Author: Team Editor

Passive Income

Maybe It Is Time to Worry About Social Security

Posted on by Team Editor

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.

For many years, the standard approach to retirement income planning involves the three legged stool. Under this approach, individuals plan for income from three sources, Social Security, employee pensions, and personal savings.

In recent years, one leg, employee pensions, has become increasingly rare. The chart below shows that about 33% of all private sector workers participated only in a defined contribution plan (DC) and just 2% participated only in a defined benefit (DB) pension plan.

pension plan

Source: Employee Benefit research institute

In essence, the three legged stool has lost one of its legs for most individuals.

Another Leg Comes Under Pressure

A recent report brings a question that many individuals struggle with to the forefront, “Will the system be there for me in retirement?”

In an annual report, the Social Security Board of Trustees said the trust funds that help support the system will run out of money in 2034. That projection is in line with previous projections. If nothing changes, only 79% of an individual’s benefit will be payable at that point.

The report also said that program’s annual costs will exceed its income in 2018 for the first time since 1982. The program’s reserves are expected to decline this year as a result.

The idea that Social Security would dip into its trust fund to pay for current benefits is a feature of the system. That is, in fact, why the reserves exist since the payment of benefits will not exactly match the sources of revenue in any given year.

Now, the truth is that even if the Social Security system completely ran out of money, the benefits promised to individuals could still be paid. That’s because Social Security payments are made by the federal government which can, if it chooses, print money to cover its obligations.

“Politically, nobody thinks that that actually is going to happen,” according to Christian Weller, professor of public policy at the University of Massachusetts at Boston and senior fellow at the Center for American Progress. “You want to see a revolution in this country, that would be one way of getting there.”

Changes Are Possible

However, to prevent the funds from being dissipated, it is possible that Congress will take action at some point. Possible changes to the system include reductions in the amount of benefits that are paid, tax increases and increases in the full retirement age.

The retirement age has been changed before. In 1983, Congress approved raising the age at which a retiree receives their full benefits to 67 from 65. That change was gradually phased in over a number of years to avoid disruptions in the retirement plans of individuals.

Weller, the expert with the Center for American Progress, believes it is unlikely that politicians would touch the initial eligibility age of 62 for retirement benefits, Weller said. “Raising the early retirement age doesn’t do anything for Social Security,” he said. “You’re hurting people for no real apparent gain.”

Experts also note that another way to slow the draining of funds from the system is change the way benefits are adjusted for inflation every year. Simply selecting a different inflation index could lower the cost of the program in the future.

measure of inflation

Source: Institutional Investor

Is It Time To Worry?

The system’s current funding status should not be cause for alarm for retirees and aspiring retirees, according to experts.

“If it all goes horribly wrong and no adjustments are made, we will get 75 to 80 cents on the dollar,” said Anne Lester, head of retirement solutions at J.P. Morgan Asset Management. “That is not broken to me. That is a fender bender, that’s not a crash.”

Any modifications to Social Security would be unlikely to affect current and near retirees, according to Weller.

So if you are less than ten years from claiming at the earliest possible age, 62, your benefits will most likely stay untouched. The greatest uncertainty is for younger generations, especially those who are under 40.

Given the concerns, some individuals may decide to begin receiving benefits earlier than they would otherwise. In many cases, individuals can begin receiving benefits when they are 62 rather than waiting for their full retirement age of 70. However, benefits are reduced prior to the full retirement age.

Reductions to income for claiming benefits early can be substantial.

social security benefits

Source: CNBC

Full retirement age depends on when an individual was born but is generally between 66 or 67. The government pays a substantial bonus for those who wait to claim benefits. For every year you wait from full retirement age up to age 70, your benefit will increase by 8%.

Social Security Should Be Part of Retirement Planning

Even though the system will be paying out more than it brings in for some time, individuals are likely to receive benefits they have earned. But, individuals should plan for the worst. The worst is most likely a lower than expected benefit.

Remember the payments are funded by the government. Even if the trust fund could only support a payment equal to 79% of the projected benefits, those receiving benefits would be unlikely to see cuts in their monthly checks. It would be politically difficult to cut existing benefits.

Future payments could be smaller than expected based on existing law. As seen above, simply changing the index for inflation used to increase benefits annually would reduce expenditures.

In short, Social security will be there, but it might not provide enough income for many individuals to fully enjoy their retirement dreams. As it always has been, it is best to save as much as possible for retirement, especially when young so that the money can compound for many years.

However, that may not always be possible because current expenses make it difficult for many to save. That means more aggressive strategies could be needed later in life to catch up.

 

Stock Picks

An Industry Income Investors Might Overlook

Posted on by Team Editor

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 example, they can take the stocks in the S&P 500 and sort the entire list by dividend yield. The top half would then be income stocks and the bottom half of the list is growth.

For individual investors, a more flexible approach can be useful.

Finding Income Where It Is Available

While individuals may not have the same willingness to separate stocks into strict categories, they may allow other biases to influence their decisions related to income. For example, an individual investor may associate certain industries with income and others with growth.

For example, utilities are often thought of as income stocks. They generally are, but the environment for utilities is changing as alternative energy sources become increasingly important. This demonstrates that even slow moving industries can be disrupted.

When thinking of growth, many individual investors think of biotech stocks. These companies often make new discoveries, obtain Federal Drug Administration (FDA) approval to distribute a new drug and grow rapidly as the drug becomes adopted.

Gilead Sciences, Inc., (Nasdaq: GILD) is an example of this model when it is successful. The company researches, develops and commercializes drugs. The company focuses primarily on antiviral drugs used in the treatment of HIV, hepatitis B, hepatitis C, and influenza, including Harvoni and Sovaldi.

As the company brought new drugs to market, sales grew rapidly. In particular, the introduction of drugs to fight hepatitis C moved rapidly into the market place and sales grew almost 40% in the past five years.

drug company news

Source: Standard & Poor’s

As sales grew, so did the stock price. The chart below shows a price gain of about 500% in five years before the peak was reached in 2015.

GILD monthly chart

This is certainly a growth story, but it is also an income story. The next chart shows the dividend yield and the growth in that metric is not as steep as the gains in revenue or the stock price but it is certainly meaningful to shareholders.

dividend yield and growth metric

Source: Standard & Poor’s

Gilead Is Not Alone

The environment for drug stocks is changing now. Health care costs are growing rapidly, and policy makers are attempting to find solutions to slow growth in these costs. Some of the proposed solutions include slowing the pace of growth in drug prices.

In this area, Gilead is again a leader. The company’s pricing decisions were the subject of a 2014 investigation by the United States Senate Committee on Finance. Senators questioned Sovaldi’s high price which is listed at $1,000 per pill or $84,000 for the full course of treatment which lasts for 12 weeks.

Senators questioned the extent to which the market was operating “efficiently and rationally.” Committee chairman Ron Wyden (D-Oregon) and ranking minority member Chuck Grassley (R-Iowa) joined in a bipartisan effort to write CEO John C. Martin asking Gilead to justify the price for this drug.

The committee hearings did not result in new law, but in 2014 and 2015, due to negotiated and mandated discounts, Sovaldi was sold well below the list price. For poorer countries, Gilead licensed multiple companies to produce generic versions of Sovaldi; in India, a pill’s price was as low as $4.29.

By 2017, Gilead was reporting drastic drops in Sovaldi revenue from year to year, not only because of pricing pressure but because the number of suitable patients decreased, not a surprise given the fact that the drug cures more than 90% of patients.

Finding Income In Drug stocks

A recent selloff in the industry resulted in lower stock prices and higher dividend yields. Large cap pharmaceutical shares in the S&P 500 recently yielded 2.9%, among the best in the index, and some of the stocks have yields approaching 4%. The market as a whole is yielding 2%.

Besides Gilead, AbbVie (NYSE: ABBV) is another potential buy. AbbVie’s dividend yield was recently at 3.8%. Pfizer (NYSE: PFE) and Merck (NYSE: MRK) are also offering higher than average dividend yields. The table below shows the yield for these two and several other companies.

 

healthy dividend stocks

Source: Barron’s

The payout ratio shows the percentage of earnings that are allocated to the current dividend payout. In all of these cases, the payout ratios appear to be reasonable. Analysts generally warn that ratios above 80% are a cause of concern and ratios above 100% are considered to be unsustainable in the long run.

Each of these companies distributes at least one drug that provides steady cash flow. Drugs will eventually lose patent protection which can be significant for a small company, since the loss of patent protection attracts competition in the form of generic drugs.

The cash flow from these drugs allows the large cap companies to fund extensive research programs that could result in the discovery of new drugs that could become future billion dollar blockbusters. This cash flow also could fund potential acquisitions.

Acquisitions can be very profitable for these companies. As an example, it is important to remember that in 2011, Gilead acquired Pharmasset, Inc. for about $10.4 billion. “This transaction helped cement Gilead as the leader in treatment of the hepatitis C virus by giving it control of sofosbuvir.”

Cash flow is the ultimate goal of any company. It can be used to reward shareholders through dividends and share buybacks, fund acquisitions or be used to reinvest in the business operations.

In the pharmaceutical industry, many of the large cap companies are generating enough cash flow to do all of these. This leads to a high probability of long term success for the company since acquisitions and investments fuel further growth while dividends and buybacks fuel shareholder returns.

Even with the current difficult political climate in the pharmaceutical industry, these companies are likely to deliver strong returns and income for shareholders.

 

To learn more about other trading opportunities, click here. 

Value Investing

Is There Really an Existential Crisis in Value Investing?

Posted on by Team Editor

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.

The chart below shows the performance that prompted questions about Buffett.

Buffett performance

The greatest value investor in the world was underperforming the broad stock market for years. Analysts questioned if Buffett had missed a change in how markets work. At the time, Buffett ignored tech, arguing that he invested in companies he understood.

Time proved that Buffett was right. He did miss the entire bubble in the stock market, and by the time stocks bottomed in the fall of 2002, Buffett’s reputation as a great investor remained intact. So did his long term record of beating the market.

Here We Go Again

For investors with a sense of history, the feelings of that era may have come rushing back when they saw the recent Wall Street Journal headline, “Value Investors Face Existential Crisis After Long Market Rally.”

The story began with a summary of how the market has been ignoring value for years:

“Hunting for cheap stocks has been out of favor for so long that some self-proclaimed “value” investors are embracing a broader mandate, a potentially costly move in the later stages of an economic cycle.

Many such buyers have drifted away from the hallmark of value investing championed by the likes of Benjamin Graham and Warren Buffett : actively picking stocks the market has overlooked. Those legendary investors assessed what they called a company’s intrinsic value and compared it with metrics such as its cash flow and price-to-book ratio, a measure of net worth.

Value stocks—traditionally shares of consumer-staples companies, basic materials firms and big manufacturers, among others—have been stuck in a rut for most of the nine-year rally in U.S. stocks. The Russell index of 1,000 of the biggest value stocks in the market has fallen 2.1% in 2018, the fifth straight year—and the 10th of the past 11 years—that the index has lagged behind its growth counterpart, which is up 6.9%.”

The chart below shows the problem in a way that mirrors the underperformance of Berkshire Hathaway in 2000.

growth stocks

Source: Wall Street Journal

The question is whether investors will react as Buffett did in 1999 and continue with their disciplined approach. Some are already showing signs of changing with the times.

Justifying Value in Growth

For some value investors, there has been an evaluation of what exactly value means in the current market.

“One of the toughest things is being able to articulate what value investing is anymore,” said Laton Spahr, the portfolio manager of Oppenheimer’s value fund. “It’s hard to pinpoint what value investing is today, and that is the hard thing to making it relevant to retail clients again.”

For him, just like it did for many others including a large number of individual investors, the 2008 financial crisis marked a turning point. It marked a significant change in the monetary regime as broadly accommodative monetary policies led to a general increase in the prices of stocks and other assets.

Spahr has focused on financials in this environment, trying to determine which banks are in a position to surprise the market with higher capital returns or faster dividend growth during their annual stress tests.

“We had to become slightly more tactical and trade a little more. There’s more awareness of what the catalyst events are,” he said. His performance shows the shift in thinking has paid off with the fund he manages down slightly this year after gaining a respectable 10% last year.

The shift in tactics has changed the pace of trading in the fund which still looks to hold stocks for about three years. But, now the investment team will add to or sell down individual positions to boost or protect returns based on their analysis of those banks.

“We trade our portfolios 20% more than we did 10 years ago,” Spahr noted.

His fund has also blurred the line between value and growth, taking stakes in Microsoft Corp. and UnitedHealth Group Inc., two stocks that Russell Indices classify as growth stocks. “Anybody who is surviving in this world as a value investor has had to run outside the value benchmarks.”

Running outside the value benchmarks can allow value investors to justify buying shares of Amazon.com Inc. or Netflix. They can argue those companies are still undervalued by the broader market, despite their high valuation ratios.

The chart below shows Amazon’s price to earnings (P/E) ratio has fallen to about 125, half the peak ratios. It’s not a traditional value stock but is a top performer in the stock market.

Amazon's PE Ratio

Critics call it portfolio window dressing to boost returns. When managers engage in window dressing, they buy popular stocks to show their investors they are in touch with the broad market. But, often they take a position size that is too small to have a meaningful impact on performance.

Window dressing seems to be justifiable in the current market.

Eddie Perkin, chief equity investment officer at Eaton Vance, said value funds that have ignored the hugely popular FANG stocks— Facebook Inc., Amazon, Apple Netflix and Google parent Alphabet Inc. —run the risk of being left behind in the market.

“The FANG stocks are so dominant in those benchmarks that to not own them, you got really hurt the last few years,” he said. So, you had to have those in your portfolio to keep up with other growth managers.”

Managers in the value space seem to be evolving rather than facing an existential crisis. That could be prudent since the goal of an investment manager is to keep assets under management so that they can keep investing.

In the long run, value is likely to deliver market beating returns. But, history shows the strategy can underperform for years at a time. As Buffett demonstrated, the underperformance is often followed by an extended period of outperformance.

However, to benefit from the times when value beats the market, investors need to stick with the strategy even when they face an existential crisis.

 

Cryptocurrencies

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

Posted on by Team Editor

Source: BlackBerry.com

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. Apple, as one example, didn’t invent the smart phone. They were not the first to put email capability onto a phone. Blackberry might have been the first company to create a phone that allowed users to text and email.

The chart of the company, now trading under the symbol BB on the New York Stock Exchange, shows the ups and downs of the company’s success.

Blackberry chart

There was a reward for developing the new product and the new technology that powered the product. But, the company was able to innovate quickly enough to make the product competitive with newer competitors including the iPhone.

Being Second, or Even Third or Later, Can Reduce Risk

In technology, there are many losers. The problem might not be that the company doesn’t have a good product or good management. It could just be that a competitor comes into the market and changes everything before the first company can react.

This situation could be unfolding in the cryptocurrency markets. Early adopters have been well rewarded for their foresight in many cases. Their rewards attracted a wave of new investors who came into the market as a peak was developing.

Technological breakthroughs also drew competitors. This led to a flurry of new cryptos and the now popular initial coin offering. Some of these will be successful in all likelihood and many will be like the competitors who enter any new field of technology, many of which will not survive the inevitable shakeout.

The chart of bitcoin, shown below, indicates we have seen the first wave of profits that have already been delivered to many investors. Many late comers may be nursing losses as they rushed in too late to benefit from the initial rate. Now, a period of stabilization appears to be underway.

Bitcoin daily chart

The relative stability is now allowing large companies to review the situation and here, many are finding that they want to be a part of the next wave. In an analogy based on smart phone technology, many companies now want to be Apple since Blackberry proved the market was possible.

The $2.4 Trillion Newcomer to the Market

In recent weeks, according to Barron’s, “Fidelity Investments, which manages $2.4 trillion in assets, is looking for new employees who can develop products for cryptocurrencies”, a sign that it could get more serious about digital currency.

For a large conservative financial firm, Fidelity was early to realize the potentially transformative impact of cryptocurrencies and blockchain technology in general.

Chief Executive Abby Johnson has pushed the firm to experiment with cryptocurrencies, and she even spoke at the Consensus conference, the largest annual gathering of crypto-fans in the world, in 2017.

Fidelity is also moving into the robo adviser space as it competes to remain large in the new environment.

global assets

Source: Business Insider

But Fidelity’s actual experiments in cryptocurrencies have been modest. Some Fidelity customers can see their bitcoin balances in their accounts, but customers can’t buy and sell digital coins on the platform. Fidelity has mined cryptocurrencies, and accepts bitcoin and ether for charitable contributions. Employees can purchase food with bitcoin at the Fidelity cafeteria in Boston, and join a Bits and Blocks club to attend internal lectures on blockchain tech.

And yet, Fidelity has mostly been experimenting while other financial firms have been diving in more aggressively, from big traditional exchanges that offer bitcoin futures to companies such as Square (SQ) and Robinhood that allow users to trade digital coins.”

But, all that might be about to change. Barron’s saw that Fidelity is advertising to hire “a systems engineer “to help engineer, create, and deploy a Digital Asset Exchange to both a public and private cloud.”

The truth is that there are already several companies that provide the capability for investors to exchange currency for digital coins. But, none of them are Fidelity.

The company is also posting help wanted ads for someone to develop custodian services for bitcoin and other digital currencies, Business Insider reported.

Custody has proven to be a problem for investors. Crypto coins are vulnerable to hacking or they can be lost. Several companies have been building custody solutions to address this problem including the U.S. exchange Coinbase which already has a solution available to institutional investors.

But, the problem of lost coins remains significant.

According to experts, there are an estimated 3 million bitcoins — totaling nearly $25 billion — lost because the retrieval codes have gone missing or the currency owners died without passing the codes onto their next of kin.

The three million lost coins is a significant portion of the maximum 21 million bit coins that will eventually be mined and available.

One example is James Howells, who reportedly lost a hard drive with the key to more than $60 million in bitcoin.

“I mined more than 7,500 coins over one week’s time in 2009; there were just six of us doing it at the time, and it was like the early days of a gold rush,” said the IT worker turned crypto investor, 32, who lives in Newport, Wales.

“Four years later, I had two hard drives in a desk drawer. One was empty and the other contained my bitcoin private keys,” Howells recalled. “I meant to throw away the empty drive — and I accidentally threw away the one with the bitcoin information.”

This story is not unusual. “People put them on laptops, storage drives, USBs,” said Brian Stoeckert, a legal consultant in the crypto field. “Lose one of them without having it backed up, and you are out of luck.”

The potential loss of the coins may also be affecting the family of entrepreneur and crypto investor Matthew Mellon who was one of the first supporters of the Ripple (XRP) cryptocurrency and was famous for his successful investments in tokens.

According to reports, in recent years, Matthew Mellon has acted as an advisor to Ripple Labs. He has Invested in XRP tokens in 2015, only $2 million and it turned to about $1 billion in the beginning of 2018, according to Forbes. Mellon took the 5th place in the list of cryptocurrency billionaires.

According to experts, even with the XRP crash in the first quarter of 2018, at the time of the death of billionaire Matthew Mellon, XRP tokens worth about $500 million (or about 1 billion coins) were stored in his crypto wallets.

The reports noted, “according to people, who were familiar with Mellon, he was paranoid in security matters. He stored his crypto assets on dozens cold wallets, which were distributed over secret bank storages throughout the United States.

Even if these wallets can be found and identified, private keys will be needed to extract the tokens. Only Mellon himself knew keys to his wallets.

The family of the deceased does not disclose information about the fate of his crypto investments. It is possible that his impressive cryptocurrency capital had been lost without any chance of recovery”

Against this backdrop, it’s not hard to understand why Fidelity is looking at the market.

A Fidelity spokeswoman wrote in an email to Barron’s that “It’s no secret that we are actively exploring cryptocurrencies, including Bitcoin and other digital assets in our Blockchain Incubator at Fidelity.”

The spokeswoman did not directly address the exchange or custody products, but wrote the firm is committed to “exploration” in this area.

“We see the future of financial services taking place on open and permission-less ledgers, with technologies like digital assets, currencies and Blockchains and we are very actively exploring what this may mean for Fidelity. We are hiring to meet the demand for this exploration, but we have nothing to announce today.”

Fidelity’s push into crypto comes as firms that started as digital currency specialists increasingly try to join the traditional finance world. Circle, a peer-to-peer cryptocurrency payment and investment company backed by Goldman Sachs Group (GS), is reportedly seeking a federal banking license.

With the rush of second wave giants into the field, it is possible crypto will be ready to create more millionaires in the coming years.

 

To find other market related tips and services, click here. 

Weekly Recap

Weekly Review

Posted on by Team Editor

Central Bankers See Space for Cryptos

Even as cryptocurrencies proliferate, there is significant debate about what exactly cryptos are. Central bankers around the world seem to be reaching a consensus that crypto is money. That’s a significant development.

Many see the likelihood, that based on the intrinsic qualities of digital assets and the various solutions that they tend to offer to the fintech industry, crypto assets could one day reduce demand for central bank money. Now could be the time to seriously look at cryptos. You can read more right here.

Reduce Your Risk With This Strategy

When searching for trades, investors tend to think a great deal about what they should buy. This is important but it’s also important to ask, “how many shares of stock should I buy?” The same question applies to exchange traded funds (ETFs) or other trading vehicles.

In a recent article, we answered these questions and provided a trading strategy than can be used to reduce risk. You can read more here.

The FBI Highlights a Trading Opportunity

Recently, the FBI issued a report recommending that everyone reboot their routers. They found that, “foreign cyber actors have compromised hundreds of thousands of home and office routers and other networked devices worldwide.”

If it’s possible the FBI struggles with cybersecurity, that shows how difficult the field is. That indicates there are many stocks to consider in the field. We share those with you in this article.

Finding Safe 5% Yields

Yields are elusive, especially high yields in the current market environment. Published yields can also be deceptive and may not really be available to investors. That’s because of an all too often overlooked investment cost, taxes.

All investors can benefit from tax savings and we tell you how in our recent article.

 

 

 

 

Passive Income

Finding Safe 5% Yields

Posted on by Team Editor

Yields are elusive, especially high yields in the current market environment. Published yields can also be deceptive and may not really be available to investors. That’s because of an all too often overlooked investment cost, taxes.

For at least some investors, taxes are considered near the end of the year. The end of year tax planning is often applied solely to the stock market and involves reviewing trades, trying to find losses that can be recognized in order to offset gains that are taxable.

Gains, in taxable accounts, are reduced by an investor’s tax rate. Capital gains can enjoy a favorable tax rate. But, that same favorable treatment does not apply to fixed income investments.

That means, on an after tax basis, income investments might offer lower than expected cash flow to investors who forget taxes.

Tax Planning Should Not Be Just For High Net Worth Investors

High net worth investors, those with significant investable assets that are $1 million or more, have access to sophisticated planning strategies. Their plans can include tax savings tools like using municipal bonds that pay relatively low yields.

However, the low yields need to be adjusted for the tax savings in order to make a true comparison with taxable bonds. It’s important to look at the taxable-equivalent yield, which factors in the tax benefits that municipal bonds, or munis, provide.

The biggest benefit is that the interest paid by munis is typically exempt from federal taxes. For an investor residing in the state in which a municipal bond was issued, state and local income taxes are usually exempt, as well. In high tax states, this is an important benefit to high net worth investors.

But, “It’s not just a marginal benefit for a high-income investor to invest in munis. It’s a very large benefit,” says Alan Schankel, a managing director and municipal strategist at Janney Investment Strategy Group, recently told Barron’s.

The table below shows the tax equivalent yields under various scenarios.

taxable yields

Source: Barron’s

Finding the Real Yield

The calculation of a taxable-equivalent yield is fairly straightforward. You begin by finding the stated yield and divide it by one minus the tax rate.

As an example, consider a married California couple whose income is $250,000: A municipal bond’s stated yield is 3% and their total tax rate is 48.1%—35% for the feds, 3.8% for Medicare, and 9.3% for state taxes. One minus 0.481 is 0.519.

Then divide the interest rate by that value, so 3 divided by 0.519 gives you a taxable-equivalent yield of nearly 5.8%. That’s nearly twice as high as the stated yield, according to the examples cited by Janney.

That is apparently a significant benefit for a high income family. But, what if you aren’t earning $250,000? Well, if you are self employed in a high tax state, then you might still be heavily taxed.

According to the IRS, “you usually must pay self-employment tax if you had net earnings from self-employment of $400 or more. Generally, the amount subject to self-employment tax is 92.35% of your net earnings from self-employment.”

This rate consists of 12.4% for social security and 2.9% for Medicare taxes, a combined 15.3%. But, TurboTax explains, you can claim 50% of what you pay in self-employment tax as an income tax deduction.

For example, a $1,000 self-employment tax payment reduces taxable income by $500. In the 25 % tax bracket, that saves you $125 in income taxes. This deduction is an adjustment to income claimed on Form 1040 and is available whether or not you itemize deductions.

You can see the deduction reduces the tax, but it is still significant. This in addition to federal income taxes and state or city income taxes and even a self employed individual with a relatively average income could face a significant tax rate.

Another thing to consider is that under the revised tax code, the deduction for state and local taxes, or SALT, is capped at $10,000. That’s especially important in certain states with higher local taxes such as New York, New Jersey, and California, as the accompanying table shows.

“I would argue that munis are more attractive than they’ve ever been because, with the loss of various deductions, including SALT, one’s taxable income is higher than it’s ever been,” Robert Willens, who runs tax consultancy Robert Willens LLC, explained in Barron’s.

Now, Where to Find Safe 5% Yields

It is important to remember that like any other fixed income investment, municipals will lose value as interest rates have risen. The iShares National Muni Bond exchange-traded fund (NYSE: MUB), which tracks the S&P National AMT-Free Municipal Bond Index, has lost 0.55% this year.

This fund consists of investment grade credits.

MUB weekly chart

The recent yield on MUB is 2.3% although the real tax equivalent yield is determined by your individual tax situation.

Catherine Stienstra, head of municipal-bond investments at Columbia Threadneedle Investments, told Barron’s that the Bloomberg Barclays Municipal Bond Index has returned a little more than 1% this month, partly owing to supply constraints. “This year, we are expecting even more supply constraints,” she adds.

High yield munis have fared better. Compared with investment grade credits, high yield bonds are much more of a play on credit risk. However, with the U.S. economy in pretty good shape and tax receipts healthy, high yield munis for the most part haven’t caused a lot of worry among investors.

The SPDR Nuveen S&P High Yield Municipal Bond ETF (NYSE: HYMB) has returned about 2.88% year to date, a respectable result. But remember that these bonds are classified as high yield for a reason, notably additional credit risk, so some caution is needed.

This fund recently yielded about 3.4% and, again, the real tax equivalent yield is determined by your individual tax situation.

HYMB weekly chart

These bonds have long been used by high net worth investors and there is a reason for that. There are significant tax savings for high income individuals.

However, even people with less income than top earners can benefit from tax savings. Munis are worth considering, especially if you are self employed and subject to state income taxes.

 

Stock Picks

The FBI Highlights a Trading Opportunity

Posted on by Team Editor

Source: FBI.gov

Recently, the FBI issued a report recommending that everyone reboot their routers. They found that, “foreign cyber actors have compromised hundreds of thousands of home and office routers and other networked devices worldwide.”

The FBI’s recommendation comes on the heels of a newly discovered malware threat called VPNFilter, which has infected over half a million routers and network devices, according to researchers from Cisco’s Talos Intelligence Group.

VPNFilter is “able to render small office and home office routers inoperable,” the FBI stated. “The malware can potentially also collect information passing through the router.”

The Justice Department believes that Russian hackers, working under the name Sofacy Group, was using the malware to control infected devices.

What Should Investors Do?

It can be difficult to determine if any individual router has been compromised by VPNFilter. The FBI notes only that “the malware targets routers produced by several manufacturers and network-attached storage devices by at least one manufacturer.”

Those manufacturers include Linksys, Mikrotik, Netgear, QNAP and TP-Link. However, Cisco’s report states that only a small number of models, just over a dozen in total, from those manufacturers are known to have been affected by the malware, and they’re mostly older ones.

Experts note that this means there’s a fairly small chance any individual is operating an infected router. Of course, you can never be too careful, so rebooting, or turning the power to a router off and back on, is a harmless procedure.

In fact, rebooting is often among the first troubleshooting steps when you’re having network or connectivity issues.

However, according this Krebs on Security post, which cites the aforementioned Cisco report, rebooting alone won’t do the trick: “Part of the code used by VPNFilter can still persist until the affected device is reset to its factory-default settings.”

So, one report asks, “is it possible the FBI misinterpreted the “reset” recommendation as “reboot”?”

This Highlights the Risks and the Opportunities

If it’s possible the FBI struggles with cybersecurity, that shows how difficult the field is. That indicates there are many stocks to consider in the field.

Some of the top brands in the group include Palo Alto Networks (Nasdaq: PANW), Fortinet (Nasdaq: FTNT) and Verisign (Nasdaq: VRSN). Proofpoint (Nasdaq: PFPT), Nice (Nasdaq: NICE), FireEye (Nasdaq: FEYE) and CyberArk Software (Nasdaq: CYBR) are also top names.

These stocks are also among the recent market leaders. Shares of Palo Alto Networks are up about 45% since the beginning of the year. Fortinet is up 39% in the same period. Proofpoint has a 35% gain, while CyberArk has surged 45%.

A Surge In Cybersecurity IPOs

The success of these stocks has led to a surge in initial public offerings (IPOs) of other companies in the field. This could be a warning of a potential top and is a factor that investors should consider as they select investment opportunities.

IPOs offer an opportunity for insiders to cash out and a rush to do so could indicate a weakening of fundamentals. That seems unlikely in this case given the increasing number of risks in the sector.

FBI’s Internet Crime Complaint Center says it received 301,580 complaints in 20117, addressing a wide array of hacks and scams. The reported losses exceed $1.4 billion. There have been more than four million complaints since the FBI center was created in 2000, it said.

Carbon Black (Nasdaq: CBLK), for example, raised $152 million with its IPO. The company provides a cybersecurity cloud solution that “continuously captures, records and analyzes rich, unfiltered endpoint data.”

Shares jumped 26% on its first day of trading, May 4. The company has more than 3,700 customers and proclaims a market opportunity of $19 billion. However, shares have been volatile.

CBLK daily

SailPoint (NYSE: SAIL) raised $240 million with is November IPO. SailPoint says it’s developed a new category of identity management solutions, offering a platform that provides organizations with a better view into who currently has access to which resources and how that access is being used.

It’s stock has also been volatile. But, it has rewarded investors with significant gains.

SAIL daily chart

Cybersecurity as an Investment

With the number of attacks growing, this could be an ideal investment opportunity.

number of complaints

Source: Mehtawebsolution.com

The number of attacks is likely to increase. This is especially true as the collection of Internet of Things (IoT) devices, mobile devices, laptops, PCs, servers and other cloud-connected units on the network’s perimeter are “endpoints.”

As more endpoints become linked to the Internet of Things, it greatly expands the number of hacker targets. The VPN Filter virus, for examples, targets routers, which are particularly weak, difficult-to-defend links in the networking chain.

The IoT has created highly complicated problems for businesses and organizations to solve.

Previously, organizations established a security perimeter to safeguard the corporate network. This approach assumed that all data and applications resided inside the corporate network. Organizations corralled the data, which had to pass through secure gateways.

But the proliferation of endpoints and cloud computing expanded the attack surface. That’s created a massive shift in the way businesses and organizations protect against cyberattacks, by focusing on the endpoints, which have become the primary targets of cyberattacks.

This can create confusion for investors. A simplified solution could be for investors to buy the First Trust NASDAQ Cybersecurity ETF (NYSE: CIBR). This ETF seeks to track an equity index called the Nasdaq CTA Cybersecurity Index.

The fund will normally invest at least 90% of its net assets (including investment borrowings) in common stocks or in depositary receipts that comprise the index. The index will include securities of companies classified as “cyber security” companies by the CTA.

The fund is not diversified and the top 10 holdings account for about 46% of the funds assets which top $500 million. Not surprisingly, the fund has tracked the stocks in the sector and rallied strongly.

CIBR daily

However, its lack of diversification indicates that it could sell off steeply in the event of a market decline. But, if the bull market continues, this ETF, or the individual stocks in the sector are likely to deliver gains.

 

 

Value Investing

Reduce Your Risk With This Strategy

Posted on by Team Editor

When searching for trades, investors tend to think a great deal about what they should buy. This is important but it’s also important to ask, “how many shares of stock should I buy?” The same question applies to exchange traded funds (ETFs) or other trading vehicles.

It’s an important question to consider. According to some experts, this is the most important question to answer. Yet, it’s a question many individual investors fail to consider as they make their trading decisions.

Rather than asking this question, some investors just buy the same number all of the time. This was an especially common approach years ago when companies would often split their stock when the price moved above $100 a share. Then, investors might routinely buy 100 or 50 shares in each trade.

Now that splits are less likely, the investor might look at their account and use all available cash to decide how many shares they should buy. Or, they might always use the same dollar size per trade, perhaps always buying $1,000 worth of stock.

To do this, they divide the investment by the share price. If a stock is trading at $22 a share, they would be able to buy 45.45 shares. Since it’s not typical to buy a fractional number of shares, the investor might round down and buy 45 shares. More aggressive investors might round up and buy 46 shares, using margin borrowing at times to increase their exposure.

There could be a better way to make this decision that involves using market data to balance position sizes by their risk rather than their share count or dollar amount.

Let Risk Determine Position Size

Risk, in the financial markets, is often associated with volatility. The more volatile a stock is, the more risky it is under this approach. This makes sense since volatility is associated with the size of the typical price move. A stock with volatility could make a large move quickly, and that could lead a large loss.

An indicator that is designed to measure the volatility of an individual stock is the average true range indicator (ATR).

The ATR is customized to the personality of each stock. The true range (TR) is the distance between the high and low accounting for any gaps that occur in trading. It’s calculation is summarized in the chart below.

true range

Source: StockCharts.com

A 14-day average of the true range is an indicator of a stock’s normal movement. Like almost all technical indicators, the ATR is readily available on a number of web sites. It’s often possible to customize the length of the indicator so that you could use a 10-day or 10-week ATR if you choose to.

The ATR provides a measure of volatility and that can be used to determine a type of risk equalized position sizing.

The Calculations

Consider the $22 stock we looked at above and decided to buy 45 shares of based upon a $1,000 trade size. We would use a 20% stop loss, risking about $200 per trade on that stock.

Now, assume the ATR is equal to $1. We still want to risk $200 so we now need to determine how many shares to buy. We can define a large move in the stock as being equal to 3 times the ATR, or a move of more than $3 in this stock. If the price falls by more than $3 we want to sell.

In this case, with a risk of $200, we could buy 66 shares. That is about equivalent to a 20% stop loss on 45 shares of the stock. Of course, rounding is affecting these values. Buying 45 shares using the equal position sized approach would lead to missing out on potential gains if we are right about the stock.

That would be because we owned too little of the stock. Notice that with the ATR we are taking the same amount of risk, in theory, as we did by buying equal dollar amounts. In practice, risk can and does spike suddenly and that possibility is impossible to eliminate.

Now, what if the ATR is equal to $3? A 3 ATR move is now $9 and dividing the $200 risk by $9 tells us to buy just 22 shares. Buying 45 shares using the equal position sized approach would lead to too much risk in our account.

If the volatility was smaller, and the ATR was just $0.50, we could buy more. In that case, the number of shares to buy would be equal to $200 by $1.50, or 3 times the $0.50 ATR. That would be 133 shares, or more than $2,900 worth of the stock.

In a $10,000 account, low volatility stocks like this could be too large of a portion to hold comfortably. This would be a position size of almost 30%. That indicates small traders may want to focus on stocks with some degree of risk to allow for adequate diversification, a slightly counterintuitive result.

The ATR can change over time as the chart below shows.

PBR weekly

In this chart, a large down move led to a sharp rise in the ATR. This would likely trigger a sell order.

Likewise, a large up move can also increase the value of the ATR as the next chart shows.

DKS daily

This indicates a trader should probably decrease exposure to the position to limit the risk of the now more volatile stock.

The ATR is an important tool to consider using. It can help determine the best position size to limit risks, while potentially maximizing returns that are consistent with the level of risk. But, it is a dynamic tool that will require updating if it’s employed in portfolio management.

It’s a flexible tool and can be applied to daily or weekly data, depending upon an individual’s preferred trading time frame. The parameters can be changed, again to accommodate a trader’s preferred approach to the markets.  

 

Cryptocurrencies

Central Bankers See Space for Cryptos

Posted on by Team Editor

Even as cryptocurrencies proliferate, there is significant debate about what exactly cryptos are. Central bankers around the world seem to be reaching a consensus that crypto is money. That’s a significant development.

According to experts, “the role of cryptocurrencies in the evolution of money remains a valid debate which has lingered for the best part of the last decade. How the emergence of digital assets will affect the existing monetary system that is upheld by central banks is a subject that is attracting a lot of attention.”

Many see the likelihood, that based on the intrinsic qualities of digital assets and the various solutions that they tend to offer to the fintech industry, crypto assets could one day reduce demand for central bank money.

Deputy Director of the IMF’s Monetary and Capital Markets Department, Dong He, recently said,

“As a medium of exchange, crypto assets have certain advantages. They offer much of the anonymity of cash while also allowing transactions at long distances, and the unit of transaction can potentially be more divisible. These properties make crypto assets especially attractive for micro payments in the new sharing and service-based digital economy.”

Hong Kong

Source: ejinsight.com

This view recognizes an important difference between cryptos and traditional forms of money.

Central banks emerged to introduce a relationship based on credit between the central bank and citizens who wanted to use cash, and between the central bank and commercial banks which used reserves to facilitate business.

Crypto assets are bringing a new narrative to the concept of money. Rather than credit relationships, crypto assets are a representation of a kind of commodity money.

The IMF believes that crypto assets could reduce demand for central bank-issued currency.

There have been criticisms about cryptocurrencies in their capacity to function as a dependable medium of exchange. According to He, for the time being, crypto assets are too volatile and too risky to pose much of a threat to fiat currencies.

He also notes that they do not enjoy the same degree of trust that citizens have in fiat currencies. The lack of trust is related to the fact that there have been cases of fraud, security breaches, and operational failures. Plus, cryptos have been associated with illicit activities.

The situation is not hopeless for crypto assets as technological innovations and continuous development could go a long way in addressing the deficiencies. That’s one reason the IMF Director, He, believes that central banks must learn from how crypto assets are used in order to fend off the competitive pressure from crypto assets.

IMF May Need to Act Soon

Apparently, the reality of the existence of cryptocurrencies and the solutions that they bring is becoming more acceptable. Rather than the fierce resistance and negative energy that existed between the crypto advocates and traditional institutions, there appears to be an increased level of acceptance between both sectors.

He noted that the onus now lies on the central banks to take steps that will enhance the effective coexistence of both sectors of the monetary ecosystem. This can be achieved by striving to make fiat currencies better and more stable units of account, while government authorities work to regulate the use of crypto assets.

Finally, He suggests that central banks also need to make fiat currency more attractive for use as a settlement vehicle while considering the issuance of digital tokens of their own to supplement physical cash and bank reserves.

A Growing Role in the Markets

While this view focuses on crypto as a means of commerce, there are other possible uses for the assets. Cryptos could become a flight to safety asset, in some ways filling the same role that gold plays in times of crises.

This doesn’t mean that gold is used as a currency in times of crises although that is certainly possible. As a flight to safety asset, crypto is an asset bought by traders during a time of crisis but could be sold after the crisis eases.

This is a role of gold, and the market size is significant with the size of the gold market estimated to be about $7.7 trillion.

Crypto represents an even smaller slice of the money market. Around the world, central bankers have created an estimated $90.4 trillion worth of money, using data for measures of the broad based money supply.

Central bankers created the money supply to facilitate commerce, as noted above. Their best estimate is that more than $90 trillion worth of money, defined as cash and other assets that can be transferred between banks in near real time, to serve that purpose.

Centuries ago, there was gold backing the decisions of central banks but now the money supply is based on the best estimates of economists around the world. There is no reason that crypto could not be incorporated into these systems.

In the current environment, crypto assets are a small sliver of the size of the broad money supply.

money supply

Source: data from Fortune.com

Crypto assets could increase in size through appreciation, perhaps even appreciation driven by speculation as many of the market’s critics claim. Or, the asset could increase in value as perceptions of its value and utility changes.

After all, at one point, the broad money supply was an idea. It was an idea to facilitate trade among people that often lived at great distances from each other. They saw the value of the trade, and eventually, visionaries found a way to facilitate the trade.

At the time, thousands of years ago, the trade was helpful in that it improved the quality of life, but an agreed upon means of exchange was needed to make those improvements possible.

Eventually central banks took control of the means of exchange. Their role evolved over time and may now be under challenge. There could be an alternative to currencies available, and the alternatives of cryptos are now in use.

By design, the new systems are decentralized, and the values are determined by supply and demand. The supply is determined by computer algorithms and the demand set in the market.

 

 

Weekly Recap

Weekly Review

Posted on by Team Editor

A Chance to Trade the Ground Floor

Many investors look at great performing stocks and wish they had gotten in “on the ground floor” or before the company’s value was obvious to everyone. Well, right now, the opportunity to invest on the ground floor might be possible in the cryptocurrency markets.

Don’t miss out on this opportunity. Read more right here.

Value Factors: Buzzwords and Profits

Some investors argue that price moves are impossible to predict. But, many of these investors will consider that there are some methods that improve the probability of success for investors. They might point to value investing as an example.

In the academic community, investment strategies that can deliver market beating profits are called “factors.” The value factor is widely studied and shown to deliver profits in the long run when properly implemented. In this article, we share details on this process. You can learn more by clicking here.

Pet Spending Could Drive These Stocks

Pet owners tend to treat their animals well. This includes feeding them high quality foods and ensuring they receive the best medical care possible. There are tradeoffs and good care does not mean unlimited spending. But, good care does result in relatively high expenditures on pets. These expenditures set up trading opportunities and we share those with you in this article.

A Different Way to Invest in Amazon

Warren Buffett has frequently written about his investment strategies. One, value investing, is well known. Buffett searches the world looking for assets he can buy below their true value. This is the goal of value investors and Buffett has been more successful than others in the field.

This week, we share how individual investors can trade like Warren Buffett to potentially create a new passive income stream. Find out more here.