Sometimes when and if you watch financial media shows on CNBC or other such networks, the hosts and/or the guests will be rambling on about something and you realize you don’t understand what they are talking about. This may be because these people have their own vocabulary, and though the words may sound familiar, their meanings may be different the way they use them as opposed to the way you use them. For instance, the word “Space” has many different meanings, and its meaning in a specific context depends on how it is being used. Other words such as “Sector” and “Industry” have similar issues. Read on and I will try to help.

Space

You may hear someone say something like, “Amazon is the leading player in the E-Commerce space.” Or, “Wells Fargo is the leading bank in the home mortgage space.” In this context, think of “space” as kind of like a store, or an area where this particular company does business. If WalMart has store space, then Amazon has e-commerce space. Although it isn’t physical space like WalMart, it does sort of mean the same thing. If you Google “Space”, this definition in the context of investing doesn’t pop up, but the concept of retail store space does, and this definition fits closest to the way the Wall Street jargoneers use it, and so that’s how best to understand “Space” when you hear it used on CNBC.

Sector

Ok, you say, but why don’t these talking heads use the term “Sector” instead of “Space”? Doesn’t it mean about the same thing? Yes, Sector and Space both have broad meanings in the investment world. I believe Space is used because Space involves the sense that people and/or businesses are transacting within a certain space, as opposed to Sector, which does not invoke the transactions part of business as much. Or, it could be that some people on CNBC started using the term “Space” and it sounded cool so everyone else started to use “Space” instead of “Sector”. That’s often how jargon or colloquialisms get started, and that’s likely what has transpired here. That said, you should be fluent in the language if you want to visit, and so you should at least know what Space means.

Industry

To make matters more complicated, you also hear about “the oil industry” or “the semiconductor industry”. How is an industry different from a sector or a space? There was an explanation for this when I looked it up. It seems that “industry” implies a more narrow definition of a group of companies that produce and sell the same stuff, whereas “sector” is a broader definition. You can have several industries within a sector but not vice versa. For instance, the semiconductor industry and the software industry are part of the high-tech sector. Got it? Clear as mud. And how does “space” differ from “sector” or “industry”? Seems like “space” is closer to “industry”, but that’s just a guess on my part.

IMO

They say the best way to learn a language is to immerse yourself within a group of the language’s native speakers. That’s probably true with Wall Street-ese as well. If you decide to work on Wall Street or in the investment world, you will probably become fluent soon enough. However, if you invest and you want to grow your investment knowledge but don’t want to work full-time in the industry, you still need at least to know some of the language. That’s why it’s useful to understand what “experts” you see on TV mean when they use terms such as Space, Sector, or Industry. Although I don’t offer a language lab for Wall Street-ese, I will be happy to clarify any confusion you might have with the language if you shoot me an email.

With US Treasury interest rates as low as they are (although their rates have been slowly rising) and with rates on corporate and other non-government debt also very low, investors seeking a current return face a difficult choice. Either they invest in safe places – government debt, money market funds, or bank CD’s, for example – and earn a miniscule return, or take on substantially more risk in order to earn a current return. This choice has been made worse by the underperformance of the stocks of traditional dividend-paying sectors such as oil, telephone companies, and utilities. Investors looking for dividend-paying stocks have had to deal with a lot of risk and uncertainty.

The Future

What does the future hold for this Safety vs. Return trade-off? On the Return side of things, it is unlikely that the return an investor will earn with safe investments will improve significantly. The US Federal Reserve has stated it is unlikely to raise short-term interest rates for the next few years. The Yield Curve has steepened and I look for it to steepen more – meaning rates on 10 Year-or-more bonds will increase in my opinion. This could help somewhat, especially if one invests in mortgage-backed bonds or bond funds, because mortgage rates correlate to a spread over 10 Year Treasuries. However, an investor will need a whole pile of money if they want to live off of the interest from government- or even corporate-backed bonds.

Diversify Instead

Instead, investors looking for current return will need to get comfortable with the risk associated with dividend stocks, high-yield debt, and any other investment vehicles that pay them a higher current return. The best way to get more comfortable is to diversify their portfolio. Do you like the dividends that you can earn by investing in the major oil companies, but you don’t want to be subject to the ups and downs of the price of oil? Then don’t invest just in oil company stocks, as I know some investors do. AT&T has long been a haven for “widows” looking for dividend income, and it still does pay a hefty current dividend of in excess of 7%. However, AT&T has real problems and is looking to sell its DirecTV assets for about half as much as they paid for them 6 short years ago. If a substantial amount of your net worth is tied up in AT&T stock because you like the dividend, you need to think seriously about selling a chunk of it to protect your net worth, even if it means giving up the generous dividend. Live to fight another day. AT&T is an example of individual company risk that you can mitigate by diversifying your holdings. If you diversify your dividend-paying holdings among several or preferably many different companies, sectors, and industries, you can mitigate the risk that any one company or sector will tank your portfolio while at the same time maintaining a decent current return on your investments.

High Yielding Funds

One thing you might do is screen for dividends. By this I mean you would go to Finviz.com or another free stock quote service that has a screener function and screen for stocks that have a dividend of in excess of 4%, for example. What may turn up through your screen are Exchange-Traded Funds or Closed-End Funds that have high yields. If so, watch out! Not to say that you shouldn’t invest in these funds, but you need to understand what they do. Typically these funds invest in a lot of different equities or bonds, so that is good for diversification. However, a number of these funds use leverage in order to prop up their yield. For instance, for every dollar of investor money the fund has, the fund manager may also borrow a dollar and invest the borrowed dollar along with the investor’s dollar. If whatever the fund invests in pays an 8% dividend and the borrowed money costs only 3%, then the 5% difference gets passed on to the actual investors in the form of an enhanced dividend. This is great as long as debt an equity markets remain stable. However, volatility, especially in the debt and interest rate markets, is the enemy of these types of investments. As long as you understand what you are investing in and the risks associated thereof, then give it a go.

Another Alternative: Covered Calls

Finally, I will once again pitch an alternative for current yield that I have written about before. I write covered calls against long index futures positions. Calls against long index ETFs can accomplish about the same objective. I write calls at strike prices that are somewhat higher than the current trading price of the index, and I do so on a weekly basis. My objective is to provide a current return of at least 6% and preferably higher while still participating in some of the upside of the index. The bad news is that I also participate in 100% of the downside, but I do keep the premium of the call option that I sold. This strategy is diversified in that I am long in index futures, such as the S&P 500 or the Nasdaq 100 Index, so I own a whole portfolio of companies through one index position. By selling the call against the long position, I collect the premium price of the call while still owning the long position. If the price of the index exceeds the strike price of the call option when the option expires, my long position gets called away from me at the strike price, even if the price of the index exceeds the strike price. I hold on to the long position if the price of the long position is below the strike price of the call option at the expiration of the call option. It sounds complicated but it really isn’t once you do it a few times. Options sound risky but they’re not if you transact them as I have laid out here. To me, this is a great way to have a win-win on the initial problem I posed regarding the trade-off between safety and return.

IMO

It is a difficult choice between safety and return, but you can mitigate your risks by diversifying, by really understanding what you are getting yourself into, and perhaps by thinking outside of the box a bit with the covered call strategy I outlined. Want to learn more? Please contact me to ask.

Is your primary bank account with a “traditional” bank, meaning one with old-fashioned branches where you can still do business with a teller? And do you sometimes get sick of all of the rules, regulations, and fees associated with your traditional bank? And have you thought about moving your bank account from your traditional bank to an online-only bank? Perhaps your hipster children are encouraging you to do so, or perhaps a slick television ad for an online bank has caught your eye. You would not be alone, as online banks are growing. However, if you are considering such a move, there are several issues you need to consider and to research thoroughly before you join the 21st Century and move your bank account online. Consider these issues:

How Do You Bank Now?

The first thing to consider is, How do I do my banking now? Do you have online banking through your existing bank so that you don’t have to write checks by hand? Do you go into the branch a lot? Or do you do everything at the ATM? Do you have multiple accounts at your current bank – such as checking, savings, and mortgage – and do you avoid fees by having all of those types of accounts at the same bank? If you don’t go into the branch very often, then perhaps an online bank can work for you. Let’s say you need to send money via a wire transfer, which most likely you would need to go into the branch to transact. Make sure your new online bank can do wire transfers, and what the cost of it is. Also, if you like paying bills online, make sure your new online bank can accommodate bill pay. Most do, but check to make sure before you make a decision.

FDIC Insurance

Make sure your online bank accounts are insured by the FDIC. Most online banks are FDIC-insured, but make sure of it. On the other hand, I think FDIC insurance is overrated, which is apostacy for a Financial Planner to say, but that’s my belief. When is the last time a bank failed and its depositors were paid out only to the extent of its FDIC insurance? Brokerage accounts are not FDIC insured (although most are SIPC insured), and investors don’t seem to have a problem with having millions of dollars on deposit with brokerage firms. FDIC insurance is a topic for a separate blog. That all said, to stay safe, go for the online bank that is FDIC insured vs one that is not.

Fees

The main selling point of an online bank is very low or no fees. Because they don’t have the “brick and mortar” that traditional banks have, online banks’ fixed asset cost overhead is much lower, and so they try to pass that cost savings down to the consumer in the form of lower fees. Most traditional banks also have a no-fee option if you maintain a certain balance at all times in your account. If you don’t have the money to maintain the required balance, or if you have difficulty keeping track of your balance or don’t want to do so on a daily basis, an online bank may be for you. However, look at your online bank (before you move your account) and make sure you understand what fees are waived and what fees remain, and if it makes a difference to you based on the way you bank.

ATM Fees

Among these fees are ATM fees. If you are old-fashioned like me, then you like to carry around cash, and so you like to go to the ATM. However, I realize I am a dinosaur with this type of thinking, and that the hipster way to go is not to carry cash and to use your debit card instead. This has appeal because payment by use of a card is getting easier, and even more so in other parts of the world. Make sure you understand how your new online bank addresses ATM withdrawals. Such information is not easy to find and is sometimes buried in the fine print. My short bit of research led me to understand that most online banks allow you to use ATMs with no fees at some specific in-network ATMs, most of which are not located at traditional banks. For instance, ATMs that you might find inside drug or convenience stores may be linked to online bank ATM networks. If so, consider if you might want or need to access the ATM while the drug or convenience store is closed. Also, consider what happens if you want to do some international travel. Also, I noted that some online banks will reimburse your account for ATM fees that you incur by using out-of-network ATMs. One online bank does this up to $10 per month, which equates to about 1 ATM withdrawal per week. In our family, avoidance of ATM fees is an ongoing game, and we plan our cash needs while out-of-town or out-of-state just so that we can avoid paying ATM fees. This doesn’t justify the extra money on gasoline that we spend to drive out of our way to go to an in-network ATM, but that’s the way we roll. Before you choose an online bank, make sure you understand where you can withdraw your own money with out paying a fee to the bank to do so, and if that situation will work for you.

Top Online Banks

Some of the largest online banks are the following: Ally Bank, CapitalOne, SoFi, Charles Schwab, TD Bank, and Silicon Valley upstart Chime Bank. Google “online bank” and see for yourself. Do your homework before you make a move.

IMO

Once you have done your homework, go back and compare what you found with your current bank, and consider what other options your current bank might have if you change the type of account you have. Traditional banks are well aware of the competition they have with online banks and many traditional banks have adapted their account regulations such that they are very similar to online banks. You may find that it is better for you to avoid the hassle of changing banks and instead to remain at your current bank. Then again, if you are as upset with your current bank as I know some people get, then go fully online, as long as you know what you are getting yourself into.

The price of oil has been heading higher. Since early November, coinciding with the election of President Biden, the benchmark West Texas Intermediate Crude has risen from $40 per barrel to about $58 per barrel, an increase of 45%. The futures market for crude oil is complicated and time will tell where it goes from here but there are several reasons why we are seeing the bulls run in the oil market, and they are fundamental rather than technical reasons.

Change in US Policy

Andrew Hecht of SeekingAlpha.com is my favorite source for information on the oil market. He says, and I agree, that it is no coincidence that the recent rally started at the same time Biden was elected. Biden and the Democrats’ stated policy is to start to move the US away from dependence on oil and toward renewable energy sources. One of his first acts as President was to cancel the Keystone XL Pipeline. While this new policy may prove to be good for the environment in the long run, the problem in the short run is that we are still mostly dependent on oil and gasoline to run our cars. Government policy may be able to turn on a dime but people can’t just ditch their gas-powered cars as quickly. Moreover production of alternatively-powered cars is not sufficient to accommodate a wholesale change in transportation.

Covid Vaccine

At the same time we are at the beginning of vaccinating our population. Over the next several months, more and more Americans will be immune Covid and our economy will open up as a result. People will go back to driving again, perhaps not as much in aggregate as before but sufficient to cause a significant jump in demand for oil products over where we are today. Same with airplane travel and jet fuel. Oil investors look at where we are in our recovery and project that oil will be more expensive in the future.

Falling Dollar

The US Dollar has also been declining in value relative to other currencies during the same period. The world pays for oil using US Dollars, and if the value of the Dollar falls, it takes more Dollars to pay for a barrel of oil.

OPEC Plus Russia

At the same time, OPEC and its new best friend Russia seem to have gotten their act together and have held production steady, at between 6.7 an 7.7 million barrels per day according to Andrew Hecht. Coalitions within OPEC have been notoriously difficult to keep together and so history would tell us that OPEC likely won’t continue to hold the production line, but so far it has. With supply holding steady and demand likely to increase in the near term, Econ 101 says the price of oil goes up and will continue to go up. This is also where a change in US policy hurts. US production can be the second derivative that could cause world oil prices to hold steady or even decrease despite OPEC’s policy of holding production steady. However, if our country is now in a mode of cutting or at least making production more difficult through increased regulation, it will be difficult for oil investors to view the US as helping the situation of oil production.

IMO

Those of you who drive a Tesla or other electric care may not care as much any more in a direct sense, but there is a chance here that rising oil prices could really put a squeeze on our economy’s ability to recover from the Covid shutdown. As Dave Matthews says, Funny the Way It Is: it was only 10 months ago, in April 2020, that we saw the price of oil drop to below $0, meaning the seller paid you to take a barrel of oil. Now we are up near $60 and perhaps heading to $100 or higher. I believe the price of oil is more likely to move higher from here than lower because of all of these factors I have outlined. These are all fundamental factors, not technical factors, which means that the rally in oil prices is more likely sustainable. Let’s look to see to what extent US production really does level off, and also how long OPEC can keep its production as it is before raising it. Otherwise we could have much higher prices at the gas pump.

It was surmised by some that the end of the Trump Administration would mean a return to a more placid trading environment, but it has not worked out that way so far. Instead, volatility has remained high. The VIX Index, also called the “Fear Index” and which measures market volatility, has remained over 20 since last March, which Covid started, despite the election of the Biden administration, and is currently at about 21. It appears there are forces that are causing the higher volatility other than our former President.

New World

One explanation for the heightened level of the VIX and volatility is that we are in an economic situation that we haven’t seen before and therefore it is inherently volatile. We have large sections of the workforce still shut down and working from home or otherwise remotely. Only a relatively small percentage of office workers are back in their cubicles – perhaps only 20% or less. New York City has just allowed restaurants to open for indoor dining at only 25% capacity, and the long shutdown until now has caused a slew of restaurants to go out of business. A significant number of schools remain closed for in-person learning and/or are on reduced schedules. In short, we have never done this before, at least during our lifetimes, and so we really don’t know how this will all fall out. All of this uncertainty in our economy is reflected in an elevated level of volatility in our stock market. Therefore, as long as our economy as a whole remains affected by Covid and the economic restrictions therein designed to address the spread of the pandemic, you can also expect that volatility will remain high and the VIX Index will remain elevated.

Government Actions

Another explanation for the high VIX is government action, specifically the expansion of the Federal Reserve’s Balance Sheet by over $3 Trillion since the start of the pandemic and the reduction of interest rates to near 0% and longer-term rates following suit. All of that is additional money pumped into the economy hopefully to keep it afloat. Because interest rates are so low, all of that money has been invested by managers seeking higher returns, and that means more money into the stock market.

Market Concentration

Problem is, with so much of the economy diminished and corporate earnings therefrom also diminished, a lot of that money is being invested into companies who aren’t as effected by the shutdown and/or whose business models perhaps thrive during the shutdown. This means we have seen even more of a concentration in the “stay at home” stocks, especially those in the tech sector. The mega-market caps such as Facebook, Apple, Amazon, Netflix, Google/Alphabet, and Microsoft have especially benefitted. Currently, the top 10 stocks in the S&P 500 Index account for 28% of the capitalization of the entire index. This is a scary level of concentration in just a few stocks. A slip-up by any one of these companies could send the entire stock market for a tumble. Add to the mixture the ascension of Tesla now as the 5th largest market cap company in the US. Do you think Elon Musk, the head of Tesla and also the head of SpaceX, Solar City, and other ventures, is a relatively stable personality? Me neither. Once again, until “normalcy” returns in our economy, meaning likely that we reach worldwide herd immunity and/or 70% or more of the population is vaccinated from Covid, and therefore companies return to operations somewhat such as they were a little over a year ago, volatility will remain high. Also, think about what might happen between now and then. For instance, now that Amazon has captured a higher percentage of the retail sales market, will shoppers stay with Amazon once the traditional retailers open up more, and if they do will Amazon’s earnings take a hit? Will Netflix suffer if and when people return to the movie theaters? Returning to “normalcy” could mean a bloodbath for the “stay at home” stocks that have benefited from the economic shutdown.

IMO

Investors are buying stocks and sending stock index prices to record highs, but they don’t seem sanguine about it as reflected by the high level of the VIX index. Look for volatility and the VIX Index to remain high until our economy does return to some level of normalcy, new or otherwise.

You are facing a substantial expense in about a year. You know that you will have to pay this expense, and you know about how much it will cost. You have enough money now but it is invested in diversified stock index funds – market risk but not really company or sector-specific risk. Interest rates are, as you know, very low, so you won’t make much money in a CD or bank account. How should you plan to pay for this Known Known of an expense?

Cash Out Now?

One option, the most conservative one, is to cash out all of the money you need in a year right now and put it in a safe place, albeit one in which you won’t earn much at all for the next year. This is the safest option because you know you will have the money – a Known Known problem with a Known solution. It is not wrong to do this. You don’t want to risk that the stock market takes a dive and you miss out on the opportunity to pay for your expense with what you see as inflated dollars. The risk-averse will opt this way every time. However, there are other options.

Let It Ride?

The gambler might let it ride at this point: cash out $0 and hope for an upswing in their portfolio so that they can effectively pay for their expense using “house money”, or money that they earn between now and then. Perhaps they believe they have a better insight as to the direction of the market for the next year and thus a leg up; perhaps their insight is wrong. This is the highest option on the risk/reward spectrum. Though the “let it ride” option has some sex appeal, no financial planner worth their salt would recommend it.

Split the Difference?

An alternative is to split the difference: Save part but not all of the cost of the known expense, and keep part invested. The percentage of each would be a function of how big the expense is relative to one’s liquid net worth. If the expense would put a large dent in your net worth, then cash out a high percentage of the expense now, and vice versa. Managers of accounts such as Target Date Funds and 529 accounts act this way: As the target date for retirement or for the college tuition expense draws nearer, the fund manager moves a higher percentage but not all of the account to cash or short-term bonds so that the pending expense is addressed. These managers recognize that there is still a need to keep earning something on their clients’ investments because there may be unknowns that arise.

IMO

A known expense is different than an unknown expense because you can make plans to pay for a known expense. What plan you make and execute will be a function of how large that known expense will be relative to your money on hand. If you feel good by cashing out now for all that you need, then go for it. If, however, you don’t want to give up the upside of earnings you might make on that money, then move some to cash and keep the rest invested. Don’t be foolish and do nothing because you will hate yourself if it doesn’t work in your direction.

Part of the Gamestop story is that the impetus to drive the price of Gamestop stock higher came through a Chatroom called /WallStreetBets, which is through Reddit.com. Reddit provides forums for people to write/chat/converse about just about anything under the sun, and WallStreetBets is now one of Reddit’s hottest forums, although not its only forum regarding investing or personal finance. Go to reddit.com and check it out for yourself if you are curious. To me, WallStreetBets is one of a growing number of opportunities for investors to band together to pose and discuss ideas, and it is probably aided (or abetted) by the quarantine economy that we are now facing. I think WallStreetBets is a good thing on balance, although investors who were short Gamestop or any of the other targets of WallStreetBets would likely disagree, and the attorneys for those short investors would probably argue that the WallStreetBets forum and its collective actions to drive up the price of Gamestop constitutes market manipulation punishable by extensive fines or even prison.

WallStreetBets

WallStreetBets is like real-life video gaming, except that instead of killing aliens, the objective is to make money in the stock market. If you are into gaming yourself or if you have a child who is into gaming, as I do, you will know what I mean. The language is rough and vulgar and not for the faint of heart. WSB itself is just a chat room but it together with Discord, which is a free online voice chat service, make a combustable mixture. Discord even banned the WallStreetBets forum last week because of hate speech. A lovely group of people. Unless you are part of the demographic of twentysomething boys looking for a cause to support when they otherwise have a lack of stuff to do, I don’t recommend joining WallStreetBets.

Bogleheads

Instead, I recommend a service such as Bogleheads, which was formed based on mutual admiration for Jack Bogle, the founder of Vanguard. Bogleheads is a free service, in keeping with Mr. Bogle’s thriftiness. It also is for adults, unlike WSB. Bogleheads is more of a forum for ideas, and not a real-time trading discussion, which WSB can be. If you have a concept or if you want to research a company or a concept on your own without actually raising your hand, Bogleheads.com is a good place to find like-minded individual investors who have a devotion to Jack Bogle, which is a good way to approach investing.

StockTwits

StockTwits is a free message board forum for retail investors to make comments about individual stocks. If you are interested in any one company, you can search by that company’s name or stock ticker symbol and you can see what people have posted about it recently. StockTwits is not related to Twitter. StockTwits bills itself as “the largest social network for investors and traders.” Probably more adult than WSB but less so than Bogleheads, StockTwits can provide you with a sense of what investors are thinking about with respect to a particular stock. However, just as with any other social network, the advice that you get on StockTwits is worth what you pay for it. That said, if it increases your knowledge of an investment that you are pondering, then by all means dive in.

Free vs. Pay

There are a lot of other services out there. Likely you are familiar with some of them; if not, just Google it. Unless you are really devoted to a particular service, I recommend you stick to free services and not pay services. Some paid subscription services can be pretty pricey, which is never a good idea. If you are willing to pay for a social media or investment service, then you should also be willing to pay for the services of a financial planner who might be more worth the money for you.

IMO

These forums, chat rooms, and social media platforms related to stocks and investing can be good if you keep it in perspective and know what you are getting into. It is always good to make connections with like-minded people and/or to engage in interplay with respect to investment ideas. However, if you begin to feel uncomfortable, then stop. Use these as an opportunity to learn, but remember they are are worth what you paid for them.