Wednesday, January 7, 2009

What to do with Your Money Now

As suggested in our post of Jan 5 2009, gold (GLD and its relatives) was in a vulnerable position. It showed no relative strength the last two days and has moved below its declining 200-day moving average. It is down about 7% year on year and in this deflationary environment appears to be more of a source of funds than an actively-accumulated asset.

The combination of a toxic economy, zombie large financial institutions and wildly aggressive Fed behavior make the current times more difficult for investors than any since the Great Depression. When nothing is working, keep it safe and simple. At Econblogreview, we have been investing for ourselves on the safe and simple basis. We humbly provide some investment opportunities that have the "safe and simple" advantage and that work for us in this investment environment in which our "gurus" continue to expect economic and financial "surprises" to be to the downside.

1. Something for nothing. Today we were able to purchase a ten-year Treasury at 3.2% after commission, with a small non-institutional quantity. This was by purchasing a zero-coupon bond for a retirement account. The yield to maturity of a comparable interest-bearing T-bond was about 2.5%. For a retirement account, not having to reinvest the interest payment for a "par" interest-bearing bond is a good thing in today's environment in which the Fed has more or less promised a prolonged period of very low short-term rates. Zero-coupon bonds have a second advantage: they are leveraged in price. Thus, if rates fall (and they have risen almost 50 basis points in a very short time frame), the price of a "zero" moves more rapidly to the upside. If rates rise, one can just hold to maturity and be guaranteed of the stated rate.

2. Vanguard mutual funds have a Government National Mortgage Association ("Ginnie Mae") fund with a yield to maturity of 4.4%. This is 4.5% if one invests $100,000 or more into the equivalent "Admiral" fund. Stock symbols are VFIIX and VFIJX. The stated yield that shows on MSN or Yahoo is not the yield to maturity but rather the cash yield. Net asset value will decline over time in a stable interest rate market, as the fund holds "premium" bonds priced over par. Fidelity has a similar fund (FGMNX).

3. FDIC-insured certificates of deposit ("CD"'s) have varying yields depending on maturity date, quantity invested and perceived safety of the depository institution. A minor amount of gambling will allow you to move to weaker institutions that may fail but that have legitimate FDIC coverage. If a large financial company such as Bank of America fails (heavens forbid), this company will be too large to be merged into another one, and so it is possible that FDIC insurance will kick in with some conditions or a lag time. Thus, paradoxically, it may be that the safest way to gamble on CDs is to pick a small bank that if it fails, will be merged into/acquired by a well-capitalized larger bank. Bank Rate Monitor.com provides a free and detailed evaluation of bank "safety and soundness", with a detailed memo on each bank. I cannot vouch for the accuracy of this service but have used it.

4. If you shop around, you will find that different banks have very different rates on old-fashioned demand deposits or their close twin, money market savings accounts. 3% can still be found here and there, whereas some banks offer close to zero.

5. The above are "picks". "Pans" include the 30-year Treasury bond, whether a par bond or a zero-coupon issue; 10 years is more than enough. The stock market will be a "buy" one day. If the stock market were an individual stock, it would be an "avoid" or a "sell". It is in poor shape technically, and the fundamentals of the economy are currently poor and have not clearly bottomed. And while I am cautious about gold right now, its intermediate to long term chart is strong and it has, to my mind, the right "story" behind it to allow it to go to new highs. But it is not a "get rich quick" investment to me.

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