Market Musings Blog

Volatility, As Expected

As broadcast well and thoroughly by the Federal Reserve, it has started to hike interest rates for overnight money (called the federal funds rate), beginning with 25 basis points (0.25%) early in the year, and now, because the perception is that the Fed is behind the curve fighting inflation, a full 50 basis points the other day.

This is a good time to review the three most important factors affecting stock prices:

  1. The level and direction of interest rates
  2. The rate of change in earnings
  3. Sentiment

Two of these are against us right now. Interest rates are rising, which confiscates value from stocks; and earnings growth is slowing. Sentiment, while not very rosy now, changes day to day and is not a reliable indicator of value, or even the likely direction of value.

We’ve been asked ‘how long will this last?’ No one knows, but typically bear markets last up to three years. The range, however, is disconcertingly wide. We’ve seen bear markets last three months. It’s likely, though, that after many, many years of great returns from stocks, future returns will be lower, following global growth downward.

For our part, the ‘holding tank’ where we keep prospective stocks that we may want to buy is expanding. On the bond side, we can now purchase tax exempt issues at 4%. We’ll buy at that rate; later we may get a chance at 5%, where we would also buy, and so on. In an economy that has long term trend growth of about 2%, a 4% tax free rate is solid.

Fundamentals matter less in bear markets than behavior. Microsoft is not a different company at $300 a share, where it sold one month ago, than it is at $277 today. It may sell at $150 sometime before this is all over; it is still not a different company. Remaining rational about values and understanding that the downtrend in place can offer opportunities is more important than trying to time the top or bottom of the market – because no one can do that.

Choosing the Best Credit Card

Choosing the Best Credit Card

A client asked us a simple question: What credit card is best for me? You would think this would have a handy answer, but alas, there are hundreds of credit cards on offer with thousands of permutations, the adverts for which all seem to end up in my mailbox at one time or another.

Card types are myriad; here are just a few.

  • Airline miles cards
  • Cash back/rewards cards, including several subcategories like for travel, groceries, etc
  • No annual fee cards
  • 0% APR (annual percentage rate, for when you do not pay off your balance) cards, which offer 0% interest for a time
  • Sign up bonus cards, which offer you credit or cash for acquiring the card

Cards can have several of these features at once; for instance, many cards are giving sign up bonuses these days. There are plenty of other niche-y cards as well, including for business, store-specific, etc. But we’ll discuss just a few types here, responding to what most people want.

First, some basic background. A credit card is different from a ‘charge card’- the credit card features a revolving balance whereas a charge card must be paid off every month. On average, US customers carry four credit cards. If you have card accounts you don’t use, please terminate them. It’s too easy these days for hackers to take advantage of an account you are not monitoring. (Note that closing a card may affect your credit score, so don’t close five cards at once!)

Next, we’re going to assume you have excellent credit and will qualify for the best cards out there.

Finally, let’s get one more thing out of the way. We tend to dislike Discover and Capital One cards because in our experience, the initial spending limits are low, and obtaining higher limits is difficult. That said, feel free to check out Capital One Venture, which is its travel card. This card has several iterations which offer, variously, no annual fee, no foreign transaction fees, 0% APR for several months, and cash back rewards for travel. Travel must be booked through Capital One Travel, but there are no blackout dates or other restrictions that you might run into with air miles cards. Tricky part: booking through Capital One Travel might not be the best deal in town; if its prices are higher than, say, Expedia, it won’t matter how great your cash back rewards are – you might lose in higher travel prices. Another warning: from personal experience, I can say Capital One’s customer service leaves much to be desired.

Also, to be fair to Discover, it does have a highly rated cash back card, Discover It. No annual fee, various cash back percentages depending on where you spend, and a low APR. As a bonus, it has a US based customer service department which claims you can talk to a real person any time.

Many card families offer a ‘concierge’ card with a high annual fee, such as Chase Sapphire Reserve, that comes with help making dining reservations, insurance offerings, extra travel deals, and so forth. You can explore those on your own, but from our reading, the Chase Sapphire and American Express Platinum cards receive high marks. These have fees in the hundreds of dollars per year, so you better travel a lot!

If you want to obsess about points/miles and their value, please check out The Points Guy, at thepointsguy.com. The Points Guy puts an actual value on the bonus awards you might receive from a card. So if you’re the type to optimize everything in life, now you have a source for the credit card realm.

Moving on to the more popular choices among cards, the chart below gives recent offers from some of the more highly rated cards (we used ratings from the Motley Fool, Bankrate, Lending Tree, WalletHub, The Points Guy and others to come up with this compendium). We included just one air miles card – the one closest to what I use personally, but there are many out there, if you want to pile up miles on a specific airline.

Happy hunting!

Credit Card Details chart

 

 

 

 

 

The Fed and the Green Economy

While the Fed’s mandates have historically been financial in nature, recently, political/social mandates have also been imposed upon it. One of these is combatting climate change. It’s a puzzle to us how the Fed – which controls a portion of the interest rate curve and can encourage or discourage bank lending but only in the most general sense – is supposed to combat climate change. Its tools are not suitable for that purpose.

However, one of its tools – jawboning about hikes in short term interest rates – has inflicted considerable damage on the Green Economy,, by slaughtering the stocks of electric vehicle, battery, solar, wind, and other alternative power companies. Of course this is not a deliberate act. The fact is, these companies are light on profit, including Tesla. Many have never made money. Some never will. Green stocks are considerably ahead of the development of the green economy, which as a whole has not demonstrated robust, non-subsidized profits at the project level yet.

The decline in green energy stocks is not trivial. These companies need to be popular, so they can continue to raise capital to fund renewable energy. Without capital, projects cannot move forward.

There is one light at the end of the tunnel however, which will be anathema to consumers: much higher energy prices. As energy prices rise around the world, energy projects of all types – green and dirty – reach profitability faster. Profits help attract capital.

For the moment, though, life is going to be tougher for the renewables space, contra to the new political opinion that the Fed needs to combat climate change. This outcome should spark a debate about whether the Fed should be the instrument of this endeavor, and if so, how.

Decoding Cryptocurrency

You can hardly turn around these days without hearing about Bitcoin, Ethereum, NFTs and that dog that’s been made into a digital currency. After about a year of reading and attending virtual webinars, we finally have some understanding of Bitcoin and its brethren. We want to emphasize ‘some’ understanding. We are not computer scientists nor facile with, say, blockchain, so no doubt certain readers will be able to run circles around us in this regard. This piece is more for the casually curious.

Here are the basics, with many of these questions gleaned directly from what clients have asked us:

  • Can you actually hold a Bitcoin, ie does it have a physical representation? No. Bitcoin and other digital currencies exist only digitally. This is not too different from, say, a credit card payment. Actual currency may never change hands when you make a credit card payment. Instead, all the transfers – from you to an intermediary to your seller and to his bank account – happen in the form of digital entries.
  • Why does Bitcoin have value? Isn’t it just a bubble ready to pop? Value is conferred by people who make judgments, which applies to any currency. Bitcoin offers intangible attributes that ordinary currency does not such as anonymity, easy and fast passage across borders, universal recognition, and the fact that institutional trust is unnecessary for its use. We in the US do not think about this latter item but if you lived in Caracas, you would. Bitcoin production in particular (but not the universe of cryptocurrencies) is limited so if demand rises, so must the price. In the future Bitcoin may be necessary to make some applications function, which is true of Ethereum now. Recent history, however, implies that cryptocurrencies are the ultimate risk asset, rising with the stock market, and falling when it declines. If Bitcoin ever deviates from that relationship, it will mark a sea change in the ‘valuation’ of this elusive asset.
  • Isn’t Bitcoin just for criminals? No. The estimate of criminal activity conducted in Bitcoin is low. In reality, far more crime is geared towards acquiring and using the world’s reserve currency, namely the US dollar.
  • How can Bitcoin be a ‘currency’ if it is so volatile? The word ‘currency’ is a misnomer, or if you don’t accept it as a misnomer, then you need to think about currency a different way. Today, a gallon of gasoline averages $3.78 in Oregon. Last year at this time, the Oregon average for a gallon of gas was $2.67. The dollar has dropped in value in a short period, versus gas, by 42%. We do not think of the dollar as volatile in this way, but it is. It buys more or less of various items over short time frames routinely. Bitcoin is just another ‘thing’ priced in US dollars that fluctuates in value. Every day the value of the yen, the lira, the Euro, changes against the dollar. Granted, Bitcoin changes a lot more in short time frames, but whether this volatility lasts or not is to be determined.
  • What is blockchain? Blockchain is a secure, immutable, programmable digital ledger. Affirmation of an addition to a blockchain is decentralized and anonymous, time-stamped and irreversible. All participants in the blockchain must unanimously agree to a transaction. Participants are paid for ratification in cryptocurrency or fees. One ‘use case’ for blockchain is to record the title to a house; another could be your ownership of Bitcoin. Interestingly, Bitcoin can be fractionated into very tiny slices. Blockchain allows that; so you can imagine that fractional interests in assets become much easier to achieve in a blockchain environment. No legal contracts, no docusign!
  • What is an NFT? NFT stands for non fungible token, and it is a digital representation of something. It can be a moment (TopShot is selling NFTs of great moments in basketball history), a static piece of art, a magazine cover, or it can provide access to an event. “Non fungible” refers to the fact that it is not exchangeable for anything else, ie it is unique. NFTs are sold largely in Ethereum. If you own an NFT, no one else can also own it. Others can look at it, copy it (sometimes) but only you can own it.
  • What will happen if governments ban Bitcoin? Banning Bitcoin would be tough. It can exist in a completely private wallet – not on the internet – that you can trade with someone else privately. Ownership is represented by very long public and private keys, which are currently impossible to hack in a human lifetime. Some governments have banned various aspects of cryptocurrency – like the trading it, but not ownership of it, transactions for goods but not trading it – but it does tend to pop up in other countries that have not banned it, simply moving around the world to more hospitable jurisdictions. If you think the world’s countries can all get on the same page to ban cryptocurrency, then stay away from cryptocurrency!
  • How can Bitcoin or blockchain be used? We gave an example above, using blockchain to record the title to a home. Bitcoin and Ethereum are used today in payment systems like Flexa, Coinbase Commerce, Bitpay and others. So if a retailer uses one of those payment systems, you can send your Bitcoin or ether to, for instance, pay your AT&T bill (via Bitpay).
  • How do you store Bitcoin? Bitcoin and other cryptocurrencies can be stored in a myriad of ways. We already mentioned a private wallet. A wallet can be a hardware wallet, like a flash drive with your keys recorded on it stored in your safe; or a software wallet, which resides on your computer hard drive (better keep track of that computer). You can also use an exchange like Coinbase which keeps your keys for you. Exchanges have been hacked in the past so beware this option. Casa offers the equivalent of a private bank/Fort Knox for Bitcoin holdings, complete with concierge service.
  • Should Bitcoin be in my portfolio? Other than indicating that you should only use money that you can afford to lose to participate in the digital currency wave, we are not currently making any recommendations pro or con regarding adding Bitcoin to client portfolios. At this point we can only act as a resource to research the topic and tell you what we know.

This overview barely scratches the surface of a complicated topic. We’ll be continually learning as these markets develop, so check back if you want to know more.

Covid and the Economy, Mid 2021

While Covid cases are picking up, and the Delta virus is changing the calculus around how efficacious vaccines are, the economy continues to slowly improve. Data shows that previous spikes in cases have resulted in less and less economic disruption as time wears on, a testament to the human ability to adjust. That said, problems could still crop up in specific areas, including travel and entertainment (including restaurants) industries, and if school closures become common again, we’ll see suppressed employment numbers.

More pertinent to the Fall/Winter economy in the US may be the fiscal and monetary support that we’ve enjoyed as a result of the pandemic. Many programs are ending, and some are experiencing court challenges. These impacts on top of higher inflation could put the skids on what has been a brisk recovery thus far. A glance at the bond market shows a heavy bet on a slowdown later this year, and we’re going to take that prognosis to heart. Our expectation is a tougher stock market will take hold for a few months, so fasten your seat belts.