All posts by Alan

Snap Projected To Be Worth $50 Billion In 2020 But With Huge Risks

Snap launched its IPO amidst a huge hype. Several investors were surprised to see that a tech company has gone public even before earning profits. The stock value soared to $29, much higher than the original valuation. Now that the buzz is settled, Snap shares cost $19 which is still a modest price. At this value, the market capitalization of Snap is $23 billion. The lack of profitability is under constant scrutiny and it has garnered a lot of criticism. The skepticism is justified, but the company could become huge if it manipulates the user base in the right way.

According to Snap’s S1 filing, monetization began only in 2014. The business model is immature with no strong leaders. However, the tech potential of the Snapchat app is incomprehensible, but Instagram poses a huge threat. While Snap is compared to other tech companies like Facebook and Google, it must be understood that Snap can’t be compared to the tech giants both in terms of age and growth.

The revenue of Snap has continued to grow since 2014. In Q4 2016, Snap earned $166 million, up from $128 million in Q3. Snap’s revenue increases by 404% annually. In the upcoming quarters, the growth rate will slow down dramatically, but it can’t be denied that the growth is impressive. The gross margin has also improved in the past few quarters. Snap showed a gross profit of $12.3 million which is about 7% of its revenue. Snap should focus on improving its operating profits too, but at this stage, it is understandable because the advertising platform needs numerous modifications. Snap is still focusing on improving monetization to increase revenue.

Snap’s potential is further enhanced by the partnership with Vice to create 8 original shows exclusively airing on Snapchat. Rapper Action Bronson will participate in setting up different couples. This means that Snap is taking the first step to becoming a content delivery network instead of just a social network. With many more exclusive shows, the revenue potential for Snap will increase without a doubt.

The major risk for investors investing in Snap is the growth of Instagram. Mark Zuckerberg owns Instagram and he is unapologetically copying every single feature of Snapchat. The Stories on Instagram is a mere copy of Stories on Snapchat. The launch of Instagram put a brake on the growth of Snapchat users. In the last quarter of 2016, Snapchat only added 5 million daily active users and this was when Instagram launched Stories.

With the current growth, Snap will reach $1 billion revenue in 2017 and double it in 2018. Snap will be a winner in the stock market if it could increase its daily active users. Snap is projected to be worth more than $50 billion in 2020 if it has 300 million daily active users. The P/S multiple of Snap would then become 8.3X similar to Facebook. Snap’s future could either be a massive success or an utter failure depending on Snapchat’s ability to gain daily active users.

Trump Reveals Plans To Cut Down 75% Of The Regulations

Trump was sworn in as the President of the United States on Friday. On Monday, he started his first formal day in the White House as the President. In the opening hours, Trump welcomed several leaders from large enterprises in the country for a meeting. He promised the company officials that he will wipe out about 75% of the government regulations, which will make it easier for the corporations to run their business. Those businesses looking to expand will enjoy expedited policies and massive tax cuts.

While talking about improving the operations in the United States, President Donald Trump told the leaders that all they have to do is stay. Trump encouraged the organizations to open new factories and expand their business in the United States. This will help to create new jobs and the companies will be rewarded with numerous benefits. Currently, many corporations spend more time on regulations than on developing the product. Trump has promised to remove most of the regulations, easing the path for company growth.

At the same time, Donald Trump also issued a warning that the companies moving their production out of the United States will have to deal with punishment in the form of a substantial border tax. Companies that have production facilities in Mexico and other countries should have to face a higher tariff, making the out-of-country production expensive. Trump promised that the new regulation policies will be better and less cumbersome. Many corporate leaders who were singled out in Trump’s speeches and tweets were present during the meeting. The press conference after the meet was short and Trump ensured that the topics don’t deviate to other matters.

Andrew Liveris of Dow Chemical told the reporters that the new president wants the companies to come up with various actions to boost economic growth. He also said that Trump revealed his plans of meeting with the business leaders four times a year to make all the industries competitive and profitable. Mark Fields of Ford Motor company said that the President is enthusiastic about economic growth which will be beneficial for all the industries.

Trump repeatedly warns the corporations about the major border tax. However, many Republicans are not happy with this policy because it could result in increased cost within the USA. The experts argue that Trump may not have the power to punish the companies and it would also result in the violation of treaties.

During his campaign, Trump has promised that he would pull the USA out of the Trans-Pacific Partnership and revisit North American Free Trade and Agreement to benefit the country. TPP is already dead even before Trump took his office. The President office has already contacted the Canadian Prime Minister and Mexican President to discuss NAFTA trade deal. Experts fear that the negotiations with respect to NAFTA could cause troubles with the USA economy. There will be serious repercussions for the Mexican economy, but the USA is not completely immune either.

Spain’s Unemployment Rate Hits 7-year Low

Spain’s jobless crisis continued to show signs of abatement in the final quarter of 2016 as the unemployment rate fell to 18.6 percent, which is the lowest in over seven years.

According to the official data released by the National Statistics Institute on Thursday, the number of unemployed people witnessed a drop of 83,000 in the last quarter of 2016 to remain at 4.2 million at the end of last year. The Institute added that the unemployment rate had dropped by 2.3 percentage points over the aforesaid period.

However, the scenario is far from favorable for Prime Minister Mariano Rajoy’s government as the unemployment rate for people under the age of 25 is still as high 43 percent, marginally down from the 46 percent at the end of 2015. Furthermore, Spain’s unemployment rate is only better than Greece’s 23.1% in the 28-member European Union.

Analysts have warned that while the recovery process was still on track, the pace of employment was starting to slow down. According to Marcel Jansen, who is a professor of economics at the Autonomous University of Madrid, “If you look at the year-on-year growth rates, you see that Spain is still one of the best-performing labor markets in Europe. But the numbers also tell us that we can’t take for granted that Spain will continue to generate employment at the high rates we have seen in recent years”.

“During 2015 and in early 2016, employment grew by about 3 percent year on year. That rate was now closer to 2 percent”, added Jansen.

PM Rajoy’s conservative government has seen reducing unemployment and boosting economic growth as its main goals since assuming office in December 2011. During an interview with Radio Onda Cero, Rajoy claimed that Spain had created 1.75 million jobs since 2013. Rajoy has vowed to return the employment numbers to their pre-crisis level of 20 million.

Employment in Spain had dropped as low as 17 million during the crisis triggered by the post-2007 property bust, which kick-started a severe recession and banking crisis. The unemployment rate, which had reached an all-time high of 27 percent in the first quarter of 2013, has been on a path of slow but steady improvement ever since. With the GDP expanding by over 3 percent in each of the last two years, economists have attributed Spain’s economic recovery to external factors like low oil prices and interest rates, besides the decline in euro’s value and the efficiency of the structural reforms introduced by Rajoy’s government. This growth is expected to reach 3.2 percent for 2016, one of the best in Europe, as the Institute is due to release its official figures the coming week.

During the interview, Mariano Rajoy assured his countrymen that the economy remained on track to recovery and urged them to remain patient. “You cannot recover from five consecutive years of recession in just a quarter of an hour. But if we continue our current economic policies… we will get to 20 million employees.”

How Trump’s victory has affected capital and equity ETFs

That presidential victory by Donald Trump completely upended equity and capital markets. The doomsdayers were left with a whole lot of egg on their faces, as investors who didn’t fall for their predictions made out “bigly.”

Here, we’ll take a look at the inflows and outflows of a few ETFs that were most affected the week Donald Trump was elected president of the United States.

Bonds
After Donald Trump became the president-elect, the bond market was among the segments of society that initially reacted poorly. U.S. Treasuries sold off sharply within the hours following the announcement of his win.

However, they quickly became an investment darling over the course of the week because of the buying opportunities that were presented. The yield on the 10-year Treasury note was up as much as 33.5 basis points last week, which was reported by MarketWatch as the largest weekly gain in three years.

As you know, in the bond world, when bond prices fall, their yields rise. What the market saw during the overnight hours after the election was did exactly that. For those looking to get into the bond market and pick up some high quality paper with decent yields, this is the ideal time. This is especially the case for fixed-income investors.

Stephen Laipply, a senior product strategist with BlackRock’s Fixed Income Portfolio Management Group told the following to MarketWatch.

“Investors are trying to reposition for what they believe will be the result of the new administration and a unified government, which is a more likely increase in stimulus.”

While you digest the possibility of anything like quantitative easing rearing its head again, also keep in mind the market’s sentiments about the fallout from Trump’s win. A concern is that Trump’s financial policies could cause inflation to rise, which would inadvertently hurt long-term bonds. That’s because inflation is one of the areas of the economy that Fed Chair Janet Yellen said she is eyeing as a catalyst to raise interest rates. Higher interest payments don’t mix well with the value of long-term bonds.

The ETFs

Following Trump’s victory, investors drained fixed-income ETFs of just under $3 billion. Most of that outflow consisted of corporate bonds. We saw the iShares iBoxx $ High Yield Corporate Bond (HYG) be drained of roughly $2.5 billion, which was the biggest outflow of any fixed income fund. The next fund that saw a significant outflow was the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD). It was drained by roughly $1.7 billion. Then there is the SPDR Bloomberg Barclays High Yield Bond ETF (JNK). It saw outflows of roughly $762 million.
The HYG and JNK funds also saw interesting inflows. Those inflows were $1.5 billion and $800 million, respectively

To get an even better idea about how ETFs responded to Trump’s win, we turned to data collected by ETF.com. In what it called a stampede, ETF.com found that investors flooded U.S.-listed funds. Those inflows totaled almost $24 billion.

The best performing ETFs were industrials and healthcare.

Be advised to tread very carefully here. Market volatility is the biggest threat to these moves in ETFs.

Alabama critics want to cap payday loan interest rates at 36%

Earlier this year, the Alabama state government approved a payday loan reform bill that was considered weaker than initially proposed. Moreover, this is irking many people who have opposed the industry.

For instance, the legislation, which was passed by the House Financial Services Committee and the Alabama Senate, restricts payday lenders to make loans at 15 percent for at least 28 days, which is a lot higher than what reformers had demanded. Another aspect of the weakened payday loan reform bill is that it does not allow borrowers to pay off the loans in installments, which, critics say, sends low-income borrowers into a never ending cycle of debt, a common concern in the state of Alabama.

The payday loan industry argued that the initial legislation would have led to an “extinction event” for the entire sector, something that many Alabama consumers rely on when they get into financial trouble.

In response, the Alliance for Responsible Lending in Alabama (ARLA) wrote that credit is needed, but the industry needs to be reined in since it acts as an “engine of poverty” across the state and the country.

“We all want the world where people can get the kinds of credit they need,” the organization wrote in an op-ed in April. “But that requires putting some brakes on a system that all too often acts as an engine for poverty, handing out extremely high-cost loans to desperate folks who may treat them as a lifeline. Too often, those ‘lifelines’ instead end up as anchors, dragging people into financial quicksand.”

After South Dakota had voted on Election Day to cap interest rates at 36 percent, there is another movement being formed in Alabama to adopt the same measures and policies as the state did earlier this month.

A consumer lending task force is looking to apply stricter regulations on businesses who offer same day payday lending services. The area that is generating the most attention is interest rates, which can surge as high as 400 percent.

It is being recommended that the issue goes to voters, who can either give the thumbs up or the thumbs down to a 36 percent cap on interest rates for short-term, high-interest loans in Alabama. This recommendation will be sent to the Governor’s Office for consideration. A decision will be made ahead of the February legislative session.

Payday loans are popular in the state. It has been estimated that Alabama consumers took out 2.4 million payday loans in 2015, and the numbers continue to be staggering to so many experts.

Critics of payday loans say that these alternative financial products negatively impact low- and middle-income consumers who enter into a debt trap. Many public officials and consumer advocacy groups have encouraged serious reforms that can limit or restrict payday loans across North America and Europe.

Meanwhile, proponents of payday loans say these are necessary alternative financial services because many of the users do not have access to traditional forms of credit and banking options. Without payday loans then they may not be able to keep the lights on, cover the rent or repair the broken down car.

Although the Consumer Financial Protection Bureau (CFPB) unveiled a national regulatory framework for the payday loan industry, some argue that president-elect Donald Trump could kill both the proposal and the CFPB during his time in office.

Trump sets sights on dismantling Dodd-Frank

Through 2007, banks in the financial sector were annually posting returns that were much to the delight of the street. These companies created products that defied logic, but their profitability made them to spectacular to do away with.

These financial institutions included Bank of America (NYSE: BAC), JP Morgan (NYSE: JPM), Wells Fargo (NYSE: WFC) and Citigroup (NYSE: C). Back then, Lehman Bros. and Bear Stearns were also members of the pack.

They were all sailing along prior to 2008, profiting from the use of mortgage-backed securities. The housing market was on fire thanks to allowances that made it easier for homebuyers to secure subprime mortgages.

After billions of bailout dollars were funneled to the big banks like Bear Stearns and Lehman Bros to keep them from failing, lawmakers drafted the Dodd-Frank Wall Street Reform and Consumer Protection Act. The legislation was stocked with all kinds of rules and regulations that were meant to keep banks from working themselves to the danger point like they did through 2008. The Act became effective in 2010.

Now, a new “sheriff” is in town in the form of president-elect Donald Trump. Market players cheer his perceived anti-regulation stance. Look no further than the stock market rally and the participation in that rally by banks after Trump won the election last week. The thought that he may tinker with Dodd-Frank is striking hope and fear into the hearts of players in the financial industry.

On the chopping block

The Consumer Finance Protection Bureau will likely be first up to be either done away with or severely altered. The agency has taken what many deem a too heavy handed approach in dealing with issues it perceives harms consumers. In all its grandiose, complaints include its investigative conclusions negatively affecting small community banks, while helping big banks.

Those risky investments that led to the housing collapse may be back in play if Dodd-Frank is dismantled. One of the rules in the Act, the Volcker Rule, was meant to prevent banks from entering into risky, speculative investments.

But Dodd-Frank does some good

One of the pluses that came from Dodd-Frank are bank stress tests. Conducted annually, banks with more than $50 billion in assets must submit certain financial information to the Federal Reserve Board. In order to pay dividends or have share buyback programs, banks must show they are capitalized well enough to weather financial storms of the magnitude that caused Bear Stearns and Lehman to fail.

The Fed explains it this way:
“The changes we make in each year’s stress scenarios allow supervisors, investors, and the public to assess the resiliency of the banking firms in different adverse economic circumstances,” Fed Governor Daniel K. Tarullo said. “This feature is key to a sound stress testing regime, since the nature of possible future stress episodes is inherently uncertain.”

With the possibility of Dodd-Frank going away, investors may be eager to jump into financials. If you do, be like the Fed.

  • Conduct your own stress tests; watching for signs that the bank’s capitalization is decreasing.
  • Stay abreast of financial products that are being rolled out to understand their risks to the bank.
  • Make a point to review quarterly earnings reports, and if you can get a copy of the transcripts from the quarterly conference call.

The possibility of Dodd-Frank going away may make financials attractive investments. However, if it does go away, the onus is on investors to be just as vigilant as the the law’s provisions to protect that investment.