Morgan Stanley is Offering its Customers 2.10% on Savings or 2.40% on a 6-Month CD

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Morgan Stanley is trying to get its large customer base to move some of their assets back to the bank from other institutions that may have offered better rates in the past.   They are doing this by offering an promotional savings rate of 2.10% or a 6-month CD rate of 2.40% so long as the capital is transferred from outside of Morgan Stanley.   These offers are available under December 7, 2018 and are subject to availability.  Certain conditions may apply.

Customers can deposit up to $2 million per product in each of two issuing subsidiaries – Morgan Stanley Bank, NA and Morgan Stanley Private Bank.   Each is separately FDIC insured.

The 2.10% savings rate is competitive versus online savings rates.    However, according to the terms of the offer, the rate will revert back to the non-promotional rate on March 1, 2019.

As of this publication, the 2.40% 6-month CD rate is above any nationally available online 6-month CD rate.  Locally available 6-month rates may be higher (check rates where you live here).

In the Spring, we suggested that these types of short-term promotional products offered by investment banks may become less attractive after depositors account for the loss of interest while transferring their money in (and presumably out, when the promotion ends).   You may also experience significant periods where your cash is sitting idle at the bank waiting for the bank’s next purchase date.   Read my earlier article here.  (

Additionally, the 6-month CD operates as a brokered CD, as cannot be made liquid with the payment of an early withdrawal penalty like most online CDs can so you better be awfully sure that you won’t need access to your money.  We’ve cautioned against brokered CDs many times (recently here) and you should be especially cautious in a rising interest rate environment like we are entering now.

Bottom line: You might be better off checking the best online savings rates here.


Federal Reserve Raises Fed Funds Target Rate to 2 - 2.25%

The Federal Reserve voted unanimously today to move the Federal Funds rate up by 25 basis points to 2 to 2.25%.

BestCashCow had predicted this move for some time.   By late last week, economists polled by various polling services had all moved to a position of over to 90% likelihood of this move.   It was very well telegraphed by Federal Reserve Chairman Jerome Powell. 

As a result of this move, we will see higher online savings rates.    You will also likely see more competitive local savings rates from banks and credit unions in your area.

We may also see a rise in CD rates, including online one-year CD rates and local one-year CD rates.

The Fed continues to be very hawkish.    We predict another rate move in December and several next year with 12 of 16 Fed members now forecasting this 4th hike for 2018.  

The Fed Funds’ long term target remains at 3.375% for 2020 and 2021.   Today, it raised its long-term "neutral" target to for years beyond 2021 to 3% from 2.90%.   Hence, we would continue to be very cautious about long-term CDs.

The Fed may need to move faster and harder than its now hawkish predictions.   Inflation is going to come as a result of Trump’s trade battles and China tariffs.   It isn’t just a premonition.  In fact, I saw a hawk today during my morning bike ride in Central Park.  In 20 years of riding my bike there, this was the first time seeing one on my morning ride.  It must mean something.  (He or she is shown on the picture).


Does the Stock Market Need to be Massively Overbought Before It Crashes?

I cannot turn on CNBC or Bloomberg without hearing some money management type explain that there is no risk of a stock market crash because it is not wildly overbought like it was in 1929, 1987, 2000 or 2008.   It seems that everyone is drinking this Kool-aid at the moment.

While it tastes good, it isn’t exactly right. 

The stock market is trading at a 2018 PE multiple of 18x and a 2019 multiple of 17x.

I would submit that a 17x future multiple for an economy that has the appearance of 3% growth is very expensive.   (I say appearance because I believe that tax relief generated most of this growth and that it will be rolled back in 2019, even if the Republicans maintain control of both houses of Congress).

The stock market is, in fact, buttressed by some stocks that are incredibly inexpensive on a PE basis.   Even some leading technology stocks appear very inexpensive (Apple and Intel, in particular).   But, some stocks are terribly out of whack with any sort of reasonable valuation metrics.

The PE multiple doesn’t need to be 20 or 25 or 30 for the market to be irrationally expensive.   There is no magic number.

And, market crashes or corrections are caused by a quick change in sentiment when the market is dramatically overbought.   In my view, some things that could cause a change in sentiment are: a President who is mentally incapacitated, a trade war with China / inflation, a change in control of the House of Representatives, or an environmental catastrophe.

Massively overbought or just irrationally expensive, there is trouble on the horizon.

This is a good time to increase your exposure to cash.   See the best rates here.


September 2018 Outlook: With the Fed Poised to Raise Twice Before the End of the Year, Here are the 5 Best Savings and CD Products Now

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As we move into the fall with all sorts of political turbulence with potential economic ramifications, the Federal Reserve remains poised to raise the Fed funds rate by 50 basis points to 2.25% to 2.50% before December. 

As we pointed out in our August update and in other recent articles, the Federal Reserves’ dovish position has now led to the spread between 1-year CD rates and online savings rates which has widened out to 60 basis points -- the widest it has been in over a decade. 

The Federal Reserve’s disposition and the likelihood of as many as four additional raises in 2019 cause us to recommend against longer-term CD rates now, especially 5 year CDs.

If you feed obliged to reach for higher yields, we recommend the following 3 products:

  1. Synchrony Bank – 13-Month CD at 2.65% (requires a balance over $2,000)

Synchrony’s 13-Month CD pays more than any online 12-month  CD, and we think it makes sense to lock in for an extra month for the additional yield.  (Editor's Note: As of September 13, 2018, it is possible to find online one-year CDs that yield more than the 13-month Synchrony product.   In many areas of the country, you can also find local 1-year CDs that match or exceed this rate at local banks or credit unions).

  1. Marcus – 12-Month CD at 2.55%

Marcus’s one-year CD rate was recently raised.   We think that the current offering provides enough of an improvement over current savings rates to adequately compensate those investors willing to lock up money that they are certain they won’t need for a year.   See all 1 year CD products here.

Editor’s Note:  Marcus is an advertiser on BestCashCow.   Please read our Advertiser Disclosure here.

  1. Ally Bank 11-Month No Penalty CD – 2.00% (requires a balance over $25,000)

For those depositors with over $25,000 to invest, Ally often offers a slight yield improvement over their savings rates. 

Since this product can be terminated easily online with no penalty, it is basically a savings or money market account a wearing different skin. 

By and large however we are more inclined to stick with savings and money market accounts in a rising interest rate environment.  Within that category, we’d prefer to stick with offerings by banks that have made a commitment to this space.   Two that we like are:

1.   Radius Bank Online Savings – 1.96% (requires a balance over $25,000)

While it is a relatively new entrant to the online savings arena, Radius has a neat cutting edge user interface and solid reviews.  Since they just raised their rates at the end of August for depositors over $25,000, we suspect that they will continue to be competitive in this space and for this market.

Editor’s Note:  Radius Bank is an advertiser on BestCashCow.   Please read our Advertiser Disclosure here.

2. Marcus – 1.85% Online Savings rate

Marcus has outstanding customer reviews and, with its lightening fast ACH transfers, it is a good place to stash cash that you might need to access quickly.  More importantly, Marcus has proved in 2018 to be just a little bit faster to raise rates than the other most recognized online banks (Amex, Barclays and Ally).   Since Marcus is owned by Goldman Sachs, we feel that depositors, especially those inclined to occasionally deposit over FDIC limits, should sleep well at night. 

Editor’s Note:  Marcus is an advertiser of BestCashCow.   Please read our Advertiser Disclosure here

Before opening an online savings or money market account, BestCashCow always urges depositors you to check local bank rates and local credit union rates.

 


Avoid Preferred Stock

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A major money center bank recently updated its website in such a way that before customers (and non customers) even log in they are encouraged to “Consider Preferred”.

Site users are immediately directed to a linked article that outlines the main benefits of bank-issued preferred stock (there are other companies that issued preferred, but the article focuses on bank-issued preferred).   The main benefit is that yields are higher than bonds issued by the same institution (the article partially attributes this to supply and demand imbalances from a refinancing cycle and partially attributes this to the fact that they sit lower in the capital structure) so that they now yield as high as 5% whereas the 10-Year Treasury yields 2.90%.   An additional benefit is tax treatment that is favored over that of bonds (preferred pay “qualified dividends”).

The article then goes into the risks.    One risk is that the preferreds sit lower in the capital structure than bonds and have a lesser stake in liquidation.   A second risk is that the dividend on a preferred stock is paid at the issuer’s discretion and can be turned off if the issuer first eliminates its common dividend.   (It is easy to discount these two risks as insignificant as banks are significantly more secure than in 2008).

Yet another risk is that call provisions could cause the yield-to-call to be significantly lower than the yield, which the article correctly cites as a serious risk for any instrument that is being purchased at a premium over its face value.

Finally, the article mentions interest rate risk.  It states: 

The perpetual nature of a preferred also brings interest rate risk, as there is no set maturity date in which the issuer must redeem the security. If longer term interest rates go higher, the price of the security may dip.

We think that this is the single biggest reason to avoid preferreds, and we don’t think that the risk can be well mitigated by buying fixed to floating rate preferred stock, as the article suggest.

Interest rates are going up.   We have stated that bond prices can get killed in a rising interest rate environment.   While BestCashCow is the most comprehensive source of CD rate information, we’ve also encouraged investors to consider carefully the implications of investing in long term CDs given the backdrop of short-term rates that are likely to move higher over the coming 12 months.

Preferred stocks, unlike bonds and long-term CDs, have no maturity date.  While these instruments can come under severe pressure in a rising rate environment, bond investors and CD investors always have the option of holding an instrument to maturity in order to receive their full principal (provided the issuer stays solvent).

As we move from an interest rate environment that has been lower than anyone alive has ever seen for longer than anyone imaged, it becomes entirely possible that we may never go back.   The Fed itself is guiding towards a Fed Funds rate of 3.375% at the end of 2020.   If short-term rates go there and stay there, long-term rates will presumably go higher, maybe much higher.    The value of instruments that represent a perpetual claim on an issuer’s assets without any date of redemption will fall, fall continuously, have no floor, and never recover.

It is very tempting to reach for yield here, but we think that prudence is especially warranted in a rising yield environment.   Savings rates are already pushing 2%, and, if you must reach, the premium offered by one-year CDs is higher than it has been in a decade.   See one-year CD rates here.


A Good Problem – Insuring Over $250,000 in a Single Bank Account

It’s nice to have over $250,000 in savings, but it is a pain in the neck to have to split the money up in more than one bank in order to ensure that it is all covered by FDIC insurance. 

Given the instability in America right now, full insurance on savings is a must.  FDIC is an independent agency of the United States government.  It protects depositors against loss of their funds were banks to fail.  The FDIC was created in 1934, during the Great Depression, and since its establishment no deposits insured by the FDIC have ever lost a single penny.

So full FDIC insurance makes all the sense in the world.  And, any savings or CD account today valued at $250,000 or less is fully insured.  Any account over that amount in insured only for $250,000.

There are, however, a number of ways to insure funds over $250,000 in a single account.  Some require rather obscure and complicated steps.  But two are easy and both make a whole lot of sense, especially because it is a lot less complicated when you have all your savings in a single bank.

One very simple way to keep your money in one bank and stay fully insured when you have over $250,000 is to open a joint account with your spouse.  In such a case, the full value of the joint account up to $500,000 will be insured by FDIC.

A second strategy, a bit more complicated than a joint account, is to open a Revocable Trust account.  Revocable Trusts are a smart way to organize your personal resources – far better than a will – and to enjoy FDIC insurance on a single account as high as $250,000 times each and every beneficiary.  Thus, if an individual names four beneficiaries, a single account can be insured fully for one million dollars (four times $250,000).

While Revocable Trusts may appear a bit intimidating, they are easy and relatively inexpensive to set up.