Is Basic Income the answer to a new AI world?

I am so glad that I am a retired senior. I don’t have to worry about a robot taking my job. Since I have lots of time on my hands to think, I wonder what a new AI world would look like. For example; will my 2 year old granddaughter even need to get a driver’s licence? Will the Uber or cab that she orders even come with a driver?

Now I have always been a big fan of science fiction movies. There is a scene in the movie “Logan” where Wolverine has to dodge driver-less trucks to cross the highway to help some people. Installing AI in 16 wheeler trucks could replace the need for a lot of truckers.

Fast food restaurants have been the training ground for teenagers and young adults.  I used to tell my kids that they better get a good education or you will end up using the phrase “would you like fries with that” while working at MacDonald’s. However, even MacDonald’s are installing new self-serve kiosks. Now you can even order your Starbucks coffee using your phone. Where will young people get work experience?

Everywhere I look, jobs are slowing disappearing, the new AI technology seems to have very few limits.

“For example, Australian company Fastbrick Robotics has developed a robot, the Hadrian X, that can lay 1,000 standard bricks in one hour – a task that would take two human bricklayers the better part of a day or longer to complete.”

Japan has the highest percentage of people over the age of 60 and their population is shrinking. As a nation, there is a shortage of workers and they have embraced the use of robots in the work place. This trend could be coming to North America sooner than you think.

As a baby boomer, I worry about the future cost of health care. The world population is aging and health care costs are raising. I hope that science fiction turns into reality and my caregiver looks something like this.

   or this 

Why universal basic income may be necessary

A 2013 study by Oxford University’s Carl Frey and Michael Osborne estimates that 47 percent of U.S. jobs will potentially be replaced by robots and automated technology in the next 10 to 20 years. Those individuals working in transportation, logistics, office management and production are likely to be the first to lose their jobs to robots, according to the report.

For many, basic income sounds like a free ride or welfare. Economist believe that masses of people will not just sit at home but will make a contribution by continuing to work. The basic income would allow recipients to explore other options not available to them if they are struggling just to survive,  such as retraining or to find new job opportunities.

In theory, new opportunities would spring up to replace jobs done by machines. However, there are some practical problems, like where will government get the money if less people are working to pay for a basic income program? The North American education system would require a major overhaul to put more job training skills into the curriculum.

Some additional information to consider

The government of Ontario just announced a three year basic income pilot project to help low income earners in three cities. A single person can apply to receive $16,889 a year and couples will receive $24,027. Recipients who are employed will keep what they made from their jobs but their basic income would be reduced by half their earnings. For example, a single person earning $10,000 per year from a part-time job would receive $11,989 in basic income ($16,989 less 50 per cent of their earned income), for a total income of $21,989.

Is basic income just a pipe dream or a future reality?

 

 

 

 

 

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Bull Call Spread: An Alternative to the Covered Call

call-spread

Most new option traders start with a covered call strategy. You buy 100 shares of company xyz and you sell one option that has a near month expiry date. One objective of this strategy is to earn extra income from the option premiums which hopefully expires worthless. Short term options decline in value very quickly if the stock price remains fairly flat or falls a little in value.

The covered call strategy is limited by the amount of capital you have to invest. Many popular stocks are trading over $100 like Apple ($114.90), Netflix ($123.75) and Facebook ($119.40) so buying 100 shares of these three companies would require about $35,805 of your capital.

An alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. Instead of buying the underlying stock in the covered call strategy, the bull call spread strategy requires the investor to buy deep-in-the-money call options instead.

To illustrate the difference, I am going to select 3 bull call spreads for the above three popular stocks. Disclaimer: These trades are for educational purposes only and are not recommendations.

Quotes as of 10:00 a.m. on Dec 13, 2016

Example #1

Buy 100 shares of Apple at $114.90 sell one call option Jan 20 at $115.00 for $2.60

Call spread: Buy 1 Jan 20 $105 call for $10.45 – sell one call Jan 20 at 115.00 for 2.60

Example #2

Buy 100 shares of Netflix for 123.75 – sell Jan 20 call at $130 for $4.50

Call spread: Buy one Jan $120 for $9.15 – sell Jan 20 call at $130 for $4.50

Example #3

Buy 100 shares of Facebook for$119.40 – sell Jan 20 call at $120 for $3.10

Call spread: Buy one Jan 20 $110 for $10.45 – sell Jan 20 call at $120 for $3.10

Now, the capital required to purchase 100 shares of each of these three stocks is $35,805 minus $1020.00 from selling the covered call options equals $34, 785. The bull call spreads requires a total outlay of $3,005 minus $1020.00 from selling the exact same covered calls equals $ $1985.00

Only time will time if these bull call spreads are good, bad or ugly. Stay tune for a follow-up post in the new year.

Could President Trump cause another Great Recession?

Republican presidential nominee Donald Trump shakes hands with Democratic presidential nominee Hillary Clinton following the second presidential debate at Washington University in St. Louis, Sunday, Oct. 9, 2016. (AP Photo/Patrick Semansky)

Being Canadian, I am not trying to influence any of my American readers on who they should vote for next Tuesday. However, my investment portfolio is heavily invested in the U.S. stock markets, I shudder at the thought of what could happen under President Trump. Naturally enough, investors and analysts hate uncertainty. Hillary Clinton largely represents the status quo. Mr. Trump is more like Forrest Gump’s box of chocolates “You never know what you’re going to get.”

What exactly happens the day after? To markets? To the economy?

The conventional wisdom is that a Trump victory would lead to a swift, knee-jerk sell-off. Many investors will choose to sell stocks and ask questions later. The Mexican peso would most likely fall on fears of a trade fight along with ETFs that contain Mexican stocks. Some insurance companies could tumble on the uncertainty of what would happen if Obamacare was repealed.

A worst case scenario is Mr. Trump’s anti-trade policies would send shock waves around the world. Add a stock market crash and it would plunge the world into recession. Europe’s economy is very fragile and it wouldn’t take much to tip Europe back into a full blown recession. This would lead to a serous banking crisis that could spiral into emerging markets.

The biggest test for the stock markets might be pegged to the future leadership of the Federal Reserve. There is much more uncertainty regarding who Trump might nominate, though he has made it clear he would not re-nominate Chair Yellen.

Now, a handful of economists have suggested that despite all of the promises made by both candidates, odds are high that whoever the next president is, they will preside over a recession. They argue that we are in the second-longest bull market of all time and the eighth year of this economic expansion. It is hard to believe that we will go through the next four years without a hiccup. If merger activity is a gauge of the market’s cycle, the recent spate of deals suggests we’re closer to the ninth inning than the first.

In reality, it’s impossible to predict how the markets would settle after an initial sell off. It will take time for investors to truly make sense and “math out” how his policies would affect the economy. Now, Trump’s bark will be a lot worse than its bite in terms of actual implementation of his anti-globalization position. Hopefully, a split in the congress and the senate will stop Trump from carrying out any outrageous election promises.

Am I worry about the U.S. election? Not really because I am an option trader. I have sold covered calls to protect most of my U.S. stocks. I have sold only a few cash secured puts on stocks that I am comfortable holding long – term. Plus, I have some extra cash just in case of a market sell-off. I am very comfortable switching from selling cash secured puts to buying puts if there is a bear market.

Where am I going to be next week? On vacation from the markets in Orlando, playing golf with my golf cronies. Hoping that they don’t ask for any financial advice and looking for another hole in one.

hole-in-one

 

Dollar-cost averaging using an option strategy

options

Most investors are familiar with dollar–cost averaging as a wealth building strategy. It involves investing a fixed amount of money at regular intervals over a long period of time. This type of systematic investment program is commonly used in company sponsored pension plans.

I use a similar approach by selling call & put options to build a stock portfolio. At first glance it sounds really complicated, but the math is simple as long as you can subtract and divide.

The two types of options: calls and puts (Investopedia)

A call gives the holder the right to buy an asset at a certain price within a specific period of time. Calls are similar to having a long position on a stock. Buyers of calls hope that the stock will increase substantially before the option expires.

A put gives the holder the right to sell an asset at a certain price within a specific period of time. Puts are very similar to having a short position on a stock. Buyers of puts hope that the price of the stock will fall before the option expires.

My strategy involves selling options and collecting a premium which will hopefully reduce the cost of buying a stock. For example: I recently wanted to add 200 shares of Royal Caribbean Cruises (RCL) to my stock portfolio.

Here is the math: I bought 100 shares at $72.22 on Oct 11th

Sold 1 call option Nov $72.50 for $3.40

Sold 1 put option Nov $72.50 for $3.65

Now both these options expire on Nov 18th, so the buyer of the call option can force me to sell my 100 shares for $72.50 and the buyer of the put option can force me to buy 100 more shares at $72.50 depending upon the share price on Nov 18th.

Scenario (1): What happens if the shares of Royal Caribbean are trading below $72.50 on Nov 18th?

The call option expires worthless and I will buy 100 shares that will cost me $72.50 – $3.40 (the call premium) – $3.65 (the put premium) for a total share cost of $64.45. If you add the cost of the 100 shares that I bought for $72.22 to the 100 shares for $64.65 and divide be 2, my dollar cost average per share is $68.84

Scenario (2): What happens if the shares of Royal Caribbean are trading above $72.50 on Nov 18th?

The put option expires worthless and I have to sell my 100 shares for $72.50 but the cost of my 100 shares that I bought for 72.22 have been reduce to $65.17 ( $72.22 – $3.40 call premium – $3.65 put premium), my net profit on the trade would $7.33 divide by $65.17 or 11.2 % in just  38 days. (Excluding trading commissions)

In order to use this strategy, you need to have a margin account with a discount broker and be approved for cash secured put option trading. The added bonus of this strategy is you can use it to buy most index funds and some EFTs, you don’t have to buy individual stocks. However, the option premiums on index funds & ETFs will be much lower because they are less volatile than individual stocks.

I like this strategy because it removes some of the emotion out of investing. In the past, I would take half a position in a stock but I found it hard to commit to buying the other half when the share price fell. Plus I would kick myself for not taking a full position when the share priced increased in value. I found averaging down or up was very difficult. In reality the decision of buying or selling is sold to the purchasers of the options for a fee. An additional benefit, option premiums are taxed as capital gains, as long as you are not making a living as a day trader.

Stay tune; I will post the results of this trade next month plus an additional trade based on which scenario unfolds.

Disclaimer: This post is for educational proposes and not an investment recommendation.

Is another credit bubble forming in subprime car loans?

I went shopping for a new car last week and was offered a subprime loan rate that sounded too good to be true. Without even checking my credit history, I was offered the choice of nothing down & half of one percent financing for 5 years. If I wanted to pay cash for the $30,000 vehicle, the dealership would reduce the price by 2,500 dollars.

The credit manager took some time to explain how subprime loans work. Auto makers take their cash back amount and give it to the finance company to buy down the interest rate. So in my case, I could take the $2,500 cash back or it would go to the finance company to reduce my loan interest. My choice really didn’t affect the car dealer in any way.

It got me thinking about some of the articles that I read sounding the alarm bells on the rising delinquency rates in subprime auto loans. Much of the concern centers around loans extended to borrowers with credit scores below 600. Some articles warn that the auto-loan market is a powder keg like the subprime mortgage market was when the globe plunged into a financial crisis eight years ago.  Will the bursting of this bubble cause another U.S. recession?

John Oliver, host of the HBO show “Last Week Tonight,” takes on the opaque world of auto lending.

Oliver points out that while helping people buy a car sounds great, lenders are taking advantage of borrowers with some predatory strategies and absurdly high interest rates. Some are offering loans to those who have recently filed for bankruptcy. Poor borrowers charged high interest rates–the average rate is 19%– end up under a pile of debt. One clip showed that a woman would have to spend $17,000 paying back a loan for a car worth $3,000.

Auto loans, including the loans extended to prime and subprime borrowers, topped $1 trillion for the first time last year, according to Experian data, exceeding the outstanding balances on U.S. credit cards. But that is a far cry compared to the $8.4 trillion mortgage market. Plus, it’s easier to repossess a car than foreclose on a home. There is typically a healthy marketplace for used and repossessed cars. Trying to unload a $300,000 home is far more difficult especially in a neighborhood of foreclosed properties.

As an investor, be aware that massive defaults on auto loans could flood the used-car market, depressing prices for all car types should the bargains among used-vehicle options sway buyers away from new cars. Both Ford & GM are trading with low P/E’s (5.8 & 3.9) and have dividend yields in the 4.7% range. The yield is very attractive for investors looking for income as long as you understand that there could more downward pressure on the stock price.

In a quarterly filing with the Securities and Exchange Commission, Ford reported in the first half of this year it allowed $449 million for credit losses, a 34% increase from the first half of 2015. General Motors reported in a similar filing that it set aside $864 million for credit losses in that same period of 2016, up 14% from a year earlier.

If you are in the market for a new or used car, make sure that you can afford the payments. Don’t fall for, no money down ads, 100% approval rates and no sin number required. Remember a car starts to depreciate as soon as you drive it off the lot. Extending a car loan to 84 months (7 years) keeps your monthly payments low but the outstanding loan could be greater than the value of the actual car.

2nd Anniversary of Smart Money: Lucky number 2

In sports, no one cares who came in second. The number 2 rating of a stock is a buy. There are two sides in investing, you can be either bullish or bearish.  Number 2 in Chinese Culture is an auspicious number because Chinese people believe that good things come in pairs.

“The symbolic meaning of number Two is kindness, balance, tact, equalization, and duality. The number Two reflects a quiet power of judgment, and the need for planning. Two beckons us to choose. The spiritual meaning of number Two also deals with exchanges made with others, partnerships (both in harmony and rivalry), and communication.

2 number

What is the 2nd best investment that you can make?  The number two  investment really depends upon your age, where you live, your risk tolerance, your income level, your time horizon and your family situation. The number two investment choice for someone in their 20’s could be paying down debt. For someone in their 30’s, it could be buying a house.  For a high income earner, it could be maximizing their contributions into their retirement account. For someone who lost their job, it could be starting a small business.

So what is number one?  My answer is YOURSELF because our education system gets a failing grade regarding financial literacy. All these choices requires some financial knowledge and some basic math skills in order to be successful. I was shocked at the results of a recent financial literacy test.

Would You Pass the Global Financial Literacy Test?

Question 1: Suppose you need to borrow 100 U.S. dollars. Which is the lower amount to pay back: 105 U.S. dollars or 100 U.S. dollars plus three percent

Question 2: Suppose over the next 10 years the prices of the things you buy double. If your income also doubles, will you be able to buy less than you can buy today, the same as you can buy today, or more than you can buy today

Question 3: Suppose you have some money. Is it safer to put your money into one business or investment, or to put your money into multiple businesses or investments?

Question 4: Suppose you put money in the bank for two years and the bank agrees to add 15 percent per year to your account. Will the bank add more money to your account the second year than it did the first year, or will it add the same amount of money both years?

Question 5: Suppose you had 100 U.S. dollars in a savings account and the bank adds 10 percent per year to the account. How much money would you have in the account after five years if you did not remove any money from the account? (a) $150 (b) more than $150 (c) less than $150

 

literacy

Highlights of the survey:

  • The U.S. lags behind other major English-speaking economies in its percentage of financially literate citizens. Citizens of Canada and the United Kingdom beat the U.S.
  • Only 35 percent of respondents around the world got the right answer to Question 3.
  • Many homeowners can’t calculate the basic interest owed on their loan payments. About a third of adults in the U.S. have an outstanding housing loan; three in 10 don’t understand how their debt accumulates.

literacy1

Answers to the literacy test

  1. 100 U.S. dollars plus three percent
  2. the same
  3. put your money into multiple businesses or investments
  4. more money in the second year
  5. (b) more than $150

Some may argue that personal financial literacy isn’t the number one investment because you can always pay a professional. I would agree if you are lucky enough to select a good one. In twenty years of running a small business, I changed accountants three times. I changed stock brokers countless times until I became a do it yourself investor. I have dealings with three different banks to meet all my financial needs. Plus selecting the right professional still takes some financial knowledge, the ability to understand the advice and act on it.

In reality, the first and best investment that you should make is in educating yourself. Did you get take the financial literacy test and did you answer all five correctly?