I hope you had a Happy Thanksgiving. I had intended on sending this out prior to the holiday, but as events in Europe unfolded I thought it would be more helpful to wait until things reached a turning point and provide our views on the situation. The lead article below in this month’s newsletter does just that, and in it I summarize where things stand, where they are likely to go from here and the likely impact on the global economy.

The tip of the month deals with something many clients enjoy – travel – and how one can find real value in credit card rewards programs that can be redeemed for travel. Finally, in the question of the month we examine the pitfalls of trying to squeeze higher returns out of what should be safe portions of your portfolio like the emergency fund and short term cash.

As always, we welcome your thoughts and feedback, and if you feel that this newsletter would be helpful to friends or family, please forward it on.

Best regards,
Micah Porter, CFA, CFP®

An Update on Europe
Micah Porter, CFA, CFP®

Thanksgiving – at least the Thanksgiving that falls on the 4th Thursday in November – is a uniquely American holiday. So, while most of us here are preparing for a meal with family and friends, the rest of the world is at work. The European markets were no exception, and the news there left little room for thankfulness, although as I mentioned in last month’s newsletter, politicians do seem to be slouching their way towards a solution.

One of the truest indicators of market concern is the relative rate a country must pay to entice investors to purchase its bonds. On that score, at an auction of 6 month bonds on Friday, Italy was forced to offer investors just under 7%, or nearly twice the rate required a month ago. Even more surprising, Germany – ostensibly the most fiscally sound of European economies – was forced to purchase over a third of the bonds it tried to auction earlier in the week. While Italy is not the first country in the periphery to see rates demanded rise sharply, Germany’s auction is sign that the core European countries aren’t immune to investor skepticism.

The German auction may however turn out to be a blessing in disguise, as it has been the Germans that have been the most intransigent in allowing either European Central Bank intervention of the issuance of Eurobonds. Their stance is somewhat understandable – after all, they have managed their finances well – why should they be on the hook for bailing out the more profligate countries? Still, German’s bond auction makes clear that in the event of the failure of the Euro, the Germans will be heavily impacted as well.

The path that, at this point, looks most likely is that European member countries will agree to accept legally binding oversight of their budgets, and in exchange Germany will soften its opposition to collective backing of member nation debts. The time for doing this is short, however, as each previous half measure politicians have proposed has frittered away investor confidence. The next European summit is on December 9th, so much of the framework will need to be in place by that point.

Such a rescue probably won’t prevent a European recession as it’s likely that one has already begun, but it will stem the drag on non-European economies that are currently being impacted. Central banks outside Europe are beginning to ease rates, and U.S. economic data, although still sub-par, is generally continuing to come in at or slightly above expectations. Lastly, there are signs that Congress will find a way to extend the payroll tax cut and unemployment benefits. Given the foregoing, if Europe can address its problems, we may skirt a recession and continue to see slow growth.

Financial Planning Tip – Credit Card Rewards Programs and Traveling in Style
Micah Porter, CFA, CFP®

I am a bit of a nervous flyer, but for some reason being at the front of the plane in the larger business class seats seems to help. Until the last year or so though we didn’t typically fly business given the cost. However, over that timeframe, I’ve discovered the value of frequent flier points, and more specifically, the value of credit cards that allow you to accrue frequent flier points.

I’ll readily admit it’s unusual for a financial advisor to tout the value of credit cards, so let me begin with this dictum:

If you don’t pay off your credit card at the end of every month, any points you accrue likely aren’t worth the interest that you pay.

So, the bottom line is that if you must carry a balance from time-to-time, there are likely cards out there that offer better terms. However, for those of you that do pay off your cards every month and like to travel, such cards and the associated airline rewards programs can provide real value.

I first began paying attention to these cards when Jennifer and I traveled to the Olympics last year. We were able to fly business class – and my nerves were the better for it – on points that I had earned on my American Express card. As I began to look into the various cards and rewards systems, I realized that I could readily accrue frequent flier miles and hotel points even though we travel infrequently. Further, I found that some cards and programs were much more lucrative than others. Here’s a bit of what I learned:

  • Credit card companies regularly offer new incentives for those applying for a card for the first time, or for those upgrading from one card to another. Typically, those incentives are based on spending a certain amount on the card in a set amount of time. For example, American Express recently had a card offer that awarded 50,000 points if you charged $1,000 to the card in the first five months.
  • Different cards offer different reward amounts depending on what you’re purchasing. Chase Sapphire Preferred card, for example, offers double points when you use the card for dining purchases.
  • The various card programs have their strengths and weaknesses. Some may be better for hotel rewards, others for airlines and so on.
  • Airlines will provide transfer bonuses from different card rewards programs. For example, Delta recently offered a 50% bonus for points transferred from American Express. Thus, transferring 50,000 points would accrue 75,000 miles.
  • Different airline frequent flier programs will often charge widely different amounts for flights on the same route.

Working your way through the various card, hotel and airline programs can become very complex. However, for those of you who  enjoy  travel, understanding the programs and using them to your benefit can be very lucrative. Recently, Jennifer and I were considering a flight to Europe and I found that for a combination of points and $2,000, we could have gotten two business class tickets from Atlanta to Madrid. The total cost had we paid without points was nearly $9,000, so the points provided a substantial savings.

As I said above, however, working your way through the rules can be challenging and obviously, anyone applying for new credit cards should be cognizant of the impact on their credit rating and also be prepared to deal with managing additional credit cards. However, for those of you who like to travel and pay off your credit cards monthly, it can be well worth your time. Two sites that I’ve used a good deal are thepointsguy.com and flyertalk.com. Both provide a wealth of information regarding how they various systems work and what the best offers are at any given time. I’ve found both to be very helpful in traveling well without paying top dollar to do so.

Question of the Month – Can I Earn a Better Return on the “Safe” Portion of my Portfolio?
Micah Porter, CFA, CFP®

One consequence of the Fed’s monetary stimulus is that the lower interest rates they are targeting have broadly impacted the fixed income universe. As a result, investors are turning to riskier investments or longer term investments to increase return. Taking on additional risk or investment term is fine as long as your investment needs match the type of investment you are choosing. If, on the other hand, you choose to invest your emergency fund in high yield bonds just to increase returns, things might not end up so well.

The most recent issue of Kiplinger ran an article under a headline promising a 7% yield tax free. The investment they were touting was actually closed end bond funds that invested in municipal debt. Some of you might remember that several years back, we used a fund in our portfolios that invested a large portion of its stake in precisely these types of funds. Unfortunately, when the market dislocation became most acute in 2008, the value of many of these funds dropped precipitously, primarily driven by the fact that institutional investors sold these funds to raise liquidity. The fact that there were no counterparties of similar size to buy the funds led to the sharp price drop.

While it’s unlikely that we’ll revisit the worst of the 2008 crisis, the point is that these investments are risky – and that’s one of the big reasons returns are what they are. Higher return rarely comes without greater risk or a greater term for which the investors funds must be committed. Certainly, great investors can find investments that offer greater return than one would expect for a given amount of risk or time commitment, but those investments aren’t typically going to be found under 24 point bold headlines.