Thinking About Money

Ok, I know it’s not technically correct. But then again, one never knows….

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Today I received a credit offer so sneaky that I just had to write about it. But while sneaky, it’s one you can use to good advantage if you’re clever.

The offer is from Washington Mutual, a bank I generally have a lot of respect for (I even have a home equity line with them). But they too have been caught up in the sub prime loan mess, their stock having dropped from the mid 40’s to about $10/share, and I suppose they’re trying to chase revenue along with every other troubled bank.

The problem is, it’s your revenue they’re after.

Here’s the deal:

0% FIXED APR on Purchases until October 1, 2009 when you Transfer a Balance NOW!

Now, I have to admit, 0% for a year and a half is a nice offer. The catch? You have to do a balance transfer of at least $100 within 90 days of opening the account. This transfer has no fees attached (which is good), but any payments you make will be applied first to the lowest interest balance.

What this means is: if you transfer $1000, then start using your card for purchases, payments you make will be applied first to the finance charges, then to the purchase principal. That $1000 will stay on your card building finance charges until you’ve paid everything else off first. At 9.99%, that’s about $100/year in finance charges.

But here’s a trick that should work (as I read the term sheet). Get the card and do a small balance transfer. Then pay it off completely. After that, you should be able to use the card for purchases at 0% until October 2009. If you save the money to pay off the card, you can effectively earn 3% or more on 18 months worth of purchases - If you spend $500/month and put them on the card that’s a free $200.

But don’t try this unless you are very disciplined and can:

• Save up the cash to pay off the balance in October 09 (earning interest on the balance in the mean time).
• Make every payment on time (if you’re late on this or any other Washington Mutual account, they can raise your interest rate to an astonishing 21.74% over the prime rate - currently 28.24%).

With all the uncertainty in the market and talk of recession, I thought this would be a good time to cut through some of the noise and panic take a quick look at some underlying trends and what they mean to investors. Hopefully you’ll find this helpful in your own investing and financial planning. The following is a quick summary - I’ll probably tackle some of these issues in more detail later.

Housing: Yes, housing prices have dropped and yes, this year’s greed sparked financial crisis is the sub prime mortgage mess. If you followed earlier advice and stuck with a fixed rate mortgage, you can just stay put. Housing prices in most places were not a bubble and will recover. Why? Because the U.S. is experiencing population growth. That means demand will catch up with supply. When? It wouldn’t surprise me if it’s a few years. Strategy? Stay put if you can, refinance to fixed if you have an adjustable.

The Dollar: We continue to borrow and spend, which means we need to keep selling dollars internationally (to China, the oil states and foreign investors). Obviously the dollar will continue to drop. It’s a fine balance: reducing interest rates to stimulate the economy also reduces the value of the dollar, making oil and foreign goods more expensive which leads to inflation. Keep some foreign exposure and investments in international funds and bond funds to protect against the falling dollar.

Natural Resources: You do have money in some natural resource funds, right? It’s still a good place to be. How is it that oil is reaching record prices during a recession? It’s partly because the dollar is dropping. But it’s also because any slowdown in the U.S. and Europe is more than offset by demand grown in China and developing countries. This is a good long-term investment. If you’re driving an SUV now might be a good time to downgrade to a smaller high mileage car or hybrid. Auto prices won’t go lower, but gas will continue to trend upward.

Investing: Unlike 2002, the stock market is not overvalued: PE ratios are average on a historic basis. Traders are bearish, which means the market will trend downward, but this will just open buying opportunities for the wise. Wait until everyone is crying about how terrible the market is - that’s your buy signal. Inflation is trending upwards - this will increase the perceived value of stocks (stock prices rise with inflation along with all the other numbers in the balance sheet). Look for companies that earn revenue in other currencies (multinationals) for better results.

Basic Financial Planning: As always, build a cash position to cover you in the event of a job-loss or crisis. Get out of high interest credit cards - in fact, get out of debt completely if you can. Grab a free credit card that pays a bonus for incremental savings. And never invest anything in the market you aren’t willing to lose, or wait a long time to recover.

Gift cards are an increasingly popular form of gift, and many of them represent a great way to give people an excuse to spend money at their favorite store.

But whatever you do - don’t give prepaid Visa, Mastercard or American Express cards as gifts! Unless it’s for someone you hate.

Why?

Because all of these cards have hidden charges - after a few months they start charging two or three dollars a month on each card until its value is completely gone. This fact is buried, naturally, in the fine print or at the end of a long list of card “features”. If the recipient forgets to use the card right away, when they finally get around to it they’ll discover that your gift actually ended up in the hands of the banks, leaving them with nothing but a hollow feeling and useless plastic.

Today Garmin offered $3.3 billion for Tele Atlas, one of the two players in the mapping field. The other player is Navteq, which is in the process of being purchased for $8.1 billion by Nokia. Garmin and TomTom are the major players in the PND (portable navigation device aka GPS unit) field. TomTom gets its maps from Tele Atlas, Garmin from Navteq.
Last month investors beat up Garmin’s stock when Nokia bid on Navteq. Presumably they were concerned that somehow Garmin might lose their map provider. Today, despite beating income expectations, Garmin’s stock got beaten down again, presumably out of fear that Garmin will be locked in a bidding war with TomTom.

As usual, Mr. Market is missing the boat (as they usually do when it comes to Garmin). They fail to take into account one key factor - Garmin isn’t just a customer for mapping data - it is THE customer for mapping data.

To find out what this means, you actually have to look at two SEC filings, that of Garmin and that of Navteq. The numbers that follow are very, very rough, but should be in the ballpark.

Last quarter Navteq sold maps for 3.9 million PND devices for cars. Based on other information in the report we can actually estimate that the cost of the maps for a single PND is about $35.

Garmin sold somewhere between 2 and 2.5 million PND units last quarter (the exact breakdown was not included in their report), which means they spent about $75 million on maps last quarter. Or in other words, and their current run rate Garmin is spending over $300 million a year on maps. And that number is only going to increase.

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If you have little or no debt and pay off your credit cards in full each month, don’t bother with this film. For everyone else, this film may prove an eye-opener. Though it suffers from “over-the-top” sensationalism in the style of Michael Moore, the basic information is sound.

You’ll learn how various loan instruments such as sub-prime loans, title loans, payday loans, tax refund advances, and rent-to-own, banks and finance companies are able to charge interest rates that you would think would be illegal. Conspiracy theorists will enjoy this as well (not to suggest that there isn’t a conspiracy).

I wish I could tell you that this will help you get out of debt if you are in debt. But it’s a great film for those who aren’t in serious trouble. And for those just starting to get credit (especially college students and recent grads who may be ignorant about credit), this film can save you a lot of grief.

In Debt We Trust: Highly recommended.

As you can probably tell, I’m a big fan of cash rebate cards that have no fees. True, a 1%-3% discount on everything you buy isn’t that big a deal, but when you add in everything from groceries, to gas, to travel, it can easily add up to hundreds of dollars a year. And that’s for the negligible effort of choosing which card to use and paying on time.

So far my main two cards are a Chase card from Amazon (3% on Amazon purchases, 1% on everything else), and a Capital One Visa (2% on groceries & gas, 1% on everything else).

I also have an American Express rebate card by way of Costco, that has a strange tiered system of .25% for the first $2,000, .5% for the next $3,000, and 1.5% for everything over $5000/year. For those of you who are wondering, this card doesn’t start beating a 1% rebate card until you’ve spent $11,000. Not very exciting.

Except that Costco and American Express have sweetened the deal. They have a second card called their “True Rewards card” that not only starts at 1%, but goes to 2% for travel and 3% for eating out. That gets interesting.

So I decided to switch, which brings me to today’s story, an experience that was absolutely astonishing.

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I have a new favorite credit card. A while back I noted the advantages of the Diner’s Club Mastercard for those who rent cars frequently (it offers primary insurance coverage on rentals) - demonstrating that one great feature can be enough in some cases to justify one card over another, even if the card has an annual fee.

Recently I found another card that offers a compelling and unique feature, in this case with the added benefit of no annual fee (in fact, it’s provides cash back). It’s the Capital One “No Hassle Cash” Rewards card.

Not only is the card free, but with a 2% rebate on gas and most groceries and a 1% rebate on all other purchases, it’s one of the most generous of the cash back cards.

But that’s not what got me interested in this card. Nope, the beauty of this card is hidden in the fine print of the disclosure form. It says:

Foreign transaction fee: None.

Once upon a time, credit cards were absolutely the best way to buy things when traveling abroad. Not only did you get the best possible exchange rate, but there were no hidden charges. But card companies in their search for fees couldn’t resist the urge to tamper with a good thing and started slapping on all kinds of fees, not only using retail exchange rates but adding fees - some as high as 4%, on each foreign exchange transaction. Even traveler friendly companies like American Express jumped on the high fee bandwagon.

Capital One is the only bank I know of that continues to use the wholesale conversion rate and charge no additional transaction fees. www.capitalone.com

I know what you’re thinking? What does this book have to do with money? Everything, as it turns out. In fact, most of the examples in the book are related to business and finance - deals and negotiations that succeeded purely because of application of the principles described in this book.

This is especially true in the information age, where success is more and more tied to effectiveness of communications. Thomas Friedman in his book “The World is Flat“ talks about communication skills as critical to surviving in a flat world, where individuals may find themselves competing with others worldwide. Surely interpersonal skills will become the key determination of success when it comes to applying these skills.

Dale Carnegie’s book “How to Win Friends and Influence People” is the seminal book on the subject. The classic. The real deal. He addresses specific rules and techniques that anyone can apply in interpersonal communication, whether it is asking for a raise, or negotiating a business deal, or even hanging out with friends.

The book is relentlessly practical. No obscure philosophies or impractical ideology here - it’s techniques and more techniques, most illustrated by real world examples. In fact, you’ll probably end up reading it more than once, each time evaluating how well you are already applying those techniques. If you’re like me, you’ll find more than one area where you can stand some improvement.

Highly recommended.

There are two areas I’m watching - the overall market, and the value of the dollar. The market, because even though I’m relatively pleased with my individual stock choices, there is no doubt that my portfolio will be influenced by the overall market. And the value of the dollar because I have a nice expensive vacation coming up next summer in Europe, and though I have some hedging in place, I don’t want it to get significantly more expensive than it already is.

Common knowledge (which is always questionable) would suggest the Republicans holding on to both houses would be good for the stock market and the economy. One imagines the movers and shakers of the economy (the banker and Wall Street types) being largely Republican and going into huge fits of selling were the Democrats to see any significant success.

Yet given the truly staggering deficits brought about by a fully Republican government, it seems possible that even the rightist of the right might (when evaluating the economy) see Democratic victories in the House and Senate as representing a possible return to fiscal responsibility (a term that is nearly impossible to apply to our current government).

So here we are, just a few days from the election, and here is my question (comments invited): would the Democrats taking the Congress help or hurt the market, and which way is the dollar likely to move? Frankly, I haven’t a clue.