Author: Manuel Jesus

Economy

This Could Be the Time to Buy a Home

Posted on by Manuel Jesus

If you are renting and considering buying a home, now could be the time to make the move based on recent data. If you’re looking at adding an investment property to your portfolio, this same data could also support that decision.

The news, according to CNBC is that the median monthly rent in February rose to $1,472, an increase of 2.4 percent compared with February 2018, according to Zillow. For the typical renter, this means about $400 more per year.

The news site noted, “Home prices may be cooling off right now, but rents are heating up yet again.”

After taking a breather in 2018, due to new supply on the market, rents for both single-family homes and multifamily apartments are now rising at the fastest pace in nearly a year, according to Zillow.

“The rental market spent part of last year catching its breath after several years of breakneck growth,” said Zillow economist Jeff Tucker.

“Landlords are now coming to terms with the fact that rent cannot grow faster than income forever, and after that short correction we can expect a much more vanilla, slow-growth market going forward. As we enter the 2020s, the demand for rentals is projected to fall as many millennials move on to homeownership.”

Rents slowed for much of last year because of robust construction in the apartment market. Much of the new supply was on the high end, and some were concerned that vacancies would rise. Demand, however, remained strong, and now the supply is leveling off.

“Consistently, apartment occupancy growth has nearly kept pace with supply growth, as demand for apartments has been robust throughout 2018,” noted Barbara Denham, senior economist at Reis, in a December report.

“Not only has job growth supported apartment demand, but the weaker housing market has also benefitted the apartment market.”

Home sales have yet to rebound so far this year, and home prices are still gaining. Mortgage rates, however, dropped at the end of last year and continue to fall this month, signaling potential strength in the spring market.

More robust sales could take a little heat out of the rental market, but there is still a very low supply of entry-level homes for sale, meaning some potential first-time buyers will continue to rent, whether they want to or not.

Local Prices Vary

Of course, all real estate is local, with rents now significantly higher than a year ago in:

  • Orlando, Florida (+7.0 percent),
  • Phoenix (+6.8 percent),
  • Riverside, California (+6.2 percent),
  • Tampa, Florida (+5.5 percent) and
  • Pittsburgh (+4.9 percent).

According to Zillow, “the priciest major metro in the country remains San Jose, Calif., at $3,547 in February, up 1.4 percent from a year earlier.

It’s followed by San Francisco at $3,448 a month (up 1.6 percent), Los Angeles at $2,835 a month (up 3.5 percent), San Diego at $2,643 a month (up 4.2 percent) and New York at $2,419 (up 1.2 percent).

The lowest rent prices among major metros in February were Pittsburgh at $1,100 a month (up 4.9 percent), St. Louis at $1,155 a month (up 1.6 percent), Cleveland at $1,162 a month (up 1.7 percent), Detroit at $1,225 a month (up 2.3 percent) and Indianapolis at $1,234 a month (up 2.7 percent).”

Nationally, the trend could be worrying for renters.

national trend

Source: Zillow

The recent increases have pushed rental prices to a level that makes rent almost unaffordable for many.

Zillow rent and mortgage affordability

Source: Zillow

This could mean rates of increases will slow in the future and be in line with changes in wages. As the chart shows, the average share of income spent on rent, 28.2%, is well above its historic average of about 26%.

Wage growth is about 3.4% according to data provided by the Atlanta branch of the Federal Reserve. This could indicate that the average share of income spent on rent could remain relatively elevated as wages increase gradually.

Owners May See Slower Gains

MarketWatch cited reason for caution in the real estate market, “Meanwhile, home value appreciation dropped to its lowest rate since December 2017. The median U.S. home value, as measured by Zillow, was $226,300 in February, up 7.2% from the previous year.

The cool down in home values was most notable in San Jose, Calif., and San Francisco. That’s down from a 7.8% annual rate of home value appreciation in January.

One major reason why home values aren’t rising as fast any more is that the inventory of homes for sale increased 1% year-over-year last month, making it the fifth out of the last six months in which inventory increased.”

The trend in prices is shown in the next chart.

Zillow home value index

Source:  Zillow

As this chart shows, prices are at new all time highs and the pace of recent gains has been high, but rather steady and not indicative of a bubble as we saw in many markets in the early 2000s. One reason for that could be slower construction activity which is in contrast to the rapid pace of building in the bubble.

Analysts note that zoning restrictions and costs of construction could serve to limit new homes for some time. Limited supply could support higher home prices, even if the appreciation in prices falls to levels that are closer to their long term average which is in line with the rate of inflation.

The outlook is for slower gains, “U.S. home values are growing at a steady pace, and have surpassed pre-recession highs nationally and in a number of large markets. Driven largely by limited inventory and high demand, home values are growing fastest at the bottom end of the market.

Regionally, markets in the Pacific Northwest, Texas, Florida and parts of the Southwest continue to outperform slower-moving markets in the Midwest and Mid-Atlantic.”

Given the trend in prices, now could be an ideal time to consider a home, while rates are low, and prices are on the rise. This could benefit owners who reside in the home who could benefit from appreciation or owners who rent and could benefit from slightly higher rents in the next few years.

 

Did you know that dividends have rewarded investors for at least 100 years, at least since John D. Rockefeller said, “Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.”

We have prepared a special report about dividends that you can access right here.

Stock market

Big Investors Are Doing Something Small Investors Should Consider

Posted on by Manuel Jesus

On Wall Street, many analysts talk about the smart money. This represents the large funds and investors with millions of dollars. They are called smart money not necessarily because they are all highly intelligent. They are smart money because when they act together, they move markets.

There’s nothing mysterious about smart money. Large investors move significant amounts of money. They tend to read similar research and notice similar trends in the market. Some will lead and others will follow but they tend to move as a herd.

While some analysts focus on the underlying causes of market moves, others believe that the cause is less important than the trend so they simply follow the smart money.

Treasuries Offer a Safe Haven

According to The Wall Street Journal, many large investors are buying Treasuries. The news service noted,

“Investors are buying more newly issued U.S. government bonds at auctions, underscoring how signs of decelerating economic growth and the Federal Reserve’s caution toward further interest-rate increases have boosted demand for Treasurys.

Domestic investors purchased a record of roughly 55% of the new U.S. government notes and bonds sold at auction in January. That is up from 51% a year ago.

percentage of Treasury note and bond auctions

Source: The Wall Street Journal

Investors are also winning a greater share of auctioned bonds—more than 90% through February, up from 82% in the year-earlier period. That suggests mutual funds are willing to bid at higher prices than before to ensure that they get the bonds they want.

percentage of winning auction treasury bids

Source: The Wall Street Journal

“The Fed’s going to be on an extended pause,” said Michael Kushma, chief investment officer for fixed-income with Morgan Stanley Investment Management. “The hurdle for resuming rate hikes is pretty high.”

Investors are now betting that an interest-rate reduction is more likely by the end of the year. That comes after last week’s jobs report missed estimates by a wide margin and the European Central Bank dashed any plans to raise rates this year. Investors will get a fresh look at the situation this week as the Commerce Department reports on retail sales data Monday and the Treasury auctions $78 billion of notes and bonds.

This year’s Treasurys demand surprised some analysts after expectations for a pickup in growth and inflation around the world helped drive yields to multiyear highs in November. Yields rise as bond prices fall.

Many had said the rising size of Treasury auctions, lifted by the government’s tax cuts and spending increases, was one factor behind the climb in yields last year.”

The report continued,

” Much of the demand has stemmed from investors’ increasing appetite for longer-term debt, which tends to lose its value more quickly when interest-rates are rising, said Jim Vogel, head of interest-rate strategy at FTN Financial.

While the amount of auction bids submitted by investors has remained stable, their higher winning percentage suggests they are bidding at higher prices, he said.

Few are betting that policy makers will lift rates again soon. Fed-funds futures, which investors use to bet on the direction of central bank policy, recently showed an 80% probability that the Fed holds rates steady this year, with 20% odds that rates will fall and no chance they will end the year higher, according to CME data late Thursday. The odds of a rate increase have fallen from 23% a month ago.”

Updated probabilities are shown in the next chart.

Target Rate probabilities

Source: CME

While weaker job growth may prevent the Fed from raising rates, higher labor costs could prevent it from lowering them.

“Investor expectations are usually anchored by the central bank’s expectations,” said Thanos Bardas, a global co-head of investment grade bond investments at Neuberger Berman.”

If You Can’t Beat Them, Join Them

Individual investors can follow the smart money into Treasuries. Treasury notes could be bought for as little as $100. And the purchases can be made at no cost.

Treasuries can always be bought, for free, through the Treasury’s web site, TreasuryDirect.gov. Individuals obtain the interest rate available to large investors by submitting noncompetitive bids for bills, notes or bonds through that site. There is no fee so returns are generally going to beat those available through passive money market funds or exchange traded funds (ETFs).

Investors could consider Treasury notes, like other marketable Treasury securities, are debt obligations of the U.S. Government and are backed by the government’s full faith and credit. Offered in multiples of $100, notes pay interest every six months at a rate determined when they are auctioned.

Notes can be held to maturity or sold prior to maturity. At maturity, the principal is paid to the owner.

Treasury currently issues notes as follows:

Treasury Notes

Source: TreasuryDirect.gov

Notes can be purchased either directly from Treasury or through an intermediary such as a bank or broker. Interest from notes is exempt from state and local income taxes, but subject to federal tax.

Notes may strike the balance between risk and reward. Buying bonds, securities that mature in more than 10 years and potentially as long as 30 years, are subject to greater interest rate risk. That means when interest rates rise, the bonds will lose part of their value.

Even if an investor holds a 30 year bond until maturity and receives back 100% of the principal invested in the bond, there could still be a loss of purchasing power due to inflation. While it is possible that inflation will stay low for 30 years, many investors will be more comfortable with less risk than that.

Treasury notes, or bonds for more risk tolerant investors and bills for less risk tolerant investors, could be an ideal position to add to increase diversification. They can even be added to a portfolio for free although they often trade at little cost at discount brokers.

If there is a flight to safety, the investment could increase in value, at which time it could be sold if held in a brokerage account. TreasuryDirect could be best for investors committed to owning securities through maturity.

 

Did you know that dividends have rewarded investors for at least 100 years, at least since John D. Rockefeller said, “Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.”

We have prepared a special report about dividends that you can access right here.

Cryptocurrencies

Are Cryptos a Recession Hedge?

Posted on by Manuel Jesus

Recession is a word that chills investors. With good reason. The stock market often declines before the economy contracts and the declines in recessions tend to be significantly steeper than stock market sell offs that occur while the economy is expanding.

That makes recent research from the Fidelity Asset Allocation Research Team, which advises Fidelity’s fund managers, especially disturbing.

The team studies the business cycle, because they believe it helps determine the direction of stocks. In a recent report, it said the U.S. entered the late stage of the business cycle late last year.

business cycle chart

Source: Barron’s

Barron’s summarized the research, noting, “Developed economies like Germany, France and Italy are much deeper into the late stage of the business cycle, as are Canada, South Korea and Australia. Emerging markets like Brazil, Mexico and India also just entered the late phase.

The U.K., reeling from pre-Brexit chaos, is on the cusp of recession. China, the researchers say, is already there, although they define it as a “growth recession” because the Chinese economy has marked slowdowns, not actually negative growth.”

This matters to investors because, although bear markets are only fair predictors of recessions (seven of 13 postwar bear markets were followed by economic downturns), bear markets that precede recessions tend to be longer and deeper, averaging declines of 37%.

So if the economy is indeed in the final phase of its long recovery, that’s a warning sign to investors to get more defensive.

“We’ve just been through the best parts of the cycle for risky assets,” Dirk Hofschire, Fidelity’s senior vice president of asset allocation research, told me in a phone interview.

“Late cycle is sort of the transition phase. By the end of the cycle, when we move into recession, that’s when you would want to be a little more risk-off.”

Could Cryptos Rise in a Recession?

Cryptocurrencies haven’t really seen a recession. Barron’s reported, “This new, decentralized asset class was born at the tail end of the housing crisis, and has yet to experience the full force of a recession or even lengthy bear market.

For years, digital assets have existed in a period of market expansion in the United States. Gross Domestic Product (GDP) has increased significantly, bringing total average GDP growth from -1.73% in 2009 to 3.138% in 2017; and unemployment has dropped from 10% to 4%, with more than two million jobs created each year for the past eight years.

Unfortunately, what’s been a positive sign for upward trends in traditional markets has had an adverse impact on the mainstream appeal of digital assets.

Because the economy has steadily improved throughout the industry’s life-span, some more casual observers have failed to fully appreciate how the intrinsic qualities of blockchain-based assets (e.g., decentralization, immutability, and bespoke structures) may benefit them.

As a result, many have erroneously assumed all digital assets are functionally interchangeable, and will all react the same way to economic fluctuations.

As is the case with any industry, companies weathering the impact of a severe market correction are, understandably, going to react differently based on their business models, leverage, and market capitalization.

That’s not to say we’ll know exactly what will happen during a recession—it’s perfectly plausible, if not likely, that there will be at least some material degree of performance correlation between various digital assets.

However, what’s more likely is that we’ll begin to see certain digital assets, each equipped with their own unique value proposition, begin to separate themselves from the pack and gain momentum as a result of their inherent structural value, not merely from speculation or the rising tide of a bullish crypto market.

Faced with a recession, Bitcoin may serve a market function similar to that of a safe-haven commodity, rather than an equity, due to its inherent scarcity and decentrality. Bitcoin, by design, is not intended to be used as a foundation on which developers could build a platform or enterprise.

Because its supply is not controlled by any one person or entity, it’s more likely that Bitcoin will perform independently of broad market pressures (akin to how one would expect gold to react)—potentially even appreciating in value should demand for alternative forms of dependable value storage arise.”

Bitcoin daily chart

By contrast, Ethereum is far more likely to follow market trends. That’s because its platform allows other companies to build products on top of the Ethereum protocol, putting significant onus on mainstream investors to keep products afloat.

If the investors suffer, the companies suffer, which causes Ethereum to suffer as a result. Because Ethereum is a developer-focused blockchain, it’s very much dependent on how many companies use the Ethereum platform to build their projects.

If those companies were to go out of business, Ethereum’s relevance and, subsequently, its price, would undoubtedly be affected. That’s not to say Ethereum is structured similarly to equity markets by any means, but it’s more closely entangled with equity markets than most other digital assets.

Ethereum chart

Ripple’s XRP is a payments-focused digital asset that currently has the third largest capitalization in the crypto industry. Unlike Bitcoin and Ethereum, Ripple digital currency is frequently used for frictionless financial asset transfers, functioning more as a medium of exchange than other digital assets.

Because XRP functions outside the purview of mainstream markets, it’s certainly reasonable to believe that XRP would act independently in the event of a recession. On the other hand, however, XRP’s price is also highly dependent on issuance and adoption.

If Ripple loses usership—either because its issuance was mismanaged or because other projects (such as J.P. Morgan ’s new coin JPM) became more popular—XRP’s value would almost surely go with it.

Ripple daily chart

This all indicates that cryptos could be worth considering. Even if the economy grows, the assets could be bargains after their extended bear market. If the recession does strike, cryptos could bounce as investors seek safe havens. That could deliver significant gains to traders in the asset class.

The bottom line is that cryptos are worth considering for both long term investors and short term traders.

 

Did you know that dividends have rewarded investors for at least 100 years, at least since John D. Rockefeller said, “Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.”

We have prepared a special report about dividends that you can access right here.

Stock market strategies

If You Follow Buffett, You Might Have This Problem In Your Portfolio

Posted on by Manuel Jesus

Warren Buffett is widely followed because he has delivered a long record of successful investments. Not all of Buffett’s investments work but he often exits a position before there is a large loss. Of course, Buffett is not perfect, and he does occasionally suffer through large losses.

One example is Wells Fargo & Company (NYSE: WFC). The bank lost more than 80% of its value in the bear market that began in 2008 and then lost more than 20% of its value after reports that the bank was creating fake accounts for customers.

WFC monthly chart

In the long run, Buffett does appear to have done fine with WFC. But that is an opinion based on hindsight. A more challenging question could be what to do if your stock suffers a steep sell off? Buffett is forced to address that question based on his investments in Kraft Heinz stock (Nasdaq: KHC).

Confronting Bad News

KHC has sold off sharply in recent weeks.

KHC weekly chart

Barron’s summarized the problems that have pushed the stock price lower, noting that the company “isn’t catching any breaks—Bernstein has joined the numerous analysts who have downgraded the shares.

… Kraft hasn’t been having a great year to begin with. The stock tumbled more than 8% after its previous earnings report in November fell short of expectations. Kraft’s bottom-line results not only missed, but the results showed it had sacrificed pricing for growth, and investors reacted negatively.

The quarter showed that what used to be considered safe stocks just aren’t so safe anymore.

[More recently], it became clear that Kraft’s problems ran deeper than the staples slump.

 Not only did its fourth quarter and guidance disappoint, but the company also cut its dividend, took a $15.4 billion asset write-down related to its Kraft and Oscar Mayer brands, and disclosed that the Securities and Exchange Commission has been investigating its procurement division’s accounting practices since October 2018.

…Not surprisingly, Kraft’s trouble led to steep stock declines and plenty of analyst downgrades for the shares. … Bernstein’s Alexia Howard added her voice to the chorus of caution, downgrading the stock to Market Perform and cutting $11 from her price target, to $50.

She wrote that her bull thesis was undercut by high cost pressures in the fourth quarter, a problem Kraft warns will persist this year.

Howard was disappointed not only with the downbeat earnings and guidance, along with other problems, but worries that issues don’t bode well for Kraft’s ability to raise prices later this quarter—something investors clearly want to see.

She also warns there is a lack of catalysts that can boost the stock’s valuation, despite how far it has fallen. (Likewise, Warren Buffett, who owns Kraft, said he doesn’t think the shares look particularly cheap despite their plunge.)

…Howard writes that “the company’s visibility into future financial performance is limited,” and without some bottom-line improvement, Kraft’s multiple will have little fuel to expand. Perhaps an even bigger issue: “It will take quite some time for management to rebuild credibility with investors.”

That seems to be an understatement.

It isn’t that Kraft doesn’t have a valuable portfolio of brands—after all Heinz ketchup is so dominant it has spawned listicles testifying to its irreplaceable taste.

But consumer brands are being squeezed—both by changing tastes that favor fresh, organic alternatives to shelf-stable packaged goods and by shoppers choosing lower margin-store brand alternatives.

Kraft may have the quality products to weather the storm, but management hasn’t done much to demonstrate it has the ability to navigate the new normal.”

Possible Actions for Investors

“We know that Buffett’s purchases are widely copied, which means many people own Kraft Heinz,” according a recent Barron’s story. The news site also offered some insights on what to do next.

“An investor fearing such a selloff, or someone who wants to earn some money from a dead-money stock, should consider selling upside call options against stock to shrink the unrealized loss. The strategy, known as “overwriting,” is a classic stock-management tool.

On any given day, fund managers overwrite positions with calls that have strike prices that reflect their stock-target prices. If they think a stock is fully valued at $45, they sell $45 calls at various expirations and pay themselves to wait.

With Kraft Heinz at $32.71, investors can sell the January $37.50 call for $2. If the stock remains below $37.50, investors keep the premium. Should the stock be at the strike price at expiration, investors must sell the stock at $37.50 or cover the call.

The risk to overwriting is that investors miss any rallies above $37.50. Kraft Heinz stock has ranged from $32.05 to $68.59 over the past 52 weeks.

The overwrite can be enhanced with a short put to create a “short strangle,” or “combo.” This is for investors who want to buy Kraft Heinz, but at a lower price. The January $30 put was recently bid around $2.40.

Selling puts on damaged stocks that are hard to evaluate is like dancing on the roof. If the roof gives way, you’re in trouble—or stuck, in this case, having to buy the stock at $30, even if it is trading at $20. Or you could pay top dollar to cover the put.

It can be difficult to repair damaged stocks, especially after a company’s management has violated investors’ trust.

Many investors say it is better to realize losses than wait for a recovery. But maintaining a sell discipline can be difficult. Besides, many investors likely own Kraft Heinz at sharply lower prices, due to historical spinoffs, and they likely reason that they can wait for the stock to recover.

We have no idea if Buffett is using options to manage his Kraft Heinz position, although he is no stranger to the options market. He has used options in the past to control stocks around corporate mergers.

He also sells options that expire in more than 10 years on major stock indexes, often committing billions of dollars in an over-the-counter market that insurance companies use to hedge the guaranteed returns of variable annuity contracts.

Our approach is less majestic. It simply expresses a view that a little life can be breathed into wounded stocks, one trading breath at a time, in the options market.”

Even if you don’t own Kraft, these strategies could be useful the next time one of your stocks drops sharply, an event that is possible even for the greatest investors.

 

Did you know that dividends have rewarded investors for at least 100 years, at least since John D. Rockefeller said, “Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.”

We have prepared a special report about dividends that you can access right here.

Retirement investing

New Thinking on Reverse Mortgages

Posted on by Manuel Jesus

A reverse mortgage, according to Investopedia, “is a loan. A homeowner who is 62 or older and has considerable home equity can borrow against the value of their home and receive funds as a lump sum, fixed monthly payment or line of credit.

Unlike a forward mortgage – the type used to buy a home – a reverse mortgage doesn’t require the homeowner to make any loan payments.

Instead, the entire loan balance becomes due and payable when the borrower dies, moves away permanently or sells the home.

reverse mortgage definition

Source: National Center for Home Equity Conversion

Federal regulations require lenders to structure the transaction so the loan amount doesn’t exceed the home’s value and the borrower or borrower’s estate won’t be held responsible for paying the difference if the loan balance does become larger than the home’s value.

One way this could happen is through a drop in the home’s market value; another is if the borrower lives a long time.

Reverse mortgages can provide much-needed cash for seniors whose net worth is mostly tied up in the value of their home. On the other hand, these loans can be costly and complex – as well as subject to scams.

Potential Pitfalls

These products are looked on with skepticism by many. And with good reason in some cases.

The FBI and the U.S. Department of Housing and Urban Development Office of Inspector General (HUD-OIG) urge consumers, especially senior citizens, to be vigilant when seeking reverse mortgage products.

FBI logo

Reverse mortgages, also known as home equity conversion mortgages (HECM), have increased more than 1,300 percent between 1999 and 2008, creating significant opportunities for fraud perpetrators.

Reverse mortgage scams are engineered by unscrupulous professionals in a multitude of real estate, financial services, and related companies to steal the equity from the property of unsuspecting senior citizens or to use these seniors to unwittingly aid the fraudsters in stealing equity from a flipped property.

In many of the reported scams, victim seniors are offered free homes, investment opportunities, and foreclosure or refinance assistance. They are also used as straw buyers in property flipping scams. Seniors are frequently targeted through local churches and investment seminars, as well as television, radio, billboard, and mailer advertisements.

A legitimate HECM loan product is insured by the Federal Housing Authority. It enables eligible homeowners to access the equity in their homes by providing funds without incurring a monthly payment.

Eligible borrowers must be 62 years or older who occupy their property as their primary residence and who own their property or have a small mortgage balance. See the FBI/HUD Intelligence Bulletin for specific details on HECMs as well as other foreclosure rescue and investment schemes.

The FBI also provides for avoiding scams:

  • Do not respond to unsolicited advertisements.
  • Be suspicious of anyone claiming that you can own a home with no down payment.
  • Do not sign anything that you do not fully understand.
  • Do not accept payment from individuals for a home you did not purchase.
  • Seek out your own reverse mortgage counselor.

New Thinking

Barron’s recently noted, “Reverse mortgages were once anathema to savvy financial planning. These loans—which let homeowners over age 62 pull equity out of their homes while still living in them—were viewed as a costly last resort for covering retirement shortfalls.

That thinking has changed as older owners find themselves sitting on record levels of home equity, while at the same time grappling with how to maximize retirement income. Though the upfront costs of reverse mortgages can be steep—we’ll get to that in a minute—when used judiciously, they can be a valuable tool in retirement.

“One of the most intriguing benefits, I think, is spending coordination with your portfolio,” says Neil Krishnaswamy, a financial planner and enrolled agent with Exencial Wealth Advisors in Frisco, Texas.

Borrowers can effectively use a reverse mortgage as a line of credit that they access when needed: They only pay interest on what they use, and the proceeds aren’t taxed.

In the event of a major market decline, for example, borrowers can access this equity in lieu of tapping their portfolios in a down market. “One of the biggest risks in retirement is that markets may not cooperate,” Krishnaswamy says. “If you have the option to access cash for spending in a tax-efficient manner, you can mitigate some of that risk.”

Some other uses: Homeowners who still have mortgages can use the proceeds of a reverse mortgage to pay off those loans and improve their cash flow, Krishnaswamy says. Depending on your age and health, a reverse mortgage may also be a less expensive insurance policy against long-term healthcare needs—and it might be the difference between claiming Social Security early or holding off for a higher payout.

The catch, of course, is that you or your heirs will need to pay back the loan when you sell the house or when you and your spouse both pass away. Interest, which recently hovered around 5%, accrues on any equity you access. Then there are the fees, which, although though rolled into the balance of the reverse mortgage, can be the biggest sticking point.”

Origination fees are the most significant up-front costs. Under HECM, a lender can charge up to 2% of the first $200,000 of the home’s value or $2,500, whichever is greater, plus 1% of any amount above $200,000. HECM caps total origination fees at $6,000.

Borrowers also need to pay FHA mortgage insurance premiums equal to 2% of the maximum claim amount, plus 0.5% of the outstanding balance annually. In the event a lender cannot pay out the reverse mortgage proceeds, insurance kicks in. If the value of the property falls below the outstanding loan balance, borrowers or their heirs don’t need to make up the difference.

In addition to these big fees, reverse mortgage borrowers also pay monthly servicing fees, which are capped at $35, plus many of the same upfront costs associated with getting a traditional mortgage. Those include appraisal fees, credit report fees, escrow fees, document preparation, and more.

All told, for loans of up to $200,000, for instance, a borrower could pay as much as $10,000 in upfront fees—which are typically rolled into the loan balance—plus ongoing mortgage insurance premiums and service fees of about $1,400 a year.

There are benefits and drawbacks just as there are with any investment.

Barron’s quoted one expert who said, “I’ve come full circle on reverse mortgages,” says Steve Vernon, a consulting research scholar at the Stanford Center on Longevity, and author of “Retirement Game-Changers.”

He added that he has even recommended it as an option for his friends in the San Francisco Bay Area, where average single-family home prices sit just under $1 million. “The costs of the loans are high,” he says, “but if you love your house and don’t have other resources, it’s something to consider.”

 

Did you know that dividends have rewarded investors for at least 100 years, at least since John D. Rockefeller said, “Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.”

We have prepared a special report about dividends that you can access right here.

Stock market strategies

This Could Be the Perfect Trade to Prepare for the Market Correction

Posted on by Manuel Jesus

In case any investor forgot, prices go both up or down. This was a lesson brought home to investors in the fourth quarter of 2018.

S&P 500 index

In the fourth quarter, the S&P 500 (shown above) fell slightly more than 20% from high to low. In the first weeks of 2019, the index rallied almost 20%.

Of course, that’s history and the question now could be what comes next.

Overvaluation Could Lead to a Decline

Investors might want to believe the decline has ended but it’s important to remember that many market declines begin when stocks are overvalued. The next chart shows the current state of the market using a popular valuation tool.

Shiller PE Ratio

Source: cmgwealth.com

This is the Shiller PE ratio which is defined by Investopedia as “a valuation measure, generally applied to broad equity indices, that uses real per-share earnings over a 10-year period.

The P/E 10 ratio uses smoothed real earnings to eliminate the fluctuations in net income caused by variations in profit margins over a typical business cycle. The P/E 10 ratio is also known as the Cyclically Adjusted Price Earnings (CAPE) ratio or the Shiller PE ratio.

The ratio was popularized by Yale University professor Robert Shiller, author of the bestseller “Irrational Exuberance,” who won the Nobel Prize in Economic Sciences in 2013. Shiller attracted a great deal of attention after he warned that the frenetic U.S. stock market rally of the late-1990s would turn out to be a bubble.

The P/E 10 ratio is based on the work of renowned investors Benjamin Graham and David Dodd in their legendary 1934 investment tome “Security Analysis.” They attributed the illogical P/E ratios to temporary and sometimes extreme fluctuations in the business cycle.

To smooth a firm’s earnings over a period of time, Graham and Dodd recommended using a multi-year average of earnings per share (EPS) — such as five, seven or 10 years — when computing P/E ratios.

The P/E 10 ratio is calculated as follows: take the annual EPS of an equity index, such as the S&P 500, for the past 10 years. Adjust these earnings for inflation using the Consumer Price Index (CPI), that is, adjust past earnings to today’s dollars.

Take the average of these real EPS figures over the 10-year period. Divide the current level of the S&P 500 by the 10-year average EPS number to get the P/E 10 ratio or CAPE ratio.”

As the chart above shows, the PE10 moved higher than it was in the 1929 market crash and is at levels seen only during the internet bubble. That episode shows that valuations can remain high for an extended period of time.

But the risk of a decline is elevated when the PE10 is at or near record levels.

Benefit From a Potential Crash

Put options increase in value when prices fall. That makes buying a put one of the best strategies to protect against large losses. While owning a put can be thought of as an insurance policy against a market crash, the low value of VIX means the insurance is available at a low cost.

So, the strategy is to buy a put which brings us to the next decision which involves which put to buy.

There are puts available on SPDR S&P 500 ETF (NYSE: SPY), an ETF that tracks the widely followed S&P 500 index.

Buying a put that benefits from price moves in SPY should help us protect at least some of our portfolio against a bear market. The risks are limited to the amount paid for the option. The profits could be significant if the price of the underlying stock or ETF drops by a large amount.

This idea is summarized in the chart below.

long put

Source: Options Industry Council

SPY was recently trading near $275. We could try to protect 100% of our portfolio but that is expensive. And there is a risk to remember when seeking to buy protection. If the market does not crash or decline significantly before the options expire, the investor could lose 100% of the amount paid to insure the portfolio.

That risk means it might not be practical to avoid the complete risk of loss. But there are strategies that could be useful to limit the down side risk even if the risk is not completely eliminated.

A Trade to Potentially Limit Risks

There are options expiring in September 2019 available. With SPY near $275, a put with a strike price of $246 would limit the risks of a decline of more than 10%.

The September 2019 put with a $246 exercise price is trading at a little less than $5. If the stock market declines below $241, it offers a 1% gain for every 1% decline in price below that level. In other words, this put can offset the risks of a decline greater than 12%.

Buying the September $246 put protects against a market crash until September 20, 2019, the day this option expires.

Since each options contract covers 100 shares, this contract would cost about $500. If the stock market drops by 20%, SPY would be near $219 and this contract would have a value of at least $2,700. That would be a $2,200 increase in value that could offset losses elsewhere in the portfolio.

One of these puts could help protect a $25,000 portfolio against the risk of a market crash for about six months.

A $100,000 portfolio could put crash insurance in place with four contracts. This would cost roughly $2,000, or 2% of the portfolio value.

This is a relatively low cost for insurance. Of course the put can have value if the market doesn’t drop 20% and the put could be worth significantly more if the market falls suddenly shortly after the position is opened.

Right now, the market is offering investors cheap insurance. Buying a put can protect against large losses at a small cost. Buying a put option can also be a strategy that delivers a gain if there is a steep market selloff at any time over the next six months.

 

Did you know that dividends have rewarded investors for at least 100 years, at least since John D. Rockefeller said, “Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.”

We have prepared a special report about dividends that you can access right here.

 

 

 

Stock Picks

Gold’s Pullback Could Show It’s Time to Buy

Posted on by Manuel Jesus

Investors know that price trends are interrupted by countertrend moves. In other words, prices move neither straight up nor straight down. Up moves will include down moves and vice versa. This is true in all time frames whether investors focus on the long term or short term.

Barron’s recently highlighted the bullish trend that appears to be developing in gold and reminded investors of the risks as they consider buying the metal. The weekly chart of SPDR Gold Trust (NYSE: GLD) is shown below.

GLD weekly chart

In the article, Barron’s noted, “Gold prices have pulled back from a 10-month high in recent sessions, leaving investors wondering why the many geopolitical and economic issues plaguing the market haven’t been able to fully support the metal’s haven appeal.

Gold notched that multi-month peak just over a week ago on the back of uncertainty linked to Brexit, the U.S.-China trade dispute, and global economic growth. But prices on Wednesday were in jeopardy of suffering a loss for the month on the heels of four monthly gains—the longest upward streak since 2016.

“Prices have run up to the top end of the trading range they have held for the past five years,” says Rob Haworth, senior investment strategist at U.S. Bank Wealth Management, pegging the “top end” at $1,350 to $1,400.

“Without further easing in financial conditions, ramping inflation or stock market volatility, gold prices are likely to struggle at the top end of this five-year trading range,” he says.

Gold still faces supply challenges and any uptick in demand would tighten inventories.

The gold-mining sector has seen a spate of merger and acquisition activity, most recently with Barrick Gold ’s (Canada.TSX: ABX) unsolicited proposal to buy Newmont Mining (NYSE: NEM) in a deal that values Newmont at nearly $18 billion.

“The M&A activity is reflective of the increasing difficulty [in] finding and mining gold reserves,” says Will Rhind, chief executive officer at exchange-traded fund issuer GraniteShares.

“The consolidation of the gold-mining sector…highlights existing gold supply difficulties and shortages, which is supportive of gold prices,” he says.

On the demand side, central banks have been on a gold buying spree, lifting 2018 net purchases of the metal to 651.5 metric tons—their highest in more than 50 years, as geopolitical uncertainty and economic worries prompted national banks to diversify their reserves, according to the World Gold Council.

“Central bank choices about composition of their reserves send important signals to financial markets about relative safety of currency alternatives,” says Trey Reik from Sprott, which manages the Sprott Physical Gold Trust (PHYS). “Whenever gold allocations are on the rise, central bank authority is augmenting the [money-like qualities] of gold.”

Carlos Artigas, WGC director of investment research, says that on an annual basis, central banks have been net buyers of gold since 2010. A recent WGC survey also revealed that almost a fifth of central banks signaled their intention to raise gold purchases over the next 12 months.

“Central bank buying is quite bullish as they are massive institutional players…and even a small allocation to gold can be quite significant in terms of additional physical demand,” says Mark O’Byrne, research director at precious metal brokerage GoldCore.

“Official sector gold buying does not imply necessarily that [central banks] are bullish on gold, per se….It likely means that they are concerned regarding the outlook for the dollar and are reducing and hedging exposures in this regard.”

“Trillion-dollar deficits in the U.S. under [President Donald] Trump and growing fiscal imprudence will be making central banks with large dollar reserves increasingly nervous about the outlook for the dollar,” says O’Byrne.

“A $22 trillion national debt and the lack of any will to rein in massive spending is making America’s creditors nervous and…the ‘risk free’ status of U.S. Treasuries will come into question.” That may lead to higher demand for haven gold.

“Given the scale of the risks,” O’Byrne believes gold is “more than likely” to climb to a record high of $2,000 within the next 24 months.

The longer term chart of gold (GLD) is shown next. At $2,000 an ounce, this ETF would be expected to trade at $200.

GLD monthly chart

That is a significant potential gain and the chart shows the potential rewards could outweigh the risks of the trade.

GLD has traded in a narrow range for some time. The downside risk is, under technical analysis, the lows of the range or about $100 a share. The upside is about three times larger than the downside which makes buying gold favorable from a risk and reward perspective.

Gold Miners Could Be A Better Trade

It’s possible to directly trade gold. This can be done with coins, ETFs or futures. Coins are collectibles and can have tax consequences that are different than investments in stocks. Of course, popular ETFs that back their shares with physical holdings of precious metals face taxes at the higher rate for collectibles.

Futures carry their own tax consequences and risks and many individual investors avoid these markets.

It is important to consult your tax adviser to learn how this could affect you.

Publicly- traded stocks of gold miners offer an indirect way to invest in gold. Mining companies are taxed at the same rate as stocks which can be lower than the rate for gains in GLD or other ETFs.

In addition to offering tax benefits, gold miners also offer the benefit of leverage. An example might be the best way to explain the leverage miners offer.

Let’s assume it costs a miner about $800 an ounce to produce gold and they mine 1 million ounces a year. If gold is at $1,000 an ounce, the company should generate a profit of about $200 an ounce or $200 million.

This is a simplified example so we will assume the company has no other costs and no additional revenue.

If the price of gold increase by 30%, to $1,300 an ounce, assuming the costs of production stayed the same, the miner’s profits would increase to $500 an ounce or $500 million for the company, an increase of 150%.

The miner is leveraged, in this example, 5 to 1, and benefits immensely from higher gold prices. Even smaller gains in the price of gold have a large impact on earnings. A 1% increase in gold prices (to $1,010 an ounce) results in a 5% jump in the earnings of this hypothetical mining company.

Remember, leverage can help increase investment returns on the upside but can cause significant losses on the downside.

A 1% decline in the price of gold could result in a 5% drop in earnings for this gold miner and we would expect the stock price to reflect the diminished earnings potential of the company. A 20% decline in gold would push the miner from a profit to a loss.

This leverage makes gold miners an excellent way to invest in gold. Buying miners while uncertainty is high could lead to gains in the short run and in the long term.

 

Did you know that dividends have rewarded investors for at least 100 years, at least since John D. Rockefeller said, “Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.”

We have prepared a special report about dividends that you can access right here.

 

 

 

Economy

How the Fed Affects Individual Investors

Posted on by Manuel Jesus

It was just a few months ago when the financial community was certain the Federal Reserve would continue raising interest rates. But, in a speech earlier this year, the Vice Chair of the Fed noted,

“The U.S. economy enters 2019 after a year of strong growth, with inflation near our 2 percent objective, and with the unemployment rate near 50-year lows.

That said, growth and growth prospects in other economies around the world have moderated somewhat in recent months, and overall financial conditions have tightened materially. These recent developments in the global economy and financial markets represent crosswinds to the U.S. economy.

If these crosswinds are sustained, appropriate forward‑looking monetary policy should seek to offset them to keep the economy as close as possible to our dual-mandate objectives of maximum employment and price stability. As we have long said, monetary policy is not on a preset course.”

Federal Reserve

Source: Federal Reserve

Clarida’s comments indicated the Fed is not determined to raise rates and could cut them when the data dictates. Traders are now incorporating this view into market prices as the chart below shows.

expected action of the fed

Source: CME

This is a chart of expected action by the Fed. In October a majority of traders believed the Fed would raise rates at their march meeting. Now, there is almost complete agreement rates will remain unchanged at that meeting.

This is all important to the economy and the market. It is also important to individual investors.

How Monetary Policy Affects Investors

According to economists working with the San Francisco branch of the Federal Reserve “the point of implementing policy through raising or lowering interest rates is to affect people’s and firms’ demand for goods and services.

For the most part, the demand for goods and services is not related to the market interest rates quoted in the financial pages of newspapers, known as nominal rates. Instead, it is related to real interest rates—that is, nominal interest rates minus the expected rate of inflation.”

This measure is shown in the next chart.

effective federal funds

Source: Federal Reserve

The recent move into positive territory could be a concern for the Fed. This interest rate affects individuals, because, as the Fed explains,

“For example, a borrower is likely to feel a lot happier about a car loan at 8% when the inflation rate is close to 10% (as it was in the late 1970s) than when the inflation rate is close to 2% (as it was in the late 1990s).

In the first case, the real (or inflation-adjusted) value of the money that the borrower would pay back would actually be lower than the real value of the money when it was borrowed. Borrowers, of course, would love this situation, while lenders would be disinclined to make any loans.”

But the Fed doesn’t directly set the rate for car loans,

“Remember, the Fed operates only in the market for bank reserves. Because it is the sole supplier of reserves, it can set the nominal funds rate.

The Fed can’t set real interest rates directly because it can’t set inflation expectations directly, even though expected inflation is closely tied to what the Fed is expected to do in the future.

Also, in general, the Fed has stayed out of the business of setting nominal rates for longer-term instruments and instead allows financial markets to determine longer-term interest rates.

Long-term interest rates reflect, in part, what people in financial markets expect the Fed to do in the future.

For instance, if they think the Fed isn’t focused on containing inflation, they’ll be concerned that inflation might move up over the next few years. So they’ll add a risk premium to long-term rates, which will make them higher.

In other words, the markets’ expectations about monetary policy tomorrow have a substantial impact on long-term interest rates today. Researchers have pointed out that the Fed could inform markets about future values of the funds rate in a number of ways.

For example, the Fed could follow a policy of moving gradually once it starts changing interest rates. Or, the Fed could issue statements about what kinds of developments the FOMC is likely to focus on in the foreseeable future; the Fed even could make more explicit statements about the future stance of policy.

Changes in real interest rates affect the public’s demand for goods and services mainly by altering borrowing costs, the availability of bank loans, the wealth of households, and foreign exchange rates.

  • For example, a decrease in real interest rates lowers the cost of borrowing; that leads businesses to increase investment spending, and it leads households to buy durable goods, such as autos and new homes.

  • In addition, lower real rates and a healthy economy may increase banks’ willingness to lend to businesses and households. This may increase spending, especially by smaller borrowers who have few sources of credit other than banks.

  • Lower real rates also make common stocks and other such investments more attractive than bonds and other debt instruments; as a result, common stock prices tend to rise. Households with stocks in their portfolios find that the value of their holdings is higher, and this increase in wealth makes them willing to spend more. Higher stock prices also make it more attractive for businesses to invest in plant and equipment by issuing stock.

In the short run, lower real interest rates in the U.S. also tend to reduce the foreign exchange value of the dollar, which lowers the prices of the U.S.-produced goods we sell abroad and raises the prices we pay for foreign-produced goods. This leads to higher aggregate spending on goods and services produced in the U.S.

The increase in aggregate demand for the economy’s output through these different channels leads firms to raise production and employment, which in turn increases business spending on capital goods even further by making greater demands on existing factory capacity. It also boosts consumption further because of the income gains that result from the higher level of economic output.”

These may sound indirect but as BankRate.com notes, “When the Federal Reserve raises interest rates, you feel it.

“The Federal Reserve has its fingers in your pocketbook to a greater degree than the IRS,” says Michael Reese, a certified financial planner.”

 

 

Did you know that dividends have rewarded investors for at least 100 years, at least since John D. Rockefeller said, “Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.”

We have prepared a special report about dividends that you can access right here.

 

 

Stock Picks

Four Warren Buffett Stocks Trading Under $10

Posted on by Manuel Jesus

Like many investors, we spend a great deal of time studying Warren Buffett. In our research, we concluded that there are several steps to finding Buffett-style stocks:

  • Find strong management teams by focusing on companies with higher than average return on equity (ROE).
  • Find companies that show growth in earnings and sales to benefit from the expected growth.
  • Ensure the company has an adequate return on assets (ROA).
  • Ensure valuation is reasonable using metrics like the price to earnings (P/E) ratio or the price top cash flow (P/CF) ratio.

There are other ways to search for Buffett stocks. This is just one possibility and we used the free screening tool at the FinViz web site and applied the setting shown below.

FINVIZ screener

Source: FinViz.com

As we noted, our screen serves as a reasonable starting point for additional research. One avenue for research is in stocks Buffett cannot buy. These include smaller companies and in our screen we found companies that have market caps of less than $10 billion.

He runs a big company, Berkshire Hathaway (NYSE: BRK-A), with a market cap of almost $500 billion Berkshire owns more than $100 billion worth of publicly traded stocks and has billions in cash on its balance sheet.

Buffett considers himself to be an elephant hunter. He is forced to focus on large cap stocks because his portfolio and company are so large.

Let’s imagine Buffett discovered a small cap stock he likes, and he invests $5 million in the company. Once he reported his ownership through Securities and Exchange Commission filings, it would be difficult to get out of the stock.

Some buyers would rush in to follow in his footsteps, decreasing the liquidity of the stock since they would be investors planning to hold for the long term. Without liquidity, Buffett would move the market against his position when he tried to exit, costing him money and taking time away from more promising investments.

Ignoring the mechanics of trading small cap stocks, Buffett faces another problem. These investments simply won’t matter to his performance.

Let’s assume the stock doubles in value and Buffett makes $5 million on his investment. This would amount to less than 0.001% of the amount of capital he manages. The gain would increase the value of his portfolio by a trivial amount. He would need to find hundreds of these investments to add 10% to the value of his stock market portfolio.

Given the small impact small investments would have on his wealth, Buffett is likely to ignore small investments.

As individual investors, we do not have this problem. A small investment can have a large impact on our personal wealth and we can invest in the smallest companies in pursuit of wealth.

To take advantage of this flexibility, we added filters to our screen to hunt for low priced stocks and we found four.

Laredo Petroleum, Inc. (NYSE: LPI) is an independent energy company. The company is focused on the acquisition, exploration and development of oil and natural gas properties, and the transportation of oil and natural gas from such properties primarily in the Permian Basin in West Texas.

Recent filings indicate LPI had assembled 127,847 net acres in the Permian Basin and had total proved reserves, presented on a three-stream basis, of 167,100 thousand of barrels of oil equivalent (MBOE).

The stock is in a persistent down trend but could be bottoming.

LPI daily chart

SRC Energy Inc (NYSE: SRCI) is also an independent oil and natural gas company. The company is engaged in the acquisition, development and production of crude oil and natural gas in and around the Denver-Julesburg Basin (D-J Basin) of Colorado.

The D-J Basin generally extends from the Denver metropolitan area throughout northeast Colorado into Wyoming, Nebraska, and Kansas. The D-J Basin contains hydrocarbon-bearing deposits in various formations, including the Niobrara, Codell, Greenhorn, Shannon, Sussex, J-Sand and D-Sand.

Filings indicate the company was the operator of 324 gross (288 net) producing wells and participated as non-operators in 307 gross (65 net) producing wells.

This stock could also be bottoming.

SRCI daily chart

Sinovac Biotech Ltd. (Nasdaq: SVA) is a biopharmaceutical company that focuses on the research, development, manufacturing and commercialization of vaccines that protect against human infectious diseases, including hepatitis A, hepatitis B, seasonal influenza, Haemagglutinase5 Neuraminidase1 (H5N1) and Influenza A (H1N1) pandemic influenza and mumps.

The company’s pipeline consists of vaccine candidates in the clinical and pre-clinical development Phases in China. SVA is engaged in the sales, marketing, manufacturing and development of vaccines for infectious disease.

Sinovac develops various products, including Healive, Bilive, Anflu, Panflu Whole Viron Pandemic Influenza Vaccine, Split Viron Pandemic Influenza Vaccine, Panflu.1, RabEnd, Mumps Vaccine, Enterovirus 71 (EV71) Vaccine, Pneumococcal Polysaccharide Vaccine, Pneumococcal Conjugate Vaccine, Rubella Vaccine, Varicella Vaccine and Sabin Inactivated Polio Vaccine.

SVA can be a volatile stock.

SVA daily chart

180 Degree Capital Corp., (Nasdaq: TURN) is a non-diversified management investment company operating as a business development company. The company’s investment objective is to achieve long-term capital appreciation by making venture capital investments.

TURN specializes in making investments in companies commercializing and integrating products enabled by disruptive technologies mainly in the life sciences industry. The company provides operational and management resources, and financial solutions to such companies.

Its investment portfolio includes publicly traded and privately held companies and its investments are focused on transformative companies in precision health and medicine

This stock is also volatile.

TURN weekly chart

These are just the companies that made it through our initial, quantitative screen as ideas that are worth additional research. Any one of these stocks could be considered a buy in the current stock market but all have risk and there is no guarantee any of them can deliver Buffett-like returns.

However, it could be useful to think like Buffett and to focus on aspects of a company’s valuation that Buffett has written about. These include the importance of cash flow since a company needs cash flow in order to reinvest in its operations and growth. Focusing solely on the P/E ratio as some investors do could miss companies like the ones we identified above.

 

Did you know that dividends have rewarded investors for at least 100 years, at least since John D. Rockefeller said, “Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.”

We have prepared a special report about dividends that you can access right here.

Cryptocurrencies

Cryptos Continue to Show Signs of a Rebound

Posted on by Manuel Jesus

Bitcoin and other cryptocurrencies are on short term winning streaks. Bitcoin is up more than 20% from its December lows.

Bitcoin daily chart

The gain comes as news about cryptos indicate more widespread acceptance of the currencies and the technology is possible.

Infrastructure Changes Improve the Market

Last week, according to MarketWatch, the ethereum network completed its latest software upgrade, known as Constantinople. The upgrade is intended to speed up processing times to address scalability issues — the ability of a blockchain to process transactions faster and more efficiently.

Ethereum is more volatile than bitcoin and is up more than 30% from the lows reached at the end of 2018.

Bitcoin daily chart

Analysts at BitOoda, a digital asset advisory firm, attributed the recent rally in Ether to the growing optimism around the upgrade, but warned investors, the euphoric rally may have come to an end.

“This event driven trade is now over, and in our eyes, it is difficult to come up with any reasonable thesis to have conviction for ETH to trade higher or lower,” wrote Tim Kelly, founder and CEO of BitOoda. “We would be of the opinion to close out of this trade, sit tight, and wait for the next trade opportunity patiently.”

Social Media Companies Boost the Market

Also last week, The New York Times reported that Facebook Inc. and other internet companies are planning to launch their own digital currency within the next year. Citing four people brief on the matter, the Times said Facebook had held conversations with exchanges about listing its coin.

Other companies pursing a potential digital currency are Signal and Telegram, the Times said.

“Truth is, this isn’t that much of a revelation as some are making of it,” wrote Mati Greenspan, senior market analyst at eToro. “The Times tells us that existing messaging platforms with a large user base have a much easier way of implementing new payment systems than those that need to start from scratch.”

According to The Times, “Some of the world’s biggest internet messaging companies are hoping to succeed where cryptocurrency start-ups have failed by introducing mainstream consumers to the alternative world of digital coins.

The internet outfits, including Facebook, Telegram and Signal, are planning to roll out new cryptocurrencies over the next year that are meant to allow users to send money to contacts on their messaging systems, like a Venmo or PayPal that can move across international borders.

The most anticipated but secretive project is underway at Facebook. The company is working on a coin that users of WhatsApp, which Facebook owns, could send to friends and family instantly, said five people briefed on the effort who spoke on the condition of anonymity because of confidentiality agreements.

The Facebook project is far enough along that the social networking giant has held conversations with cryptocurrency exchanges about selling the Facebook coin to consumers, said four people briefed on the negotiations.”

This news is likely to have had just a small impact on shares of Facebook (Nasdaq: FB) but the stock is improving.

FB daily chart

Banks Also Boost the Crypto Market

This news follows last month’s announcement that big banks are also looking at cryptos. Then, The Times noted,

“In 2017, Jamie Dimon, JPMorgan Chase’s chief executive, declared Bitcoin a “fraud” and said that any employee caught trading it would be fired for being “stupid.”

On Thursday, JPMorgan became the first major United States bank to introduce its own digital token for real-world use, the latest step in Wall Street’s evolving approach to the blockchain technology that underpins cryptocurrencies like Bitcoin and Ether.

Despite questioning Bitcoin’s legitimacy, Mr. Dimon has said he recognizes blockchain’s potential in the future of the global financial system. And JPMorgan has already released a blockchain platform, Quorum, that several institutions are using to keep track of financial data.

With the announcement of its coin, JPMorgan is widening its experiment and moving to make the idea of digital currencies more palatable to its typically risk-averse corporate customers.

“Clients engaged us, saying they need a way to move money onto the blockchain,” Umar Farooq, who leads JPMorgan’s blockchain efforts, said in a telephone interview.

The bank’s token is unlikely to shake up the financial system anytime soon. Because it will be run by JPMorgan, it lacks the fundamental qualities that have made cryptocurrencies so radical: the freedom from middlemen and from regulatory oversight.

JPMorgan will control the JPM Coin ledger, and each coin will be backed by a dollar in JPMorgan accounts, giving the coins a stable value. That means JPM Coin will not be subject to the wild price volatility that has drawn speculators to other cryptocurrencies.

The bank is following in the footsteps of several smaller players that have introduced similar digital coins tied to the dollar. A consortium of European banks has been finalizing a similar product, Utility Settlement Coin, that would make it possible to move money between banks more quickly. Several cryptocurrency exchanges already have their own so-called stablecoins.

JPMorgan’s version will be less useful than other similar products because it will not be possible to move it outside the firm’s own systems, at least initially. What’s more, it is still just being tested and is not available to clients yet.

JPMorgan’s offering would be useful for big clients, but not for the smaller speculators who have typically taken an interest in cryptocurrencies.

“This is designed specifically for institutional use cases on blockchain,” an analyst said. “It’s not created to be for public investment.”

Overall, this news all indicates that cryptos could be moving towards more acceptance and that should boost the value of the currencies.

The crisis in Venezuela also boosts the currency. The New York Times recently reported,

“The local market for Bitcoins broke a record on April 17, reaching $1 million worth on that day alone, Bloomberg reported. Venezuela has been ranking second worldwide in volume of activity on LocalBitcoins.com, after Russia.

According to Coin Dance, a website that monitors cryptocurrency transactions, during the week ending on Feb. 16, people in Venezuela traded about $6.9 million on LocalBitcoins.com, compared with about $13.8 million in Russia.

That’s saying something for a country in its fifth year of a recession, whose economy contracted by some 18 percent in 2018.”

Whether it’s a crisis hedge or a means of commerce, bitcoin could be worth another look.

 

Did you know that dividends have rewarded investors for at least 100 years, at least since John D. Rockefeller said, “Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.”

We have prepared a special report about dividends that you can access right here.