Bitcoin Options Trading

Options are what are called derivative contracts. One does not buy or sell Bitcoin itself but rather the right to buy or sell. Options come in two flavors, calls and puts. The point of options is that buyers of contracts pay money to have the right to buy when Bitcoin goes up or sell when it goes down. The contract for a call or put specifies a price called the strike price. This is the price at which a person can buy or sell no matter how high or how low the price of Bitcoin goes.

Trading Options Allows Traders to Hedge Risk

Options help traders hedge risk and leverage their trading capital. Let us say that you expect Bitcoin to rally. You could buy Bitcoin and then wait and see what happens. One very real risk is that your assumption is wrong and Bitcoin falls in price. You not only did not make money. You lost money in this scenario. If you had purchased a call contract on the same quantity of Bitcoin you would have paid a premium for that right. If Bitcoin fell in price your maximum loss would be the price of the contract called the premium.

Trading Options Allows Traders to Leverage Trading Capital

As in the example above, you expect Bitcoin to go up. You buy ten tokens which amounts to about $37,000 x 10 = $370,000 late in 2023. The price does go up by $5,000 per token and you sell your tokens. Your profit is $50,000 minus fees and commissions. However, you could have purchased call contracts covering those ten Bitcoin tokens for a fraction of the $370,000 that you put at risk. When the price of Bitcoin went up by $5,000 you could sell your option contracts before expiration and gain the same amount or about $50,000 minus fees and commissions. Alternatively, you could buy the tokens at the strike price of $37,000 each and own tokens worth $42,000 each. In either case, trading options allows you to leverage your trading capital at the same time as you are hedging your risk.

Calls Versus Puts in Options Trading

Options trading can be very basic or rather complicated. At its very basic a trader buys a call contract that gives them the right up until the contract expires to buy Bitcoin at a set price no matter high how it might rise. Or they can buy a put contract that gives them the right to sell Bitcoin at the contract price no matter how low Bitcoin falls. In each case, the buyer is under no obligation to do anything unless it is profitable. The seller, however, is paid a premium for taking on the risk that Bitcoin will go up or down contrary to their expectations. Professional option traders commonly use more complicated strategies like vertical spreads where they both buy and sell calls or puts at different price levels. This is typically done to gain a reasonable profit while hedging against downside risk. To do this sort of trading one needs to take the time to learn more about options than is contained in this article.

SlideShare Version – Why Trade Options Versus Bitcoin

Why Trade Options Versus Bitcoin – DOC

Why Trade Options Versus Bitcoin – PDF

Dow Jones futures and S&P 500 futures jumped early Tuesday, while Nasdaq futures rose modestly. With a market correction in force, a new stock market rally attempt is underway with Election 2020 finally here, with the latest IBD/TIPP Trump vs. Biden poll showing a tighter race.

There are two pieces to the issue of who will be governing the country over the next years. Biden appears to have the edge over Trump but that will not be certain until all votes are counted and all court challenges have been dealt with. A more likely case is that Democrats will probably gain control of the US Senate by a few votes. This by itself could lead to stimulus payments before the start of the next year and would be a boost for both the economy and the markets.

Investing Government Spending on Infrastructure

We have written about the sorry state of US infrastructure and how infrastructure spending on everything from roads and bridges to 5 G will drive the US economy. Interest rates are extremely low and likely to remain so for years. Thus, any government borrowing will be subject to low interest rates. A Democratic Congress along with a Democratic President will likely invest in a Made in America program focusing on infrastructure, green energy, bringing more manufacturing back to the USA, and driving consumer spending higher.

The shape of the economic recovery has been starting to look like an “L” or really wide “U” instead of the hoped for “V”. We could be looking at a recession that lasts for years, like the Great Depression, if a stimulus does not happen. A new administration with the same party in control of Congress will likely spend without concern for the budget until they get the economy moving and healthy again. This would provide a stimulus similar to WWII spending that forklifted the US economy out of the Great Depression.

Investing in a Post-election Stock Market Rally

If there is a strong post-election stock market rally, which sectors will benefit the most? If stimulus checks resume it will put money in consumers’ hands at the base of the economy and the result will a surge of spending on consumer goods. When infrastructure spending starts it will benefit construction and materials suppliers as well as the general economy because there will be more jobs. For many years the big tech stocks have been the best bet but that will no longer be the case. As such, the FAANG stocks may not fall but they may cool off. If we see a positive economic result from infrastructure spending, it will be repeated. That bodes well for long term investors in the sectors that will benefit.

Post-election Stock Market Rally – Slideshare Version

Post-election Stock Market Rally – DOC

Post-election Stock Market Rally – PDF

There are already law suits against several major banks pressed by the attorney generals of all fifty states. These suits will be dwarfed by the US Federal Housing Agency if it, in fact, goes forward. There have been large numbers of bank foreclosures in the wake of the 2008 stock market meltdown and worst recession in nearly 80 years. Now more of the major banks may be at risk. There is talk already of another bailout with the US tax payer picking up the tab, again. However, this time the talk leans toward taxpayer ownership of these banks. If the situation gets bad enough banks will need to issue stock to raise capital. Doing so will drive down their stock prices. The investor interested in picking bank stocks at bargain prices will need to read the situation carefully with bank stock analysis in order to get in at the bottom of the price curve and not throw away their money on buying a stock on a bank that then goes bankrupt. Buying preferred stock might be an option in such a case as it puts one ahead of ordinary shareholders for payment if a bank goes under. Certainly how to invest in stocks of failing companies is to tread softly but there is a history in the USA of not letting the biggest companies fail. Many have earned handsome profits applying a “blood in the streets” strategy to buying failing stocks.

As always we are not suggesting that one buy bank stocks or avoid them. Bank stock analysis whether it be of Bank of America or any of the big banks currently in trouble can be instructive. The Federal Reserve chairman, Ben Bernanke, implied that the Fed would step in with further economic stimulation if the slowly recovering economy weakens. Successful bank stock analysis will take more than guessing what the Fed will do next or if their will another fiasco on Capitol Hill when in dealing with the US debt dilemma. Investment research including close reading of quarterly financial reports will give investors an idea of just how bad the situation is and when it appears on the verge of recovering. Those who time their investments just right could end up with handsome profits.

As technology moves into banking AI, there will be many changes and those who don’t keep up will loose ground.

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Fears of increased government scrutiny just crushed FANG stocks.

Facebook, Amazon, Netflix and Alphabet tanked Monday, shedding nearly $130 billion in market cap collectively. Those losses sent Facebook, Netflix and Alphabet into a bear market, having dropped at least 20% from recent records.

The drop came on the first trading day after The Wall Street Journal reported that the Justice Department is readying an antitrust investigation against Google over its search practices and other issues. Alphabet declined to comment.

They go on to say that having to deal with regulators takes management away from making effective decisions for company growth and, by itself, could be damaging.

Gina Sanchez, CEO of Chantico Global, says just the threat of increased regulatory oversight could stymie the FANG trade for some time.

“These companies will be very, very mired in the process of being scrutinized,” Sanchez said during the same segment. “They could actually keep these companies so involved in this process over the next two years that they won’t be able to effectively run and do the things that growth companies do.”

And, of course, the look at anti-competitive practices could end up with any of these companies getting broken up as happened to the venerable AT&T in the 1980s.

Are Your FANG Investments at Risk for Other Reasons?

Regulatory concerns are not the only reason that the FANG stocks have cooled off. The group has led the bull market to higher and higher levels since the economy emerged from the financial crisis and Great Recession. There is always a point at which the market price of a stock exceeds its intrinsic value so much that even the most optimistic investor will sell a few shares. The trade war with China affects some of these stocks but not others. And, there is no guarantee that their prices will continue to rise as they may not continue to buy back shares indefinitely.

Are All FANG Stocks in the Same Boat?

To the extent that passive investors are investing in FANG stocks through an ETF, it makes no difference which FANG stock is most strongly threatened by the risk of government regulation. However, Alphabet (Google) is a different business than Netflix and Amazon.com is different than either. Facebook is a totally different animal as well. However, all of these companies have grown large and have the capacity to limit competition in various ways. As such, they become targets for regulators. It seemed such a shame when the old AT&T was broken up but, in fact, the breakup ushered in a great new era of telecommunication in which the better companies with better ideas succeeded and the one who continued in the staid ways of AT&T failed and were absorbed by the competition.

Google is far and away the leading internet search engine. Because of the importance of internet searches in an era where no one used the yellow pages or phone book anymore, it is a major concern for society that this system be fair to all users and not meant to manipulate to hide information.

Facebook has become a major social force and also a hiding place for terrorists and crazy people. This will be regulated at some point as we discussed in our article about FANG regulatory risk.

Netflix is essentially a monopoly but always runs the risk of a newer technology passing it by. Just think of how video cassettes were such a big deal and how Blockbuster controlled the content on movies that it rented. Then everything went to disk and then it was downloaded and then Blockbuster just went away. We are not sure what technology might make Netflix obsolete but there is probably one out there. To give Netflix credit, they have become a movie production and content generator which will always give them something to sell even if they are not the major viewing platform.

Amazon.com is unique in how they have displaced so many brick and mortar businesses but they have also followed the John D. Rockefeller approach of undercutting competition until there is none and then they have the capacity to raise prices. At some point, this behavior will be broken up or regulated.

In the end, we think the FANG investments at risk include all of them. This is a doomsday scenario of these great companies going out of business but the world changes and that simply makes yesterday’s winners change or fade.

Also, a person may wish to use only conservative investments to avoid risking their investment capital on more risky investments in hopes of more spectacular gains. What we have put together is not a list of stock tips but rather a consideration of the wide range of choices and their pros and cons.

How to Invest in Stocks

There are successful and famous long term investors in the stock market and there are folks who have made money by skipping in and out of the market for short term profits. Some investors focus on a single investment while most choose to diversify their investment portfolios. Ultra-conservative investors choose ways to invest without losing any money while most investors realize that in order to make a profit over the years you need to tolerate the usual market volatility and accept a reasonable degree of risk. In fact, the trading off of risk versus profit potential is a recurring issue as you consider how to invest in stocks over the years.

Investing in Stocks for Beginners

Take Care of Loose Ends before Investing in Stocks

As you start your stock market investing journey, there are a couple of housekeeping chores to consider. One is that you should not be investing with the grocery or rent money. Thus, a beginning investor needs to simply put enough money in a bank account to cover the bills for the next three months. That way you will not end up taking money out of a promising investment in order to pay routine expenses. The other chore is paying off your credit card debt before starting to put money in the stock market. The interest rate charged on credit card debt is far and above what a beginning investor will make in the market and more than veteran investors expect over time.

How to Invest in Stocks Most Successfully Is to Start Early

Although there are times when a well-chosen stock investment will make a lot of money in a hurry, the vast majority of successful investors are in it for the long haul. They invest in such a way as to gain a high average return on their investment year after year. The important part here is the average return on investment. Many times the market goes into a slump and nobody’s stocks appreciate in value. And then a bull market takes hold and stocks go up a lot. The best investments are the ones that appreciate in value ten percent a year or more on the average.

Exponential Investment Growth

What investors get in the stock market is exponential growth of their investment capital. The S&P 500 is an index of 500 stocks meant to reflect the stock market as a whole. From the time this index started keeping track in 1926 until the present day, it has gone up 10% per year on the average. This is a better return, on the average, than any other investment vehicle available to investors. This rate of return, if delivered every year for seven years, with all appreciation and dividends reinvested, will double your investment during that time frame. Obviously, as the market moves through bull and bear cycles the rate will change but over the long term, the exponential growth of the market as reflected in the S&P 500 is what generates returns and builds wealth. The sooner you start, the more years you have to see your investments grow!
(Investopedia)

How to Invest in Stocks: Active Investing

The wealthiest long term investors pick their own stocks. They also invest in stocks as a full time occupation and when they are very successful they have lots of smart people helping them do research. The individual beginning investor does not start out with the knowledge, experience, and helpers that these folks have. But, the average investor has areas of expertise which the “experts” often do not. If you have insights that will help your investing, use them. And, stick to the areas where you expertise will make a difference.

The legendary manager of the Fidelity’s Magellan Fund, Peter Lynch, made this point. In the 1970’s one of the “in” investments for the wealthy was to buy railroad boxcars and lease them. Thus, many doctors followed this advice. These folks had money to invest but were pressed for time. They also had great insights in regard to pharmaceutical stocks, medical supply companies, and the like.

It turns out that the buy and lease boxcar investment strategy did not work out all that well as the folks who sold the boxcars did not help the good doctors with the leasing. And at the same time, the pharmaceutical giant, Smith Kline & French discovered cimetidine (Tagamet) which is a medicine that revolutionized medical treatment of ulcers, gastritis, and esophagitis, making ulcer surgery a thing of the past. Lynch said that all a physician needed to do was look at what was happening in the field of medicine and invest in Smith, Kline, & French as the stock soared. And, they needed to ignore the losing investments (like leasing railroad boxcars) that they knew nothing about!

The point of this little story is that there is definitely a place for active investing if you have unique insights and experience. Active investing takes work and time. And, it requires that the investor understand both the fundamentals that drive stock prices over the long term and market forces that cause shorter term volatility. Understanding and using important moving averages is a critical skill for active investing.

How to Invest in Stocks: Passive Investing

Letting someone else make investment decisions is the most common route for most beginning investors. In fact, today nearly half of all money investing in the U.S. stock market is directed by investment vehicles that track index funds. Although there are some concerns about too much passive investment being risky, this is still the most conservative and risk-free approach for beginners.

Investing in Mutual Funds

Mutual funds are a commonly used passive investment vehicle. Investopedia defines mutual fund.

A mutual fund is a type of financial vehicle made up of a pool of money collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments, and other assets. Mutual funds are operated by professional money managers, who allocate the fund’s assets and attempt to produce capital gains and/or income for the fund’s investors. A mutual fund’s portfolio is structured and maintained to match the investment objectives stated in its prospectus.

The benefit if putting you money in a mutual fund is that someone who very likely knows more about stocks and bonds and spends their life making investments will invest your money for you. However, there are three drawbacks. First of all, these folks charge fees for making the investments. Second, if the fund buys and sells very frequently there are fees and commissions all the time and there are capital gains taxes to be paid on short term earnings. Third, in recent years many mutual funds have not done as well as ETFs (Exchange Traded Funds) that simply track the S&P 500!

Index Fund Investing

Index funds are a popular vehicle for passive investing and are becoming more popular all of the time. There are index funds that track the S&P 500 or the Dow Jones Industrial Average and there are funds that track sectors of the market. For those with insights into certain areas of the economy but not enough time to make individual investments, this can be a good mix of active investment choices but passive day by day investing.

Investment Managers

Wealthy individuals and families often rely on professionals to invest and manage their money. This approach can be useful if the money manager is good at what he or she does. But the expense of paying someone with an exceptional skillset to buy and sell stocks should result in both better return on investment and fewer headaches than other approaches. Certainly, wealthy individuals need to pay attention because it can be all too easy to be bilked such as what happened with the Bernie Madoff Ponzi scheme.

It was great being in Bernie Madoff’s orbit, until it wasn’t. For decades, Madoff was a respected Wall Street financier, generous with employees and beloved by his family. But after his securities firm was exposed a decade ago as the biggest Ponzi scheme in U.S. history, thousands of investors lost their money, in many cases their life savings – $19 billion in principal, all told. Those closest to Madoff suffered in other ways, amid criminal convictions and giant payouts.

(Bloomberg)

A simple answer to avoid a Madoff-type disaster for both the wealthy and for other normal investors is to diversify so that a disaster in one part of your portfolio does not take down rest.

How to Invest in Stocks: Diversify

The point of diversifying your investment portfolio and the stocks within that portfolio is to reduce risk and increase your chances of finding a spectacular investment. Fidelity writes about investment diversification.

Choosing a mix of different kinds of investments and maintaining that mix are among the most important ingredients in your long-term investment success. This means creating an investment mix based on your goals, risk tolerance, financial situation, and timeline; and being diversified both among and within different types of stocks, bonds, and other investments.

The usual advice that investment advisors give is to keep part of your money in stocks and part in bonds. The idea is that there is more room to grow your wealth with stocks and guaranteed preservation of your investment capital with investments like US Treasuries or AAA corporate bonds. Likewise, owning your own home should be part of that mix.

If you are an active investors picking individual stocks, you should diversify with stocks in different business sectors and a mix of growth stocks and value investments. However, if you are a passive investor who simply buys shares of an ETF that tracks the S&P 500 the stock sector of your investment portfolio is already diversified!

One smart way to diversify your stocks is to have a mix of dividend stocks and stocks whose whole value comes from the appreciation of their share price. This approach also works if you want to part of your money to work in socially responsible investing.

How to Invest in Stocks the Tax Deferred Way: IRA and 401k

Taxes become an issue with your stocks when you sell or when you collect dividends. When a long term investor sells a stock that he or she purchased more than a year before, they are liable for long term capital gains taxes on any appreciation. If they sell within a year, they are liable for taxes at the higher short term capital gains rate. Either way, paying taxes when you sell on stock and buy the next reduces how fast you can grow your wealth. And, when you receive a dividend payment you need to pay taxes on that even if you routinely reinvest dividends.

Fortunately, there are vehicles that an investor can use to defer paying taxes on capital gains and reinvested dividends. These are IRAs and 401k plans from work. In each case, money invested in stocks typically remains in the account until you retire at which time any profits are taxed at your current tax rate. And, of course, if you are retired you will be in a lower tax bracket! But, perhaps more importantly, your wealth multiplies more rapidly because the IRS is not taking their share every year and reducing your rate of appreciation!

Every investor should take advantage of every tax-deferred way investment vehicle that they can.

How to Invest in Stocks by Yourself

There are investors who want to manage their own money, pick their own stocks, and not rely on or pay someone else to do the work. Choosing stocks to own and to hold is not an impossible task but it does require that the investor learn how to assess intrinsic stock value. This is the “real value” of the stock based on the projected ability of the company to make money and to continue to do so for many years to come. Whether an investor works from a stock “tip” or decides on a stock for some other reason, it is important to know what the company does to make money and how their business plan is likely to remain viable for years to come. And, it is important to use the intrinsic value calculation to come up with a reasonable valuation of the stock based on fundamentals as opposed to its market value.

Successful long term investors will often evaluate many stocks before choosing one with good earnings potential for years to come and a current market price that is less than the price based on intrinsic value assessment. However, when an investor finds such a stock, it can typically be held in their portfolio for years if not decades as it steadily appreciates in value and pays dividends (hopefully reinvested). An excellent choice for average investors in this era is the FAANG group of stocks. What does FAANG mean? These are the leading tech stocks, Facebook, Amazon, Apple, Netflix, and Google.

Invest in Stocks Early and Routinely: Dollar Cost Averaging

The “secret” to successful long term investing in stocks is to start early and let exponential growth take care of creating wealth. Picking good stocks and paying attention are important as not all stocks that have been strong for years remain strong forever. So, re-balancing a stock portfolio from time to time is advisable. But, many investors worry about waiting for the right time to invest. A simple and advisable way to avoid this worry is called dollar cost averaging.

DOLLAR-COST AVERAGING is a disciplined way for investors to build wealth in their portfolio over time while helping them avoid emotional-driven decisions.

Many people mistakenly believe that they need thousands of dollars to start investing for their retirement, causing them to be risk-adverse in opening a traditional investment retirement account or Roth IRA. But nearly anyone can get started with the strategy. For instance, this style of investing can help novice investors who have recently opened a retirement portfolio, and don’t have a large sum of money for an initial investment.

With dollar cost averaging an investor invests a set amount each month, such as $100. When stocks are expensive, they are not overspending on their investing and when stocks are cheap they are buying at bargain prices and getting more for their money. Perhaps more importantly, with dollar cost averaging an investor sets up a system by which they invest routinely for years and years. That is really how to invest in stocks to grow wealth.
(U.S. News & World Report)

Closely followed strategist Jim Paulsen told CNBC on Monday he’s worried that economic data could stop supporting the stock market’s bull run.

“The economy has been doing so good for so long now that even if it continues to do well, it won’t any longer be a surprise,” said Paulsen, chief investment strategist at Leuthold Group.

“Economic surprises I think are going to get as high as they’re going to get,” Paulsen told “Squawk Box.” “We may see toward year end and the first quarter next year a pause in this market.”

Paulson says there is a wall of worry about the market being overpriced. The economy does not really need to falter to take stocks down. It could simply stop providing surprises. And if something in the economy happens to concern investors there are probably a lot of them ready to pull the plug on their portfolios after making nice profits on the years-long run up.

Where Is the Economy Going?

How long will the current level of economic growth last? Is Trump’s plan to stimulate the economy going to happen and if it happens is it going to work? What does the Fed say and are they going to raise interest rates or not? Bloomberg quotes Janet Yellen who says inflation is the biggest surprise in the economy this year.

Federal Reserve Chair Janet Yellen said that the U.S. central bank expects to continue to raise interest rates gradually as solid growth, a strong labor market and a healthy global economy lift prices even as she recognized that inflation has been surprisingly low.

“My best guess is that these soft readings will not persist, and with the ongoing strengthening of labor markets, I expect inflation to move higher next year,” Yellen said Sunday at the Group of Thirty’s Annual International Banking Seminar in Washington.

Thus the current Fed chairperson expects the economic sweet spot to last awhile. She notes that asset valuations like stock prices are supported by low interest rates and that could be a new norm so long as relatively low rates persist.

Hands On or Hands Off, Which Best?

In regard to Trump’s tax cut plans we wrote about whether Republicans or economists are right.

As congressional action progresses so will the belief that tax cuts are in the wings. And thus the market may reignite and continue to go up. But eventually, what drives stock prices is the strength of the economy and one of the factors that drives or impedes the US economy is the cost of the nearly $18 Trillion US debt. In the end the issue comes down to who is right about tax cuts, the Republicans or the economists.

An argument can be made that things are going pretty well right now and trying to make changes could result in damage to the economic sweet spot that we are in. In the meantime watch the earnings reports and what congress is doing.

How Long Will the Economic Sweet Spot Last? DOC

How Long Will the Economic Sweet Spot Last? PDF

How Long Will the Economic Sweet Spot Last? PPT

The reason that U.S. presidential candidates always move politically toward the center as the election approaches is because it works. Each party has its base of ardent supporters but not enough people to win the election. The winner is the candidate who convinces the vast undecided middle of the U.S. political spectrum to vote for them and who keeps their base energized enough to get out and vote. The problem for Donald Trump is that with questions arising about his business acumen ($1 billion dollar business loss in one year) and his morals (bragging on tape about unsolicited sexual advances on women) he has retreated to the attack, slash and burn, mode that is popular with his base but is offensive to virtually everyone else. Take a look at the odds reported in the New York Times “Upshot” page and their “Who Will Be President” page.

The Upshot’s elections model suggests that Hillary Clinton is favored to win the presidency, based on the latest state and national polls. A victory by Mr. Trump remains quite possible: Mrs. Clinton’s chance of losing is about the same as the probability that an N.F.L. kicker misses a 36-yard field goal.

In the last couple of weeks Mr. Trumps odds of winning have gone down from about one in three to one in six or worse and the market has gone up. Our point is not to argue the pros and cons of either candidate’s positions or defend or attack either candidate. Rather our point is to ask if stocks will continue to rise as Trump goes down in flames, perhaps taking a Republican Party in both houses of congress with him.

Stocks Are Up Post Debate

Reuters reports that U.S. stocks gain on Clinton’s debate performance.

U.S. stocks strode higher on Monday, buoyed by the perception that Hilary Clinton won the second U.S. presidential debate and by a surge in oil prices, while sterling was under pressure on concerns Britain will make a hard exit from the European Union.

A poll taken by CNN immediately following Sunday night’s debate showed viewers said Clinton had beaten Donald Trump, 57 percent to 34 percent.

“The broader market is responding positively to the events over the weekend that make Clinton more likely to win,” said Rick Meckler, president of hedge fund LibertyView Capital Management LLC in Jersey City, New Jersey.

Investors see a Democratic Clinton administration as more predictable than one led by Trump, who has provided less detail about his plans and raised fears of market volatility around his candidacy, Meckler said.

As the election campaign winds down to close it would appear that Mr. Trump is going to retreat back into his base and fail to contest the middle ground. This will make him fall even further in the polls and will hearten the market which likes predictability. Take a look at what a Clinton presidency would mean for stocks.

Will Stocks Continue to Rise as Trump Goes Down in Flames? PPT

The outlook is improving for some of the world’s most-battered currencies after a plunge in raw materials spurred routs from the Colombian peso to Russia’s ruble in 2015.

Analysts are forecasting gains for the currencies most linked to oil even as they see more declines in store for those with stronger ties to industrial metals, such as Chile’s peso and Peru’s sol. After its worst year in more than a decade, Canada’s dollar may bounce back with crude, while the Australian and New Zealand dollars are poised for tumbles as policy makers consider interest-rate cuts to spur growth, forecasts for next year show.

While a slowdown in China continues to hurt exporters, signs that the world’s second-biggest economy is stabilizing and increased clarity on the timing for U.S. rate increases are bolstering speculation that commodities will rebound from their worst year since 2008. Crude, grains and soy are all expected to rise next year, even as precious metals such as gold slip or stay little changed, according to analysts surveyed by Bloomberg.

The point is to invest offshore when a currency is weak in relation to the U.S. dollar and sell when the situation is revered. Due to the fall in oil and other commodity prices many foreign currencies have suffered. Here is a chart from Bloomberg with anticipated movement of foreign currencies versus the USD in the coming year.

Simply on the basis of a better currency outlook one might consider directing foreign investment in 2016 towards Canada (CAD), South Africa (ZAR), Colombia (COP), Russia (RUB) or Norway (NOK). Nations to avoid in anticipation of a further currency slide are Chile (CLP), Peru (PEN), Australia (AUD), Brazil (BRL) and New Zealand (NZD). One nation left out of this list and whose currency may well slide next year is China.

China

There are a lot of good reasons to avoid China for foreign investment in 2016. The country’s real estate bubble has not yet been resolved. Chinese exports and imports are falling as its economy slows. And there is a huge load of US dollar denominated debt that may lend itself to a hard landing of the managed capitalism economy. The South China Morning Post predicts a measured fall in China’s yuan.

While the People’s Bank of China might be opposed to a sharp depreciation in the value of the yuan, the reality of tighter US monetary policy does help justify a measured fall in the value of China’s currency against the dollar.

It would also be a natural by-product of China’s own economic policies, which, in 2016, will probably be aimed at boosting domestic aggregate demand through continuing application of accommodative policies.

There may be a time in a year to two to invest in China again but for the time being expect to see a falling yuan and weakening Chinese economy.

Colombia

Eventually the recovery story of the year could be the Colombian peso. The value of the peso is linked to the price of crude oil from which Colombia derives most of its foreign currency. Despite the fall in value of the Colombian peso due to low oil prices Colombia’s economy grew the most of all South America this last year according to Latin Correspondent.

Trade and agriculture exports helped Colombia’s economy to pull in a 3.2 percent year-on-year growth this quarter. This makes Colombia the fastest growing economy in South America.
Hotels, restaurants, retail, and business services contributed a total of 4.8 percent to the growth.

An important factor for Colombia is progress in talks with rebels in Havana to end the longest running civil war in the hemisphere. Colombia appears to be one of the nations that are best positioned to provide a good return on foreign investment in 2016.

Foreign Investment in 2016 PPT

As always do your own homework before investing.

U.S. stocks pared the worst of their losses in afternoon trading, brushing off steep declines in emerging markets and European stocks. Investors in those regions were seeking safety ahead of a highly anticipated meeting from the Federal Reserve later this week, when officials could signal an increase in short-term interest rates. Currencies in Russia and Indonesia were hit Monday, along with markets in Malaysia and Thailand. Europe’s Stoxx 600 fell 2.2%, extending a 5% slide last week.

Now add higher interest rates. What will the US stock response be to an interest rate hike?

Comparative Shopping

In general higher interest rates hurt stocks because higher interest rates add to the cost of doing business, unless you are a bank. Thus we might think that the US stock response to an interest rate hike will be to drive the market down. But, where else would you put your money? Markets are down in Europe, Asia and developing markets. And, higher interest rates will drive up the value of the dollar. This is partially because Forex traders can get a better interest rate in greenbacks so they will buy dollars and hold them as opposed to other currencies. Currencies from the Ruble to the Rupee are weakening against the US dollar. According to BBC Business News:

As of Monday afternoon, it takes more than 60 rubles to buy a single dollar. The 60 mark is considered a “psychological barrier” for Russia’s national currency, says the BBC’s Moscow correspondent, Steve Rosenberg. Since the start of the year, the ruble has lost more than 45% of its value against the dollar.

Russia may be a special case because of the sanctions and low price of oil but the slide of other currencies includes countries like Colombia, another oil exporter. According to the Bogota Post Money, Money, Money article:

The Colombian government approved the 2015 budget on December 2 amid a looming shortfall and a fiscal deficit.

The budget for the coming year was originally based on the assumption that the price of oil would hover around $98 USD per barrel. But crude oil has taken a tumble, and is now at $67.30 USD – more than 30 percent lower – and lawmakers did not adjust the budget accordingly.

The government is now staring down a $6.5 billion USD budget shortfall which they are hoping to make up through imposing controversial tax reform laws.

A financial analyst told The Bogota Post that the new tax reforms are expected to affect entrepreneurs most.

Several years ago it took 2,400 Colombian pesos to buy a US dollar and then the dollar slide while the peso rose to 1,600 to the dollar. It was a spectacular success story as the price of oil rose. While the oil fracking boom and high OPEC production have been good for the US economy the fall in prices has been a problem for nations like Colombia.

In the end the US stock response to an interest rate hike will likely be negligible as the shift of capital to the USA and lack of better prospects elsewhere keeps upward pressure on US markets.

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EBay Inc. said it plans to spin off its PayPal electronic-payments business into a separate publicly traded company next year, acceding to the wishes of activist investor Carl Icahn who had pushed for the company to split.

This news comes on the heels of a new mobile payment service from Apple and pressure from investor Carl Icahn to increase shareholder value by splitting up the company. In response to the news EBay went up seven percent. When it becomes a separate publically traded stock should we invest in PayPal?

EBay

EBay has been a publically traded company since 1998. From $1.60 a share it grew to nearly $60 a share by early 2004 and then fell back to $12 a share after the market crash. Subsequently EBay has returned to the fifty to sixty dollar a share range. This graph from Google Finance shows the NASDAQ:EBAY picture.

Mr. Icahn and others want to unlock more of the value in Ebay and have pushed to spin off PayPal.

PayPal

PayPal is an international e-commerce business. It allows payments and money transfers through the Internet. It is subject to the US economic sanction list, and subject to other rules and interventions required by US laws or government. The company is an acquirer, performing payment processing for online vendors, auction sites and other commercial users. PayPal charges a fee for these services, the fee being dependent upon what currency and payments are involved. PayPal was founded in 1998 and was the first dot com IPO after the 9 11 attacks. It was acquired for $1.5 Billion by EBay in 2002. Although PayPal is the payment method of choice for those using EBay its customer base is not limited to its parent company.

Invest in PayPal

The news that EBay and PayPal are to split heartened EBay investors and drove the stock price up. It also makes us think of whether it will eventually be better to invest in PayPal or EBay once the split is accomplished in mid-2015.

After spending much of this year explaining why its two businesses are best left together, eBay’s board of directors and CEO did a complete about-face Tuesday morning, announcing a plan under which its PayPal and eBay marketplace businesses will be split into separately traded public companies by the middle of next year. And CEO John Donahoe will step down as CEO of eBay once the split takes effect in 2015.

A reasonable take on why to invest in PayPal is that EBay is one business and PayPal can deal with many. EBay with its business model may rise or fall. PayPal can service any and all online businesses with its payment system. This reminds us of the old saying from the days of the California gold rush, when everyone is digging for gold the best money is to be made selling picks and shovels. Being the go to company for online payments is a enviable situation. Then, of course, PayPal needs to worry about the new Apple online payment system.

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