Image Copyright

Recent Articles

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

Rate information contained on this page may have changed. Please find latest savings rates.

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

Rate information contained on this page may have changed. Please find latest savings rates.

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.

August 2018 Outlook: Savings Rates Increasing and Poised to Move Higher – 5 Accounts to Consider

Rate information contained on this page may have changed. Please find latest savings rates.

We’ve entered the long hot days of summer with all sorts of political and economic turbulence on the horizon.

Savings rates have firmed and would seem to be poised to move still higher, with the Fed likely to raise the Fed funds rate by 50 basis points to 2.25% to 2.50% before December. 

CD rates too have firmed, and, as we recently noted in this article, the spread between 1-year CD rates and the online savings rates has widened out to 60 basis points which is the widest it has been in over a decade.   Some will be inclined to reach for CDs with money that they will not need for the next year (see today’s best rates here), but we’d be cautious, even with short term CDs against the current backdrop.

Longer term CD rates are quite interesting.   We now see online 2-year CD rates as high as 2.95%, 3-year rates over 3% and 5-year rates pushing 3.25%.   However, the Federal Reserve’s most recent forecasts continue to guide towards a 3.125% Fed funds rate at the end of 2019 and a 3.375% Fed funds rate at the end of 2020.  With the possibility of a protracted trade war and rising commodity prices causing real inflation, we think rates could be much higher and would be especially cautious here.

So here are five accounts we’d focus on:

Here are five products worth taking a look at:

1. 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.  Marcus is also a subsidiary of Goldman Sachs and if you listen to their executives on Bloomberg or CNBC, you’ll see that they have made a real commitment to the online savings and CD spaces.   We doubt they will be doing anything other than raising rates as the Federal Reserve moves.  To boot, Marcus is perhaps the only one of the major online banks where it seems very safe to go well over FDIC-insurance limits.

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

2.  Ally Bank – 1.80% Online Savings rate

Ally has been around for many years and, as reviewed on BestCashCow, is the gold standard in online banks.   It isn’t a bank that is going to raise their rates one day only to lower them (or to stop raising them) the next.  As rates rise, consumers can have full confidence that Ally will always stay competitive.  We also know that they won’t be quietly lowering their savings rates while they give new customers better ones.   Their TV advertisements promise as much.

3. Radius Bank Online Savings – 1.86% (requires balance over $25,000)

Radius Bank is a new entrant to the online savings arena, but has a neat cutting edge user interface.  This savings account is also worth a look as it can be easily partnered with a high interest checking account packed with features that can enable depositors to migrate virtually all of their branch banking to online banking.

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

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

We’ve been a fan of Ally Bank’s No penalty 11-Month CD for years.   If you have over $25,000 to invest, it ordinarily offers depositors a light yield improvement over their savings rates.  Like a CD, this product, guarantees that it will pay the 2.00% amount for almost a year.   In the meantime, it can be terminated and moved to the money market account at any time and without penalty.  You are also protected from the extremely unlikely possibility of falling rates.   With this product, Ally is essentially offering depositors a free option.

  1. Colorado Federal Savings Bank One-Year CD – 2.51% 

If you must reach for a 1-year CD, Colorado Federal Savings Bank provides the highest yield in an account that can be easily opened and funded online.   Their website is not so great, and you will encounter some challenges if you have closed your funding account at maturity, but we think that this is one to look at.  Some others with rates almost as high are listed here. Again, only look at one-year CDs if you really feel you must reach for the yield and read our 65 Questions to Ask before locking into any CD.

Before opening an online savings or money market account, we also encourage you to check local bank rates and local credit union rates.


The Wisdom of Old or Not-So-Old Age

While Bankrate no longer provides the most accurate and comprehensive information on bank rates (that distinction now belongs to BestCashCow or, they do sometimes produce interesting surveys.

Their latest survey indicated that 5% of those aged 18 to 37 say bitcoin is the best place to put money they won’t need for 10 years or more, whereas only 1.2% of those aged 38 to 53 favor it for long term savings, and less than 1% of those aged 54 to 72 do.

I myself am not so old, though I do fall into the bracket of people aged 38 to 53.   I cannot imagine what planet the 1.2% of my age cohort would trust bitcoin or any cryptocurrency, and I am startled that so many people who are younger would entrust their savings to these instruments.

While Bitcoin has fallen this year, it hasn’t collapsed completely as many - including myself – had predicted.   It, however, remains an artificial asset, a mirage, and one where $7,000 per coin has no more fundamental value than $0.32.

With age comes the reality that a crisis in confidence in an instrument can cause pandemonium, confusion and widespread selling of assets representing a claim on fairly predictable future cash flows.  History books will tell you that this has happened in 1929 and 1987.   Even in the youngest age bracket, many can remember the internet crash of 2000-01 and the financial crisis of 2008-09.   While fundamental strong assets were often devastated, fake assets (those assets not fundamentally backed by future cash flows) disappeared (eg., Enron collapsed in the aftermath of the internet crash).

To believe that bitcoin represents a store of value is to ignore those lessons and to bet on a constant and indefinite faith in a mirage that ignores fundamentals.   It also assumes that there will be no hiccups in broader financial markets that would cause people to lift the sheets and look underneath.

Investors should stick with savings and money market accounts, CDs, bonds and equities as major components of their financial portfolios.  Not bitcoin.