The Bottom Line
By Chad Wilson
March 27, 2008
Foundation Bank --
The Bottom Line
Keep your Eyes on the Horizon
Volume IV Issue III – Thursday, March 27, 2008
A monthly newsletter of financial commentary for our friends
CD Rates sure have dropped haven’t they? 6 months ago you could easily find a 5% 1 year CD. Today, you are lucky to find one for 3%, and are more likely to be in the 2.5% range. This reminds me of 2002. At that time, the Fed was relentless in lowering rates to save the economy from an outright depression, exacerbated by 9-11 and the bursting of the tech bubble in the stock market. I remember 1.5% on 1 year CD’s. We’re not that low yet, but we would not be surprised one bit if we find ourselves close to those levels in the near future. It hurts seniors the most. This faithful generation who has been called on to sacrifice more than any other living generation is sacrificing once again. They are finding their monthly income, which is highly dependant on CD rates cut in half. Most of them do not have debt, so they are not benefiting from the low rate environment on that side of the balance sheet. Our words of hope to this generation are to hang on tight. Low rates won’t be around forever. As soon as the Fed sees any sort of light over the horizon, they will begin raising rates back to a neutral level. Remember, the Fed’s archenemy is inflation. But right now they are more worried about recession than inflation. As soon as they have defeated the recession enemy, they will turn once again to that nemesis called inflation. So our advice to seniors is to keep your CD maturities short, and look toward the horizon. It may get worse before it gets better.
The stock market has rebounded off its lows of the year. The S&P 500 is down about 10% so far this year. It’s always hard to see the market loosing money. Our human emotions tell us to run for the hills. We want to dig a hole in the back yard, and bury our money there to make sure it doesn’t disappear. It is in these times we must remind ourselves that this is the price that we pay for higher returns over a long period of time. During a 10-year period you will likely see several good years, and a few bad years sprinkled in along the way. Investors have to stomach the bad years to enjoy the fruits of the good years. If we had a crystal ball to see in advance which years would be good and which would be bad, that would be great. But we are only human, with forecasts that are fallible. So we invest our money, wait patiently, and take the good with the bad. It is in these times that good financial planners earn their money. Our job is to help you stay invested. Our job is to keep your eye on the horizon. Our job is to be realistically optimistic.
Municipal Bonds are trading at levels not seen in their history. According to the Financial Times, municipal bond yields are trading at 125% of treasury yields, when they are normally at 80%. This is a very interesting result of the current credit crunch. Municipal Bonds are simply obligations of local governments such as the city or county. These have historically been safe investments, since local governments rarely default on their debt. However, just the other day, a municipality in California did in fact default on their bonds. This is not common, but can happen. So the bottom line is that fear of municipals (and all debt obligations for that matter) has pushed the yields in this arena to record levels. If you are in a high tax bracket you might want to talk to your financial planner to see if municipals would be appropriate for you. In weak markets opportunity abounds for someone. Will you have the courage to look for it?
Chad P. Wilson, CFP
Foundation Bank – a division of McKenzie Banking Company - 731-554-2423
The above is strictly informational commentary and does not constitute any sort of recommendation. Please consult your own financial advisor for specific tax, loan, or other investment advice.
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