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>>> Bull of the Day: Gartner (IT)
By: Zacks Investment Research
August 23, 2022
https://www.zacks.com/commentary/1970961/bull-of-the-day-gartner-it?art_rec=home-home-featured_zacks_rank_stocks-ID01-txt-1970961
https://investorshub.advfn.com/boards/read_msg.aspx?message_id=169761801
Gartner (IT) is $25 billion leader in information technology research and consulting. Headquartered in Stamford, CT, the company offers diverse industry expertise and technology-related insight necessary for informed decision-making at Fortune 1,000 companies.
Gartner's comprehensive services portfolio has enabled customers across sectors to research, analyze and interpret their data-dependent business with greater precision, efficiency and discipline.
You may be familiar with the Gartner Magic Quadrant which as become something like the JD Powers award of technology innovation.
Magic Quadrant (MQ) is a series of market research reports published by Gartner that rely on proprietary qualitative data analysis methods to demonstrate market trends, such as direction, maturity and participants.
Their analyses are conducted for several specific technology industries and are updated every 1–2 years: once an updated report has been published its predecessor is "retired". Thus, the value of making the list frequently as a leader of innovation.
Beat and Raise Quarter
On August 2, Gartner delivered a big beat-and-raise quarterly report. Adjusted earnings (excluding 32 cents from non-recurring items) per share of $2.85 beat the consensus mark by 33% and increased 27% year over year.
Revenues of $1.38 billion beat the consensus estimate by 4.4% and improved 17.9% year over year on a reported basis and 21.8% on a foreign-currency-neutral basis.
Total contract value was $4.3 billion, up 15.4% year over year on a foreign-currency-neutral basis.
Gartner reported Q2 adjusted EPS of $2.85 vs. the consensus of $2.15 and Q2 revenue of $1.377 billion vs. consensus of $1.32B.
CEO Gene Hall commented, "Gartner had another strong quarter with double-digit growth in contract value, revenue, and Adjusted EPS. We are again raising our guidance and remain well-positioned to deliver long-term, sustained, double-digit growth. And we continue to buy back stock, which will increase our per share results this year and beyond."
Quarterly Numbers in Detail
Revenues at the Research segment increased 13.9% year over year on a reported basis and 17.3% on a foreign-currency-neutral basis to $1.14 billion. Gross contribution margin was 73.9% in the reported quarter.
Revenues at the Conferences segment surged 95.1% year over year on a reported basis and 102.2% on a foreign-currency-neutral basis to $114 million. Gross contribution margin dropped to 64.8% in the reported quarter.
Revenues at the Consulting segment grew 13.9% year over year on a reported basis and 20.5% on a foreign-currency-neutral basis to $121 million. Gross contribution margin was 41.6% in the reported quarter.
Adjusted EBITDA of $389 million improved 9.5% year over year on a reported basis and 14.2% on a foreign-currency-neutral basis.
Operating cash flow totaled $416 million while free cash flow was $395 million in the reported quarter. Capital expenditures totaled $21 million. Gartner repurchased 1.8 million common shares for $479 million.
Boosted 2022 View
Adjusted EPS is anticipated to be $8.85 (previous view: $7.80). Adjusted EBITDA is projected to be $1.235 billion (previous view: $1.14 billion). Free cash flow is anticipated to be 985 million (previous view: $930 million).
Based on this guidance, analysts boosted this year's EPS consensus over 12% from $8.08 to $9.08.
Meanwhile, the topline is projected to grow 13.7% to $5.38 billion.
Analyst Commentary
Baird analyst Jeffrey Meuler his price target on Gartner to $365 from $334 and kept an Outperform rating on the shares. The analyst likes Gartner as a multi-year compounder, and likes the risk/reward across a range of potential macro scenarios.
Meuler said he interprets management's updated commentary for go-forward underlying margins in the "low 20s" as a notable positive revision, especially given recent material outperformance of its public targets.
Wells Fargo analyst Seth Weber his price target on Gartner to $345 from $305 and kept an Overweight rating on the shares. The analyst noted that upside Q2 with a raised 2022 outlook underscores Gartner's well-entrenched position within core IT/tech markets, complemented by newer categories such as supply chain and HR.
Weber observed that these areas are supporting strong/resilient growth and considerable cash generation. Meanwhile, updated margin framework commentary should quell fears in that area.
BMO Capital analyst Jeffrey Silber raised his price target on Gartner to $305 from $265 and kept a Market Perform rating on the shares. The company's Q2 earnings beat was driven by strength in all three segments. Silber added that its research revenues also remained strong with retention at records highs.
Barclays analyst Manav Patnaik his price target on Gartner to $315 from $265 and kept an Equal Weight rating on the shares. The company's base margin guidance of low-20s, with modest expansion thereafter, is an encouraging development that could bode well long-term.
After the company report, Gartner shares jumped 7% and then found a few analysts scrambling to revise their lowered price targets from July.
This goes to show that the bull market in technology is alive and well, despite rising inflation and interest rates. You can understand why from my 2018 report The Technology Super Cycle, whose long-tail principles remain in play.
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>>> Charlie Munger says Costco 'has one thing that Amazon does not'
Yahoo Finance
Emily McCormick
February 24, 2021
https://finance.yahoo.com/news/this-the-the-one-thing-costco-has-that-amazon-lacks-according-to-charlie-munger-200739515.html
Costco (COST) has a leg up on e-commerce behemoth Amazon (AMZN) on at least one measure, according to Charlie Munger, vice chairman of Berkshire Hathaway.
"Costco, I do think, has one thing that Amazon does not," the billionaire investor said during the Annual Meeting of Shareholders of the Daily Journal Corporation (DJCO) in Los Angeles on Wednesday. "People really trust Costco to be delivering enormous values."
"That is why Costco presents some danger to Amazon — because they've got a better reputation for providing value than practically anybody including Amazon," he added.
Munger's comments came shortly after Berkshire Hathaway revealed in November that it had exited its stake in Costco, with the move taking place during a year when Costco's stock price soared to record levels as consumers stocked their pantries during the COVID-19 pandemic. Previously, Berkshire Hathaway had invested in Costco for two decades. The firm sold 4.33 million shares valued at $1.31 billion.
However, Munger has maintained ongoing ties to Costco. Munger has served as a director at Costco since 1997, and has praised the company for its corporate culture over the years. And a filing showed he personally owned more than 186,000 shares of the company as of December.
"It's quite important," Munger said in response to a later inquiry over the importance of evaluating a company's culture in making investment decisions. "Part of the success of a company like Costco — and it's been amazing that one little company, starting up not all that many decades ago could become as big as Costco did as fast as Costco did. And part of the reason for that was cultural. They have created a strong culture of fanaticism about cost and quality and so forth, and efficiency and honor, all the good things. And of course, it's all worked. And so, of course culture is very important."
Munger still had plaudits for Amazon's CEO Jeff Bezos, who is set to depart from the company he founded later this year. However, Munger added that he was not planning on investing in any of Bezos's new, post-Amazon endeavors.
"I'm a great admirer of Jeff Bezos, whom I consider one of the smartest businessmen who ever lived," Munger said. "But I won't be following him. We have our crotchets. And I just don't know enough about it to want to go into that activity."
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>>> Generac Holdings
https://finance.yahoo.com/m/f85da5ec-ca98-3a40-beaa-5ea91283e129/4-growth-stocks-to-buy-and.html
When most investors think of a home generator, they envision a dirty, gas-powered engine with a couple of electrical outlets attached, to be dragged out and dusted off in the event of a prolonged power outage.
That's anything but the sort of solutions Generac Holdings (GNRC) brings to the table, though. Its modern generators are automated, remotely monitored, and connected to a home's or business's wiring in a way that allows for seamless operation. And, even more important these days, Generac's portfolio provides energy storage solutions for solar panel systems that are generating excess energy during the day to supply electricity at night.
In an environment where self-sufficiency is king, Generac Holdings is holding the proverbial key. Although this year's projected revenue growth of nearly 39% is a tough act to follow, the company's projected follow-up growth rate of 9% for 2023 is still plenty healthy. Per-share earnings are expected to swell from last year's $9.63 to $11.73 per share this year, en route to next year's record-breaking $13.89.
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>>> Should You Buy Fortinet After Its Recent Stock Split?
Motley Fool
By Bradley Guichard
Aug 11, 2022
https://www.fool.com/investing/2022/08/11/should-you-buy-fortinet-after-its-recent-stock-spl/?source=eptyholnk0000202&utm_source=yahoo-host&utm_medium=feed&utm_campaign=article
KEY POINTS
Cybersecurity leader Fortinet executed a 5-to-1 stock split less than two months ago.
Last week's Q2 earnings release sent shares tumbling.
Is this an opportune time to pounce on the stock?
Fortinet is a leader in defending against growing cybersecurity threats.
Cybersecurity is one of the defining defense issues of our time. What is unique is that it is largely fought by the private sector. Businesses large and small spend billions each year to defend against breaches, ransomware, and other bad actors. An ounce of prevention is definitely worth a pound of cure.
What's more, it seems it is just a matter of time before a broad cyber conflict takes place. This would be a gigantic catalyst for cybersecurity companies like Fortinet (FTNT) which is at the forefront of network security.
Fortinet's stock split didn't garner nearly the attention of Amazon or Alphabet, but perhaps it should. The stock has outpaced both of these juggernauts over the past one, three, five, and 10-year periods.
Is the market being shortsighted?
Fortinet sells products and services such as its Fortigate Next-Generation Firewall, security subscriptions, and tech support services. Higher-margin services make up over 60% of total sales. The market reacted negatively to Fortinet's second-quarter earnings, but this may be shortsighted.
The tremendous growth in sales and billings has become a hallmark of Fortinet. The company expects to continue this trend this year with sales and billings north of $4.3 billion and $5.5 billion, respectively, as shown below.
Billings growing in excess of sales suggest strong continued growth. These numbers represent revenue that will be earned in future periods.
Cash flow is still king
The cybersecurity industry is full of fast-growing companies that aren't profitable. Fortinet has a solid mix of both. Fortinet had an operating margin of 19% last quarter, far outpacing many competitors. This success allows Fortinet to generate generous free cash flow, which it uses to improve the company and repurchase its stock. Fortinet spent $800 million on buybacks in Q2, rewarding shareholders and offsetting the effect of stock-based compensation. In fact, Fortinet's free-cash-flow margin puts it in the top 10% of the S&P 500.
Room to expand and catalysts
Statista puts global cybersecurity revenue at $160 billion for 2022, ballooning to nearly $300 billion in the next five years. Fortinet has set itself up to capture a significant chunk of this market.
A cybersecurity sector catalyst is also upcoming; we just don't know when. Early examples include the Colonial Pipeline attack and Russian tactics in Ukraine. Just last week, during House Speaker Nancy Pelosi's visit, broad cyberattacks were reported in Taiwan.
Businesses and governments must be ready to meet this challenge and will spend billions doing so. Fortinet has the opportunity to continue outpacing the market for years to come.
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>>> Palo Alto Networks, Inc. (PANW) provides cybersecurity solutions worldwide. The company offers firewall appliances and software; Panorama, a security management solution for the control of firewall appliances and software deployed on an end-customer's network and instances in public or private cloud environments, as a virtual or a physical appliance; and virtual system upgrades, which are available as extensions to the virtual system capacity that ships with physical appliances.
It also provides subscription services covering the areas of threat prevention, malware and persistent threat, uniform resource locator filtering, laptop and mobile device protection, and firewall; and DNS security, Internet of Things security, SaaS security API, and SaaS security inline, as well as threat intelligence, and data loss prevention. In addition, the company offers cloud security, secure access, security analytics and automation, and threat intelligence and cyber security consulting; professional services, including architecture design and planning, implementation, configuration, and firewall migration; education services, such as certifications, as well as online and in-classroom training; and support services.
Palo Alto Networks, Inc. sells its products and services through its channel partners, as well as directly to medium to large enterprises, service providers, and government entities operating in various industries, including education, energy, financial services, government entities, healthcare, Internet and media, manufacturing, public sector, and telecommunications. The company was incorporated in 2005 and is headquartered in Santa Clara, California.
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https://finance.yahoo.com/quote/PANW/profile?p=PANW
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>>> J&J to end sales of baby powder with talc globally next year
Associated Press
August 12, 2022
https://www.yahoo.com/news/j-j-end-sales-baby-115137462.html
Johnson & Johnson is pulling baby powder containing talc worldwide next year after it did the same in the U.S. and Canada amid thousands of lawsuits claiming it caused cancer.
Talc will be replaced by cornstarch, the company said.
The company has faced litigation alleging its talcum powder caused users to develop ovarian cancer, through use for feminine hygiene, or mesothelioma, a cancer that strikes the lungs and other organs.
J&J insists, and the overwhelming majority of medical research on talc indicates, that the talc baby powder is safe and doesn’t cause cancer.
However, demand for the company's baby powder fell off, and J&J removed the talc-based product in most of North America in 2020.
The company did so after it saw demand drop due to “misleading talc litigation advertising that caused global confusion and unfounded concern,” about product safety a company spokeswoman said.
J&J said the change announced late Thursday will simplify its product selection and meet evolving global trends.
Last October, J&J said a separate subsidiary it created to manage talc litigation claims had filed for Chapter 11 bankruptcy protection.
J&J said then that it funded the subsidiary, named LTL Management, and established a $2 billion trust to pay claims the bankruptcy court determines that it owes.
The health care giant also said last fall that it will turn its consumer health business — which sells the baby powder, Band-Aids and other products — into a separate publicly traded company. The part of the company selling prescription drugs and medical devices will keep the J&J name.
Shares of Johnson & Johnson, based in New Brunswick, New Jersey, rose slightly before the opening bell Friday. The stock has performed better than the Dow Jones Industrial Average, of which J&J is a member, for most of the year.
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Zoetis - >>> Pet health ‘has proven to be recession resistant': Zoetis CFO
Yahoo Finance
by Ethan Kimball
August 10, 2022
https://finance.yahoo.com/news/pet-health-recession-resistant-zoetis-cfo-164147497.html
While some industries have proven to be vulnerable to the recent economic downturn and record inflation, pet health care is not one of them.
“If you look at animal health historically, it has proven to be recession resistant," Wetteny Joseph, chief financial officer of Zoetis (ZTS), a global animal health company, said on Yahoo Finance Live (video above). “The demographics of pet ownership have trended towards millennials and Gen Z, and they place a higher premium on the health of their pets.”
Strong demand for animal health care products can be attributed to the increase in demand for pets during the COVID-19 pandemic.
According to a 2021 survey from the American Pet Products Association (APPA), the percentage of U.S. households that had pets increased in 2020 from 67% to an all-time high of 70% as more Americans sought out comforting companionship during the lockdown period.
Furthermore, pet owners who took the survey also stated that they spent more on their pets now than they did before the onset of COVID-19. An estimated $123.6 billion was spent on pets in 2021, with $34.3 billion used towards veterinary care.
"Despite the broader uncertainty in the economic environment, pet spending and the prioritization on pet health remains very strong," Joseph said. "And the underlying fundamentals of the industry remain strong."
'We don't see any signs of slowing down'
For Zoetis, an essential aspect of the company's business model is its medications being recommended by veterinarians.
The company reported a strong quarter, with 8% operational growth in revenue and 9% in adjusted net income, "driven by a companion animal portfolio," Joseph said, while the companion animal business grew 14% operationally on a global level.
“Puppies and kittens need to go see the vet,” he said. “That created a really high watermark, if you will, if you go back in the first half of last year. But as we tracked visits to the clinic over a number of years, the visits in the second quarter were the fourth-highest of visits that we have on record. So it's just a matter of [comparison]."
Vet visits are down 1.3% YOY but revenue is up 6.4%. showing that owners are still willing to spend money on pet health.
Although visits to the vet are down roughly 1.3% year-over-year, revenue is up 6.4% in that same time, according to the American Veterinary Medical Association (AVMA), meaning that when pet owners are taking their furry friends to the vet, they're willing to spend money, even as millions of Americans have started to pull back on spending in other consumer categories.
According to Joseph, that's indicative of a "much higher correlation" to how Zoetis performs due to the innovation it brings to the market.
"Given more pets and higher prioritization on the health of pets, we expect that to continue to remain robust," he said, adding: "We don't see any signs of slowing down."
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>>> BlackRock, Inc. (BLK) is a publicly owned investment manager. The firm primarily provides its services to institutional, intermediary, and individual investors including corporate, public, union, and industry pension plans, insurance companies, third-party mutual funds, endowments, public institutions, governments, foundations, charities, sovereign wealth funds, corporations, official institutions, and banks. It also provides global risk management and advisory services. The firm manages separate client-focused equity, fixed income, and balanced portfolios. It also launches and manages open-end and closed-end mutual funds, offshore funds, unit trusts, and alternative investment vehicles including structured funds. The firm launches equity, fixed income, balanced, and real estate mutual funds. It also launches equity, fixed income, balanced, currency, commodity, and multi-asset exchange traded funds.
The firm also launches and manages hedge funds. It invests in the public equity, fixed income, real estate, currency, commodity, and alternative markets across the globe. The firm primarily invests in growth and value stocks of small-cap, mid-cap, SMID-cap, large-cap, and multi-cap companies. It also invests in dividend-paying equity securities. The firm invests in investment grade municipal securities, government securities including securities issued or guaranteed by a government or a government agency or instrumentality, corporate bonds, and asset-backed and mortgage-backed securities. It employs fundamental and quantitative analysis with a focus on bottom-up and top-down approach to make its investments. The firm employs liquidity, asset allocation, balanced, real estate, and alternative strategies to make its investments.
In real estate sector, it seeks to invest in Poland and Germany. The firm benchmarks the performance of its portfolios against various S&P, Russell, Barclays, MSCI, Citigroup, and Merrill Lynch indices.
BlackRock, Inc. was founded in 1988 and is based in New York City with additional offices in Boston, Massachusetts; London, United Kingdom; Gurgaon, India; Hong Kong; Greenwich, Connecticut; Princeton, New Jersey; Edinburgh, United Kingdom; Sydney, Australia; Taipei, Taiwan; Singapore; Sao Paulo, Brazil; Philadelphia, Pennsylvania; Washington, District of Columbia; Toronto, Canada; Wilmington, Delaware; and San Francisco, California.
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https://finance.yahoo.com/quote/BLK/profile?p=BLK
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Blackstone - >>> The private equity club: how corporate raiders became teams of rivals
Financial Times
by Antoine Gara
August 9, 2022
https://www.ft.com/content/aec70aab-7215-4fa7-9ee3-1224d967dc28?ftcamp=traffic/partner/feed_headline/us_yahoo/auddev
The industry was founded by mercenary dealmakers who bludgeoned opponents. But firms now nurture complex relationships with their competitors
When buyout groups Hellman & Friedman and Permira began stalking a takeover of business software giant Zendesk in February, they tried to bring in a third partner for what would be a large deal. They called Blackstone, a firm that manages more than $125bn in private equity assets and that they each knew well from previous transactions.
Blackstone was initially interested in Zendesk but in the end it passed on the investment. However, the firm’s involvement did not end there. When H&F and Permira eventually announced their $10.2bn acquisition of the software company in June, the press release did not name any of the Wall Street banks that would usually provide the bridge loans to complete such a deal.
Instead, H&F and Permira said that amid choppy capital markets they had secured more than $4bn of debt financing. The debt came from a group of would-be competitors led by Blackstone.
Firms like Blackstone and Apollo, another lender in the deal, made their names as swashbuckling takeover artists. The industry was founded from the 1970s to the early 90s by small teams of mercenary dealmakers, who then duelled with each other to win control of large corporations such as RJR Nabisco, Alliance Boots, and Philips Semiconductors.
The Zendesk takeover shows how deep the ties can run between leading private equity firms
Private equity firms have since grown to manage almost $10tn in assets and have become the dominant force in global financial markets.
But as the industry has expanded, its character has been transformed. Firms that once bludgeoned opponents now nurture complex business relationships with their competitors. Private equity has become just a fraction of their overall assets under management, with credit investing businesses now managing hundreds of billions of dollars, including providing loans for leveraged buyouts.
The result of these sprawling empires is that once heated rivals increasingly see the benefits of a level of co-operation between different business units that once seemed inconceivable.
“Private equity started 35 years ago as a dark art. Now it is an asset class,” Marc Rowan, chief executive of Apollo Global, told an audience earlier this year. “There are no permanent friends or permanent enemies anymore.”
With private equity deals now accounting for over 25 per cent of global M&A activity — a record market share — the collective power of the leading groups is starting to attract the attention of regulators.
Private equity takeovers, once rubber stamped by antitrust authorities, are now being treated with the scrutiny reserved for large corporations, competition watchdogs have told the Financial Times.
It is a striking reversal for a sector that has more often in the past been criticised by politicians for its ruthlessness rather than its clubbiness.
“When you have repeated relationships, you are just not going to go to war with the same ferocity,” says Josh Lerner, a professor at Harvard Business School, who has studied private equity for decades.
Relationships that run deep
The Zendesk takeover is illustrative of how deep the ties can run between leading private equity firms.
The origins of the takeover go back to 2016 when Permira invited H&F to make a minority investment in a call centre technology company called Genesys, which it had bought from Alcatel-Lucent four years earlier. H&F invested $900mn in Genesys at a $3.8bn valuation, more than double Permira’s initial investment.
H&F and Permira initially studied merging Genesys with Zendesk, according to sources directly involved in the deal. When the idea did not advance, they turned to Blackstone, which helped arrange more than $4bn in debt financing that is now the largest private financing on record.
For Blackstone, it meant supporting a deal led by two of its most important customers. Blackstone Credit, the buyout firm’s $230bn in assets lending arm, is a reliable lender to both firms. It provided the majority of $1.2bn in financing for H&F’s takeover of NPD Group in October 2021 and $2.2bn in debt for Permira’s take-private of cyber security group Mimecast two months later.
H&F co-led the largest leveraged buyout of 2021 alongside Blackstone, taking control of medical supplier Medline Industries for $34bn. A year earlier, the two firms struck an equally ambitious deal to merge their combined investments in human resources IT company Ultimate Software and cloud software specialist Kronos, in a $22bn deal.
To buy Zendesk, H&F and Permira raised billions in debt against a business that generated just $80mn in profits last year, far more than what regulated banks could offer, according to three people involved in the deal.
Blackstone, which considers H&F a skilled partner for takeovers, took part in the financing, as did Apollo, which financed more than $750mn of the takeover, and counts both firms among the 25 private equity firms to which it has lent over $40bn. Famed for its ruthless tactics with debtholders, Apollo now aspires to become a go-to financier for the deals organised by competitors.
“The zero-sum game mentality of old school dealmakers that always assumed that for them to win someone had to lose is really an outdated point of view,” says an executive at one of the industry’s largest global firms. “There are so many opportunities. Today you are competing and tomorrow you will bring them in as a partner on a deal. It is the new reality.”
By the 2008 crisis, buyout firms could not always afford to purchase on their own some of the companies they considered attractive targets, such as Toys ‘R’ Us
Aggressive outsiders
The modern day private equity buyout traces to Michael Milken’s Drexel Burnham Lambert, the investment bank that popularised the “junk bond”. Drexel financed small teams of dealmakers targeting corporate giants such as Disney, Texaco and then RJR Nabisco, the signature LBO of the go-go 1980s.
Milken, and many of Drexel’s clients, were considered aggressive outsiders, unafraid to gatecrash Wall Street.
“The Drexel guys that Milken was backing were pretty non-genteel types,” says a buyout executive who worked in that era. “It was like the Gold Rush. The guys who couldn’t make it in the city went off to look for gold.”
By the 2008 crisis, private equity had become part of the financial mainstream as it pulled off a string of ever-larger takeovers. These so-called “club deals” hinted at the willingness of some firms to co-operate out of self-interest.
Buyout firms, then privately owned partnerships almost exclusively focused on corporate takeovers, could not always afford to purchase on their own some of the companies they considered attractive targets — such as hotelier Hilton, utility TXU, retailer Toys “R” Us, and hospital chain HCA. However, by assembling consortiums of competitors that each contributed a slice of the equity, almost any deal became possible.
These club deals led to some legal battles. A 2007 civil lawsuit in Massachusetts led by a pension fund in Detroit accused 16 private equity firms of forming consortiums that rigged bids in sale processes.
The case centred on the $33bn LBO of HCA, which was won by Bain Capital, KKR and Merrill Lynch, after there were no other competing bids. Emails unearthed by lawyers showed competitors refraining from outbidding each other.
“I don’t want to be in a pissing battle with KKR at the same time we are teaming on other deals,” said David Rubenstein, one of Carlyle’s founders, in an email unearthed during the litigation.
These deals were not all successes. Toys “R” Us, for instance, fell into restructuring. Moreover, to settle the Massachusetts litigation, Goldman Sachs and Bain Capital paid $121mn, while KKR, Blackstone and TPG agreed to pay $325mn, all without admitting or denying guilt.
By the time of the financial crisis, club deals had mostly vanished as investors found themselves exposed to the same failing investments in multiple funds and called for an end to the practice.
But the crisis also opened a window for buyout firms to transform themselves into much broader operations that are shifting the balance of power in finance towards private markets.
Investment banks, hamstrung by new regulations like the 2010 Dodd Frank Act, were curtailed from holding risky assets such as low-rated debts, which has limited their ability to finance many deals. As a result, corporations and private equity buyers have had to seek new ways of issuing debt. Blackstone, Apollo, KKR and Carlyle stepped into the void.
They bought billions of non-performing loans from banks in the US and Europe, betting that the portfolios would stabilise. As markets recovered, they shifted to originating new loans, underwriting midsized private equity takeovers that banks would not finance.
It set off private equity’s march into new businesses such as lending, insurance-related investments, real estate and infrastructure, which were far from their original speciality in buyouts.
Blackstone acquired debt manager GSO in 2008, seeding its expansion into credit and insurance-based investments, which now comprise 28 per cent of the group’s $940bn in assets.
Apollo, under current chief executive Rowan, built an insurer called Athene that was designed to invest fixed-rate annuity premiums into complex debts, like senior loans. These credit investments are now Apollo’s biggest and fastest growing business.
In private lending markets, the fastest growth has come from financing software takeovers, like Zendesk, which banks cannot handle due to the level of leverage involved. Several other large software deals this year, like Thoma Bravo’s $10.4bn takeover of Anaplan, were financed by private lenders because the leverage ratios on the debt are beyond what banks are comfortable handling.
In these deals, lenders will “club up” by assembling a consortium of competitors, resembling the consortiums of the pre-crisis era.
These private financings have continued as interest rates rise — just as many investment banks have been refusing to make new lending commitments until loans from deals struck earlier in the year have been sold on. The result has been a halt in the market for bank-financed takeovers and the private lenders winning market share.
“The idea that we would work with KKR and Blackstone to provide debt for us once seemed like a crazy idea. Today, people don’t even think about it,” says the head of one private equity firm. “There are no clean lines. Everyone is a competitor, a collaborator and a partner.”
This web of relationships has changed the character of the industry. “It is costlier than ever to be a jerk,” says Steven Kaplan, an expert on private equity who teaches at the University of Chicago. “If they behave badly in one deal, they will be treated differently in the next deal.”
The ties stretch far beyond lending. The fastest way for buyout firms to deploy their nearly $2tn in “dry powder,” or funds they have raised that have yet to be invested, is to buy companies directly from other private equity firms. A record 442 of such deals worth $62bn were struck last year, according to Refinitiv.
These deals can close in less than three months, say bankers, versus as long as nine months to acquire a public company. They can also be expedient: sellers sometimes look to quickly lock in gains and show strong returns as they raise their next fund, notes one private equity firm executive.
“A lot of times you have good companies that a sponsor owns, but they need to sell to show dollars realised for their fundraising,” says the executive.
There has also been a surge in so-called “secondary buyout transactions,” where one private equity firm sells a large stake in an existing investment to another firm at a higher valuation.
One of the industry’s earliest major deals was H&F’s 2014 sale of a $750mn minority interest in Kronos, a seller of cloud-based time sheet services, to a group of buyers led by Blackstone, that were willing to take lower governance rights and leave H&F in control of the deal.
Five years later, H&F led a deal to acquire Ultimate Software for $11bn, bringing in Blackstone and GIC, its same partners on the Kronos stake sale. Blackstone’s debt arm co-led $900mn in financing for the riskiest piece of the deal’s $3.4bn total debt package, helping to get it over the line.
The two private equity firms then merged Ultimate Software with Kronos a year later, generating billions of dollars in gains, underscoring how close relationships can get deals done.
Can it last?
The first test of the private equity industry’s new co-operative structure was the coronavirus pandemic. Broad swaths of the global economy closed, threatening to create a wave of defaults for private lenders that had financed a flurry of takeovers.
What occurred instead was a mass forbearance as private equity borrowers and their lenders amended loans to give companies breathing room. To smooth the new and more lenient liquidity measures and show good faith, some borrowers added additional equity to the deals.
“The whole concept was we’re not going to foreclose,” says one borrower involved in numerous negotiations. “They’re in the business of ideally doing multiple deals with your portfolio companies. They know that if they act poorly, my job is to not show them future business.”
One such example was a company called European Wax Centre, an operator of hair removal salons that was acquired in 2018 by private equity firm General Atlantic with a $180mn loan from private lender Blue Owl. When the pandemic shuttered the company’s salons, Blue Owl voluntarily amended the loan to forestall a cash crunch and General Atlantic made an over $10mn cash infusion as a concession.
After the economy reopened, European Wax recovered and its debts were refinanced at par. Last year, the company went public, valuing General Atlantic’s stake at $639mn, several multiples of its original investment.
Young Soo Jang, a PhD student at the University of Chicago, has studied private lenders’ behaviour by examining over 200 deals that fell into distress during Covid.
He found private lenders were twice as likely as the broadly syndicated loan market to ask for borrowers to agree to inject new capital into deals, forestalling restructuring. Five per cent of distressed private deals led to bankruptcies, according to the research, half the rates of bank financed deals.
“A lot of the direct lenders put out a lot of capital?.?.?.?They were extremely nervous,” adds one executive involved in these deals. “Everyone benefited from the fact that there was such a sharp snap back in the economy.”
The global economy sidestepped a brewing financial crisis during the pandemic thanks to an unprecedented policy response.
But as financial markets enter another troubled moment amid the war in Ukraine and central bank tightening, the ties between firms will be tested again.
“This increased co-operation and cosiness is really a bull market phenomenon,” says Lerner, the Harvard professor, who expects falling markets will unearth new conflict as deals sour, pitting parties against each other.
However, the firms involved in the Zendesk financing insist these new relationships will not break.
“It is very hard to be a credible direct lender and a hostile investor,” says the head of one firm involved in the deal. Another adds: “We’re just trying to get our money back and get a return.”
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>>> Blackstone Inc. (BX) is an alternative asset management firm specializing in real estate, private equity, hedge fund solutions, credit, secondary funds of funds, public debt and equity and multi-asset class strategies. The firm typically invests in early-stage companies. It also provide capital markets services.
The real estate segment specializes in opportunistic, core+ investments as well as debt investment opportunities collateralized by commercial real estate, and stabilized income-oriented commercial real estate across North America, Europe and Asia.
The firm's corporate private equity business pursues transactions throughout the world across a variety of transaction types, including large buyouts, special situations, distressed mortgage loans, mid-cap buyouts, buy and build platforms, which involves multiple acquisitions behind a single management team and platform, and growth equity/development projects involving significant majority stakes in portfolio companies and minority investments in operating companies, shipping, real estate, corporate or consumer loans, and alternative energy greenfield development projects in energy and power, property, dislocated markets, shipping opportunities, financial institution breakups, re-insurance, and improving freight mobility, financial services, healthcare, life sciences, enterprise tech and consumer, as well as consumer technologies.
The fund considers investment in Asia and Latin America. It has a three year investment period. Its hedge fund business manages a broad range of commingled and customized fund solutions and its credit business focuses on loans, and securities of non-investment grade companies spread across the capital structure including senior debt, subordinated debt, preferred stock and common equity.
Blackstone Inc. was founded in 1985 and is headquartered in New York, New York with additional offices across Asia, Europe and North America.
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https://finance.yahoo.com/quote/BX/profile?p=BX
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>>> Blackstone to Buy Bulk Purchaser CoreTrust From HCA Subsidiary
Firm getting supply chain used by its companies, and rivals
Bet is competitors’ portfolio firms will stay with CoreTrust
Bloomberg
By Benjamin Robertson, Dawn Lim, and Kamaron Leach
August 10, 2022
https://www.bloomberg.com/news/articles/2022-08-10/blackstone-to-buy-bulk-purchaser-coretrust-from-hca-subsidiary?srnd=premium
Blackstone Inc. is buying a company that controls how a swath of businesses owned by private equity firms secure and pay for goods and services as varied as printers, pallets and postage.
The world’s largest alternative asset manager agreed to buy a majority stake in CoreTrust, a business that started within a supply arm for hospital giant HCA Healthcare Inc., Blackstone executives said. HCA’s HealthTrust subsidiary will continue to hold a minority stake in CoreTrust. A Blackstone spokesperson declined to comment on financial terms of the deal.
CoreTrust aggregates the buying power of its customers -- mostly companies backed by Blackstone and its investment rivals -- for a negotiated group discount with service providers for purchases spanning software subscriptions to forklifts. The deal may reverberate across private equity though, prompting some firms to reconsider whether to keep steering portfolio companies to CoreTrust, given the new ownership.
Blackstone is taking measures to keep their business. For instance, it won’t collect commissions from vendors anymore for referring portfolio companies to CoreTrust after the deal closes in coming months, according to a representative for the firm. New York-based Blackstone, which is making CoreTrust investment through its buyout arm, won’t have access to rivals’ trade secrets through the purchase.
Advantage of Scale
Blackstone is banking on CoreTrust’s customers to stay on given the advantage of economies of scale, and to hedge against inflation. It also plans to expand the company’s reach beyond its main clientele.
“As you become a bigger customer, you move to the top of the queue and get some benefits in supply chain certainty,” said Peter Wallace, Blackstone’s head of core private equity.
“Inflation is the biggest story in the country right now,” he said. “With this on the top of everyone’s agenda, it’s easier to get more people on it and drive more adoption.”
Representatives for HCA and CoreTrust didn’t immediately respond to requests for comment.
2004 Investment
In 2004, Blackstone invested in a hospital system network that used HealthTrust. The firm considered starting a group-purchasing business but ultimately asked HealthTrust to start a division to do it for them.
Blackstone has steered hundreds of portfolio companies to CoreTrust, which saved them almost $200 million over the years, said people familiar with the matter who asked not to be identified because the information was private. Blackstone doesn’t dictate where those businesses buy supplies, the people said.
Other clients have included portfolio companies of Onex Corp. and KKR & Co., according to CoreTrust’s website.
Bulk purchasing recognizes that “portfolio companies can unlock new value in each other” rather than be “a bunch of isolated, individual investments,” said Francois Mann Quirici, a founding partner at Nexus Associates, who advises buyout firms on how to take advantage of cross-portfolio linkages. Firms including Carlyle Group Inc. and Oaktree Capital Management have been exploring how to centralize procurement for their portfolio companies.
The strategy has generated extra fee streams for the private equity industry, who pocket money in exchange for matching up portfolio companies with group purchasers.
Commissions Questioned
Those types of commissions have attracted the attention of regulators and pension funds. During the Obama Administration, the US Securities and Exchange Commission examined the practice, calling out Welsh, Carson, Anderson & Stowe for failing to tell investors about money received for portfolio companies’ purchases. Welsh Carson, which settled with the SEC without admitting or denying any findings, declined to comment.
“Group purchasing organization has been a big part of the Blackstone strategy,” said Jeremy Smith, head of public sector at London-based consulting firm 4C Associates. “Now Blackstone has not only their own scale, but that of other private equity firms too.”
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>>> Occidental Petroleum Corporation (OXY), together with its subsidiaries, engages in the acquisition, exploration, and development of oil and gas properties in the United States, the Middle East, Africa, and Latin America. It operates through three segments: Oil and Gas, Chemical, and Midstream and Marketing.
The company's Oil and Gas segment explores for, develops, and produces oil and condensate, natural gas liquids (NGLs), and natural gas.
Its Chemical segment manufactures and markets basic chemicals, including chlorine, caustic soda, chlorinated organics, potassium chemicals, ethylene dichloride, chlorinated isocyanurates, sodium silicates, and calcium chloride; vinyls comprising vinyl chloride monomer, polyvinyl chloride, and ethylene.
The Midstream and Marketing segment gathers, processes, transports, stores, purchases, and markets oil, condensate, NGLs, natural gas, carbon dioxide, and power. This segment also trades around its assets consisting of transportation and storage capacity; and invests in entities. Occidental Petroleum Corporation was founded in 1920 and is headquartered in Houston, Texas.
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>>> Occidental Petroleum Corporation: An Often Overlooked Oil Company
Motley Fool
By Matthew DiLallo
Sep 8, 2015
https://www.fool.com/investing/general/2015/09/08/occidental-petroleum-corporation-an-often-overlook.aspx
Occidental Petroleum Corporation has the safety of an integrated oil company with the growth of an independent, yet investors continue to overlook it.
Occidental Petroleum (OXY) is a rather unique oil company. In a lot of ways it's similar to the larger integrated oil companies like Royal Dutch Shell (RDS.A) (RDS.B) or BP (BP) as it not only produces oil and gas but also has midstream and downstream assets like pipelines and petrochemical plants. However, it's a lot smaller than those big oil giants and it is growing much faster, which are similar characteristics to an independent oil company like Anadarko Petroleum (APC). Unfortunately, because it is more of a hybrid, investors tend to overlook Occidental when instead it offers them the best of both worlds.
The perfect combination?
In a lot of ways Occidental Petroleum is an ideal long-term core energy holding for investors. As the company points out on the slide below, it combines the positive elements from both sides of the energy spectrum.
As that slide notes, it has the stronger balance sheet, lower risk, and solid dividend that investors would find in a major integrated oil company. In fact, Occidental Petroleum currently maintains a single A credit rating, which puts it in the same league as the top integrated oil companies as that credit rating is the same as BP's while being just below Royal Dutch Shell and other major integrated companies.
One of the reasons why its credit rating is so strong is because it generates strong cash flow. This is where its integrated model comes into play as its OxyChem business generates a lot of free cash flow for the company while its midstream business helps the company maximize the price it receives for its oil and gas, which really helps to keep its margins up in a downturn. Much like BP and Royal Dutch Shell, Occidental's cash flow during a downturn holds up a bit better because its downstream and midstream assets provide a natural hedge helping it to offset some of the oil price decline.
One other area of strength for the company is the fact that it is a leader in producing oil via enhanced oil recovery, or EOR, which generates gobs and gobs of cash flow for the company. In fact, it can break even on its EOR production at a price as low as $22 per barrel.
Because of its much more stable cash flow, Occidental Petroleum estimates that at a $60 oil price it can fund its dividend and growth capital expenditure without having to borrow any money. This is a much different path from a lot of independents that haven't been shy in using debt to fund growth.
Lots of growth
Speaking of growth, Occidental Petroleum believes that it can still grow its oil and gas production by 5%-8% per year over the long term in a low oil price environment. That's a much higher rate than the low single digit growth rates of companies like BP or Royal Dutch Shell. Instead, its growth is more in line with a company like Anadarko, which has grown its production by 8% per year over the past five years after adjusting for asset sales. Having said that, Anadarko has eliminated much of its short-cycle growth spending in light of the downturn, which will lead to roughly flat production in the near term.
That's not the case at Occidental, which has a lot of short-term growth potential due to its strong position in the Permian Basin. The company has grown its production out of the basin by a 20% compound annual rate over the past few years and sees that upward growth trajectory continuing despite lower oil prices as the slide below shows.
One of the reasons why it's continuing to grow at a healthy clip despite the downturn is because of its rapidly falling costs. As the slide above notes, it is seeing step changes in well productivity and costs, which is enabling it to drill more wells with less money so that it can still grow in the current environment.
Investor takeaway
There's a lot to like at Occidental Petroleum. Not only does it have all the safety features an investor would want as it has a strong balance sheet, generates strong cash flow, and pays a very solid dividend just like its integrated peers BP and Royal Dutch Shell, but it also offers the faster growth rate of an independent like Anadarko Petroleum. So, for investors looking for the best of both worlds, Occidental Petroleum is worth a closer look.
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>>> Johnson & Johnson to spin out consumer health business in new publicly traded company
Fierce Pharma
By Kevin Dunleavy
Nov 12, 2021
https://www.fiercepharma.com/pharma/johnson-johnson-to-separate-its-consumer-health-business-create-new-publicly-traded-company
Johnson & Johnson's decision to hive off its consumer health products follows the lead of companies such as Merck, Pfizer, Sanofi and GlaxoSmithKline.
Continuing a trend, especially among the largest firms in the pharmaceutical industry, Johnson & Johnson will form a new publicly traded company to handle its consumer health business, it announced Friday.
This is a particularly significant step for J&J, which has become readily associated with signature products such as Neutrogena, Aveeno, Tylenol, Listerine, Band-Aid and Johnson & Johnson’s Baby Powder. Those brands will fuel the new company along with popular allergy medicine Zyrtec.
The separation will take 18 to 24 months, J&J said.
The move mirrors similar initiatives by companies such as Merck, Sanofi, Pfizer and GlaxoSmithKline, which separated their consumer health products to focus on the highly profitable pharmaceutical business.
Joaquin Duato, announced recently as the successor to departing CEO Alex Gorsky, will continue to lead J&J after the separation. Leadership for the new company will be determined later, J&J said.
“Our board and executive team have regularly evaluated Johnson & Johnson’s portfolio of business over the years, asking whether a broad-based approach best meets the needs of our stakeholders," Gorsky said in an investor call today (Nov. 12). "And while this approach has historically served us well, addressing the complexity of today’s global healthcare and consumer environments now demands unprecedented innovation, focus and agility."
Even after the separation of its consumer health unit—expected by the company to generate $15 billion in revenue this year—J&J will remain a powerhouse as it expects its pharma and medical device units to make $77 billion in 2021.
"We'll remain the world's largest healthcare company, and we'll be highly diversified," said Duato, who added that the new structure would give both units "advantages operationally" that would help "accelerate growth on both sides."
As for the timing of the move, Gorsky said that the pandemic created more urgency for the company to split as people became more concerned with personal health and wellness.
"We felt this was the right time to recognize the differences between the consumer-facing business versus that in our medical device and pharmaceuticals," Gorsky said. "These have evolved as fundamentally different businesses. If you look at the rate and pace of innovation, the level of science and technology involved in pharmaceutical and medical devices, if you look at the investment required in clinical development plans, if you look at the regulatory pathways ... these two businesses share many more common themes versus our consumer business."
The move will allow J&J to concentrate on developing treatments for oncology and immunology and advance new efforts in cell and gene therapy. Additionally, the company said it expects its medical devices business to “accelerate its momentum across orthopedics, interventional solutions, surgery and vision.”
"This business will have four billion-dollar brands, more than 20 brands over $150 million, so it's a very diverse portfolio," Gorsky said of the new spinout. "We think this business is really positioned well. This is from a position of strength."
Gorsky added that J&J's approach to mergers and acquisitions would remain consistent. He said that the company's current pipeline shows a balanced approach, with equal parts external and internal sourcing.
"We definitely tend to have an appetite for smaller tuck-in acquisitions versus large acquisitions. We would expect that to continue," Gorsky said. "There's a lot of emerging areas of science that we'll continue to watch closely and ultimately source that kind of innovation in value-creating ways."
Goldman Sachs and J.P. Morgan will assist J&J in the transition. The planned organizational design will be complete by the end of 2022. Employees assigned to the new company will participate in their current pay, benefits and retirement programs through the end of 2022, J&J said.
The industry trend of major companies separating their consumer health units picked up steam in 2018 when several made moves. The same year, however, J&J doubled down on remaining intact.
Instead of selling off, it agreed to pay 230 billion Japanese yen ($2.0 billion) to acquire the remaining share of Japanese cosmetics and skincare specialist Ci:z. The move gave J&J popular medical cosmetic products Dr.Ci: Labo, Labo Labo and Genomer and additional heft in Japan and other Asian markets. Moreover, instead of distancing consumer from pharma, in June J&J put the two units under one leader, former pharma chief Duato.
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>>> Badger Meter, Inc. (BMI) manufactures and markets flow measurement, quality, control, and communication solutions in the United States, Asia, Canada, Europe, Mexico, the Middle East, and internationally. It offers mechanical or static water meters, and related radio and software technologies and services to municipal water utilities. The company also provides flow instrumentation products, including meters, valves, and other sensing instruments to measure and control fluids going through a pipe or pipeline, including water, air, steam, oil, and other liquids and gases to original equipment manufacturers as the primary flow measurement device within a product or system, as well as through manufacturers' representatives. Its flow instrumentation products are used in water/wastewater, heating, ventilating and air conditioning, and corporate sustainability markets. In addition, the company offers ORION Migratable for automatic meter reading; ORION (SE) for traditional fixed network applications; and ORION Cellular for infrastructure-free fixed network meter reading solution, as well as BEACON advanced metering analytics, a secure cloud-hosted software suite that establishes alerts for specific conditions and allows consumer engagement tools that permit end water customers to view and manage their water usage activity. It also serves water utilities, industrial, and other industries. The company sells its products directly, as well as through resellers and representatives. Badger Meter, Inc. was incorporated in 1905 and is headquartered in Milwaukee, Wisconsin.
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S&P Global - >>> Is This the Best Dividend Aristocrat for the Next Decade?
Motley Fool
By Dave Kovaleski
Mar 17, 2022
https://www.fool.com/investing/2022/03/17/is-this-the-best-dividend-aristocrat-for-the-next/?source=eptyholnk0000202&utm_source=yahoo-host&utm_medium=feed&utm_campaign=article
KEY POINTS
S&P Global has increased its dividend for 48 straight years and counting.
It has three unique advantages that should allow it to continue doing so through the decade.
It just boosted its quarterly dividend for the second quarter.
This company has increased its dividend for 48 straight years. Here's why that will continue.
In a couple of years, Standard & Poor?s Global ( SPGI 1.42% ) will enter a very exclusive club -- it will become a Dividend King.
Dividend Kings are stocks that have increased their annual dividends for at least 50 straight years. Currently there are only 33 of them -- but Standard & Poor?s is knocking on the door of the king?s castle with 48 straight years of dividend increases. Not only should it become dividend royalty, but it should extend its streak of annual increases throughout the decade. Here?s why Standard & Poor?s Global will continue to deliver on its dividend.
Why S&P Global Stands Out
There are three reasons Standard & Poor's is a great dividend stock. The big one is the market-leading positions of its businesses, two of which have significant moats. Its largest business is its credit rating business. It is one of just three major credit raters, and it is the largest, tied with Moody's, with a 40% market share. While revenue here will fluctuate based on credit issuance, S&P should always dominate in this market because there's really no room for more than a few credit raters and the regulatory barrier to entry is high.
The other market-leading position is that of its indexing business. S&P is best known for its benchmarks, most notably the S&P 500. It is one of a handful of major indexers along with FTSE/Russell, MSCI, and Nasdaq. S&P, as one of the largest, should see continued growth with the explosion of exchange-traded funds, because ETFs pay fees to index owners like S&P to use their indexes.
The third major business, and the fastest growing, is market intelligence, which provides data and research for investment professionals. S&P just completed its acquisition of IHS Markit, an information and data provider for complementary markets, creating a market intelligence powerhouse -- one of the largest in its field.
So not only are each of these dominant businesses in their respective fields, but they also provide the company with a diversified revenue stream. Each of these businesses performs differently in various market cycles, so if credit issuance is down, market intelligence or indexing might be up.
This is the second key reason that S&P is a great dividend stock, because this diversity of revenue has allowed the company to consistently generate earnings over the years. Over the last 10 years through March 14, earnings have gone up about 22% on an annual basis, and the stock price has climbed 23% per year.
Lots of cash and recurring flows
These two advantages set S&P up for continued market dominance and earnings growth. But the third advantage it has is its business model. It's asset-light as it's all data-based, so it is able to keep operational expenses relatively low and its margins extremely high.
It has an operating margin -- which is the amount of profit a company makes on every dollar of sales after all expenses are subtracted -- of 50%. And, because all of its businesses generate fee- or subscription-based revenue, the income is steady and stable. That gives the company tons of cash, currently about $6.5 billion even after the acquisition of IHS Markit, which is the key to sustaining a dividend.
S&P just raised its dividend for the next quarter, bumping it up to $0.85 per share from $0.77, a 10% boost. It pays out a yield of 0.90%, which is lower than the average yield on the S&P 500, but very sustainable with a payout ratio of 22%.
When you consider the unique advantages that S&P Global enjoys, it is clear that the company should be able to deliver a rising dividend throughout the decade.
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>>> As Russia nears a debt default, talk now turns to global contagion
CNBC
MAR 14 2022
Elliot Smith
https://www.cnbc.com/2022/03/14/as-russia-nears-a-debt-default-talk-now-turns-to-global-contagion.html
KEY POINTS
International Monetary Fund Managing Director Kristalina Georgieva said Sunday that Russian sovereign debt default is no longer an “improbable event.”
The Russian state has a host of key payment dates coming up, the first of which is a $117 million payment of some U.S. dollar-denominated eurobond coupons on Wednesday.
Russia is on the brink of defaulting on its debt, according to ratings agencies and international bodies, but economists do not yet see a global contagion effect on the horizon.
International Monetary Fund Managing Director Kristalina Georgieva said Sunday that sanctions imposed by western governments on Russia in response to its invasion of Ukraine would trigger a sharp recession this year. She added that the IMF no longer sees Russian sovereign debt default as an “improbable event.”
Her warning followed that of World Bank Chief Economist Carmen Reinhart, who cautioned last week that Russia and ally Belarus were “mightily close” to defaulting on debt repayments.
Despite the high risk of default, however, the IMF’s Georgieva told CBS that a wider financial crisis in the event of a Russian default was unlikely for now, deeming global banks’ $120 billion exposure to Russia “not systematically relevant.”
However, some banks and investment houses could be disproportionately affected. U.S. fund manager Pimco started the year with $1.1 billion of exposure to credit default swaps — a type of debt derivative — on Russian debt, the Financial Times reported last week. A spokesperson for Pimco wasn’t immediately available for comment when contacted by CNBC.
The Russian state has a host of key payment dates coming up, the first of which is a $117 million payment of some U.S. dollar-denominated eurobond coupons on Wednesday.
Credit ratings agency Fitch last week downgraded Russian sovereign debt to a “C” rating, indicating that “a sovereign default is imminent.”
S&P Global Ratings also downgraded Russia’s foreign and local currency sovereign credit ratings to “CCC-” on the basis that the measures taken by Moscow to mitigate the unprecedented barrage of sanctions imposed by the U.S. and allies “will likely substantially increase the risk of default.”
Moody’s downgrades Russia’s credit rating in an ‘unprecedented’ way
“Russia’s military conflict with Ukraine has prompted a new round of G7 government sanctions, including ones targeting the foreign exchange reserves of The Central Bank of Russia (CBR); this has rendered a large part of these reserves inaccessible, undermining the CBR’s ability to act as a lender of last resort and impairing what had been – until recently – Russia’s standout credit strength: its net external liquidity position,” S&P said.
Moody’s also slashed Russia’s credit rating earlier this month to its second-lowest tier, citing the same central bank capital controls likely to hinder payments in foreign currencies, resulting in defaults.
Moscow moved to strengthen its financial position following a suite of western sanctions imposed in 2014, in response to its annexation of Crimea. The government ran consistent budget surpluses and sought to scale back both its debts and its reliance on the U.S. dollar.
Scholar discusses China’s position on U.S. and EU sanctions on Russia
The accumulation of substantial foreign exchange reserves was intended to mitigate against the depreciation of local assets, but reserves of dollars and euros have been effectively frozen by recent sanctions. Meanwhile, the Russian ruble has plunged to all-time lows.
“To mitigate the resulting high exchange rate and financial market volatility, and to preserve remaining foreign currency buffers, Russia’s authorities have – among other steps – introduced capital-control measures that we understand could constrain nonresident government bondholders from receiving interest and principal payments on time,” S&P added.
Grace periods
Russian Finance Minister Anton Siluanov said Monday that Russia will use its reserves of Chinese yuan to pay Wednesday’s coupon on a sovereign eurobond issue in foreign currency.
Alternatively, Siluanov suggested the payment could be made in rubles if the payment request is rebuffed by western banks, a move Moscow would view as fulfilling its foreign debt obligations.
Although any defaults on upcoming payments would be symbolic – since Russia has not defaulted since 1998 – Deutsche Bank economists noted that nonpayments will likely begin a 30-day grace period granted to issuers before defaults are officially triggered.
We could be heading for World War III if Russia joins forces with China, investor says
“Thirty days still gives time for there to be a negotiated end to the war and therefore this probably isn’t yet the moment where we see where the full stresses in the financial system might reside,” Jim Reid, Deutsche Bank’s global head of credit strategy, said in an email Monday.
“There has already been a huge mark to market loss anyway with news coming through or write downs. However, this is clearly an important story to watch.”
Russian assets pricing in defaults
Trading in Russian debt has largely shut down since the web of sanctions on central banks and financial institutions was imposed, with government restrictions and actions taken by investors and clearing exchanges freezing most positions.
Ashok Bhatia, deputy chief investment officer for fixed income at Neuberger Berman, said in a recent note that investors will be unable to access any liquidity in Russian assets for some time. Bhatia added that prices for Russian government securities are now pricing in a default scenario, which Neuberger Berman strategists think is a likely outcome.
“It’s unclear why Russia would want to use hard currency to repay these securities at the moment, and we expect much of this debt to enter ‘grace periods’ over the coming month,” he said.
Russia’s economy will limp on without much deeper dislocation, strategist says
“Russian hard currency sovereign securities are indicated at 10 – 30 cents on the dollar and will likely remain there.”
Bhatia suggested that the key macroeconomic risk arising from the conflict in Ukraine is energy prices, but the spillover pressure to global credit markets will be “relatively muted” with recent volatility across asset classes continuing.
“But given that Russian securities have been repriced to default levels, we believe those immediate impacts are largely over,” he said.
“Debates about the economic impacts and central bank responses will now become front and center.”
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>>> Ecolab Expects Strong 4Q 2021 Sales Growth but Lower Than Expected EPS Growth Due to COVID & Supply Chain Disruptions; Expects Low-Teens Adjusted EPS Growth in Full-Year 2022
Business Wire
January 20, 2022
https://finance.yahoo.com/news/ecolab-expects-strong-4q-2021-213000274.html
ST. PAUL, Minn., January 20, 2022--(BUSINESS WIRE)--Ecolab said that it expects reported sales to increase 10% versus last year and acquisition adjusted fixed currency sales growth to accelerate to 9% in its fourth quarter 2021, led by double-digit increases in the Institutional & Specialty and Other segments, with further strong gains in the Industrial segment. However, fourth quarter adjusted diluted earnings per share growth (excluding Purolite impact) is expected to be below the previously announced double-digit growth outlook as temporary COVID related effects on broad business activity impacted the speed of the market recovery in the fourth quarter. Ecolab also absorbed significant short-term cost increases to assure seamless customer supply in a very tight environment that impacted margins in the short-term.
These incremental supply headwinds, alone estimated to be an unfavorable $0.10 per share, are expected to result in fourth quarter reported earnings per share from continuing operations in a $1.03 to $1.05 range and adjusted diluted earnings per share from continuing operations (excluding Purolite impact) in a $1.26 to $1.28 range, showing modest year over year growth. For the full year 2021, this would yield 16% to 17% adjusted diluted earnings per share growth, including an estimated $1.00 per share of substantial delivered product cost inflation and other supply chain impacts. Assuming the rate of cost inflation and COVID impacts ease over the next couple of quarters, Ecolab expects continued strong sales and pricing momentum in 2022 and looks for full-year 2022 adjusted diluted earnings per share growth to rise in the low-teens.
Fourth quarter and full year 2021 results remain subject to our normal year-end accounting and financial reporting procedures. Ecolab expects to report fourth quarter 2021 results February 15, 2022.
Christophe Beck, Ecolab’s president and chief executive officer, said, "In this very challenging environment, we remain encouraged by the exceptional work of our teams, which led to the strong sales results, new business wins and accelerating pricing nearing 4% as we exited the quarter, all of which improved further from the third quarter and underscore the success of our long-term value proposition. The raw material supply and customer logistics issues remain significant, which is why we have focused our efforts on protecting our current customers and on serving earlier business wins, with extraordinary actions that came at a substantial short-term cost. This was the outcome of a strategic decision made in 2020 to protect our current customers while investing further in accelerating share gains to emerge even stronger as market disruptions ease.
"We enter 2022 not with the environment we expected, but with the underlying momentum we wanted to have. With a continued, but uneven, global economic recovery, we expect further strong sales trends, robust new business wins, new innovation and increased pricing to capture the incremental value we create for our customers and to compensate for the much higher supply costs we expect in 2022. At the same time, we will continue to leverage digital automation to drive performance in ways that improve both customer experience and cost efficiency. While we expect the challenges that affected us and the rest of the world in the fourth quarter to continue into the first quarter of 2022, assuming the rate of cost inflation and COVID impacts ease over the next couple of quarters, we believe our continued actions should help us deliver improved results as the year goes on and deliver strong full year 2022 sales growth with adjusted diluted earnings per share growth reaching low-teens levels.
"With our unique value proposition to help solve the world’s people and planet health challenges while improving business health, we remain confident in our longer-term outlook and we expect to continue to leverage our growth opportunities to drive superior results for our customers and shareholders."
About Ecolab
A trusted partner at nearly three million commercial customer locations, Ecolab (ECL) is the global leader in water, hygiene and infection prevention solutions and services. With annual sales of $12 billion and more than 44,000 associates, Ecolab delivers comprehensive solutions, data-driven insights and personalized service to advance food safety, maintain clean and safe environments, optimize water and energy use, and improve operational efficiencies and sustainability for customers in the food, healthcare, hospitality and industrial markets in more than 170 countries around the world. www.ecolab.com
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>>> Axcelis Technologies, Inc. (ACLS) designs, manufactures, and services ion implantation and other processing equipment used in the fabrication of semiconductor chips in the United States, Europe, and Asia. The company offers high energy, high current, and medium current implanters for various application requirements. It also provides aftermarket lifecycle products and services, including used tools, spare parts, equipment upgrades, maintenance services, and customer training. It sells its equipment and services to semiconductor chip manufacturers through its direct sales force. The company was founded in 1978 and is headquartered in Beverly, Massachusetts.
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>>> Memories of Post-Covid Melt-Up Haunt Anyone Selling Stocks Now
Hedge funds derisking at odds with relentless retail buying
Small-fry investors win big after bottom fishing amid pandemic
Bloomberg
by ByLu Wang and Vildana Hajric
March 8, 2022
https://www.bloomberg.com/news/articles/2022-03-08/memories-of-post-covid-melt-up-haunt-anyone-selling-stocks-now
Institutional investors are offloading equities to retail buyers in a traumatized market. While similarities between now and the bottom of the coronavirus crash may end there, memories of how that episode played out are proving hard to shake.
Despite breakneck volatility and harrowing images of war, retail traders just plowed money into the equity market for a ninth straight week, according to Bank of America Corp. client data. That’s a stark contrast to the firm’s hedge fund clients, which last week sold $4 billion of stocks, the most on record. Same thing on Morgan Stanley’s trading desk, where professional speculators have been cutting equity exposure, alongside relentless buying from amateurs.
Who exactly constitutes the smart money on post-pandemic Wall Street is a point of debate after mom and pop day traders dove into stocks as they were bottoming two years ago. While a single example of prescience doesn’t imply the retail crowd is right this time, the fortunes minted at the bottom of that crash have constituted powerful psychological conditioning during two years of buy-the-dip euphoria.
BofA data shows that S&P 500 returns following periods of big retail inflows have been above average, while the index’s performance is subpar post-retail selling. When compared with the hedge funds’ record, the retail crowd acts as a “slightly better” indicator for future returns.
“This is just an extremely dynamic situation, and if peace breaks out, there’s not going to be enough time to react,” said Peter Mallouk, president of Creative Planning, which has about $230 billion in assets under management. “It will be as if when we got news of the Fed intervention and how quickly the market recuperated.”
A question related to the debate around who has it right at present is whether stocks have fallen enough to become bargains. Based on forecast earnings, the S&P 500 looked much cheaper than it was in January. At 18.3 times profits, the index’s valuation is at the lowest level since the month right after the 2020 pandemic crash and was in line with its five-year average.
The valuation case turned equally favorable when measured against the bond market. With 10-year Treasury yields hovering below 2%, the S&P 500’s earnings yield -- a reciprocal of its P/E ratio, pointed to the highest equity premium since the early days of this bull market.
“You would have pretty much doubled your money in just two years if you had bought that dip after the Covid selloff,” said Christoph Schon, senior principal of applied research at Qontigo. “Maybe now those who didn’t buy at that point, they’re trying to get in now in the hope that we will see a similar rebound.”
Stocks look attractive relative to bonds
While the dip-buying strategy has worked consistently well since the last bull cycle began in 2009, skeptics are quick to point out this episode may be different. During the past week, at least three Wall Street strategists slashed their 2022 year-end targets for the S&P 500, with recession risk among the concerns cited.
Thanks to inflation running at a four-decade high, the Fed has ceased its role as the bull market’s most reliable ally. In fact, the central bank is expected to raise interest rates this month for the first time in three years, creating pressure on equity valuations. The runup in commodities prices from oil to nickel since the war began has only exacerbated pressure on the Fed to corral runaway price gains.
Granted, history shows the market impact from military events was often fleeting. But with the war in Ukraine leading to sanctions against Russia, uncertain economic prospects challenge every conviction.
“If we woke up tomorrow and Russia left and Ukraine was left to its own devices, I think you’d see a big market rally but I don’t think we’d see a sustained multi-year profits boom,” said Brian Nick, chief investment strategist at Nuveen. “Covid did so many things to scramble how people behave, how corporations make money, how policy makers work -- I just don’t think we’re going to see the same collection of half a dozen really stiff tailwinds helping profits, helping the markets.”
And while day traders are free to load up on beaten-down stocks, pros may have been constrained by their risk-management frameworks where rising volatility often necessitates the unloading of portfolio assets -- selling longs and covering shorts.
Last week, when the S&P 500 dropped in the third week in four, hedge funds tracked by JPMorgan Chase & Co. cut gross leverage -- a measure of risk appetite that takes into account both bullish and bearish equity wagers -- at the fastest rate in more than a year. Meanwhile, the firm’s data pointed to continued buoyant retail purchases.
For anyone who experienced the bursting of the dot-com bubble, today’s persistent retail buying likely brings flashbacks to the days when a long spell of momentum chasing led to an unsustainable market top. While many factors differ now versus then, some market watchers say the S&P 500’s bottom will only form when the YOLO crowd capitulates.
“This group has a tendency of making investment decisions that are influenced by emotions,” said Adam Phillips, managing director of portfolio strategy at EP Wealth Advisors. “It’s important to acknowledge that the average retail investor has a different approach, or process, to buying stocks. This explains why many investors track measures of broad retail investor sentiment and in some cases use them as a contra-indicator.”
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>>> Top Railroad Stocks for Q1 2022
CP, CNI, and GBX are top for value, growth, and momentum, respectively
Investopedia
By MATTHEW JOHNSTON
February 01, 2022
https://www.investopedia.com/investing/railroad-stocks/
The railroad industry is one of the major components of the transportation sector and is closely tied to the economy's growth. Railroad companies operate vast networks that transport agricultural products, packaged foods, commodities, electronics, and other goods to companies and consumers. Major companies in the industry include Union Pacific Corp. (UNP), Norfolk Southern Corp. (NSC), and CSX Corp. (CSX).
The railroad industry does not have its own benchmark, but as a part of the broader transportation sector, its performance can be reasonably approximated by the iShares Transportation Average ETF (IYT). IYT has underperformed the broader market with a total return of 20.6% over the past 12 months, below the Russell 1000's total return of 23.0%.1 These performance figures and all others below are as of Jan. 11, 2022.
Here are the top 3 railroad stocks with the best value, the fastest growth, and the most momentum.
Best Value Railroad Stocks
These are the railroad stocks with the lowest 12-month trailing price-to-earnings (P/E) ratio. Because profits can be returned to shareholders in the form of dividends and buybacks, a low P/E ratio shows you’re paying less for each dollar of profit generated.
Best Value Railroad Stocks
Price ($) Market Cap ($B) 12-Month Trailing P/E Ratio
Canadian Pacific Railway Ltd. (CP) 74.75 49.9 20.2
CSX Corp. (CSX) 36.30 80.5 22.8
Canadian National Railway CO. (CNI) 122.28 86.4 23.3
Canadian Pacific Railway Ltd.: Canadian Pacific Railway is a Canada-based company that offers rail transportation services, including intermodal shipping, rail siding construction, and logistics services. The company announced in mid-December that it has completed its acquisition of Kansas City Southern (KSU), a cross-border railroad between the U.S. and Mexico, for approximately $31 billion. The shares of Kansas City Southern were placed in a voting trust upon the close of the acquisition, ensuring that the railroad operates independently of Canadian Pacific until the U.S. Surface Transportation Board makes a decision on the companies' joint railroad control application. The board's review of Canadian Pacific's proposed control of Kansas City Southern is expected to be finalized during the fourth quarter of 2022.2
CSX Corp.: CSX is a transportation company that provides rail, intermodal, and rail-to-truck transload services and solutions. It serves customers in a variety of markets, including energy, industrial, construction, agricultural, and consumer products.
Canadian National Railway Co.: Canadian National Railway is a Canada-based transportation company that offers fully-integrated rail and other transportation services, including intermodal, trucking, freight forwarding, warehousing, and distribution.
Fastest Growing Railroad Stocks
These are the top railroad stocks as ranked by a growth model that scores companies based on a 50/50 weighting of their most recent quarterly YOY percentage revenue growth and their most recent quarterly YOY earnings-per-share (EPS) growth. Both sales and earnings are critical factors in the success of a company.
On Nov. 15, 2021, President Biden signed into law the Infrastructure Investment and Jobs Act, which will invest approximately $550 billion in America's roads and bridges, water infrastructure, resilience, internet, and more. Of this $550 billion, $66 billion will be allocated to improving America's passenger and freight rail system.3
Therefore ranking companies by only one growth metric makes a ranking susceptible to the accounting anomalies of that quarter (such as changes in tax law or restructuring costs) that may make one or the other figure unrepresentative of the business in general. Companies with quarterly EPS or revenue growth of over 2,500% were excluded as outliers.
Fastest Growing Railroad Stocks
Price ($) Market Cap ($B) EPS Growth (%) Revenue Growth (%)
Canadian National Railway Co. (CNI) 122.28 86.4 81.7 11.5
CSX Corp. (CSX) 36.30 80.5 34.4 24.3
Trinity Industries Inc. (TRN) 30.87 3.0 57.1 9.6
Canadian National Railway Co.: See company description above.
CSX Corp.: See company description above.
Trinity Industries Inc.: Trinity Industries provides rail transportation products and services in North America. It offers railcar leasing and management services, as well as railcar manufacturing and modifications. The company announced in October financial results for Q3 of its 2021 fiscal year (FY), the three-month period ended Sept. 30, 2021. Net income attributable to shareholders rose 27.5% compared to the year-ago quarter. Revenue rose 9.6% YOY. Trinity Industries said that results were adversely impacted by labor shortages, turnover, and disruptions in supply chains, partly due to the economic impact of the COVID-19 pandemic. However, it expects profitability and demand for railcars to continue improving.4
Railroad Stocks With the Most Momentum
These are the railroad stocks that had the highest total return over the last 12 months.
Railroad Stocks with the Most Momentum
Price ($) Market Cap ($B) 12-Month Trailing Total Return (%)
Greenbrier Companies Inc. (GBX) 40.82 1.3 17.2
Union Pacific Corp. (UNP) 246.42 158.4 15.6
CSX Corp. (CSX) 36.30 80.5 14.7
Russell 1000 N/A N/A 23.0
iShares Transportation Average ETF (IYT) N/A N/A 20.6
Greenbrier Companies Inc.: Greenbrier Companies is a supplier of equipment and services to global freight transportation markets. The company designs and manufactures freight railcars and marine barges in North America, Europe, and Brazil. It also provides freight railcar wheel services, parts, maintenance, and retrofitting services in North America. Greenbrier announced in late October the appointment of President and Chief Operating Officer (COO) Lorie Tekorius, to the role of chief executive officer (CEO), effective March 1, 2022. Co-founder, Chairman, and CEO William A. Furman will assume the newly created role of Executive Chair on that same date.5
Union Pacific Corp.: Union Pacific connects 23 states in the western two-thirds of the U.S. by rail. It operates rail transportation services from all major West Coast and Gulf Coast ports to eastern gateways, connects with Canada's rail systems, and serves all six major Mexico gateways. The company announced in December that its board of directors approved a 10% increase in the quarterly dividend on the company's common shares, bringing it to $1.18 per share. The dividend was payable on Dec. 30, 2021 to shareholders of record as of Dec. 20, 2021.6
CSX Corp.: See above for company description.
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>>> Warren Buffett’s advice for a volatile market: patience pays
MarketWatch
Jan. 28, 2022
By Mitch Tuchman
https://www.marketwatch.com/story/warren-buffetts-advice-for-a-volatile-market-patience-pays-11643223497?siteid=yhoof2
There are two participants in each and every transaction — a seller and a buyer
Certainly you’ve been watching the stock market over the past few days. It would be hard not to.
Even the most hands-off investor has likely noticed the scare headlines popping up on the evening news, counting out thousand-point drops and flashing downward-sloping charts in bright red. There’s nothing the media likes more than a disaster, after all.
The recent stock market volatility, following years of up markets, is nevertheless the most widely forecast financial reversal in recent history.
Nothing about what we’re seeing now should be surprising — or particularly dangerous to the prepared. But what about the unprepared?
For them I offer a fundamental insight, one which can escape even seasoned investors. When you see a stock market sell off, always remember there are two participants in each and every transaction — a seller and a buyer.
Yes, stocks can go down in value, particularly when a few have been bid up out of proportion to their ultimate long-term profitability. A stock price is, after all, a number today that tells a story about tomorrow.
Remember, though, that as some investors exit the market, others enter. As Warren Buffett put it: “The stock market is a device which transfers money from the impatient to the patient.”
The unprepared are, by definition, impatient. They have overinvested in a small number of companies. They have bet big on unproven names. They have bought what Wall Street is selling, which is action over intelligence, buying over owning, and blind greed over diligence.
For perspective when stock market volatility creeps up, I refer clients to what we call our “Wall of Worry” table.
The table lists market returns back to 1934 and events in the news during those years of gains, as well as losses.
If you take a few minutes to read through it, year-by-year, it’s hard to avoid a simple truth about investing: Wars, bubbles, credit defaults, pandemics, currency devaluations, inflation — none of it stops the upward climb of stock values in most years.
Consider these three data points:
For over 100 years stocks have roughly doubled every eight years.
A dollar invested 50 years ago in the S&P 500 is worth well over $100 today.
Finally, there is no five-year period where the S&P did not register a positive return.
Can you wait up to five years for the stock market to find its footing and give you the return you seek? Great, you’re an investor.
No? Then you shouldn’t be investing at all. To quote Buffett again, “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.”
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>>> The Chip Shortage is Even Worse Than Biden Thinks
The supply of chips that power and move Americans has never been tighter, according to a U.S. Commerce Department report. Is a Strategic 'Chip' Reserve on the way?
The Street
M. COREY GOLDMAN
JAN 26, 2022
https://www.thestreet.com/investing/less-than-five-days-supply-chip-shortage-slams-u-s-manufacturers
In the wake of the 1970s oil crises, the U.S. established the Strategic Petroleum Reserve, making it official U.S. policy to stockpile billion of barrels of petroleum to end reliance on foreign producers for the literal gas that ran America's engine.
Fast forward 50 years, and that "gas" is now semiconductors.
While you still need to fill up your car and in some cases heat your home with oil, the vast majority of manufactured goods -- from cars and trucks to iPhones to refrigerators to video games and kids' toys -- function using tiny little computer chips.
And the supply of those tiny little computer chips has never been tighter, according to the U.S. Commerce Department.
The median supply of chips held by manufacturers has dropped from 40 days' worth in 2019 to less than five days' worth last year, according to the eye-popping request for information report released Tuesday, with inventories even smaller in "key industries."
"The semiconductor supply chain remains fragile," the report said. "Demand continues to far outstrip supply."
That limited supply means that disruptions to production overseas -- such as those from weather or new Covid-19 outbreaks -- could again lead to factory shutdowns and furloughed workers in the U.S., according to the report, which also noted that respondents “…did not see the problem going away in the next six months."
Chinese Carmakers Sidestep Chip Shortage Troubles To Grow Sales, Market Share At The Expense Of Global Rivals
More Pain on the Way for Consumers
A global supply crunch sparked by the pandemic, extreme weather and supply chain issues has led to shortages and, in some cases, higher prices of cars, iPhones, washing machines, kids' toys and more — at a time when consumers have never been more reliant on tech devices.
The Commerce Department report identified certain semiconductor products for which the supply challenges are most acute, including "legacy logic chips" which are used in cars, medical devices and other products, and "analog chips" used in image sensors.
"We aren’t even close to being out of the woods as it relates to the supply problems with semiconductors," Commerce Department Secretary Gina Raimondo said. "The semiconductor supply chain is very fragile, and it is going to remain that way until we can increase chip production."
Last year, General Motors was forced to temporarily shutter production at most of its North American plants because of the chip shortage, and many other automakers slashed their production plans.
The Biden administration has been working to prop up the US chip-making industry, both to ease current supply chain woes and reduce America's dependence on foreign production of the crucial components going forward.
The biggest bottleneck in the chip supply chain is capacity at semiconductor fabrication plants, called "fabs.” Still, some chipmakers are already looking to turn the tide.
A Strategic Chip Reserve?
Several chip makers have announced plans to invest billions of dollars in new plants. Just last week, Intel announced plans to invest another $20 billion to build a chip manufacturing complex outside Columbus, Ohio. Samsung, meantime, is set to build a semiconductor plant in Taylor, Texas.
Congress has passed the CHIPS for America Act, which includes $52 billion in subsidies to support domestic semiconductor manufacturing but has not yet allocated the funds.
To be sure, one high-profile company isn't being stopped in its tracks by the ongoing chip shortage.
Tesla delivered a record 308,000 vehicles in the fourth quarter, a record for the electric vehicle (EV) company, with most of those deliveries being 3 and Y models stacked to the brim with chips.
Tesla's ability to design parts and components in-house and also adapt parts and even switch to newly available parts has helped it navigate the chip crisis.
A better view of just how well will emerge after the bell on Wednesday when the electric car maker releases its fourth-quarter results.
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>>> 9 Asset Classes for Protection Against Inflation
Investopedia
By KATELYN PETERS
January 07, 2022
https://www.investopedia.com/articles/investing/081315/9-top-assets-protection-against-inflation.asp?utm_campaign=quote-yahoo&utm_source=yahoo&utm_medium=referral
Gold
Commodities
60/40 Stock/Bond Portfolio
REITs
S&P 500
Real Estate Income
Aggregate Bond Index
Leveraged Loans
TIPS
Does Whole Life Insurance Hedge Against Inflation?
Are CDs a Good Hedge Against Inflation?
Are Annuities a Good Hedge Against Inflation?
What Is Inflation Protection Home Insurance?
A dollar today will not buy the same value of goods in ten years. This is due to inflation. Inflation measures the average price level of a basket of goods and services in an economy; it refers to the increases in prices over a specified period of time. As a result of inflation, a specific amount of currency will be able to buy less than before. Therefore, it is important to find the right strategies and investments to hedge against inflation.
The level of inflation in an economy changes depending on current events. Rising wages and rapid increases in raw materials, such as oil, are two factors that contribute to inflation.
Inflation is a natural occurrence in the market economy. There are many ways to hedge against inflation; a disciplined investor can plan for inflation by investing in asset classes that outperform the market during inflationary climates.
Keeping inflation-hedged asset classes on your watch list—and then striking when you see inflation begin to take shape in a real, organic growth economy—can help your portfolio thrive when inflation hits.
KEY TAKEAWAYS
Inflation occurs in market economies, but investors can plan for inflation by investing in asset classes that tend to outperform the market during inflationary climates.
With any diversified portfolio, keeping inflation-hedged asset classes on your watch list, and then striking when you see inflation can help your portfolio thrive when inflation hits.
Common anti-inflation assets include gold, commodities, various real estate investments, and TIPS.
Many people have looked to gold as an "alternative currency," particularly in countries where the native currency is losing value.
Commodities and inflation have a unique relationship, where commodities are an indicator of inflation to come; as the price of a commodity rises, so does the price of the products that the commodity is used to produce.
Here are some of the top ways to hedge against inflation:
1. Gold
Gold has often been considered a hedge against inflation. In fact, many people have looked to gold as an "alternative currency," particularly in countries where the native currency is losing value. These countries tend to utilize gold or other strong currencies when their own currency has failed. Gold is a real, physical asset, and tends to hold its value for the most part.
Inflation is caused by a rise in the price of goods or services. A rise in the price of goods or services is driven by supply and demand. A rise in demand can push prices higher, while a supply reduction can also drive prices. Demand can also rise because consumers have more money to spend.
However, gold is not a true perfect hedge against inflation. When inflation rises, central banks tend to increase interest rates as part of monetary policy.1 Holding onto an asset like gold that pays no yields is not as valuable as holding onto an asset that does, particularly when rates are higher, meaning yields are higher.
There are better assets to invest in when aiming to protect yourself against inflation. But like any strong portfolio, diversification is key, and if you are considering investing in gold, the SPDR Gold Shares ETF (GLD) is a worthwhile consideration.2
The SPDR Gold Shares ETF
2. Commodities
Commodities are a broad category that includes grain, precious metals, electricity, oil, beef, orange juice, and natural gas, as well as foreign currencies, emissions, and certain other financial instruments. Commodities and inflation have a unique relationship, where commodities are an indicator of inflation to come. As the price of a commodity rises, so does the price of the products that the commodity is used to produce.
Fortunately, it's possible to broadly invest in commodities via exchange traded funds (ETFs). The iShares S&P GSCI Commodity-Indexed Trust (GSG) is a commodity ETF worth considering.3
Before investing in commodities, investors should be aware that they are highly volatile and investor caution is advised in commodity trading. Because commodities are dependent on demand and supply factors, a slight change in supply due to geopolitical tensions or conflicts can adversely affect the prices of commodities.
The iShares S&P GSCI Commodity-Indexed Trust
3. A 60/40 Stock/Bond Portfolio
A 60/40 stock/bond portfolio is considered to be a safe, traditional mix of stocks and bonds in a conservative portfolio. If you don’t want to do the work on your own and you're reluctant to pay an investment advisor to assemble such a portfolio, consider investing in Dimensional DFA Global Allocation 60/40 Portfolio (I) (DGSIX).4
Dimensional DFA Global Allocation 60/40 Portfolio
A 60/40 stock/bond portfolio is a straightforward, easy investment strategy. But like all investment plans, it does have some disadvantages. Compared to an all-equity portfolio, a 60/40 portfolio will underperform over the long term. Additionally, over very long time periods, a 60/40 portfolio may significantly underperform an all-equity portfolio because of the effects of compounding interest.
It's important to keep in mind that a 60/40 portfolio will help you hedge against inflation (and keep you safer), but you'll likely be missing out on returns compared to a portfolio with a higher percentage of stocks.
4. Real Estate Investment Trusts (REITs)
Real estate investment trusts (REITs) are companies that own and operate income-producing real estate. Property prices and rental income tend to rise when inflation rises. An REIT consists of a pool of real estate that pays out dividends to its investors. If you seek broad exposure to real estate to go along with a low expense ratio, consider the Vanguard Real Estate ETF (VNQ).5
Vanguard Real Estate ETF
REITs also have some drawbacks, including their sensitivity to demand other high-yield assets. When interest rates rise, Treasury securities generally become attractive. This can draw funds away from REITs and lower their share prices.
REITs must also pay property taxes, which can make up as much as 25% of total operating expenses. If state or municipal authorities decided to increase property taxes to make up for their budget shortfalls, this would significantly reduce cash flows to shareholders. Finally, while REITs offer high yields, taxes are due on the dividends. The tax rates are typically higher than the 15% most dividends are currently taxed at because a high percentage of REIT dividends are considered ordinary income, which is usually taxed at a higher rate.6
5. The S&P 500
Stocks offer the most upside potential in the long term. In general, businesses that gain from inflation are those that require little capital (whereas businesses that are engaged in natural resources are inflation losers).
Currently, the S&P 500 has a high concentration of technology businesses and communication services. (They account for a 35% stake in the Index.) Both technology and communication services are capital-light businesses, so, theoretically, they should be inflation winners.
If you wish to invest in the S&P 500, an index of the 500 largest U.S. public companies—or if you favor an ETF that tracks it for your watch list—look into the SPDR S&P 500 ETF (SPY).78
The SPDR S&P 500 ETF
However, like any investment, there are disadvantages to investing in the S&P 500 Index. The main drawback is that the Index gives higher weights to companies with more market capitalization, so the stock prices for the largest companies have a much greater influence on the Index than a company with a lower market cap. And the S&P 500 index does not provide any exposure to small-cap companies, which historically produced higher returns.
6. Real Estate Income
Real estate income is income earned from renting out a property. Real estate works well with inflation. This is because, as inflation rises, so do property values, and so does the amount a landlord can charge for rent. This results in the landlord earning a higher rental income over time. This helps to keep pace with the rise in inflation. For this reason, real estate income is one of the best ways to hedge an investment portfolio against inflation.
For future exposure, consider VanEck Vectors Mortgage REIT Income ETF (MORT).9
VanEck Vectors Mortgage REIT Income ETF
Like any investment, there are pros and cons to investing in real estate. First, when purchasing real estate, the transaction costs are considerably higher (as compared to purchasing shares of a stock). Second, real estate investments are illiquid, meaning they can’t be quickly and easily sold without a substantial loss in value. If you are purchasing a property, it requires management and maintenance, and these costs can add up quickly. And finally, real estate investing involves taking on a great deal of financial and legal liability.
7. The Bloomberg Aggregate Bond Index
The Bloomberg Aggregate Bond Index is a market index that measures the U.S. bond market. All bonds are covered in the index: government, corporate, taxable, and municipal bonds. To invest in this index, investors can invest in funds that aim to replicate the performance of the index. There are many funds that track this index, one of them being the iShares Core U.S. Aggregate Bond ETF (AGG).10
iShares Core U.S. Aggregate Bond ETF
There are some disadvantages to investing in the Bloomberg U.S. Aggregate Bond Index as a core fixed-income allocation.
First, it is weighted toward the companies and agencies that have the most debt. Unlike the S&P 500 Index, which is market-capitalization-weighted—the bigger the company, the bigger its position in the index—the largest components of the Bloomberg U.S. Aggregate Bond Index are the companies and agencies with the most debt outstanding. In addition, it is heavily weighted toward U.S. government exposure, so it is not necessarily well-diversified across sectors of the bond market.
8. Leveraged Loans
A leveraged loan is a loan that is made to companies that already have high levels of debt or a low credit score. These loans have higher risks of default and therefore are more expensive to the borrower.
Leveraged loans as an asset class are typically referred to as collateralized loan obligations (CLOs). These are multiple loans that have been pooled into one security. The investor receives scheduled debt payments from the underlying loans. CLOs typically have a floating rate yield, which makes them a good hedge against inflation. If you're interested in this approach at some point down the road, consider Invesco Senior Loan ETF (BKLN).11
Like every investment, leveraged loans involve a trade-off between rewards and risks. Some of the risks of investing in funds that invest in leveraged loans are credit default, liquidity, and fewer protections.
Borrowers of leveraged loans can shutter their business or reach a point where they are unable to pay their debts. Leveraged loans may not be as easily purchased or sold as publicly traded securities. And finally, leveraged loans generally have fewer restrictions in place to protect the lender than traditional loans. This could leave a fund exposed to greater losses if the borrower is unable to pay back the loan.
9. TIPS
Treasury inflation-protected securities (TIPS), a type of U.S. Treasury bond, are indexed to inflation in order to explicitly protect investors from inflation. Twice a year, TIPS payout at a fixed rate. The principal value of TIPS changes based on the inflation rate, and so the rate of return includes the adjusted principal. TIPS come in three maturities: five-year, 10-year, and 30-year.
If you favor using an ETF as your vehicle, the three choices below might appeal to you.121314
The iShares TIPS Bond ETF (TIP)
The FlexShares iBoxx 3-Year Target Duration TIPS Index ETF (TDTT)
Even though TIPS may appear like an attractive investment, there are a few risks that are important for investors to keep in mind. If there is deflation or the Consumer Price Index (CPI) is falling, the principal amount may drop. If there is an increase in the face value of the bond, you will also have to pay more tax (and this could nullify any benefit you may receive from investing in TIPS). Finally, TIPS are sensitive to any change in the current interest rates, so if you sell your investment before maturity, you may lose some money.
Does Whole Life Insurance Hedge Against Inflation?
Whole life insurance is a contract designed to provide protection over the insured’s entire lifetime. Because whole life insurance is a long-term purchase, the guaranteed return on this type of policy provides little inflation protection. However, it is sometimes referred to as a hedge against inflation because the dividends paid on participating policies—which reflect the favorable mortality, investment, and business expense results of the insurer—can act as a partial hedge against inflation.
Are CDs a Good Hedge Against Inflation?
A certificate of deposit (CD) is a short- to medium-term deposit in a financial institution at a specific fixed interest rate. Typical CDs are not protected against inflation. If you would like to reduce the impacts of inflation on your CD investments, consider buying a CD that is higher than the inflation rate so that you can get the most value for your money. The longer the term of the CD, the higher the interest rate will be.
Are Annuities a Good Hedge Against Inflation?
Annuities are not often considered a good hedge against inflation; in fact, the primary risk of most annuity payouts is inflation. This is because commercial annuities generally pay a fixed monthly income, rather than an inflation-adjusted income. If your annuity pays a fixed $3,000 per month for life, and inflation increases 12%, the buying power of your annuity payments decreases to $2,640. Variable annuities that adjust with interest rates may offer better inflation protection than fixed annuities.
What Is Inflation Protection Home Insurance?
Some insurance policies have a feature called insurance inflation protection, which stipulates that future or ongoing benefits to be paid are adjusted upward with inflation. Inflation protection home insurance is intended to ensure that the relative buying power of the dollars granted as benefits does not erode over time due to inflation.
Strategies to Help Minimize Investment Taxes
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<<<
>>> BlackRock Offers 2022 Outlook
Yahoo Finance
by Dan Mika
December 14, 2021
https://finance.yahoo.com/news/blackrock-offers-2022-outlook-211500997.html
As 2021 heads to a close, BlackRock is warning investors: Buckle up for persistent inflation through the next year.
The world’s largest ETF issuer by assets laid out its view of the global economy heading into the new year in a Monday morning webinar and outlined some of its strategies to adjust to what it calls a new reality for financial markets.
Long-Term Inflation
BlackRock expects monthly readings of around 6% annualized inflation in the U.S. to decline over the medium term, but inflation beyond the Federal Reserve’s 2% core target is likely here over a longer run. The firm cited the dynamics of virus-driven stops and starts and structural issues in the supply chain system as main drivers, along with persistent strength in housing prices.
Gargi Chaudhuri, BlackRock’s head of iShares Investment Strategy, said investors need to build multi-asset portfolios to offset the new inflation reality. These can include holdings in inflation-linked bonds, along with asset classes like diversified commodity baskets and real estate that can ride prices toward higher returns. Equities in companies with high market power are also an option, as they can pass the cost of inflation on to customers with less penalty.
Equities Over Bonds, Despite Risks
Wei Li, BlackRock’s global chief investment strategist, said the combination of persistent inflation and its expectations that the Fed won’t cut off support entirely for the economy sets up another year of growth for equities and low real yields on the fixed income side.
However, the uncertainty of the pandemic, geopolitical tension and other global factors are giving Li pause on making big risk-on calls, particularly as data surprises continue both on the upside and downside.
“Confusion is only natural, both for policymakers as well as for markets, as we adapt to this new reality,” she said.
Resiliency In Net Zero
Chaudhuri also argued that ESG-focused ETFs and other climate-friendly investments can add relative confidence into portfolios at a time when much of the world agrees that herculean amounts of effort and capital will need to be invested to stave off a full-blown environmental crisis.
Investors can get that exposure through broad ESG ETFs, or in thematic funds like the iShares Self-Driving EV and Tech ETF (IDRV), she said. That and similar products such as the Global X Lithium & Battery Tech ETF (LIT) stand to benefit from about $15 billion worth of electric vehicle spending in the $1.2 trillion U.S. infrastructure bill passed this summer, along with the downstream demand for lithium and other materials needed to make electric cars and charging ports.
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>>> Nasdaq books worst day in 11 months, S&P 500 skids 1.9% after Fed minutes surprise with talk of shrinking balance sheet
MarketWatch
Jan. 5, 2022
By Joy Wiltermuth and Mark DeCambre
https://www.marketwatch.com/story/tech-stocks-set-for-further-pressure-ahead-of-fed-minutes-11641383511?siteid=yhoof2
Nasdaq Composite is down 3.5% since Monday, its worst start to a year since 2008, according to Dow Jones Market Data.
Stocks finished sharply lower Wednesday after the release of minutes of the Federal Reserve’s last policy gathering in 2021 showed discussion around a potentially faster pace of shrinking the central bank’s massive balance sheet and raising rates.
What did stock benchmarks do?
The Dow Jones Industrial Average DJIA, -0.47% shed 392.54 points, or 1.1%, to end at 36,407.11, its worst daily percentage drop since Dec. 20, according to Dow Jones Market Data.
The S&P 500 SPX, -0.10% fell 92.96 points, or 1.9%, closing at 4,700.58, its steepest daily percentage fall since Nov. 26.
The Nasdaq Composite Index COMP, -0.13% tumbled 522.54 points, or 3.34%, finishing at 15,100.17, its sharpest daily percentage slump since Feb. 25, 2021.
What drove markets
Stocks tumbled into the close following the release of minutes from the latest Federal Open Market Committee meeting in December, which revealed a more hawkish tone by Fed officials grappling with taming what some have described as 1980s-like levels of inflation.
Minutes revealed robust talk among some Fed officials around the central bank potentially moving to raise rates quicker and cutting its current $8.8 trillion sized balance sheet faster than earlier anticipated to help tackle higher costs of living.
The market reaction to talk of faster-paced steps toward policy normalization surprised some on Wall Street. “It was maybe confirming what people had worried about previously, and now it’s out there in black and white, on paper, for everyone to see,” said John Carey, director for equity income at Amundi U.S., by phone.
“You can’t doubt it’s going to happen at this point. That reality is sinking in.”
At the Dec. 14-15 meeting, Fed policy makers agreed to speed the wind-down of the central bank’s monthly asset purchases.
But Carey also expects the Fed to remain cautious about tightening monetary policy too much during its battle with inflation, particularly if the surge in COVID-19 infections hampers the economy, with some school districts hitting pause on in-person classes and difficulties emerging for planned industry conferences and other events major events, including the Grammy Awards, nearly two years into the pandemic.
“The problem could be resolved if the economy slows with omicron,” Carey said of inflation pressures.
Meanwhile, the minutes of the Fed meeting hastened a wreck in technology-related sectors SP500.45, -0.48% already gathering momentum on Wednesday. Shares of Google parent Alphabet Inc. GOOGL, -0.02% closed down 4.6%, off more than 7.6% from its Nov. 18 closing high of $2,996.77.
A rise in government bond yields also contributed to pressure on tech plays, as investors factored in the prospect of the higher borrowing costs if the Fed lifts interest rates as many as the three times as anticipated this year.
On the other hand, financials SP500.40, +1.55%, which benefit from a rising rate environment, still were headed solidly higher for the week...
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>>> Bond king Jeffrey Gundlach: The yield curve may be sending a recessionary signal
MarketWatch
by Brian Sozzi
January 4, 2022
https://finance.yahoo.com/news/bond-king-jeffrey-gundlach-the-yield-curve-may-be-sending-a-recessionary-signal-160935243.html
Bond king Jeffrey Gundlach has a lot on his mind as it pertains to markets when Yahoo Finance sits down with the DoubleLine founder at length inside his California estate on the first trading day of 2022.
China isn't a great market to be investing in, contends Gundlach. Stock valuations as measured by the DoubleLine favorite the CAPE ratio appear too rich, says Gundlach.
But it's Gundlach's warning on the path of the U.S. economy — in part caused by looming interest rate hikes by the Federal Reserve — that perhaps warrants the most attention by investors large and small after a strong run-up in equity prices last year.
"We have the highest two-year yield of the past year. We have the highest three-year yield. We have basically a high on the five-year yield. And so what's happening is the yield curve is sending a bonafide recessionary signal. You have interest rates going up at the short end and going down at the long end," explains Gundlach ahead of his third annual 'Roundtable Prime' investing panel at DoubleLine's headquarters.
The basic mechanics of a flattening yield (which could then lead to an inverted curve) as a recession predictor goes a little something like this: markets start to worry the Fed will slowdown an overheated economy by increasing interest rates which in turn triggers an economic slowdown. That then leads to a period of renewed lower interest rates from the Fed as they attempt to stave off a recession.
To wit, a yield curve inversion has preceded every recession of the past 50 years.
Indeed this junction may be where markets are at present as the Fed seeks to turn into an inflation fighter inside of a global health pandemic by 1) winding down its quantitative easing (QE) campaign; and 2) signaling a path of higher interest rates in 2022 and beyond.
As Factset recently pointed out, the spread between the 10-year and two-year Treasury yield narrowed to 79 basis points at the end of 2021. In March of last year — or well before the Fed signaled it would move into a period of tighter policy — that spread tallied 160 basis points. Looked at another way, the yield curve is flattening ... starting the clock on a key recession indicator used by pros such as Gundlach.
Gundlach believes the bond market is suggesting an economic slowdown is in the cards this year. And as such, the yield curve is a must watch for investors right out of the gate.
Adds Gundlach, "I think the bond market is already showing enough of a recession indicator that by 2023 it's seems pretty likely. And I, like I said earlier, I don't think a lot of Fed officials, economists and investors appreciate the fact the economy keeps buckling at lower and lower interest rates. So I think the Fed only has to raise rates four times and you're going to start seeing really a plethora of recessionary signals. I think it's certainly a non-zero probability that you get a recession in the latter part of 2022. That's going to be dependent again on how aggressive the Fed is. One thing that we did notice in 2018 is the Fed stopped QE, they started quantitative tightening — letting the bonds roll off. And then they started raising interest rates and we got an instantaneous bear market."
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>>> This is the No. 1 risk to the stock market right now, according to Jim Bianco
MarketWatch
by Brian Sozzi
January 4, 2022
https://finance.yahoo.com/news/this-is-the-no-1-risk-to-the-stock-market-right-now-according-to-jim-bianco-181416285.html
Market veteran Jim Bianco tells Yahoo Finance the Federal Reserve could break the back of the red-hot rally in stocks as it attempts to cool inflation with interest rate hikes.
"I think that is the number one risk right now in 2022," the president of Bianco Research said inside of DoubeLine's California headquarters where he will be presenting his key themes at the bond giant's annual Roundtable Prime event. [The risk] is that the high inflation rate is perceived to be persistent, which pushes the Fed hard to do something about it and in the process of doing something about it, it puts the rally of the stock market at risk."
To be sure, the broader stock market is in no way positioned for a potential Fed heavy hand.
The S&P 500 advanced a stellar 27% last year. Apple started the first trading day of 2022 by reaching the coveted $3 trillion market cap level for the first time. Tesla shares continue to be on fire, same with Ford in part fueled by money sloshing around in the markets chasing hot stocks.
Bulls are even using market history to support their bullish thesis.
Truist Advisory Services co-chief investment officer Keith Lerner found that going back to 1950, when the S&P 500 had a total return of at least 25% in a year, stocks usually rose in the following year. The outcome during that 71-year stretch: stocks advanced 82% of the time, or 14 out of 17 instances.
The average gain: 14%.
But Bianco is more cautious on risk, and justifiably so given the trading levels of stocks.
Adds Bianco, "My concern is the Fed makes a mistake. I think the market is concerned the Fed makes a mistake, too. Unfortunately the Fed is very good at one thing that they wouldn't like to be good at — that is they raise rates until they break something. That is a real fear in the market. They will start a rate hiking campaign this spring, and it will go through the rest of this year and there will be multiple rate hikes. When are they going to end? They will go too far and raise rates too much, and either the financial markets have a hiccup or the economy slips into recession or the plumbing of the financial system has a problem."
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>>> This investing legend has been predicting surprises for the last 37 years. Here’s how he did last year — and what he’s forecasting now
MarketWatch
Jan. 4, 2022
By Steve Goldstein
https://www.marketwatch.com/story/this-investing-legend-has-been-predicting-surprises-for-the-last-37-years-heres-how-he-did-last-year-and-what-hes-predicting-now-11641292134?siteid=yhoof2
Byron Wien, the vice chairman of private-equity giant Blackstone, has been making his list of ten surprises for 37 years. Previously the chief U.S. investment strategist at Morgan Stanley, Wien has been with Blackstone since 2009.
These days Wien makes his “surprise” predictions with Joe Zidle, chief investment strategist in Blackstone’s private wealth solutions. Surprise is defined here as an event with a better than 50% likelihood of happening but that an average investor would assign a one in three possibility.
While the pair have published their list of 2022 surprises, it might be more informative to review last year’s surprises.
“Former President Trump starts his own television network and also plans his 2024 campaign.” He certainly seems to be gearing up for a 2024 run. As for the TV network, there’s none in existence as yet, though the Trump Media & Technology Group has been formed on paper at least, hired Rep. Devin Nunes to be its chief executive, and has agreed to be acquired by special-purpose acquisition company Digital World Acquisition Company DWAC, +1.03%.
“Despite the hostile rhetoric from both sides during the U.S. presidential campaign, President Biden begins to restore a constructive diplomatic and trade relationship with China. China A shares SHCOMP, -0.20% lead emerging markets higher.” The diplomatic mending is still in its infancy, though what Wien and Zidle didn’t seem to account for was China derailing its own stock market with aggressive regulation.
“The success of between five and ten vaccines, together with an improvement in therapeutics, allows the U.S. to return to some form of ‘normal’ by Memorial Day 2021.” Mostly correct, even if some of the details, like spectators at the Olympics, didn’t materialize.
“The Justice Department softens its case against Google GOOGL, -0.41% and Facebook FB, -0.59%, persuaded by the argument that the consumer actually benefits from the services provided by these companies.” No sign of that, and many expect tougher action by U.S. authorities this year.
“The economy develops momentum on its own because of pent-up demand, and depressed hospitality and airline stocks become strong performers.” Right on the economy, mixed on stocks — the JETS JETS, +1.47% exchange-traded fund, for instance, peaked in March, while leisure stocks PEJ, +0.28% enjoyed strong gains but did underperform the S&P 500 SPX, -0.06%.
“The Federal Reserve and the Treasury openly embrace Modern Monetary Theory as their accommodative policies continue.” The rise of inflation stamped this trend out.
“Even as energy company executives cut estimates for long-term growth, near-term opportunities are increasing. The return to ‘normal’ increases both industrial activity and mobility, and the price of West Texas Intermediate oil rises to $65/bbl.” A good call here, with WTI CL.1, 0.10% surging 55%.
“The equity market broadens out. Stocks beyond health care and technology participate in the rise in prices.” Participate, yes, but the market was still overwhelmingly tech-focused.
“The surge in economic growth causes the 10-year Treasury TMUBMUSD10Y, 1.652% yield to rise to 2%.” Directionally correct, though a half-point off.
“The slide in the dollar turns around.” It sure did, with the WSJ dollar index BUXX, 0.03% jumping 5%.
They certainly didn’t get ten for ten. But in all, the pair did well in predicting the direction of major assets, apart from the Chinese stock market, and they may have been too early in thinking equity-market gains would broaden out.
Need to Know starts early and is updated until the opening bell, but sign up here to get it delivered once to your email box. The emailed version will be sent out at about 7:30 a.m. Eastern.
Here’s their 2022 list.
“The combination of strong earnings clashes with rising interest rates, resulting in the S&P 500 making no progress in 2022. Value outperforms growth. High volatility continues and there is a correction that approaches, but does not exceed, 20%.
While the prices of some commodities decline, wages and rents continue to rise and the Consumer Price Index and other widely followed measures of inflation increase by 4.5% for the year. Declines in prices of transportation and energy encourage the die-hard proponents of the view that inflation is “transitory,” but persistent inflation becomes the dominant theme.
The bond market begins to respond to rising inflation and tapering by the Federal Reserve, and the yield on the 10-year Treasury rises to 2.75%. The Fed completes its tapering and raises rates four times in 2022.
In spite of the Omicron variant, group meetings and convention gatherings return to pre-pandemic levels by the end of the year. While Covid remains a problem throughout both the developed and the less-developed world, normal conditions are largely restored in the US. People spend three to four a days a week in offices and return to theaters, concerts, and sports arenas en masse.
Chinese policymakers respond to recent turmoil in the country’s property markets by curbing speculative investment in housing. As a result, there is more capital from Chinese households that needs to be invested. A major asset management industry begins to flourish in China, creating opportunities for Western companies.
The price of gold rallies by 20% to a new record high. Despite strong growth in the US, investors seek the perceived safety and inflation hedge of gold amidst rising prices and volatility. Gold reclaims its title as a haven for newly minted billionaires, even as cryptocurrencies continue to gain market share.
While the major oil-producing countries conclude that high oil prices are speeding up the implementation of alternative energy programs and allowing US shale producers to become profitable again, these countries can’t increase production enough to meet demand. The price of West Texas crude confounds forward curves and analyst forecasts when it rises above $100 per barrel.
Suddenly, the nuclear alternative for power generation enters the arena. Enough safety measures have been developed to reduce fears about its dangers, and the viability of nuclear power is widely acknowledged. A major nuclear site is approved for development in the Midwest of the United States. Fusion technology emerges as a possible future source of energy.
ESG evolves beyond corporate policy statements. Government agencies develop and enforce new regulatory standards that require public companies in the US to publish information documenting progress on various metrics deemed critical in the new era. Federal Reserve governors spearhead implementation of stress tests to assess financial institutions’ vulnerability to climate change scenarios.
In a setback to its green energy program, the United States finds it cannot buy enough lithium batteries to power the electric vehicles planned for production. China controls the lithium market, as well as the markets for the cobalt and nickel used in making the transmission rods, and it opts to reserve most of the supply of these commodities for domestic use.”
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Gladstone Land (LAND) - the Motley Fool article yesterday may be raising awareness of this farmland REIT. People are looking for investment alternatives, and there are only a few passive vehicles available for farmland. They appear to be piling into LAND.
In addition to farmland, Jim Rogers likes silver, and also copper, which is used extensively in electric vehicles. There are several copper ETFs (CPER, JJC), but owning the mining stocks (SCCO, RIO, FCX) is another way to participate, and these also have nice dividends -
https://investorshub.advfn.com/boards/read_msg.aspx?message_id=167348419
>>> 16 big stocks near records before the New Year
Yahoo Finance
by Brian Sozzi
December 30, 2021
The big keep getting bigger.
Troll the list of 52-week highs (see some names below) in the record-setting stock market right now, and it's a who's who of big cap, household name companies.
The stocks mentioned here reflect a couple themes being played by investors into 2022: likely increased at-home food/consumer products consumption with the Omicron variant raging (Hershey, Coca-Cola, McDonald's, Mondelez, Proctor & Gamble, Constellation Brands, Yum! Brands); solid health care plays amid the ongoing pandemic (Abbott, McKesson, Zoetis); economic recovery names (Norfolk Southern, Paychex, Hilton); the hot U.S. housing market continues (Home Depot, Sherwin-Williams).
Hershey (HSY)
Coca-Cola (KO)
McDonald's (MCD)
McKesson (MKC)
Mondelez (MDLZ)
Norfolk Southern (NSC)
Paychex (PAYX)
Proctor & Gamble (PG)
Sherwin Williams (SHW)
Constellation Brands (STZ)
Yum! Brands (YUM)
Zoetis (ZTS)
CME Group (CME)
Hilton (HLT)
Abbott (ABT)
Home Depot (HD)
Of course, the moves higher in these big cap stocks come as the broader market remains in full Santa Claus Rally mode despite the fast-spreading COVID-19 pandemic. Hence, investors are feeling emboldened to bid up these stocks even as they are far from cheap from a valuation perspective.
The S&P 500 (^GSPC) notched its 70th record close of the year on Wednesday. It represented the second highest number of record closes for the S&P 500 in a calendar year. Back in 1995, the S&P 500 saw 77 record closing highs according to Bloomberg data.
Most on Wall Street expect the rally to continue into the early part of January, reflecting favorable seasonal factors such as money managers making new bets for the New Year.
"We encourage our clients not to get out, to stay in the market. When the recoveries hit, when the sentiment changes, it happens so quickly that often by the time you're able to get back into the market, you have already missed out," said Erin Gibbs, Main Street Asset Management chief investment officer, on Yahoo Finance Live.
In other words, the big ... may keep on getting bigger.
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>>> Best Performing Sector ETFs Of The Year
Yahoo Finance
by Sumit Roy
December 30, 2021
https://finance.yahoo.com/news/best-performing-sector-etfs-021500432.html
In a year in which the S&P 500 has surged as much as it has, it’s tough to find a group of stocks that has done poorly.
Sure, there are pockets of weakness, such as in the ARK Innovation ETF (ARKK), which is down 23% year-to-date. But if you look at the big, broad indices and the major sectors that lie beneath them, there is no weakness to speak of.
That’s not a surprise considering the S&P 500 is up 29.2% on the year with only a few trading days left to go. No matter how you slice it, that’s a monster return—the third-largest of the past 10 years.
Four sectors have performed even better than the large cap index, while seven have done worse. In this article, we take a look at the performance for the 11 sectors under the Global Industry Classification Standard (GICS), using the SPDR suite of sector ETFs as a proxy.
Energy: From Boom To Bust
At the top of the 2021 sector rankings is energy, with a nearly 55% gain. Left for dead in 2020, the sector has made a stunning comeback this year thanks to oil’s rebound from a low of less than $20 last year (based on Brent crude oil prices) to more than $80 this year.
Natural gas prices have also surged, from $1.5/mmbtu last year to more than $6 at one point this year.
No wonder energy stocks got a boost this year—though they remain well off their all-time highs set in 2014, and the sector remains very much out of favor with increasingly ESG-focused investors and those who see the obsolescence of fossil fuels in the not-too-distant future.
Real Estate Comeback
Energy’s outperformance in 2021 was a surprise, as was the stellar performance of the No. 2 sector of the year, real estate, which is up 44.3%.
The real estate sector, which predominantly comprises real estate investment trusts (REITs), has benefited from low interest rates and a comeback in commercial restate.
For instance, even though the outlook for brick-and-mortar retail is still challenged, mall operator Simon Property Group recovered all of its losses from last year and more.
Meanwhile, other REITs, such as the REIT Prologis and wireless communications infrastructure provider American Tower Corporation, have benefited from the continued growth of e-commerce and 5G, respectively.
Relentless Tech Rally
The only two other sectors to beat the S&P 500 this year are technology and financials. Tech’s outperformance needs little explanation. It’s the same story investors have heard for years.
The relentless growth of companies like Apple, Microsoft and Nvidia (which account for half of the tech’s market capitalization) has fueled consistent gains for the sector. Under GICS, Google parent company Alphabet and Facebook parent company Meta aren’t considered technology stocks anymore—though many investors would argue otherwise.
Google has performed fantastically this year, gaining 67%. Meta has delivered a more modest 27%. The communication services sector in which they both reside lagged in 2021, returning 17.7%.
Some of the top holdings in XLC outside of Alphabet and Facebook—such as AT&T, Verizon and Comcast—have lagged the market significantly, weighing on the sector’s performance.
Financials Outperform, Safe Sectors Lag
The aforementioned financials sector has been another outperformer this year thanks to the solid showing in names like Berkshire Hathaway, J.P. Morgan, Bank of America and Wells Fargo, among others.
Interest rates are still low, but they are up from last year’s record-low levels and are anticipated to rise further as the Fed begins tightening monetary policy. That may help bolster the profitability of banks, insurance companies and other financials.
Finally, consumer discretionary, materials, health care, industrials, consumer staples and utilities are the sectors with below-market returns this year, which we haven’t yet touched on.
Utilities and consumer staples are the bottom two sectors, both relatively safe groups that have been neglected amid a booming stock market.
For a full breakdown of this year’s sector performance, see the table below:
Ticker
Sector
YTD Return (%)
XLE
Energy
54.86
XLRE
Real Estate
44.25
XLK
Technology
36.18
XLF
Financials
35.48
SPY
S&P 500
29.20
XLY
Consumer Disc.
28.45
XLB
Materials
26.81
XLV
Health Care
25.60
XLI
Industrials
20.79
XLC
Communication Services
17.68
XLP
Consumer Staples
16.24
XLU
Utilities
16.23
Data measures total returns for the year-to-date period through Dec. 28, 2021.
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>>> Nancy Pelosi Buys Millions In Call Options In Google, Micron, Roblox, Salesforce And Disney
Zero Hedge
BY TYLER DURDEN
DEC 30, 2021
https://www.zerohedge.com/markets/nancy-pelosi-buys-millions-call-options-google-micron-roblox-salesforce-and-disney
Despite a populist grassroots movement seeking to ban Congress members from trading stocks, one which has attracted bipartisan political support, Democratic House Speaker Nancy Pelosi - arguably one of the most prolific Congressional traders - said two weeks ago that lawmakers should be allowed to make trades while serving.
“We’re a free market economy,” Pelosi told reporters during a news conference. “They should be able to participate in that.”
Pelosi’s statement came days after progressive New Yorker, Alexandria Ocasio-Cortez, reiterated her support for banning lawmakers from the practice. Ocasio-Cortez and other members of Congress argue that lawmakers have access to information the public is not privy to and the ability to write and pass policy, they should abstain from buying and selling individual stock and other assets. She and other lawmakers support members of Congress investing in index funds.
I choose not to hold any so I can remain impartial about policy making,” Ocasio-Cortez wrote on Instagram.
Pelosi's statement also came in the wake of a series of scandals involving federal lawmakers, Fed and government officials making suspect trades throughout the coronavirus pandemic.
Currently, Senator Richard Burr (R-N.C.), is under investigation by the Securities and Exchange Commission for trades he made in the early days of the pandemic (Burr has said all of his trades were based on news reports, not non-public information), and other lawmakers were investigated by the Department of Justice for their trades.
It’s not limited to Congress: In October the Fed announced it would ban officials from owning individual stocks and bonds after two officials - Dallas Fed president Robert Kaplan and Boston Fed president Eric Rosengren - resigned following allegations of insider trading.
Members of Congress are theoretically barred from trading on nonpublic information thanks to the Stop Trading on Congressional Knowledge, or STOCK, Act, and during the press conference, Pelosi noted that lawmakers need to follow that law. “If people aren’t reporting [stock trades], they should be,” she said.
We mention all of this because according to the latest Periodic Transaction Report covering Nancy Pelosi's latest trades, the California Democrat purchased millions worth of call options in companies from Alphabet, to Micron, to Roblox, Saleforce and Walt Disney. Unfortunately, the strike price of the options was not disclosed (yes it is - see below), although with maturities well into 2022 and in some cases 2023, this appears to be a long-term levered bet.
And while the presumption is that there Pelosi did not trade on inside information, something tells us each of those trades will be profitable.
GOOG - 10 calls at 2000 (strike price), expires 9-16-22
MU - 100 calls at 50, expires 9-16-22
Roblox (RBLX) - 100 calls at 100, 1-20-23
CRM - 130 calls at 210, 1-20-23
DIS - 50 calls at 130, 9-16-22
REOF XX LLC (AB)
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>>> Market timer McClellan sees sharp stock-market selloff 'beginning imminently'
MarketWatch
Dec. 30, 2021
By Tomi Kilgore
https://www.marketwatch.com/story/market-timer-mcclellan-sees-sharp-stock-market-selloff-beginning-imminently-2021-12-30?siteid=yhoof2
Market timer Tom McClellan, publisher of the McClellan Market Report, warned of a "sharp drop" in the stock market "beginning imminently" and continuing for a couple of weeks into January.
Among reasons for his view, chart signals suggest the recent rally in the Dow Jones Industrial Average DJIA, +0.03% and S&P 500 SPX, +0.03% to record highs appears to reflect a "blowoff exhaustion"; negative divergence in the advance-decline line, which showed most stocks were declining while the indexes rose; and the fact that the annual seasonal pattern shows a tendency for the Dow to fall during the first two to three weeks of January, McClellan said in a newsletter sent to clients overnight.
McClellan said he's bearish short-, intermediate- and long-term trading styles. The Dow was up 27 points, or 0.1%, in afternoon trading Thursday and on track for a seventh straight gain and second straight record close. Meanwhile, only two of the Dow's 30 components -- UnitedHealth Group Inc. UNH, +0.15% and Coca-Cola Co. KO, -0.07% -- have reached 52-week highs in intraday trading on Thursday, and only eight components have reached 52-week highs this month. For the S&P 500 SPX, +0.03%, which was up 0.1% and in record territory, 12% of its components have reached 52-week highs on Thursday, and 27% have reached 52-week highs this month.
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Recent interview with Jim Rickards. He explains why current inflation actually is transitory, and why the Fed's plans for aggressive tightening will be a major mistake that will likely end in recession.
For gold, he said a falling dollar will be needed to get the gold price moving higher (the dollar has been rising for most of 2021). He said that a weakening US economy could eventually prompt the US administration into a an active policy to lower the dollar.
First however, the Fed overreacts by tightening too aggressively, leading to recession -
>>> Don't fear a 20% stock market plunge: JPMorgan
Yahoo Finance
by Brian Sozzi
December 27, 2021
https://finance.yahoo.com/news/dont-fear-a-20-stock-market-plunge-jp-morgan-180947467.html
Some reassuring words on record-setting markets into the New Year from JPMorgan strategists.
"In particular, outside of the Big 10 stocks in the U.S., equity drawdowns and multiple de-rating have been severe. Russell 3000 was down only -4% and Nasdaq Composite -7% from 12-month highs, however, the average drawdown for constituents in these indices was -28% and -38%, respectively. Some argue this price action is a harbinger of late-cycle dynamics or at least an intra-cycle 10-20% market correction. In our view, conditions for a large sell-off are not in place right now given already low investor positioning, record buybacks, limited systematic amplifiers, and positive January seasonals," said JPMorgan chief macro equity strategist Dubravko Lakos-Bujas in a new research Monday.
Lakos-Bujas doesn't appear to be alone in the bullishness.
The S&P 500 hit an intraday record early on in Monday's session as investors bid up stocks despite rising Omicron-related infections globally. Gains were fueled by upbeat holiday retail sales data out of Mastercard SpendingPulse. If the S&P 500 closes at a record, it will mark the 69th time this year the index has hit a record high. The S&P 500 has notched a record close on nearly 30% of trading days this year, according to Bloomberg.
Meanwhile, 26 out of 30 components of the Dow Jones Industrial Average were in the green, paced by gains in Home Depot, Cisco, and Yahoo Finance Company of the Year Microsoft.
Traders also nibbled at high multiple tech stocks such as Nvidia, which held down the spot as the top trending ticker on the Yahoo Finance platform for most of the session.
With the momentum in the markets persisting despite numerous macroeconomic and health concerns, Lakos-Bujas says investors should stay in risk-on mode.
"We find the current setup very attractive for high beta stocks — emphasizing both sides of the barbell: (1) on the value/cyclical side, in particular, reopening stocks (such as travel, leisure, hospitality, experiences) and energy; (2) on the secular growth side various high beta segments (such as payments, e-commerce, gaming, cybersecurity, biotech) have already seen significant multiple de-rating (i.e., -30% to -70%), yet fundamentals for many of these themes remain intact with continued strong secular growth and large addressable market sizes. Historical analysis (30+ years) shows that the largest outperformance of high beta stocks tends to be in January (i.e., tax-loss harvesting, investor bottom fishing, etc.)," writes Lakos-Bujas.
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>>> 7 Reasons the Stock Market Could Crash in January
Motley Fool
by Sean Williams
12-24-21
https://www.msn.com/en-us/money/markets/7-reasons-the-stock-market-could-crash-in-january/ar-AAS8p8u
In less than a week, we'll officially be ringing in a new year. However, Wall Street might be sad to see 2021 come to a close. The benchmark S&P 500 (SNPINDEX: ^GSPC) has more than doubled up (+24%) its average annual total return of 11% (including dividends) over the past four decades, and it hasn't undergone a steeper correction than 5%. It's been a true running of the bulls.
But as we turn the page on 2021, it's quite possible Wall Street could lose its luster. Below are seven reasons the stock market could crash in January.
1. Omicron supply chain issues (domestic and abroad)
The most obvious obstacle for the S&P 500 is the ongoing spread of coronavirus variants, of which omicron is now the most predominant in the United States. The issue is that there's no unified global approach as to how best to curtail omicron. Whereas some countries are now mandating vaccines, others are imposing few restrictions, if any.
With a wide variance of mitigation measures being deployed, the single greatest risk to Wall Street is continued or brand-new supply chain issues. From tech and consumer goods to industrial companies, most sectors are at risk of operating shortfalls if global logistics continue to be tied into knots by the pandemic.
2. QE winding down
Another fairly obvious high-risk factor for Wall Street is the Federal Reserve going on the offensive against inflation. As a reminder, the Consumer Price Index for all Urban Consumers (CPI-U) rose 6.8% in November, which marked a 39-year high for inflation.
Earlier this month, Federal Reserve Chairman Jerome Powell announced that the nation's central bank would expedite the winding down of its quantitative easing (QE) program. QE is the umbrella program responsible for buying long-term Treasury bonds (buying T-bonds pushes up their price and weighs down long-term yields) and mortgage-backed securities.
Reduced bond buying should equate to higher borrowing rates, which in turn can slow the growth potential of previously fast-paced stocks.
3. Margin calls
Wall Street should also be deeply concerned about rapidly rising levels of margin debt, which is the amount of money that's been borrowed by institutions or investors with interest to purchase or short-sell securities.
Over time, it's perfectly normal for the nominal amount of outstanding margin debt to climb. But since the March 2020 low, the amount of outstanding margin debt has come close to doubling, and now sits at nearly $919 billion, according to November data from the independent Financial Industry Regulatory Authority.
There have only been three instances in the last 26 years where margin debt outstanding rose by at least 60% in a single year. It happened just months before the dot-com bubble burst, almost immediately ahead of the financial crisis, and in 2021. If stocks drift lower to begin the year, a margin-call wave could really accelerate things to the downside.
4. Sector rotation
Sometimes, the stock market dives for purely benign reasons. One such possibility is if we witness sector rotation in January. Sector rotation refers to investors moving money from one sector of the market to another.
On the surface, you'd think a broad-based index like the S&P 500 wouldn't be fazed by sector rotation. But it's no secret that growth stocks in the technology and healthcare sectors have been primarily leading this rally from the March 2020 bear market bottom. Now that we're well past the one-year mark since this bottom, it wouldn't be all that surprising to see investors locking in some profits on companies with valuation premiums and migrating some of their cash to safer/value investments or dividend plays.
If investors do begin to choose value and dividends over growth stocks, there's little question the market-cap-weighted S&P 500 will find itself under pressure.
5. Meme stock reversion
A fifth reason the stock market could crash in January is the potential for a dive in meme stocks, such as AMC Entertainment Holdings and GameStop.
Even though these are grossly overvalued companies that have become detached from their respectively poor operating performances, the Fed noted in its semiannual Financial Stability Report that near- and long-term risks exist with the way young and novice investors have been putting their money to work.
In particular, the report highlights that households invested in these social-media-driven stocks tend to have more-leveraged balance sheets. If common sense prevails and these bubble-like stocks begin to deflate, these leveraged investors may have no choice but to retreat, leading to increased market volatility.
6. Valuation
Even though valuation is rarely ever enough, by itself, to send the S&P 500 screaming lower, historic precedents do suggest Wall Street may be in trouble come January.
As of the closing bell on Dec. 21, the S&P 500's Shiller price-to-earnings (P/E) ratio was 39. The Shiller P/E takes into account inflation-adjusted earnings over the past 10 years. Though the Shiller P/E multiple for the S&P 500 has risen a bit since the advent of the internet in the mid-1990s, the current Shiller P/E is more than double its 151-year average of 16.9.
What's far more worrisome is that the S&P 500 has declined at least 20% in each of the previous four instances when the Shiller P/E surpassed 30. Wall Street simply doesn't have a good track record of supporting extreme valuations for long periods of time.
7. History makes its presence felt
Lastly, investors can look to history as another reason to be concerned about the broader market.
Since 1960, there have been nine bear market declines (20% or more) for the S&P 500. Following each of the previous eight bear market bottoms (i.e., not including the coronavirus crash), the S&P 500 underwent either one or two double-digit percentage declines in the subsequent 36 months. We're now 21 months removed from the March 2020 bear market low and haven't come close to a double-digit correction in the broad-market index.
Keep in mind that if a stock market crash or correction does occur in January, it would represent a fantastic buying opportunity for long-term investors. Just be aware that crashes and corrections are the price of admission to one of the world's greatest wealth creators.
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>>> Diversify your portfolio the right way ?— here are 5 assets with little connection to the stock market’s wild swings
MoneyWise
by Clayton Jarvis
December 19, 2021
https://finance.yahoo.com/news/diversify-portfolio-way-5-assets-140000363.html
Diversify your portfolio the right way ?— here are 5 assets with little connection to the stock market’s wild swings
If your idea of a diversified portfolio is one that only needs growth and value stocks, it’s a good thing you’re reading this.
With prominent investors like Michael Burry, Jeremy Grantham and Charlie Munger expecting a historic correction to hit the stock market, it’s an opportune time to take a long, thoughtful look at your portfolio.
Specifically, you need to make sure it holds the kinds of assets that can help offset any potential losses associated with your stock market exposure.
Let’s look at five assets that can help grow your portfolio, even in the midst of market chaos. We’ll start with three traditional asset classes and then dig into two overlooked examples that show just how interesting — and profitable — alternative investments can be.
1. Bonds
When inflation is making short work of fixed-income returns, bonds can seem even less attractive than usual.
But elevated inflation won’t be around forever, and if the stock market truly is in for a reckoning, the guaranteed income associated with bonds, modest as it is, may be easier to stomach than a historic decline in share values.
In addition to the lower risk, investors also opt for bonds at times of economic uncertainty because decreases in consumer spending can lead to weakening profits and lower share prices.
The bond market is vast, so you should be able to find products that meet your needs as an investor.
U.S. savings bonds, mortgage-backed securities and emerging market bonds are a few examples. And getting exposure is now as easy as purchasing established bond ETFs such as the iShares U.S. Treasury Bond ETF, SPDR Long Term Corporate Bond ETF, and VanEck Investment Grade Floating Rate ETF.
2. Real estate
Real estate is detached from the stock market to such an extent that it provides one of the best hedges against falling share prices.
There hasn’t been a period in recent American history where millions of people weren’t willing to pay for shelter, either by renting or buying properties of their own.
Demand for housing may fluctuate from neighborhood to neighborhood, but its overall ceaselessness should continue to push prices and rent higher, no matter what’s happening on Wall Street.
Purchasing an investment property — a condo, a detached home, a triplex — is the ideal for most investors. Others are happy to keep updating their own residence with an eye toward a future sale.
You can also purchase shares in a real estate investment trust, or REIT, which distributes rental income to shareholders. Names like Realty Income, Digital Realty Trust, and Public Storage should provide a good starting point for investors who'd like to investigate the space.
3. Commodities
Commodities can help shield your portfolio from a declining stock market, but they come with their own unique risks.
When investing in commodities, you’re buying the raw materials used to produce consumer goods and reselling them at (hopefully) a higher price. Cotton, coffee, metals, cattle and petroleum products all qualify as commodities.
Commodity prices are a reflection of supply and demand dynamics in individual markets, so their performance isn’t tied to the stock market. Commodities tend to have a low to negative correlation to both stocks and bonds.
That said, commodities investing is inherently volatile. Unfavorable weather could ruin an investment in chickpeas; new regulations could kill your investment in coal. But if everything falls into place, the returns can be great.
These days, a practical way to invest in commodities is through well-established, broad-based commodity ETFs, such as the Invesco DB Commodity Index Tracking Fund.
If you want to invest in a specific commodity, there are ETFs for that too. For instance, gold bugs have long loved the SPDR Gold Shares ETF for easy access to the market.
Meanwhile, gold mining companies like Barrick Gold and Newmont should also do well if the price of the yellow metal goes up.
4. Fine art
Like commodities, art values depend on supply and demand; it’s just that supply, when it comes to art, means a one-of-a-kind display of genius — something people regularly pay millions for.
In addition to being uncorrelated with the stock market, fine art has the ability to kick off healthy returns.
Between 1995 and 2020, contemporary art has outperformed the S&P 500 by 174% — that’s nearly three times the returns — according to the Citi Global Art Market chart.
Fine art used to be an investment for wealthy aficionados with access to the capital and insight required to make smart purchases.
But new platforms are helping everyday investors get into the fine art market by selling shares in modern masterpieces that could one day be sold for solid gains.
“Those artists tend to appreciate at single-digit to low-double-digit rates, but they're very good stores of value,” says Scott Lyn, CEO of art investing platform Masterworks. “It's very unlikely that you lose money investing in one of those paintings.”
5. Sports cards
In the same investable, collectible vein as fine art lie sports cards, some of which can be worth a fortune.
In October, a rare Michael Jordan Upper Deck card was auctioned off for $2.7 million. Earlier this year, a Tom Brady rookie card was sold for $2.25 million.
Social media and a whole lot of pandemic-related free time spent digging through old collections have helped trigger a new wave of interest in sports cards.
They’re like a meme stock alternative — they don’t always pay off, but when they do, look out.
You can play the sports card game in many ways:
Buy individual cards you think will maintain their value.
Buy boxes of cards and go hunting for one-of-a-kind items that can sell for ridiculous amounts.
Pool your money with other investors to purchase high value cards and resell them at some point in the future.
Find a broker who, for a fee, will help you buy, sell and trade sports cards like stocks.
Just be careful.
The bottom fell out of the sports card market in the mid-90s — too many companies, too many cards. With all the money the space is attracting today, expect more companies to try and get a piece of it.
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>>> As U.S. inflation hits a 39-year high, pros share 7 things to do with your money to help protect yourself from high inflation
Dec. 15, 2021
MarketWatch
By Alisa Wolfson
https://www.marketwatch.com/picks/as-u-s-inflation-hits-a-39-year-high-pros-share-7-things-to-do-with-your-money-to-help-protect-yourself-from-high-inflation-01639577364?siteid=yhoof2
As consumer prices post their biggest yearly gain since 1982, here’s investment advice on TIPS, I bonds, stocks, crypto and more.
U.S. inflation hit a 39-year high in November, according to government data, with consumer prices rising 6.8% in November, as compared to the same month in 2020. This is the fastest rise in consumer prices since 1982, and November was the sixth consecutive month that inflation was over 5%. These changes, no doubt, have many Americans worried about their money — and more specifically, what they can do with their money to help protect against inflation.
“For those that keep their savings in a traditional savings account, it’s unlikely the interest rate they are earning will outpace inflation, and what can happen is inflation can eat into your purchasing power of money as a result,” says Leanna Devinney, certified financial planner and vice president and branch leader of Fidelity Investments. So while you still need an emergency fund (you’ll want at least three months worth of income in there) in savings, investing is going to be key to helping you weather inflation better, pros say. Here’s their advice on where to put your money.
Stocks and diversification are key, says Snigdha Kumar, head of product operations at investment app Digit
Investors should continue to be invested in stocks because they generally hold up better during times of inflation, explains Kumar, who adds that “diversification is our north star.” Suze Orman shared a similar sentiment about stocks recently, noting that: “Bonds and cash struggle to keep pace with inflation; only stocks have a track record of earning more than inflation.”
Consider value stocks in the consumer staples space, says Kumar. “Value stocks that are in the consumer staples space, like food and energy, do well during inflation because demand for staples is inelastic and that gives these companies higher pricing power as they are able to increase their prices with inflation better than other industries,” Kumar says.
Think about TIPS and high-yield bonds, says Devinney
“Consider different types of inflation-resistant fixed income investments such as Treasury Inflation-Protected Securities (TIPS) and high-yield bonds,” says Devinney. Kumar also recommends TIPS. “Since diversification is our north star, one could also acquire some lower risk securities that are inflation linked,” Kumar says. “TIPS securities carry a similar risk as other fixed income investments, but they add an adjusted principal amount if inflation increases.”
Look into I bonds
I bonds are inflation-protected U.S. savings bonds, and I bonds purchased before the end of April offer a 7.12% yield. But, there’s a catch: An individual can only purchase up to $10,000 of I bonds per year electronically or $5,000 in paper. Here’s a guide on I bonds.
Consider crypto, says Michael Wilkerson, executive vice chairman of Helios Fairfax Partners
Wilkerson says Bitcoin and Ethereum provide the most liquid ways to invest in crypto. “This may yet prove to be the most efficient inflation hedge in this environment. Regulatory interference will remain the main risk for the crypto utopia,” says Wilkerson. That said, read this guide on how much of your portfolio to put in crypto.
Consider alternative investments like gold and real estate, says Kumar. In the theme of diversification, Kumar says she always suggests having 5% to 10% of a portfolio in alternatives or hedges, like gold and real estate, during inflation. “The rationale for buying gold is that its asset value isn’t damaged by the eroding value of cash so it’s a good anti-inflationary hedge,” Kumar says. “Real-estate platforms, especially retail real estate, do well during inflation because landlords and property owners see the value of their property increase,” she says, noting that: “We’re already seeing that in the real estate market in the United States right now.” For his part, Warren Buffett has also spoken of real estate as something to consider to hedge against inflation.
Reduce exposure to certain types of investments, says Devinney
“It may also help to reduce exposure to investments that are more sensitive to inflation such as certain Treasury bonds. Treasury bonds typically have lower yields than the equivalent duration investment grade bonds and that is why treasury bonds aren’t as inflation resistant,” says Devinney. You may also want to steer clear or some CDs, savings accounts and more.
And Kumar doesn’t recommend investing too much in growth stocks during times of inflation because those companies expect to earn a bulk of their cash flow in the future. As inflation increases, those future cash flows are worth less and therefore they lose stock value.
And finally, you should do an honest review of your expenses. Kelly LaVigne, vice president of consumer insights at Allianz Life, says most people think they can combat rising costs simply by cutting back on some aspect of their current expenses, but it’s impossible to do this in a logical way without a clear understanding of what you’re currently spending. “You might think you can make an impact by spending less on a few grocery items or limiting daily trips to the coffee shop, but those might be relatively useless endeavors if you are paying significantly more in other places where inflation is taking a bigger chunk of your budget,” says LaVigne.
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>>> The Best And Worst Sectors For Rising Interest Rates
Mar 31, 2021
Seeking Alpha
by Kevin Means
https://seekingalpha.com/article/4416978-best-worst-sectors-etfs-for-rising-interest-rates
Summary
Current monetary and fiscal policies risk an overheated and inflationary economy.
Increased interest rates already begun are a likely result.
Using an objective statistical model, I calibrate the current sensitivity of sectors and industries to rising interest rates.
Sector recommendations are to buy financials (XLF) and energy (XLE) and avoid/sell technology (XLK).
Interest rates are notoriously difficult to forecast. However, if you believe that rates will continue to rise (as I do), it may be helpful to know which market sectors are likely to be most affected, for good or ill.
Four-Factor Risk Model
At Sapient Investments, we use a proprietary risk model to measure the risks of a stock, bond, fund, or portfolio. It is described more fully in an article on our website entitled “How Much Risk is in My Portfolio?” The four risk factors are:
MKT – stock market risk (S&P 500 Index)
LTB – interest rate risk (10-Year Treasury Index)
DLR – currency risk (U.S. Dollar Index)
OIL – commodity risk (West Texas Intermediate Crude Oil Index)
These four major risk factors are the most important in explaining the behavior of most investments. Although the focus of today’s article is LTB risk, to get an accurate measure, it is important to control for the other risk effects at the same time. That is why our risk model uses multiple regression analysis in which we regress monthly returns against monthly changes in all four risk factors simultaneously. That allows us to disentangle the various risk effects from each other and present a more accurate picture of the true risk factor sensitivities.
Also important is the fact that our risk model uses exponentially-weighted regressions, which weight more recent monthly returns more heavily than those further back in time. Specifically, our regressions use the most recent 36 months, with half of the weight on the most recent 12 months.
10 Major Sectors
In the graph below, we show the LTB betas of the 10 major economic sectors into which U.S. stocks are generally grouped.
Source: Graph created by author using data from FactSet
Perhaps the most important thing to remember when thinking about the effects of interest rate changes is that bond prices and returns move in the opposite direction of interest rate changes. When interest rates go up, bond prices go down. So, assets that have a positive LTB beta will also go down when rates go up.
In the graphs above and below, we use color as a reminder about this relationship. Assets with the most negative sensitivity to LTB changes are in green—they will go up in price if interest rates rise, the opposite reaction from bonds. Assets with the most positive sensitivity to LTB changes are in orange—they will go down in price if interest rates rise, just like bonds.
When trying to understand the effects of LTB risk on various sectors, it is helpful to understand why interest rates might be changing. The fact that our risk model emphasizes what has been happening recently is particularly helpful. For example, energy stocks have not historically had a strong relationship with the 10-Year Treasury Bond, either positive or negative. However, recently, energy stocks have been exhibiting a decidedly more negative relationship to bonds than has been typical in the past because of the extremely depressed levels from which energy stocks have been rebounding as hopes for an economic recovery have been emerging. Rising interest rates are often associated with a strengthening economy, which is good for all economically-sensitive stocks. Energy stocks have been behaving with very heightened sensitivity to the outlook for a post-pandemic recovery.
Financial stocks have historically had a slightly negative relationship to the 10-Year Treasury Bond, but they have recently exhibited a much stronger inverse relationship, probably because interest rates have been so low and the yield curve so flat that it has been difficult for financial institutions, particularly banks, to earn normal profits using their traditional model of “borrowing short and lending long.” Rising long-term bond yields help financial stocks to earn a positive spread on their assets.
Technology has not traditionally been known for a high level of sensitivity to changes in interest rates. However, interest rates are so low that mathematically speaking, even relatively small changes in interest rates can have a dramatic effect on the current value of high growth stocks.
All financial assets are valued by discounting future cash flows. This relationship is easier to calculate for bonds because all of their cash flows are known in advance—the coupon interest payments and the return of principal are contractual. Bonds with longer maturities have more of their cash flows in the distant future. A bond’s “duration” measures its sensitivity to changes in interest rates, which is exactly what LTB beta measures. The difference is that duration can be calculated exactly ahead of time, but stock LTB beta is estimated using time-series regression analysis. But the underlying rationale is the same. High growth stocks with little or no present earnings are expected to have the bulk of their cash flows occur in the distant future, making their present values much more sensitive to changes in interest rates. They are, in effect, “high duration stocks.”
Industries Most Affected
The graph below shows some of the industries that have unusually extreme LTB betas, either positive or negative.
Source: Graph created by author using data from FactSet
Those on the left side could be described as economic recovery industries. They typically suffered poor returns in 2020 and are only recently seeing their stock prices recover. They are also most often considered value industries as opposed to growth industries.
The industries on the right side are a varied lot. Some are clearly associated with the “winners” in 2020, especially software, medical equipment, and solar. These are all growth industries in which a large portion of the expected cash flows are many years down the road. Consequently, they have been hurt by rising rates through the mechanism of the increased discount rate.
Other industries on the right side are sensitive to changes in interest rates through the economics of how their businesses operate. For example, the demand for real estate and home construction is strongly influenced by mortgage interest rates—when rates move up, demand falls. Similarly, gold miners are affected by the price of gold, which in turn is affected by interest rates because gold does not provide any interest or dividend income, and when interest rates rise, the opportunity cost of owning gold increases, making it a less attractive store of value.
Will Rates Keep Rising?
The graph below depicts the history of the 10-Year Treasury Bond Yield since 1979. It had been on a downtrend since 1981 when it peaked at 15.8%. Last summer, the yield hit an all-time low of .5%. Since then, the yield has increased over 1% to 1.7%.
Source: Graph created by author using data from FactSet
Two observations can be made from this graph. One is that the short-term trend has clearly been up. The other is that if there is a tendency for long-term reversion to the mean, it will be an upward gravitational pull.
What has caused the 10-Year Treasury Yield to move up? Certainly not Fed tightening. The Fed has maintained its unprecedentedly easy money approach, holding short-term rates close to zero and buying huge amounts of longer-term bonds to try to push rates lower all along the yield curve. It appears that the “bond market vigilantes” are back. If bond market participants fear that inflation will devalue their investments, they will naturally sell. They may not wait for the Fed to tighten to stave off inflation or trust that it will, and in fact, given the mindset of the current Fed, the central bank appears much more willing to tolerate much more inflation than would have been the case even a few years ago, in the interest of fostering “full employment.”
With the change in control of both houses of Congress as well as the executive branch, another potentially inflationary element has been added to the policy mix—aggressively expansionary fiscal policy. Blowout deficit spending now looks like it will be the new normal. Historically, when governments have overspent, rather than raise taxes, the easier route has been to weaken the value of the currency through inflation, making repayment of government borrowing easier. Add a propensity towards anti-business, pro-union, and environmental tax and regulatory changes, which are likely to dampen productivity and economic growth, and the mix looks a lot like the policies that led to the “stagflation” conditions of the 1970s.
Inflation has not shown up in the CPI yet, but the bond market is clearly worried about it, and rightly so. The present trends seem unlikely to go away any time soon, and if anything, they seem likely to intensify.
Prepare your portfolio for higher interest rates.
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>>> Wholesale inflation jumps record 9.6% over past 12 months
Yahoo Finance
MARTIN CRUTSINGER
December 14, 2021
https://finance.yahoo.com/news/wholesale-inflation-jumps-record-9-134429918.html
WASHINGTON (AP) — Prices at the wholesale level surged by a record 9.6% in November from a year earlier, an indication of on-going inflation pressures.
The Labor Department said Tuesday that its producer price index, which measures inflation before it reaches consumers, rose 0.8% in November after a 0.6% monthly gain in October. It was the highest monthly reading in four months.
Food prices, which had fallen 0.3% in October, jumped 1.2% in November. Energy prices rose 2.6% after a 5.3% percent rise October.
The 12-month increase in wholesale inflation set a new record, surpassing the old records for 12-month increases of 8.6% set in both September and October. The records on wholesale prices go back to 2010.
Core inflation at the wholesale level, which excludes volatile food and energy, rose 0.8% in November with core prices were up 9.5% over the past 12 months.
The increase in wholesale prices was widespread, led by a 1.2% increase in the cost of goods and a 0.7% rise in the price of services.
In the goods category, the price of iron and steel scrap rose 10.7% while the price for gasoline, jet fuel and industrial chemicals all moved higher. In the food category, the price of fresh fruits and vegetables rose while the price of chickens fell.
The surge in wholesale prices followed news Friday that consumer prices shot up 6.8% for the 12 months ending in November, the biggest increase in 39 years, as the price of energy, food and many other items shot up.
The Federal Reserve, holding its last meeting of the year this week, is expected to announce Wednesday that it will accelerate the pace at which it reduces its monthly bond purchases, preparing the way to begin raising its key benchmark interest rate, possibly by mid-2022 as it seeks to demonstrate its resolve to bring inflation under control.
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>>> Twenty Central Banks Hold Meetings as Inflation Forces Split
Bloomberg
By Enda Curran, Jana Randow, Rich Miller, and Philip Aldrick
December 11, 2021
https://www.bloomberg.com/news/articles/2021-12-11/twenty-central-banks-hold-meetings-as-inflation-forces-split?srnd=premium
Fed is expected to taper support while others are still easing
Bank of England’s hiking hints undermined by omicron
The world’s top central banks are diverging, as some turn to tackling surging inflation while others keep stoking demand, a split that looks set to widen in 2022.
The differences will be on full display this week with the final decisions for 2021 due at the U.S. Federal Reserve, European Central Bank, Bank of Japan and Bank of England, which are together responsible for monetary policy in almost half of the world economy. They won’t be alone -- about 16 counterparts also meet this week, including those in Switzerland, Norway, Mexico and Russia.
Central Bank Decisions This Week
The latest wild-card is the omicron coronavirus variant -- how severe its impact proves to be on growth and inflation will be a crucial consideration for officials into the new year. The worry is that a strain more resistant to vaccines would force governments to impose new restrictions on business and keep consumers at home.
A shift in policy always carries risks. Tightening and then discovering the inflation threat was temporary all along -- as many central bankers have said all along -- could derail recoveries; waiting and finding that price pressures are persistent could require more aggressive tightening than otherwise.
“The likelihood of policy slip-ups is now much much greater,” said Freya Beamish, head of macro research at TS Lombard. The inflation outlook is confused by “the presence of an endemic virus,” she said.
Fed Chair Jerome Powell is tipped to confirm on Wednesday that he’ll deliver a quicker withdrawal of stimulus than planned just a month ago. He may even hint at being open to raising interest rates sooner than expected in 2022 if inflation persists near its highest in four decades.
The outlook for his central banking peers is less clear, marking an end of two years in which they largely synchronized their efforts to tackle the coronavirus recession, only to find inflation surging back stronger than anticipated in many key economies.
Stimulus at Fed, ECB, BOJ has vastly increased their balance sheets
Although she’s likely to end emergency stimulus, ECB President Christine Lagarde will stick to an expansionary policy stance on Thursday as she insists soaring prices are due to factors that won’t endure, such as energy costs, supply snags and statistical quirks. Lagarde has indicated she doesn’t expect to raise rates in 2023.
Subdued price pressures in Japan are also allowing BOJ Governor Haruhiko Kuroda to hold onto a doggedly dovish stance, even as the government rolls out another round of record spending. Japanese policy makers convene Friday.
Perhaps most strikingly, Governor Andrew Bailey’s Bank of England is now cooling on the need to hike rates, having not long ago flirted with a shift. In contrast, Norway’s central bank may hike again.
Elsewhere, while the People’s Bank of China has started to ease policy as a property-market downturn threatens to hamper growth, other emerging economies such as Brazil and Russia are aggressively tightening.
Russia may do so again this week, as may Mexico, Chile, Colombia and Hungary. Still, Turkey is set to cut again at the urging of President Recip Tayyip Erdogan.
“We are set for increasing monetary policy divergence,” said Alicia Garcia Herrero, chief economist for Asia Pacific at Natixis SA.
What Bloomberg Economics Says...
“Rising global inflation, higher commodity prices and weaker currencies likely synchronized rate movements in emerging markets this year. Tighter U.S. monetary policy will probably provide another global force for more rate hikes next year.”
-- Ziad Daoud, chief emerging markets economist
Even if the path of rates differs, a wide-scale slowing of bond-buying programs will reduce support for economies. BofA Global Research strategists predict liquidity will peak in the first quarter of 2022, and that the Fed, ECB and BOE are on course to shrink their balance sheets to $18 trillion by the end of next year from above $20 trillion at the start of the year.
The implications for divisions in global policy could also include a rising dollar against a weakening euro and yuan, potentially stoking currency tensions as China’s exports get another lift. A stronger greenback would also lure money away from emerging markets, undermining their own fragile recoveries.
“The increase in the Fed fund rates next year and a stronger U.S. dollar will be a testing time for emerging markets,” said Jerome Jean Haegeli, chief economist at Swiss Re AG in Zurich, and previously of the International Monetary Fund. “The fault lines opened up by Covid-19 are looking more persistent.”
At the Fed, a widely-anticipated decision to wind up its bond-buying more quickly could leave it in a position to raise rates as early as March, should it deem that necessary to stem surging inflation.
U.S. consumer prices rose the fastest in almost four decades, government data showed Friday.
Fed watchers expect the central bank’s new economic forecasts to show for the first time that a majority of policy makers project at least one rate increase in 2022.
ECB’s Stimulus Exit Path Emerges With Inflation at Record Pace
Inflation Near 40-Year High Shocks Americans, Spooks Washington
Fed Seen on Track to Quicken Taper After Latest Inflation Print
The Bank of England Needs One Million Missing Workers to Return
In the U.K., traders convinced of a liftoff this year pared bets after the emergence of omicron, and they’ll likely be proved right if comments from the BOE’s most hawkish official serve as a guide. Michael Saunders recently highlighted the benefits of waiting before raising rates from 0.1% to assess the economic impact of the variant.
The U.K.’s tight labor market is nevertheless driving up wage growth, and officials are concerned that high inflation, expected to hit a decade high of 5% next year, is seeping into expectations. Unlike the Fed, the BOE’s mandate keeps it focused on prices.
At the ECB, Lagarde is also sticking to the narrative that record-high inflation will eventually subside -- even though officials acknowledge that persistent supply bottlenecks mean it may take longer than initially thought, and some policy makers are getting uncomfortable just standing by.
With the European economy close to pre-crisis levels, the institution is set to confirm that bond-buying under its signature 1.85 trillion-euro ($2.1 trillion) pandemic program will end in March as planned. Regular asset purchases will continue. Rate hikes, economists surveyed by Bloomberg agree, won’t be on the agenda until 2023.
Ultimately, the severity of omicron will play a huge role in the monetary policy story next year. Two weeks after the variant’s discovery, there are plenty of unknowns.
“If the variant dampens demand more than it exacerbates supply-chain disruptions, it could prove disinflationary,” said economist Sian Fenner of Oxford Economics. “But the reverse is equally true.”
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>>> It’s not just Elon Musk: Corporate insiders sell stocks at historic levels as market soars
Wall Street Journal
Dec. 11, 2021
By Tripp Mickle , Theo Francis
https://www.marketwatch.com/story/its-not-just-elon-musk-corporate-insiders-sell-stocks-at-historic-levels-as-market-soars-11639091560
So far this year, 48 top executives have collected more than $200 million each from stock sales
Microsoft CEO Satya Narayana Nadella sold about half of his Microsoft shares in late November, yielding about $285 million.
Company founders and leaders are unloading their stock at historic levels, with some selling shares in their businesses for the first time in years, amid soaring market valuations and ahead of possible changes in U.S. and some state tax laws.
So far this year, 48 top executives have collected more than $200 million each from stock sales, nearly four times the average number of insiders from 2016 through 2020, according to a Wall Street Journal analysis of data from the research firm InsiderScore.
The wave has included super sellers such as cosmetics billionaire Ronald Lauder and Google GOOGL, +0.25% co-founders Larry Page and Sergey Brin, who have sold shares for the first time in four years or more as the economic recovery fueled strong growth in sales and profit. Other high-profile insiders—including the Walton family, heirs to the Walmart Inc. WMT, +1.83% fortune, and Mark Zuckerberg, chief executive of Facebook parent Meta Platforms Inc. FB, -0.02% —have accelerated sales and are on track to break recent records for the number of shares they have sold.
Read: Elon Musk exercises more options, sells another $1 billion of Tesla stock
Across the S&P 500, insiders have sold a record $63.5 billion in shares through November, a 50% increase from all of 2020, driven both by stock-market gains and an increase in sales by some big holders. The technology sector has led with $41 billion in sales across the entire market, up by more than a third, with a smaller amount but an even bigger increase in financial services.
Read: CEO Satya Nadella sells about half of his Microsoft shares
“What you’re seeing is unprecedented” in recent years, said Daniel Taylor, an accounting professor at the University of Pennsylvania’s Wharton School who studies trading by executives and directors. He said 2021 marks the most sales he can recall by insiders in a decade, resembling waves of sales during the twilight of the early 2000s dot-com boom.
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>>> Warren Buffett is holding these stocks for the huge free cash flow — with inflation at a 31-year high, you should too
MoneyWise
by Brian Pacampara, CFA
December 7, 2021
https://finance.yahoo.com/news/warren-buffett-holding-stocks-huge-175400129.html
Warren Buffett is holding these stocks for the huge free cash flow — with inflation at a 31-year high, you should too
Wall Street pays a ton of attention to company earnings.
But reported earnings are often manipulated through aggressive or even fraudulent accounting methods.
That’s why risk-averse investors need to focus on companies that generate gobs of free cash flow.
Cold, hard cash is real, and can be used by shareholder-friendly management teams to:
Pay inflation-fighting dividends.
Repurchase shares.
Grow the business organically.
Investing legend and Berkshire Hathaway CEO Warren Buffett is famous for his love of cash flow-producing businesses.
Let’s take a look at three stocks in Berkshire’s portfolio that boast double-digit free cash flow margins (free cash flow as a percentage of sales).
Chevron (CVX)
Leading off our list is oil and gas giant Chevron, which has generated $13.9 billion in free cash flow over the past 12 months and consistently posts free cash flow margins in the ballpark of 10%.
The shares have been hot in recent months on the strong rebound in energy prices, but with inflation continuing to heat up, there might be plenty of room left to run.
Management’s recent initiatives to cut costs and improve efficiency are starting to take hold and should be able to fuel shareholder-friendly actions for the foreseeable future.
Just last week, Chevron announced that it would boost its buyback program to as much as $5 billion a year, about 60% higher than previous guidance.
The stock still offers an attractive dividend yield of 4.7%, which investors can pounce on using some extra cash.
Moody’s (MCO)
With whopping free cash flow margins above 30%, credit ratings leader Moody’s is next up on our list.
Moody’s shares held up incredibly well during the height of the pandemic and are up nearly 290% over the past five years, suggesting that it’s a recession-proof business worth betting on.
Specifically, the company’s well-entrenched leadership position in credit ratings, which leads to outsized cash flow and returns on capital, should continue to limit Moody’s long-term downside
Moody’s has generated about $2.4 billion in trailing twelve-month free cash flow. And over the first nine months of 2021, the company has returned $975 million to shareholders through share repurchases and dividends.
Moody’s has a dividend yield of 0.6%.
Coca-Cola (KO)
Rounding out our list is beverage giant Coca-Cola, which has produced $8.1 billion in trailing twelve-month free cash flow and habitually delivers free cash flow margins above 20%.
The stock has had plenty of ups and downs in recent months, but patient investors should look to take advantage of the short-term uncertainty. Coca-Cola’s long-term investment case continues to be backed by an unrivaled brand presence, massive scale efficiencies, and still-attractive geographic growth tailwinds.
And the company is back to operating at pre-pandemic levels.
In the most recent quarter, Coca-Cola posted revenue of $10 billion, up 16% from the year-ago period, driven largely by a 6% increase in unit case volume.
Coca-Cola shares offer a dividend yield of 3.1%.
Generate income outside of the shaky stock market
Even if you don't like these specific stock picks, you should still look to implement Buffett's time-tested strategy of investing in real assets that produce cold, hard cash.
And you don't have to limit yourself to the stock market.
For instance, some popular investing services make it possible to lock in a passive income stream by investing in a wide variety of alternative assets — including fine art, commercial real estate, and even luxury vehicle finance.
You’ll gain diversified exposure to alternative asset classes that big-time investment moguls usually have access to, and you’ll receive regular payouts in the form of monthly or quarterly dividend distributions.
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>>> Bill Gates is using these dividend stocks to generate a giant inflation-fighting income stream ?— you might want to do the same
MoneyWise
by Clayton Jarvis
December 8, 2021
https://finance.yahoo.com/news/bill-gates-using-dividend-stocks-194300892.html
With elite investors like Michael Burry and Jeremy Grantham predicting a reckoning for today’s overheated stock market, it might be time to look at dividend stocks.
Dividend stocks are a way to diversify a portfolio that may be chasing growth a little too obsessively. They generate income in good times, bad times and, particularly important today, times of high inflation.
They also tend to outdo the S&P 500 over the long run.
One prominent portfolio that’s heavy on dividend stocks belongs to The Bill & Melinda Gates Foundation Trust. With the trust being used to pay for so many initiatives, income needs to keep flowing into it.
Dividend stocks help make this happen.
Here are three dividend stocks that occupy significant space in the foundation’s holdings. You may even be able to follow in its footsteps with some of your spare change.
Waste Management (WM)
Waste Management Inc, is an American waste management & environmental services company. It’s not the most glamorous of industries, but waste management is an essential one.
No matter what happens with the economy, municipalities have little choice but to pay companies to get rid of our mountains of garbage, even if those costs increase.
As one of the biggest players in the space, Waste Management remains in an entrenched position.
The shares have more than doubled over the past five years and are up about 42% year to date. Management is projecting 15% revenue growth this year.
Currently offering a yield of 1.4%, Waste Management’s dividend has increased 18 years in a row.
The company has paid out almost $1 billion in dividends over the last year, and its roughly $2.5 billion in free cash flow for 2021 means investors shouldn’t have to worry about receiving their checks.
Caterpillar (CAT)
As a company whose fortunes typically follow that of the larger economy — that’ll happen when your equipment is a fixture on building sites the world over — Caterpillar is in an intriguing post-pandemic position.
The company’s revenues are feeling the effects of a paralyzed global supply chain, but still-historically low interest rates and President Joe Biden’s recently passed $1.2 trillion infrastructure bill mean there could be an awful lot of building going on in the U.S. in the near future.
Caterpillar’s mining and energy businesses also provide exposure to commodities, which tend to do well during times of high inflation.
The company’s stock has ridden higher raw material and petroleum prices to an almost 15% increase this year.
After announcing an 8% increase in June, Caterpillar’s quarterly dividend is currently at $1.11 per share and offers a yield of 2.2%. The company has increased its annual dividend 27 years straight.
Walmart (WMT)
With grocery stores deemed essential businesses, Walmart was able to keep its more than 1,700 stores in the U.S. open throughout the pandemic.
Not only has the company increased both profits and market share since COVID coughed its way across the planet, but its reputation as a low-cost haven makes Walmart many consumers’ go-to retailer when prices are rising.
Walmart has steadily increased its dividends over the past 45 years. Its annual payout is currently $2.20 per share, translating into a dividend yield of 1.6%.
After trending slightly downward over the past month, Walmart currently trades at roughly $136 per share. If that's still too steep, you can get a smaller piece of the company using a popular app that lets you to buy fractions of shares with as much money as you are willing to spend.
Look beyond the stock market
Aerial side view head of cargo ship carrying container and running near international sea port for export.
At the end of the day, stocks are inherently volatile — even those that provide dividends. And not everyone feels comfortable holding assets that swing wildly every week.
If you want to invest in something that has little correlation with the ups and downs of the stock market, take a look at some unique alternative assets.
Traditionally, investing in fine art or commercial real estate or even marine finance have only been options for the ultra rich, like Gates.
But with the help of new platforms, these kinds of opportunities are now available to retail investors, too.
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>>> Billionaire George Soros Loads Up on These 3 “Strong Buy” Stocks
TipRanks
November 29, 2021
https://finance.yahoo.com/news/billionaire-george-soros-loads-3-144712924.html
Wall Street has known its share of legends, but few of them have made as big a splash as “the Man Who Broke the Bank of England.” That nickname belongs to George Soros who earned the tag after famously betting against the British Pound in 1992; following the Black Wednesday crash, the hedge fund manager pocketed $1 billion in a single day. This is the stuff that Wall Street legends are made of.
By then Soros was already incredibly successful and in the midst of steering his Quantum Fund to decades-long average annual returns of 30%.
Today, Soros remains the chair of Soros Fund Management and is thought to be worth over $8 billion, a figure which would have been far greater but for the billionaire’s extensive philanthropic work.
So, when Soros takes out new positions for his stock portfolio, it is only natural for investors to sit up and take notice. With this in mind, we decided to take a look at three stocks his fund has recently loaded up on. Soros is not the only one showing confidence in these names; according to the TipRanks database, Wall Street’s analysts rate all three as Strong Buys and see plenty of upside on the horizon too.
EQT Corporation (EQT)
We’ll start with the largest natural gas producer in the US. EQT is an $8 billion industry giant, operating in the gas-rich Appalachian states of Pennsylvania, West Virginia, and Ohio. With 1 million acres of land holdings in the Marcellus and Utica shale deposits, and 19 trillion cubic feet of proven natural gas reserves, the company is well-positioned to gain from the current regime of rising gas prices, even as the Biden Administration pushes an anti-fossil fuel strategy.
One clear sign of EQT’s strong position: the stock is up 65% year-to-date, even after some late-summer volatility. In the most recent quarterly report, for Q3, the company’s revenue came in at $1.79 billion, reversing the year-ago quarter’s $255 million revenue loss, while the EPS of 12 cents was up from a year-ago loss of 15 cents per share. Looking forward, management has boosted this year’s guidance on free cash flow upward by $200 million.
From Soros’ position, it’s clear that he sees profit potential in natural gas. His fund pulled the trigger on 534,475 shares, giving it a new position in EQT. At current prices these shares are now worth over $11.4 million.
Soros isn’t the only one giving this resource stock some love. Wall Street analyst Vincent Lovaglio, writing from Mizuho Securities, points out several strong points from 3Q21.
“Gas realizations were better than expected, low end of full year capex guidance is down slightly, full year operating cash flow guide is higher on the commodity rally and in line with our full-year forecast, and the company optimized firm-transport agreements expected to lower unit gathering while improving realizations.”
In addition, Lovaglio isn’t shy in setting forth his opinion that the company will start returning cash to shareholders, sooner rather than later, believing EQT is “positioned to announce a cash return framework early next year.”
In line with these comments, Lovaglio rates EQT stock a Buy and his $35 price target points toward 68% upside in the next 12 months. (To watch Lovaglio’s track record, click here)
Overall, the Strong Buy consensus rating on this stock is supported by 11 recent reviews, which include 9 Buys against just 2 Holds. The shares are selling for $21.35 and the $29.64 average price target suggests an upside of 42%. (See EQT stock analysis on TipRanks)
Fisker (FSR)
The next stock we’ll look at is Fisker, an electric vehicle (EV) maker based in LA, California. Fisker is preparing to jump full-on into the consumer automotive segment, and unveiled its Ocean fully electric SUV earlier this month at the 2021 Los Angeles Auto Show. The company has already been taking pre-orders on the vehicle; with the unveiling, Fisker is now putting its money where its mouth is. The Ocean, with – among other features – a solar-panel roof capable of generating battery charging power, is scheduled to start its regular production run in November of next year.
In recent weeks, Fisker has met some other important milestones for investors to consider. First, on November 2, the company announced an agreement with the European battery maker Contemporary Amperex Technology to receive two separate battery supply options for the Ocean, with a total of 5 gigawatt-hours annual battery capacity over the years 2023 to 2025. And one day later, Fisker noted that its prototype Body Shop at the Austria Fisker Ocean assembly plant, is now fully operational and that production has begun on the Ocean’s prototype run, allowing the vehicle to enter the next phase of testing.
Constant progress toward a deliverable product is a clear positive marker for a pre-production auto maker, and Soros clearly agrees; he picked up 317,300 shares of Fisker, opening his position in the company with a holding now worth $6.26 million.
Giving Fisker an Outperform (i.e. Buy) rating, with a $32 target price indicating room for ~57% one-year upside, Credit Suisse analyst Dan Levy is also clearly bullish, and he bases his conclusion on the recent unveil.
Backing his stance, Levy writes, “FSR’s unveil of the production version of the Ocean at the LA Auto Show last week reinforces our bull thesis on FSR – with EV uptake sharply inflecting and the market lacking sufficient model options, FSR offers a compelling value proposition – sleek product at a high-volume price point, and with a de-risked path to market.”
Going on, Levy lays out the key point: “Reaching start-of-production for Ocean next year, even if the vehicle isn’t profitable initially, may be enough to drive significant upside for the stock.” (To watch Levy’s track record click here)
Wall Street appears to be in broad agreement with Levy, as FSR shares maintain a Strong Buy rating from the analyst consensus. There have been 8 recent reviews, including 6 Buys and 2 Holds. Meanwhile, the stock’s $26 average implies 27% upside potential from the $20.44 trading price. (See FSR stock analysis on TipRanks)
SoFi Technologies (SOFI)
Last on our list is SoFi, short for Social Finance, a San Francisco-based personal finance company. The company uses social media modes to connect its members with loan funding sources. SoFi offers a full range of loan products, from student loans to home financing, and maintains a solid commitment to its ‘no fee’ policy; the only cost to borrowers is the interest on the loan. And with SoFi’s non-traditional underwriting approach, it is able to offer borrowers lower rates than are available with banks.
Founded 10 years ago, SoFi only entered the public trading markets this year. Like many firms in recent years, the company took advantage of the rising market environment to enter a SPAC transaction, merging with Social Capital Hedosophia V in the early summer and putting the SOFI ticker on the NASDAQ on June 1.
Earlier this month, SoFi published its 3Q21 financial data, showing strong growth, especially in membership numbers. The company recorded year-over-year member growth of 96%, reaching a total of 2.9 million. Of that growth, 377,000 new members were added in Q3, making the quarter the company’s second-best ever for member increase. For the quarter, adjusted net revenue came in at $277 million, beating the company’s previously published guidance high end of $255 million by 9%. Management is predicting further acceleration of revenue growth in Q4, and is guiding toward $272 million to $282 million in net revenue. Achieving this would bring 49% to 55% yoy revenue growth. For the full year, the company expects revenues in the range of $1.002 billion to $1.012 billion.
Also looking ahead, the company has applied for a national bank charter, a move that will take it into the traditional banking industry. The move would bring the lender under the auspices of the Federal Deposit Insurance Corporation, a plus for account holders. SoFi management has indicated that its charter application is in line with regulatory expectations.
A finance company with sound underwriting and bright prospects, working in an environment flush with cash, is sure to attract investors – and Soros bought in heavily. He opened his position at 177,500 shares, valued at $3.22 million given current prices.
Wall Street, like Soros, sees plenty to appreciate here. Rosenblatt analyst Sean Horgan says, “We continue to be buyers on SOFI here." His Buy rating is backed by a $30 price target indicating his confidence in a one-year upside of 65%. (To watch Horgan’s track record, click here)
Looking at the company's latest earnings, the analyst highlights several positive developments: "1) Digital influencer partnerships led to 400mn impressions and 775k engagements with SOFI content, and SOFI's TikTok campaign drove more than 8bn views and more than 1mn uses of SOFI's branded hashtag #SoFiMoneyMoves; 2) 18% of member growth (up from 3% in 2Q) was driven by the successful launch of SOFI's new and enhanced referral programs, including 'Refer the App'; 3) 73% of cross buying was driven by money/invest members (85% including relay); 4) Galileo accounts totaled 88.9mn (80%y/y) vs. consensus of 85.1mn; 5) the lending segment adj. revenue hit a record of $215mn,which was driven by growth in SOFI's personal loan business originations (+167% y/y to$1.6bn); 6) total members grew 96% y/y to 2.9mn in 3Q21."
Once again, we’re looking at a Strong Buy stock, with the Buys outweighing the Holds by a 5 to 1 margin. The shares have a current trading price of $18.11 and an average price target of $26.33, indicative of a ~46% one-year upside. (See SOFI stock analysis on TipRanks)
To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.
<<<
>>> Never Mind Tesla CEO Elon Musk’s Stock Sales. Look What Microsoft’s CEO Just Did.
Barron's
By Al Root
Nov. 30, 2021
https://www.barrons.com/articles/microsoft-ceo-stock-sale-tesla-elon-musk-51638284642
A lot has been made of Tesla CEO Elon Musk’s stock sales, but Microsoft CEO Satya Nadella recently sold a chunk of stock that is a much larger portion of his total holdings.
Nadella sold about half his stake in Microsoft (ticker: MSFT), according to recent filings with the Securities and Exchange Commission. The CEO unloaded 838,584 shares on Nov. 22 and 23, netting him about $285 million. He has about 831,000 Microsoft shares left, worth roughly $280 million.
“Satya sold approximately 840,000 shares of his holdings of Microsoft stock for personal financial planning and diversification reasons,” a Microsoft spokesperson told Barron’s in an emailed statement. “He is committed to the continued success of the company and his holdings significantly exceed the holding requirements set by the Microsoft Board of Directors.”
Nadella is required to hold stock worth 15 times his base salary. That amounts to about $38 million. Nadella’s salary is $2.5 million. That’s cash compensation.
Planning and diversification are two reasons. Still, investors are left to debate why he might choose to diversify now, or if state or federal capital-gains taxes changes weighed in Nadell’a decision.
Regardless of the details, the sale is significant. It represents a large portion of his total pay and holdings. Nadella’s total reported compensation over the past three years amounts to about $137 million, including more than $93 million worth of stock.
Microsoft doesn’t award stock options any longer. The company has shifted to performance stock awards that are earned when certain time or performance milestones are hit.
He has been CEO since early 2014. Microsoft stock has returned about 35% a year on average since then, while the S&P 500 and Dow Jones Industrial Average have returned about 16% and 14% a year on average, respectively, over the same span.
The Nadella sales take the CEO pay-and-taxation spotlight away from Musk for the moment. Musk started selling Tesla stock after asking Twitter (TWTR) followers if he should sell 10% of his holdings to accelerate paying taxes on unrealized capital gains. Twitter voted yes and the sales commenced.
Musk has sold about 8.6 million shares worth $9.2 billion in recent weeks. He appears to be about half way through the 10% sale his Twitter followers voted for. It’s hard to say exactly, however. Some sales have been stock received as Musk has exercised stock options, while other sales have been from his existing holdings.
Most of Musk’s pay comes in the form of management stock options. Musk, excluding his options, owns about 17% of Tesla stock. Nadella owns about 0.01% of Microsoft stock outstanding.
Microsoft shares aren’t doing much in response to the news. Shares were 1.4% lower in late trading Tuesday, while the S&P 500 and Dow were down about 1.3% and 1.4%, respectively.
<<<
>>> Investor Ackman says U.S. facing 'classic bubble' fueled by Fed's easy money policy
Reuters
November 18, 2021
By Svea Herbst-Bayliss
https://finance.yahoo.com/news/investor-ackman-says-u-facing-173150771.html
(Reuters) - Investor William Ackman, whose views are widely watched on Wall Street, said on Thursday that the U.S. central bank's ultra-easy monetary policy has created a "classic bubble" and that he thinks the Federal Reserve will need to tighten rates more quickly to fight inflation.
"We are in a classic bubble which has been driven by the Fed," Ackman, who runs hedge fund Pershing Square Capital Management, said at a conference sponsored by S&P Global Ratings.
Ackman was speaking days after the government announced that U.S. consumer prices in October surged 6.2% over the last 12 months, outpacing many economists' forecasts.
"Every indicator is flashing red," Ackman said, citing surging prices in real estate, the art market and the stock market.
He called inflation the biggest risk for his hedge fund this year and said he expects the central bank will have to raise rates soon, echoing warnings he made on Twitter several weeks ago.
"I think the Fed will be forced to tighten much more quickly," Ackman said, adding that he does not see much reason to keep interest rates at their current low levels, arguing that easy monetary policy was not bringing people back into the workforce.
He also said higher prices are being fueled by structural changes and that recent increases may not be transitory, as some policy makers, economists and many corporations have said.
ESG initiatives, including a switch to cleaner energy and demands for higher wages, are here to stay and are costly, Ackman said, noting they will fuel higher prices for some time.
Ackman said on Twitter last month that he had been invited to give a presentation to the Federal Reserve Bank of New York to share his views on inflation and that he said policy makers should "taper immediately and begin raising rates as soon as possible."
He said again on Thursday that he has hedged his portfolio, fearing higher rates could negatively impact the hedge fund's long-only equity portfolio. Ackman's Pershing Square Holdings Fund has returned 26.1% since January after a 70.2% gain last year.
<<<
>>> Gladstone Land Corporation (LAND) Q3 2021 Earnings Call Transcript
LAND earnings call for the period ending September 30, 2021.
Motley Fool
Gladstone Land Corporation (NASDAQ:LAND)
Q3 2021 Earnings Call
Nov 10, 2021, 8:30 a.m. ET
https://www.fool.com/earnings/call-transcripts/2021/11/10/gladstone-land-corporation-land-q3-2021-earnings-c/?source=eptyholnk0000202&utm_source=yahoo-host&utm_medium=feed&utm_campaign=article
Contents:
Prepared Remarks
Questions and Answers
Call Participants
Prepared Remarks:
Operator
Greetings, and welcome to Gladstone Land Third Quarter Earnings Call. [Operator Instructions]. A question-and-answer session will follow the formal presentation. [Operator Instructions].
I would now like to turn the conference over to your host, David Gladstone, Chief Executive Officer and President. Thank you. You may begin.
David J. Gladstone -- Chairman, Chief Executive Officer and President
Well, thank you for that nice introduction. This is David Gladstone, and welcome to the quarterly conference call for Gladstone Land. And again, thank you all for calling in today. We appreciate you take time out of your day to listen to our presentation. We're first going to start with Erich. Erich Hellmold is in the office today for Michael LiCalsi. Erich is our Deputy General Counsel, and he is also the -- one of the big guns in administration side of our business and that's the administrator for all the Gladstone funds. Erich, why don't you start?
Erich Hellmold -- Deputy General Counsel
Thanks, David, and good morning. Today's report may include forward-looking statements under the Securities Act of 1933 and the Securities Exchange Act of 1934, including those regarding our future performance. These forward-looking statements involve certain risks and uncertainties that are based upon our current plans, which we believe to be reasonable.
Many factors may cause our actual results to be materially different from any future results expressed or implied by these forward-looking statements, including all risk factors in our Forms 10-K and other documents we file with the SEC. Those can be found on our website, www.gladstoneland.com, specifically the Investor's page or on the SEC's website at www.sec.gov. We undertake no obligation to publicly update or revise any of these forward-looking statements whether as a result of new information, future events or otherwise, except as required by law.
Today we will discuss FFO, which is Funds From Operations. FFO is a non-GAAP accounting term defined as net income excluding the gains or losses from the sale of real estate and any impairment losses from property, plus depreciation and amortization of real estate assets. We will also discuss core FFO, which we generally define as FFO adjusted for certain non-recurring revenues and expenses, and adjusted FFO which further adjusts core FFO for certain non-cash items, such as converting GAAP rents to normalized cash rents. We believe these are better indications of our operating results and allow better comparability of our period-over-period performance.
Please take the opportunity to visit our website, www.gladstoneland.com, and sign up for our email notification service, so you can stay up to date on the Company. You can also find us on Facebook, keyword-The Gladstone Companies, and we have our own Twitter handle @GladstoneComps.
Today's call is an overview of our results, so we ask you to review our press release and Form 10-Q, both issued yesterday for more detailed information. Again, those can be found on the Investors page of our website.
Now, I'll turn the presentation back to David Gladstone.
David J. Gladstone -- Chairman, Chief Executive Officer and President
All right. Thank you, Erich. I always start with a brief recap of the current farmland holdings. We currently own about 108,000 acres on 160 farms and about 45,000 acre-feet of banked water. All those together total about $1.4 billion in assets that we own. Our farms are located in 14 different states, and more importantly in 28 different growing regions, and our farms continue to be 100% occupied and are leased to 82 different tenant farmers, all of whom are unrelated to us. And the tenants on these farms are growing over 60 different types of crops.
Given the number of different growing regions, tenants, types of crops, our farms -- on our farms, we think this is sufficient diversification to provide for safety and security of the cash flows coming from the rents. And we believe this diversification helps protect the dividends that we're paying to our preferred as well as our common shareholders. There are no guarantees in this world, anything can happen in this life. But right now, we're feeling pretty good about getting the money in from rents and paying it out as dividends.
We had another strong quarter from the acquisition standpoint and we continued to see a decent number of buying opportunities come our way. And in the fourth quarter, we've gotten off to a nice start. We still have a few farms that we're working on to close before the end of the year. Hopefully, we'll get them all done. It has been kind of a slow year in terms of the pandemic has kept people out of the office and that always slows things down.
We continue to be able to renew all the expiring leases without incurring any downtime on any of our farms and notable increase in these renewals reflects the positive trends in all the rental rates that we're currently seeing in many regions.
Overall operations on our farms remained strong and demand for products that are grown in most of our farms remains relatively strong. And these are products like berries and vegetables and nuts. And as anybody who goes to the grocery store these days, tell you, there are many of these types of food that continue to increase in price and that's good for our farmers and good for us long-term.
During the third quarter, the team acquired five farms, 5,000 acre-feet of banked water for total price of about $62 million. In addition, right after the quarter-end, we acquired two more farms, approximately 2,000 more acre-feet of banked water or total about $46 million. So we have new investments of about $108,000 -- $108 million from last time.
Overall, initial net cash yield to us on these are about 5.5%. In addition, all the leases on these farms contain certain provisions such as participation rents or annual escalations that should push that figure higher as we go forward in the future. As a reminder, this banked water is water that we own, but is stored in a local water district. We can use the water that's in these districts on the farmland located in Kern County that sub-basin where the water is, where we have several farms and we can sell it to a third-party, or we can use it on our farms.
Our plan is to hold the water to keep as a safeguard for our own assets in the region. Currently, we are not using any of it. We're using the water that we have from the wells that we have on the farms in the past. They say they have not used any of it, they kept buying a little bit. So when it came time to sell, they wanted to sell us the same insurance for water that we have in these wells. All of our farms currently have enough water, but we like the security of having extra water.
On the leasing front, since the beginning of the third quarter, we executed ten lease renewals on properties located in California, Colorado, Florida and Michigan.
Overall, these lease renewals are expected to result in an increase in annual net operating income of about $227,000 or about 8% over the prior leases that we had. Looking ahead, we only have three leases scheduled to expire in the next six months that make up less than 2% of our total annualized lease revenue. We are in discussion with the existing tenants on these farms, as well as some potential new tenants and we aren't expecting any downturn -- downtime on these farms.
Overall, we continue to expect the new leases on these farms to be relatively flat from where they are today. There are few other items I'd like to touch on before we move on. The first one is going -- the ongoing drought in the West, despite some recent record-breaking rainfall parts of California. Certainly in Oregon and Washington, they've gotten a good amount of water down on the farms, but they also have gotten many feet of snow in the mountains, and when that snow melts, it feeds all the farms in the valley. However, all our properties continued to be in a position where there is currently ample water to complete both the current crop and next year's crop. Where we have farms located in water districts, those districts have stored water or other supplemental sources that cover our farms for the short-term.
Almost all of the farms out West have well sites and most of them rely on groundwater as their main source of the irrigation. For these properties, we are seeing a typical seasonal dropping of the water table levels, and we haven't had any, of course, that have gone dry. And all of our farms currently have pumping capacity to cover their crop needs.
One thing you should know is that wet and dry weather cycles are the norm out West. Those of you here in the Midwest or in the South, this is something that you would know how to handle most likely, but it's very difficult in the West, especially California. Throughout any long-term investment, we know that we're going to have both drought periods and wet periods. So when we underwrite a potential investment out West, we look for properties with multiple sources of water, we build in drought scenarios in our projections, and we also take into account potential government regulations because sometimes they just come in and say we'd like you to pump 25% less water out of the ground. We've done that and we've done a good job keeping the government happy with our water.
We continue to expect a strong year in terms of participation rents. I think this will be the largest year we've ever had. You know, we recorded about $2.4 million in participation rents each of the past two years and we are expecting a sizable increase in that amount for 2021. No guarantees, but that's what we're projecting right now. And this is mainly due to having several more farms with participation rents this year. We recorded about $1.8 million of participation rents so far through the third quarter. People have begun to pay and give us good projection, so we're bringing in that money now.
Regarding the progress on our ESG policy, we continue to work on developing a formal policy related to disclosures that we continue to think are relevant and we will continue to update you on this as we get closer to finalizing these policies. One of our problems on ESG is just finding someone who can identify and say we've done it correctly. There is a lot of fighting on Europe over what constitutes some of the ESG policies.
Finally, I want to again briefly mention that Gladstone Acquisition, it's our SPAC that recently filed and reiterate the relationship to Gladstone Land. It has a little over $100 million in cash in it now. And as mentioned in previous calls, we sometimes come across farm owners who don't want to sell just their land, they want to sell both their farmland and their operations as a package deal.
As you know, a REIT like Gladstone Land is limited in the ability to own operating companies because operating income is generally not permitted in a Real Estate Investment Trust. So Gladstone Acquisition was created to potentially take advantage of such opportunities. We're looking at a couple now, we've not signed anything, and so, there has been no press releases on it, but stay tuned, you'll hear what we do there.
I'm going to stop at this point on operations. I'll turn it over to our Chief Financial Officer, Lewis Parrish, to talk to you more about the numbers that he published last night.
Lewis Parrish -- Chief Financial Officer and Assistant Treasurer
Thank you, Dave, and good morning, everyone.
I'll begin with our balance sheet. During the third quarter our total assets increased by about $60 million, due to new acquisitions which were financed with a mix of debt and equity proceeds. During the quarter, we secured about $31 million of new long-term borrowings at a weighted average rate of 2.75%, which is fixed for the next ten years.
On the equity side, since the beginning of the third quarter, we've raised about $86 million of net proceeds through sales of our common stock under the ATM Program, representing a net cost of capital of 2.35% with our recently increased dividend. And over the same time period, we've also raised about $22 million of net proceeds from sales of the Series C Preferred Stock.
Moving on to our operating results, first, I'll note that for the third quarter we had net income of about $1.5 million and a net loss to common shareholders of $1.6 million or $0.052 per common share. On a quarter-over-quarter basis, adjusted FFO for the third quarter was approximately $5.3 million compared to $3.7 million in the second quarter, an increase of about 41%. AFFO per share was $0.166 in the third quarter versus $0.126 in the second quarter, an increase of 32%. Dividends declared per share were about $0.135 in each quarter. The primary driver behind the increase in AFFO was additional participation rent recorded. This was partially offset by incentive fee earned by advisor during the current quarter.
During the third quarter, we recorded about $1.8 million of participation rents versus only $19,000 in the previous quarter. Fixed base cash rents increased by about $1 million or 6% on a quarter-over-quarter basis, primarily driven by additional revenue earned from recent acquisitions.
On the expense side, excluding reimbursable expenses and certain non-recurring or non-cash expenses, our core operating expenses increased by about $1.1 million, which is driven by higher related party fees. The quarter-over-quarter increase in related party fees is reflective of a higher rate used to determine the base management fee rate, which became effective from July 1 and includes an incentive fee of $945,000 earned by our advisor during the current quarter versus none earned in the prior quarter.
Removing related party fees, our core operating expenses decreased by about $250,000. This decrease was primarily driven by lower property operating expenses, which was largely due to less water costs incurred in one of our properties in Colorado and reduced annual filing fees as well as a decrease in our general and administrative expenses due to the additional costs incurred in the prior quarter related to our annual shareholders meeting.
Regarding the additional water costs in Colorado, the impact on the current quarter's numbers was about $260,000 or $0.01 per share, down from about $350,000 in the prior quarter. We currently anticipate incurring an additional $100,000 to $150,000 during the fourth quarter for these water costs, but we do not currently anticipate continuing to incur these costs beyond 2021.
Moving on to net asset value, we had 37 farms revalued during the quarter, all via third-party appraisals except for three farms that we revalued internally. Overall, these farms increased in value by about $2 million over their previous valuations from a year ago. So as of September 30, our portfolio was valued at just over $1.3 billion all of which was supported by third-party appraisals or the actual purchase prices.
And based on these updated valuations and including the fair value of our debt and all preferred stock, our net asset value per common share at September 30 was $13.80, which is up by $0.64 from last quarter.
Turning to our capital makeup and overall liquidity, from a leverage standpoint and with respect to our borrowings, our loan-to-value ratio on our total farmland holdings on a fair value basis and net of cash was about 44% at September 30. Over 99% of our borrowings are currently at fixed rates, and on a weighted average basis, these rates are fixed at 3.35% for another six years out. So we believe we are currently well protected on the debt side against any future interest rate volatility. In addition, the weighted average maturity of these borrowings is about ten years out.
Regarding upcoming debt maturities, we have about $43 million coming due over the next 12 months. However, about $27 million of that represents maturities of eight loans coming due. The eight properties collateralizing these loans have increased in value by a total of $14 million since their respective acquisitions. So we do not foresee any problems refinancing any of these loans if and when we choose to do so.
So removing these maturities, we only have about $16 million of amortizing principal payments coming due over the next 12 months, or about 2% of our total debt outstanding. From a liquidity standpoint, including availability on our lines of credit and other undrawn notes, we currently have over $125 million of dry powder, in addition to over $100 million of unpledged properties. We have ample availability under our two largest borrowing facilities and we continue to be in discussions with these and other lenders for new borrowings and credit facilities. But overall, credit continues to be readily available to us from multiple vendors and at very favorable terms.
Finally, I will touch on our common distributions. We recently raised our common dividend again to $0.0452 per share per month. Over the past 27 quarters, we've raised our dividend -- our common dividend 24 times resulting in an overall increase of 50.7% in our monthly common distributions over this time. Since 2013, we've paid 105 consecutive monthly dividends to common shareholders totaling $5.39 per share in total distributions. Paying dividends to our shareholders is paramount to our business plan and our goal is to continue to increase the dividend at regular intervals.
When considering the relative stability and security of the underlying assets and the related cash flows, we believe the stock continues to offer a compelling investment alternative especially in light of today's inflationary concerns.
And with that, I'll turn the program back over to David.
David J. Gladstone -- Chairman, Chief Executive Officer and President
All right. Thank you, Lewis. That's a nice report and Erich gave us a nice introduction. So we're gliding along here. Acquisition activity remains good for us. We continue to see buying opportunities, we continue to make offers, we sign up people and get them into a position that we can go forward and close -- little bit slow in the marketplace out there simply because people are still reacting to the COVID-19.
Just a few final points before -- that I'd like to make before we move too far on. We believe that investing in farmland, growing crops that contribute to healthy lifestyle such as fruits and vegetables and nuts is following the trend that we're seeing in the marketplace today. Currently, about 85% of our total crop revenues come from farms growing the types of food that you'd find in either the produce section or the nut section of your local grocery store.
So if you want to see what we grow, just go to the grocery store and you will see it. We consider these foods to be among the healthiest type foods, and we continue to see a growing trend toward organic among these food groups. About 40% of our fresh produce acreage is either organic or transitioning to become organic and about 15% of the permanent crop acreage falls into this organic category.
We believe the organic sector would continue to be strong -- as very strong growth area. And in addition, more than 95% of the crops that are grown on our farmland is classified as being non-GMO.
Another major reason our business strategy is to focus on farmland growing fresh produce is due to the effect of inflation on the particular segment. According to the Bureau of Labor -- the Bureau of Labor, the overall annual food CPI generally keeps pace with inflation. This is why so many financial advisors tell their clients to invest in farmland because it acts as the hedge against inflation. However, over the 40-plus years, the fresh fruit and vegetable segment of the food category has outpaced total food CPI by a multiple of 1.5 times. And this is a large reason why we like being in this segment as well.
And while prices of commodity grain crops such as corn and wheat are typically more volatile and susceptible to global supply and demand, fresh produce is mostly insulated from global volatility mainly because the crops are generally consumed locally and within a short time after harvest. You've got about 14 days to get a strawberry off the vine and into somebody's mouth before it goes bad.
I'm telling you this because we are often confused with owning farms where farmers grow corn, soy, wheat and we have mostly stayed clear of these crops because we have to compete, they have to compete with other countries like Brazil, Argentina, the Ukraine, where cost of production, even after shipping cost, is very low. And those farmers can undercut the prices of grain farmers in the US. This year, grain prices have been much higher in the United States. But one reason and that's because Brazil and Argentina are in a very difficult drought situation. Farms in these countries, largely depend on rain for water.
So overall demand for prime farmland growing berries and vegetables remains stable to strong in almost all of the areas where our farms are located, particularly along the West Coast, including most of California, Oregon and Washington. And not to forget East Coast especially Florida and some of the other states on the East Coast, everything is going along at a good pace. And overall, farmland continues to perform well compared to other assets. There is an association called NCREIF and it has a farmland index and is currently made up of about $13.2 billion worth of agricultural properties including all of ours and that's averaged return of about 12.3% over the last 20 years compared to 11% for the overall REIT index and lower for the S&P index.
And during those 20 years, the Farmland Index has not had a single negative year yield, whereas the REIT Index and the S&P Index have had four negative years over that same period. Farmland has generally provided investors with a safe haven during turbulent times and in financial marketplaces as both land prices and food prices, especially for fresh produce have continued to rise steadily.
So just in closing, please remember that purchasing stock in this Company is a long-term investment in farmland. I think, an investment in our stock really has two parts. It's similar to gold in the sense that it's a hard asset, farmland or dirt, and it's the good farmland that can grow food. It has an intrinsic value because there's a limited amount of good farmland and it's being used up by urban development especially in California and Florida, where we have many farms.
Second, I'd like to compare gold and other alternative assets because it's better than those because it's an active investment with cash flows to investors. And we believe that's better than a bond fund because we keep increasing the dividend. We expect inflation, particularly in the food sector to increase and increase to values that pump up the value of underlying farmland to increase as a result. And we expect this especially be true of fresh produce food sector, the trends are more people in the US are eating healthy foods continuing to grow such products for distribution through.
And Gladstone Land would not be anything without the good people we have operating and managing it. Buying and leasing farmland is a complex business. So if you like, what we're doing, please buy some stock and keep eating fresh fruits and vegetables and nuts.
Now we will stop and have some questions from those who follow us. Operator, would you please come on and tell these people how they can ask us some questions?
Questions and Answers:
Operator
Thank you. At this time, we will conduct a question-and-answer session. [Operator Instructions]. Our first question comes from Rob Stevenson with Janney. Please proceed.
Robert Stevenson -- Janney Montgomery Scott LLC -- Analyst
Good morning. David, where is pricing for farmland today versus a couple of years ago pre-pandemic? When you look at similar properties, are we up 5%, 10% flattish? How do you sort of characterize it across your various sort of property types and markets?
David J. Gladstone -- Chairman, Chief Executive Officer and President
Yeah. If you're looking at the Midwest, which is most often the one that's published, it's gone up pretty substantially this year simply because people are making money. They're also buying lots of tractors and those kind of equipment. In the areas that we're in, there has been sort of a steady increase over the last ten years and certainly over the last three or four years as people have realized that there is other things, other than corn and wheat that are growing. And I would say, there has been a good 15% increase over the last three years.
Robert Stevenson -- Janney Montgomery Scott LLC -- Analyst
Okay. And then given how hot the housing market is, have you guys thought about selling some of your land to homebuilders in some markets where it's bumping up against the farms?
David J. Gladstone -- Chairman, Chief Executive Officer and President
We have a few farms that are inside of the areas like, in California, you can't just sell your land to a developer and the developer goes off and builds where he wants to on it. In California, you need to get the local city -- you have to be inside the city districts. So if you're in Watsonville, you need to be inside of the town limits for Watsonville, and then the local government officials can make that decision.
If you're outside of that, you have to put it on the ballot for voting. And if you've ever seen a ballot for California, they are about four-feet long. There are really a lot of things on those ballots. And one of those would be I want to take that lot that's right next to the -- right next to this one or that one and build houses on it. And they always get shot down. Californians are not interested in building more houses. And so, you have California pushing now to take neighborhoods and tear down the houses and build apartment buildings or condos, something in order to increase the net amount of land that's being used for that.
And it's really rough in California. They're probably 15% under house built or places to live and they just can't seem to get out of their own way in terms of regulations. And I know a lot of farms will be there. We have one right inside of Watsonville. It's a small, mostly blueberries, no mostly strawberries in that. And I think some day someone will show up and want to buy that. But that's not going to be a big hit, it's going to be a nice hit. But they haven't shown up yet. And one reason is quite frankly the strawberry fields are in an area that is not the best part of town. So as a result, they have a lot of old houses around it and they haven't done much changes. And unlike a lot of cities in California, there's not a lot of people moving to Watsonville. So as a result, we haven't had the pressures that you'd have if we were next to Los Angeles or San Francisco or even some of the other large cities.
So I would say, one day someone will show up in one of our big farm, which is -- it's probably 500 acres, and it's right next to the ocean. And somebody is going to be able to get that through and build on it because it's an hour and 20 minutes to LAX, and that's going to be a big one. We paid about $25,000 in total for everything on that farm. It's probably worth $80,000 an acre today. And if you could zone it, it would be worth $1.5 million an acre if you could put townhouses on it.
So, yes, someday all you lucky people after I'm gone are going to enjoy the benefits of us selling some of these farms. Right now, we're not interested in selling anything. What we want to do is build an incredible Company with lots of farms and try to catch up with some of the other big farmers in the United States.
As you well know, there is a man that is in the -- really not in the business anymore, but he is buying up a lot of land around the country. He has got about 230,000 acres and he is the largest farmer and we need to catch him. It's going to be a while because there is issues in tax-free dollars to buy farms. But I think we are in good shape, Rob, and I think we're just going to continue doing the same thing every day for the next ten years until we get a really big farming operation going.
Robert Stevenson -- Janney Montgomery Scott LLC -- Analyst
Okay. And then last one from me. The acquisition vehicle, I mean, are the opportunities which you're looking at there going to be too big for taxable REIT subsidiary? Is that the reason why you're going that route rather than just putting any of the operations into a taxable REIT subsidiary for the time being?
David J. Gladstone -- Chairman, Chief Executive Officer and President
Yeah. They are too big and they would overshadow everything. And as you know, if we bust that regulation, we are out of the REIT business for five years. So I don't want to break it in. So that's why we're there and we keep getting these opportunities showing up and saying we'd like to sell the whole thing, and we say, well, hang on, as soon as we get public, we will be able to distribute some of the $100 million that we have in that SPAC, and also give you some publicly traded stock. We are working on some now. We've got some in here. And when is our acquisition call? Did we have a date? Anybody know?
Lewis Parrish -- Chief Financial Officer and Assistant Treasurer
We don't yet.
David J. Gladstone -- Chairman, Chief Executive Officer and President
We don't have a date yet. Okay. I know he's filing next week. Is it...?
Erich Hellmold -- Deputy General Counsel
Isn't it filed?
David J. Gladstone -- Chairman, Chief Executive Officer and President
No.
Lewis Parrish -- Chief Financial Officer and Assistant Treasurer
It hasn't been.
David J. Gladstone -- Chairman, Chief Executive Officer and President
It's the case, so it will happen soon. You'll get a copy of it obviously, Rob, and maybe by then, we'll have something little more firmed up. I don't think it's going to be a problem finding things to buy. We've seen a lot of those. And what we want to do is buy several relatively large ones and start out as a diversified group rather than one that just does one thing and then continue to buy smaller farms and operations and have a good operating team. We don't have an operating team now. We'd have to tap one of our tenants to do some of that. But I don't -- I don't know how all of that's going to work out until we buy the first couple of farms.
Robert Stevenson -- Janney Montgomery Scott LLC -- Analyst
Okay. Thanks, David. Guys, I appreciate it.
David J. Gladstone -- Chairman, Chief Executive Officer and President
Okay. Next question?
Operator
Our next question comes from Eddie Reilly with EF Hutton. Please proceed.
Eddie Reilly -- EF Hutton -- Analyst
Hey guys, congrats on a strong quarter. It's like this is the second quarter on a row where our lease renewals will contribute over 10% in growth in net operating income. Is this more indicative of the individual farms whose leases were renewed? Or is this indicative of the general environment we're in, in terms of inflation you think?
Lewis Parrish -- Chief Financial Officer and Assistant Treasurer
We think it's a little bit of both. I mean, obviously there are certain pockets in the country where if we were renewing leases in those regions, it might be a more muted increase or maybe even flat. But with a couple of the farms that we've negotiated, where those negotiations have taken place, in Northern California, Michigan, parts of -- some parts of Florida, Midwest and that's where we're seeing rents in those particular areas are increasing slightly, particularly in the Midwest as David mentioned, with the commodity prices this year. But Florida has been a pretty strong market consistently, Central and Northern California has -- Southern California cap rates have compressed a little bit there, but none of our lease renewals have been in that area lately. So it's a little bit of both.
Eddie Reilly -- EF Hutton -- Analyst
Got you, got you. And where are most of the lease renewals say in upcoming year taking place?
David J. Gladstone -- Chairman, Chief Executive Officer and President
In the rest of 2021, it's just one farm. We have three leases in '21 that are expiring over the next -- well I guess, actually over the next six months, three leases, but two of them are tenant termination options that are exercisable within the next five days. We do not believe the tenants want to exercise the option on either one of those. So it's really just one renewal that we're working on. And it's on a farm in Colorado that we're close to finalizing negotiations with a tenant. The gross rent is likely to remain flat. But we are expecting a significant decrease in the amount of operating expenses we will be on the hook for. So we would expect hopefully an increase in NOI for us there.
Eddie Reilly -- EF Hutton -- Analyst
Got it, got it. Turning to the financing, it seems like you guys have a pretty healthy loan-to-value ratio right now. Can you just talk a little bit about your plan of action for funding new deals going forward?
David J. Gladstone -- Chairman, Chief Executive Officer and President
Well, we have three ways of generating funds for that. One, of course, we've touched on and that's the borrowing. There are lots of lenders in the agricultural space. In the US, we have -- I think, there's five federal large banks that do lending and we've used them pretty much every time. We also have a couple of large institutions. Rabobank is the largest in the world in terms of agricultural lending. We've done a little bit with them, but not a lot. And in addition to that, we've got -- MetLife is the largest lender in the United States and we've done deals with them.
So there is plenty of leverage, and it doesn't seem to be impacted by banks that might have problems. So we're in good shape there. We also sell some preferred stock. We've got a number of those outstanding and we participate by selling non-traded preferred. That's more expensive. It's about 6%, but we use it when we need a little extra leverage. So it's that kind of situation.
And quite frankly, the ATM Program has been very strong. What have you got from that?
Lewis Parrish -- Chief Financial Officer and Assistant Treasurer
We've got about $86 million over the past four months or so.
David J. Gladstone -- Chairman, Chief Executive Officer and President
So we've been selling stock through that ATM Program and using it to buy farms that are generating 5%, 6%. And so after leverage, we've got a good ratio. And the nice thing about leverage is that it doesn't go up until the end of it, and we've got long-term mortgages on these things. So as a result, the spread is sort of locked in for years and years and years. And so for us, the next movement for us is going to be to raise money in some other way. And I don't have any other way right now. But all of those that I mentioned are just wonderful places to get leverage now. That's going to change over time and that will reduce how much we can pay for a farm. And all of these farmers know that. So we've had good transaction with them. And as you probably know, we do from time to time have people that will take UPREIT shares that is -- and that's a non-taxable transaction whereby we give them shares of our stock and they give us their farm and it's quite nice for them and for us, because that's another way of raising equity. So we are in good shape on the financial side. We don't see any problems unless something blows up and I don't see that happening in the economy right now.
Eddie Reilly -- EF Hutton -- Analyst
Got you. Thank you.
Lewis Parrish -- Chief Financial Officer and Assistant Treasurer
And I will add regarding the use of some of the sources that David mentioned, in the past where we would almost always get a loan simultaneously with the acquisition, with all the equity proceeds that we've been able to bring in. What we've been doing and what we probably will continue to do is buy these farms with equity proceeds and then close on a loan, but not draw it until later. We want to close on it now because interest rates are very attractive. As we said earlier, we got 2.75% fixed debt for next ten years this quarter, but we want to lock in these rates, but not drawn them yet until late down the road when we actually need the additional proceeds.
Eddie Reilly -- EF Hutton -- Analyst
Okay, great. That makes sense. Thank you, guys.
David J. Gladstone -- Chairman, Chief Executive Officer and President
Other questions?
Operator
Our next question comes from Eric Borden with Berenberg Capital. Please proceed.
Eric Borden -- Berenberg Capital -- Analyst
Hey, guys, good morning.
David J. Gladstone -- Chairman, Chief Executive Officer and President
Good morning.
Eric Borden -- Berenberg Capital -- Analyst
Kind of -- can you talk about the volumes in the quarter? What was the mix in terms of deal size there? And then kind of maybe going forward given your favorable cost of capital, what's the appetite to target larger deals or maybe portfolios out there in terms of farmland?
David J. Gladstone -- Chairman, Chief Executive Officer and President
Yeah, there are not that many that come up with big farms, other than the fact that the farms continue to go up in price in some areas. So I think we'd love to get some big farms, 5,000 acres would be great. We can find acreage here and there and everywhere. We also want diversification. So getting one huge farm like we have in Southern California. There are not that many people that can lease it. We've leased it to one of the largest strawberry operators in the country. And they are strong, big and lots of cash flow. So we like that.
But to get to these much larger farms, there aren't that many farmers that can take down that much. So we have to be very careful not to get in a vine whereby we have a large farm, we don't have a tenant. So we like the onesie, twosies. There not a lot of players there. And that's our forte as being able to negotiate those and offer the seller a good price for the farm, but also tax-free if they want to do the right transaction. So we'll keep doing what we're doing and the diversification is really important for me. I don't want to get into a situation where we've got a couple of big farms that are going to hurt us.
Eric Borden -- Berenberg Capital -- Analyst
No, I appreciate that. And then maybe on the acquisition front, kind of historically Q4 seems to be the key time to acquire farms, but given constraints as it relates to COVID, do you think you'll see more farmers come to market in Q1 or will there be some rollover there into the New Year?
David J. Gladstone -- Chairman, Chief Executive Officer and President
Probably, I would guess. We never know if they're going to be able to close on time. We had one situation in which after the review of everything, we found that we were about a half a acre or maybe it was more on somebody else's farm that we were -- that the farmer was farming, and we had to get that undone before we close. And of course that's got to go through the government in California. So that's always a pain. Not that they're bad people, it's just that COVID has messed up their scheduling. And so as a result, we get -- we don't get really quick response on that. So you sit for a while waiting for it to close.
I think the bottom line, Eric, is that we are known in the marketplace now. We were not known five years ago very much. And so now everybody knows who we are, that's going to sell our farm, and so they show up on our doorstep. And we are just sitting there working with them, trying to get them to move to a point where we can get the deal done.
And unfortunately a lot of these farms are tied up in history that is it's been in the family for five, six generations. And there is a lot of emotional in the sale of that. It just is one of those things that it's been in our family for six generations or three generations, whatever it is and they don't want to let it go for what it's really worth to somebody who's farming it. And while we can always agree to look at somebody doing -- some third-party doing the review, it doesn't mean you're going to get the farm just because you got the review at the [Technical Issues] there is a lot of things bundled up into that.
There is a lot of farms out there in California. It's massive in terms of the areas that we like which is berries and most of the nut trees are out there. Certainly, almonds and pistachios, and we've picked up a lot of pistachio farms because there weren't a lot of people buying those, and it's a wonderful product. So, I don't know, acquisitions are going to go at the pace that people want us -- want to go. And I know, I talked to a guy ten years ago, trying to buy his farm, and unfortunately for him, he died and we bought it from his sister, who inherited that and she didn't have the same emotional impact and that went back to 1938, where they sold off the oil and gas underneath the farm. And so it was a little bit different transaction.
I just think there is the time when people decide to sell. The pandemic pushed some people along. Others once you talk to them and say, look you're 65 years old, do you have a plan for your farm? And they don't usually. So we show them how they can do it. We talk with some of the people that advise farmers on what to do and they see the non-taxable way of going, and here's the difference between that program that we have, is that farms that might be 200 or 300 acres are broken into maybe six or eight different tax districts. And so as a result, each one of those taxable pieces is considered a farm by the IRS, and so they can sell us three or four of those and take cash, and sell the other two or three in the form of cash, non-cash and be a shareholder.
We've had a number of those, where they want to take some cash out. And this is one of the only places that I know that works like that because if you're buying a warehouse some place, it's one unit. And so you've got to be very careful how you do that, because I think there is only a 10% amount that you can pay in cash, if the other part of it is in non-taxable.
The pressure that's been put on the marketplace by the reduction in 1031's value, because the government has changed the way that works, has been good for us. And I think we'll see more of that as time goes on. Anyway, if you talk to some of these advisors, farmland is where you want to be, but having a whole lot of money tied up in one farm is not where you want to be, as there's little -- only a few things you can do with it.
The other question?
Eric Borden -- Berenberg Capital -- Analyst
Yeah. Last one for me and then -- kind of relates to potential development opportunities. I know in the past you kind of talked about potential deforestation around the farmlands, certain farms, and I was just curious, is that potential -- does that arable land give you an opportunity to increase the acreage per farm or is that really not how I should be thinking about it?
David J. Gladstone -- Chairman, Chief Executive Officer and President
Probably not the way to think about it, only because the deforestation is up in the mountains and we don't grow anything in the mountains. So we're not part of that whole problem. And it's really sad people have burned down houses and a lot of trees have been lost that were up in the mountains. But at the end of the day, problem for us is we just need good flat farmland and that's what we're looking forward.
So I think from our standpoint, you shouldn't look at it that way, you should consider it, gee, they've got some farmland, the farmer is going to sell it. If you sometimes have taken a small plane from Watsonville down to Oxnard, the two small airports you can go through, and as you fly over that part of the world, it's just everything is in farmland that isn't in houses. And so over time, there is no doubt in my mind that over time those places will go away.
There used to be -- in Watsonville, there was a company that you probably know, it's that sparkling apple juice, and a lot of non-alcoholic drinkers drink that in place of champagne. And they've been around forever and a day, and all of that farmland that we farm there in Watsonville plus thousands of other acres used to be, filled with apple trees. And those all got chopped down and put into berries and some of the other ground crops because it was much more profitable. And they now get a lot of their apples from up in the mountains of Washington and maybe some of the other apple tree makers. And so it's just a changing thing that goes on almost every day out there. And we are seeing more and more people needing place to live. And so it's going to continue with pressure on all of those places.
So, I don't know, Eric, we just are following huge transition in land from agricultural to places to live. It won't happen in my lifetime completely, but I'd say 50 years, a lot of that will be gone, and it will be cashed in by us and other people who own farms. So, hang in there.
Eric Borden -- Berenberg Capital -- Analyst
Sounds good. Thank you, guys. Appreciate it.
David J. Gladstone -- Chairman, Chief Executive Officer and President
Okay. We have any more questions?
Operator
Our next question comes from James Villard with Ladenburg Thalmann. Please proceed.
James Villard -- Ladenburg Thalmann -- Analyst
Good morning, guys.
David J. Gladstone -- Chairman, Chief Executive Officer and President
Good morning.
James Villard -- Ladenburg Thalmann -- Analyst
Just one quick one. How do you think inflation expectations were impacting your acquisition volume?
David J. Gladstone -- Chairman, Chief Executive Officer and President
Yeah, maybe some there. Obviously, inflation in berries and other ground crops are pretty steep right now. And so the farmer is making good money and he wants more money than he wanted before. So, yes, it's following through. The difference is that a lot of the leases that we have in place now go up in price when inflation goes up. So, it helps us. We have stopping points as we call it, where in three years or five years, we assess the marketplace, and to the extent that the marketplace has gone up, we are able to push up the price of our rents. We also have, as we've mentioned many times now, the ownership in some of the crop. And as the crop prices go up, we benefit as well on that.
So it's kind of sheltered ourselves from inflation. We're not in the crops that people rent by the year. For example, a lot of the corn crops are rented on an annual basis, and they, of course, have a chance to jack up the rent every year. We've tried to stay away from that and just put some bumps in there for us, and all of others have some kind of way of the price going up and it's worked very well.
I think there is always a tension between what you want to do on something like that, and because if the prices of the crop go down, our rent doesn't go down. So we only have a chance to move rents up rather than any other method. And like many other REITs, we have built into our leases 2% increases every year, 3% increases every year, and that pretty much takes care of the way inflation is going.
However, at the rate of the last six months, that would be stripped away pretty quick. So inflation could hurt us, unlikely at some point in time, we will regain our strength back because the lease will come due and that's when we push up the price. I think the acquisition side -- inflation on the acquisition side is taken care of by the fact that people want to sell, they want to sell for no taxes or they want to sell and lease it back with some kind of inflation protection for us and for them that they know what they're going to have to pay over the next five to ten years, in the sense that they have a base rent and an inflated piece of the rent.
I don't know, there is not many ways to protect yourself. We go through that with our other REIT which is in the business of buying warehouses and office buildings that are leased to tenants. And those are all long-term leases with bumps every year. That seems to be OK, but I think you're right, there is some herd [Phonetic] against us being able to buy some properties, we looked at a farm in Oxnard, not too long ago that was growing some very inflated types of crops. And so as a result, they wanted more money for it and they also were in an area -- if you're in Oxnard, you're within striking distance of LA. And I think all of that land will be sold over time.
I remember going over from LA some years ago and I arrived in the afternoon and the twinkling lights were very few ten years ago. Today you come over that hill that's just before you get to Oxnard, and there are a lot of lights, so they're building houses there, they're building this, that and the other. And so it's going to -- it's going to grow, it's just too close to LA not to grow. So we're going to see that pressure on those properties as well.
Anything else I can answer for you?
James Villard -- Ladenburg Thalmann -- Analyst
Yeah. I guess just kind of following up on that, are you seeing any -- I guess, in the negotiations you're having on new potential leases, are you seeing more push back on your ability to get percentage rent agreements?
David J. Gladstone -- Chairman, Chief Executive Officer and President
No, I don't think so. I think we always -- there is a dance that goes on between buyers and sellers, and we are no different from anybody else. They're pushing whatever they think they can get, and which they should do. But I think the negotiations go pretty straightforward. Most people have already heard about us, they've already read about us, they are probably some shareholders that come with their land. But having negotiations go pretty straightforward, and some sellers as I mentioned in another part of the presentation have an emotional attachment to their land. And they just don't want to sell it at the average price that's going on.
They have their whole history. I know when we bought a farm in Oxnard, it had an old fashioned house on it. We ended up tearing down the house. And after we tore it down, I realized that one of the families there, all of their children who were in their 60s now had grown up in that house, and I regretted it from that standpoint, but we had to get rid of it because we were afraid they were going to come in and tell us, it's one of those protected areas that we couldn't tear down the house. It was a beautiful old farm house, but it didn't fit in the farm. They had been lived in for years and years and years. So it was not in good shape.
Anyway, I think there is a lot of people in the California areas that I went -- recently there was a family with 24 members in the family that had come over about 100 years ago. And each of those 24 people have the right to stop any sale. I had 23 of them lined up -- I'm sorry, 22 of them lined up, but they were two hold-outs and we couldn't get them to agree. So it's still sitting out there, I guess, it's ready for somebody else to take over at some point in time and sell it off. But it will get sold. There is just nobody there that wants to do it. Besides it's in -- it's growing garlic and how many people can grow garlic. Any other question?
James Villard -- Ladenburg Thalmann -- Analyst
I mean, I guess just following up on that, I mean, is there -- have you seen a change -- I'm guessing, where I'm getting at it, is there a change in what's versus pre -- I guess pre-inflation scare looking back to a year?
David J. Gladstone -- Chairman, Chief Executive Officer and President
No, we haven't seen anybody say, gee, it's worth more this year because of inflation. I mean, I'm sure somebody argues that. We don't spend a lot of time on it. We usually have an appraisal. We need to keep the -- within the confines of the appraisal because that's what we borrow against this, whatever the appraiser says, the banks will usually give us 60% of that in terms of a long-term mortgage. So we don't have a lot of room to go outside of that appraised relationship, but we're in every time we do a deal.
So, yeah, they know what we can -- and we tell them, here's what we can pay. And they either keep coming back and negotiating or they stop and go away. And at this -- as we call it the smaller end of the spectrum, there just aren't that many people out there bidding against us. I'm sure we'll see somebody come and do the same thing we're doing at some point in time. So far, no one is there. And as you probably know, we have a huge team of people in both Florida -- not a huge team in Florida, but a huge team in California, just everywhere there, everybody knows us.
James Villard -- Ladenburg Thalmann -- Analyst
Yeah, thank you for the color. Great answer.
David J. Gladstone -- Chairman, Chief Executive Officer and President
Okay, thank you. Any other questions?
Operator
There are no further questions in queue at this time. I would like to turn the call back over to Mr. Gladstone for closing comments.
David J. Gladstone -- Chairman, Chief Executive Officer and President
Well, thank you all for asking questions. Hope you come with a lot of questions next time. It's always great just to chat about things that are on your mind. And we'll see you next quarter. That's the end of this call.
Operator
[Operator Closing Remarks].
Duration: 59 minutes
Call participants:
David J. Gladstone -- Chairman, Chief Executive Officer and President
Erich Hellmold -- Deputy General Counsel
Lewis Parrish -- Chief Financial Officer and Assistant Treasurer
Robert Stevenson -- Janney Montgomery Scott LLC -- Analyst
Eddie Reilly -- EF Hutton -- Analyst
Eric Borden -- Berenberg Capital -- Analyst
James Villard -- Ladenburg Thalmann -- Analyst
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>>> 'Stagflation is the message' as prices spike to 30-year highs: Morning Brief
Yahoo Finance
Javier E. David
November 11, 2021
https://finance.yahoo.com/news/stagflation-is-the-message-of-spiking-prices-yields-morning-brief-100608345.html
Forget a 'taper tantrum' — 'inflation indignation' is here
After Thursday’s bad news that consumer prices in October ran hotter — at over 6%, the hottest they’ve been since the first Bush administration, to be exact — than Wall Street expected, most of the emphasis has been on the reaction in stock markets, where frothy prices pulled back from record highs.
However, as the Morning Brief has pointed out at least a couple of times in the last week, the more interesting reaction has taken place in government bond markets. Since the Federal Reserve announced its plans to taper its massive bond purchases, yields have been unusually calm, showing little if any signs of a tantrum.
Yet the white hot price data clearly upset the bond market’s equipoise. Rates spiked and spilled over into a tepid 30-year bond auction, where bidders drove up government borrowing costs on longer-dated paper by over 10 basis points. It reflected growing investor demands to be compensated at a premium in the face of spiraling prices across a range of sectors.
“I think this inflation is going to be pretty persistent,” Satori Fund founder and portfolio manager Dan Niles told Yahoo Finance Live. “I think we’re going to have a big problem, especially given where valuations are. I expect multiple rate hikes next year from the Fed.”
A market once braced for a "taper tantrum" is now in the throes of what I’d like to call inflation indignation. A convergence of strong pandemic-era demand, skyrocketing energy costs and the worsening supply chain crisis is creating the worst of all possible outcomes.
“The world’s debt levels, asset price valuations and current level of extraordinarily low interest rates, including negative ones overseas, is just not positioned for a bout of high inflation that we are clearly in,” Peter Boockvar, CIO of Bleakley Advisory Group, said.
With growth decelerating sharply from stratospheric pandemic-era levels, “stagflation is the bond market’s message,” the veteran Wall Street watcher warned.
The wags at BlackRock think the dreaded ‘s’ word isn’t warranted, writing in a research note to clients that “while many facile comparisons have been made to other historical periods of elevated inflation (such as the 1970s/early-1980s), and the term ‘stagflation’ has been bandied about quite a bit of late, we do not think the data warrants such worries.”
However, as we’ve noted in these digital pages more than once, stagflation has been a widening worry over the last several months, with Google searches for the term having spiked recently — alongside prices for just about everything (especially food, gas and rent: October’s price data showed tenant costs jumping by nearly half a percentage point).
“It has not just an impact on the consumer, it’ll start to have an impact on how asset prices reflect the change in the inflationary environment,” Vaughan Nelson Investment Management CEO Chris Wallis told Yahoo Finance Live.
“More importantly, we are starting to see it play out in the political realm as well,” he added.
That’s at least partly why President Joe Biden, sensing the dual political peril of ships marooned in the Pacific and spiking prices, vowed to make inflation his administration’s top priority.
He may want to move quickly, because the more inflation shoots, the grumpier the general public — already in a foul mood — is expected to get. Voter unease with the pandemic-era economy was at least partly a motivating factor behind the political earthquake of Virginia’s gubernatorial race, and the near-political death experience of New Jersey Democratic governor Phil Murphy, in what should have been a cakewalk reelection.
Moreover, political betting markets, which have become a more reliable barometer than public polling, are starting to trend in the wrong direction for Biden and his party. After the Virginia and NJ elections, US-Bookies.com shows Republican odds to win majority control of both chambers of Congress are rising sharply.
“With a string of poor approval ratings for the Biden administration, the Republicans’ odds improved to the point that bookies favored them to win control of Congress,” US-Bookies said. “And with Donald Trump being the favorite to win in 2024, the odds are now predicting a clean sweep for the GOP.”
Indeed. What a difference a year makes.
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