Savers Ignore Economists’ Rate Ideas
A lot of highly paid economists believe that interest rates are going lower. A lot of average-Joe savers believe that rates are going higher--if not right away, then soon enough.
The difference between the two groups is that the savers are putting their hard-earned money on the line.
Check out the accompanying charts. The sum of small time deposits at banks and S&Ls--basically;, certificates of deposit under $100,000 of any term--has been falling like a stone this year.
Since early January, the small time deposit total has dropped from $1.165 trillion to $1.144 trillion nationwide, a cool $20 billion.
Meanwhile, the amount in passbook savings accounts has jumped by $20 billion this year, after languishing at the $412-billion level for all of 1990.
Passbooks pay around 5% at most banks and S&Ls.; That’s even less than the cheap rate paid on money market deposit accounts, the hybrid checking/savings accounts that banks and S&Ls; use to compete with money market mutual funds. Bank Rate Monitor, a newsletter that tracks savings rate, says the national average rate on money market deposit accounts is 5.22%.
The only advantage of the passbook is that it’s simple and mostly comes without strings attached--you can get your money out quickly. And that’s apparently all that matters to a lot of savers who see no attraction now in locking into annualized yields of 6% or less on six-month or one-year CDs.
Nationally, Bank Rate Monitor says the average yield on one-year CDs is 6.22%, down from more than 8% a year ago. Southern California banks, meanwhile, generally are offering yields below the national average--closer to 6%, according to The Times’ weekly rate survey. S&Ls; in the region mostly pay better than the average, with many offering around 6.3%.
In any case, 6% just isn’t cutting it with many savers across the country. Those who have decided against rolling over maturing CDs into new ones probably figure it this way: If the bank is going to pay me just 6% on a one-year CD, and I can get 5% in a passbook, I may as well just keep the cash liquid and wait for rates to turn up again.
After all, if the economy starts recovering later this year, and demand for loans rises, so too should short-term interest rates.
Even if rates don’t rise until early next year, many savers figure that they can hang on until then with the 5% passbook. Even money market mutual funds aren’t paying much better than a passbook today: The average money fund yield is about 5.6%.
“It makes sense,” says economist Dan Thornton at the Federal Reserve Bank of St. Louis. “When the differentials (between short-term rates) get this small, people figure they’ll just wait it out.”
Bank Stock Bull: Friday’s column suggested that the party is nearing an end for big-bank stocks, many of which have leaped 40% or more this year.
But don’t lump the risky mega-banks with their brethren at the mid-sized level, says Carl Dorf, who manages the Pilgrim Regional Bank Shares investment fund in Los Angeles.
The share price of Dorf’s fund has jumped to $8.875 from a low of $6.125 last year, a 45% gain. The $93-million fund, started in 1986, invests mostly in stocks of small to mid-size banks around the country.
Dorf came to the fund in January after two decades of running money for numerous other big-buck operators--including a stint in the 1970s with CBS Chairman (and savvy investor) Larry Tisch.
So far this year, many of the biggest gainers among bank stocks have been lower-quality banks, which have been boosted by investors speculating on a major earnings turnaround in 1992.
Dorf takes a different tack: “We’re trying to buy the better-quality banks,” he says, figuring that they’re the long-term survivors. He wants banks that have:
* Relatively low levels of nonperforming loans and high reserves against problems that have already cropped up.
* Low exposure to commercial real estate and construction loans.
* Above-average capital levels--the financial cushion that carries a bank through tough times and is the base for future growth.
Where do you find banks like those? Mostly in the Midwest, says Dorf. His major holdings include Security Bancorp in Michigan ($29.25, OTC), Commerce Bancshares in Missouri ($29, OTC), Fifth Third Bancorp in Ohio ($50, OTC) and First Security Corp. in Utah ($36, OTC).
The best-capitalized regional banks put investors in a win-win situation, Dorf figures. If Congress passes legislation this year to allow nationwide banking, as seems likely, many banks are going to become takeover candidates.
The best-capitalized regionals will be in the best shape to buy other banks, especially the weaklings that regulators will want to push into stronger arms at bargain prices, Dorf says.
The flip side is that a strong capital base “also makes you much more attractive to a potential acquirer,” he says.
For the banking business overall, “consolidation in the long-term will be healthy,” Dorf says. “There are just too many banks”--about 13,000 nationwide, not counting S&Ls.;
“As the industry consolidates, over time you’ll have an improvement in profit margins” for the survivors, he says. Over the next five years, he thinks that most of his banks can grow earnings at an 8% to 12% annual rate.
That may not sound terribly exciting, but with dividend yields on most of these stocks in the 2.5% to 4% range, annual total return potential could be comfortably close to or above double digits--that is, if Dorf is right about his regionals emerging as key players in the business in the mid-1990s.
The Pilgrim fund trades on the New York Stock Exchange. It is a closed-end fund, which means that the stock price can trade above or below the actual per-share value of the fund’s assets. Lately the stock has been trading right around the asset value.
Briefly: The board of Torrance-based Standard Brands Paint Co. will meet this week to set a new annual meeting date. The ailing paint retailer’s meeting was supposed to take place last Friday but was canceled. Standard Brands is embroiled in a proxy battle with a large investor who owns 16% and with its own employee union. The outcome is almost impossible to call. The stock closed at $8.25 Friday, up $1. . . .
Benham Capital Management, the Mountain View, Calif.-based mutual fund firm that made a big name for itself in the 1980s managing $7 billion in money market and bond funds, has opened its first broad-based stock funds. The two--a growth fund and an income-and-growth fund--will be managed the same as Benham’s money market and bond funds: The firm uses computerized investing models to tell money managers when to buy and sell. Benham says it spent two years testing the stock fund concepts on its computer before bringing them to market. . . .
Following the smashing success of stock sales by national telephone companies in Chile and Mexico, investors worldwide may soon be able to buy stock in another phone monopoly: Pakistan is said to be mulling the sale of stock in its national telecommunications firm. . . .
Just-What-We-All-Needed Dept.: Holliston, Mass.-based investment adviser Adrian Van Eck, editor of the Money-Forecast Letter, tells subscribers to “stand by for a New Depression!”
