Author: Smart Investing

Commodities

Lead-Lag Live: Oil Is the Mother Of All Bull Markets

Posted on by Smart Investing

One sector of the market that has been booming this year has been the energy space. Prices have been creeping up since oil briefly went negative in futures trading in mid-2020.

A combination of tight supply and recovering demand have led to a major rally. Russia’s invasion of Ukraine complicated matters, as international demand for Russian oil has dried up. That’s caused prices to trend even higher.

With a bull market underway in the energy space, the question is, when will it end?

It may not be anytime soon. That’s because the last energy boom led to the rise of fracking technology. That allowed companies to revisit previously-depleted oil wells for a few more years of modest production.

However, that technology has somewhat played out. And the last bear market in oil led to many of these companies facing financial challenges. That’s why lending to the space remains muted, even with oil hitting a high price again today.

As a result, the past few years has led to an under-investment in the oil space. New exploration and development opportunities have failed to find major new properties to develop.

This is setting up oil to remain in a bull market for some time to come. That’s true even if demand drops due to economic uncertainty or a recession in the months ahead.

To listen to the full interview, click here.

 

Income investing

Money For Nothing: Covered Calls Primer

Posted on by Smart Investing

Over the long-term, the stock market trends up. Investors can be taken by surprise during those periods when the market trades down. Or even by those long periods where the market trades sideways.

That’s why it’s important to have an investing strategy in place to continue to grow one’s portfolio no matter what the market is doing. The easiest way for most investors to get started is by learning how to sell covered call options against their existing stocks.

The strategy is simple. It allows investors to continue owning shares of a company, potentially through a short-term decline. But selling covered calls adds extra income to a portfolio. The only possible “downside” is if investors get called away on their shares.

But done right, investors can grab extra money. Added to dividend stocks held for the long-term, the results can add up over time.

Traders looking to sell covered calls first need to own 100 shares of a stock for every contract they want to sell.

And while strategies can vary, investors should find a consistent strategy, such as finding options with a strike price at least 10% higher than current prices. Many volatile stocks will make that easy. But less volatile stocks may not offer sufficient option premium relative to the risk of being called away.

That’s why covered call writing is a bit of an art as well as a science.

To read the full primer on how to add covered call writing to your portfolio, click here.

 

Economy

A Wealth of Common Sense: Why Housing Is More Important Than the Stock Market

Posted on by Smart Investing

For years, the concept of a “wealth effect” has been in place. When asset prices rise, investors feel wealthier. And they tend to spend more. Likewise, when prices are falling, investors tend to cut back on spending.

It’s become a bit of a self-fulfilling prophecy in a number of ways. Right now, the Fed is raising interest rates in the hope of getting consumers to cut back on spending, which should lower inflation.

However, that could put the economy at risk of a recession. Raising interest rates also raises the cost of home ownership.

Nearly two-thirds of Americans own homes but only about 50% of households own stocks. So any weakness in the housing market could have a major dampening effect on spending far more than a stock market correction.

The downside? For most Americans, home equity is their largest source of wealth. That wealth can become uncertain quickly in a weak real estate market. But if it leads to an unwinding of the wealth effect, the long-term effect of crushing inflation could be better in time.

In the meantime, the stock market is reacting more strongly to higher interest rates than housing. Wealthy Americans will likely add to their stock purchases as markets fall. So getting home prices to come off their massive increases of the past few years is the move to slow down the economy and stop inflation now.

To read the full analysis of why housing is more important than stocks, click here.

Economy

Collaborative Fund: Endless Uncertainty

Posted on by Smart Investing

The past few months has seen a rise in the concept of uncertainty. Investors may be waiting for clarity on issues such as inflation, the job market, inflation, Russia’s invasion of Ukraine, or any other issue under the sun.

Headlines reflect this concept often, even more than just a few years ago. But the past few years have seen record uncertainties, from a pandemic to election strife.

The bottom line is that uncertainty is always with us. The future can never be predicted. And whatever plans we make have to be flexible enough to contend with changing outlooks.

Attempts to track outlooks on uncertainty show that people are at their most certain about the future right before a major change. That’s a sign that investors need to be prepared to handle complacency.

When looking at the world today, the issue may not be uncertainty. It might simply be the idea that people are no longer complacent.

We saw that complacency when investors piled into shares of bankrupt companies over the past two years. Or into high-growth stocks going public at a rate that pushed valuations beyond the levels of the tech bubble.

With investors now acting less complacent, the world seems more uncertain. But given that it always has been and always will be, there will still be opportunities for those willing to buck the prevailing trend.

To read the full blog, click here.

Cryptocurrencies

Bitcoin Magazine: MACRO ANALYSIS: Bitcoin & Currency Markets

Posted on by Smart Investing

When it comes to investing, paying attention to macroeconomic trends can provide a quick way of determining where the economy is – and where it may be going based on recent trends.

Globally, a number of currencies are weakening relative to the US dollar. In turn, that’s a way of saying that the dollar is strengthening. Those moves have a number of implications for the global economy and for a number of major countries specifically.

Bitcoin Magazine’s latest analysis goes through some major currency charts and what it means for markets. Overall, prices may not reflect fundamentals for a number of asset classes at the moment, given the fearful sentiment out there today.

It’s easy to see fear in the markets today, and not just in the US. Germany is reporting their highest surge in CPI in 60 years. And the Eurozone inflation measures have risen to 8.1 percent.

That’s a continued rise in inflation rates, which may be 3-6 months behind the US data, which is finally starting to show a year-over-year decline based on the PCE data. This slowdown in year-over-year inflation data could also be a reason for last week’s rally in the stock market.

Investors looking for a move in the markets right now are likely to see more downside pressure in the coming months. The biggest potential catalyst for a change would be the Federal Reserve changing its policy back towards more easy money.

To view the full chart-laden video, click here.

Cryptocurrencies

Simply Bitcoin: Bitcoin’s Incentives Destroy China’s Mining Ban

Posted on by Smart Investing

Cryptocurrencies are down over 50 percent from their peak just a few months ago. While that’s somewhat typical for the volatile asset class, other trends point towards the space continuing to attract capital and investor interest.

For instance, it’s been nearly one year since China banned cryptocurrency mining. They were the largest source of crypto mining, thanks to cheap and abundant electricity costs.

However, one year later, and data out of China shows that the ban has been somewhat ignored. More importantly, the global hash rate for the Bitcoin network shows that the cryptocurrency is stronger than ever, with more miners and nodes running.

That’s a strong sign that individuals continue to invest in the cryptocurrency space. And many corporations and even countries continue to onboard into Bitcoin. Overall, it’s clear that even with the price down, the network continues to grow.

As crypto networks grow, the more value and capital they tend to attract. So in time, this recent selloff in the crypto space may simply be clearing the deck for the next big move higher.

To get such a move higher, a few things need to happen. First, sentiment needs to shift away from being so negative right now. And we’ll likely need to see more monetary easing, or at least a decrease from the current tightening policy. Such a trend may start to play out in the next few months.

To listen to the full podcast, click here.

Income investing

3 Reasons to Invest in Real Estate During a Recession

Posted on by Smart Investing

During a recession, prices of many assets tend to pull back. Sometimes that includes real estate… but sometimes not.

Right now, real estate is coming off of strong performance over the past two years. But a slowing economy and rising interest rates will likely cause prices to take a breather. That could make for an excellent long-term opportunity for investors.

The pros tend to outweigh any short-term downside. That’s because rental properties, particularly single-family housing, are still a basic necessity. And a well-kept home in the right area should continue to generate steady cash flow during uncertain times.

Even better, homes have been less volatile that commercial real estate. Office space tends to be far more cyclical. And in the post-pandemic era, the rise of remote work means the space is likely overbuilt in most markets at this time.

To best succeed in real estate, investors need to consider cash flow. As long as a property earns more than it costs each month, including financing costs, it should perform well.

And given that homes have a fairly steady return above inflation on average, investors should be protected in the long term. For many who gravitated towards fast-moving financial markets, the slower, but steadier, returns from real estate can likely add up to better returns over time.

To read the full blog post, click here.

 

Stock market strategies

Of Dollars And Data: How to Not Panic

Posted on by Smart Investing

Investors feel in control of their portfolios – at least when markets are on the rise. But when markets go through one of their periodic drops, panic can often reign.

To succeed in avoiding big losses and to get set up for better profits in the future, controlling emotions during a stock downturn is key. In today’s market downturn, the key to succeed is to keep calm. And focus on the facts.

One thing investors may have forgotten in recent years is that stocks don’t “always go up.” Rather they have down years. And even down periods within a year.

On average, investors should expect a 10 percent correction every other year. And a pullback of as much as 30 percent every 4-5 years. While many remember a steady bull market starting in 2009, there have now been 5 episodes of at least a 10 percent drop.

This current drop is bigger than other recent drops have been. Given the combination of a slow economy and high inflation, however, this may not be too surprising. And following last year’s massive market rally, valuations are coming back to their historical range.

For most investors, staying the course and focusing on the long-term will work out over time. Those who have been trading excessively have likely been burned enough to avoid doing so for some time.

But understanding the market averages, and market history, will make it easier to avoid panicking during a downturn.

To read the full blog, click here.

Economy

Money For the Rest of Us: Will Quantitative Tightening Lead To Even Greater Financial Losses?

Posted on by Smart Investing

The Federal Reserve is “taking away the punch bowl” as the latest economic party has long been in full swing. Historically, doing so can lead to challenges for investors.

That’s because rising interest rates and a slowing economy tend to slow investment returns. But that trade-off may be worthwhile, if it means curbing today’s high inflation rates. The process underway right now is known as “quantitative tightening.” And it could lead to further declines in the stock market.

In the past, such measures to raise interest rates and curb inflation mean short-term pain. But if the economy ends up on a stronger footing, then investors may be better off in time.

The Fed lightly tightened between 2015 and 2019. They did this by gradually raising interest rates off of 0 percent. The economy managed to grow during that period, only to fall during the pandemic. And stocks performed well on an annualized basis during this period, averaging 11.3 percent annually.

Right now, the Federal Reserve continues to tighten, even as economic data indicates the economy is already slowing. That means that, even with high inflation rates, investors may not want to gravitate towards having more cash on hand.

Investors may feel crunched for cash right now with rising interest rates, but given how asset classes perform even during periods of tightening, a better use for cash on hand right now may be to buy oversold assets now.

To listen to the full podcast, click here.

Economy

Game of Trades: SP500 Looking Very Familiar to the 2001 Bear Market

Posted on by Smart Investing

Whether the economy is going up or down, it can be helpful to place the current move in a historical narrative where similar trends have played out.

Rising inflation rates hark back to a period last seen over 40 years ago. However, the charts are showing that the market is more likely simply deflating. That means some of the market’s excessive returns over the past two years are unwinding.

A more accurate comparison would come from the 2001 bear market. While tech stocks peaked in 2000, 2001 saw further declines. And the final rally higher in the late 1990s was similar to the market performance of the past two years.

This time around, history somewhat repeated itself. Tech once again led the market far higher, and is now underperforming on the way down.

As of last week, markets have had 7 down weeks in a row. The last time this happened was also in 2001.

If the similarity to 2001 continues, traders should expect markets to continue sliding. And stocks will eventually bottom out, but will take a long time to recover.

So those hoping for a repeat of a V-shape recovery in stocks like in 2020 may be disappointed. That’s true given the signs of an economic slowdown, and the Federal Reserve continuing to tighten monetary policy right now.

To view the full video comparing today’s markets to the 2001 decline, click here.