Offsite

We started this thing awhile back where the four partners of the firm step out of the office for a day at the start of the year to plan the next twelve months.
And more than plan, we set some specific goals.
Last year, we met or exceeded most, and fell short of others. Today, we’ll take a look at our successes and shortcomings and then discuss how we want to spend our time in 2018. What do we want to emphasize? How…
Source: http://thereformedbroker.com/2018/01/18/offsite/

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The case for convertibles in 2018

A new year has begun, and investors are hoping for a repeat of the strong returns enjoyed in 2017. But in one key area investors face a familiar dilemma, which they’ve endured for the last nine years: finding income in a still low yield environment without taking on too much risk. Although the yield of a 10-year U.S. Treasury bond has risen recently to around 2.50%—that’s not too far from where it was at the beginning of 2017 (source: Bloomberg, as of 1/10/2018). And, as the BlackRock Investment Institute’s Jean Boivin noted recently, a range of secular factors is likely to keep a lid on a sharp increase in rates for some time to come.

Still, the Federal Reserve (Fed) raised its benchmark interest rate again in December, and we do expect rates to grind higher in 2018. Against this backdrop, some investors are taking a look at convertible bonds, which are debt instruments issued by a company that can be converted into stock of the same company. They are a sort of hybrid investment vehicle, combining attributes of both stocks and bonds.

Convertibles have characteristics that potentially augur well in the current environment. They can offer the growth potential of stocks, a possible plus at a time when the economic environment and earnings are generally supportive of equities, as we’ve seen with the steady rise in indexes across most asset classes. But they historically have lower equity beta and bond-like characteristics that may help provide some protection in downturns, where they have tended to exhibit less downside capture. Note, for example, how they performed during the “taper tantrum” in 2013.

chart-convertible

Additionally, with many investors focused on credit risks, particularly in high yield, convertibles may be more favorable relative to spread products. Historically, convertibles have had lower default rates than high yield bonds, according to research from Barclays.

There’s more. The sector breakdown of the Bloomberg Barclays U.S. Convertibles: Cash Pay Bond Index currently has a large exposure to equity factors and sectors we are positive on, namely the momentum factor and technology, which comprise nearly half of the index (source: Bloomberg, as of 1/10/2018). And while these exposures can change, convertibles can be a way to access tech and biotech-type momentum names while managing risk and accessing yield potential. The index has a 12-month trailing yield of 2.18%, which is roughly similar to the Bloomberg Barclays U.S. Aggregate Bond Index’s 2.33% yield and is higher than the S&P 500’s 1.78% (source: Bloomberg, as of 1/4/2018).

Convertibles have generally performed well in periods of rising interest rates, as well as in market shocks like the taper tantrum (source: Bloomberg, as of 1/10/2018). In other words, convertibles are uniquely positioned to offer the growth potential of stocks, but with the income and downside risk management characteristics of traditional bonds.

Bottom line: It may be time for some investors to consider convertibles in their asset allocation in 2018. iShares Convertible Bond ETF (ICVT) could be an option.

Chris Dhanraj is the Head of the ETF Investment Strategy team in iShares and a regular contributor to The Blog.

Carefully consider the Funds’ investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds’ prospectuses or, if available, the summary prospectuses which may be obtained by visiting http://www.iShares.com or http://www.blackrock.com. Read the prospectus carefully before investing.

Investing involves risk, including possible loss of principal.

Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments. Non-investment-grade debt securities (high-yield/junk bonds) may be subject to greater market fluctuations, risk of default or loss of income and principal than higher-rated securities.

Convertible securities are subject to the market and issuer risks that apply to the underlying common stock.

The methodology of the index that ICVT seeks to track does not provide for the conversion of the convertible bonds in the index and ICVT is not obligated to exercise the conversion feature associated with those securities, even if it is economically beneficial to do so.

Funds that concentrate investments in specific industries, sectors, markets or asset classes may underperform or be more volatile than other industries, sectors, markets or asset classes and than the general securities market.

When comparing stocks or bonds and iShares Funds, it should be remembered that management fees associated with fund investments, like iShares Funds, are not borne by investors in individual stocks or bonds.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date indicated and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any of these views will come to pass. Reliance upon information in this post is at the sole discretion of the reader.

The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective. The information presented does not take into consideration commissions, tax implications, or other transactions costs, which may significantly affect the economic consequences of a given strategy or investment decision.

This post contains general information only and does not take into account an individual’s financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision.

The iShares Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”).

The iShares Funds are not sponsored, endorsed, issued, sold or promoted by Barclays or Bloomberg Finance L.P., nor do these companies make any representation regarding the advisability of investing in the Funds. BlackRock is not affiliated with the companies listed above.

©2018 BlackRock, Inc. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.

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Source: https://www.blackrockblog.com/2018/01/18/case-for-convertibles/

How a Criminal Defense Attorney Thinks About Crypto Currency

You are all in for a very special treat today. On the heels of last week’s guest post, in which the Unassuming Banker looked at crypto from a traditional IB’s view, I’ve got a new guest post from a friend of mine who is about to give you a perspective on the nascent asset class you’ve not read before. 
Aaron Goldsmith is a top criminal defense attorney and commercial lawyer who has appeared in fed…
Source: http://thereformedbroker.com/2018/01/17/how-a-criminal-defense-attorney-thinks-about-crypto-currency/

The 2018 bond market: This time things are different. Kind of.

Hello everyone, and welcome to 2018! The new year is all about New Year’s resolutions, and you can find mine here. The new year is also about making bold predictions for what may lie ahead of us.

A note of caution first. Readers of this blog know that I am a pretty boring investor at heart. My simplified approach is to determine asset allocation based upon investment goals. Then find the most efficient way to build the portfolio, and rebalance regularly to make sure investments are on track. Most importantly, don’t over-trade. Portfolio positioning should be determined by long-term investment goals, not by whatever looks interesting or scary today.

With all that said, every investor should be forward thinking about the markets and consider where things might be headed. Staying informed about the investment landscape is important; it helps in planning for life events and making the needed portfolio changes. To that end, I offer up my five predictions for the bond market in 2018:

1. The Federal Reserve keeps on trucking along.

The current interest rate hike cycle began late 2015, and the Federal Reserve (Fed) has been very transparent in communicating future actions. After one hike in 2015, the Fed followed with another single hike in 2016 before it got going with three hikes in 2017. Based upon the Fed’s guidance, it looks like we are in line for two more rate bumps this year, which would bring the federal funds target rate up to 1.75%-2%. Slow and steady.

2. Inflation is coming but remains mild.

With unemployment staying low and the labor market strong, we are beginning to see these factors push wages higher more consistently. Average hourly earnings were up 2.5% in December 2017, and this could contribute to higher consumer prices down the line (source: Bureau of Labor Statistics). The pickup in wages should be bolstered by the impact of the tax overhaul. But don’t panic: The rise in inflation is likely to be modest. The market is currently pricing in just 2.03% inflation over the next 10 years (source: Bloomberg). Although this figure is on the rise and is likely to continue to increase, it probably won’t spike significantly.

3. The yield curve continues to flatten.

The difference in yield between two-year and 10-year Treasuries recently fell below 50 basis points (source: Bloomberg). Yields on 2-year Treasuries have risen on the back of the Fed moves, but 10-year rates have been held in check by a combination of low inflation and continued actions by global central banks. Although inflation is likely to tick up in 2018, and most central banks are stepping back from their aggressive quantitative easing programs, the changes are probably not enough to cause 10-year rates to move up substantially. Thus the yield curve flattens, as the pace of rising two-year yields has been greater than that of 10-year yields. The big question remains: Will we see two-year rates rise above those of 10-year notes? It’s known as a yield curve inversion and typically a sign of a coming recession. I think this scenario is unlikely in 2018, but it could happen in 2019 if the forces at play continue.

4. Credit spreads are tight, but that doesn’t mean that we are close to a correction.

The amount of extra yield over Treasuries provided by high yield bonds recently was 3.22%, which is the lowest it has been in 10 years and makes some investors cautious. But keep in mind that high yield spreads were below 4% for much of the 2003 to 2007 period, reaching a low of 2.38%. (The source for yield is Bloomberg Barclays). The point being that low spreads can continue for a while.

Now, thoughtful readers will recall that beginning in 2007, spreads widened significantly, peaking during the financial crisis at the end of 2008. This behavior is actually fairly common; when a credit cycle ends, we tend to see yields spike considerably. But that does not appear to be on the horizon in 2018. We can talk again at the end of the year about what 2019 might hold.

5. Once again, yields will drive returns.

Much like in 2017, there isn’t a lot of room for interest rates to fall in 2018, for government or corporate bonds. At the same time, I don’t see any shocks coming that would significantly push rates up. As a result, the majority of bond returns in 2018 will likely come from income, and not from price changes. I hate to have a repeat prediction, but market conditions for 2017 are still very much in place for 2018.

There you have it, insights from my crystal ball for 2018. All that I can really guarantee is that one or more of these will be wrong. Forecasting markets 12 months out is almost an impossible task for anyone. And that is why my points at the top are so important: Let your investment goals be the driver of your portfolio. Good luck in the new year.

Matt Tucker, CFA, is the iShares Head of Fixed Income Strategy and a regular contributor to The Blog.

Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments. Non-investment-grade debt securities (high-yield/junk bonds) may be subject to greater market fluctuations, risk of default or loss of income and principal than higher-rated securities.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date indicated and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any of these views will come to pass. Reliance upon information in this post is at the sole discretion of the reader.

The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective.

This post contains general information only and does not take into account an individual’s financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision.

©2018 BlackRock, Inc. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.

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Source: https://www.blackrockblog.com/2018/01/17/2018-bond-market/

What if the price of Bitcoin is the least interesting thing about it?

Over the summer, I reviewed Steven Johnson’s book about innovation, called The Invention of Air. Johnson shows us how a simple insight by one of the least technically gifted scientists in history led to a massive chain reaction of human understanding about the world we live in and how it truly works.
If you missed my synopsis, it’s here.
Anyway, Johnson dropped a monster article about Bitcoin and the Blockchai…
Source: http://thereformedbroker.com/2018/01/16/what-if-the-price-of-bitcoin-is-the-least-interesting-thing-about-it/

What the tax overhaul means for investors

The Tax Cuts and Jobs Act is poised to boost a U.S. economy already running at full capacity. A windfall from lower taxes and incentives for capex could spur more consumer and business spending and corporate deal-making. A likely convergence in tax rates could create winners and losers, rippling across sectors and companies.

A 30-year rewind is informative. In the decade following the 1986 U.S. tax reforms, companies paying a relatively high share of their income in taxes saw their effective tax rates drop. Low effective tax payers saw a small rise as reforms leveled the playing field and closed loopholes. Effective tax rates started diverging again in the late 1990s as globalization, the adoption of territorial tax systems and relatively high top U.S. tax rates encouraged tax avoidance schemes.

We believe something similar may play out today. The top quartile of U.S. companies currently pay an effective tax rate of 34% or more, our analysis shows. This leaves plenty of room for relief as the top rate is slashed to 21%. Lightly taxed companies, by contrast, may see their rates go up over time. See the chart below.

71841_BII_COTW_011518_v2_blog

The overhaul of the U.S. tax code includes supply-side reforms and injects significant near-term demand stimulus into a U.S. economy running at near-full employment. A faster-growing U.S. may accelerate global growth, and result in rising inflation, higher Treasury yields and steeper yield curves. Look for a deep dive into how the tax changes and potentially higher U.S. government spending may affect the economy and interest rates in our upcoming Global macro outlook.

The tax cuts create winners and losers in the corporate sector. The drop in the top statutory rate will broadly benefit U.S. companies with high effective tax rates. But some of the benefits for these companies appear to be priced in already, suggesting investors need to look beneath the surface to identify the longer-term winners. There is significant dispersion within industries, sub-sectors and companies. The sustainability of increased corporate profitability derived from tax cuts will also vary. Companies in highly competitive industries, for example, will likely see a temporary profit boost that is quickly competed away. Changes to companies’ spending and investment plans because of the tax law are key details to watch through the fourth-quarter earnings season. We expect U.S. global corporations to scrutinize the new tax code’s complex international rules in an effort to manage any rises in their effective tax rates.

In credit markets, we see investment grade companies benefiting from lower tax rates. Yet we see most of the impact going to shareholders rather than toward paying down debt. High yield companies benefit from lower tax rates and immediate expensing of capex. But we expect more bifurcation between higher- and lower-quality issuers, as ones with large debt loads face limits to interest expense deductibility. This reinforces our up-in-quality credit stance. Municipal bonds emerged relatively unscathed, even as advanced-refunding bonds lost their tax-exempt status. This is set to shrink issuance, a factor we see supporting valuations. Read more market insights in my Weekly Commentary.

Richard Turnill is BlackRock’s global chief investment strategist. He is a regular contributor to The Blog.

In the latest episode of The Bid podcast, Richard Turnill discusses the current golden age of prolonged and stable economic growth and answers the tough question: Can it persist?

 

 

Investing involves risks, including possible loss of principal.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of January 2018 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader.

©2018 BlackRock, Inc. All rights reserved. BLACKROCK is a registered trademark of BlackRock, Inc., or its subsidiaries in the United States or elsewhere. All other marks are the property of their respective owners.

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Source: https://www.blackrockblog.com/2018/01/16/tax-overhaul-investors/

Back-door Roth Blessed by Congress

back-door RothFor years now, the back-door Roth IRA contribution method has been discussed ad nauseam in the financial industry press. It’s been touted as a possibility, but always with a caveat: taking this course of action may ultimately be disallowed by the IRS. As of the passage of the Tax Cuts and Jobs Act (TCJA) of 2017, all skepticism about this method should be removed.

Let’s back up a bit and talk about the back-door Roth. This is the action where you make a non-deductible contribution to your traditional IRA, followed later by a tax-free Roth conversion of that contribution. Folks often took these steps because they were above the income limits for a normal Roth IRA contribution. The problem was that the IRS had never weighed in on the concept. As such, there were many folks in the industry who took a conservative point of view with regard to this action. The IRS has ways to disallow such an action if they deemed that it was to work around the law. But that’s all over for now.

Tax Cuts and Jobs Act

The back-door Roth contribution is not specifically addressed in TCJA, but it was discussed on the record by the Conference Committee in their Explanatory Statement of the TCJA. In that document, the Conference Committee states in four places that “Although an individual with AGI exceeding certain limits is not permitted to make a contribution directly to a Roth IRA, the individual can make a contribution to a traditional IRA and convert the traditional IRA to a Roth IRA…” (for full context, see the Joint Explanatory Statement of the Committee of Conference, footnotes 268, 269, 276, 277, beginning on page 114.)

This verbiage not only blesses the back-door Roth contribution technique currently and going forward, the matter-of-fact manner of the footnotes seems to declare that this has always been acceptable.

So – have at it with your back-door Roth contributions!

The post Back-door Roth Blessed by Congress appeared first on Getting Your Financial Ducks In A Row.


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Make Yourself Useful

I forget where I read this but someone did a post about how the best career advice you could give a young kid starting out is for them to identify a senior person’s pain point and offer to take that work away from them. Not only is it perhaps the single best piece of career advice I’ve ever heard, but it’s applicable to everyone at pretty much every level, not just someone coming out of school.
Figure ou…
Source: http://thereformedbroker.com/2018/01/16/make-yourself-useful-2/

Breaking Up Tech: Indexes doing what the economy won’t

Nobody wants to say this but I will.
The technology sector has gotten so big, so pervasive and powerful, that the stock market index creators had to break it up. Because the monopolist powers of these corporations off of the stock market and in the real world have not been checked by natural competitive forces or government intervention.
The big names in tech get bigger and bigger every year, their influence extending in…
Source: http://thereformedbroker.com/2018/01/15/breaking-up-tech-indexes-doing-what-the-economy-wont/