The Amazon effect could still benefit the following companies

The “Amazon effect” is the ongoing evolution and disruption of the retail market, resulting in increased e-commerce. The major manifestation of the Amazon effect is the ongoing consumer shift to shopping online.

You don’t have to be a financial analyst to realize that card credit usage has gone up. Most brick and mortar retail establishments allow the consumer the choice of paying with cash, debit or credit card. Almost 90 % of all purchases that happen on line are with credit cards. Credit card companies are a popular choice because they will reverse any fraudulent purchases plus some offer extended warranties and all of them have reward programs.

The three most popular credit card cards world-wide are Visa (V), MasterCard (MC) and American Express (AXP). The chart below compares all three to Amazon over a five year period. It appears that investors think that Visa will benefit the most from the “Amazon effect”.

Keep in mind that Amazon has a rewards Visa card which earns users a rebate on all their purchases. Cardholders get 3% back for purchases made at Amazon.com, 2% cash back at gas stations, restaurants and drugstores, and 1% back on all other purchases which earns users a rebate on all their purchases.

Despite news that Amazon is buying trucks and planes to better service their prime customers, delivery companies FedEx and UPS will still benefit from the “Amazon Effect.” The chart below compares these two companies to Amazon over a five year period. FedEx is by far the clear winner for investors.

While there is a glut of malls in America, there aren’t nearly enough warehouses across the U.S. to support internet retailers like Amazon. Retail sales are not in decline, but rather shifting toward e-commerce so all retailers will require large amounts of warehouse space.”

When retailers reconfigure their supply chain to accommodate the shift in consumer behavior, the requirement for warehousing space will increase substantially. This is true incremental demand and not a displacement of existing demand for warehouse square footage. Companies like Wal-Mart, Alibaba and Wayfair will also have to invest in new warehouses to try to compete with Amazon over the next few years.

Industrial REITs such as Rexford Industrial (REXR), Terreno (TRNO) and Stag Industrial (STAG) are at the top of most buy lists. Other industrial REITs that you should consider include First Industrial (FR) and Monmouth (MNR). 

Amazon’s deal for Whole Foods will likely spur a “last mile” investment by the internet giant and its competitors, Jefferies’ Petersen has predicted. “Last mile” is a reference to the warehouse that is closest to a store, a crucial point of the distribution chain that makes same-day delivery possible.

“By analyzing all of Amazon’s ‘last mile’ facilities by size and population demographics against the Industrial REIT portfolios, we found that REXR and TRNO are best positioned to serve the ‘last mile,'” Petersen said.

Then, Amazon investing in so-called secondary and tertiary markets will benefit a REIT like STAG, he added.

One of the biggest risks in owning REITs is rising interest rates. Higher borrowing costs can reduce cash flow and effect their ability to pay dividends. It also makes the financing of new projects less profitable.

A lot of the “Amazon effect” is already priced in to all of these stocks but the long term upward trend is still there.

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Three key tips for option traders

Most new option traders start by selling covered calls. It is an income producing strategy where you sell a call option on a stock that you own to collect the option premium. However, the premium comes with an obligation, if the call option you sold is exercised by the buyer, you may be obligated to sell your shares of the underlying stock.

1.  Consider the ex-dividend date

A common mistake to avoid is selling a covered call near the ex-dividend date of a stock that you own. Sometimes investors will come in to buy a stock a few days before the dividend date causing the stock value to briefly go up. This could make it very profitable for the buyer of the call option to force you to sell and collect the dividend payment. Not only do you lose the dividend but your broker’s fee to sell your shares will be much higher than normal.

For example; Royal Dutch Shell (RDS.b) has an ex–dividend of May 17th and pays $0.94 per share every quarter. So if you sold a May 19th call option, your shares could be called away early if the call option is in the money.

2.  Open interest or liquidity

Sometimes there is a wide spread between the bid and ask price of an option based on trading volume or the amount of open interest. The open interest will tell you the total number of option contracts that haven’t been exercised or assigned. Many options on Canadian stocks are illiquid and the bid-ask spread can be really extensive.

For example; Shopify (shop) trades on the Canadian exchange at $128. 14 and $93.58 on the U.S. stock exchange. If you wanted to sell a cash secured put option June 125 strike price the bid is $4.50 and ask is $5.75 but the open interest is zero contracts. However, the June 90 put option on the U.S. exchange has an open interest of 873 contracts and the bid is $3.10 and ask is 3.30 making it much easier to trade.

3. Implied volatility can increase when earnings are released

Implied volatility represents the expected price action of the stock over the life of the option. As expectations change, or as the demand for the option increases, implied volatility will also rise. Earnings expectations can influence the option premiums that expire when companies release their earnings.

For example; Ulta Beauty (ulta) is currently trading around $297.55 and is reporting their earnings on May 25th. See the weekly at the money call and put options below:

Calls Bid Ask Open Interest
May 19 $297.50 $2.45 $2.85 141
May 26 $297.50 $8.90 $10.60 87
June 2  $297.50 $10.30 $11.80 0
June 9  $297.50 $10.80 $12.30 2

 

Puts Bid Ask Open Interest
May 19 $297.50 $2.45 $2.80 99
May 26 $297.50 $8.90 $10.50 13
June 2  $297.50 $10.40 $11.90 1
June 9  $297.50 $10.70 $12.00 0

Without the change in implied volatility  the May 26 calls and puts options bid-ask price would have been in the $4.90 to $5.60 range but earnings expectations have increased the value of these options. Take note of the wider bid-ask spread on the June 9 and 16 call and put options which have little or no open interest contracts.

Before you buy or sell options you should always check for the ex-dividend date and earnings release date. Keep a close eye on the number of open interest contracts, a large bid-ask spread could turn a profitable trade into a loser.

 

Disclaimer: The stocks mentioned in this post are for educational proposes only and not recommendations.

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?

 

 

 

 

 

10 Reasons to be cautious on equity markets

Image result for david rosenberg

David Rosenberg is chief economist with Gluskin Sheff + Associates Inc. and author of the daily economic newsletter Breakfast with Dave.

Here are my 10 reasons to be cautious on equity markets right now.

Valuations are stretched

Trailing and forward price-to-earnings multiples are now in the top quintiles historically and the most expensive in 15 years.

Only in 1929 and the “Dotcom” bubble has the cyclically-adjusted multiple (CAPE) been as high as the case today.

We are heading into the ninth year in the cycle and have logged an epic 250-per-cent surge in the process. As retail investors now plow in to this market in the late innings, one could legitimately ask what it is they could possibly know that corporate insiders do not, considering the latter have been selling their company’s stock this year at a pace not seen since the data began to be published in 1988.

Extended leverage

U.S. margin debt has surged at a 27-per-cent annual rate since immediately prior to the election to stand at $513-billion, the highest level on record (eclipsing the high from April 2015).

Retail inflows

After an eight-year hiatus ($200-billion of net outflows), private clients have thrown in the towel and plowed nearly $80-billion into mutual funds and ETFs since the November election.

Remember Bob Farrell’s Rule No. 5: “The public buys the most at the top and the least at the bottom”.

Narrowing leadership

For the past four sessions, we have seen more new 52-week lows than new highs (the longest streak since Nov. 4) — a technical sign of a toppy market.

Moreover, the Russell 2000 index is now flat for the year and off 4 per cent from the high — again, we know from history that the generals tend to follow the privates.

Tack on the fact that the S&P 500 recently traded as much as 10 per cent above the 200-day moving average, and we have a market ripe for a near-term correction.

Complacency abounds

From a VIX of 11.9 to nearly 60-per-cent Bulls in the Investors Intelligence poll — though this has begun to roll off its highs in a sign of the “smart money” beginning to take profits.

The S&P 500 has gone 57 days without so much as a 1-per-cent intraday swing, something we have not seen in at least 35 years. The proverbial calm before the storm.

The Fed is in play

The front-end Treasury yields are rising discernibly — the two-year T-note yield has gapped up to nearly 1.4 per cent and futures market is in the process of pricing in an extra two rate hikes after the likely March tightening (the overnight index swaps market currently has priced in 70 basis points of tightening by year end).

The Fed has met its twin objectives and the fed funds rate consistent with that is 3 per cent, not the 0.75 per cent currently.

By the time the Fed reaches that level, the yield curve will likely have inverted long before and that’s when the clouds will come rolling in.

This could be next year’s story, which means a forward-looking market begins to discount this prospect sometime later this year.

Inflation pickup

Cyclical price pressures are showing through, with the core PCE inflation rate at a 30-month high of 1.738 per cent year over year.

As was the case in 1990, 2000 or 2007, this likely is not sustainable, but is a classic late-game signpost nonetheless.

All one needs to see is the latest blow-off in the commodity complex, which is now on pause, to notice how late cycle we are. Remember what oil did, for example, in 2008?

Lofty expectations

The survey data are at extremely high levels at a time when actual economic growth is running barely above a 1% annual rate.

Gaps like this, once again, are classic near-end-of-cycle developments.

The prospect of there being huge disappointment over the pace of policy change in Washington is also very high.

Over-ownership

While households were not net buyers of equities until very recently, the near-quadrupling in the stock market has still boosted their exposure to a 21.1-per-cent share of total assets. Only five times in the past 16 years has the share been this high or higher — this is 42% above the norm.

Frothy credit markets

Bonds lead stocks, just know that. And the risk-premium on U.S. high-yield corporate bonds very recently approached lows for the cycle at a super-tight 335 basis points.

However, they now are widening again, and with the overall narrowing path of the Treasury curve, this is well worth monitoring for those equity investors who are still long this market.

Nobody ever lost money by booking a profit, especially for a cycle that is now heading into year number nine.

Do you think that David is right?

Being Canadian, I am worried about the Federal Budget scheduled for March 22 because there are rumours of an increase in the capital gains tax. I have been taking some profits in my taxable accounts and for investment club just in case. I do believe it is impossible to time the market so I am still fully invested in my tax sheltered accounts.

 

Gilead Sciences: A buy, Sell or Hold?

gild-2

Many money managers have made Gilead a top investment pick when interview on some popular business shows. I never buy a stock based solely on the recommendation of a media personality. However, I will put it on my watch list and do some fundamental research and study some chart patterns.

Back in November of 2014, I decided to dollar cost average some Gilead shares using a strangle option strategy. I ended up owning 200 shares at $102.00 and made some nice profits selling covered calls. Unfortunately, the share price has been in free fall since Aug of 2015. See the chart below:

gild

I managed to reduce my average cost down to $90.50 but Gilead tumbled to a record low on Feb 8th after the company provided guidance for fiscal 2017 revenue, which missed analysts’ expectations. See press release:

The research-based biopharmaceutical company said it expects fiscal 2017 net product sales of $22.5 billion – $24.5 billion, below the Capital IQ consensus estimate of $27.98 billion.

Gilead reported late Tuesday Q4 non-GAAP earnings of $2.70 per share, a dime better than the analyst consensus on Capital IQ. Revenue was $7.32 billion, vs. expectations of $7.16 billion.

HCV product sales, were $3.2 billion for the fourth quarter of 2016, compared to $4.9 billion for the same period in 2015.

Price: $65.93, Change: -$7.20, Percent Change: -9.85

Is Gilead turning into a value trap or a real value investment?

valuetrap-300x250

This stock is cheap with a PE ratio of 6.68 compared to the biotechnology industry average of 34.55. Gilead has a 3.13% dividend yield which is the highest within the industry. It has one of the highest ROEs of all companies in the biotechnology & drug industries. Although, EPS growth at Gilead is declining, it is still above the industry average.

The biggest problem with this stock is the biotech industry is experiencing positive revenue growth as a whole but Gilead has been unable to grow revenues and is losing market share. This negative trend has been continuing from the previous year when revenue growth at Gilead was -13.94% while the biotech industry was up some 202.65%.

I hate throwing good money after bad in the hopes of breaking even. So I am not big on averaging down on a losing position. I have been fighting a losing battle on this stock for quite a long time. However, I am anticipating a dead cat bounce off the bottom if some deep value or dividend investors decide to buy. I think that I should take a lost and buy something else. What do you think?

Do you own Gilead, are you going to average down, sell for a lost or are you going to continue to hold?

Dogs of the Dow: A winning strategy in 2016

The “Dogs of the Dow” strategy was popularized by Michael O’Higgins in his 1991 book “Beating the Dow.” The Dogs of the Dow are the 10 of the 30 companies in the Dow Jones Industrial Average with the highest dividend yield. The investor would allocate an equal amount into each of these 10 stocks and hold them for the entire year. They are called investment “Dogs” because rising dividend yields tend to be a function of falling prices.

Typically, an investor would need to only rid about two to three stocks every year and replace them with different ones. The stocks are typically replaced because their dividend yields have fallen out of the top 10, or occasionally, because they have been removed from the DJIA altogether. The strategy’s simplicity is one of its most attractive attributes.

The premise of this investment style is that the Dow laggards, which are temporarily out-of-favor stocks, are still good companies because they are still included in the DJIA. Therefore, holding on to them is a smart idea, in theory. Once these companies rebound and the market has revalued them properly, you can sell them and replenish your portfolio with other good companies that are temporarily out of favor.

Companies in the Dow have historically been very stable companies that can weather any market decline with their solid balance sheets and strong fundamentals. Furthermore, because there is a committee perpetually tinkering with the DJIA’s components, you can rest assured that the DJIA is made up of good, solid companies.

The 2016 returns:

Dogs of the Dow = 16.1%

Dow Jones Industrials = 13.4%

S&P 500 = 9.5%

Here are some historical returns:

Investment Symbol 2011 2012 2013 2014 2015 1 Year 3 Year 5 Year 10 Year Since 2000
Dogs of the Dow 16.3% 9.9% 34.9% 10.8% 2.6% 2.6% 16.1% 14.9% 10.6% 7.9%
Dow Jones Industrials 8.4% 10.2% 29.7% 10.0% 0.2% 0.2% 13.3% 11.7% 9.1% 6.3%
S&P 500 2.1% 16.0% 32.4% 13.7% 1.4% 1.4% 15.8% 13.1% 9.1% 5.8%

Variations of the Dogs

Because of this strategy’s simplicity and its returns, many have tried to alter it in an attempt to refine it, making it both simpler and higher yielding. There is the Dow 5, which includes the five Dogs of the Dow that have the lowest per share price. Then there is the Dow 4, which includes the 4 highest priced stocks of the Dow 5.

A contrarian strategy of favoring the worst over the best doesn’t always work out, but it often does. Consider the worst-performing stock in the 30-member Dow Jones Industrial Average in 2015 was Wal-Mart. The retailer’s shares produced a dividend-adjusted loss of 26.6% in 2015 but was up 14.3% in 2016 including dividend. In contrast with Nike which had a big gain of 31.4% in 2015 but had loss of 17.4% in 2016!

The Dogs of the Dow for 2017

Symbol Company Price Yield
The Dow stocks ranked by yield 12/31/16 12/31/16
VZ Verizon 53.38 4.33%
PFE Pfizer 32.48 3.94%
CVX Chevron 117.70 3.67%
BA Boeing 155.68 3.65%
CSCO Cisco Systems 30.22 3.44%
KO Coca-Cola 41.46 3.38%
IBM International Business Machines 165.99 3.37%
XOM ExxonMobil 90.26 3.32%
CAT Caterpillar 92.74 3.32%
MRK Merck 58.87 3.19%

Dogs of the Dow strategy is not fool-proof

Dow Industrial Average is price-weighted but the Dogs of the Dow assumes equal weighting which can explain some performance differences over the long-term. Part of the outperformance can also be attributed to differences in overall dividend yields.

The Dogs of the Dow is a simple stock picking strategy and can be very effective over the long-term. Owning 10 of highest yielding stocks of the 30 Dow stocks which are out of favor with Wall Street gives the investor some downward protection and some extra income.

What do you think about “Dogs of the Dow?”

Disclaimer: This post is for discussion purposes only!

 

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.