Author: Team Editor

Passive Income

Climbing the Ladder to Escape Inflation

Posted on by Team Editor

Interest rates are rising, slowly. Federal Reserve policies seem to be pointing to even higher rates. And, after a decade of historic low rates the increases are welcome by income investors. But, the increases raise an important question for many income investors.

Income investors are faced with a dilemma that is easy to understand. They wonder if they should invest now, potentially locking in rates that are higher than they were a few years ago or wait for higher rates which seem possible within months.

There is a solution to this problem that involves investing now and later. It is a solution that could meet the needs of many investors and it is known as a bond ladder.

A Ladder Reduces Risk

Fixed income investing means buying an investment and collecting income until maturity at which time the amount of investment is returned. This requires making a decision about how long to invest the money for. Longer periods to maturity offer higher income.

But, longer terms also carry the risk that interest rates will rise. If rates rise, the investor loses out on potentially higher income. The difference in rates for different periods of time is significant so the decision can be challenging.

interest rates

Source: US Treasury

An investor could earn an annualized rate of 1.79% using Treasury bills maturing in one month. Or, they could lock up funds for 30 years and earn 3.03% a year.

The probability of rates rising within the next 30 years appears to be high and the investor would forego higher income if they lock in that rate now. That is because the value of the 30 year bond will fall as interest rates rise so it will be impossible to sell and lock in the higher gains.

Many investors treat the decision about the maturity of their investments as an all or none type of questions. They decide how long to invest for and then buy a security that matches that time frame. A better alternative could be to use a ladder.

A bond ladder is a multi-maturity investment strategy that diversifies bond holdings within a portfolio. It reduces the reinvestment risk associated with rolling over maturing bonds into similar fixed-income products all at once.

In simpler terms, according to Investopedia, “a bond ladder is the name given to a portfolio of bonds with different maturities. Suppose you had $50,000 to invest in bonds. By using the bond ladder approach, you could buy five different bonds each with a face value of $10,000 or even 10 different bonds each a with face value of $5,000.

Each bond, however, would have a different maturity. One bond might mature in one year, another in three years and the remaining bonds might mature in five-plus years – each bond would represent a different rung on the ladder.”

The Ladder in Practice

Bond ladders do reduce the opportunity costs associated with higher interest rates and they do solve the problem of an all or none decision. However, there is the question of whether or not the bond ladder hurts the income investor if rates fall.

To answer that question, there is data available. Crestmont Research has looked at that question and a summary of their testing is shown below.

bond ladders

Source: Crestmont Research

In a bear market, bond prices are falling, and interest rates are rising. At these times, the left side of the bottom section of the chart, the bond ladder will deliver acceptable returns, on average. Shorter term bonds carry the least risk.

The favorability of shorter term maturities holds in bull markets as well. These are times when bond prices are rising and interest rates are falling. Notice that there is a greater likelihood of losses when 15 or 20 year bonds are used.

The data suggests that 5 years could be the sweet spot for a ladder, especially when facing a secular bear market in bonds as we seem to be now.

To build a five year ladder, an investor could own five bonds, each maturing one year after the next. To build the initial ladder, an investor could buy bonds maturing in 1, 2, 3, 4 and 5 years. As each one matures, a new 5 year bond would be bought.

The long term chart of five year Treasury yields does show there is potential up side possible.

SFVX monthly chart

Rates could almost double to reach the level they saw twenty years ago. Of course, rates could also fall and they were significantly lower just five years ago.

Alternatively, shorter term investments could be used, maturing every six months, for example. This would require purchasing 10 different securities for a five year ladder but a new five year investment would still be bought when each one matures.

There may not be securities available to exactly match the desired maturity dates and that could require holding cash for some period of time to align the ladder with the objectives. This strategy could take months to properly construct.

Now, income could be increased by extending the maturity of the ladder. However, there are more risks, whether rates rise or fall, with longer maturities. There is no guarantee of profits with this strategy but history shows the five year has never delivered a loss.

There is, unfortunately, no right answer as to what a fixed income investor should do. That is the same situation investors in the stock market face. There are countless possible answers, each with unique risks and potential rewards.

Bond ladders can minimize the pain that fixed income investors experience when interest rates rise. The ladder is designed to adapt to changes in rates and could deliver higher incomes than a buy and hold investment in the long run.

If rates fall, an event that seems unlikely but is certainly possible, a ladder will deliver lower income than a buy and hold investment. Each investor should consider the risks and rewards of the strategies and make the choice that matches their personal preferences for risk.

To read more market related tips, click right here.https://www.smartinvestingsociety.com/blog/

 

 

Stock Picks

How to Trade Oil Prices, Whether They Rise or Fall

Posted on by Team Editor

Oil prices are a constant concern. Consumers worry about higher prices because gas and transportation expenses rise with oil prices. For most consumers, transportation expenses are unavoidable so higher gas prices can reduce the money available for discretionary spending.

For traders, higher prices present an opportunity and a risk. They will often strive to be right on the right side of the oil market if they are trading commodities. In the stock market, traders will want to be on the right side of the trade for stocks in the energy sector.

For policy makers, oil prices can boost or slow economic growth, depending upon the country and whether they are a producer or consumer.

Traders can, fortunately, benefit from either increases or decreases in the price of oil. There are often “hidden” oil plays that are actually hiding in plain sight.

Refiners Can Benefit from Price Swings

Investors.com recently reported that oil building up in West Texas’ Permian basin has fallen off sharply over the past two months. The area’s rising production is backing up, bottlenecked because of limited pipeline capacity. “The result is blocking a rising number of producers from their markets.

The localized glut is carving into shale producers’ sales. But it’s been a boon to many refiners — particularly those near the Permian, which process the crude into gasoline and other finished products.”

It’s actually likely that the situation will get worse. The International Energy Agency believes the ability to move oil away from the Permian fields will “become insufficient by midyear, with a deficit possibly reaching as much as 290,000 barrels a day during the first half of 2019.”

Pipeline operators are working to boost capacity but that takes time, in many cases it requires a significant amount of time to change capacity. “The biggest thing that’s just crazy for refiners are the wide crude differentials,” said Jennifer Rowland, a senior analyst covering refiners for Edward Jones.

This has led to a significant discount on the U.S. oil price benchmark, West Texas Intermediate, or WTI, compared to the European benchmark known as Brent crude. Recently that discount was about $10 a barrel.

That price difference “goes right into the pocket of the refiners,” Rowland said. “That’s going to be a significant boost to earnings in the second-quarter.”

Finding Specific Opportunities

Several companies have significant operations in that region. This has led to rising earnings estimates. Analysts are looking for earnings per share (EPS) of HollyFrontier (YNSE: HFC) to more than double.

HFC weekly chart

The stock chart shows a potential pullback after an extended up trend. But, the rising earnings indicate that the pull back could be a buying opportunity.

HFC is not alone in being a favorite of analysts. “Refiners, especially in the Permian, that are producing gasoline and distillate in El Paso have the closest proximity to where the crude is produced,” said Craig Weiland, executive director at U.S. Capital Advisors.

“In the short term, a stock like HollyFrontier, stands to benefit from the pronounced Permian discount, which we think will last until 2019,” Weiland said.

Rowland agrees. She doesn’t expect the wide differentials to narrow anytime soon as pipeline capacity remains constrained through 2019.

In an April note, Tudor, Pickering, Holt was especially bullish on Delek U.S. (NYSE: DK) “which can run (as much as) 70% Midland crude in its four-refinery system.” DK’s chart appears to be similar to the pattern of HFC’s.

DK weekly chart

DK could be even better positioned to benefit from the capacity constraints in the Permian. A Barclays report from earlier this month, said that Delek gets 78% of its oil from the Permian while HollyFrontier gets 39%.

East coast refiners like Phillips 66 (NYSE: PSX) can also benefit from the differentials if they have transportation capacity. The company ships Permian crude in tankers from the Gulf Coast to its refineries in Philadelphia.

Earnings of Phillips 66 (PSX) are also expected to double in the current quarter compared to a year ago.

PSX weekly chart

Benefits Might Not Be Widespread

Analysts caution that the discount in WTI might not result in lower prices for gasoline. Although refiners may be seeing lower costs from the Permian, they appear to be unlikely to pass that benefit on to consumers.

The price of a gallon of gasoline recently averaged about $2.90 per gallon across the U.S. That was an increase of about 25% compared to a year ago. The only good news may be that the price is significantly below $4, a price where consumer demand has weakened in the past.

That could lead to increased costs of $225 to $250 for the average drive compared to a year ago, according to AAA.

But, gasoline “demand is relatively inelastic,” Weiland said. “Consumers will pay generally the price of gasoline without changing consumption habits.”

This indicates that “refiners are going to do well regardless of commodity prices,” according to Rowland. “It’s hard to see how it can really fall apart. What would ruin them would have to be significant demand erosion.”

She said the industry does face long-term headwinds from the rise of alternative fuels, electric and hybrid vehicles, and stricter traditional fuel standards, but those are outside the immediate investment horizon as the positives far outweigh the negatives.

“Those are long-term headwinds outside the immediate investment horizon and are far outweighed by positives in the space,” Rowland said.

Of course, oil is a volatile market and international events can have a large and sudden impact on prices. Saudi Arabia and Russia recently agreed to increase production, but the increase came in at the low end of expectations which is bullish for prices.

The worsening crisis in Venezuela could offset these increases since production from that country is now unpredictable. Iran is also increasingly unpredictable since the current nuclear deal with that country is now being questioned.

Overall, the macroeconomic trends and geopolitical situation point to the likelihood of higher prices and that could lead to even wider margins between WTI and Brent since the pipeline problem is going to affect the Permian for months.

This indicates the refiners could see upside surprises and deliver even larger earnings gains than expected.

For other market related tips, click right here.

Value Investing

Improving Value Investing

Posted on by Team Editor

Hundreds of years ago, in medieval legend, medieval knights went on great quests in search of the Holy Grail. At least according to legends. Those legends gave rise to a phrase often used to describe a noble but difficult pursuit of something.

Investors have long sought the Holy Grail of investing. Of course, it seems unlikely one single grail will ever be found. But, researchers do keep improving their focus.

Value investing and specialties within that discipline offer a promising path to better than average profits and that is an area where time spent on a quest for knowledge is likely to deliver rewards.

Factors Segment Value

The success of value investing in the long run led to a search for what makes value investing successful. This search came to be associated with factors which “can be thought of as any characteristic relating a group of securities that is important in explaining their return and risk” according to MSCI Research.

That study explains that “a large body of academic research highlights that long term equity portfolio performance can be explained by factors. This research has been prevalent for over 40 years; Barra (now an MSCI company) for instance has undertaken the research of factors since the 1970s.

Certain factors have historically earned a long-term risk premium and represent exposure to systematic sources of risk. Factor investing is the investment process that aims to harvest these risk premia through exposure to factors.

We currently identify six equity risk premia factors: Value, Low Size, Low Volatility, High Yield, Quality and Momentum. They are grounded in academic research and have solid explanations as to why they historically have provided a premium.”

These factors are summarized in the table below.

six equity risk premia factors

Source: MSCI Research

The tools that are commonly used to capture the factor could each be thought of as an individual factor. This makes it important to some investors to understand whether the price to book (P/B) ratio is better to use than the price to earnings (P/E) ratio and other definitions of value.

One problem with passive investing from the perspective of many investors is that it matches the market. It is designed to never beat or lag the index it tracks. This means accepting 100% of the risk of the bear markets.

Active investors seek to reduce risks in bear markets and outperform in bull markets. They do with mixed success in the long run. But the goal is certainly appealing.

Factor investing can be appealing because it is a middle ground between active and passive investing.

factor investing

Source: MSCI Research

The Search for the Holy Grail of Value Can Be a Dead End

Many index funds and investment managers focus on individual factors and seek to deliver market beating returns. Over the long run, many have found success with differing factors based on value. But, the question remains as to whether or not there is a single best factor use.

Recently, Jim O’Shaughnessy addressed that question. He is the Chairman and CEO of O’Shaughnessy Asset Management and the author of four books on investing, including What Works on Wall Street, a BusinessWeek and New York Times Business bestseller.

What Works on Wall Street is an investment classic.  It first appeared in 1996 and has been updated since then. As the author explains, “when the first edition of my book came out, I was super excited to be offering a compendium of the actual long-term results of all of Wall Street’s favorite measurements for determining if a stock was a good investment or not.

At the time, I only looked at individual factors and price-to-sales proved itself to be head-and-shoulders above all the others. Other than a great book by Ken Fisher called Super Stocks, which focused on how great the price-to-sales ratio was, at the time, it was a very obscure factor that wasn’t popular like PE or Price-to-book. That made me even more excited to proclaim it the “King of Value Factors.”

This was a breakthrough at the time and was well received by investors. But, O’Shaughnessy has now rethought his position and says,

“With hindsight (another nasty behavioral bias), this was a rookie mistake. Had I given it any thought, I would have remembered that you can make anything look good if you varied the amount of time in your analysis.

But I thought, gosh, this is decades of data, surely things won’t change that much going forward. But, of course, they do. Instead of focusing on how value factors in general did in identifying attractive stocks, I rushed to proclaim price-to-sales the winner.”

In subsequent editions, as O’Shaughnessy became what he “a lot more sophisticated in my analysis—thanks to criticism of my earlier work,” he realized that “everything, including factors, moves in and out of favor, depending upon the market environment.”

O’Shaughnessy’s new research drove him to the conclusion that investors would be “far better off seeing how a stock scored on a composite of value factors that took more aspects of the balance sheet into account.”

Fidelity has been doing similar research and has been introducing exchange traded funds (ETFs) that apply that research. Buying factor based ETFs could be a simple way for investors to adopt a value methodology for the long run.

Fidelity is using more sophisticated metrics to find market beating factors including the example below which explains the method used for their fund that seeks to deliver results at times when interest rates are rising as they are now.

fidelity dividend

Source: Fidelity

The Lesson For Investors

No single factor or fundamental piece of data is ever the answer or solution to the stock picking problem. In other words, there is no Holy Grail of investing.

O’Shaughnessy believes there is value in combining indicators and his current preferred metric is shareholder yield which consists of dividends and net share buy backs. This metric can be combined with other value metrics or with momentum.

Others have found success with single indicators and tests in the academic papers tend to show that any value approach can work well in the long run. So, although there is no Holy Grail there is an answer to the truth investors are searching for.

Find a valuation tool you are comfortable with and stick with it for the long run. That is the key to success in most studies.

Cryptocurrencies

Central Banks Could Boost Crypto

Posted on by Team Editor

digital currency

There is a debate between skeptics and advocates of cryptocurrencies, or cryptos. Skeptics view the technology as a novelty at best while advocates see a change to the global financial system. We are in the early stages of the debate, but central banks are starting to find potential value in cryptos.

The latest central bank research came from New Zealand where economists with the Reserve Bank of New Zealand studied the questions. The paper is called The pros and cons of issuing a central bank digital currency and it provides a balanced look at the question.

The author begins by acknowledging that questions about cryptos need answers because “central banks are considering how they can take advantage of these new technologies.”

The conclusion is important because the economists “find the implications for monetary policy and financial stability could be significant, both positively and negatively.” That means early investors could benefit from the demand created by central banks in the future.

Important issues to consider include how the technology can be used across the functional areas that legacy currencies currently serve including currency distribution, payments, monetary stability and financial stability.

Currencies Are Already Digital

The truth is that central bank issued currencies such as dollars and euros are already largely digital and the amount of money in circulation is significantly greater than the physical paper money that’s printed and in circulation.

The money tree

Source: Reserve Bank of New Zealand

Given this reality, it is prudent for central banks to consider digital currencies. Some advocates argue an all digital currency could reduce crime and maximize tax revenue. India is attempting to increase tax revenue by making cash more difficult to use in illicit markets.

However, digital cash might not be ready for prime time, so to speak. Digital currency is dependent on technology and a power outage or other system glitch could prove to be a significant set back for an economy that relied solely on digital cash.

In addition, in its current state, digital currencies are subject to hacking. This has been seen on several occasions at crypto exchanges. But, central bank systems using traditional currencies are not immune from crime.

Security Will Always Be a Concern

Even when physical cash is locked in bank vaults, it is at risk of theft. In fact, according to the FBI, when the famous bank robber Willie Sutton was asked why he robbed banks, Sutton simply replied, “Because that’s where the money is.”

Willie Sutton

Source: FBI

If Sutton was alive today, he would probably be looking at banks as computer systems and looking at finding a way to rob the computers. Others are following in his footsteps and going to where the money is.

A secure messaging system maintained by the bank owned cooperative SWIFT, formally known as the Society for Worldwide Interbank Financial Telecommunication, is designed to guarantee that instructions to move money between banks are authentic.

Authorities admit that there have been at least a few successful thefts using that system. BankInfoSecurity.com reports on some of the attacks:

  • Sonali Bank: Bangladesh bank lost $250,000 to attackers in 2013.
  • Banco del Austro: $12 million was stolen from Ecuadorian bank in January 2015.
  • Bank in the Philippines: As yet unnamed, this bank was attacked in October 2015, security firm Symantec says.
  • TPBank: Vietnamese bank blocked the attempted theft of more than $1 million in December 2015.
  • Bangladesh Bank: The central bank of Bangladesh lost $81 million to attackers, who attempted to steal nearly $1 billion in their February 2016 heist.

While some will insist cryptos must meet an impossible security standard of 100% safety, the reality is that the central banks face some risk with current systems.

But, Digital Currencies Can Still Be Appealing

Despite the risk of a technology glitch and despite the ever present security risk, there still could be an important reason for the central banks to issue their own digital currencies. The chart below, from the New Zealand paper, summarizes some of the arguments for and against issuing such a currency.

central bank digital currency

Source: Reserve Bank of New Zealand

Perhaps the most important point in that table, from the perspective of a central bank is the monetary policy implications. Creating an interest bearing digital currency provides a rapid means for central banks to make policy changes.

It also makes it possible for central banks to quickly adopt negative interest rates. Once unthinkable, negative rates are in place in Europe now for several years.

rates and yields

Source: Federal Reserve

Implementing negative rates has proven to be a difficult task in a society with cash. Despite negative rates, wealthy individuals and corporations are unlikely to hold large amounts of cash to avoid the penalty because the cost of securing cash exceeds the negative rate penalty.

In an all digital world, the holders of cash would have an incentive to put cash to work when rates are negative to avoid the penalty since moving cash would be cost free.

The Bottom Line: Change Is Coming

Even if central banks never issue cryptocurrencies, it is important to note that one of the world’s major banks is considering the value of the idea. It’s also important to consider that central banks could be interested in eliminating physical cash at some point.

Remember that central banks exist to improve the operations of the economy. If one function of the economy is to generate tax revenue to fund government operations, it’s possible to argue that an economy running solely with digital currencies maximizes tax revenue.

This would be especially true if the central bank had access to all ledgers for the cryptos.

This all presents another reason to owning crypto right now. If central banks enter the market, and their research points to that possibility, then existing currencies will increase in value as they become appealing to those seeking privacy.

In that environment, cryptos like bitcoin and other large cap currencies, become exactly like gold in many ways. They become a medium of exchange that government authorities can only track with a degree of difficulty.

You can read more about digital currencies and other market related news, right here.

 

 

 

Weekly Recap

Weekly Review

Posted on by Team Editor

weekly review

Should You Buy the Crash in Cryptos?

Cryptocurrencies crashed, again. This time, there are at least a few reasons to explain the market action according to analysts.

CNBC noted that Bitcoin fell to a multi-month low after a relatively small South Korean exchange said it was hacked.

Now the question is, should you buy the crash? Find out right here.

Finding Value Around the World

Investors often receive vague advice. They are told to buy value, hold for the long term, and diversify broadly. Diversification should include investments in foreign markets because there will be times when different countries offer more value than the U. S. stock market.

In this article, we provide detailed information that can be used to find value around the world. It’s all right here.

Three Buys in a Sector that Greases the Wheels of Commerce

Retailers have been struggling over the past few years and many investors are scouting the sector in search of trading opportunities. Some of the companies in the sector will survive and do well in the long run. Others will fail. Both groups offer trading opportunities.

This week, we provide three trading opportunities that you can find right here.

How Central Banks Will Affect Your Income Investments

Income investors have learned in the past decade that they are subject to risks associated with central banks. The largest and most important central banks around the world include the Federal Reserve, the European Central (ECB) and the Bank of Japan (BOJ).

In this article, we discuss those risks and provide a plan for your income investments. You can read more here.

 

To read other market related tips, click here.

 

Passive Income

How Central Banks Will Affect Your Income Investments

Posted on by Team Editor

Income investors have learned in the past decade that they are subject to risks associated with central banks. The largest and most important central banks around the world include the Federal Reserve, the European Central (ECB) and the Bank of Japan (BOJ).

For years, the banks have been responsible for low interest rates and high stock prices according to many analysts. This view is shown in the chart below which refers to the three central banks as the G3.

G3 chart

Source: ZeroHedge.com

In the chart, the steady rise of assets held by the G3 largely tracks the stock market. This implies that the various quantitative easing programs pursued by the banks has resulted in an inflation of stock prices at the same time rates reached historic low levels.

If this view is correct, as the Fed and the ECB take steps to reverse their accommodative money policies, the stock market is at risk.

Fed Pushing Rates Up

The Federal Reserve has been raising interest rates for some time and at its June meeting set the short term benchmark interest rate at a range of 1.75% to 2%.

In a press conference after the meeting, the new Chairman, Jerome Powell signaled no dramatic about-face from the policies pursued under his predecessor.

The New York Times highlighted the continuity saying, the “Fed’s policy committee raised its main target for interest rates, as had been widely expected. By making subtle changes in custom, though, he put a new imprint on the institution, with potentially big implications for monetary policy and the economy.”

But, there are differences between Powell and his predecessors. Powell began his session with the news media with what he called a “plain-English” description of what the Fed had done and why, a contrast with the practice of his predecessors Janet Yellen and Ben Bernanke, both Ph.D. economists.

“The economy is doing very well,” Powell said, standing before reporters which was a change from the policy of both Yellen and Bernanke who sat at a desk for their post-meeting news conferences. “Most people who want to find jobs are finding them, and unemployment and inflation are low.”

Even after the increase, rates remain low by historic standards.

federal funds target rate

Source: NYTimes.com

Analysts now expect two more rate hikes by the end of the year. This will help income investors to a degree even though income dependent on interest rates will remain relatively low.

But, the hike in interest rates will not be welcome to all.

MarketWatch noted “Consumers with credit-card debt will likely pay an additional $2.2 billion in interest payments annually, according to an analysis from the credit-card website CompareCards.com.

To determine that number, analysts at the site looked how much those carrying a balance pay in interest, based on the current average annual percentage rate (APR). They used a 15.32% APR as a base, which rose to 15.57% after the hike.

Cardholders currently have about $1 trillion in credit-card debt collectively, according to the Federal Reserve. Based on those numbers, CompareCards concluded they will collectively pay $2.2 billion more with a 25-basis point hike.”

Higher costs of credit could slow consumer spending on discretionary items and slow economic growth.

“Rising interest rates will start taking a toll on borrowers that are already stretched to the limit with tight household budgets,” said Greg McBride, chief financial analyst at the personal-finance website Bankrate. “Higher rates and higher payments will squeeze the buying power of households without a compensating increase in wages.”

Europe Also Changes Course

The ECB is also planning to be less accommodative. The bank expects to stop its monthly bond purchases beginning in October, planning an end of the program by the end of 2018.

But, the ECB pledged to keep interest rates at ultralow levels at least through next summer, while ECB President Mario Draghi emphasized in his news conference that uncertainty surrounding the economic outlook was on the rise.

“The ECB’s announcement that it will end its asset purchases in December is probably a little bolder than markets had expected, but this is tempered by the pledge to keep interest rates on hold for more than a year,” said Jennifer McKeown, chief European economist at Capital Markets, in a note.

In a statement following their meeting, the ECB’s Governing Council said it would continue to purchase €30 billion ($35.2 billion) a month of bonds through the end of September, as planned.

Then, if data is in line with the ECB’s medium-term inflation outlook, it intends to reduce purchases to €15 billion a month through the end of December and then end them.

The ECB left interest rates unchanged, as expected, with its main lending rate at 0% and the deposit rate on funds parked overnight at the central bank at minus 0.4%.

key ECB rate

Source: CBRates.com

In the statement, the ECB said it would keep rates at present levels “at least through the summer of 2019 and in any case for as long as necessary to ensure that the evolution of inflation remains aligned with the current expectations of a sustained adjustment path.”

Draghi is putting markets on notice; ‘don’t go overboard and start pricing in rate hikes immediately after QE is ending,’” said Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, in a note. “It is also a signal that markets should not expect further changes in the guidance on rates until Q2 next year, later than currently expected by markets.”

In his news conference, Draghi emphasized that policy makers didn’t discuss when to raise rates and highlighted growing global risks to the economic outlook, including the threat of rising protectionism in what he described as a trade conflict pitting the U.S. against the rest of the world.

“This decision has been taken in the presence of a strong economy with increasing uncertainty,” he said.

This all indicates income investors could see significant volatility in the next few months. Some factors point to higher rates, for a time. This could mean that investors should consider locking in higher rates as they became available. The higher rates may not last long.

 

 

Stock Picks

Three Buys in a Sector that Greases the Wheels of Commerce

Posted on by Team Editor

Retailers have been struggling over the past few years and many investors are scouting the sector in search of trading opportunities. Some of the companies in the sector will survive and do well in the long run. Others will fail. Both groups offer trading opportunities.

But, both groups also carry risk. Retail is a difficult business. It means getting consumers what they want at the right time and at the right price. Even if a retailer solves the problems associated with that problem now, they must continue meeting those objectives in the future.

That means today’s winners could be tomorrow’s loser and the companies appearing to be destined for failure at this moment could mount rapid turnarounds. The challenges for the retailers are also challenges for investors who must react to changing consumer preferences and retailer performance.

A Common Theme Among Winners and Losers

Whether a retailer wins or loses in the short run or long run, there is one aspect of the business model that appears to be destined to grow. That is the payments processing businesses. These are the companies that make it possible for consumers to pay for goods and for sellers to generate sales.

Many of these transactions are completed with credit cards.

Mastercard Incorporated (NYSE: MA) is one of the companies that makes it possible for retailers to process transactions. The company processes more than $3.5 trillion worth of payments a year. The company charges a small fee on each transaction and those fees add up quickly.

Over the past twelve months, the company reported more than $13.3 billion in revenue from its small share of the transaction costs. Although expenses for information technology equipment, communications lines and security are high, the company’s net profit margin consistently exceeds 30%.

These profit margins are appealing to investors. The chart below shows the stock’s performance since it began trading in 2006.

MA quarterly chart

The total return since the initial public offering (IPO) tops 4,900%. The trend has generally been higher but there are significant risks. The stock declined more than 60% during the market crash of 2008 and 2009.

The largest credit card issuer, Visa Inc (NYSE: V), reports a net profit margin of more than 40% and generated more than $19.5 billion in revenue over the past twelve months.

This stock has also delivered significant gains since its IPO in March 2008.

V quarterly chart

The financial crisis did send the stock price down by more than 50% but since the IPO shares have delivered a total return of almost 900%.

While these companies have a majority of the market share, there are competitors. American Express and Discover have also issued millions of cards and generate significant revenue and profitability.

A Different Niche for a Payments Processing Company

PayPal (Nasdaq: PYPL) began trading as a separate company when it was spun off from online auction site eBay in 2015. The stock is up more than 180% since then.

PYPL monthly chart

PayPal has adopted a strategy to coexist with the larger players in the field. PayPal users can draw on a Mastercard or Visa card or their bank account to pay for purchases. Earlier this year, PayPal said users would be able to pay for purchases on Gmail, YouTube and other locations in the Google ecosphere.

Last year, the company reached an agreement with Facebook that allowed someone to send money via Facebook Messenger.

Analysts have been impressed with these moves. “That’s really helped them become much more of a partner, obviously, than a competitor with a lot of these companies,” Edward Jones analyst Josh Olson told investors.com.

He added, “I think that’s helped ease Wall Street’s concerns about whether a big tech company would just leapfrog them or make their technology obsolete.”

The company also counts Bank of America and JPMorgan Chase as partners and is trying to attract more people without bank accounts. In moves abroad, the company last year struck a deal with Chinese search giant Baidu to let Baidu Wallet holders buy things from PayPal merchants.

PayPal is also pursuing growth through acquisitions. In May, it announced the $2.2 billion purchase of iZettle, a Swedish company sometimes called the Square of Europe. The deal is intended to put PayPal’s technology into retail outlets across Europe and lead to growth in Latin America.

PayPal is significantly smaller than the larger credit card companies. Over the past twelve months, revenue was just $1.3 billion, and the net profit margin was just 14%.

Small size could result in rapid growth. Management is targeting a growth rate of about 20% a year in earnings per share over the next three to five years. Management also forecasts improving its income margins and growing sales by 17%-18% a year.

PayPal now has 218 million active users in more than 200 markets. It processes around one in every six dollars spent online, according to Edward Jones.

Analysts seem to agree that the company’s technology is good, and it works on lots of things with which you can make payments. PayPal’s One Touch technology allows customers to make online purchases without entering their password and other information.

To meet consumer demand, the company introduced its own cash back credit card last year and the company is testing a Venmo debit card. These improvements in making it easier to pay for things, attract the attention of businesses.

PayPal processes payments for about 19 million merchant accounts, most of them small to midsize businesses.

But, a large part of PayPal’s financials rely on eBay’s auction activity. EBay acquired the company in 2002 to make it easier for eBay’s buyers and sellers to pay or get paid online. Last year, PayPal drew around a fifth of its revenue from customers on eBay’s Marketplaces platform.

But this year, eBay said it would begin managing payments on its own although PayPal will remain a payment option on eBay until mid-2023. This allows time for  PayPal to meet those challenges associated with the loss of that business.

Based on recent trends, it does seem that PayPal could be the next Mastercard or Visa although all three stocks should be considered as buys.

 

 

 

 

Value Investing

Finding Value Around the World

Posted on by Team Editor

global value

Investors often receive vague advice. They are told to buy value, hold for the long term and diversify broadly. Diversification should include investments in foreign markets because there will be times when different countries offer more value than the U. S. stock market.

The advice to consider overseas investments appears to be sound. It makes sense that there will be times when overseas markets do offer more value. But, the advice is vague, and that is truly typical of the advice offered to individual investors.

Fortunately, that vague advice can be defined in specific terms. Best of all, data is available for free to help investors implement that advice in a specific way.

Defining Value in Foreign Markets

Value is no different outside of the United States than it is in the United States. Value can be defined in terms of common valuation metrics including the price to earnings (P/E) ratio, price to book (P/B) ratio, ratios based on cash flow or sales or the dividend yield.

Investors can find success with any of those metrics. The key to long term success is to be consistent. When using value to find investments in the stock market, a holding period of at least one year should be considered. Even longer holding periods have been shown to be successful.

Academic studies looking at value in the stock market often consider holding periods of three or five years. However, one year may be most practical, since it reduces the likelihood of a long and extended period of time with below average returns.

Greece provides an example of the long term under performance that is possible in the stock market. The chart below shows the Global X MSCI Greece ETF (NYSE: GREK) which has been in an extended trading range for more than three years.

GREK monthly chart

Investors in GREK may be rewarded in the long run, but they are sacrificing returns in more promising investments while they wait. This is what economists call an opportunity cost and what traders often call dead money.

To avoid this problem, a rotation strategy could be used. To further minimize the impact of dead money, the dividend yield could be used to screen potential investments. A dividend is, in effect, a payment for waiting for an investment to deliver capital gains.

A Strategy For Finding Overseas Value

In the U. S., many investors use screeners for stocks having certain characteristics. They might screen for low P/E ratios or high dividend yields for example.

One way to find stocks meeting these requirements is with the free stock screening tool available at FinViz.com. At this site, you could screen for a variety of fundamental factors, high levels of institutional ownership and bullish institutional transactions among other criteria. An example is shown below.

FINVIZ screener

Source: FinViz.com

This type of screener provides a list of stocks that could be considered as buys. For international investors, a screener available for free at Star Capital could be useful. An example of the data available at that site is shown below.

valuation ratios

Source: Star Capital

This example is sorted by dividend yields and is limited to countries with a dividend yield of more than 4%. The screener also includes regions, shown in all capital letters.

To implement a foreign investment value based investment strategy, an investor could start with this data. They could then find investments and re-balance their portfolio on a yearly basis using the same sorting strategy, dividend yield in this example.

Identifying Specific Investments

The list of countries with relatively high dividends is diversified geographically. An investor could find specific exchange traded funds, or ETFs, to obtain exposure to specific countries.

A theme also emerges in this information. Emerging markets, specifically in emerging markets in Europe and the Middle East, could be promising investments. There are a number of ETFs that provide exposure to emerging markets and any one of them could be considered a suitable investment for broad exposure.

To fine tune exposure to the high dividend countries, investors could seek out ETFs that offer exposure only to a specific country.

From the list of countries above, for example, an investor may not be able to obtain a single country ETF with exposure to the Czech Republic but funds with exposure to Russia, Australia, Taiwan and Portugal are available.

ETFs may have dividend yields that differ from that listed in the original data source. There are several possible reasons for this.

One is that the ETF may hold stocks that are different than the ones included in the overall country equity market index. Another is that the ETF may report dividend yields after various withholding taxes are considered. There could also be additional tax considerations for the individual investor.

If taxes are a concern, investors should consult with their personal tax professionals. Dividends received from stocks that are headquartered in foreign countries, or from ETFs with exposure to these type of companies, could require additional reporting and additional taxes.

If an investor is comfortable with the potential tax concerns, then these ETFs could offer high income. The ETFs could also be a source of additional research.

Single country ETFs will generally hold a diversified basket of stocks. The list of specific holdings will be available at web sites like Yahoo or Morningstar and at the fund sponsor’s web page. The complete list of holdings will be available in the ETFs regulatory filings.

Those holdings could be considered as potential buys. They may be available as depository receipts on U. S. based exchanges or they may be available for holding in brokerage accounts at many discount brokers who offer access to markets around the world.

When considering individual stocks, a similar strategy could be used, which involves buying the highest yielding stock in several different countries and re-balancing the portfolio at a predefined time period perhaps yearly.

International investing can be rewarding for individual investors and it can also be a means of achieving diversification. Data for selecting individual stocks or ETFs is readily available and a plan for rebalancing can be fairly straightforward. Value investors could find new opportunities in this area.

 

 

 

Cryptocurrencies

Should You Buy the Crash In Cryptos?

Posted on by Team Editor

Cryptocurrencies crashed, again. This time, there are at least a few reasons to explain the market action according to analysts.

CNBC noted that Bitcoin fell to a multi-month low after a relatively small South Korean exchange said it was hacked.

“Crypto exchange Coinrail tweeted that it was hacked, and noted that lesser-known cryptocurrencies such as Pundi X were among those affected, according to Google Translate. The Pundi X-bitcoin pair is the most-traded on Coinrail, CoinMarketCap data showed.

However, Coinrail’s public statements did not mention bitcoin, according to Google Translate.”

Concerns of Manipulation Weigh on the Market

The Wall Street Journal noted that “government investigators have demanded that several bitcoin exchanges hand over comprehensive trading data to assist a probe into whether manipulation is distorting prices in markets linked to the cryptocurrency, according to people familiar with the matter.”

This investigation includes looking into how the market reacts after bitcoin futures were introduced. This has long been a concern of the exchange that listed the contracts late last year.

“CME’s bitcoin futures derive their final value from prices at four bitcoin exchanges: Bitstamp, Coinbase, itBit and Kraken. Manipulative trading in those markets could skew the price of bitcoin futures that the government directly regulates.”

In the past, the CME asked the exchanges for trading data after its first contract settled in January. Not all of the exchanges responded, arguing the data collection was too intrusive. Eventually, the CME did obtain limited data from all four.

Stepping in to clear the matter up, the Commodity Futures Trading Commission, the CFTC, subpoenaed the exchanges for the data. Now, the CFTC is investigating whether or not traders colluded to manipulate bitcoin prices.

The U.S. Justice Department is also involved, and the investigation is in its early stages. But, crypto exchanges believe the possibility of manipulation is remote and that regulatory inquiries could dampen the markets.

Kraken Chief Executive Jesse Powell said in a statement that the CFTC’s “newly declared oversight” of bitcoin prices that drive futures “has the spot exchanges questioning the value and cost of their index participation.”

Mr. Powell had earlier told the Wall Street Journal that worries about bitcoin market manipulation were exaggerated.

“If there is any kind of attempted manipulation, whoever is doing it is taking a huge amount of risk for very little possible upside,” he said.

Investigators are looking for trading schemes that can be used to manipulate the price at which a cryptocurrency trades.

In one example, akin to a practice known as spoofing, a trader enters large orders with the intention of tricking others into thinking there had been a fundamental change in the supply and demand of bitcoin. That might lead others to raise their prices to buy, which allows spoofers to sell at artificially high prices.

The impact of all this news can be seen in the daily price chart of bitcoin which is shown below.

BTC-067 daily bars

The Long Term Trend Could Be Near a Reversal

Traders often focus on news in the short term and fundamentals in the long term. The result can be that short term dips in prices could be buying opportunities if the fundamentals are improving in the long run.

For bitcoin, the long run fundamentals could be improving. The driver could be the Securities and Exchange Commission (SEC) which is adding a level of clarity to the market according to some analysts.

CNBC reported that, “The SEC’s point man on cryptocurrencies and initial coin offerings (ICOs) says that bitcoin and ether are not securities but that many, but not all, ICOs are securities and will come under the regulatory control of the SEC and relevant securities laws.”

“Central to determining whether a security is being sold is how it is being sold and the reasonable expectations of purchasers,” William Hinman, head of the Division of Corporation Finance at the SEC, said in a speech at the Yahoo All Markets Summit: Crypto conference in San Francisco.”

Source: SEC

Hinman said the primary issue in determining whether cryptocurrencies and ICOs were securities was the expectation of a return by a third party, specifically whether there was a person or group that sponsored the creation and sale of the asset, and who played a significant role in its development and maintenance.

For purchasers of the asset, the key is whether they are seeking a return on the investment. If there is a centralized third party, along with purchasers with an expectation of a return, then it is likely a security, Hinman said.

This is all confusing to some so Hinman provided some examples where cryptocurrencies would not be considered securities and would not come under the purview of the SEC.

He specifically said that bitcoin is not a security because it is decentralized: there is no central party whose efforts are a key determining factor in the enterprise. In addition, ether is also not a security because the ethereum network is also decentralized.

That means threat of regulation diminishes for bitcoin and that could mark a fundamental change in the trend which is shown below.

BTC-067 weekly chart

Bitcoin’s latest crash appears to be testing support of the lows reached on two previous occasions this year, in February and April. Support appears when buyers believe a price decline has gone on far enough and the price represents a bargain.

Buying near support is a technical buy signal for a security. Technical analysis is well suited to cryptocurrencies since the fundamentals are difficult to analyze, which is also true in futures markets of many commodities.

Trader psychology is also bullish for cryptos since there is so much interest in the assets and there is so much potential investment capital available to move into the markets. Each decline should be moving some of those investors off the sidelines.

All of this indicates that crashes in cryptos are likely to be at least good short term buying opportunities. Investors considering building longer term positions should consider making small commitments near support and adding to that position later.

 

You can read other investment tips by clicking, right here.

 

 

 

Weekly Recap

Weekly Review

Posted on by Team Editor

weekly review

This Trillion Dollar Investment Manager Seems Set to Enter the Crypto Market

Sometimes, it’s not necessary to be the first one into a market to make a large fortune. John D. Rockefeller wasn’t the first to drill for oil. In fact, none of the business operations he turned into a fortune were based on new sectors. Rockefeller perfected existing practices.

The same is true in the modern world. With the rush of second wave giants into the crypto field, it is possible that investors can make millions. We detail how right here.

Is There Really an Existential Crisis in Value Investing?

The Wall Street Journal was clear. And, it was the type of headline that we saw way back in 1999. Back then, the questions were about Warren Buffett. The ultimate value investor seemed to be facing a historic market shift and he was doomed, according to experts.

For investors with a sense of history, the feelings of that era may have come rushing back when they saw a recent Wall Street Journal headline. You can read more in this article.

An Industry Income Investors Might Overlook

In many cases, individuals divide stocks into income or growth categories. In many cases, the categories are mutually exclusive. That is, a stock is either a growth stock or an income stock. This is how many index funds categorize their investments.

This process certainly makes sense for index funds when the managers must have a clear distinction between categories. For individual investors, a more flexible approach can be useful. We detail that approach right here.

Maybe It Is Time to Worry About Social Security

Retirement is a dream for many individuals. It is also among the greatest fear for many individuals. The fears often concern money. The big question is if retirement income will be sufficient to support the minimum lifestyle requirements of a retiree.

Of course it is best to save as much as possible before retirement. However, that may not always be possible. That means more aggressive strategies could be needed and we explain that here.

 

To read more about each of these topics you can follow this link.