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Personal Finance Blog By MoneyRates - May 2012

Job growth: A study in contrasts

May 30, 2012

| MoneyRates.com Senior Financial Analyst, CFA

On June 1, the latest window into the national employment situation will open when the Bureau of Labor Statistics releases its May report on job growth. In the meantime, the BLS's latest look at regional employment has provided some insight into where conditions are getting better -- and where they are getting worse.

The insights in the report indicate not only where jobs are plentiful, but also where banking conditions may be getting better or worse. In fact, the potential link between employment and banking conditions, such as rates on savings accounts and the availability of mortgages, may be especially strong when viewed on a local level.

Employment contrasts

After a promising start to the year, the U.S. has now seen two disappointing employment reports. The net number of new jobs nationally slumped from 259,000 in February to 154,000 in March and then 115,000 in April.

A state-by-state breakdown of job growth shows that this is not indicative of a universal weakening in the job market. Instead, there are sharp contrasts from one region to the next.

For example, three states -- Nevada, Rhode Island and California -- are still wrestling with double-digit unemployment rates. California, at least, is still adding jobs at a reasonably healthy clip, joining Texas and New York as the only three states to have added more than 100,000 jobs in the past year.

In terms of more recent trends, Indiana was the big employment gainer in April, adding a net total of 17,100 jobs for the month. This contrasts with Maryland, which lost 6,000 jobs during the same month -- the most of any state in the union.

The connection to banking

Generally speaking, employment may be the most important indicator of the economy's health right now. With the government swamped by debt, there is little hope that additional fiscal stimulus will spark the economy. Individuals also are grappling with high debt levels, so it will take more than consumer confidence to fuel a sustainable economic recovery. Only putting more people back to work can provide the type of broad-based income boost that the economy needs.

From a jobs perspective, employment trends are especially significant on a local level. After all, most people don't look for jobs nationally -- they tend to focus on their local area. State-by-state employment trends help people know whether conditions in their area are getting better, or if they should consider relocating.

State-by-state job trends can also tell you something about local banking conditions. A healthy job market is key to supporting a healthy housing market, which in turn is likely to mean mortgages are easier to obtain. Also, job growth indicates business expansion, which creates the type of thriving lending environment that gives banks the incentive to offer higher interest rates on savings accounts.

On a state-by-state basis, recent employment trends have been a study in contrast. The good news, though, is that there are still more states where jobs are growing rather than shrinking.

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Faceplant: 4 lessons from the Facebook IPO

May 24, 2012

| MoneyRates.com Senior Financial Analyst, CFA

The Facebook IPO is shaping up as one of the biggest opening flops in stock market history. By the end of its third day of trading, the stock was down by more than 18 percent from its initial offering price, and regulators were investigating amid accusations that the investment bankers did not fully disclose concerns about the company's earnings.

Whether or not there was any wrongdoing, the reasons for the Facebook flop are understandable. In many ways, this is an echo of the dot-com bubble of the late 1990s, when emotion triumphed over logic for long enough to drive Internet stocks to prices that could only fall.

This time around, though, there is an added element. The low interest rates that have made the last few years miserable for people in savings accounts and other deposits have also played a hand in stirring up stock market risk.

Here are four lessons from the Facebook IPO:

  1. The business model matters. Facebook has done a tremendous job in accumulating users around the world and holding their attention. However, they have only just begun to realize the revenue potential of their audience. This is consistent with the Internet-based approach: draw people in with a non-commercial offering, and then steadily introduce revenue-producing elements. The problem is, that transition isn't always seamless, as users sometimes balk at those commercial elements. As an investment with a still-evolving business model, Facebook was bound to be somewhat risky.
  2. Valuation matters. No matter how great the company, the price you pay will determine the return you get. Facebook's initial offering price of $38 per share was about 88 times its earnings over the past 12 months. That means the company would need six-fold earnings growth just to support that price at a more normal valuation of around 14 or 15 times earnings. In other words, explosive growth wouldn't be a win -- it would be just enough to support the initial price. That's setting the bar for success awfully high.
  3. Low interest rates exacerbate risk. Stocks are commonly valued using mathematical models with interest rates as the denominator. That means today's low interest rates drive those valuation models higher, making the market generally riskier.
  4. Hype is hazardous. You didn't need to understand business models or valuation formulas to sense the hype that preceded Facebook's IPO. Buying into such hype is always going to be risky. Just look at last year's most hyped Internet IPO, which was Groupon. Its price has fallen by more than half since it went public late last year.

Getting back to the low-interest-rate issue, this environment heightens risk beyond just what it does to stock valuation models. Low interest rates have many people desperate for alternatives to savings accounts, money market accounts and CDs. The Facebook experience is a reminder that searching for extra return may well lead you into a whole new realm of risk.

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Inflation report offers good news -- with a catch

May 17, 2012

| MoneyRates.com Senior Financial Analyst, CFA

The Bureau of Labor Statistics (BLS) announced Tuesday that there was no inflation overall in April. This is good news, but the reasons behind it may not be so good.

The BLS announced that the Consumer Price Index (CPI), the most widely followed index of U.S. inflation, was unchanged for the month of April. Inflation is always a force to be reckoned with, and in an era of low pay increases and virtually non-existent interest rates on savings accounts and other deposits, most household budgets are especially sensitive to inflation. So, seeing inflation simply not show up for a month is a bit of a relief.

But there is a catch to this good news.

The latest inflation trend

The unchanged CPI for April marked the first 0 percent monthly inflation reading so far in 2012. Prior to that, inflation was starting to look as though it might be a problem this year. Inflation increased by 0.9 percent in the first quarter, which put it on pace to rise by more than 3.6 percent for the full year. That's not extraordinary by historical standards, but certainly an out-sized threat given the extraordinarily low level of interest rates today.

Instead, inflation cooled off in April. As a result the year-over-year inflation number dropped to a moderate 2.3 percent. That's still more than enough to wipe out a couple year's worth of savings account interest, but if April's reading marks a turn in the inflation trend, prices may ease even more.

The influence of oil

For better or worse, the key driver of inflation so far this year has been the price of oil. When the combination of Middle East tensions and economic optimism sent oil prices soaring earlier this year, it was the biggest factor in pushing the CPI higher. However, April saw the price of oil influence the CPI in the other direction.

Overall, the energy component of the CPI declined by 1.7 percent in April, meaning that while prices overall were flat, energy prices were actually falling. Gasoline prices fell by even more, dropping by 2.6 percent in April. Based on developments so far this month, it looks like the trend of falling energy prices could continue in May, taking even more pressure off of inflation.

Here's the catch

Given the star-crossed nature of the U.S. economy in recent years, it is almost inevitable that there should be a catch to this piece of good news, and here it is: Oil prices are falling in large part because of growing pessimism about global economic growth.

For workers looking at minimal pay increases and retirees getting barely any interest from their savings accounts, seeing the level of inflation subside should be a relief, but it also means those pay raises and interest rates aren't likely to get bigger any time soon. Still, half a loaf is better than none -- and in this economy, half a loaf is all that many can afford.

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Would you change banks for a Mercedes?

May 10, 2012

| MoneyRates.com Senior Financial Analyst, CFA

It's nothing new for banks to offer gifts to new customers -- a free toaster is the age-old example. However, a bank in Florida has come up with something a little sexier: a new Mercedes in exchange for opening a 5-year CD.

As is often the case with flashy promotions, this one isn't quite as good a deal as it sounds. However, it does say something about today's low-interest-rate environment.

Devil in the details

It's true -- C1 Bank in Florida is offering customers the option of receiving a new Mercedes when they open a new account. But, before you get excited, consider some of the details of this offer.

First of all, it only applies to customers who open a $1 million, 5-year CD. That puts this deal out of reach of the vast majority of bank customers.

Second, the Mercedes isn't exactly a gift. It actually represents the pre-payment of interest on the 5-year CD. In other words, you are exchanging five years of interest on $1 million for a new Mercedes.

There can be some economic value to getting your interest paid in advance, but there is a third catch to this deal. The C1 Bank 5-year CD pays a 1.20 annual percentage yield. That's not bad when 5-year CD rates nationally are averaging 1.10 percent, but you could do even better by shopping around.

The fourth catch is an unusually heavy penalty for early withdrawal. Most CDs will penalize you a portion of your interest if you take your money out before the CD matures. Since this C1 Bank offer effectively pays you your interest upfront, if you want to withdraw your money early they will not only reduce your principal by the purchase price of the car -- effectively confiscating all five years of interest -- but they will also tack on an additional $3,000 penalty.

What it says about CD rates

C1 bank has come up with an attention-getting gimmick, but it is far from certain that anyone will actually take them up on the offer. Still, it is an interesting symptom of the low-interest-rate environment.

With 5-year CD rates barely above 1 percent, the C1 deal attempts to make a low interest rate more attractive, simply by demonstrating what could be bought with five years of interest -- if you have a million dollars to deposit.

This deal is also symptomatic of low interest rates on CDs in what it says about the bank and any customer who would take this deal. For the bank's part, being willing to pay interest in advance indicates just how diminished the time value of money has become with rates so low.

As for the customer, locking into a 5-year CD with such an onerous early-withdrawal penalty would demonstrate a belief that the low-rate era is here to stay. On balance, though, the customer would be better off with a toaster -- if it also came with old-style CD rates.

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Manufacturing and exports show signs of strength

May 3, 2012

| MoneyRates.com Senior Financial Analyst, CFA

After a string of disappointing economic reports in April, May began with an encouraging report on U.S. manufacturing growth. One of the few strong points in the first quarter GDP report may also be related to this recent strength in manufacturing, which could represent a sustainable source of progress for the economy.

The question remains, though: Will this be enough to break the economy out of its rut?

Escaping the rut

The recent economic rut represents more than just the dreary series of economic reports that appeared in April -- disappointing employment growth and weak GDP figures among them. Although the economy technically escaped from recession in the third quarter of 2009, for most of the time since it has been in slow-growth mode. Real GDP growth has reached a 3 percent annual rate just once in the past seven quarters.

The signs of the rut are everywhere. Nearly three years into the economic recovery, unemployment is still high. Interest rates, from savings accounts to treasury bonds, are anemic. The stock market's progress comes in fits and starts, and investors are so cautious that they seem almost to be walking on egg shells.

Manufacturing rises

Against this dreary backdrop, a May 1 report on the manufacturing sector provided some welcome good news.

The Institute for Supply Managers announced that its manufacturing index rose to 54.8 in April, up from 53.4 in March. That's the highest level in 10 months, and pushes the index more firmly into the above-50 territory that represents an expansion.

The manufacturing report takes on special significance because it is one of the first major economic indicators for the month of April. Following generally disappointing reports for March, economists are looking anxiously to see if the economy is sliding again toward recession.

Exports provide a source of new demand

One reason for the strength in manufacturing may be found in the first-quarter GDP report. Although overall GDP growth was lackluster, one bright spot was export growth. The Bureau of Economic Analysis reported that real export growth was 5.4 percent in the first quarter, up from 2.7 percent in the fourth quarter of 2011.

Foreign markets have mostly been a cause of concern lately, with a focus on the troubled economies of Europe. However, if large developing economies such as China and Brazil can sustain their growth, it could help demand pull through the current malaise.

What to watch for

Will the strength in manufacturing lead to more jobs, higher rates for savings accounts and a more reliable stock market? The stock market rallied on the news about the manufacturing index, so that's a start. It will take much longer before this translates into higher rates on savings accounts, but in the meantime, the next key sign for the economy will be if the job market firms up after its March stumble.

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