High Yield Savings Account Update as Fed Cuts Rates

As the Fed cuts rates aggressively, the yields of no (or low) minimum online savings accounts have gone down.

Here are a few sample high yield online savings accounts with no or very few fees and with no or low minimums.

1. Amboy Direct: APY = 4.25%


2. E*Trade Bank Complete Savings Account: APY = 4.10%


3. FNBO Direct: APY = 3.85%


4. Emigrant Direct: APY = 3.60%


5. HSBC Direct: APY = 3.55%


6. ING Direct: APY = 3.40%

Among the things to consider in choosing a high yield savings account:

1. The Yield.
   
2. The Minimum Amount Needed to Open.
   
3. What are the fees (if any)
   
4. How easy is it to use?
   
5. Is there a minimum amount you need to keep in the account to avoid a fee?
   
6. Does it have an ATM or Debit Card Feature?
   
7. Are there any fees when using the ATM?
   
8. Are there any fees when using a competitors ATM?
   
9. Is it a reputable bank?
   
10. Are they FDIC insured?
    
11. Is there a check-writing service?
    
12. How many times can you withdraw or transfer out of per month?
    
13. How easy is it to open the account?
    
14. Do you need to access the accounts online at all hours of the day? (Some sites are down for maintainance longer than others)
    
15. How good is customer support?

All the accounts mentioned above generally fit in the no fees, low minimum, FDIC insured category.

If you aren't getting those high rates, consider choosing one of the accounts above.

Effects of Falling Rates and Inflation on the Stock Market

In a previous article, we examined the historical Price to Earning Ratios of the US large cap index, the S&P 500.

Now, let us examine how a falling interest rate environment or low inflation situation affect stocks, stock performance, and sector performance.

Effect of Inflation on Stock Performance

Crestmont Research provides very interesting information on Inflation and Price to Earnings Ratios from 1900 to 2006.

When we look at Inflation (as measured by CPI) ranges, we see the average PE:

1. CPI Range (less than 0%): Average PE = 14
   
2. CPI Range (0 to 0.99%): Average PE = 16
   
3. CPI Range (1 to 1.99%): Average PE = 17
   
4. CPI Range (2 to 2.99%): Average PE = 22
   
5. CPI Range (3 to 3.99%): Average PE = 19
   
6. CPI Range (4 to 4.99%): Average PE = 16
   
7. CPI Range (5 to 5.99%): Average PE = 15
   
8. CPI Range (6 to 9.99%): Average PE = 13
   
9. CPI Range (10% or more): Average PE = 8
   

During times of low inflation, especially in the range of 2 to 2.99%, the US equity market supports a high PE ratio of 22. As we have deflation, or very high inflation, the average PE ratios are much less. The historic average PE ratio of the S&P 500 is 14 or 16 depending on how you calculate it.

In addition, the link above shows the general inverse relationship between inflation and stock prices. As inflation rises, stocks tend to fall. And as inflation drops from high levels (so long as there is no deflation), stocks tend to rise.

As of July 2007, the Inflation rate (through CPI) is 2.36%. Based on the chart above, this is a good inflation rate for Price to Earnings multiple expansion. As long as inflation remains contained, the outlook for US equities remains bright.

Effect of Falling Interest Rates on Stock Prices

The Fed, according to Fed Funds Futures, is likely to start cutting the Fed Funds Rate, currently at 5.25%.

How does a Falling interest rate environment affect stocks?

The Business Week magazine has an article showing the effect of falling rates and rising stock prices.

Since World War 2, the Fed has started rate cutting programs 10 times, and in the six month period after the first cut, the S&P 500 advanced by an average of 11%, two percentage points better than the average of 9% price increase in all years since 1945.

In the 12 months after the first rate cut, the S&P 500 gained an average of 18.6% and posted an increase in 9 out of 10 cases.

So for the most part, except for a few cases (such as the big drop in 2000-2002 due to excessive valuations of Nasdaq and S&P 500 stocks), falling interest rates are good for stocks.

Effect on Different Indices in a Falling Interest Rate Environment

Since 1945, during a falling interest rate environment, Growth and Blend methodologies in the S&P 500 returned 11%. Value stocks in the S&P 500 returned 7.9%. During a falling interest rate environment, large capitalization US growth stocks outperformed large capitalization US value stocks.

The small capitalization stocks as represented by the Russell 2000 or the S&P SmallCap 600 returned 7.8% six months after first interest rate decrease. However, this still underperforms the US Growth S&P 500 Index during a falling interest rate environment.

During a Falling Interest Rate Environment, it would be a good idea to invest in large cap growth stocks.


Effect on Sectors in a Falling Interest Rate Environment

Which sectors outperform and underperform during a falling interest rate environment?

According to Standard and Poors and the Business Week Article, these sectors performed in the six months after the first rate reduction (since 1945). The average percent change is listed:

1. Information Technology: +21%
   
2. Consumer Discretionary: +18%
   
3. Industrials: +17%
   
4. Consumer Staples: +14%
   
5. Energy: +12%
   
6. Health Care: +11%
   
7. Materials: +11%
   
8. Financials: +10%
   
9. Utilities: +7%
   
10. Telecom Services: +4%
    

During a Falling Interest Rate Environment, it would be a good idea to overweight Information Technology (Growth), Consumer Discretionary, and Industrials and underweight utilities and telecom services.


How I reallocated a portfolio to take advantage of the Falling Interest Rate Environment

Strategic Portfolio Re-Allocation as Fed Cuts Rates (Aug. 21, 2007)

Fed expected to Cut

We've been experiencing a painful market correction centered around subprime problems, mortgages, and a US liquidity crunch. Because of all this, the Fed is now expected to cut the Fed's Funds Rate from 0.50% to 0.75% by First Quarter of 2008 from various sources.

Sector Rotation Model based on Fed Cutting Rates

When the Fed acts to raise or cut rates, we should act accordingly. These are important turning points. According to Standard and Poor's Sam Stovall's Sector Rotation Model, and Jim Cramer's Sector Rotation Model (Page 115 of his Jim Cramer's book: "Real Money: Sane Investing in an Insane World") as the Fed tightens or cuts rates, it is profitable to get out of certain sectors and into others.

In Jim Cramer's Sector Rotation Chart, we should be doing the following (Interpretation of the chart can differ depending on whether you look at GDP growth or look at the actions of the Fed):
1. Sell "smokestack" stocks such as Caterpillar (CAT), or 3M (MMM).
2. Sell metals and mineral stocks such as Alcoa (AA) or Newmont Mining (NEM)
3. Buy high multiple tech stocks such as Google (GOOG)
4. Buy Banks and Financials such as JP Morgan (JPM) or Wells Fargo (WFC)
5. Eventually, as the economy slows, buy Retailers.

However, there is another story that may conflict with the advice above: The Global Growth Story.

The Global Growth Story

Because emerging markets like China are growing fast, they need materials such as Copper, and industrial equipment like those made by Caterpillar (CAT). This goes against some of the advice based on the Sector Rotation model above.

I do believe the Global Growth Story is a multi-year/multi-decade long cycle.

Portfolio Strategic Repositioning

So what can we do to strategically position ourselves for the intermediate future?

I have several different portfolios with different styles (most are well diversified portfolios). However, in one of the portfolios, I apply a more concentrated method, and this is what I've been doing during the last month with this portfolio:

1. Sell Oil and Oil Services

Oil and Oil Services have not been doing well recently as crude prices have been going down and may settle in the $60 to $65 per barrel range. If we are to see an economic slowdown in the US, demand could weaken. Yes, over the long term, the global growth story needs oil. So while my concentrated portfolio has no oil, my long term diversified portfolios have sufficient exposure to this sector.

2. Sell Coal

Coal, as embodied by the stock Peabody Energy (BTU) has been going down. Peabody Energy reported reduced guidance because of delays in ramping production at recently acquired mines.

3. Sell Minerals

I took profits in Freeport McMoran (FCX) whose stock price had been dropping like a rock. Also, the Sector Rotation model above suggests that we do sell mineral stocks. However, I still believe in the Global Growth Story. I am looking for ways to get back into Freeport McMoran (FCX), a Gold and Copper company.

4. Sell Selected Financial Companies

Goldman Sachs (GS) is a quality company, but it had been dropping hard, and during the time when it was uncertain that the Fed was going to do anything, I had to sell Goldman Sachs in order to stop the freefall and to raise cash to purchase other securities. Some of Goldman Sach's Hedge Funds suffered big losses.

5. Reduce Emerging Market Wireless Telecom (Overweight to Neutral)

I still believe in the strength of Emerging Market Wireless Telecom especially companies such as Mexico's America Movil (AMX). I had overweighted America Movil, but I reduced it to a neutral position so I can invest in other names.

6. Hold Computer and Video Gaming Company

I am continuing to hold Gamestop (GME), a retailer of computer and video game consoles, equipment and software. Gamestop has been doing well, and is part of the great Computer and Video Game Cycle. This cycle will remain strong, and Jim Cramer even mentions this very positively in a discussion with TheStreet.com's Michael Comeau.

7. Hold Infrastructure Company

Countries around the world needs infrastructure as they grow, and I continue to hold ABB Limited (ABB), a Swiss Infrastructure company providing power and automation technologies to utility and industry customers worldwide. Infrastructure is still needed around the world.

8. Overweight High Growth Tech:

Currently continuing to hold Google (GOOG), Apple (AAPL), and added Garmin (GRMN) and all have been doing well recently. These are the key high tech growth stories that can be owned for many years. They are the leaders, and innovators, and their forward PE ratio are all under 30 for their great growth. The sector rotation model also suggests this, and these stocks have held up well during the downturn and will do very well in the future.

9. Add Selected Financials with No Subprime Risk

After discovering that a financial company, Hudson City Bank (HCBK) had been holding up well during the most recent market correction where financial companies stock prices were being punished, I decided to look deeper. James Altucher, of TheStreet.com pointed out a link to the Bergen Reporter. The article, written by Dunstan Prial, says that "Officials at Hudson City Savings Bank, Columbia Bank and Valley National Bank said fallout from the subprime mortgage crisis that has roiled markets in recent weeks has so far been minimal. The primary reason, said Hudson City Chief Executive Officer Ron Hermance, is smaller regional banks tend to hold on to the mortgages they generate instead of reselling them into so-called secondary markets, where they are resold as investment products." CNN even reports that Hudson City Bancorp is the Anti-Countrywide. Jim Cramer also is bullish on regional banks in this part of the cycle.

Hudson City Bank is also a fast growing bank with conservative lending practices. In a falling rate environment with many financials suffering from a liquidity crunch and subprime problems, Hudson City Bank (HCBK) stands to benefit.

10. Hold and Add to Cash Rich Companies with Great Investors

Leucadia (LUK) is a cash rich company run by two Guru investors, Ian Cumming and Joseph Steinberg. American Real Estate Partners (ACP) is a very cash rich Real Estate company that recently includes veteran activist investor Carl Icahn. In a cash strapped environment, whoever has cash holds a very valuable commodity. And if the allocator of Capital is a talented investor such as Ian Cumming, Joseph Steinberg, and Carl Icahn, who like to buy undervalued and distressed securities, then the return on investment is even better.

I continue to accumulate Leucadia (LUK) and have added a position in ACP (American Real Estate Partners). Both have held up very well during the market downturn and both will do well in this environment.

11. Hold Aerospace Company

The Aerospace Cycle is still strong. Boeing (BA) would be an obvious play, but I continue to hold Transdigm Group (TDG). Transdigm Group is a $1.8 Billion company, with a forward PE of 15.55, a five year estimated growth rate of 28.5% for a very low Price Earnings to Growth (PEG) ratio of 0.55, very cheap! (less than 1 is very cheap).

12. Hold Defense Play

The defense bull market is still there, and is levered more to government spending than consumer spending. Obvious names include Raytheon (RTN) or Lockheed Martin (LMT), but I prefer investing in Harris (HRS).

Harris (HRS) is a $7.7 Billion company that provides special equipment to the government and the military. They operate four segments, Government Communications Systems, RF Communications, Microwave Communications and Broadcast Communications. It has a forward PE of 15.11 and a five year estimated growth rate of 27% for a very low PEG of 0.56.

13. Hold Emerging Market Beverage Play

I continue to hold Wimm Bill Dann (WBD), a high growth diary and juice producer in Russia. This play should not have a large correlation with the US Financial situation and is more levered to the local Russian economy. TheStreet.com Ratings often lists Wimm Bill Dann as one of its five top growing stocks.

S&P 500 Chart Update after Big Drop Today (August 3, 2007)

On August 2, 2007, I said that the S&P 500 Index ($SPX) would bounce to at least 1484, a 38.2% retracement from the all time highs of 1556 on July 2007, to the recent bottom of 1440 late July 2007. However, the $SPX couldn't even bounce to the 38.2% retracement level. This is a sign of a very weak market.

I also said that after the bounce, the $SPX would re-test lows from 1437-1440, and we have to see how the $SPX behaves, whether it forms a double bottom, or break through support.

Today, August 3, 2007, the $SPX went down 2.66% to end at 1433.06. We have our answer: the $SPX fails the re-test of the lows. And support (1437-1440) is now overhead resistance.

Breaking the 1437 level is also not positive, since 1437 is a 61.8% retracement from the March 2007 lows of 1364 to the recent highs of 1556. I would have liked to see the 1437 line hold, but it didn't.

Next support areas are horizontal support at 1410, 1372 and 1362.

The $SPX is currently very oversold, with only 16.40% S&P 500 stocks above the 50 day moving average. Typically, numbers under 20% signals that we are near or at the bottom. Of course, oversold markets can remain irrational and continue to be more oversold. Next support level is 1410.

There are wild cards in the market. The Fed could cut rates, and impact the $SPX positively.

Also, there are sectors which are working better than others.

Perspective from 2 Year View


If we look at the 2 Year view, we can get a better perspective. We can set up a Fibonacci grid from the October 2005 lows to the July 2007 highs (Fibonacci means that certain numbers, such as 38.2%, 61.8%, and 50% occur very often in nature. And this can be applied to stock charts as well. This can aid in determining resistance and support levels). If we look at the 38.2% retracement, we find 1411, which coincides almost exactly to the 1410 level mentioned above when looking at the 6 month chart above. When we look at the 50% retracement, we find 1365, which coincides almost exactly to the 1362 level above when looking at the 6 month chart above. This is a good sign that the support resistance levels mentioned in the 6 month and 2 year charts are valid. (Valid means they are valid, but it doesn't mean that the support levels will always hold. Support levels can be breached, or stocks or indices could bounce at support levels).



Today's 6 month Chart of $SPX

Today's 2 year Chart of $SPX