Broken Pie Chart

Debit and deficits continue to be in the news. This includes funding levels for public state pensions. But what does it mean to be underfunded or overfunded? What discount rate or investment return assumptions are they using and are they realistic? Derek Moore discusses and simplifies what makes up this discussion and ways that they could get on track.

What makes a pension underfunded?

Are investment return expectations realistic?

Which states are the worst regarding funding levels?

Differences between defined benefit plans and defined contribution plans

Options for pensions include cutting benefits, raising contributions, or increasing investment returns

Differences between public pension discount rates and private corporation's investment assumptions

Pension plans in a low interest rate environment

Is there any hope for states to get their funding percentages higher?

Mentioned in this Episode:

State pensions funding gap https://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2019/06/the-state-pension-funding-gap-2017#targetText=States%20reported%20a%20total%20liability,funding%20gap%20of%20%241.28%20trillion.

How well funded is your states pension? https://taxfoundation.org/state-pension-plan-funding-2019/

Podcast explaining negative yielding bonds https://razorwealth.com/wacky-negative-yielding-bonds-and-need-for-alternative-income/

Book: Broken Pie Chart https://amzn.to/31oy1hE

Razor Wealth Management www.razorwealth.com

It seems like lately there has been more an more talk about interest rates moving closer to zero in the U.S. So which bonds will move the most when rates move lower (or higher)? Derek talks through various types of bonds and how they are different plus see how to tell how much a change in rates can hurt or help investors holding bonds. We even touch on bond convexity!

How do interest rates change the value of a bond?

What is modified duration and how it can project a rise or fall in value?

Introduction to bond convexity

Unique aspects to U.S. Treasuries, Corporate Bonds, Municipal Bonds, and Mortgage Bonds

Callable Bond Features, Puttable Bond Features, and Convertible Bonds

How rates moving lower negatively affect mortgage bonds

Is the bond trade based on lower rates getting crowded?

How low interest rates can help companies

Mentioned in this Episode:

Podcast explaining negative yielding bonds https://razorwealth.com/wacky-negative-yielding-bonds-and-need-for-alternative-income/

Book: Broken Pie Chart https://amzn.to/31oy1hE

Razor Wealth Management www.razorwealth.com

Companies can issue debt via bonds to raise capital. But how can you tell whether they have too much debt issued? What are some key ratios to look at to evaluate for yourself? Derek Moore explains how interest rates effect the cost of capital (WACC) and how to see when a stocks debt is maturing and what interest rates they must pay. And what are Zombie Companies?

Interest Coverage Ratios

Debt Ratio (Total Debt/Total Assets)

Debit to Equity (Total Debt/Stockholders Equity)

WACC Weighted Average Cost of Capital

What happens when bonds come due for companies?

What are Zombie Companies?

Where to find list of a company's outstanding debt?

How low interest rates can help companies

Mentioned in this Episode:

Netflix list of it's outstanding bonds (page 51) on annual report https://www.sec.gov/Archives/edgar/data/1065280/000106528018000069/q4nflx201710k.htm

Book: Broken Pie Chart https://amzn.to/31oy1hE

Razor Wealth Management www.razorwealth.com

Commentators on CNBC are always opining about whether a market is overvalued or undervalued. But how would you look for yourself to make your own opinion? In this episode Derek Moore reviews the S&P 500 Index earnings per share, forward earnings estimates, PE Ratio, Forward PE ratio, and more. Plus, a review of what composes earnings per share growth including margins, share count, and revenue. Learn how to form you own opinions.

S&P 500 Index Earnings Per Share

S&P 500 PE Ratio and Forward PE Ratio

Where are we historically on S&P 500 Forward Price to Estimated Earnings?

Shiller PE Ratio or CAPE Ratio

Earnings Per Share Growth Components: Revenues, Margins, and Share Counts

Share Buybacks effect on Earnings Per Share

Interest Rate Effects on Discounting Future Earnings

Subsequent 5-year annualized returns from various forward PE ratios

Mentioned in this Episode:

Podcast on being an armchair economist https://razorwealth.com/is-a-recession-coming/

JP Morgan Guide to the Markets Report https://am.jpmorgan.com/blob-gim/protected/1383426387662/83456/MI-GTM_3Q19_August.pdf

Book: Broken Pie Chart https://amzn.to/31oy1hE

Razor Wealth Management www.razorwealth.com

Lately commentators have been trying to predict the next recession. But what would you look at to try and tell for yourself what the numbers are? In this episode Derek Moore reviews the 5 areas that the NBER per their site uses to develop their criteria to call recessions.

What is a recession?

NBER historical list of recessions

Real GDP Growth Rate

Real Median Income Growth in the U.S.

Unemployment Rate

Retail Sales Monthly Growth Rate

Industrial Production Index

Real versus Nominal Growth Rates

Mentioned in this Episode:

Federal Reserve Bank of Atlanta GDP Now Forecast https://www.frbatlanta.org/cqer/research/gdpnow.aspx

United States Real GDP Growth Rate https://tradingeconomics.com/united-states/gdp-growth

United States Inflation Rate https://tradingeconomics.com/united-states/inflation-cpi

Federal Reserve Bank of St. Louis FRED Retail Sales Monthly growth rate https://fred.stlouisfed.org/series/RETAILMPCSMSA

US Annual Median Real Wage Levels https://fred.stlouisfed.org/series/MEHOINUSA672N

US Real Median Personal Income Levels https://fred.stlouisfed.org/series/MEPAINUSA672N

US Civilian Unemployment Rate https://fred.stlouisfed.org/series/UNRATE

US Industrial Production Index https://fred.stlouisfed.org/series/INDPRO

Atlanta Fed Real Wage Growth Tracker (more updates) https://www.frbatlanta.org/chcs/wage-growth-tracker.aspx

Atlanta Fed Real Wage Growth by Job Switcher and Job Stayer https://www.frbatlanta.org/chcs/wage-growth-tracker.aspx

Book: Broken Pie Chart https://amzn.to/31oy1hE

Razor Wealth Management www.razorwealth.com

How risky is just holding a single stock in a portfolio? Often either through company stock grants or holding company shares for very long periods where it has appreciated investors may wind up holding either a single stock or just a few. This creates single stock risk and has both systematic stock risk and idiosyncratic stock risk. Derek Moore reviews how the volatility via the standard deviation may increase as well as some interesting historical data on Apple stock regarding its annual drawdowns and volatility.

What is concentrated stock risk?

What is systematic stock market risk?

What is idiosyncratic stock risk?

Comparing volatility of single stocks to a market portfolio

How many stocks does it take to achieve diversification?

How does correlation indicate whether diversification will work?

Why diversification fails when markets sell off badly

Apple's annual compounded growth rate performance 1981 through 2008

Apple annual significant drawdowns

Apple stock standard deviation from 1981 through 2018

Mentioned in this Episode:

Book: Broken Pie Chart https://amzn.to/31oy1hE

Razor Wealth Management www.razorwealth.com

Study showing single stock volatility compared to market portfolio http://ppca-inc.com/Articles/DiversByNumbers.pdf

Derek Moore explains the theory of time decay in options otherwise known as options theta. How does the erosion of time decay benefit option sellers? Plus, how much do position decay from day to day. How much of a factor is theta time decay relative to other things like volatility and underlying price movement? And how does options time decay work over weekends and long holiday weekends with regard to theta?

Benefits of options time decay to option sellers

What is options theta?

How much do option positions lose value each day due to time decay?

Options weekend time decay (Theta)

Should option sellers put on positions prior to weekends and holiday weekends?

How much does a short spread position realize option theta each day?

Options software utilizing 365-day calendar versus 252-day calendar

Why some options software overestimates time decay going into the weekend

Mentioned in this Episode:

Podcast on selling option spreads and volatility https://razorwealth.com/high-probability-options-strategies-explained-podcast/

Razor Wealth Management www.razorwealth.com

Derek Moore's book Broken Pie Chart https://www.amazon.com/Broken-Pie-Chart-Investment-Portfolio/dp/1787435547

Derek Moore and Jay Pestrichelli team up once again to discus how probabilities are used to understand where to sell short options to generate premium. Discussed in this episode are who is on the other side of the short volatility trade, how changes in implied volatility impact expected multiple standard deviations of expected movement, and how value at risk VAR impacts option premiums. Plus, they discuss how professional management adds value especially when option spreads widen and volatility increases.

Using probabilities to generate short high probability option positions

Expected underlying index moves based on varied levels of implied volatility

How large investment banks take the opposite side of the trade looking to reduce Value at Risk (VAR)

Difference between being patient for opportunities versus and always in the market strategy

What happens to option spreads when markets sell off?

Value at Risk VAR impact on institutional hedging as dynamic volatility hedging increases

Why sell options on large diverse indexes as opposed to individual stocks

Netflix example of implied volatility right before earnings and expected moves

Single stock risk using Netflix and Disney examples of over 10% moves down after announcements

Mentioned in this Episode:

Jay Pestrichelli and Derek Moore talk myths of the 60/40 portfolio

https://razorwealth.com/discussing-myths-around-the-classic-60-40-portfolio-part-i/

How are options priced and what is short volatility?

https://razorwealth.com/how-are-options-priced-and-what-is-short-volatility-podcast/

What implied volatility on options tells us about stock earnings expectations?

https://razorwealth.com/what-the-options-market-tells-us-about-expected-stock-moves-around-earnings/

Razor Wealth Management www.razorwealth.com

Derek Moore's book Broken Pie Chart https://www.amazon.com/Broken-Pie-Chart-Investment-Portfolio/dp/1787435547

Jay Pestrichelli once again joins host Derek Moore to discuss all things hedging and options. This week they talk through some surprising data Jay compiled that shows markets are within 3% its all-time highs 36% of the time. Many people like to try and time the market thinking markets are too high. Another data set shows often markets never get a pullback during bull runs. Plus, Jay and Derek test out new hedging analogies on the fly to see if they work.

How often are stock markets within 3% of their all-time high?

Comparing portfolio hedging to buying car insurance?

Comparing the Brooklyn Nets getting 75% of Kevin Durant's pre-injury game versus their downside risk

How often is the market 10% lower one year later study

Discussing fear investors have at getting into markets at perceived highs

How the hedgers opportunity may let investors buy more lower

The Random Walk Theory in stock markets

How Random Walk needs and upward bias to fit its narrative

How sometimes waiting to buy into markets causes investors to miss out

Is it better to lose early or lose late in retirement?

The effect withdrawals for income have on portfolios

Mentioned in this Episode:

Jay Pestrichelli and Derek Moore talk myths of the 60/40 portfolio

https://razorwealth.com/discussing-myths-around-the-classic-60-40-portfolio-part-i/

Razor Wealth Management www.razorwealth.com

Derek Moore's book Broken Pie Chart https://www.amazon.com/Broken-Pie-Chart-Investment-Portfolio/dp/1787435547

See what factors determine how an option is priced. Whether on a stock index or underlying stock, time, implied volatility, interest rates, dividends, and distance in or out of the money all play a role. Known as the Black-Scholes model, Derek breaks down the inputs and which ones are more significant not only to option premium levels but also changes in price.

Explaining the option greeks Delta, Gamma, Theta, Vega, Rho

What is implied volatility and why is it so important in options pricing?

How do option premiums decay towards expiration day?

What determines whether an option is in or out of the money?

How to convert a stock's implied volatility percentage to expected multiple standard deviation ranges?

What does is mean to sell option volatility premium for income?

Mentioned in this Episode:

What the options market tells us about stock moves around earnings releases

https://razorwealth.com/what-the-options-market-tells-us-about-expected-stock-moves-around-earnings/

Razor Wealth Management www.razorwealth.com

Derek Moore's book Broken Pie Chart https://www.amazon.com/Broken-Pie-Chart-Investment-Portfolio/dp/1787435547