Author: Andrew Packer

Income investing

Dividend Growth Investor: Happy Coca-Cola Dividend Day Warren Buffett

Posted on by Andrew Packer

One investment strategy that stands the test of time is dividend growth investing. Fewer than 50 companies in the S&P 500 have achieved the status of dividend kings. These companies have raised their dividend payouts at least once a year for over 50 years.

While the dividend yields may be small, reinvesting that dividend income can lead to a market-beating return. And even modest dividend growth levels can compound substantially over time.

For instance, over the past decade, Coca-Cola (KO) has raised its dividend payment by about 5.7 percent each year. That may not sound like much. However, over time, the dividend payments roughly double every eight years.

That’s the power of dividend growth investing. In practice, consider the 400 million shares owned by Berkshire Hathaway (BRK-A). Bought between 1988 and 1994, the stake has a cost basis just under $1.3 billion.

However, the shares now pay out $704 million in annual income. That’s just over half the original purchase price. Since 1994, Coca-Cola has paid nearly $10 billion in dividends to Berkshire, or more than five time the purchase price.

Also, shares of Coca-Cola have moved gradually higher over time, adding capital gains to the mix.

That’s just one example of buying and holding a dividend growth stock through decades of the market’s short-term ups and downs. Naturally, that’s why the strategy pays so well for patient investors.

 

To read the full analysis, click here.

Economy

Bigger Pockets: How to Change Your Financial Life with a Money “Reset”

Posted on by Andrew Packer

Many investors have the end goal of a comfortable retirement. Perhaps, with the right investments, they can even retire early.

This concept can be known as financial independence. That is a level of wealth that allows someone to be free from the confines of a job – if they so choose. However, getting there requires thinking about the exact amount of money needed to make the move.

The first step is to make a plan. Without a plan, it will be difficult to track progress, if any. And it may be prudent for one to rethink their career.

That may mean starting in a new field with more opportunities for advancement. That’s because earning a higher salary is one big way to speed up the process of hitting a financial independence goal.

This process may also help someone decide if they’re happy with the path they’re currently on in their career and life. Just bear in mind, that changing a career is hard work. Working to retire earlier may mean working harder, making for a tough trade off.

That said, many who do retire early have found that they now have the time to take up new hobbies. Or work on new jobs, but without the pressure of having to work for a job. Planning for a comfortable or early retirement may have benefits, even if it takes years to pay off.

 

To listen to the full podcast, click here.

 

Stock market

George Gammon: The Fed Just Broke Everything

Posted on by Andrew Packer

Over the past year, the Federal Reserve has aggressively raised interest rates at its fastest pace in 40 years. The goal? To stop inflation in its tracks as it approached double-digit levels.

So far, inflation has started to come down. However, the speed at which the Fed has raised interest rates has caused significant issues. That includes a stock market decline, the collapse of crypto lending, and now problems with the banking sector.

Worse, as the Fed has raised interest rates, the yields on U.S. Treasuries have become inverted. Short-term yields are higher than long-term yields. That’s usually the opposite of a normal yield curve. This is usually a sign of a recession.

It can also mean that banks and other institutions that own sizeable positions in long bonds may face liquidity issues. That was the issue that broke Silicon Valley Bank. The bank was technically solvent, but only if they held their 30-year U.S. Treasuries to maturity.

Banks generally borrow short and lend long. This requires shorter-term rates to be lower than longer-term rates. An inverted yield curve makes the space unprofitable. And it’s likely that Silicon Valley Bank wasn’t alone in poor risk management on its Treasury yields.

That suggests that we’re not out of the woods yet. The chances of a recession have jumped with the latest banking concerns. That suggests that the economy and stock market are likely to get worse in the months ahead.

 

To watch the full analysis, click here.

 

Economy

Heresy Financial: A Credit Crunch is About to Crush Small Businesses

Posted on by Andrew Packer

While the recent fears in the banking sector have waned, we’re not out of the woods yet. A combination of factors, including a slowing economy and rising interest rates, have set the stage for a big danger.

This danger could cause businesses, particularly small ones, to go bankrupt. And it could cause a freefall in the stock market that would be worse than last year’s performance. Sure, that may be an extreme outcome, but the danger is rising.

The problem? A credit crunch. That occurs when banks stop lending. That includes loans to big companies that may borrow money for periods as short as one day.

Typically, there are two reasons why this happens. First, rising interest rates make it less attractive for banks to lend out on such short periods. Especially when yield curves are inverted, such as they are now.

Next, there may be fears of a counterparty risk. The recent bank failures highlighted this issue. When Bank A can no longer trust the solvency of Bank B, they will stop loaning out money overnight.

However, a credit crunch is most likely to cause a banking crisis to expand to companies that need banks for short-term credit needs. That’s the biggest issue, and one that is more likely than it was a month ago.

 

To watch the full analysis, click here.

 

Stock market

Elliott Wave Options: 68% Of Investors Expect More Downside!

Posted on by Andrew Packer

Short-term market moves often come down to expectations. If traders expect good news, stocks may rise in anticipation. However, if there’s a negative development, stocks may sink before the full impact – if any – becomes known.

Understanding investor sentiment can help out in a number of ways. It can give an idea of the direction for short-term trades. And it can be a sign for long-term investors to wait for a better price, or enter a trend now.

While markets have held up well in recent weeks, 68 percent, or over two-thirds of investors, expect the stock market to decline from here.

That’s a negative sentiment. And it’s supported by the fact that the recent market move higher has occurred on low volume. That suggests that big investors aren’t moving money into stocks right now.

Overall, that’s a sign of caution. If volume were increasing on the way up, it would be a strong sign of institutional buying. And likely a sign that higher cash and fixed income money was flowing into stocks.

Other data from the past week, such as slightly rising jobless claims, suggests a slowing economy. As does the slowdown in producer inflation, which didn’t slow as much as expected.

With slowing data and without strong volume supporting the current rally, the majority fears of a market decline ahead may prove a self-fulfilling prophecy.

 

To watch the full video, click here.

Cryptocurrencies

The Breakdown, With NLW: Why We’ll Remember This Banking Crisis as a Turning Point for Bitcoin

Posted on by Andrew Packer

Cryptocurrencies are a relatively new asset. The first crypto, Bitcoin, was launched in 2009. It was created based on a white paper written in 2008. So from the start, it’s clear that the space has evolved out of concerns over the banking system.

Today, that system is at risk of a meltdown again. As that risk has weighed on investors, cryptocurrencies like Bitcoin have perked up instead.

This crisis is still in its early stages. But the collapse of three banks within a span of days raises concerns over the safety of the legacy financial system.

Cryptocurrencies have started to see widespread adoption in the past few years, partially as a speculative investment. And the froth has come off in the past year as crypto prices have tanked. Yet those that serve a purpose are likely to continue to grow their network size and value over time.

Even central bankers have taken notice. A few of the world’s central banks have started to create pilot projects using crypto technologies like blockchains to create their own central bank digital currencies (CBDCs).

Given that the current legacy financial system is prone to locking up, or having fearful drops and liquidations, cryptos may still yet be a solution to that perennial problem.

 

To listen to the full podcast, click here.

Stock market strategies

Contrarian Edge: What to Expect After the Silicon Valley Bank Collapse

Posted on by Andrew Packer

The past 15 years have been dominated by the 2008 housing meltdown and its aftermath. For years afterward, interest rates were kept at zero percent. While borrowers were still initially reluctant to borrow immediately following the housing crisis… life moves on.

Low interest rates made many projects look attractive that wouldn’t have at higher rates. Many companies used low interest rates to take on corporate debt and buy back shares.

That led to higher share prices. And the interest on the debt, while low, was an expense.

That’s just one way that low interest rates created an environment where risk could increase without feeling risky. Today, investors can feel that risk.

Those who issued debt at low interest rates are feeling the pain as rates rise and the price of that debt falls to match. Long-term mortgages have fallen 20-30 percent, wiping out trillions in value on bank balance sheets.

The good news? The financial system is in far safer shape today. Or at least the housing market is, as borrowers have had to make sizeable down payments and verify income.

But it’s clear that the rapid increase in interest rates is having consequences. And Silicon Valley Bank, which bought long-term government bonds ahead of this jump higher in interest rates, may just be the tip of the iceberg.

What seems like an extreme event may simply be a preview of problems ahead.

 

To read the full analysis, click here.

Economy

A Wealth of Common Sense: Talk Your Book: Startups In a Crisis

Posted on by Andrew Packer

Small businesses are in trouble. That’s largely due to rising interest rates. Higher interest rates have made it costlier to borrow. And investors are less interested in stocks, which has caused the initial public offering (IPO) market to sputter out.

Now, there’s added risk to many startup companies from the banking system. That’s because small and regional banks tend to be the biggest lenders to startups.

Small businesses play a big role in the economy. They provide much of the newly-created jobs. A handful will go on to become the major employers of the next generation.

But all big companies today started out as a small company. Keeping them going during a financial crisis can have huge implications for the economy for years to come.

For these small companies, and potentially for small investors too, cash management matters. Keeping cash somewhere where it won’t be at risk of a bank failure is critical. The ability to benefit from rising interest rates matters too.

That’s why some companies are moving their cash to government bonds. The U.S. Treasury has bonds with durations from 30 days to 30 years.

Plus, thanks to rising interest rates, one-year Treasury bills have gone from paying 0.1 percent to over 4 percent right now. That’s a big jump of about 46 times the prior income. If interest rates continue to stay high, investors may continue to move to Treasury bonds.

 

To listen to the full podcast, click here.

Stock market strategies

Game of Trades: A Credit Crunch is Inevitable in 2023

Posted on by Andrew Packer

While we’ve just seen the two biggest bank failures since 2008, investors haven’t been too worried about any further contagion. Even with European banks showing a strain right now, the sector has largely started to move on.

But events may be unfolding that could tumble out of control quickly. That includes the possibility of a credit crunch. While not as visible as the housing crisis, a credit crunch played a strong role in the 2008 market collapse.

Simply put, a credit crunch, or credit crisis, occurs when trust in the banking system is lost between banks themselves. Many banks loan out money overnight, or for other short-term periods. In a credit crisis, that dries up.

In turn, banks stop making or offering similar short-term loans to companies, many of which use that as a form of funding. General Electric (GE) nearly went under in 2008 due to its reliance on short-term overnight loans.

If we see further deterioration in the banking system, such a credit crunch could easily occur again. However, stocks don’t seem to have priced in that possibility yet.

Should that happen, the stock market would likely drop to new lows. And bank stocks would take a big hit. That includes the major banks, which provide the bulk of short-term credit.

Investors should be prepared for this possibility. It may take weeks or months before it plays out, however, just like in 2008. So be patient.

 

To watch the full video, click here.

Economy

Quoth the Raven: Everyone Is Just Pretending Nothing’s Wrong

Posted on by Andrew Packer

Markets have moved sideways in the weeks following the second and third-largest bank collapses in U.S. history. It’s clear that interest rates have risen so quickly over the past year that some companies made a mistake by expecting a slower move.

We’ve now seen signs that something has broken in the markets. Yet things are calm. That’s not a sustainable trend. It’s also a sign that things will get worse until they get better.

The current strategy of simply creating more money to paper over the banking system won’t cut it forever. And cutting interest rates to save the economy from a recession may end up creating an even more unsustainable future bubble.

For now, these moves have created the illusion of stability. But economic reality can’t be ignored forever. Nor can it even be delayed for too long.

In the meantime, investors now expect the Federal Reserve to stop raising interest rates as it nears 5 percent. Yet inflation is still at 6 percent. That means we won’t solve the inflation problem if the Fed has to stop now to save the banking system.

Historically, the Fed has acted to save the banking system – it’s the central bank’s primary job, after all. But that may mean investors can expect a contracting economy that still has high inflation. That’s a recipe for stagflation.

 

To read the full analysis, click here.