One Percentage Point Cut in Benchmark Rate, Now at 0% – 0.25%

What Happened?

Today the Federal Reserve announced it will cut the benchmark rate to between 0% and 0.25%. On top of this, the Federal Reserve has said it will proceed with $700 billion in asset purchases (quantitative easing)

This is an important milestone in that the only additional tools the Federal Reserve now has to curb further depression in the stock market and slowing of the economy due to Coronavirus is to either:

  1. Push the benchmark rate into negative territory
  2. Introduce additional quantitative easing

Focusing in on this change only, and not the other stimulus the Federal government is pursuing, indicates that there is a large amount of fear about the economy.

What should you do now based on these changes?

Refinance

If you have an existing home loan chances are very high at this point you will be able to refinance your loan for a lower interest rate (more than 1% of your current rate) which would make it financially worth the closing costs.

Figure out to do with your cash

0% benchmark rates and increased government spending through stimulus measures means your cash is at risk of devaluation.

Commodities

Consider investing in alternative forms of wealth including gold, silver, platinum, palladium, rhodium, and consider diversifying with some cryptocurrencies such as bitcoin or etherium. Last time quantitative easing was introduced and implemented gold prices more than doubled from $800/oz in 2009 to over $1800/oz in 2011. Today gold stands at $1544/oz. Gold isn’t so much a way to make huge returns rather a way to store value, but a tool nonetheless. Silver went from $10/oz to over $45/oz in 2011. Same concept applies except silver is more volatile, less expensive, and more abundant. Also silver oxidizes, unlike gold.

Equities

Consider investing in companies that can weather a Coronavirus instigated economic adjustment that are on discount after our stock market rout of the past few weeks. Don’t dump all your cash into the market immediately, but start moving money over time and pick up some bargains. Anyone who used this strategy in 2009 would be looking good today. Be careful of companies in high risk industries in the current environment. Casinos, resorts, cruise, and travel companies come to mind as high risk investments. Secondary companies that could share some of that risk include airplane manufacturers, and restaurant franchises that aren’t tuned for home delivery, and theater companies.

The no-brainer at this point is the refinance. Others are optional, and carry risk.

Ally Bank Loses Its Luster as Robinhood Introduces Cash Management


Robinhood vs Ally Savings Over time

Robinhood’s New Cash Management Feature

Robinhood has introduced a new feature Cash Management which allows Robinhood users to save their extra cash in a high-yield account. Current rates for Ally Bank is only 1.6% (see below). Considering the main draw for Ally Savings bank was the interest rate (Ally has no physical walk-in bank), I can see a huge challenge approaching if Robinhood indeed keeps it’s interest rate at 0.2% higher than Ally Savings.

Adding insult to injury, Robinhood does not impose the transaction restrictions on its new account.

The only redeeming factor for Ally at this point is that Robinhood is releasing this slowly on a waiting list as it has done with features in the past.

Side by Side Comparison

Interest rate (most important)

  1. Robinhood Cash Management: 1.8% APY
  2. Ally Savings: 1.6% APY

Initial Deposit

  1. Both have $0.01 minimum requirement

FDIC Insured

  1. Both are FDIC Insured

Transactions

  1. Robinhood Cash Management comes with a debit card and no transaction restrictions (huge)
  2. Ally limits transactions to 6 per statement cycle

Ally savings rate as of 12/31/2019

Robinhood cash management rate as of 12/31/2019

 

 

 

 

 

 

 

 

 


How to Get Robinhood?

You can use this link to join Robinhood. By using my referral code (included in the link) you will receive a free share as a signup bonus. Alternatively you can forgo the free share and go to Robinhood.com and figure it out from there. Good luck and best returns!

Buying Lasting Presents Which Appreciate in Value

Buying Gifts that Retain or Increase in Value

If you’ve ever watched the 1964 rendition of Rudolf the Red Nosed Reindeer you’ll know who Yukon Cornelius is. He’s the most famous prospector in the north, searching for silver and gold. That being said, he never finds any.

Don’t be like Yukon, buy your relatives gifts that appreciate in value! Silver coins are a nice gift because they are affordable and have a decent upside potential – and look nice!

Legos hold their value well if you don’t open the box! Video games depreciate fairly quickly, and clothes are basically worthless after they are used. Gift cards are worse than cash in that they usually have an expiration and can get lost or forgotten about. Stocks are not easy to buy for kids these days because you have to open accounts and deal with a lot of overhead in getting started. Bonds are boring.

So next time your considering buying present buy a fancy silver coin! There are a variety of designs to choose from, including Star Wars designs, battleships, pirates, and dinosaurs for the young ones.

Coins can be cool!

Recommended Websites

1.  Modern Coin Mart

https://www.moderncoinmart.com/

I like Modern Coin Mart because they have a wide variety of coins to choose from. These range from historical to modern (like the dinosaur coin), and hail from a variety of countries. You can buy directly from their website (link above) or go through eBay and buy from their eBay store. If you buy from the eBay store they are usually quick to give positive ratings to buyers – if you don’t care about ratings it may make more sense to buy directly from their website.

2. APMEX

https://www.apmex.com/

APMEX is another great website for starting your coin or bullion collecting journey. I like how their bullion includes hand poured bars (like below).

hand poured 2oz silver bar

The January Stock Market Bump

The IRS lets investors offset capital gains with capital losses. These are separated into two groups, long-term and short-term. At the end of the year (December) investors often dump stocks they lost money on in order to offset their capital gains of the same group. These investors have to wait a month before re-purchasing shares otherwise those losses will be disallowed (called a Wash sale). For this reason later in the money of January a historical trend of putting the money back to use occurs, often buying back the losing stocks because there was some anticipation of future gains.

 

Palladium Overtakes Gold and Platinum

What is Palladium?

The least well known precious metal is now the most valuable. Everyone knows about gold, silver, and platinum – it’s about time everyone educated themselves on palladium!

  • As of December 13, 2019 Palladium trades at $1,954.06 per ounce, compared to gold at $1,478.12 and platinum at $931.15.
  • 10 years ago Palladium traded at $363 per ounce, gold was $1118 and platinum was $1435.

Palladium is precious metal used primarily in the creation of catalytic converters – which convert harmful gas emissions into CO2 and water vapor. Without catalytic converters the noxious fumes would be released directly by motor vehicles, greatly increasing pollution and cancer rates among urban dwellings.

Where does it come from?

Mined primarily in Russia and South Africa.

A major source of palladium for new items comes from recycling of old catalytic converters (seen below). Palladium is often mined along side nickel and platinum, and unfortunately thieves have resorted to stealing these off of cars for the valuable scrap value of the metal.

Most common use of palladium is in catalytic converters

Jewelry and coinage use palladium

 

Why is it getting expensive?

Supply and demand is pushing prices up. Palladium mines are located in Russia and South Africa, and are not increasing their output of the metal but demand continues to rise. This has made recycling of the converters a necessity, and the increased price should eventually make more mining economically feasible – yet this has not yet happened.

Plop onto this combination speculation and investors buying up the metal and you have a perfect formula for a great price boost.

How do I get in?

The Fastest way is to buy a palladium ETF in your stock portfolio. The major ETF is:

PALL (Aberdeen Standard Physical Palladium Shares ETF). Below is a one year chart:

PALL 1 year performance

Slower way to invest is buy palladium coins or bullion.

Palladium 1 oz bar

Tax Loss Harvesting for Dummies

It’s that time of year. Tax loss harvesting will save some thousands or even millions of dollars in capital gains taxes.

To do so it’s really simple, sell losses to offset gains or sell gains that already have corresponding losses so no tax is owed.

The way I do it is as follows:

Use a spreadsheet and create the following:

Account Short Term Profit Long Term Profit
S1 1,958.39 -2,323.39
S2 44,967.46 5,101.62
S3 229.72 44.29
F1 -2003 5423.65
Short Term Long Term
45152.57 8246.17

Where the cells in the bottom right are sums of column B and C, respectively. At this point the alarming figure should be the short term gains. At this point go through your stock portfolio and hopefully find some short term losses you can sell before end of year end to offset this gain.

Most trading platforms will split out “Long Term” and “Short Term” gains/losses, if not a long term transaction is one which is longer than one year and a short term is one year or shorter.

You’ll want to keep an eye out to make sure you don’t perform a wash sale – these types of sales are not allowed to be claimed as losses. A wash sale happens when you sell a stock for a loss and buy the same shares within a month before or after that loss sale. This is to prevent tax loss harvesting of shares which are not really meant to be sold but sold purely to tax loss harvest.

You can look up the rules on capital gains taxes and wash sales at the following websites:

https://www.irs.gov/taxtopics/tc409

https://www.sec.gov/answers/wash.htm

Younger People Not Owning Homes

Home Ownership is Fleeting

Millennials are less likely to claim home ownership by age 30 than baby boomers at the same age. A report by the Standford Center on Longevity that 48% of Baby Boomers owned homes by thirty versus 36% of Millennials.

A huge factor that plays into this figure is the number of unmarried Millennials – 55% of married Millennials own homes while only 19% of single Millennials do. The average age of marriage is rising – where in the 1950’s and 60’s the average age was 20, now the average age is 27.4 and rising according to the US Census Bureau historical marital status tables.

Other factors are increased housing costs, high student debt, and need for some workers to relocate.

Who Benefits?

The largest beneficiary, in my view, of lower home ownership is the landlord or corporation who rents out their home or apartment. As home ownership decreases, you’ll see the rise of more publicly traded REITS which take investor money, plop down new apartment units, and pay a share of the profits to their investors while driving away private investors through economy of scale price reductions. Private investors can employ a strategy involving buying, rehab/renovating, renting, and then refinancing to chain purchase multiple investment properties. As competition between private and public investors increases, the prices for properties goes up – further distancing potential first time home buyers. As long as there is a strong rental demand, the potential for cashflow means investors may buy in bulk.

Who Suffers?

Renters who pay more in rent than they otherwise would pay on a mortgage gain no principal ownership in their residence. While they may forgo having to fix home appliances and heating/plumbing they will gain nothing when they leave. Home owners with typical 30 year loans will have principal invested into their home and may be fortunate enough to have their house sell for more than it was purchased for. Historically house price appreciation is the norm, especially for homes in good locations. Depreciation of the house structure is usually offset by the appreciation of land value that the house sits on.

Renters are also at the whims of the landlord or property management company as to when their rents will go up. When I first started working my rent started at $880 in Atlanta and it went up to $1000 by the time I left 3 years later. This was not because they had improved the property – in fact the property slowly got worse. The reason they could increase rent is because demand was up – population growth and an influx of new younger workers means more people looking for rent. It is simply business.

What Should Younger People Do?

First off, everyone should choose what they want to do with their own lives. I can’t dictate that someone should study engineering rather than political science as much as I can force you to like the color orange more than brown. However, as this website aims to help people get a higher return on their money I would 100% encourage younger people to buy a home rather than rent one. I would ask them to take advantage of the historically low interest rates and get a low interest rate mortgage which limits how much the bank can increase interest rates. Pay a mortgage of equivalent value to what they’re paying in rent and look to save money and buy a rental property. Take advantage of the fact that your peers are renting and rent to them instead of from them.

 

 

Ally Financial

Ally Bank itself gives 2.1% interest rate on an online savings account, and 2.5% on annual CDs. Ally Financial Stocks pay out 68 cents per year on a $31.9 stock. Which is also 2.1%! What investing in the stock gives you, on the other hand, to increase your potential as interest rates start to rise. This isn’t a get rich quick stock, but with a 8.92 forward P/E ratio it’s a pretty good bargain that pays dividends. With Ally’s amazing interest rates for consumers, it’s only a matter of time before others start abandoning the brick and mortar banks which pay a measly 0.1% to 0.4% interest rate on their savings accounts. I bought Ally Financial and hold it as a nice dividend earning investment at $31.90 per share.

Ally Financial is divided into 5 areas:

  • Banking
  • Auto Finance
  • Home Loans
  • Invest – Self directed and managed investment products
  • Corporate Finance

ALLY 3 year chart

 

 

Google Search trend on term “ally savings bank” over time

How to Avoid Capital Gains Tax on Your Residence

Selling Your House for a Profit? You May Qualify for an Exclusion on Capital Gains Tax

A lot of people have a false assumption they have to pay capital gains tax on their house if they make a profit on it. According to the IRS (as of January 5th, 2019), you may exclude up to $250,000 dollars of gain if you file single or up to $500,000 if you file joint with your spouse, as long as you meet their criteria which I will mention later.

That means if you buy, for example, a $250,000 house and sell it for $750,000 you can keep that gain in your pocket as long as you file joint with your spouse.

Now let’s get to the important part, the criteria.

IRS Section 121 Exclusion Criteria

You must have used the house as your main house for two of the past five years before the sale. That doesn’t mean you need to have owned it for five years, it just means you must have used it as your main home for two of the past five years before the sale date of the property.

It logically follows that you generally could not have claimed this exclusion on a different property less than two years prior to the sale date. <See IRS Publication 523>

This general rule does not apply to certain situations including government assignments (military, intelligence, etc) and they can extend that five year window out further to ten years.

How does the IRS determine your “main” home?

  • US Postal Service Address
  • Federal and State Tax Return Address
  • Drivers License Address

They may also consider other information including:

  • Where you work
  • Where you bank

Disqualifiers

  • You can not have acquired the property through a 1031 exchange. <See Investopedia for more information about 1031 exchanges>
  • You cannot be subject to expatriate tax. This is a tax on US citizens renouncing their citizenship.

Partial Exclusion

The IRS allows for partial exclusion under the following circumstances:

  • Work related moves
    • New work location more than 50 miles further from home
  • Health related moves
    • Move to take care of relative
    • Move based on doctor recommendation
  • Unforeseeable events
    • Disaster
    • Deaths
      • Of owner(s)
    • Birth of Two or more children
    • Home Destruction
    • Act of Terrorism on Property

Other Things to Remember

Even though this is a great exclusion written in the tax code, it could change! Make sure to double check the rules when you do end up selling your house for profit. Also, keep in mind that some of your closing costs in buying the property can go into the cost basis for the house – keep those records! Lastly, make sure to report the sale to the IRS – even though you may qualify for a complete exclusion.

Wallstreet Enters Single Family Housing Market… Again

Single family American home

 

REITS are Eating Homes

“The American dream no longer includes homeownership,” said Jordan Kavana, chief executive of Transcendent Investment Management LLC. Transcendent Investment Management is buying up rental homes, and expects Americans to transition into all being renters to drive profits for his and other similar companies.

This type of corporate incursion into housing was popular back in 2013 when houses were dirt cheap, but it’s starting to ramp up yet again. A few publicly traded companies involved in this type of business include Blackstone (BX), and American Homes 4 Rent (AMH). American Homes 4 Rent has been the largest player in the single family homes arena until Blackstone and Starwood properties merge their operations to join Blackstone’s existing single family division Invitation Homes (INVH). The merger will see Invitation Homes landlord almost 100,000 single family homes spread across the United States.

The Giants are Coming

These massive REITs may be part of some of your 401k mutual funds already, and are driving up prices for single families and potentially forcing them to buy more expensive homes. This is not unexpected due to the historically low interest rate the US still supports – and the benefits that come with scaling up operations. My problem with this is that by investing in these REITs you could be inadvertently encouraging Wall Street investors to drive up home prices around you putting the younger generation at more risk of lifelong homelessness (you get what I’m saying).

Traditionally most REITs focused on multifamily apartment buildings, we shall see how this foray into single family housing impacts the US economy for years to come. For millennials, this does not bode well for their home ownership prospects. I would prefer to be an owner of my own residential property than invest in these types of REITs, and if anything I would stick to multi-family apartment focus REITs as they should yield better returns. For more information on REITs and how to make money on real estate, check out my real estate page.