Category: Finance

(photo by Jean-christophe Gougeion on Unsplash)

Prices for things we buy always seem to go up. Did your parents or grandparents ever say, “when I was a child, a candy bar only cost a nickel”. The cost of tolls on highways and bridges, train and bus fares, and parking meters inevitably goes up. They never drop. The price of gasoline fluctuates, but inevitably is most expensive during the times of year that we drive the most.

These price increases on their own would not be terrible if our annual salaries increased at a higher percentage than these expense price increases. Then we would still have money leftover. But for most workers, the cost of living always seems to increase at a higher rate than our annual salary raises, if we are lucky enough to get a raise at all.

Inflation is “a general increase in prices and fall in the purchasing value of money” (Oxford Dictionary).

I realized quick that home ownership had hidden costs that never go away. When I first purchased my home, I did not realize that property taxes would go up every year. I thought that my fixed mortgage would be just that, fixed. Wrong.

Expenses can grow quickly if we do not pay attention. Cable companies reel us in with a special low price for the first three, six, or twelve months. And then the real, higher price kicks in. The vendor may even bump up prices at random times without notice. If we do not pay attention, these expense increases can go unnoticed for months before we realize what has happened. We must be vigilant towards keeping our expenses in check. Sometimes that means calling a vendor to complain and demand a better price.

Food is another cost that continues its upward trend. Spend fifty or one hundred dollars at the supermarket. And upon returning home to empty the grocery bag contents on the counter, we realize that the expensive cost did not procure much food. And the kicker is that the size of many products have mysteriously gotten smaller. So we not only pay more for the same product, but we get less product than before.

These inflation issues were already around pre-Covid. But the pandemic has added an extra layer of inflation. With many companies shutting down, especially at the beginning of the lockdown, many goods stopped being produced, while the demand for these products skyrocketed. Low supply combined with high demand means that companies will raise their prices because they know that many consumers will be willing to overpay to procure their desired products.

I wish that I was a consumer that did not have to care about price, so I could obtain things I desperately need right now during the pandemic. But my accountant brain seems to kick in whenever I see the higher-than-normal overpriced costs. I’ve been shopping for a car over the past year, and for a computer over the past few months. And I have yet to find what I’m looking for at a reasonable price. In my mind, the reasonable price of pre-covid was still expensive, but even that price would look good right now.

I have been using two old computers that don’t work as well as they used to. Actually one broke down a few months ago. And the one remaining computer runs through its power very quickly if it is not plugged in to electricity. And it also overheats at random times.

The car I drive is over twenty years old. Both last year and this year, the car has needed a lot of repairs. And while it is working okay right now, who knows when the next issue will arise, perhaps leaving me car-less.

For both of my desired purchases, car and computer, there are shortages of both in the marketplace because there is a shortage of computer chips. And the prices for each are astronomical, also due to this shortage. Today I searched online for a computer and finally found one that met my specification requirements, only to see that it would be delivered by September 30. That’s two months out! And the price was still full price, plus the Covid inflation cost added on. I will continue my search through Labor Day, with hopes of finding either a back-to-school or Labor Day sale.

And as for car shopping, ugghhh! Have you noticed the shortage of vehicles in auto dealership lots? My part-time job location has a window overlooking a Ford dealership. Pre-Covid, their parking lot was packed with vehicles. Now they have many less vehicles that they space out in the lot to make it look like there are more than there really are. To recap, there is a shortage of NEW vehicle inventory due to a chip shortage, which has caused the price of NEW vehicles to skyrocket. And because of these high prices for NEW vehicles, many car shoppers are switching their search to USED vehicles, which has caused the price of USED vehicles to skyrocket.

In conclusion, the Federal government (and others) believe that our current inflation situation is “transitory” or temporary. I don’t buy it, but time will tell. If this inflation is transitory, then prices will roll back to pre-Covid pricing within a few months from now. The longer that inflation sticks around, however, the more likely that it is not temporary, and will continue on.  This will bring about more pain to the economy, and more hardship for us, the individual consumers. Remain vigilant with your expenses. Spend wisely.

(photo by Hello I’m Nik on Unsplash)

Here is a graph that reflects the stock performance of the four major indexes over the past TEN years (per TD Ameritrade website).

Orange: Nasdaq (technology & other) increase of ~475%

Blue: S&P500 (80% of market) increase of ~250%

Purple: Russell (small caps) increase of ~200%

Aqua: Dow Jones (30 Belweathers) increase of ~200%

Notice that since the initial pandemic drop during 2019, the Nasdaq (orange) has gone up around 275% in about two years. Amazing!

This past Friday, August 6, 2021, the S&P500 closed at an all-time high after the monthly jobs report came in better than expected, as the economy continues to recover from the Covid-19 pandemic, and investors shake off delta variant concerns (per TD Ameritrade website).

And per Sven Henrich’s twitter feed (@NorthmanTrader): S&P500 “new highs on Friday with only 45 components making new highs.”

The market indexes can be broken down into eleven sectors. While the INDEXES provide a general view of the market, the SECTORS provide guidance regarding how specific segments of the market are performing.

Here is a chart reflecting the most recent ONE YEAR performance of all eleven sectors against the S&P500 (per TD Ameritrade website). All sectors are in the green!

The following chart shows sector performance over the LAST MONTH timeframe (per TD Ameritrade website).

Financials and IT have led the way in both timeframes. On the plus side, Health Care and Communication Services have moved up. On the negative side, Consumer Discretionary and Energy have slid down to the bottom.

Within each SECTOR there are INDUSTRIES. We have identified the Consumer Discretionary SECTOR as the poorest performer over the past month. Which INDUSTRIES are driving this downtrend? The chart below lists all INDUSTRIES within the Consumer Discretionary SECTOR.

While one month is not a listed timeframe in the chart below, we can still use it as an illustration. The Diversified Consumer Services INDUSTRY is the only industry that has been down over the past three years. And the Internet & Direct Marketing Retail INDUSTRY has been down over the past year. Also, scanning the “YTD” and “1 Year” columns, it looks like all INDUSTRIES have seen a slowdown (per TD Ameritrade website).

Let’s focus on the Internet & Direct Marketing Retail INDUSTRY from the chart above. The chart BELOW reflects some of the specific companies that make up the Internet & Direct Marketing Retail Industry. On top of the list is Amazon (AMZN) (per TD Ameritrade website).

Here is an AMZN 30-Day Chart broken down in one-hour increments (per tastyworks trading platform).

Notice the big down gap around July 29. That is when AMZN reported earnings for the most recent quarter. They did not meet street estimates, which caused the stock to drop about 250 points. And since then (one week in) the stock has remained flat. I would venture to guess that this big drop in AMZN is one of the main drivers for the Internet & Direct Marketing Retail INDUSTRY and Consumer Discretionary SECTOR decrease (over the past month), as AMZN is, by far, the biggest company in this Sector-Industry.

To conclude, money is constantly flowing in and out of the sectors and sub-industries. Recognizing these shifts can be helpful in assessing where to invest your own money next.

(photo by Aidan Hancock on Unsplash)

I have already stated in previous posts, my view is the stock market is overpriced and I’m waiting for a stock market pull-back. However, I want to be clear that I am in the minority. There are very few bears left in this bull market.

Individual investors continue to “buy the dip” after the rare small drops in the market. The Federal Reserve continues to pour money into the market, feeling the need to help hold the market up, even while stating over-and-over that the economy is in great shape. And frankly, there is no where else to invest money at this time. With extremely low interest rates from savings accounts, CDs, and bonds, interest income can be found no where. It makes sense that the professional trading firms continue to invest their client’s money in the market.

Had I stuck to the mantra, “the trend is your friend”, I’d be in better shape. We have been in a bull market for years now, with an additional massive surge to the upside during the pandemic. Many professional traders recommend trading what’s in front of you, not what you think will happen. And that advice has held up well.

Perhaps I’m a little skittish at these high levels because I lived through the tech bubble of 1999-2000 that started with soaring tech names and ended with a huge drop. There is a saying that the market goes up like an escalator (slow and steady), and down like an elevator (fast and hard). However, during the 1999-2000 technology stock bubble and other times, like last year, it felt like the opposite, with a massive elevator up.

I just saw a twitter post this morning by Carl Quintanilla (CNBC, NBC) quoting Goldman Sachs, the big investment bank: “We raise our S&P 500 year-end 2021 price target to 4700 (from 4300) and our 2022 target to 4900 (from 4600). The combination of higher-than-expected S&P 500 earnings and lower-than-expected interest rates drive our upgraded price targets…” [Kostin]

Many companies that have reported earnings for the most recent quarter have reflected fantastic financial results. I would argue that these great earnings reports are already factored into the market. Tech companies like Apple reported an all-time great latest quarterly earnings, yet their stock dipped with news that they foresee a slowdown next quarter due to the Covid variant picking up steam. On the other hand, Amazon had less than stellar numbers, which saw their stock price drop.

There are also plenty of companies that have seen their stock prices come down. While the overall market indexes (S&P, Nasdaq, Dow) continue to flirt with all-time highs, the reality is that all companies are not created equal in these market indexes. Big tech companies, for example, are weighted more heavily in these indexes than smaller companies. In effect, for most of this year, big name tech stocks (and others) have been carrying the S&P and Nasdaq indexes, even though many other company stock prices are down.

The Russell index which represents smaller companies is one index that has been in a downtrend recently. To quote an email I received this morning from tastytrade: “With all the attention given to the rallies in SPY, QQQ, and even DIA, it may be surprising to know that IWM is the same price it was six months ago. On Feb 4, IWM closed at 218.62. Yesterday, it closed at 218.11.

What am I doing in my own portfolio? First, I have cash on hand to buy stocks after a pull-back occurs (whenever that will be). Second, when I uncover a stock that looks like a good entry point for a long position based on chart technicals, I’m in the trade short-term. Either the stock goes up and I close out for a profit, or I close the trade for a small loss. Third, and the majority of my strategies, I utilize stock options (not for all investors) to enter mostly short positions.

To conclude, the stock market is at all-time highs and continues it’s upward trend, even today. No one knows which way the market will go in the future. It may continue up for a while. However, based on the economic data that I see, I am taking a contrarian stance.

(photo by Kelly Sikkema on Unsplash)

Here are nine personal finance ideas…

When possible, pay bills by credit card to earn credit card points. Be careful though, as some vendors may charge an extra fee when paying by credit card. Ensure that you have enough cash on hand to cover your charge, and pay your credit card bill in full each month. It’s been my experience that it takes a lot of spending to earn enough points to buy things for free. Only use credit card for necessary purchases. It has still been worth it for me. I earned enough points for a beginner $200 electric guitar and amp that has lasted for several years. I’ve ordered books here and there for $20 credits. And occasionally, I have enough points to pay a small portion of an Amazon bill with credits. Small payoffs yes, but still free money if you use your charge card in a healthy way.

Periodically call your credit card company to request an increase in your credit limit. As a valued customer who pays your credit card bill on time each month, the credit card company may approve your request. It’s always good to have additional credit on hand for emergency purposes. I have not had the need for this extra credit yet, and hopefully never will. If an emergency did occur, I would probably use my emergency cash fund first, so not to incur unnecessary interest charges. However, if I ever had a big life emergency, it’s good to know that I’ve got this extra amount available to me.

Periodically check your credit score. The higher the score, the more benefits to you, such as: lower interest rates offered on loans, access to better credit cards, insurance discounts, more housing options, etc. You are entitled to one free copy of your credit score every twelve months from each of the three nationwide credit reporting companies (Equifax, Experian, TransUnion). You will need to share your name, address, social security number, and date of birth to verify your identity. Some credit card companies offer free credit score lookups too.

Reconcile bank and credit card statements on a monthly basis. It is helpful to know how much money is available to you in your accounts each month. However, another important reason to stay on top of this is to ensure that no fraudulent transactions have been posted to your accounts. If, for example, someone illegally used your credit card to make purchases, you have a limited timeframe to contact your credit card company to file a complaint and to receive a credit back onto your card.

Contribute to your employer’s retirement plan, especially if they offer an employer match up to a certain percent. At a minimum, contribute enough to earn the full employer match. This is free money to you for retirement.

Spend less than you earn. Live below your means. It sounds easy but is not. Create a budget that lists out all income sources minus all expense items. Track expenses and assess if they are truly needed. Cut expenses when possible. Brainstorm ways to bring in extra income.

Pay yourself first. Put money aside before paying bills. If in debt, pay off first. Then build an emergency fund. And then save, save, save.

Invest your savings wisely. It’s difficult in the current economic environment to find investments that earn income at a higher rate than inflation. Interest on savings accounts, CDs, and bonds are non-existent. And the stock market is at all time highs. No one really knows which direction the stock market will go. It can certainly keep going up from here. Personally, I’m waiting for a drop before I invest. But I’ve been wrong in my assumption for quite some time, so what do I know. Corrections in the market are healthy. The stock market has not had a 10% correction since Feb 2018. “According to data from market analytics firm Yardeni Research, the S&P500 has undergone 38 corrections since the beginning of 1950. That’s an average decline of at least 10% every 1.87 years.” So it’s tough right now to decide how best to save. Everyone has different levels of risk. Determine your risk profile. Holding cash for a bit before making a decision is an option for sure.

Invest in yourself. You are your most valued asset. Grow your knowledge in topics that inspire you. Spend money on activities that lift up your spirit.

(photo by Meric Dagli on Unsplash)

How do we determine how the OVERALL stock market is doing? We can look at charts of individual stocks. However, 2,400 companies trade on the NY Stock Exchange alone. Instead, we can look at various indexes, which group together a bunch of individual stocks. In the U.S., the three biggest indexes are the S&P500, Nasdaq, and Dow Jones. I also like to include the Russell. In addition to these indexes, there are 5,000 others that make up the U.S. equity market, allowing us to dice and slice the market into many subcategories. Indexes can be constructed in a variety of ways, but they are commonly identified by capitalization (size) and sector segregation (similar businesses grouped together).

News broadcasts tend to focus on the Dow Jones, as it is one of the oldest and well-known indexes. It includes the stocks of 30 of the largest and most influential companies in the U.S. Because the Dow contains only 30 stocks, it really does not carry as much weight as the S&P500 (500 stocks), Nasdaq Composite (2,500 stocks), and Russell 2000 (2,000 stocks).

The S&P500 Index represents 80% of the total value of the U.S. stock market. Generally, the S&P500 reflects movement in the U.S. stock market as a whole.

The Nasdaq Composite Index is more technology focused, although it does include other non-technology industries, as well as some companies NOT based in the U.S.

The Russell 2000 focuses on smaller companies in the U.S. market in various sectors. The largest company in this index has a market cap of $32 billion, while the smaller ones have market caps around $200 million. This index also contains a lot of U.S. community banks. At least it did until June 2021. Every year, indexes recalibrate to remove and add companies based on how the company capitalization (size) has changed. Because bank stock prices have dropped over the past year, relative to other sectors, many banks’ capitalization dropped below the Russell $200 million threshold. I’m not sure how many banks got dropped.

The first thing I look at each trading day is which direction these four market indexes are moving. Many times they go up and down in unison. Other times, as an example, the Nasdaq may skyrocket higher due to tech stock focus, while the Russell (small caps) are dropping. This helps me gauge how the markets are trending.

There is overlap between these four indexes, because some of the same companies are included in more than one index. For example, Apple (ticker: AAPL) is a component of both the S&P (broader market) and the Nasdaq (high number of tech stocks). But AAPL is not included in the Russell (smaller companies). Thus, the S&P and Nasdaq have a stronger correlation between each other than against the Russell.

The screenshot below shows the correlation between:

SPY = S&P500; IWM=Russell; QQQ=Nasdaq; DIA=Dow

Looking at the first column, notice that SPY is the header. Looking down to the second row – column 1 – IWM has a 38% negative correlation to SPY. The third row – column 1 – QQQ has a 96% positive correlation to SPY. While the fourth row – column 1 – DIA has a negative 36% percent correlation to SPY. That means that generally (but not always), SPY and QQQ will move in similar directions; and IWM and DIA generally move independently of SPY and QQQ.

(above chart per MicroAxis.com)

Economic scenarios can affect various stock sectors differently. For example, I have noticed that changes in interest rates have a different impact on QQQ (Nasdaq-Tech heavy) versus IWM (Russell – Banks). Interest rates are currently low. In today’s interest rate environment, you can borrow money (i.e., auto loan, mortgage) at a very low rate. And, if you deposit money in a savings account, the interest you earn will also be very low. Banks make more money when there is a wider gap between the interest rate banks make off of your loans versus the interest rate the bank has to pay you each month for keeping your savings account funds with them. Banks have not been making enough net revenue on this spread in recent times. However, the outlook for banks going forward is favorable, because at some point interest rates will increase, producing a bigger net income spread.

Tech stocks are impacted by interest rates in reverse of banks. When interest rates are low, Tech stocks can purchase more materials at lower prices. But when interest rates eventually go back up, Tech stocks will have to pay more.

To summarize, following broad market trends can help in formulating opinions and trade ideas. Overarching trends can last a long time, such as straight up during this current multi-year bull market. But underneath the main trend, we can uncover money flows in and out of different sectors and industries that also help in assessing our next moves.

Notes: (www.investopedia.com was used to formulate index definitions)