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Duke Energy PremierNotes: An awful, awful product

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IF YOU HAVE EXTRA MONEY, DUKE ENERGY WOULD LIKE SOME OF IT: We don’t even remember how, but in the course of our internet wanderings we came upon this page promoting something called Duke Energy PremierNotes. This is a utility company offering consumers something like a money market account or checking account, except not as good, and you should stay far, far away from it.

There are two things you need to know about PremierNotes:

  1. They offer slightly higher rates than you can get from a savings account.
  2. They are not FDIC-insured.

Obviously there’s nothing wrong per se with investments which are not insured by the FDIC. The question is, does the additional reward offset the risk? How much higher are the rates on this investment vehicle vs. other liquid accounts?

premiernotes

That’s not very high. By way of comparison, here are the CD rates at Ally Bank:

ally CDsNote that if you pull your money out of the Ally CD before it matures, the penalty is only 60  days’ interest. So at Ally, you’re making an equivalent interest rate AND you’re federally insured AND there’s not a $50,000 minimum.

How risky is Duke Energy? As per their investor page, Fitch has them at BBB+, Moody’s has them at Baa2, and S&P has them at BBB+. In other words, they are just above a junk bond rating. If you want to invest in junk bonds, then invest in junk bonds–but do so by actually buying the bonds, preferably via a low-cost index fund or an ETF so that you’ll diversify your risk. Your rate of return should be several percentage points higher that the meager gruel served up by Duke Energy.

The Duke Energy PremierNotes pay you much, much less than they ought to given the level of risk you’re assuming. Why do they offer this product? Because they can. Because people without the inclination or the ability to think about their investments hand over their money to a trusted name.

What people are investing in this awful product, you ask? We’re not sure, but we did notice that Duke Energy PremierNotes has an “Employees and Retirees” page. According to BusinessWeek:

“I like to call them a bond with a checkbook,” said John Heffernan, director of the PremierNotes program at Duke Energy. “The unique thing about this is we’re selling them directly to the investors.”

Duke Energy started offering floating-rate notes to individuals about a year ago [Ed: this article is from June 2012], marketing them first to employees and through billing inserts to customers before advertising in newspapers, Heffernan said in an interview. The amount of debt outstanding through the program increased 59 percent to $126 million as of March 31.

$126 million! Odds are they won’t lose their money, but… it’s not worth the risk. Shame on you for offering this product, Duke Energy.

CHINA EXPORTS DECLINING: An interesting graph from Caitlyn at The Big Picture:

An explanation of what’s going on here:

China’s external sector is probably expanding much more slowly than overall export growth implies. Have a look at “unusual surges” in China’s “reported shipments to Hong Kong.” It seems the entire country is either channel stuffing or dumping goods or ever cooking books via inflated invoices. Another thesis is that Exporters are “repatriating capital through export transactions rather than through traditional methods” to avoid Mainland’s controls and/or taxes.

As Bloomberg Brief points out,

Chinese exports to Hong Kong jumped 93 percent year-on-year in March, while annual growth has averaged more than 50 percent since September. Hong Kong now accounts for 27 percent of China’s total monthly ex-ports, compared with less than 16 percent prior to September. None of China’s other major trading partners saw growth of this magnitude.

Odd stuff going on over there…

ONE LAST THING BEFORE WE LEAVE: Enter the code 10APRIL for $10 off a $100 order at homedepot.com (H/T: Slickdeals).

PenFed mortgage refi, office supply sales, traveling to Saudi Arabia, and a Lehman refugee

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PENFED MORTGAGE REFI: Starting on a personal note, we just did a mortgage refi with PenFed–specifically, their 5/5 ARM deal wherein they pick up all the closing costs. It was a little on the slow side, but they were true to their marketing pitch: they indeed picked up all of the closing costs, they didn’t hit us with any funny fees, the documentation process wasn’t too bad, and we’re now paying 2.75% on our mortgage.

OFFICE MAX 20% OFF / STAPLES PAPER TOWEL SALE: Via Slickdeals, a couple of office supply deals. First, Staples is having a very good sale on paper towels, so it’s a good opportunity to stock up. Second, here’s a coupon for 20% off your OfficeMax purchases, or you can use the code ‘SAVE20’ when ordering online.

HOW TO TRAVEL TO SAUDI ARABIA: Via Rapid Travel Chai, who’s got an upcoming trip there, we were referred to an interesting account from Matthew at Upgrd on his experience getting a Saudi Arabia transit visa. Saudi Arabia is pretty restrictive about letting Westerners into the country, but Matthew persevered and made it. Here are a bunch of pictures he took in Jeddah–we had no idea Krispy Kreme had a presence there.

Courtesy of Live and Let’s Fly at Upgrd.com

“MY TIME AT LEHMAN”: Via Barry Ritholtz, we found a nice read by Nicholas Chirls, a former Lehman employee. Check this out:

Investment banking was a default career of sorts in 2007, something for the kids who didn’t quite know what they hell they wanted to do, and there were plenty of jobs being given out back then.

Investment banking a default career! How screwed up is that? The fact that it’s a default career tells us this individual went to either Harvard or Yale. Or maybe Columbia, who knows.

I was later told that of my class of 1400 graduates from Yale, forty percent took jobs in finance. No joke.

Yale it is… but enough about that. The crux of the article:

Unfortunately, what I eventually came to learn, and this took time, was that what was really happening was a simple transfer of wealth, more often than not from the less intelligent and informed to the more so… these traders (or salespeople) could buy bonds at the “market” price from intelligent hedge fund managers in NYC and sell this same crap at much higher levels to unsophisticated (but legally considered “sophisticated”) pension funds and insurance companies in middle America. What I discovered, quite starkly, is that the part of Wall Street that I worked in was simply transferring wealth from the less sophisticated investors, often teachers’ pension funds and factory workers’ retirement accounts, to the more sophisticated investors that call themselves proprietary trading desks and hedge funds. Of course, the traders had all sorts of excuses and jargon to deal with this truth. “Oh no,” they would say, “We are important providers of liquidity that create stable financial markets. We’re a crucial part of a system. And besides, if we don’t do it, someone else will.” These are the lies that people tell themselves so that they can buy larger homes.

Damning stuff, but it’s pretty much how we understand the game works. And kudos to Chirls, both for getting out of that industry as well as for writing honestly about it.

Mortgage interest deductability, a $60K/yr panhandler, and point valuation

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MORTGAGE INTEREST DEDUCTIONS: Since it’s tax season, it’s probably good to have a reminder that mortgage interest isn’t always as deductible as you think it is. My Money Blog gives some good points in the course of a longer post discussing whether or not it’s wise to prepay a mortgage:

    • In order for paying off your mortgage at 4% to get you the same net return as an investment earning 4%, the assumption is that your mortgage interest is 100% tax-deductible while your potential investment is to be taxed at your ordinary income tax rate. That way, the taxes cancel out.
    • Mortgage interest is only tax-deductible if you itemize. However, the standard deduction in 2013 is $12,200 for married filing joints and $6,100 for single filers. This is the amount that anyone can deduct. Let’s say your mortgage is for $250,000 and the interest rate is 4%. That’s $10,000 in interest annually. So far, the married folks have no tax benefit at all! You would need a lot of other deductions like state income tax, property tax, and charitable contributions to push you over the hump. For example if you have $7,200 in other deductions, then only $5,000 of your $10,000 in mortgage interest is actually saving you anything extra in taxes. I call this 50% deductibility.
    • In addition, as you pay down your mortgage over time, your interest paid will decrease and make it gradually harder to itemize.
    • On the flip side, if your investments are stocks, then your long-term capital gains tax rate may be lower than your ordinary income tax rate.
    • The ability to avoid some taxes and thus increase your effective return is also why it is generally advised that you shouldn’t pay extra towards your mortgage unless you’ve maximized your tax-advantaged accounts (401k, IRA) and definitely any 401k employer match. An employer match is often a 50%-100% instant return, so you definitely can’t leave that on the table.
    • Bottom line: People think their mortgage interest is saving them lots of money in taxes, but it often isn’t. Each person should add up their other deductions and figure out their own percentage of deductibility.

A SELF-EMPLOYMENT SUCCESS STORY: We’ve written a lot about issues with college and graduate school, but maybe grads just aren’t thinking outside the box enough. Case in point: an Oklahoma City panhandler, Shane Speegle claims to have made $60,000 last year. As the article points out:

 A $60,000 salary puts Speegle in the average-income realm of architects, appraisers and computer programmer analysts, according to careerbuilder.com. It also puts Speegle comfortably above the U.S. median household income of between $49,434 and $51,413, BusinessInsider pointed out.

The best line of the article comes from Speegle himself: “I’m lazy and I made $60,000.” The man is living his dream, folks.

POINT VALUATION: Lucky at One Mile At A Time has a good post discussing valuation of points in the Amex Membership Rewards, Chase Ultimate Rewards, and Starwood programs. His estimates are 1.8 cents, 1.8 cents, and 2.2 cents per points respectively.

Amex has gone up slightly in his opinion thanks to the ability to redeem for Singapore Airlines suites (A double bed on a plane? Oh, yes.) and transfer bonuses to the awesome British Airways Avios program. UR remains valuable on account of United and Hyatt redemptions, while Starwood retains its value despite the recent hotel devaluation since they can be transferred into a great selection of airlines. For example, you can spend 70,000 Starwood points to go roundtrip from New York to Dubai on Emirates business class by redeeming Japan Airlines miles–and Starwood is JA’s only major transfer partner.

Frugal Travel Guy also has some new point valuation work up. Conclusions: Starwood points are worth 2.3 cents, while Hyatt points are worth 1.9 cents.

A BLOG WORTH CHECKING OUT: Thanks to a poster at Fatwallet, we’ve discovered Oddball Stocks, which we’ve enjoyed reading so far. Blogger Nate Tobik does high-quality write-ups of off-the-beaten-path stocks you’re not likely to hear about anywhere else. If you’re into that kind of thing, give it a look.

How to get a free one-way flight!

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FLY FOR FREE: Did you know that you can get a free one-way flight appended to your frequent flyer redemption? We didn’t. Courtesy of Point Me to the Plane, we found a presentation from Scott at milevalue.com which explains how this works and how you can make your redemptions 50% more awesome. Even if you don’t have miles to redeem, you should take a look–we are always inspired by clever way of exploiting loopholes.

TIME-LIFE OPERATORS ARE STANDING BY: Frugal Travel Guy discusses a question which probably isn’t discussed as much as it ought to be: is it worth it to take so much time to rack up frequent flyer miles, chase deals, cut coupons, track bank bonuses, and so on? One thing we like about his take is that he spends a good deal of time dicussing Pudding Guy. If you don’t know who he is–well, you really should, so please do pay attention. As FTG summarizes the story:

Once upon a time, while doing his routine grocery shopping, David noticed a promotion that Healthy Choice foods was running. For every ten UPC codes he mailed in, he’d receive 1,000 frequent flyer miles in the program of his choice. When he realized that an individual pudding cup actually had its own UPC code, and only cost 25 cents, he raced into action. He cleaned out his grocery store, then upped the ante by jumping in a van and emptying out every single Grocery Outlet in California’s Central Valley. If you lived in Sacramento or Modesto, and had a hankerin’ for some pudding on that May weekend, you were out of luck – David owned it all. He had cornered the pudding market, turned himself into a modern-day Pudding Rockefeller. With a little help, he cut off all the UPC codes from 12,150 individual pudding cups, and when the custard settled, David had earned a total of 1,253,000 miles, for about $3,150 in cost, not including his tax write-off for donating the pudding to charity. And thus, he was elevated into the Pantheon of Miles Godhood. The story made national news. It actually partially inspired an Adam Sandler movie.

In this case, it’s a no-brainer–a weekend spent hoarding pudding is definitely worth a million miles and lifetime gold status. But FTG makes the point that you have to consider not only the value of your time but the opportunity cost of it as well. We here at PFD see deals we’d like to go after but darn, there aren’t enough hours in a day. There’s a particular deal we passed up for time reasons involving cash for 20% off at Best Buy which has been eating at us–more on that in the future. Alas…

In a similar vein, Jim Wang at Bargaineering reminds you that time is your most valuable asset. If you have kids, you probably already know that, but it’s good to be reminded of it all the same.

HEALTHY, WEALTHY, AND SLEEPY: Honestly, this stuff bores the heck out of us, but we feel obligated to educate ourselves about healthcare costs because whereas in the past healthcare was expensive and complicated, it now stands to be expensive and more complicated. So let’s buckle down and eat our personal finance vegetables, shall we? Kristin Wong at Get Rich Slowly explains what’s the deal with Health Savings Accounts. If you’re young and healthy have a look, but if you have kids who get sick regularly, you might want to skip this one. Miranda Marquit at Bargaineering lays out the details of the new Medicare tax coming in 2013. It only affects The Rich, defined as: “modified adjusted gross income (MAGI) that exceeds $200,000 for those who are single, $125,000 for those who are married filing separately, and $250,000 for those married filing jointly.” (Does anybody else tend to get sleepy when they read the words ‘modified adjusted gross income’? Is that just us?)

AND STAY OFF MY LAWN TOO: Justin at Young and Thrifty would like to remind you youngsters that owning a house can be a drag on your career. He’s absolutely right as it’s important to be mobile when you’re younger–making a few strategic jumps can give you big boosts in salary and responsibility early on.

CONFIRMATION BIAS: It’s not, strictly speaking a financial topic, but it’s very relevant to your financial being. Seriously, if you only learn about one cognitive bias in your life, you should learn about this one. Trent at The Simple Dollar explains what it is and how it affects your decision making. The Wikipedia entry is pretty good too. Our own summary of what you should know about confirmation bias: you will make better decisions by trying to prove yourself wrong than by trying to prove yourself right.

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