Broken Pie Chart

Quasi co-host Jay Pestrichelli, CEO of ZEGA Financial, is back on to discuss whether the lower interest rates for longer crowd is on to something. Plus, while interest rates may cause home price inflation, the data points to other reasons car prices have continually risen. What is the real inflation rate? The Federal Reserve doing "whatever it takes" to keep rates down and buying bond funds. Plus, risk to bonds in a low rate period and what alternative strategies that use synthetic options to replicate a bond yield.

Jay Pestrichelli re-releases Amazon bestseller "Buy and Hedge Book"

Lots of talk around the lower interest rates for longer idea

Does the CPI represent real inflation?

Chapwood alternative inflation index

Comparing Japan and Europe's negative rate experiment with the current US landscape

Have risks in bonds ever been higher if interest rates rise?

Low interest rates leading to housing inflation or just readjusting for lower rates?

Lower rates do not impact car prices moving higher quite as much as extending loan durations

Option spreads to create a synthetic bond replacement strategy

How a stocks dividend is embedded in a put option

Low bond yields tough for early retirees

Mentioned in this Episode:

Jay Pestrichelli' s book "Buy and Hedge" https://amzn.to/2UEk12c

Chapwood alternative inflation index https://chapwoodindex.com/

Are bonds riskier with low rates podcast https://podcasts.apple.com/us/podcast/are-bonds-riskier-with-low-interest-rates/id1432836154?i=1000465096378

Derek Moore's book Broken Pie Chart https://www.amazon.com/Broken-Pie-Chart-Investment-Portfolio/dp/1787435547/ref=sr_1_1?keywords=broken+pie+chart&qid=1558722226&s=books&sr=1-1-catcorr

Contact Derek www.razorwealth.com

Graniteshares CEO William Rhind joins Derek Moore on the podcast to discuss how technology disruption is causing some companies to adapt and thrive while others falter. Can you focus on eliminating companies who are likely not positioned for the future while keeping those that are? How the Covid-19 crisis may have sped up many technology innovations while zombie companies face pressures. Value vs Growth debate. Was Dominos a tech company all along? Plus, European Football relegation and promotion and much more.

Growing vs faltering companies

What traits do growing companies possess that those likely to be disrupted lack?

Dominos vs Google – Both 2004 IPOs yet surprising which would have highest cumulative growth rate

Dominos – a pizza shop or stealthy tech company?

Value vs Growth debate

Did companies like Apple an Amazon live up to their value?

Netflix vs Blockbuster Video – obvious now but in the moment?

Will inflation and interest rates be lower for longer?

Zombie Companies – how Covid-19 sped up some of their declines

Walmart growth over the year's vs Amazon

XOUT ETF strategy overview

Risks of rising interest rates to US Treasuries

Negative Yielding TIPS auctioned off

60/40 portfolio with bonds vs gold

Mentioned in this Episode:

Graniteshares https://www.graniteshares.com/

Forbes piece on William Rhind https://www.forbes.com/sites/baldwin/2018/08/30/this-guy-is-taking-on-blackrock-and-state-street-with-cut-rate-gold-and-commodity-etfs/#25ce004b750d

Contact Derek www.razorwealth.com

Derek Moore's book Broken Pie Chart https://www.amazon.com/Broken-Pie-Chart-Investment-Portfolio/dp/1787435547/ref=sr_1_1?keywords=broken+pie+chart&qid=1558722226&s=books&sr=1-1-catcorr

How does the social security administration estimate what your monthly benefits? How do they adjust prior earnings for inflation? You can look up your earnings history and monthly benefit estimate at the social security site, but how do they come up with their numbers? How do they determine the cost of living adjustments? How much difference is there in taking social security at age 62 vs full retirement age? What are some considerations in that decision?

How social security uses your highest 35 inflation adjusted earnings years to figure benefit

How does social security adjust your prior earnings for inflation?

What is the breakeven point in taking benefits at 62 (early) vs 67 or 70?

What are the bend points to determine how much your monthly benefit will be at full retirement age?

The CPI-W index used to determine COLA or cost of living adjustments

How to find out what your earnings history and benefit estimated monthly number is

Mentioned in this Episode:

Bend points in social security used to calculate monthly estimated check https://www.ssa.gov/OACT/COLA/piaformula.html

CPI for Urban Wage Earners and Clerical Workers https://www.ssa.gov/OACT/STATS/cpiw.html

What is the amount up to you pay social security taxes on? https://www.ssa.gov/OACT/COLA/cbb.html

National Wage Index for Social Security (to inflation adjust your past earnings) https://www.ssa.gov/OACT/COLA/AWI.html

Create My Social Security account and see what your earnings history and benefit estimation is https://www.ssa.gov/myaccount/

Contact Derek www.razorwealth.com

Derek Moore's book Broken Pie Chart https://www.amazon.com/Broken-Pie-Chart-Investment-Portfolio/dp/1787435547/ref=sr_1_1?keywords=broken+pie+chart&qid=1558722226&s=books&sr=1-1-catcorr

Jay Pestrichelli, ZEGA Financials' CEO joins Derek Moore to walk through how this bear market compares to the 2008 Financial Crisis, 1997-1998 Asian Contagion, and 2000-2001 Dotcom crash. Are all these bear markets the same? Jay explains his rule of 3 showing the catalyst in each and how they are different. Plus, Derek describes how this last sharp decline resembles the trading action in August of 1998. What lessons can we take out of bear markets with regards to how sectors and regions tend to revert to the mean?

Discuss Charles Schwab commercial adding perspective to long run history in markets

Speed of this bear market compared to previous ones

Personal recollections of the last couple bear markets

Surprising data from the 1997-1998 bear market in emerging markets vs US equities

Trading halts and curbs

The case again for using hedges in building portfolios

Discussion of various catalysts behind previous bear markets

Not all bear markets have a recession as well

Reversion to the mean in historical sector returns

Mentioned in this Episode:

Jay Pestrichelli previous podcast appearances https://zegafinancial.com/in-the-news/podcast

Callan Periodic table of investment returns by sectors https://www.callan.com/wp-content/uploads/2020/01/Classic-Periodic-Table.pdf

Older Time frames Callan Periodic Table of returns including emerging markets https://www.callan.com/wp-content/uploads/2017/02/Callan-PErTbl_Collection_2017-1.pdf

Contact Derek www.razorwealth.com

Derek Moore's book Broken Pie Chart https://www.amazon.com/Broken-Pie-Chart-Investment-Portfolio/dp/1787435547/ref=sr_1_1?keywords=broken+pie+chart&qid=1558722226&s=books&sr=1-1-catcorr

Watching the financial news, we have been seeing some people make predictions of a deflationary period. At the same time others point to growing debt levels and Federal Reserve money printing as precursors to inflation. But what if deflation could be both good at the same time? Falling prices can happen by technological innovations or falling demand. One is better than the other. But for indebted countries, individuals, and companies' deflation can increase the real value of debt. That is potentially bad!

What is deflation?

What is inflation?

Formula to inflation adjust prices using CPI Index

Examples of how deflation raises the real value of debt

How inflation can deflate the value of debt

Massive inflation in textbooks but deflation in the price of TVs.

Demand falling off can hurt margins and equal bad deflation

Adjusting the price of a 10-minute-long distance call from 1982 to 2020 dollars.

Deflation doesn't mean consumers will always put off purchases to later day

Mentioned in this Episode:

Chart showing various inflation or deflation in consumer goods 1997-2017 https://s.marketwatch.com/public/resources/images/MW-GD574_CPICha_NS_20180212131601.png

CPI Index https://fred.stlouisfed.org/series/CPIAUCSL

What are Zombie Companies https://podcasts.apple.com/us/podcast/what-are-zombie-companies/id1432836154?i=1000473428395

Payoff mortgage early or invest periodically https://podcasts.apple.com/us/podcast/should-i-payoff-my-mortgage-early-or-invest/id1432836154?i=1000467130109

Inflation erodes purchasing power of US Dollar https://podcasts.apple.com/us/podcast/how-purchasing-power-dollar-is-eroding-plus-why-inflation/id1432836154?i=1000433222599

Contact Derek www.razorwealth.com

Derek Moore's book Broken Pie Chart https://www.amazon.com/Broken-Pie-Chart-Investment-Portfolio/dp/1787435547/ref=sr_1_1?keywords=broken+pie+chart&qid=1558722226&s=books&sr=1-1-catcorr

2011 saw the release of Margin Call, a movie staring Kevin Spacey, Jeremy Irons, Demi Moore, Stanley Tucci and more. A very strong acting performance from the whole cast. But what was the problem they pointed to with their (Var) or Value at Risk Formula? What did the junior analysts figure out that the firm did not? Margin call was focused around 24 hours at an investment bank on the verge of a problem with their mortgage backed assets. Learn about another good finance movie plus an explanation of the (Var) Value at Risk theory and its good and bad.

What is VAR?

What is Value at Risk formula?

What type of data does VAR utilize?

Speculation on what investment bank Margin Call Movie is based on

Volatility based risk estimates

95% and 99% confidence levels and VAR

Simplified explanation of probability and confidence levels

Discussion on historical data and normal distribution to predict future returns

Implied Volatility to show expected single and multiple standard deviation moves

Implied volatility around earnings releases for momentum stocks like Netflix or Tesla

Mentioned in this Episode:

Credit Default Swaps explained through the Big Short Movie https://podcasts.apple.com/us/podcast/the-big-short-movie-credit-default-swaps-explained/id1432836154?i=1000465683509

Contact Derek www.razorwealth.com

Derek Moore's book Broken Pie Chart https://www.amazon.com/Broken-Pie-Chart-Investment-Portfolio/dp/1787435547/ref=sr_1_1?keywords=broken+pie+chart&qid=1558722226&s=books&sr=1-1-catcorr

In the 1990's the term "Zombie Company" originated out of Japan during their lost decade. Today though we are hearing more and more about Zombie Companies in the U.S. Zombies are companies that only make barely enough net income to cover their annual interest costs on debt. Or, they may not even make enough to cover their annual debt and must borrow more money. What are Zombie Companies? Why are Zombie Companies bad? And how can you determine if a company is a Zombie Company or not?

What are Zombie Companies?

What percentage of companies in U.S. are considered Zombies?

Calculation used to identify Zombie Companies

What is the Interest Coverage Ratio?

Example of EBIT and Interest payments indicating Zombie Company Status

Assets minus Liabilities on balance sheet indicate net income number of quarters to pay off debt

Why Zombie companies are bad

How Zombie companies cannot grow or reinvest capital

How the Fed and low interest rates fueled Zombie Company creation

Economic and interest rate risks to Zombie companies

Mentioned in this Episode:

Podcast: Earnings Multiples, Valuations, Revenue, Net Profit Margins, Stock Buybacks and other Explanations http://brokenpiechart.libsyn.com/earnings-multiples-valuations-revenue-net-profit-margins-stock-buybacks-and-other-explanations

Podcast: How low interest rates benefit corporations http://brokenpiechart.libsyn.com/how-low-interest-rates-can-benefit-corporations

Paper titled Rise of Zombie companies: causes and consequences https://www.bis.org/publ/qtrpdf/r_qt1809g.pdf

Contact Derek www.razorwealth.com

Derek Moore's book Broken Pie Chart https://www.amazon.com/Broken-Pie-Chart-Investment-Portfolio/dp/1787435547/ref=sr_1_1?keywords=broken+pie+chart&qid=1558722226&s=books&sr=1-1-catcorr

On April 20th, the price of a WTI (West Texas Intermediate) futures contract representing 1000 barrels of oil went to negative -$37 a barrel. How is it possible that you could theoretically be paid to buy oil? How do oil futures work and how storage of oil works with regard to the futures market? The quick answer is, no you cannot buy a single barrel of oil and store it in your garage. Plus, using a silly Ikea couch example to explain why people would pay you to take their oil.

How did the price of oil go negative?

What is the difference between WTI and Brent Crude Oil?

Storing oil in Cushing Oklahoma

Size of 1 oil futures contract (1000 barrels)

Problems with trying to store an oil barrel

Difference between taking physical delivery of oil and speculation

USO exchange traded product methodology

Contango vs. Backwardation in futures market

Rolling front month contracts forward to next month

When does USO roll their front month contracts

Mentioned in this Episode:

Bloomberg funny article "That Time I Tried to Buy an Actual Barrel of Crude Oil" https://www.bloomberg.com/news/articles/2015-11-03/that-time-i-tried-to-buy-some-crude-oil

WTI Oil Futures Prices by Month https://www.marketwatch.com/investing/future/crude%20oil%20-%20electronic

Contact Derek www.razorwealth.com

Derek Moore's book Broken Pie Chart https://www.amazon.com/Broken-Pie-Chart-Investment-Portfolio/dp/1787435547/ref=sr_1_1?keywords=broken+pie+chart&qid=1558722226&s=books&sr=1-1-catcorr

Given the recent Coronavirus selloff in the markets, I thought it might be interesting to view investor actions through the prism of the 2008 crisis in this replay of an earlier podcast episode. Recently I found several different research pieces showing how at the very lows of the Great Recession in 2009 the percentage of funds in money market funds was at its highest. In 2009 the fund flows to bonds were greater than the previous 5 years combined. So why with equities so cheap did people stay in cash or bonds? Wouldn't they want stocks when they were cheaper? This highlights how investors who panic an make rash decisions can do so at the very worst times.

Why do investors panic?

How does fear guide investor decisions?

Percentage of funds in money markets spiked at time of March of 2009 lows

Why investors didn't rebalance out of bonds and into stocks during the great recession

2009 fund flows were a record year for bonds

How using Buffered or Hedged Equity Strategies can help reduce fear and irrational choices

Benefits of staying invested while hedged

Why now is a good time to be hedged

Mentioned in this Episode:

Contact Derek www.razorwealth.com

Morningstar Bond Fund Flows 2009 Chart https://morningstardirect.morningstar.com/clientcomm/2009.pdf

Dalbar Quantitative Analysis on Investor Behavior Report https://www.qidllc.com/wp-content/uploads/2016/02/2016-Dalbar-QAIB-Report.pdf

Podcast talking about markets within 3% of all-time highs 36% of time https://podcasts.apple.com/us/podcast/fear-investing-surprising-data-points-to-markets-near/id1432836154?i=1000443860686

Why diversification fails https://podcasts.apple.com/us/podcast/ep012-does-diversification-alone-reduce-systematic/id1432836154?i=1000423615813

Buffered Equity Strategies https://podcasts.apple.com/us/podcast/adding-downside-buffers-to-investment-portfolios-using/id1432836154?i=1000419699076

Why investors need a hedged equity strategy https://podcasts.apple.com/us/podcast/why-investors-need-a-protective-hedged-equity-strategy/id1432836154?i=1000418366567

Derek Moore's book Broken Pie Chart https://www.amazon.com/Broken-Pie-Chart-Investment-Portfolio/dp/1787435547/ref=sr_1_1?keywords=broken+pie+chart&qid=1558722226&s=books&sr=1-1-catcorr

Recently you've probably heard a lot of financial news media referring to the widening of spreads. Specifically, the High Yield Spread has widened above 1000 basis points. But what does it mean when the high yield spread increases? Get an overview on spreads widening or tightening. Plus, see how differently rated parts of the bond fixed income market see their spreads widen or narrow compared to US Treasury Bonds.

What is the High Yield Bond Spread?

What does it mean when bond spreads widen?

Comparing High Yield Bond yields to yields on US Treasury Bonds

Bond spreads as indicator on stock market

Explaining difference in credit rating on bonds

What rating is considered junk bond status

What did high yield spreads do in 2008 crisis?

What is the Option Adjusted Spread or OAS spread?

Callable bond features

Comparing yield spreads in investment grade bonds, CCC bonds, BBB bonds

Default rates as risk factors

Probability of bond defaults

Mentioned in this Episode:

Current High Yield Option Adjusted Bond Spread https://fred.stlouisfed.org/series/BAMLH0A0HYM2

Podcast explaining bonds for investors and corporations http://brokenpiechart.libsyn.com/explaining-bonds-for-investors-and-corporations

Current CCC High Yield Bond Spread https://fred.stlouisfed.org/series/BAMLH0A3HYC

Current BBB Bond Yield Spread https://fred.stlouisfed.org/series/BAMLC0A4CBBB

Derek Moore's book Broken Pie Chart https://www.amazon.com/Broken-Pie-Chart-Investment-Portfolio/dp/1787435547/ref=sr_1_1?keywords=broken+pie+chart&qid=1558722226&s=books&sr=1-1-catcorr

Contact Derek www.razorwealth.com