Beating the Fed’s Low-yield Racket
While in the midst of a recent morning routine of protein nourishment with frequent palate cleansing of espresso, I was swept into a vocabulary adventure. As I suspect many of you reading this also do, I was making the rounds of my favorite blogs. Clicking my way onto James Howard Kunstler’s always-colorful weekly posting, my eyes, passing over the prose, came to a screeching halt at the word “malaprop.”
A quick visit to Wikipedia informs that a malapropism is the misuse of similar sounding words – often to a humorous end. “What are you incinerating (insinuating)?” and “He’s a vast suppository (repository) of knowledge” are two fine examples.
To those I would add “The Fed’s continued accommodative (accumulative) policy,” because there is little about this policy that accommodates those struggling to earn a fair return on their savings. And this malapropism leaves millions as the butt of a very cruel joke.
ZIRP or RICO?
Today’s ultra-low interest rates have been disconnected from the free market discovery process, and are instead hostage to a syndicate of central banks that set interest rates via edict. ZIRP (zero interest rate policy) is an accumulative policy whereby the banks benefit from borrowing short (at next to zero interest) and lending long (at a nice spread) – and accumulate the difference. And the difference is stolen from the pockets of the prudent class of savers.
The interest rate scheme looks suspiciously like a racket. Under the RICO Act (Racketeer Influenced and Corrupt Organizations), a racket is understood as a business (central banks are private, for-profit businesses) or syndicate that is engaged in the sale of a solution to a problem that the institution itself creates, with the intent to effect continual patronage.
The Fed is engaged in a ZIRP solution to the fall-out from the 2008 financial crisis, itself the product of the US housing finance bubble that the Fed conspired to create and fully orchestrated its ascent. We are all “buyers” of the solution and are paying through forfeiture of a market-driven yield on our wealth.
And while we’re at it, let’s throw in conspiracy. The unfolding Libor scandal has stripped naked the illusion of a fair mechanism that determines the base interest rate off of which trillions of dollars of loans are priced. The banks that set the daily Libor “fixing” were themselves making bets linked to the Libor rate and then fraudulently manipulating its direction to their benefit.
Continual patronage? Central banks are monopoly institutions. ‘Nuff said.
As troubling as the above is, it is beyond our control. Low rates will be with us through at least 2014 per the latest Fed announcement released last week regarding its monetary accumulative policy.
As investors, what remains in our control is the pursuit of higher yields offered by many of today’s securities that pay a dividend. Within this segment of stocks is an often overlooked subset: the ADRs of international companies that list on US exchanges.
Although it is advisable to buy the shares of a foreign stock on its home exchange, many investors are uncomfortable with the idea. For self-directed investors in particular, buying shares on an exchange outside of North America may not be offered by your current discount
broker. And if foreign stock trades are available, the service can come with exorbitant fees and commissions.
There are many international companies with solid businesses and steady cash flow that sell at good valuations and also offer decent yields. For the investor seeking easy access to international markets and stocks that offer CD-busting yields, don’t forget to consider the world of ADRs.
The hunt for yield is more accurately phrased as the hunt for after-tax yield, or more accurately still, the yield after taxes and fees. That is especially true for an ADR.
In 2009, the Depository Trust Company (DTC) gained SEC approval to begin collecting custody fees on behalf of the agent banks that provide the custodial services on behalf of the ADR. The DTC collects the fees from the brokerages that hold the ADRs for their clients. For example, if you purchase and hold an ADR with Schwab, Schwab will assess the fee against your account and pass the fee onto the DTC. This is known in the industry as a pass-through fee.
Prior to 2009, the fee was deducted from the dividend paid by the ADR. However, not all ADRs pay a dividend, and hence the 2009 change.
If you hold a position in a dividend-paying ADR, the fee is deducted from the payout. If the ADR does not pay a dividend, the fee is shown on your brokerage statement on the date it is assessed.
The pass-through fee will generally range from 1¢ to 3¢ per share, although the amounts will differ by ADR. The prospectus for the ADR will show the fees. A prospectus can be obtained through the SEC’s