Stress Test Results: Nothing Surprising

Stress results are out... I don't really see any surprises, it seems that the leaks this week were accurate. I am looking to tomorrow's unemployment numbers now to see how the economy is performing. People have become custom to the better than expected numbers that have been released as of late so we will see how the market reacts to the numbers tomorrow. I think the market is expecting job losses closer to 500,000 even though the estimate by most economists is 610,000. 

US banking regulators released results of the stress tests on the 19 biggest American financial institutions, saying which banks need additional capital to survive a worsening of the economy.

Here's a rundown of the results:

Capital Needs of Big U.S. Banks (in alphabetical order)

American Express — None

Bank of America — $33.9 Billion

Bank of New York — None

BB&T — None

Capital One Financial — None

Citigroup — $5.5 Billion

Fifth Third — $1.1 billion

GMAC — $11.5 Billion

Goldman Sachs — None

JPMorgan Chase — None

KeyCorp — $1.8 billion

MetLife — None

Morgan Stanley — $1.8 Billion

PNC Financial — $0.6 Billion

Regions Financial — $2.5 billion

State Street — None

SunTrust Banks — $2.2 billion

U.S. Bancorp — None

Wells Fargo — $13.7 Billion

Source: CNBC

So What Are Market Money Accounts?

Money market accounts are accounts you open with a bank, where you deposit your money and it collects interest until you want to use it. You typically have a limited number of transactions allowed per month. It is an extremely safe investment because up to $100,000 ($250,000 until the end of 2009) is insured by the FDIC. This sounds like a savings account doesn’t it? They are actually very similar; money market accounts are sometimes even known as high interest savings accounts. So what is the difference? Why does a money market account earn a higher interest rate?

When you open a savings account, you are allowing your money to be loaned out by the bank. When you open a money market account, you are giving your money to the bank to invest in the money market. To put it simply, the money market is a place where CDs and treasury bills, among several other things, are traded. You don’t own anything the bank is trading. It’s not like you can claim a particular treasury bill that the bank bought without your money. The money from your account is pooled with the money from all the other money market accounts open in that back. However, this is just background information. None of this really impacts your investment because the bank deals with all of the trading and just pays you interest for using your money.

Money market accounts can have higher minimum balances to start an account. They can also require that you keep more money in the account unless you want to incur a penalty. Look around at different banks to find one that fits your needs though, because not all banks have the same requirements. Most banks though, do offer higher interest rates to accounts that have more money in them. Here is a chart showing the difference between average rates for money market accounts and rates for money market accounts with at least $50,000

Graph from Bankrate.com

While it may seem risky that you are trading in a market like this, it is not at all. The bank is is the one making the trade, taking the risk and getting any profits. You are getting your guaranteed interest regardless of how poorly or well the bank does. 

Don't Jump Into Every Market Ripple

So today we had a nice rally of 200 points in the Dow Jones, thanks to a strong performance by bank stocks. But that doesn't mean anything. Tomorrow we could see a 300 point drop because someone reported bad earnings. The bank stocks got a lift from news that the Fed will keep rates at almost 0% all year long and the Obama Administration is moving quickly to buy up more toxic assets from banks. Additionally, House Democrats leaders announced today that the Stimulus Bill is expected to pass the House. 

While this is all good news for banks, don't be fooled by this market ripple. Today Starbucks and others announced even more layoffs. As companies continue to release earnings, they keep announcing massive layoffs to help cut costs. Don't overlook this. As more layoffs occur, companies based on consumer spending will continue to see their earnings deteriorate. The job losses from this week alone are really adding up. 

Lastly, the Stimulus Bill is supposed to pass the House, but that does not mean it will pass the Senate. Democrats do not have enough votes to bypass a filibuster, and right now Republicans seem to hold strong opinions against the excessive spending of the bill and a lack of tax cuts. The market is expecting the bill to pass, but it will probably find resistance in the Senate. And if it doesn't pass the Senate, do not expect the market to take it well. Having said that, I don't think the bill will never pass, I just don't think it will pass right away. Republicans and Democrats both agree that some kind of stimulus package needs to be passed, but not on how it should take shape. And I have faith that President Obama will be able to stretch across the aisle and bring both sides together. If the bill doesn't pass the first time, it will present a great buying opportunity as the market will likely push down prices.  

Keep following how strong Senate Republican opposition is to the bill is so you can predict if the bill will get passed or not. And amongst all the news of stimulus and banks, do not lose sight of unemployment.

Savings Accounts

This is the 4th installment of the series 7 Alternatives To The Stock Market

Savings accounts are pretty much the simplest way to invest your money. Over 65% of Americans already use one. You put your money in the savings account, interest accrues and that’s it. Savings accounts can have some restrictions on the number of transactions or withdrawals you can make. However, there are so many different options out there that it will be easy to find one that corresponds with what you want from it. Assuming you choose a bank that is FDIC insured, which you always should, up to $250,000 of your money is completely safe. (In case you missed it, the FDIC is raising the maximum amount they will insure to $250,000 until the end of 2009 at which point it will revert back to $100,000.) Compared to many other forms of investments, they are very good for emergency funds. There will never be any risk of a loss just to get your money right away. Also unlike many other types of investments, it is reletively easy to withdraw smaller portions of your money.

One thing I would really like to emphasize is online savings accounts. Right now the interest you will be earning in a traditional savings account is pitifully low. For instance, Bank of America is offering 0.20%. While it may appeal to you because your money will be safe, it’s going to be earning you virtually nothing. If you are looking for more of a return, check out online savings accounts. It may sound unsafe, but many of these online banks have been around for years and are FDIC insured. Online banks can afford to give you a higher interest rate because they don’t have many of the expenses of a traditional bank, such as paying for a building, tellers, etc. Here is a quick comparison to show you the difference.

Online Banks	Traditional Banks
E*trade: 3.01%	Bank of America: 0.20%
ING Direct: 3.40%	Wells Fargo: 0.10%
FNBO Direct: 2.80%	Citi: 0.40%
WTDirect: 2.81%	Wachovia: 0.15%
HSBC Direct: 2.60%	Chase: 0.10%

Bank Madness!

This post got featured in the Carnival of Financial Planning. Check it out!

So lately you have seen bank stocks plummet. Many of you may be confused as to why because bank CEOs and financial analysts have been saying that the banks are financially sound. You have even seen Bank of America, the largest bank in America buy back shares, a move done when management feels their shares will go up. So if there seems to be so much confidence in the banking system, then why, are their shares dropping? Because of what investors do not know. Investors do not know if the government is going to inject more capital into banks and end up nationalizing them. We have already heard talks of this happening in Europe, where the governments of the European Union have said they are considering nationalizing their banks. And after Meredith Whitney, from Oppenheimer & Co. came out earlier this year and said banks would need to raise more capital in 2009, the fear of nationalizing banks has spread to America.

So what if the banks are nationalized? If the banks are nationalized, all your shares in the bank will be worth nothing. You will lose your investment in the bank, hence why shares have fallen so drastically, no one wants to own them. Additionally, as the government injects more capital, they also make more rules on how the banks can spend it, and in essence, run their business. Investors do not like all the rules that the money banks are forced to take are coming with.

If you think the banks will not end up being nationalized, they might make a good investment. The managements of banks are claiming they are solid, and the analysts following them agree. If you are to invest in a bank, invest in a larger one like Bank of America or Wells Fargo. These banks are large enough to make it through these tough times. Additionally, Tim Geithner, the new Treasury Secretary, said he was against nationalization of the banks, instead he wants to seek private investment into the banks. Banks have been rattled by this fear and are trading at extremely low prices, if Geithner follows through with his statement, you could make a lot of money when the banks return to prosperity. If you are going to invest in banks, wait until we get a better picture of what team Obama is going to do. Let the new stimulus package go through talks with the GOP, because it will surely be changed to please both parties.

If however, you think that the government is going to take over one of the banks, stay away, you risk losing ALL your money.