" and the "How Often" time interval. Select "Monthly" for the four-week T-bill even though that interval is technically not exactly correct. You might also buy the T-bills on a weekly or bi-weekly basis, but be sure to divide your total investment by two or four if you do so. Or divide by 13 if you wish to buy three-month T-bills every week, or divide by 3.25 (13 divided by 4) if you wish to buy 3-month (13-week) T-bills every four weeks.

I only have experience with the 4-week T-bills since July and you never hear even the financial media discuss them. Generally speaking, a higher yield means there is lower demand, suggesting that people feel that they have somewhere else to put their money to earn a higher return. My recent suspicion is that short-term speculators in commodities are continuously deciding even on a weekly basis whether to be "in" or "out" of various speculative opportunities, and being "in" means they would be less interested in T-bills. Precious metals commodities were rising in recent weeks.

Some people believe that the Fed may cut interest rates in a few months, so buying a six-month T-bill will lock in a rate for six months. That means higher demand for the six-month T-bill, which means a lower yield.

And there is always demand for the "benchmark" three-month T-bill. Of course, that demand varies from week to week, so we see the weekly investment rate vary as well.

There has been a lot of volatility in T-bill yields in the past few months, so it is difficult to say that there might be a trend, especially since the Fed has been "paused" for that period and is likely to be paused for at least the next couple of months as well.

I automatically re-ordered the 27-day T-bill this week and got lucky with a 5.25% investment rate, but I have no feeling for what the yield will be next week or in four weeks when my next automatic re-order occurs.

I keep meaning to find out what services Fidelity offers for investing in Treasuries, other than government bond funds which charge a management fee, but I haven't gotten around to it yet. TreasuryDirect seems like it has to be the lowest cost vehicle for investing in T-bills. The only advantage a fund manager could give would be to intelligently decide between the various durations of T-bills or other government securities besides Treasuries, but I have no knowledge about whether such a manager even exists at the retail level. The big investment banks make (and lose) huge amounts of money trading Treasuries and are unlikely to want to "give" any of that money to you or I by clueing us in on their trading secrets. A lot of their trading is in notes and bonds anyway.

The current Treasury yield curve with T-bill yields well above T-notes and T-bonds is quite an anomaly and usually doesn't persist for long (e.g., it starts when speculators smells a recession coming and ends as the Fed lowers short rates), but this time it may persist if the Fed is "right" and keeps the economy out of recession without lowering the Fed funds target interest rate from its current "neutral" stance and also keeps inflationary expectations relatively low.

A lot of people are betting heavily against the Fed (buying notes and bonds), but just because they are betting that outcome doesn't mean they are likely to be proven correct.

There are plenty of other factors putting downwards pressure on the long end of the Treasury yield curve. For example, a lot of 401K investors are still leery of the stock market and continuing to pour vast sums of money into bond funds, which puts downwards pressure on bond yields, especially as more "boomers" get incrementally closer to retirement and shift more of their assets to fixed income.

Even if an investor has a simple, "normal" asset allocation, a sizable chunk of any new investment will still be pouring into bond funds and pushing downwards on yields.

For now, we should simply savor the benefit of a higher return with less commitment and more flexibility that we get with T-bills. Better than a free lunch, it's like getting paid to eat lunch.

-- Jack Krupansky

Rising gasoline prices suggest renewed economic strength

Gasoline prices have been rising again over the past month, even as crude oil prices have been stuck in a relatively narrow trading range and crude oil inventory levels have been rising. This suggests that consumers are somewhat undeterred by the relatively high level of gasoline prices, further suggesting that the economy is stronger than many pundits are suggesting.

The economy is not "booming", but it is not "spiraling downwards into recession" either.

I continue to forecast annualized Q4 real GDP growth in a range of +0.25% to +3.25%, with a midpoint of 1.75%, which would be a very modest improvement over Q3, but nonetheless both believable and moving in the right direction. The forecasting difficulty here is that the housing market and commodities prices are being rather uneven, and could lead to either a lurch to the downside as well as a lurch to the upside. I like to think of my "goal" for Q4 to be GDP growth of +2.0%, but neither +0.25% nor +3.25% would greatly surprise me.

The recent rise in gasoline prices suggests that GDP growth in Q4 of +2.50% to +2.75% might be a reasonable estimate.

-- Jack Krupansky

Fidelity saga - correction: no fee for supermarket debit cashback

Contrary to what I originally posted in Fidelity saga - mostly there, cashback on a supermarket purchase using a Fidelity debit card does not count against the five free ATM withdrawals that Fidelity gives you each month. So, a cashback purchase twice a week for eight cashbacks per month has no fees from Fidelity. As a result, I will likely use debit card cashback as my primary means of getting my weekly pocket cash.

Note: Even though Fidelity gives you five "free" ATM withdrawals each month, that simply means that Fidelity doesn't add its own fee, but the ATM owner will likely add a fee, such as the $2 my own bank (Wells Fargo) charges per ATM withdrawal for anything other than the bank's debit card. You can get service from Fidelity that refunds even that bank fee, but I haven't paid for that extra service.

-- Jack Krupansky

Fed monetary policy is neutral, not restrictive

Just to be clear, the current Federal Reserve monetary policy with the Fed funds target interest rate at 5.25% is still neutral, and not restrictive. It is above the middle of the neutral range, but certainly not at the level where it chokes off economic growth. Nonetheless, I read quite a bit of commentary that strongly suggests that monetary policy is "restrictive." The whole point of the recent rate hike campaign was not to "slam on the brakes", but merely to remove the bulk of the excessively easy money that was fueling inflationary pressures.

Besides, mortgage rates are still quite low, so it is somewhat misleading to say that the Fed rate hikes themselves were the cause of the slowing of the housing sector. High prices and excess supply relative to demand are the probable culprits and market forces will cause adjustments regardless of Fed policy.

-- Jack Krupansky

Should I suspend my monthly ShareBuilder investment program?

Since June I have had a modest monthly dollar-cost-averaging investment program with ShareBuilder. It is a relatively small amount of money each month, invested 100% in Microsoft (MSFT) stock. Since June, I have accumulated a much larger amount of stock in my 401k plan and via the Employee Stock Purchase Plan. At the same time, my ratio of cash to stock continues to fall and my rainy day contingency fund remains somewhat meager. So, I am considering a suspension of the ShareBuilder plan and simply saving the monthly investment money as cash in my rainy day fund. Either way, I would continue to hold the current stock in the plan. I haven't made any final decision yet, but may within a couple more months. For now, I'll stay on my ShareBuilder plan.

-- Jack Krupansky

Selling off oil and gas producing properties

Back in the late 1980's, I invested some money in Geodyne Energy Income Programs which produce regular income from the production of crude oil and natural gas. I sold most of the investment in the early 1990's, but got stuck with some fractional units which could not be sold easily or profitably. Every quarter my old UBS IRA earns a little cash from these investments. I just received the latest quarterly statement and see that the distribution amounts for three of the program partnerships are like an order of magnitude higher than the typical distribution. The notes say that this is because the Geodyne partnerships are now selling off some of their "interests" in various "producing properties," meaning oil and gas wells. This first batch of sales occurred at an auction in Houston at "The Oil and Gas Clearinghouse." According to the SEC filing, additional sales are expected at auctions in December and February. The SEC filing covers Geodyne Energy Income Limited Partnerships II-E, -F, -G, and -H. I have small investments in the first free.

The filing states an intent to "sell an increased amount of the Partnerships' properties as a result of the generally favorable current environment for oil and gas dispositions."

The big question mark is what fraction of wells were sold, how many wells are left, and whether the remaining wells are better-producing or lower-producing than those that were sold.

What I don't know is whether these auctions are a better deal for the limited partners in these programs or the purchasers. I suspect the latter, but I do not know, and I have no choice anyway.

I'll shift the proceeds into the Hartford Floating Rate Fund, a mutual fund simular to a money market fund which currently yields more than 6%. It's almost as good as a money market mutual fund, but has a 1% exit load (deferred sales charge). I'm not sure whether expenses are already taken out before the monthly distributions or at some other time. The prospectus says that the total annual operating expenses are 1.79%, so the question is whether that is taken out before or after the 6% number is calculated. I haven't had time to track this down yet. I've only had money in this fund since late September. It is also a very small amount of money.

-- Jack Krupansky

Picking through the credit card offers

I had the day off from work, so I finally had some spare time to sort through the various credit card offers I've received over the past few months. Seventeen of them to be exact. I applied for two of them over the phone, and was immediately approved for both. A year ago (next Wednesday) I was waiting for the final discharge of my personal bankruptcy, and it has taken be a while to get back on my feet and feel at least marginally comfortable with my renewed financial "security."

I had gotten one credit card back in July, and that is all I really need, but with my upcoming two-week trip to New York City at the end of the year, I felt the need for a little more flexibility. Some of these 0% introductory offers seemed like a great way to spread my expenses over a couple of months. Actually, I have decided not to do that and actually pay off the expenses as they became due in January and February, but at least I now will have the flexibility to shuffle money a little less rigidly.

Of the seventeen offers, I immediately rejected seven because they either had annual fees or simply had nothing special to offer. Two of the offers were affiliated with airline frequent traveler programs. I picked the Frontier-affiliated MasterCard since it offered miles for purchases and the HSBC Household Bank MasterCard which offers 2% cashback on purchases and 0% interest on purchases for six months. The credit limits are modest, in fact together only half of the limit for my CapitalOne card, but it is not my intention to use them for very much in the near future. Both have no annual fee.

I am still considering whether I should actually carry a balance on at least one card for a few months to help start rebuilding my credit history. The 0% introductory HSBC Household Bank card is a good candidate for that. If it comes within two weeks, I may well use it for half of my NYC hotel expenses. If I do run up a balance, it is also my intention to incrementally pay the balance into savings so that I don't need to mangle my budget to pay off the balance a few months down the line.

With three credit cards now (or at least within the next couple of weeks), I no longer need to consider getting any additional cards and have increased financial flexibility for short-term spikes in expenses. I will keep my eyes open for any cashback offers that might be better than the one I just got.

-- Jack Krupansky

Mortgage applications up over the past month and mortgage rates down as well

Correction: Since there is a delay between when the mortgage applications report is released and when the Mortgage Bankers Association web site is updated, I inadvertently looked at the report from a week ago. There was in fact a decline in mortgage applications this past week, but the four-week moving average continued to move higher. This demonstrates that the numbers can be volatile even as there is a trend upwards.

Two interesting phenomena of the past month are that mortgage rates have actually declined and mortgage applications have actually risen. Applications for both refinancing and purchase have risen over that period (although applications fell in the most recent week.) A lot of the refinancing applications are conversions of adjustable rate mortgages to cheap fixed-rate mortgages, suggesting that the overhang of ARM mortgages that will "reset" next year will be less a danger than the doomsayers have been wildly claiming. The reports on applications and rates come out every week.

The raw fuel for financing mortgages is not money from the Fed or banks, but the vast excess liquidity of private investors (and public pensions) that is seeking even a modest return greater than safe Treasuries. A lot of this money continues to find the yield of mortgage-backed securities (MBS) reasonably attractive and low-risk. The low yield on the 10-year Treasury Note assures that an MBS yield will be attractive.

The housing market may continue to pull back for a few more months, but the bulk of the pullback is likely behind us. By spring (March to May), the housing market will probably be relatively stable, if not growing again.

-- Jack Krupansky

1-month T-bill yield up to 5.25%

The Treasury auction on Tuesday resulted in the following yields for new T-bills:

• 27-day T-bill investment rate up from 5.243% to 5.252%, equivalent to 5.38% APY
• 90-day T-bill investment rate down from 5.088% to 5.071%, equivalent to 5.17% APY
• 181-day T-bill investment rate up from 5.153% to 5.136%, equivalent to 5.20% APY

The duration of these T-bills was trimmed by a day (from 28, 91, and 182 days) since they will be issued a day later due to Thursday being the Thanksgiving holiday.

My own 1-month T-bills rolled over this week. This was the first time since July that I have gotten a yield at or greater than the Fed funds target rate of 5.25%.

-- Jack Krupansky

ECRI Weekly Leading Index indicator up slightly and continues to point to a stable economy ahead

The Weekly Leading Index (WLI) from the Economic Cycle Research Institute (ECRI) rose slightly (+0.01% vs. +0.21% last week) and the six-month smoothed growth rate rose moderately (from +1.1% to +1.6%) but remains relatively near the flat line, suggesting an economy that has leveled out. This is the third positive reading for the smoothed growth rate in 17 weeks (June 21, 2006). We haven't finished the soft landing yet, but we are in great shape, despite the weakness in the housing sector.

The WLI is now 15 weeks past its summer low and the six-month smoothed growth rate is now 13 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 relatively 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. Anyone expecting a recession or very weak economy next year will be disappointed.

-- Jack Krupansky

Fed to hold a steady course at 5.25% until at least 2008

For now, my overall assessment of Fed monetary policy remains unchanged:

My view is that the Fed will keep the 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.

I tentatively say "for now" because I am half-convinced that the Fed may in fact feel the need to make another hike in the Spring (March or May). To my way of thinking, it all depends on what happens with energy commodities. Prices of oil and gasoline futures are still quite elevated, albeit off their Summer peaks, and this constitutes an ongoing source of inflationary pressure that continues to propagate throughout the economy. As long as prices of energy commodities continue to decline, the Fed will be able to remain paused for all of 2007. But if energy commodities prices do not continue to fall, the Fed may have little choice but to hike to 5.50% in March or May. Another 20% decline is needed by March. If we don't see crude oil back down in the mid $40's and unleaded retail gasoline under $1.80 by April, expect a Fed hike to 5.50% at the May FOMC meeting. Based on economic fundamentals, we should see the prices of energy commodities come back down to Earth, but unfortunately there is simply so much free cash sloshing around seeking "some action" and a lot of speculators are simply unable to resist the urge to try to run commodities prices back up since "it worked before." My view is that there is a fairly good chance that prices of energy commodities will recede in the coming months, but it may be too soon to bet too heavily against the speculators.

Although the moderation of the housing boom will indeed hold back the economy over the next couple of quarters, the Fed seems to agree with me that this is to be expected and not an indicator of a coming recession. A lot of people are desperately funneling money into bond funds in response to an expectation of well below-par economic growth, and this is depressing Treasury yeilds and causing an inverted yield curve, but this is ultimately indicating only below-par growth (e.g., 1% to 2.75% rather that 3+%) for the coming six months. Yes, there is a lot of anxiety, but anxiety itself is not a reliable indicator of a particular outcome.

As of Friday, Fed funds futures contracts indicate the following probabilities for changes in the Fed funds target rate at upcoming FOMC meetings:

• December: 0% probability of a hike and a 2% chance of a cut
• January: 4% chance of a cut
• March: 30% chance of a cut
• June: 96% chance of a cut
• August: 100% chance of a cut and a 40% chance of a second cut
• December 2007: 100% change of two cuts and 12% chance of a third 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 and evolves. Like it or not, the economy proceeds more through Darwinian evolution than "intelligent design." The Fed (and Wall Street) can influence the evolution, of the economy, but not control it as if it were a clockwork machine. Predicting the precise or even general impact of any Fed action or inaction is quite literally a fools errand. 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, studies have shown that Fed funds futures are not a very reliable indicator more than 45 days into the future.

I also note that as of the October 26, 2006 edition of the UBS As We See It - Market Viewpoint report, UBS Wealth Management Research was forecasting a Fed funds rate of 4.00% by the end of 2007. That would be five quarter-point cuts. They are also forecasting 2% GDP growth for 2007. Obviously I do not concur, although I welcome their alternative perspective.

The bottom line here is that the Fed won't move through January, and any speculation about Fed moves further down the road are simply wild guesses based on contrived stories about a hypothetical future economy that happens to have a mind of its own.

-- Jack Krupansky

Fidelity saga - mostly there

Correction: Cash back on a supermarket debit card purchase is simply part of the purchase and does not count as one of the five free ATM withdrawals that Fidelity allows you each month.

I have arranged for my new Fidelity brokerage account to be a replacement for almost all of the functions of my traditional bank checking account. Other than the issue of needing to arrange for payments from TreasuryDirect, I am essentially "there" and have very little need for my old bank account. I'll continue to keep the bank account for any lingering needs for a "real" bank account, but for almost all intents and purposes, Fidelity is now my "bank."

Yesterday I finally got around to using my Fidelity debit card and PIN to get cash from a bank ATM. The bank charged me $2 for the transaction, but Fidelity doesn't add on to that charge for the first five ATM withdrawals and then adds $1 for additional ATM withdrawals.

I also got around to using the debit card for a purchase in the supermarket and getting cash back at checkout. The store limited me to $20 back, but there was no fee from the store and no fee from Fidelity, even if you do this more than five times per month, since the cash is included as part of the purchase and not treated as an ATM withdrawal. I'll probably use this is my preferred method for getting my typical weekly pocket cash.

I split my company payroll direct deposit so that $100 continues to go to my old bank for fee-free ATM withdrawal and the rest goes directly into my Fidelity brokerage account where it earns about 3.20% tax-free interest from the day of deposit to the day of withdrawal.

I probably will continue to use my credit card for purchases rather than my Fidelity debit card simply to take advantage of the float on the balance.

My ShareBuilder account did in fact debit my Fidelity account last week for the modest monthly stock investment plan I have with ShareBuilder.

I still need to switch my Amazon affiliate account to pay to Fidelity.

I made my monthly installment plan payment to the IRS last week for my back taxes through EFTPS from my Fidelity account.

I only have one remaining item, which 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 from my Treasury account 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. I'm in no hurry to resolve this issue since it works fine in the old bank account and is such a small amount of money at present. I'll simply transfer any excess cash from the bank to Fidelity as it accumulates.

A minor task is the calculate how much excess cash to keep in "core" cash, which unfortunately pays a moderately lower interest rate, so that bills can be paid, including occasional travel without having to shuffle money around from higher-yielding accounts. Whether $1,000 or $500 or $250, it wants to be enough to avoid inconvenience, but not so much that I have to "pay" a noticeable amount in lost interest. Since I now have a normal credit card with a high enough credit limit to cover most travel that I might expect, keeping excess cash in higher-yielding accounts and manually transferring it on odd occasions seems to make sense for me. Actually, Fidelity did tell me that they will sell from my higher-yield money market fund in order to avoid a check or debit bouncing, but they said that is a "courtesy" that isn't intended to be used too frequently. Given my limited traveling and purchasing, maybe that "auto-sell" will work out well for me and I'll be able to keep excess cash in the higher-yielding money market fund.

-- Jack Krupansky

Rainy day contingency fund

Since I got my new job at The Evil Empire back in May, I've been trying to create a rainy day contingency fund, to act as a buffer should I have any dramatic unexpected expenses or a loss of income. A traditional rule of thumb is to have six months of living expenses in ready cash. A more conservative rule of thumb is to have an entire year of living expenses in ready. A "thin ice" rule of thumb would be to have enough ready cash to cover three full months of living expenses. It can be difficult to meet such a goal when you are just starting out or recovering from a financial disaster such as a bankruptcy (me), but at least you should have a goal and a plan to save enough each month to fund this contingency fund as quickly as possible.

In the past, I have always simply "planned" that I could and would use credit cards to cover contingencies. That is superficially appealing and does kind of work, but a really bad idea. Saving cash in a rainy day fund demonstrates and reinforces the kind of financial discipline needed to stay away from financial disasters in the first place. In other words, if you are able to successfully fund your contingency fund, the odds are that you won't need it. Out of the blue contingencies are rarely completely out of the blue. Usually there is some hint or "writing on the wall" that careless and sloppy thinking overlooks, and only discipline will help you see these things over the horizon and around the corner and take steps to avoid disaster before you walk blindly into it. Besides, if you are unable to manage a dirt-simple rainy day fund (cash in a money market mutual fund), you are unlikely to be even more disciplined with more sophisticated money and investment matters.

I just updated my net worth spreadsheet model to calculate how many months of rainy day contingency expenses I can cover, assumping a normal monthly expense budget. Presently I am sitting at 3.5 months of funding. I have additional net worth, but the intention is that only the rainy day contingency fund is available for contingencies. I need to get this up to six months ASAP, and even that is only a steppingstone to a full twleve months of funding.

I would have a six month fund today, but I chose to acelerate paydown of my back taxes. That was a choice I consciously made and continue to make. I am trying to balance these two competing priorities.

I expect to get to that magical six-month mark by the end of 2007.

I also made the conscious decision to maximize my contributions to my 401K retirement plan, my employee stock purchase plan, and even my standalone Roth IRA. None of these "count" as a rainy day contingency fund, but building up my retirement assets and overall net worth is just as important as a contingency fund. Once again, it is a matter of balancing the competing priorities.

I monitor my budget and actual expenses very carefully almost every day and move a little cash over to the rainy day fund whenever I see that I have managed to get ahead of budget. I also try to do the same to pay down my back taxes more aggressively. I consider the two to be roughly equal priority, although I may switch to bias a bit more in favor of saving for the rainy day fund until I get to a full six months of funding.

-- Jack Krupansky

Hotel budget decision: Pay from savings

I have already made one important decision concerning the financing of my hotel budget for my  two-week trip to New York City at the end of the year, and that is that I will pay for it all out of my savings. This will impact my rainy day fund, but at least I'll be free and clear going forward and won't have to modify my budget plan to accommodate monthly credit card payments. It just feels too soon after bankruptcy for me to be be depending on credit cards for big-ticket expenses, even if it is only for a few months.

Back in July I had actually thought forward about how to budget for expenses such as this trip and decided that rather than budget for them per se, I would simply add to my savings as rapidly as possible and these savings would double as a part of my rainy day contingency fund and saving for expected expenses such as this trip.

All of my trip expenses will be on my credit card. Some of them, such as my plane ticket that I purchased last week and any hotels that I might prepay by around December 9 will be due by around January 9. Expenses incurred after around December 9 won't actually be due until around February 9. That means that I will have roughly two months of incremental monthly savings to apply to my trip expenses, significantly reducing the amount of my rainy day contingency fund that will need to be drawn down to pay for my trip.

I estimate that paying for this trip might require three-quarters of a month's worth of my rainy day contingency fund. That would take me from 3.5 months down to 2.75 months. That is relatively thin ice, and not where I would prefer to be, but is workable considering that I continue to accumulate net worth at a good clip.

-- Jack Krupansky

No cheap hotel rooms for New Years Eve weekend in New York City

I went ahead and did a test with Priceline to try to get a hotel room for New Years Eve for my two-week trip to New York City at the end of the year. I tried a bunch of bid combinations at $110, $120, and $140 in various areas of Manhattan, but they were all rejected, even for 1-star budget hotels. I didn't have a high hope for success, but there was no sense not to try to get a cheap room if one were available. At least I now know that if I get a bid  accepted at above that range I won't have left all that money on the table.

Maybe this simply illustrates how well the economy is doing and how much many people have to spend.

The big unknown question is whether demand will slacken or tighten between now and New Years. I suspect it will tighten since New Years Eve is such a special event in New York City.

In a few days I'll re-bid, shooting for the $140 to $175 range. I suspect that I have a 50/50 chance of success there. If that fails, I'll go for $175 to $200, then the $200 to $225 range, then the $225 to $300 range. At that point I'll opt to stay outside Manhattan. I might also opt for an even higher bid for New Years Eve itself and balance that in my budget by staying outside Manhattan the night before New Years Eve.

-- Jack Krupansky

Hotel budget version 1.0 for trip to New York City at the end of the year

Now that I have my plane ticket for my two-week trip to New York City at the end of the year, the next big task is planning for my hotel stays. In the old days, I might be able to budget $250 per night and that would be okay. Despite the fact that I now have a decent job with The Evil Empire, even $200 per night is out of the question. Initially I set a target of $1,500 for fourteen nights of hotel, not all of them in Manhattan proper, but that was too optimistic as well.

I came up with a spreadsheet for a more realistic approach to my hotel budget. Even these numbers may be too optimistic, but they are probably semi-reasonably close to what I should by able to get, especially using Priceline's Name Your Own Price Feature.

1. Wednesday, December 20, 2006: $85 (near Newark Airport)
2. Thursday, December 21, 2006: $125
3. Friday, December 22, 2006: $125
4. Saturday, December 23, 2006: $125
5. Sunday, December 24, 2006: $75 (Atlantic City)
6. Monday, December 25, 2006: $85 (Outside Manhattan)
7. Tuesday, December 26, 2006: $85 (Outside Manhattan)
8. Wednesday, December 27, 2006: $125
9. Thursday, December 28, 2006: $125
10. Friday, December 29, 2006: $75 (Atlantic City)
11. Saturday, December 30, 2006: $300 (Pre-New Years Eve)
12. Sunday, December 31, 2006: $300 (New Years Eve)
13. Monday, January 1, 2007: $125
14. Tuesday, January 2, 2007: $125

For a total of $1,880 and an average of $134.29 per night.

I'm prepared for the fact that it might run another $200 or $300 higher, but I'm also motivated to work harder to keep within this budget. It may mean that I have to stay a few more nights outside of Manhattan, or in less luxurious digs, but there are plenty of parameters to play around with.

This is version 1.0 of my hotel budget. I may have to go through ten or more revisions, but at least I have a solid starting point.

My next step may be to do a test with Priceline to try to minimize my cost for the New Years Eve weekend. I'll lowball a bid for a moderate hotel, say $125, and see how it goes. If I get it, I'll be glad to have it out of the way even though I have to pre-pay immediately. Otherwise, I can re-bid in three days. I can also re-bid immediately by starting with a narrow area and then re-bid with a wider area. I am willing to accept a hotel a little bit out of the way, but still in Manhattan, and maybe a little less luxurious, in order to get a low-ball bid. If my attempts at a low-ball bid fail, I'll bid a moderate price for an above moderate hotel so I can enjoy what I'm paying for.

-- Jack Krupansky

Budgeting a two-week trip to New York City at the end of the year

One of my main short-term projects is planning a two-week trip to New York City at the end of the year. Besides my overall budget and all of the details, I need to decide whether I will pay for the trip out of cash savings, whether to simply charge in on my credit card and pay it off over several months, or some combination of the two.

Paying cash makes the most financial sense, but that would dramatically reduce my limited rainy day contingency fund.

I also have to be careful with hotels which I have to prepay (e.g., Priceline) versus those that I may not need to pay until the January or even February credit card billing cycle.

I am also considering getting a second credit card, preferably with a 0% introductory rate, to easy the financing of this trip.

Ultimately, I do expect that the entire trip will be paid for by the end of April.

Part of my difficulty with funding this trip is that I significantly depleted my rainy day fund by paying off my entire New York State income tax back taxes in one lump sum last month. If I hadn't done that, I could have used that cash to cover most of this trip.

I may opt to carry a balance on my credit card for a few months simply so that I can keep my rainy day fund intact in case any contingencies do arise.

My bias right now is to pay half in cash and half over three to four months.

And if I get a 0% credit card, paying over several months won't cost me a dime.

I have about fifteen credit card offers stacked up right now. Maybe tomorrow I'll pick the best offer and apply for it.

-- Jack Krupansky

Might the Fed hike in the Spring?

For the past few days I have been ruminating on the idea that the Federal Reserve may actually feel the need to hike the Fed funds target interest rate in the Spring to further tamp down persistently lingering inflationary pressures. In particular, although crude oil and gasoline have been relatively well-behaved over the past two months, they are both still at a rather high absolute level that continues to seep through to higher prices in the rest of the economy, not to mention lackluster productivity-producing investment due to those high energy expenses.

The economic dampening of the weakness in the housing sector is not likely to be a long-term issue, and lower interest rates would not further the Fed's intentions of bringing housing back into being a moderate portion of the economy rather than a source of inflationary pressure.

My tentative conclusion is that the Fed will likely hike to 5.50% at the March 20/21 or the May 9 meeting. I don't anticipate additional hikes, but see this as more of an insurance move since the economy is still quite strong and a "shot across the bow" of speculators who are behaving a little too wildly with easy money.

Please note that even 5.50% is not a true restrictive interest rate, but merely near the upper end of the neutral range. The point is that even at 5.25%, money is relatively cheap and in fact too cheap to dampen the wild and frenetic enthusiasm of speculators.

I have not yet formed a firm, final opinion on this, but I may soon do so.

-- Jack Krupansky

Oil and gasoline prices remain in a trading range as of 11/18/2006

Although I continue to see retail gasoline prices ticking up, crude oil prices have remained within a fairly narrow trading range in recent weeks, continuing to reflect market uncertainty as to whether the next major move is to the upside or the downside. This trading range scenario is not inconsistent with the possibility that crude oil may rally moderately at some point in the not too distant future, even as there is also the possibility of a further withdrawal of speculative capital from the commodities markets causing a significant decline in prices.

We did see a dramatic plunge in the price of crude oil this past week, but that was really simply due to short-term traders dumping the "front month" December futures contract as they shifted into the January futures contract since trading of the December contract terminated on Friday. If there is no change in price, the "front month" oil futures contract (January) will open at $58.97 on Monday versus the close for the December contract of $55.81 on Friday.

I would also note that crude oil futures prices are in contango (rising as you go out in delivery date) through December 2008, so we could see crude tick up each month for quite some time as each front month expires and the next month becomes the front month. For example, if there were absolutely no change in prices, crude would jump from $58.97 to $60.54 on December 20, 2006 as trading of the January contract ceases on December 19 and the February 2007 contract becomes the front month for trading. That's a $1.57 jump. Similarly, there is a $1.26 jump from February to March futures ($61.70). And so on up to a peak of $67.97 in November and December 2008. Then, futures go into backwardation (declining prices) all the way out to December 2012 ($64.09). All of this is subject to dramatic change, even on a daily basis.

In short, I am prepared to see a moderate rise in oil prices in the coming months, but I would not bet against declining oil prices either, especially if economic growth continues to be modest and the commodities markets continue to hemmorage capital as frantic speculators grow increasingly weary of anemic returns.

I would also note that since gasoline prices remain at a fairly high level, the vast majority of car and truck buyers will be very keen to raise their personal energy efficiency. This will be a slow evolution, but the per-capita consumption of energy (at least in the developed countries) is likely to trend down for the forseeable future.

I would also note that the mentality of short-term commodities traders is compatible with the people who are loudly proclaiming that the economy is falling off a cliff due to the so-called "housing recession" and that a full-blown recession is coming in 2007. I don't concur with that outlook, but nonetheless many people do and that could lead to additional downwards pressure on commodities futures.

Overall, I expect crude oil prices to remain in a relatively narrow trading range of $55 to $65 for the next few months, unless we see a wholesale exit of the commodities speculators.

-- Jack Krupansky

PayPal money market fund yield holds steady at 5.03% as of 11/18/2006

Here are some recent money market mutual fund yields as of Saturday, November 18, 2006:

• iMoneyNet average taxable money market fund 7-day yield fell from 4.73% to 4.72%
• PayPal money market fund 7-day yield remains at 5.03%
• ShareBuilder money market fund (BDMXX) 7-day yield rose from 4.45% to 4.46%
• Fidelity Money Market Fund (SPRXX) 7-day remains at 4.98% ($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 4.95% to 4.96%
• Fidelity Prime Reserves money market fund (FPRXX) 7-day yield rose from 4.44% to 4.45%
• Fidelity Municipal Money Market fund (FTEXX) 7-day yield rose from 3.13% to 3.28% or tax equivalent yield of 5.05% (up from 4.82%) for the 35% marginal tax bracket and 4.56% (up from 4.35%) for the 28% marginal tax bracket
• Fidelity Tax-Free Money Market fund (FMOXX) 7-day yield rose from 3.09% to 3.25% or tax equivalent yield of 5.00% (up from 4.75%) for the 35% marginal tax bracket and 4.51% (up from 4.29%) for the 28% marginal tax bracket
• 28-day (1-month) T-bill investment rate rose from 5.20% to 5.24%
• 91-day (3-month) T-bill investment rate remains at 5.09%
• 182-day (6-month) T-bill investment rate fell from 5.18% to 5.15%
• Treasury I Bond composite earnings rate (semiannual compounded annually) for new I Bonds is 4.52%, with a fixed rate of 1.40% and a semiannual inflation rate of 1.55% (updated November 1, 2006, next semiannual update on May 1, 2007)
• Charles Schwab 3-month CD APY fell from 5.19% to 5.14%
• Charles Schwab 6-month CD APY fell from 5.21% to 5.16%
• Charles Schwab 1-year CD APY remains at 5.10%

Note: APY yield is worth somewhat less than the same 7-day yield. See my discussion and table for Comparing 7-day yield and APY.

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 or even your brokerage 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." The PayPal 7-day yield of 5.03% is equivalent to a bank APY of 5.15%.

28-day T-bills once again are 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, this rate fluctuates significantly from week to week. The rate is locked in for four weeks once you buy the T-bill at the weekly auction, but you can't predict what rate you will get at the next auction since it is based on supply and demand.

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

ECRI Weekly Leading Index indicator up moderately and continues to point to a stable economy ahead

The Weekly Leading Index (WLI) from the Economic Cycle Research Institute (ECRI) rose moderately (+0.45% vs. +1.0% last week) and the six-month smoothed growth rate rose moderately (from +0.6% to +1.2%) but remains relatively near the flat line, suggesting an economy that has leveled out. This is the second positive reading for the smoothed growth rate in 16 weeks (June 21, 2006). We haven't finished the soft landing yet, but we are in great shape, despite the weakness in the housing sector.

The WLI is now 14 weeks past its summer low and the six-month smoothed growth rate is now 12 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 relatively 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. Anyone expecting a recession next year will be disappointed.

-- Jack Krupansky

Oil and gasoline prices remain in a trading range

Although I have noticed that retail gasoline prices have started to tick up again, crude oil prices remain within a fairly narrow trading range in recent weeks, continuing to reflect market uncertainty as to whether the next major move is to the upside or the downside. This trading range scenario is not inconsistent with the possibility that crude oil may rally moderately at some point in the not too distant future, even as there is also the possibility of a further withdrawal of speculative capital from the commodities markets causing a significant decline in prices.

I would also note that crude oil futures prices are in contango (rising as you go out in delivery date) through July 2008, so we could see crude tick up each month for quite some time as each front month expires and the next month becomes the front month. For example, if there were absolutely no change in prices, crude would jump from $59.59 to $61.54 on November 20, 2006 as trading of the December contract ceases on November 17 and the January 2007 contract becomes the front month for trading. That's a $1.95 jump. Similarly, there is a $1.34 jump from January to February futures ($62.88), a $0.95 jump to March futures ($63.83), a $0.72 jump to April ($64.55), a $0.59 jump to May ($65.14), a $0.48 jump to June ($65.62), a $0.41 jump to July ($66.03), a $0.34 jump to August ($66.37), a $0.29 jump to September ($66.66), a $0.25 jump to October ($66.91), and smaller increases through July 2008 ($67.87), no change to August 2008, and then backwardation (declining prices) from then on all the way out to December 2012 ($62.57).

In short, I am prepared to see a moderate rise in oil prices in the coming months, but I would not bet against declining oil prices either, especially if economic growth continues to be modest and the commodities markets continue to hemmorage capital as frantic speculators grow increasingly weary of anemic returns.

I would also note that since gasoline prices remain at a fairly high level, the vast majority of car and truck buyers will be very keen to raise their personal energy efficiency. This will be a slow evolution, but the per-capita consumption of energy (at least in the developed countries) is likely to trend down for the forseeable future.

Overall, I expect crude oil prices to remain in a relatively narrow trading range of $55 to $65 for the next few months.

-- Jack Krupansky

Fed to hold a steady course at 5.25% until at least 2008

My overall assessment of Fed monetary policy remains unchanged:

My view is that the Fed will keep the 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.

Although the moderation of the housing boom will indeed hold back the economy over the next couple of quarters, the Fed seems to agree with me that this is to be expected and not an indicator of a coming recession. A lot of people are desperately funneling money into bond funds in response to an expectation of well below-par economic growth, and this is depressing Treasury yeilds and causing an inverted yield curve, but this is ultimately indicating only below-par growth (e.g., 1% to 2.75% rather that 3+%) for the coming six months. Yes, there is a lot of anxiety, but anxiety itself is not a reliable indicator of a particular outcome.

As of Friday, Fed funds futures contracts indicate the following probabilities for changes in the Fed funds target rate at upcoming FOMC meetings:

• December: 0% probability of a hike and a 0% chance of a cut
• January: 2% chance of a hike
• March: 28% chance of a cut
• June: 100% chance of a cut and a 4% chance of a second cut
• August: 100% chance of a cut and an 50% chance of a second cut
• December 2007: 100% change of two cuts and 24% chance of a third 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 and evolves. Like it or not, the economy proceeds more through Darwinian evolution than "intelligent design." The Fed (and Wall Street) can influence the evolution, of the economy, but not control it as if it were a clockwork machine. Predicting the precise or even general impact of any Fed action or inaction is quite literally a fools errand. 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, studies have shown that Fed funds futures are not a very reliable indicator more than 45 days into the future.

I also note that as of the October 26, 2006 edition of the UBS As We See It - Market Viewpoint report, UBS Wealth Management Research was forecasting a Fed funds rate of 4.00% by the end of 2007. That would be five quarter-point cuts. They are also forecasting 2% GDP growth for 2007. Obviously I do not concur, although I welcome their alternative perspective.

The bottom line here is that the Fed won't move through January, and any speculation about Fed moves further down the road are simply wild guesses based on contrived stories about a hypothetical future economy that happens to have a mind of its own.

-- Jack Krupansky

Treasury yield curve is not a surefire predictor for a recession

Despite a lot of the chatter, there is good reason to not consider the Treasury yield curve as an indicator of an imminent recession. The simple fact is that there is a lot of uncertainty about the trajectory of the economy over the next few months and the next year. There are plenty of reasons for a lot of demand for intermediate and longer-term Treasuries. A lot of money is still going into bond funds and a lot of people are incrementally approaching retirement age which means higher demand for fixed-income securities, which depresses yields. Yes, there are a lot of people who are (misguidedly) betting on a recession or near-recession next year, and their bests do add to the demand and do contribute to the inversion, but betting on an outcome doesn't necessarily make it so.

In addition, it is only in the past few years that foreign central banks have shifted to holding longer-term Treasuries rather than simply short-term T-bills for foreign exchange reserves. There simply isn't a large enough supply of T-bills to satisfy the demand Treasuries.

Quite a number of people continue to fail to comprehend the distinction between correlation and causality. Just because two variables might be in sync a number of times in the past does not necessarily imply causality. The studies that get quoted as to the correlation between Treasury yield curve inversions and recessions always add the caveat that the prediction reliability is not close to 100%.

Although the stock market has bounced back from the lows of 2002, but that may be due more to overall growth of the economy than a willingness of the average saver to bet on stocks. The result is that bond funds continue to remain popular, further depressing intermediate and longer-term yields.

Yes, there has been a significant increase in demand for intermediate and longer-term Treasuries, but that does not imply that a recession or dramatic growth slump is right around the corner.

-- Jack Krupansky

PayPal money market fund yield holds steady at 5.03% as of 11/11/2006

Here are some recent money market mutual fund yields as of Saturday, November 11, 2006:

• iMoneyNet average taxable money market fund 7-day yield was unchanged at 4.73%
• PayPal money market fund 7-day yield remains at 5.03%
• ShareBuilder money market fund (BDMXX) 7-day yield rose from 4.44% to 4.45%
• Fidelity Money Market Fund (SPRXX) 7-day yield fell from 5.00% to 4.98% ($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 4.96% to 4.95%
• Fidelity Prime Reserves money market fund (FPRXX) 7-day yield fell from 4.45% to 4.44%
• Fidelity Municipal Money Market fund (FTEXX) 7-day yield fell from 3.16% to 3.13% or tax equivalent yield of 4.82% (down from 4.86%) for the 35% marginal tax bracket and 4.35% (down from 4.39%) for the 28% marginal tax bracket
• Fidelity Tax-Free Money Market fund (FMOXX) 7-day yield fell from 3.12% to 3.09% or tax equivalent yield of 4.75% (down from 4.80%) for the 35% marginal tax bracket and 4.29% (down from 4.33%) for the 28% marginal tax bracket
• 28-day (1-month) T-bill investment rate rose from 5.18% to 5.20%
• 91-day (3-month) T-bill investment rate fell from 5.11% to 5.09%
• 182-day (6-month) T-bill investment rate rose from 5.15% to 5.18%
• Treasury I Bond composite earnings rate (semiannual compounded annually) for new I Bonds is 4.52%, with a fixed rate of 1.40% and a semiannual inflation rate of 1.55% (updated November 1, 2006, next semiannual update on May 1, 2007)
• 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 5.10%

Note: APY yield is worth somewhat less than the same 7-day yield. See my discussion and table for Comparing 7-day yield and APY.

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 or even your brokerage 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." The PayPal 7-day yield of 5.03% is equivalent to a bank APY of 5.15%.

The Schwab CD rates are attractive, but only to the extent that you can afford to lock up your money for the full term of the CD.

28-day T-bills once again are 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, this rate fluctuates significantly from week to week. The rate is locked in for four weeks once you buy the T-bill at the weekly auction, but you can't predict what rate you will get at the next auction since it is based on supply and demand.

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

ECRI Weekly Leading Index indicator up sharply and continues to point to a stable economy ahead

The Weekly Leading Index (WLI) from the Economic Cycle Research Institute (ECRI) rose sharply (+1.04% vs. -0.17% last week) and the six-month smoothed growth rate rose moderately (from -0.3% to +0.3%) but remains very near the flat line, suggesting an economy that has leveled out. This is the first positive reading for the smoothed growth rate in 15 weeks (June 21, 2006). We haven't finished the soft landing yet, but we are in great shape.

The WLI is now 14 weeks past its summer low and the six-month smoothed growth rate is now 11 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. Anyone expecting a recession next year will be disappointed.

-- Jack Krupansky

Fed really 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 the 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.

A number of weak and mediocre economic reports early in the week caused a lot of people to believe that the economy was on the verge of calling off a cliff, but a couple semi-decent reports later in the week caused people to backtrack significantly in their commitment to an economic decline.

As of Friday, Fed funds futures contracts indicate a 0% probability of a further rate hike at the December FOMC meeting and a 0% chance of a cut. Futures indicate a 2% chance of a hike at the January meeting, a 16% chance of a cut by the March meeting, a 66% chance of a cut by the June meeting, a 100% chance of a cut by the August meeting and an 8% chance of a second cut, and a 66% chance of a third 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.

The bottom line here is that the Fed won't move through January, and any speculation above Fed moves further down the road are simply wild guesses based on contrived stories about a hypothetical future economy.

-- Jack Krupansky

Fidelity saga - real progress at last

I have finally made some real progress at transitioning to my Fidelity brokerage account as my main "bank" checking account. In fact, although a few tasks remain, I am essentially "there."

I have successfully used a check and had it paid from the Fidelity account. I paid my rent from my traditional bank account this month, but from now on all of my checks will be from my Fidelity checking.

I just received the PIN for the debit card, but I called to change it, so I'll have to wait a couple of days to try it out in an ATM. My intention is to continue to keep a small amount of cash in my traditional bank account for fee-free withdrawal of cash from ATMs, but I would like to know that I have Fidelity available as a backup for cash.

I keep meaning to check whether I can get "cash back" using my Fidelity debut card in the grocery store without incurring any fees. I'll try that next weekend. That would eliminate much of my need to use a bank ATM.

I switched most of my company payroll direct deposit to my Fidelity account, with a small amount still directed to my traditional bank account for fee-free ATM withdrawal. I'll know in 10 days whether this is working out.

I paid a couple more utility bills using the Fidelity checking routing and account numbers. I still have a couple of utility-type bills to switch over over the coming month.

I was able to transfer some cash into my Fidelity account from my ShareBuilder account via the Fidelity checking account.

My ShareBuilder account will now debit my Fidelity checking for the modest monthly investment plan I have with ShareBuilder. This should work, but I won't know for another 10 days.

Google was successful at initiating a small payment to me via the Fidelity checking account, so my next Google AdSense payment (in December or January) should go direct to my Fidelity account.

I still need to switch my Amazon account to Fidelity.

I switched my EFTPS account to make my installment plan payments for back taxes to the IRS via my Fidelity checking account. It should now be all set to go, but I won't be trying it until I get my next paycheck on the 15th.

One of the few remaining items 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. I'm in no hurry to resolve this issue since it works fine in the old bank account and is such a small amount of money at present. I'll simply transfer any excess cash from the bank to Fidelity as it accumulates.

The next big step is to simply wait and watch and see that everything happens smoothly over the next month.

A minor task is the calculate how much excess cash to keep in "core" cash, which unfortunately pays a lower interest rate, so that bills can be paid, including occasional travel without having to shuffle money around from higher-yielding accounts. Whether $1,000 or $500 or $250, it wants to be enough to avoid inconvenience, but not so much that I have to "pay" a noticeable amount in lost interest. Since I now have a normal credit card with a high enough credit limit to cover most travel that I might expect, keeping excess cash in higher-yielding accounts and manually transferring it on odd occasions seems to make sense for me. Actually, Fidelity did tell me that they will sell from my higher-yield money market fund in order to avoid a check or debit bouncing, but they said that is a "courtesy" that isn't intended to be used too frequently. Given my limited traveling and purchasing, maybe that "auto-sell" will work out well for me and I'll be able to keep excess cash in the higher-yielding money market fund.

Finally, as we passed the end of a month, I actually earning a little interest on my "core" cash and my Fidelity Cash Reserves (FDRXX) fund. The good news is that the interest on a money market fund automatically gets reinvested in that same fund rather than kicked off as "cash" in the "core" account where it would earn a lower interest rate.

More to come as the saga continues. I'm sure there are some loose ends that I have overlooked.

-- Jack Krupansky