News & Views

Bitcoin “Strategy”

Earlier today the first bitcoin-linked exchange traded fund (ETF), ProShares Bitcoin Strategy (BITO), commenced trading on the New York Stock Exchange. I say “linked” as BITO doesn’t actually hold bitcoins. Rather, ProShares structured BITO as an investment vehicle in bitcoin futures, or contracts traded on the regulated Chicago Mercantile Exchange (CME) that track the future prices of bitcoins. I have no idea what ProShares’ “strategy” might be with respect to trading bitcoin futures other than simply being the first ETF to do so. While the first-mover advantage frequently represents a fine strategy, we’ll withhold judgment on this one for a while.

Investing in futures contracts likely represents one of the few ways that the Securities and Exchange Commission allows an ETF to offer exposure to bitcoin. Notably, the SEC chose not to disapprove or approve BITO. Rather, they simply chose not to act on ProShares’ offering of BITO. The SEC had a 75-day period over which they could comment on BITO, which expired yesterday (10/18/21). The fact that BITO invests in futures traded on a regulated exchange, much like similar ETFs tied to crude oil, gold, or other commodities, likely paved the way for inaction from the SEC. More futures-based cryptocurrency ETFs likely soon will follow BITO.

Before investors jump into BITO or their likely soon-to-be-launched look-alike ETFs, I recommend taking a moment to digest the differences between owning futures and owning the underlying assets. Most prominently, price relationships between futures and bitcoins infrequently will reflect 1:1 proportionality. In fact, based on the anticipated popularity of BITO CME’s bitcoin futures contracts recently reflects a 15% premium to the actual spot price of their underlying bitcoin. Second, this “contango” relationship, which describes the condition under which the prices for the underlying in the future trade higher than the current spot price, creates “roll risk.” As funds like BITO periodically must reinvest in new futures contracts to replace expiring contracts, the potential exists for these ETFs to buy high and selling low if bitcoin spot price dynamics change substantially between buy and sell dates. Additionally, BITO cannot participate in the spot market for bitcoins, which removes a key function many large futures traders employ to limit the potential negative impact of roll risk. While the bitcoin futures and spot markets appear large and liquid the potential for manipulation persists. Trading bitcoin futures is not a cost-less exercise either.

All of these potential risks, however, probably pale in comparison to the substantial risk of price volatility posed to bitcoin investors. Without the linkages to material uses offered by the more typical assets on which futures markets base values – currencies, lumber, interest rates and such – bitcoin prices reflect consumers’ views as a store of value. As such bitcoin price behavior likely will correlate better with art and collectibles than it does even with gold, the other historically popular store of value. All of this is not to say that investors owning bitcoin or other cryptocurrencies is necessarily bad or good, just that it likely will be quite different than their experiences owning other assets.

Solid First Month For Solyco Wealth

The first month for Solyco Wealth’s Model Portfolios, which provide a risk tolerance-based framework for discussing client goals and investments, proved to be an eventful one. Characterized by ongoing debates concerning Fed policy, COVID impacts on labor supply, and the resulting impacts on domestic and international economies, the investing landscape offered plenty of challenges. All told, Solyco Wealth, which populates its model portfolios primarily with individual equities and fixed income exchange traded funds (ETFs), turned in a solid first month, as shown in the following table.

Solyco Wealth Returns and Benchmark Comparisons by Strategy, 9/8/21 – 10/8/21

Strategy Return, Net of Fee Return, Prior of Fee
1-Month and Since Inception Benchmark Strategy +/- Benchmark 1-Month and Since Inception Benchmark Strategy +/- Benchmark
Conservative -0.87% -1.44% 0.57% -0.79% -1.44% 0.65%
Moderate -1.07% -2.15% 1.09% -0.98% -2.15% 1.17%
Moderately Aggresive -0.73% -2.69% 1.96% -0.65% -2.69% 2.04%
Aggressive -2.48% -3.40% 0.92% -2.40% -3.40% 1.00%
Russell 3000 Index -2.70%  
Bloomberg US Agg Bond Index -1.07%
MSCI World ex-US Index -4.74%

Past performance should not be construed as illustrative of potential future performance.

Solyco Wealth used Morningstar Direct to calculate the above returns for the 1-month and since inception periods from September 8, 2021, through October 8, 2021.
Fee assumed in above calculations amounts to 0.083%, or 1/12 of annual 1% management fee. Actual client investment performance likely will differ from respective model portfolio performance due to several factors including: 1) Timing of securities purchases and sales, 2) Dividend reinvestment choices, 3) Securities held outside the model portfolio, 4) Weighting differentials for certain securities relating to whole versus partial share accounting, 5) Timing and pricing of rebalancing actions, and other minor factors.
Conservative benchmark = total returns for 10.0% Russell 3000 Index, 65.0% Bloomberg US Aggregate Bond Index, and 10.0% MSCI World ex-US Index and 15.0% cash allocations.
Moderate benchmark = total returns for 22.5% Russell 3000 Index, 45.0% Bloomberg US Aggregate Bond Index, and 22.5% MSCI World ex-US Index, and 10.0% cash allocations.
Moderately Aggressive benchmark = total returns for 32.5% Russell 3000 Index, 25.0% Bloomberg US Aggregate Bond Index, and 32.5% MSCI World ex-US Index, and 10.0% cash allocations.
Aggregate benchmark = total returns for 45% Russell 3000 Index, 5.0% Bloomberg US Aggregate Bond Index, 45% MSCI World ex-US Index, and 5.0% cash allocations.

More information on Solyco Wealth’s Model Portfolio’s available upon request:
– 713-444-3560.

Great Advice Depends On Great Questions

Asking great questions ranks as a superpower in my view. Doing so can elevate normal, everyday folks to exalted status. From “Can I help you with that box?” to “How’s your mother today?” to “Would you like fries with that?”, just having another human being display a modicum of concern frequently places a little more pep in a step or turns a frown upside down.

Great questioning defines great financial advice as well. Irrespective of whether the situation involves an advisor endeavoring to aid a recent widow in making sense of her financial situation or a banker seeking to offer the most useful advice possible to a CEO and his strategic initiatives team, effective engagement centers on asking about the right things in the correct way.

With respect to conversations revolving around money, many frequently lose sight of what I view of the most important question: “What do you want to do with your money?” Many, many more people, of course, may argue that “How do I get more money?” may be a more important question. I beg to differ as the “what” conveys a goal while the “how” – at best – might offer a pathway toward achieving that goal. In my experience figuring our the “what” yields significant insights into the anxieties, challenges, hurdles, and, in the end, the opportunities, to aid in determining the best “how”.

Little of this great questioning matters though if I fail to listen to the answers. A one-sided conversation, which my daughter in high school would sneeringly term a “lecture,” does little more than convey facts or opinions or viewpoints from one person. As an advisor I’m seriously disinterested in spouting facts and views on stocks, interest rates, or tax regulations. Rather, I’d prefer to ask clients to describe their financial goals and what they see as the opportunities and challenges impacting the achievement of these goals. Maybe then I can put those views on stocks, rates, and regulations into action to motivate them closer to those goals.

Planning Sucks, But It’s Worth It

I get it: planning sucks. It’s like someone else always telling you what to do. Much of it involves trying to allocate insufficient resources to satisfy excess demand for those resources. Financial planning can be even worse: it involves money, which never seems to be oversupplied (unless you’re Elizabeth Warren bad-mouthing poor Jerome Powell). Undesirable terms like budget, taxes, required, beneficiary, and, yep, death, get thrown around ad nauseum (I threw Latin in there just to drive the discomfort point right where it needs to be).

Here’s the kicker on planning, though: rarely, if ever, does one incur a negative outcome from it. Sure, executing the plan frequently proves to be rife with pitfalls. Conditions change. Unintended consequences arise from choices made (or avoided). Your in-laws move in for an indeterminate period of time because their basement flooded. The process of planning is like free self-education.

The upsides of financial planning can be multitude. One might discover upside earnings potential due to an over-allocation to cash or “low-risk” fixed income. Or, a couple could learn that their counterpart is far more risk averse than they initially thought, stressing their union with lost sleep and unneeded anxiety. Reviewing financial assets in their entirety with a professional could unearth misallocations versus a risk profile that explain past periods of under- (or over-) performance amid periods of market turbulence or calm. To borrow from Forbes: with all thy getting, get understanding.

Recent conversations with a prospective client discovered that across the half-dozen accounts they held at four different firms they sat on $250,000 of cash in excess of their desired cushion. At a moderate level of risk tolerance (45% in the Bloomberg Agg Treasury Bond Index and 22.5% in each of the Russell 3000 and MSCI World ex-US) over the past year this misallocation amounted to an opportunity cost in excess of $33,000, or the sum of lease payments over the next three years on the new pickup the client wanted to purchase. Another client complained of a prior advisor perpetually allocating their capital too conservatively when, in effect, the advisor achieved an appropriate risk profile but did so by significantly over-allocating to relatively underperforming international equities. Without an effective planning process, however, no one grasped the roots of the issues. Anecdotal evidence, to be sure, but personal examples frequently provide the best impetus for action.

Extrapolating FedEx’s Fiscal 1Q22 Results

FedEx’s fiscal 1Q22 results, reported yesterday after market’s closed yesterday, may provide a snapshot of the U.S. economy. Earnings per share of $4.37 fell well short of the $4.92 S&P consensus estimate while revenue of $22.0 billion was in-line with the $21.9 billion consensus forecast. About ninety minutes before trading opens FDX shares traded $15.50, or 6.1%, lower at $236.57. Shares of FDX are not included in any accounts or model portfolios either personally or at Solyco Wealth. Also, I’ve got no view on FDX’s investability; I’m just using its results as an example of what potentially is going on across much of the U.S. economy and in the minds of management teams.

Management cited a litany of factors that, in sum, amounted to an estimated $450 million in elevated 1Q22 costs: labor, inefficiencies, wages, and outsourcing. The “outsourcing” component of these higher-than-anticipated expenses particularly caught our eye. Theoretically, if FDX management expected current conditions to persist beyond the short-term, they would consolidate those 3rd-party outsources. Doing so, given the stellar abilities of FDX management in the past to drive efficiency and reduce costs in their businesses, would go a long way towards alleviating the other three phenomena negatively impacting expenses as doing so would increase labor access, offer opportunities to improve efficiency, and – potentially – consolidate wages as they would no longer need to fund outsourcers’ margins. The conventional explanation for FDX management NOT doing this: they assess these pressures as transitory.

Sure I’m oversimplifying FDX’s capital budgeting processes and decision-making, but I thought the exercise worthwhile. The fact that management pulled down full-year fiscal 2022 guidance from a range for EPS of $19.75 to $21.00 from a prior EPS range of $20.50 to $21.50 maybe points to a timeframe that management anticipates these expense pressures persisting. If 1Q22 missed EPS forecasts by $0.52, an extrapolation of this figure across the change in guidance appears to stretch into fiscal 2Q22 or 3Q22. Notably, given the accelerated shipping activities occurring around the holiday season, though, FDX’s inefficiencies could be WORSE through the company’s fiscal 2Q22. The recent jump in fuel costs probably don’t help expense levels either.

Looking at the larger economy, package volumes remained strong for FDX at 6.2 million units – flat year-over-year (y/y). Revenue per package scaled 15% higher to $21.05 y/y with international volume and pricing notably stronger than domestic measures. Another nod towards “transitory” here as well: with pricing already +15% and volumes flat FDX presumably could have moved pricing even higher. In fact, FDX management did just that a two days ago, announcing a 5.9% price increase starting in calendar 2022. Interesting: raise prices to pay for increased costs to outsource deliveries rather than consolidate those outsourcers.

An Equity Market Correction

Equity markets likely correct 5% to 10% over the next six weeks, if for no other reasons than a bevy of Wall Street strategists seemingly agreed last week that conditions appeared ripe for such a move. No major problem, in my view: it’s been a while since equities digested their sizeable gains. Typically, corrections, providing they don’t accelerate beyond the 10% level or so, prove healthy for long-term equity price appreciation.

Corrections, as they materialize, lead me along a few lines of thinking:

  1. Are the medium- to long-term economic conditions constructive for ongoing equity price appreciation?
  2. What conditions could prevail that amend the correction? and
  3. Might unforeseen or ill-considered phenomena drive a correction beyond the “healthy” 5% to 10% level and deeper into damaging territory?

Medium- to long-term economic conditions remain constructive for ongoing equity price appreciation, in my opinion. Abundant liquidity in combination with ultra-low interest rates and the aforementioned increases in equity prices result in corporate and personal balance sheets that rank among the healthiest in history. The resulting climate for fixed income investing from low interest rates also make equities the most attractive option from a risk-reward basis for investment capital, a relationship we expect to persist for the next 18 months or so. The dislocation of employment over the past year and a half, while terribly painful for tens of millions, results in among the most attractive backdrops for employment prospects ever.

Conditions that could win-out and perpetuate the overall trajectory for equities in 2021 without a correction include:                 

  • Acceleration of a decline COVID-19 cases,
  • Rising consumer sentiment from that drop in COVID-19 cases that propels increasingly positive expectations for Holiday 2021 shopping,
  • Bipartisan support for a sensible Federal budget,
  • A lower-than-feared increase in the corporate tax rate related to that sensible budget
  • Declining logistical challenges to putting sufficient products in inventories and onto shelves for consumers to purchase during their Holiday 2021 shopping,
  • Increasing employment participation related to declining COVID-19 cases and improving consumer confidence and sentiment

Any number of unexpected events or underappreciated issues could lead an equity market correction beyond a healthy level and into destructive territory. The key, in my view, is to focus on those factors with the highest probabilities of occurring. COVID-19 challenges rank chief among these factors. Increased infections, escalating hospitalizations, and mounting mortality rates – to say nothing of the possibility of an “Epsilon” variant developing in response to our ineptitude at controlling the Delta variant – that undermine fundamental economic activity could deepen a correction and turn it into an equity market tailspin. Further increases in Federal spending WITHOUT requisite increases in the amount of goods and services that consumers can purchase, would make a mess of equity values as well The heavy-handedness with which Chinese authorities chose to deal with mounting inequalities in the country and/or an implosion of Chinese property markets that spills over to international capital markets or disrupts recoveries in global semiconductor production also could exact deleterious impacts on equity markets.

The Labor Market Disconnect

The conclusion of a recent missive I read on the jobs situation – more openings than applicants, if you choose to read more interesting things – reminded me of the closing scene of the movie Office Space. The piece I read suggested folks uncomfortable working in bars, restaurants and retail shops, possibly seek employment in more accommodating sectors such as construction, manufacturing or retail trade. If you recall from Office Space, Peter Gibbons (Ron Livingston) opted out of a dead-end but comfy office job after a short-lived life as a white-collar criminal mastermind for the life as a construction worker with his next-door neighbor Lawrence (Deidrich Bader). The relative joy of moving dirt and debris around outside and being able to actually see the fruits of his labors seemingly trumped the disgust-riddled process of shuffling TPS reports from desk to desk in a cubicle-infested, yet air-conditioned climate.

Training and experience differentials be damned, another anomaly in this labor piece really gets at the root of the problem: “retail shops” versus “retail trade.” Not enough folks want to work in the shops anymore while trade apparently experiences more success filling openings. The primary difference: in the shop one must deal with people while, at least the way I understand it, trade involves putting things out for customers to purchase without any requirement to interface with the customer.

People, more specifically the way many of us choose to treat each other, define the essence of the labor market disconnect. That’s my conclusion. Just like Peter Gibbons no longer wanted to deal with his butthole of a boss Bill Lumberg (Gary Cole), almost to the point of blowing up his relationship with way-out-of-his league Joanna (Jennifer Aniston), no one wants to deal with anyone else anymore. For those choosing not to go back to tending bar, serving food, or finding that pair of jeans in the right size, COVID didn’t create their distaste for dealing with the rest of us. Instead, it significantly increased their assessments of the costs of dealing with the rest of us. For some an extra $300 per week might sufficiently compensate them in the form of an enhanced unemployment benefit. For many, however, I fear that they discovered – like Peter Gibbons – that the benefits of not dealing with buttholes and doing something else are far greater than they earlier estimated. Putting on my economists had really quickly, I forecast that the cost of dealing with us in the future will skyrocket far beyond $300 a week if we can’t quit being buttholes.

Smackdown on SPACs

I experienced an interesting confluence of events yesterday. First, The Wall Street Journal ran an article on the smackdown SPACs received over the past few months: the 137 mergers closed as of mid-February lost 25% of their value. Then, yesterday evening at a high school football game, I ended up sitting in front of United Wholesale Mortgage CEO Mat Ishbia, who took his company public via a merger with a Special Purpose Acquisition Corporation, or SPAC.

The first thought that struck me sitting there watching the two teams warm up was, “Huh, Ishibia’s a football fan as well as a basketball guy.” The second, and more important thought for my professional purposes, was that the demands of SPAC investing differ little, if at all, from those of investing in any other security: one still needs to do their fundamental work. Grouping UWM, which offers tangible and substantial sales, earnings, and even dividends, in with many of the other pre-revenue SPACs does both groups of companies significant disservices. As investors sort out the SPAC universe, including UWMC, I anticipate they’ll experience long-term winners and losers, similar to the balance of the universe of investable securities.

I predict that investors doing the old-school analysis on potential addressable markets and sizes, prospective sales into those markets, and projected earnings and cash flows from those sales, will enjoy better outcomes than those who do not. However, as I’ve not completed this work on UWMC, I’ve got no thoughts on its investment merits and therefore, offer no opinion on its shares…

Retirement: Taking The Long View

Detroit Free Press personal finance columnist Susan Tompor authored another thoughtful piece in this morning’s paper. Tompor fears, and rightfully so, I think, that folks approaching retirement may be prone to jump the gun this year in response to news of a possible 6%+ hike in Social Security’s cost of living adjustment (COLA). However, unless near-retirees possess substantial resources beyond Social Security on which to draw on through retirement, it likely will behoove them to take the long view and to keep plugging away at work. First, all Social Security beneficiaries, including those already drawing benefits as well as those yet to initiate benefits, will gain from 2022’s likely outsized COLA adjustment. Second, research from Boston University economist Laurence Kotlikoff quoted by Tompor estimates that the inflation-adjusted Social Security benefit at age 70 exceeds the age 62 benefit by 76%. Also, wages likely will continue to climb through the balance of 2021 and into 2022, which should lead to higher paychecks. To the downside, higher 2022 taxes almost certainly will act to deflate the purchasing power of those higher benefits and paychecks.