Thursday, April 18^th, 2024

Utilize The “ONE-TENTH RULE” When Buying a Vehicle

With very few exceptions, AUTOMOBILES (aka: Cars) are “GUARANTEED” to LOSE VALUE!!!

You may “LOVE” your car, BUT there is no reason to overspend on a DEPRECIATING LIABILITY, especially at a time when all other goods and services eat up so much of your income…

The 1/10th “RULE” for car buying is a budgeting strategy AND one that has been gaining traction among car buyers looking to spend as little as possible on an item that loses them money.

Often lumped in to the 20/4/10 “RULE (which adds being able to pay 20% or more of the total purchase price of the vehicle up front and being able to pay off the balance in 48 months or fewer to the mix), the 1/10th rule alone is something worth sticking to when shopping for a new ride.

The thinking behind this 10% spending suggestion is:

Too often, people will purchase a car without having a “REALISTIC” OVERSTANDING/UNDERSTANDING of how much more it will actually cost to own it. As a result, they end up spending too much and exceeding their budget.

If you earn the median per capita income of about $42,000 a year, for example, you should limit your budget to $4,200. If you earn the median household income of about $62,000 a year, don’t spend more than $6,200 on a car.

Remembering that total car costs include insurance, maintenance and gas (not to mention traffic tickets!!!), if you can manage to spend only one-tenth of your gross income on a new-to-you car, the financial benefits are plentiful.

Listed below are three (3) reasons why you should try the 1/10th “RULE” the next time you purchase a car.

1. Practice “RESPONSIBLE” Spending

There are really only two (2) questions you need to ask yourself when you are purchasing a car:

1. What kind of car do you need???

2. How much can you afford to pay???

Following the 1/10th “RULE” helps you select a vehicle that you can comfortably afford, taking into account not just the purchase price, but also ongoing expenses like insurance, maintenance and fuel.

2. Saving and Investing Opportunities

Spending more than 10% of your income on a car means you will have less money for other things, in particular, “ASSETS” that can grow your “WEALTH”. By making a modest investment in a vehicle, you can redirect funds towards savings, trading and/or investing that have the potential to grow over time, which will ultimately improve your financial future. Buying too much car is like NEGATIVE “COMPUNDING”!!!  

3. Less Ownership “STRESS” and “GUILT”

Paying over 1/10th of your income on a car causes “STRESS” because you are always thinking of what can go “WRONG” and what potential “DAMAGE” will cost. Often, when people overspend on an item they “FEAR” the money should be going toward something more important, causing “GUILT” and “RESENTMENT”. Sticking to spending 1/10th of your income on a car makes ownership and driving “STRESS” free.

PEACE & BLESSINGS

Kenneth Reaves, Ph.D.

Wednesday, April 17^th, 2024

Beware of “ANCHORING BIAS”… The U.S. Economy Is “STRONGER” Than You Think

Jobs are plentiful right now, with unemployment hovering near all-time lows. And corporate profits are up – S&P 500 earnings grew 2% in 2023 BUT, are forecast to “SOAR” 10% this year (2024) and 13% in 2025!!!

For many people, the higher costs of food, energy and especially housing are a “REAL” hardship. But many others are continuing to spend despite higher prices, and that’s what is helping businesses grow and keeping the jobs picture so robust.

So if the economy is “THRIVING”… why doesn’t it feel like it???

I believe it has to do with “ANCHORING BIAS”, a PSYCHOLOGICAL BIAS TOWARD PREVIOUS INFORMATION…

For example, a person may decide they dislike a political candidate because of something they said or did. Going forward, no matter what that politician does, the person will CONTINUE to dislike them because of their “PREVIOUS BIAS” – even if the politician does something very positive. (I know a politician doing something positive is very unlikely… but you get the idea.)

This happens all the time in financial markets. Suppose you buy a stock at $50, and then the stock falls to $25 because of a decline in the company’s business. You might continue to believe the stock is worth at least $50 despite the evidence to the contrary.

We are also seeing “ANCHORING BIAS” in the economy right now when it comes to INFLATION and INTEREST RATES…

For over a decade, society had rock-bottom INTEREST RATES and barely any INFLATION. So society got very “ACCUSTOMED” to 3% mortgages and prices not moving much.

Then, SUDDENLY, INFLATION SPIKED to nearly DOUBLE DIGITS, making everything in our lives much more EXPENSIVE and pinching household budgets.

INFLATION has since fallen back to 3.2%, which is actually slightly BELOW the long-term average of 3.3%. BUT, due to “ANCHORING BIAS”, it still feels like prices are out of control. We think that hamburger, fries and, beverage at our favorite restaurant should still cost $12 rather than the $16 it costs now.

NOTE: KEEP IN MIND THAT FALLING INFLATION DOES NOT MEAN PRICES HAVE COME DOWN…IT MEANS PRICES ARE RISING MORE SLOWLY!!!

Even though I have studied “ANCHORING BIAS” in numerous classes on BEHAVIORAL FINANCE and TECHNICAL ANALYSIS, I still fall into “OLD” patterns too.

When filling out my March Madness bracket this year, I picked the top-seeded University of Houston to win the championship. I couldn’t name one player on Houston’s team, but I remembered the great “PHI SLAMA JAMA” Houston teams that featured Clyde Drexler and Hakeem Olajuwon when I was a kid.

(My bracket fell apart when Houston ended up losing in the Sweet Sixteen last week – another sobering lesson for me about the pitfalls of “ANCHORING BIAS”.)

Here are a few ways to get past “ANCHORING BIAS”. They may or may not help you get over the higher-priced hamburger combo, BUT they will definitely make you a better trader/investor and give you a more “REALISTIC” perspective of the economy.

1. Acknowledge the “BIAS”

The best way to start “SOLVING” a problem is admitting that there “IS” a problem. When you acknowledge that you may have a “BIAS”, that can sometimes instantly help you see things more clearly.

2. Embrace the “DISCOMFORT”

It doesn’t feel good when we are presented with information that goes against our thinking. Let’s go back to the example of a political candidate. If you have an opinion about a particular candidate and then you read details that go completely against what you think, your immediate reaction might be to suspect the information is “FALSE”. After all, no one wants to admit that they are wrong.

BUT, that’s how we get “SMARTER”: by taking in more information and having to think about it “CRITICALLY”.

When I have had to completely change my opinion on something – especially a view that was deeply entrenched – it was almost like I could feel new “SYNAPSES” forming in my brain.

That’s why I actively seek out “PERSPECTIVES” that are DIFFERENT from mine. At a minimum, it helps me OVERSTAND/UNDERSTAND the other side of the argument – and sometimes it also teaches me something that changes my mind and helps me “GROW”.

This is a very useful task when it comes to trading/investing. You should always be willing to take in new information that will help you decide whether to “BUY”, “SELL” or, “HOLD”.

This one (1) skill has improved my life “DRAMATICALLY”...

Choosing not to AUTOMATICALLY DISMISS THINGS I DISAGREE WITH has improved my relationships, sharpened my problem-solving abilities and made me a better analyst, trader and, investor.

3. Use “ANCHORING” to your advantage

There is a common negotiating technique that suggests you should NEVER make the first offer… BUT, if you do, that number becomes the “ANCHOR”.

The negotiation starts from “YOUR” number, not the other person’s. All “COUNTEROFFERS” will be viewed in relation to your “INITIAL OFFER”.

When you buy a house, you negotiate “DOWN” from the listed price. Even if the house is overpriced, that listing price becomes the “ANCHOR” that helps you determine what you are willing to offer.

If the house is listed at $500,000 and you think it’s worth $450,000, you may think, “They will never accept an offer 10% lower than the listing price.” (which may or may not be the case),

So you might offer $460,000 instead.

Be aware of “ANCHORING BIAS” and how it affects your EMOTIONS and DECISION MAKING.

Do not let the past shape your thoughts on what is happening right in front of you.

In this economy, you might miss some “GREAT” trading/investing opportunities.

PEACE & BLESSINGS
Kenneth Reaves, Ph.D.

Tuesday, April 16^th, 2024

How to Invest Like “ROCKEFELLER”

Imagine if you had been able to invest in Standard Oil back at the dawn of the petroleum and automobile industries in the early 20^th century. You would have become a massively WEALTHY “OLIGARCH” along the lines of JOHN D. ROCKEFELLER.

At its peak in the year 1904, ROCKFELLER’S STANDARD OIL controlled 91% of oil refinement and 85% of final sales in the United States!!!

The company’s value that year exceeded $1 trillion. Rockefeller retains the title of “WEALTHIEST” American in HIStory; he amassed a personal fortune of $410 billion. Both figures are in today’s money, adjusted for inflation.

The multi-billionaire “OIL BARON” could have told you that one of the surest ways to build “WEALTH” is to get on the ground floor of a RAW MATERIAL that is transforming society. Despite the concerted efforts in recent years of governments around the world to transition away from FOSSIL FUELS, CRUDE OIL remains the world’s most valuable commodity.

As the second quarter of 2024 gets underway, we are seeing the increasing prevalence of a commodities “SUPER CYCLE”. The prices of essential raw materials such as COPPER, IRON ORE, ALUMINUM and, COBALT are “SURGING”, driven by a convergence of factors.

The term “SUPER CYCLE” refers to an extended period during which commodity prices experience significant and sustained increases, driven by fundamental shifts in supply and demand.

Unlike short-term fluctuations, “SUPER CYCLES” are characterized by their longevity and breadth, often spanning several years or even decades. They typically arise from structural changes in the global economy, such as rapid industrialization, technological advancements, or geopolitical shifts.

At the heart of the current “SUPER CYCLE” lies accelerating global economic growth, fueled by the rise of a burgeoning middle class in emerging economies. Countries such as CHINA, with its vast population and insatiable appetite for resources, have become the primary drivers of demand for commodities.

As optimism about CHINA’s economic growth in 2024 increases, so too does the expectation of increased consumption of raw materials, particularly CRUDE OIL.

CHINA is the world’s LARGEST IMPORTER of CRUDE OIL, consuming about 14 million barrels PER DAY.

The prices of West Texas Intermediate (the U.S. benchmark) and Brent North Sea crude (the international benchmark) have been climbing and both currently hover near $83+ per barrel. Accordingly, the top performing sector in the first quarter of 2024 was ENERGY.

However, this surge in commodities demand comes at a time when supplies are tightening, exacerbating concerns about global scarcity. Geopolitical tensions, supply chain disruptions, and environmental challenges have all contributed to a squeeze on the availability of key commodities. From the closure of mines to trade embargoes and natural disasters, the specter of scarcity looms large, driving prices ever HIGHER.

The COMMODITY TOTAL PRICE INDEX climbed by 3.5% in the first quarter of 2024 compared to December 2023.

The threat of global warming has added another layer of complexity to the commodities market. As temperatures rise and extreme weather events become more frequent, the agricultural sector faces mounting challenges in maintaining production levels.

Droughts, floods, and heatwaves threaten crops, leading to disruptions in food supplies and inflationary pressures. This, in turn, impacts the prices of commodities such as wheat, corn, and soybeans.

The RUSSIA-UKRAINE war also has weighed on agricultural production. UKRAINE is a major WHEAT EXPORTER and its production of this staple crop has been severely disrupted.

The transition to cleaner, alternative energy is a “LAUDABLE” goal, but the adherents of “GOING GREEN” tend to underestimate the large degree to which these advanced technologies require RAW MATERIALS that are in SHORT supply.

The production of “GREEN ENERGY” components, such as solar panels and electric vehicle batteries, relies heavily on commodities such as LITHIUM, SILVER and, COBALT. This burgeoning demand for “GREEN” commodities has added another “BULLISH” dimension to the commodities “SUPER CYCLE”.

GOLD remains a steadfast “ANCHOR” for investors seeking refuge from unforeseen crises, such as a resurgence of inflation or worsening geopolitical strife. HIStorically viewed as a “STORE OF VALUE” and a “HEDGE” against INFLATION, the “YELLOW METAL” should continue to play a “VITAL” role in investors portfolio.

There are many ways to invest in commodities, including individual equities, physical ownership, mutual funds, hedge funds, and exchange-traded funds (ETFs). Your choice depends on your investment goals, stage of life and, “RISK” tolerance level.

PEACE & BLESSINGS
Kenneth Reaves, Ph.D.

Monday, April 15^th, 2024

The BOND Market Is “BOOMING”

It’s no secret that corporate bonds are booming. But what might come as a surprise to some folks is that we’re not too late to get in. Through a group of well-run closed-end funds (CEFs), we can still tap big corporate-bond yields at a discount.

Many analysts acknowledged the terrific environment for bonds right now. Corporate bonds are the safest they have been in years.

The demand for bonds has caused inflows into US corporate bond funds to hit record levels. Investors are shifting to a large extent from less “RISKY” products and into CORPORATE BOND FUNDS.

It’s easy to see why. Check out the yields on the following three (3) corporate bond–focused CEFs:

These are just three (3) of many BOND CEFs with yields above 9%, and those yields are better covered by these three (3) funds’ investments than they have been in a long time. Here’s why…

Corporate-Bond Yields Surge

Since the FED started INCREASING rates, BOND YIELDS with average yields on bonds rated Aaa and Baa by Moody’s—have “SOARED”.

BOND YIELDS usually go UP when the “RISK” of DEFAULT RISES, but defaults are still tame this time around.

Currently, private credit has a 0.3% DEFAULT RATE, and INVESTMENT GRADE CORPORATE BONDS have been around 0.5%.

LOW RATE CORPORATE BONDS are defaulting at a HIGHER RATE, around 4.2%, including the lowest-quality JUNK BONDS, so a “SAVVY” bond-fund manager should be able to avoid those and produce a high-yielding portfolio with relative ease.

On the ground, we’ve seen exactly that scenario play out. Consider PTY, which is listed above. During the 2010s, when interest rates were much lower than today, the fund’s net asset value (NAV, or the value of its underlying portfolio) “SOARED”. PTY’s portfolio even outperformed the S&P 500 due to management’s ability to select “WINNERS” and avoid “LOSERS”.

Not only did PTY beat stocks, but it maintained its generous PAYOUTS, too, which now yield that rich 9.6% we saw in the table earlier.

PTY did so well in the last decade that it even paid “SPECIAL DIVIDENDS” despite low rates!!!

Now that yields are a lot higher and defaults have not risen significantly, PTY will have an easier time maintaining its current PAYOUT than it has in a decade.

Now, I have to be honest—PTY was able to do that because of a very aggressive trading strategy that other BOND FUNDS could NOT replicate. As a result, their performance was nowhere near as good. Both DHY and EVV are in that category, which is why their long-term returns could not match PTY’s performance.

BUT, remember what has happened to interest rates…

Higher Rates = Easier Dividend Coverage for Everyone
Unlike PTY, which trades aggressively, EVV and DHY have mandates that limit such “AGGRESSION”, so these funds tend to HOLD THEIR BONDS LONGER. The secret to their success is avoiding DEFAULTS. That has helped DHY and EVV “OUTPERFORM” the broader CORPORATE BOND INDEX.

EVV and DHY Outrun the Broader Bond Market

Still, their LONG-TERM PERFORMANCE has been much LOWER than that of PTY, not only due to their LONGER HOLDING PERIODS but because they were limited by CORPORATE BONDS’ LOW YIELDS PRE-PANDEMIC. That’s no longer the case, which is why funds have more “RELIABLE” DIVIDENDS than they have had for over a decade.

That leads us to these funds’ current pricing.

As we saw in the table at the top, while PTY is priced at a massive premium (30.9% as of this writing), DHY and EVV both sport 8.2% discounts, making them more interesting right now. PTY’s strong long-term returns were built in a different environment and aren’t too helpful to YOU, ME, WE the ATWWI FAMILY now, looking into the future.

With HIGHER YIELDING BONDS on the market, and with these funds’ focus on holding HIGH-YIELDING issues for LONGER than PTY, they are better positioned to lock in today’s HIGH YIELDS.

ALSO, DHY and EVV have DISCOUNTS that make their payouts more sustainable. DHY pays out 9.2%, but thanks to the magic of CEF discounts, management needs to earn just 8.5% on a NAV basis to maintain that payout, while EVV’s 9.8% yield becomes 9%, again thanks to its DISCOUNT.

These sound like “UNBELIEVABLE” returns, but they are sustainable in a market where bond yields have “SOARED” and interest rates, as Jerome Powell recently hinted, are set to FALL.

LOWER RATES (and BOND YIELDS) will boost DHY and EVV’s portfolio values, while their yields are LOCKED IN. That, in turn, might help both funds see the kinds of premiums PTY enjoys.

EVV and DHY demonstrate an often-overlooked benefit of CEFs: They let us get in on big swings in the market (in this case, the CORPORATE BOND market) at BIG DISCOUNTS... AND because we are getting a LARGE slice of our income in DIVIDEND CASH, CEFs add an “EXTRA LAYER OF SAFETY” .

That is why I refer to CEFs as a “HIDDEN MARKET”…

BUT, they likely won’t stay off the radar for long. As rates head lower, more people will go searching for higher income… AND CEFs, with their HIGH YIELDS and LARGE DISCOUNTS, will attract their share of these investors.

PEACE & BLESSINGS

Kenneth Reaves, Ph.D.

Thursday April 11^th, 2024

A “CLEVER” WAY TO GET “P.A.I.D.” From The “INFRASTRUCTURE” Demands of Artificial Intelligence (AI)

It’s been 16 months since ChatGPT burst onto the scene.

In a little over a year, the companies working on ARTIFICIAL INTELLIGENCE (AI) technology have been “SUPERCHARGED” and “TRANSFORMED”.

Investors who got in on the AI trend early have been “P.A.I.D.”!!!

Nvidia (NVDA) alone is up over 226% over the past year.

BUT, the race to build bigger and better AI programs is far from over. In fact, in one unique sector, it may only just be starting up.

Companies are making BIG investments into building the “INFRASTRUCTURE” that AI will need to work: DATA CENTERS

Microsoft (MSFT) is planning to build an AI DATA CENTER called “STARGATE” that could cost up to $100 billion.

Amazon (AMZN) plans to spend $150 billion on DATA CENTERS in the coming years.

PRIVATE EQUITY firm BLACKSTONE has built a $25 billion DATA CENTER and has $65 billion of investors’ money to keep investing. It’s currently trying to buy WINTHROP – one of Europe’s LARGEST DATA CENTER CONSTRUCTION COMPANIES.

One of the goal(s) is to find the best ways to generate “SAFE”” income from the biggest market trends.

In this “WIZ” DAILY JOURNAL I will explain how AI is fueling a growing need for more DATA CENTERS. I will also show you how to collect a “RELIABLE YIELD” by owning these “MISSION-CRITICAL assets as the world races into the future.

The "INFRASTRUCTURE" AI Needs to Function

One of the key factors in AI development is having enough COMPUTING POWER. It’s also one of the biggest bottlenecks. Here’s why…

ChatGPT uses an AI model called GPT-4. Without getting too “TECHNICAL”, it has more than a trillion parameters – or variables – that affect how the AI responds. To train the AI, each of those parameters must be “OPTIMIZED”.

Basically, that means running a lot of calculations to figure out the best setting for each of those parameters.

As companies develop newer AI programs, they will include more parameters and use more data to train them. That means the amount of COMPUTING POWER needed will keep GROWING.

That’s where DATA CENTERS come in. DATA CENTERS are buildings that HOUSE COMPUTER SYSTEMS, GENERATE STORAGE, COMPUTING POWER and SECURITY for millions of remote clients.

All those chips running AI programs will need to be kept in DATA CENTERS that provide power, cooling, and high-speed internet connections.

There IS just one problem – the available supply of DATA CENTER space can’t keep up with the HUGE demand for COMPUTING POWERC coming from AI.

It takes years to build a DATA CENTER. Plus, because of supply chain issues and data centers’ unique electrical, power, and cooling demands, construction is taking around FOUR TIMES longer than it used to.

The best locations are running low on land and electricity. That’s causing a strong increase in DATA CENTER rental rates.

According to real estate broker CBRE, data center rents have been rising at a double-digit pace since 2021.

Most of the new DATA CENTERS finishing construction in 2024 are already spoken for. Which means companies looking to find space in DATA CENTERS have to wait up to two (2) years…

That makes the companies that own and build DATA CENTERS an attractive opportunity today for YOU, ME, WE the ATWWI FAMILY.

One Way to Invest in AI’s "INFRASTRUCTURE"

One company that’s setting up to be a big beneficiary of this growing trend is EQUINIX (EQIX).

EQIX is a REAL ESTATE INVESTMENT TRUST (REIT) and one of the LARGEST DATA CENTER companies in the world. Its portfolio includes 260 DATA CENTERS on five (5) continents in 33 countries.

EQIX has been building DATA CENTERS for more than 20 years. That means it has already “LOCKED” in many of the best locations in its portfolio.

That’s important because it gives the company many opportunities to expand its existing DATA CENTERS without having to buy new land and wait for power and internet connections.

EQUINIX currently has 49 DATA CENTER construction projects in progress.

As a REIT, it’s REQUIRED by law to pay out 90% of its “TAXABLE INCOME” to SHAREHOLDERS through DIVIDENDS.

The company’s contracts include 2-5% rent INCREASES each year, allowing it to keep up with INFLATION, which is around 3.15% right now.

Plus, as it builds more DATA CENTERS, it can lock in even HIGHER RENTAL RATES as a result of the AI boom. That means shareholders will continue to get RELIABLE and GROWING INCOME.

EQIX yields 2.1%. That may seem low, but the company is growing its DIVIDEND at a rapid pace. Last year (2023), it INCREASED its DIVIDEND by nearly 25%.

Shares are trading at under 24x ADJUSTED FUNDS FROM OPERATIONS (AFFO). AFFO is a financial metric that tells shareholders how much CASH FLOW a REIT has available for paying DIVIDENDS.

Although EQUINIX has HIStorically traded at 24x AFFO, it’s a “FAIR” price to pay for a company that’s helping provide the computing power desperately needed to meet the rapidly growing INFRASTRUCTURE demands of AI.

PEACE & BLESSINGS

Kenneth Reaves, Ph.D.