In Search of the Perfect Investment

Please send me your money. I’ll put it in my mattress.  If you ever want your money back, I’ll give it back, but reduced by huge fees I’m making up — like Mattress Maintenance Fees.

If I were a Swiss bank, I’d also not send you a monthly statement. If you  died and your heirs didn’t know the number of your account and its password, I’d keep your money too.

I like the banking business.

I called my favorite smart investor yesterday. “Whatcha doing with all your cash?”

His reply, “Nothing.”

“Nothing?” I asked incredulously.

“Nothing. I know it’s there. That’s comforting, but it’s no longer worth my time to fiddle with the banks.”

I had called him because I thought he would know some magic solution. Personally, I’m still looking for bonds, but their rates — like those of treasuries — have declined even more.

The “ultra-smart money” has been piling into TBT — that bet on interest rates turning up. They’ve lost their shirts.

Coincidentally Bloomberg’s new service is also obsessed with cash. Today’s story:

Savers Pay U.S. Banks to Keep Cash as Rates Dip, Fees Multiply
It’s getting tougher for U.S. savers to find a bank where they won’t end up paying to keep their money safe.

Average interest on savings, checking, money-market and certificate of deposit accounts fell to 0.99 percent in July, the first decline below 1 percent in a decade, according to researcher Market Rates Insight. Banks also have been raising fees and adding new ones, most recently in response to the financial-services overhaul bill that became law July 21.

The result is that an increasing number of savers are seeing their deposit earnings eaten up by charges. That’s frustrating people like Ken Ward, who recently passed on a savings account with a 0.01 percent interest rate at the Chase bank branch near his home in Wantagh, New York.

“We went to Chase because of the convenience,” said Ward, 57, a stock-loan trader who was helping his daughter find a place to tuck away $10,000. “But with those rates, we might as well put it in the mattress and then at least we won’t be charged any fees.”

Had they gone with the Chase savings account, it would have paid about $1 in annual interest. Potential fees included $4 if the balance fell below $300, $2 for each non-Chase ATM withdrawal and $3 for each withdrawal after making more than four withdrawals in a monthly statement cycle.

Ward said he and his daughter settled on a 13-month Chase CD paying 0.75 percent, and will look for a better alternative when it matures.

Chase’s interest payments reflect the low-rate environment created by the Federal Reserve, according to Greg Hassell, a spokesman for the bank’s New York-based parent, JPMorgan Chase & Co. The Fed has kept the overnight interbank lending rate target near zero since the end of 2008 to stimulate the economy after the collapse of Lehman Brothers Holdings Inc.

Unattractive rates and new fees may drive consumers to smaller banks and credit unions. Big banks such as Bank of America Corp., the largest lender in the U.S. by assets, No. 2 JPMorgan and No. 4 Wells Fargo & Co. may lose about 1 million checking accounts each, based on estimates by Moebs Services, an economic-research firm in Lake Bluff, Illinois.

The average interest rate offered on a checking account by a credit union is 0.21 percent, according to Bankrate.com, the North Palm Beach, Florida-based website that tracks bank products. That compares with 0.12 percent at the five largest banks and five largest thrifts in each of the 10 largest markets.

Almost 80 percent of the 50 largest credit unions offered free checking as of April, Bankrate.com data show, while unconditional free checking is no longer offered by Bank of America, Chase, Citigroup Inc. and Wells Fargo.

Consumers looking for higher rates may also turn to online banks. DollarSavingsDirect.com, a division of Emigrant Bank, offers 1.2 percent for savings accounts with account balances of at least $1,000.

Another option, money-market funds, which aren’t backed by the Federal Deposit Insurance Corp., were averaging 0.04 percent as of Aug. 24, according to iMoneyNet Inc., a research firm in Westborough, Massachusetts, which tracks money funds.

Investors can also lock up their money for longer periods in U.S. Treasuries or savings bonds. Ten-year notes fell below 2.50 percent on Aug. 24 for the first time since March 2009, according to data compiled by Bloomberg. For investors buying now, the EE savings bond is paying a fixed 1.4 percent, according to savingsbonds.gov. These bonds can’t be cashed for one year and there’s a 3-month penalty on interest earnings if redeemed within five years.

The Fed’s low rates have allowed U.S. commercial and savings banks to reduce their deposit costs. They paid $4.38 billion in interest on transaction, savings and money-market deposit accounts in the first quarter of 2010, a decline of 74 percent from the first quarter of 2007, according to SNL Financial, a bank-research firm in Charlottesville, Virginia.

Another reason banks are cutting the interest they pay out is to recoup losses from federal legislation that limits overdraft fees, estimated to be about $15 billion annually, said Dan Geller, executive vice president of Market Rates Insight, which is based in San Anselmo, California.

Average interest rates have been decreasing since the third quarter of 2007, when they were 4.23 percent, he said. When the overdraft provisions took effect for new accounts last month, there was “a sudden and accelerated drop,” Geller said. The rules require consumers to consent before banks automatically cover them when they have insufficient funds for debit or ATM transactions.

Changes such as caps on fees banks charge merchants for debit-card transactions and the creation of a consumer financial protection agency to regulate products such as credit cards and mortgages will decrease banks’ profits and lead to new fees for consumers, said Tony Plath, a finance professor at the University of North Carolina at Charlotte.

“The days of 10 percent of customers subsidizing free checking for 90 percent of customers are over,” Plath said.

Higher fees have driven the average annual price of a checking account to $301, an 11 percent increase in the past five years, data from Moebs Services show.

“If you’re a restaurant and you can’t charge for the soda, you’re going to charge more for the burger,” JPMorgan Chief Executive Officer Jamie Dimon said on a conference call with analysts July 15. For Chase customers, charges may come in the form of monthly fees and higher credit-card rates, he said.

Wells Fargo customers will bear some of the burden for new financial regulation, CEO John Stumpf said in a July 22 interview. The bank, which is based in San Francisco and has the biggest U.S. branch network, introduced a new checking account in July with a $5 monthly fee, which can be waived if customers meet certain conditions.

Brian Moynihan, CEO of Charlotte, North Carolina-based Bank of America, has said he’s looking for ways to soften the impact of new regulations on revenue. Bank of America ended overdraft services Aug. 13 and is considering a tiered structure of charging for checking accounts, according to Anne Pace, a spokeswoman for the bank.

Bank of America’s rates for savings accounts currently range from 0.01 percent to 0.85 percent, Wells Fargo pays from 0.05 percent to 0.40 percent and Chase’s go from 0.01 percent to 0.75 percent, company spokesmen said. Rates may vary based on location, the size of the account and if other accounts are held at the bank.

Some financial institutions will charge monthly maintenance fees for checking accounts unless customers do certain things such as maintain a minimum balance or make a specific number of debit transactions, said Chris Gill, director of the banking and professional services group at SNL Financial. Banks may charge customers for expedited payments or use of debit cards for online bill payments. They may also tighten fee waiver policies and reduce the costs of existing programs, such as debit rewards, Gill said.

That doesn’t mean customers are just paying banks for storage, said Gill. The convenience of making payments using various methods and the backing of the FDIC are part of what consumers receive in exchange for putting their money in bank accounts, he said.

“Harry, they have $6 a share in cash.” It’s such an easy measure. How much money per share a company has. Brokers intone it endlessly as though it were the secret key to figuring if the stock is a great buy. But unless the company does something useful with the money — like paying me a dividend — the money is as relevant as a 50-year old obsolete factory. It sits on the balance sheet gathering dust. The Wall Street Journal followed this theme today:

Cash on their balance sheets.
A decade on from the Internet bust, should young investment bankers once again be fighting to get on the technology beat?

With the sector’s top eight companies sitting on $125 billion of net cash, deals look set to continue.

And investors won’t necessarily be burned.

Intel’s shares may have dropped after the company agreed to pay a huge price for McAfee, but, in general, markets have been surprisingly supportive of acquisitive firms as growth has slowed.

Oracle has spent $28 billion on seven companies since 2005, according to Dealogic data on deals over $500 million whose terms were disclosed. Its stock is up 67% over that period. Hewlett-Packard has bought six companies for $25 billion and seen its stock rise 82% since 2005. The Nasdaq Composite index is down 1.3% in that time.

Microsoft, in contrast, has spent $9 billion on five companies, a far smaller sum relative to its much larger market capitalization. Its shares are off 10% since 2005.

There are other ways to get cash off the balance sheet. In their most recent quarters, the top eight bought back $13 billion of stock. Some even pay decent dividends.

Still, with the sector generating tens of billions of dollars from operations each year, bank accounts should keep expanding despite buybacks and dividends. So more big deals are likely in the offing.

The surest path to riches, of course, isn’t acquisitions but innovation. The two least acquisitive, Google and Apple, have seen share gains of 150% and 680%, respectively, since 2005. In their cases, starting dividends or share buybacks make sense. Each has about 20% of its market capitalization in cash, yielding next to nothing. Saving, in their case, is no longer a virtue.

The mosque at Ground Zero debate. As a Jew, I feel pretty strongly about freedom to worship. As an American, I feel very ambivalent about the Mosque at Ground Zero. It seems to me that the local community has as much right to say No to the mosque as it does to another WalMart or an ugly strip mall. The more we debate the mosque on freedom of religion grounds, the sillier we as a nation look.  Charles Krauthammer of the Washington Post wrote the following

Radical Islam is not, by any means, a majority of Islam. But with its financiers, clerics,
propagandists, trainers, leaders, operatives, and sympathizers – according to a conservative estimate,
it commands the allegiance of 7 percent of Muslims, i.e., over 80 million souls – it is a very powerful
strain within Islam. It has changed the course of nations and affected the lives of millions. It is the
reason every airport in the West is an armed camp and every land is on constant alert.

Ground Zero is the site of the most lethal attack of that worldwide movement, which consists entirely of
Muslims, acts in the name of Islam, and is deeply embedded within the Islamic world. These are
regrettable facts, but facts they are. And that is why putting up a monument to Islam in this place is
not just insensitive but provocative.

Just as the people of Japan today would not think of planting their flag at Pearl Harbor, despite the
fact that no Japanese under the age of 85 has any possible responsibility for that infamy,
representatives of contemporary Islam – the overwhelming majority of whose adherents are equally
innocent of the infamy committed on 9/11 in their name – should exercise comparable respect for what
even Obama calls hallowed ground.

You can read his full piece here.

The search for the excellent lion tamer.
A circus owner runs an ad for a lion tamer and two people show up. One is a retired golfer in his late sixties and the other a gorgeous blond in her mid-twenties.

The circus owner tells them, “I’m not going to sugar coat it.. This is one ferocious lion. He ate my last tamer so you two had better be good or you’re history. Here’s your equipment — chair,  whip and a gun. Who wants to try out first?”

The  girl says, “I’ll go first.”  She  walks past the chair, the whip and the gun and steps right into the lion’s cage. The lion starts to snarl and pant and begins to charge her. About halfway there, she throws open her coat revealing her beautiful naked body..

The lion stops dead in his tracks, sheepishly crawls up to her and starts licking her feet and ankles. He continues to lick and kiss her entire body for several minutes and then rests his head at her feet.

The circus owner’s jaw is on the floor. He says, “I’ve never seen a display like that in my life.” He then turns to the retired golfer and asks, “Can you top that?”

The tough old golfer replies, “No problem, just get that lion out of there.”

Harry Newton,who is still having wonderful thoughts about last weekend’s wedding.

Susan and I were asked to give the groom, our son,  our “final” 60 seconds of advice. Mine was simple, “Many readers have found the key to instant riches in this column. They simply do the exact opposite of what I recommend. Michael might consider following suit.”