San Diego Housing Bubble News and Analysis

I typically find better rates (on guaranteed returns) at Credit Unions. They usually have at least slightly better rates and usually less fees if any at all. Check for promotional CD's with them too.

You have to be able to qualify for membership obviously, but some require only that you live in the same city.

Some people here may tell you index funds, but that all depends on what you expect the market to do.

$150K in two years. I would put about $50K in each of:

- Countryfried Bank CD (pays 4.2% and is FDIC insured)
- FXE (Euro ETF, pays over 3.5%)
- A high-dividend stock, like Pfizer or Hugoton Royalty Trust

If you feel more risk-averse, increase the first and reduce the third. Do the opposite if you feel more adventurous. You can also replace the third option with Vanguard's 500 Index fund. The FXE is to protect you in case the housing bailout and further interest rate cuts put the exchange rate at $2.5 per euro by 2010. If the euro stays flat, at least you'll earn a dividend.

May I ask: Why two years?

Coop: Thanks for the lead on the Credit Unions. I'll have to check them out and see what we'd have to do to join. Maybe there's one that likes Biologists and stay at home moms. :>)

Sheila: Good idea on Countryfried. I suppose as long as the money is under the FDIC limits we're o.k. even if the bank falls to bits...something to think about.
The husband has been trying to figure out how to get interest paid in British Pounds..he's even jokingly thought of diverting to the UK from his next trip to Norway to open an account at The Bank of Scotland...maybe your FXE idea will work for him. It does make sense and the dividend is more than any CD I can get right now.

There's nothing magical about two years. We just want to be ultra conservative while we wait and see how the US economy shakes out after a new Prez enters office, the possiblity of ending the war in Iraq (if Obama wins and sticks to his promises), the housing drama, etc.
Also, I may be back at work by then since our daughter will be a Sophmore in High School, so my income could be invested more agressivly or offset a more agressive investment plan for our current "nest egg" of 150K. We're really just trying to lay low waiting to see where the chips fall, we've not got the stomach for the agressive stuff right now while things are so hairy.

Doublewide

Schwab also offeres a interest bearing checking account that you could open but if you are looking for short term safety I would look at a California Tax Free Muni Bond Fund. You might find the liqudity is there, and you don't deal with paying tax on it at the end of the year. This oftentime provides a higher overall yield. If it is just over a couple of years you are looking to keep your money in this type of account consider using a no load fund or consider C shares of a loaded fund. Good Luck

You could purchase cds in other countries with higher interest rates. Everbank lets you do this:
http://www.everbank.com/001CurrencyCDSin...
For example, New Zealand 3-12 month cds yield over 6% right now.

If you have direct access to a NZ bank (rather than going through Everbank) it's even better, currently 8.9% for a 12 month term deposit:
http://www.westpac.co.nz/olcontent/olcon...

Beware of exchange rate risks, of course.

Why don't you contact Rich and see what he thinks?

Your money will be safest in FDIC insured CDs, but it won't hedge inflation, so even the best rate of 6% after inflation will yeild your 150K a nice Negative 11%.

Try crunching your tax numbers if you run a scenario where you pay down your mortgage with the 150K instead. Sum up your mortage interest for the year and divide by 3200. The result is the number of additional dependents you can claim on your W4 that will allow you to net more from each paycheck.

Then take the extra paycheck funds to hedge real inflation in your real life like making an accelerated payment of your mortgage or buying a hybrid or paying off revolving accounts.

ING's 9 mo CD is currently at 3.25%.

Capital One's money market is at 3.25%, FDIC insured and obviously no maturity term so you can pull it out whenever if something better comes along.

What's the catch on the everbank foreign CD's? If something looks too good to be true it usually is...

It looks like that NZ CD can give 6% interest, protect against more drops in the dollar, and all with FDIC insurance. Am I missing something here? I'm on the verge of parking 10k as a guinea pig into this but I want to be sure of what I'm doing.

UK interest rates on the £ are still over 6% in many banks. RBS had exposure to subprime so careful who you go with. Anglo Irish offer a good rate but they are all in on Commercial RE. HSBC is probably the safest due to size but lower rates. Bankrate.com has rate comparisons for MM and CDs. How about bond mutual funds? They are said to have no load, low operating costs, and maturity is not so much an issue, but if interests rates increase their value may go down.

This inquiry is the exact reason why people who manage their money statistically do worse that people who just let it sit in a retirement fund or index fund. Yes the US stock market is accompanied by high levels of risk but over a three year period the risk or volatility is not that great.

Couple this with the fact that there is STRONG negative sentiment about the US market (think about it, if you the average guy is scared to invest, think about the professionals) and bad press related to writedowns, inflation, and oil prices, I believe that this is an actually an extremely good time to invest in the US stock market through an index fund.

Now to mitigating your risk in investing in stocks. There are plenty of books that cover this suggesting derivatives, portfolio theory etc. but by far the easiest way is to use dollar cost averaging. You suspect the bottom to be any time in the next 2 years. So put your cash into an interest bearing checking account and deposit 1/24 of it into an index fund each month. That way you'll average out somewhere close to the bottom.

Yes there is inflation risk in the dollar right now. You could short the dollar to mitigate this risk, but read any newspaper or ask anyone who follows currencies and see that Bernanke most likely is instituting a tighter monetary policy to stop inflation and is likely going to increase interest rates. It is likely that a long position with the dollar is more favorable. Remember, the most telling indicator for the future value of a currency is its present value.

Again, the general lesson I am trying to impart is to not to time the market making changes here and there to your portfolio as you hear news. When the news reaches you, it is often too late to make the changes necessary to your portfolio as the market reacts very quickly and even in response to expected news.

CDs are a safe place for your money but don't discount mutual funds and index funds as over a longer maturity, they are historically safe.

It is easy to think that the US is encountering something entirely new and has lost its superior position in the world. This is the story the media paints but is far from true. There is strong evidence to back this up by looking at history of the US economy etc. but the most compelling evidence against the demise of the US is the entrepreneurial spirit of the law. No other country has bankruptcy law that allow one to fail many times and still find success as sam walton and many other have done. And yes everyone hates the US but there are still tons of people who want visas.

US has over 500 billionares and the next country has 50. Think about that.

Brilliant summation vkailas and a useful pep talk for investors.

AmTrust Direct 12-month CD is at 4% APY currently and is FDIC insured up to $100,000. I have not checked out what penalties there may be for early withdrawal, but it is not a brokered account so it shouldn't be as bad as Schwab.

http://www.amtrustdirect.com/cd/pages/12...

"What's the catch on the everbank foreign CD's? If something looks too good to be true it usually is..."
********************

I've had three CDs, in different currencies, with Everbank over the past year. During a time when the dollar was falling, I lost 13% with Everbank, much of it due to the Icelandic Krona, but have lost a little money in the SAR and NZD.

I've had better luck with the currency ETFs (FXE, FXY, etc.) because I could get in and out whenever the market was changing.

IMHO, Everbank is not a good place to park your money.

Also, I use brokered CDs because it's easier to manage multiple CDs in a brokerage account rather than having them spread out over many institutions. Too easy to miss maturity dates & instructions, and I like knowing what we're getting into before it happens. With bank CDs, they won't tell you the rate when the CD matures and rolls over, until it's already done.

A word of warning on municipal bonds...

In an inflationary environmnet with artificially low rates, it would be wise to use caution here. Also, a number of municipalities own some of the toxic paper from the housing bubble (derivatives and mortgage paper). They are underfunded, and could face possible bankruptcy in many cases -- revenues are down because of lower property and sales tax receipts. Then, you have the pension issues -- probably underfunded in most cases.

Best of luck to you!!!

but read any newspaper or ask anyone who follows currencies and see that Bernanke most likely is instituting a tighter monetary policy to stop inflation and is likely going to increase interest rates

BWAHAHAHAHHAAHAHAHAHAAHAHAHAHAHAHAAH. Two words, Jaw-bone. Thats all the Fed is going to do about interest rates. Maybe a 1/4 here or even dare we hope 1/2 point. The Fed is trying and failing to stave off deflation.

There are times, and this is one where being ultra-conservative is the most dangerous place to be. The reasons are two fold. First those in power are deliberately debasing our currency and more important the investments that people think are safest really aren't. Take bonds for example. How many bond funds hold toxic junk? I don't know and neither do most of the people who own them.

I'd love to see Berspankme raise rates meaningfully at least up to the real rate of inflation, but it ain't going to happen. If you are truly ultra conservative, buy some gold, buy some foreign currencies, or ETF equivalents and stocks in solid companies that do well in recessions (like MO). Thats about the safest thing you can do and keep your purchasing power.

guess bernake has not proven himself as of yet. I don't claim to know what is going on the with currency market. was just suggesting a general trend based on the derivatives market for currency and federal funds futures. I am not convinced but a contrarian position in this market is not out of question.

Second, investing in other currencies CD is risky. Interest rate parity (theory that amounts to something like arbitrage is impossible in a free market) suggests that the interest rate of a foreign currency is only higher than the interest rate for a domestic currency if the domestic currency is undervalued by the difference between the two rates. The fundamental concept in laymens terms is "there is no fundamental advantage to borrowing or lending in one currency over another." This is of course theory and clearly you can make money (because unlike theory there are many other factors involved) but in many cases you can also lose money. Theory does often hold in the long term but definitely not in the short term. Guess a class on capital markets is in order if you intend to invest in foreign CDs anyways. good luck

I just read an article in the "~Finance and Investing~" portion of this page. It warns "US stock market priced for poor returns. The jist of the article is that it historically looked at the average valuation of the sp500 using multiples (price/earnings). The higher the average market multiple, the more expensive the the valuation. Then they divvy up annualized return over 10 years for each valuation. They conclude that the most expensive valuation gets very poor returns with an annualized return of 3.5%. The go on to say we are currently very safely in an expensive valuation so you probably should not invest considering that only rarely when in a expensive valuation do investors get good returns. These kind of articles or common in a down market. Trying to scare investors even more. Maybe you even know a little something about investing and read them and are convinced.

The article however glances over the fact that their valuation is an average of the past 10 years of earnings. And while it's historically rare to have good returns in markets with similar average valuations over the past 10 years, the tech bubble we experienced is also rare with astronomical valuations that made no sense and lower earnings that other past booms. Using an average of all these lower earnings over the past 10 years leads to a average expensive valuation. Yes. But that, in my mind, does not indicate that the current price is extremely overvalued (most expensive 20% of valuations in history) as they suggest.

As I mentioned earlier, I believe now is a good time to consider investing in the US stock market. Of course it is prudent to watch earnings and P/E ratios before investing, but if you take the article at face value with claims for poor returns over 10 years for investing today, you be scared into thinking that it won't be a good time to invest for many years to come and would probably decide to horde money away in a 3-5 year CD missing the possibility in investing in the downturn altogether. I suspect that average earning for most companies will come down and the market will react resulting in good investment opportunity. Remember, the market is efficient i.e. quick but tends to overreact to news.

Any other comments on my analysis of this article are welcomed.

Here is the article I mentioned: article

Here is the SP 500 P/E valuation over time (using 12 months trailing:
sp500-pe

Here is the SP 500 "corrected" P/E valuation over time (using the past 10 years earnings): sp500-pe-corr

I wrote the article you refer to.

That's not what the article says at all... that fact that you come away with that conclusion indicates that you didn't read it very carefully. (Further proof is found below).

If you view the articles page on the pca site, you will see that we were putting up bearish articles in early 2007 well before the market peaked. So your implicit accusation that we wait until a down market to put up such articles is incorrect.

We truly believe that the market is overvalued, we invest accordingly, and we try to educate people as such. The accusation that we are trying to scare people (with the implication that we don't even believe what we are writing) is very insulting.

The valuation is based on the past 10 years' earnings, not on the past 10 years' valuations, so the above is incorrect.

Rich

Thanks for clarifications. I was wondering if you would be so kinds as to voice your opinion for the aforementioned topic of this thread. The woman has a sizable amount of money she wants to keep safe for a 2-3 years.

Sorry for my misunderstanding. I am still learning and thanks for your insights.

That's cool... I apologize for the brusqueness of my initial reply. Re. the initial question I would want to have a much more in depth discussion with someone before recommending on a specific situation, so I will take a pass on that one...

Thanks,
Rich

Remember that CD's are currently not keeping up with current inflation rates. If you look at the REAL inflation rate, you will need to make at least 10% a year to keep up with inflation. Just make sure you are okay with the loss in buying power.

I manage a family trust through a brokerage, because while I have learned a lot here and elsewhere, I am still relatively unsophisticated financially. The broker has been a big help. As of yesterday, all of the highest CD interest rates were from WaMu. Twelve-month CD for $100K was 4%. I asked him why WaMu was higher than everybody else and he told me bluntly (this is why he'll be my broker for life, just like I have a hairdresser for life), "WaMu is in trouble and needs the cash."

Doublewide,

I don't think you are ready yet, but an alternative to CD's that you may want to start watching or learning about is Private Money Mortgages. Don't do 2nd TD's; stay in 1st TD's. With much of the air out of the bubble, a well secured (65% Loan/Value) 1st Mortgage (TD) can yield 8 -10%. If you believe the market will drop 35% from here, even a 65% LTV will not be safe enough.

TD's are not insured and are not liquid when times are tough, but absent a terrfic downdraft in values, they typically yield 3-4 times CD rates and are reasonably safe when made properly.

Institutional financing has gone from stupidly loose to stupidly tight. That is providing a fantastic market for private money lenders. We can now get reasonable to terrific LTV's as well as great yields and often great credit.

An old boss always told clients to ask a potential financial planner if annuities were a good investment. If the financial planner said yes it was a sure sign to run. Annuities are horrible for an investor, but great for the broker. Brokers get a large commission and win vacations. Annuities are basically the Alt-A of investments.

J
I think you are wrong on this. Annuities are unfortunately marrketed to everyone but ideal for a few.
I would think if someone asked about annuities there is a check list of questions to explore before making any type of recommendation.

When you immediately exclude products it show a very limited understanding of the uses of the products. This means that your client can sometimes miss out.

If I didn't understand a product a more accurate response might be that due to the amount of moving parts and the complicated nature of the product I don't recommend them to my clients.

vkailas writes:

I believe that this is an actually an extremely good time to invest in the US stock market through an index fund.

stockstradr writes:

I agree completely with that sentiment. You've got an original poster who, after the markets have fallen 20% (since Oct '07) wants a "safe" place to park their money to ride out the storm.

What?

(I'll assume for the moment that the original poster is not approaching retirement, so can handle some risk beyond simply buying CD's.)

Now stocks are on a 20% off sale. I think the vkailas' suggestion is a good one that this is EXACTLY the market situation where dollar cost averaging (continuing to buying stocks) can really pay off.

However, don't conclude my comments above imply I agree with everything else that vkailas wrote in the post, or the others. I totally disagree with his views on the long-term strength of the US economy. Also, as for me personally throwing the darts and guessing the turn of the market, I think US stocks are at least 10% away from the bottom.

As for CD's at those rates mentioned in this thread? I personally would NEVER buy such an investment product that is obviously paying much lower rates, relative to current inflation. That's a strategy for watching the vale of your money DECLINE, in real terms.

I have one more comment:

vkailas quoted:

"there is no fundamental advantage to borrowing or lending in one currency over another."

My reponse:
If you really believe THAT, then I'm now starting to completely lose respect for you.

What do you think George Soros would reply to your quote, a man who proved that quote wrong and also made BILLIONS for himself and his hedge fund investors in the currency markets.

My wife and I bought an investment property in China because we not only wanted our money out of dollars and into RMB, we also wanted some leverage which we got to the tune of 5X through a 20% down mortgage from a Chinese bank.

Since we did that a few years ago, the RMB to $ exchange rate has moved 20% in our favor, moving in the direction that anyone with any economic common sense knew it would. And it has much much farther to move. There IS advantage in many situations to borrowing in another currency, particularly when you are economically sharp enough to look at global economics and predict future monetary flows driving currency rates.

I know plenty of smart people who are buying CD's in RMB from Chinese banks. Smart move. The rate is lower, but when combined with the RMB vs $ exchange rate moves, it works out well.

Nice call on investing in the RMB. I believe that political pressure is what allowed the RMS peg to the dollar to slide. That quote you took is from a text book so we can assume it of no real use :) it's completely theory, based on the assumption there is no arbitrage opportunities through buying a item cheap in one currency and selling in the other.

I have not myself invested in currency and am definately interested. I was just pointed out that often there IS a reason that some country is offering a high CD rate. Before investing, it is wise to find out if that particular reason puts you at a lot of risk, e.g. currency risk, risk of default, political risk or whatever. I agree that currencies can be very profitable. Some US companies I know did well by asking clients to pay in euros when they realized the dollar was too strong in comparison with trading partners currencies. A simple measure like Purchasing Price Parity showed that for a tourist, things had cost more in the US. eg the cost of a big mac in the US converted to a foreign currency was greater than the cost a of big mac in foreign country or Ef/us * Cus > Cf. You could have also measured that the currency was overvalued in terms of trade balance (would need to depreciate to eliminate trade deficit).

I have also heard people borrowing from countries with low interest rates and investing in other countries CDs. Stockstradr, do you know anything about this or how to find such opportunities when they arise? Also, anyone have any recommendation on good resources or books that are relavent.