💨 Market pessimism is overblown
October 28, 2021
The Gist
TOGETHER WITH

Good day! Here's a fun fact: What percent of Elon Musk's wealth can solve world hunger? a. 2%, b. 12%, c. 22%. Follow the 🌊 below to see the answer.

Here are our bite-size market topics of the day:

  • Is the market pessimism overblown? 
  • Bitcoin or the ETF?
  • BOGO & the retail trap

MARKETS & INVESTING

Is the market pessimism overblown?

The very nature of investing entices us to make predictions about the future. After all, the whole idea is to invest money today and watch it grow tomorrow. Unfortunately though, it remains an inexact science that even the most prophetic analysts can’t seem to perfect.

Lately, and namely through the end of Q3 2021, we’ve seen a noticeable amount of prophesying that calls for a market correction or worse. Despite the negatives though, we’re inclined to lend an ear to the case for bullishness, just to keep balanced.

The numerical case for bullishness

Proponents of an impending bear market have commonly noted a few things in their case, but we’ve uncovered a few noteworthy numbers to counter that sentiment.

  • The S&P 500 correction: Last month, investors were noticing that the index went a long while without a 5% haircut. On October 4th though, the S&P closed more than 5% below its previous all-time high a month earlier. Correction complete. 
  • Q3 earnings fears: “The only thing to fear is fear itself” couldn’t be truer in investing. Worry alone is enough to move markets, and move them it did throughout September and early October. All major indexes suffered a pullback of 4%+ amidst fears that supply chain issues and inflation would ding pending earnings. 
  • Fears proven wrong: Well, Q3 earnings are in, and companies are reporting earnings that exceed expectations by 15.4%. The S&P’s blended earnings growth rate was 30%, which would be the highest jump since 2010, and thus far, 80% of reporting companies have brought EPS numbers above their mean estimates. 
  • Profit margins remain high: Net profit margins are down slightly from quarters one and two, but remain around all-time highs. As Great Hill Capital Chairman Thomas Hayes said: "If these [supply chain] issues were going to persist and be permanent, why would net profit margins be so high?”

The takeaway here is based on a relatively simple observation. Our pessimism towards earnings may be proven to be overblown and on top of that, we’ve staved off the debt ceiling fiasco until a little while longer.

There’s always a case to be made for both the bulls and the bears, and we should be sensitive to hearing both sides of the story. Red or green, a prepared investor feels no need to panic.

INVESTING IN CRYPTO

Bitcoin or the ETF?

Investors have been awaiting the approval of a Bitcoin ETF for almost a decade now, and it seems we’ve finally made some progress toward that goal. By the time you’re reading this edition of The Gist, we’ll have seen two US Bitcoin ETFs finally launch into the open market: $BITO and $BTF. 

The introduction of these new investment options to your classic stock exchanges opens a new door for investors, some 401k holders, Roth IRA lovers, and traditional accounts or retirement aficionados to now hold Bitcoin. Well, kind of.

The ETFs

Here’s the thing, the “Bitcoin ETFs” being approved aren’t actually funds that hold Bitcoin (BTC). Instead, they hold the futures contracts of the coin. SEC Chairman Gary Gensler and others still have trepidations about bringing BTC into the stock market, namely due to “fraud and volatility” concerns. 

So, while the ETFs even launching are cool and all, there are some drawbacks. For one, we're talking about investing in futures and the possibility of what's known as contango. And if you don't understand futures too well, you’re already violating the rule of only investing in things you understand. 

A brief breakdown on futures:

  • A futures contract is an agreement between a buyer and a seller of an asset—usually a commodity or financial product—that's traded on an exchange at a set price but to be paid for and delivered at some point in the future. 
  • The purpose of futures contracts is to allow investors, hedgers and speculators to take a bet on the direction of the asset (either long or short). For example, if the price of Bitcoin goes up, the futures contract becomes more valuable, and the owner of that contract could sell it for more in the futures market.
  • And some traders like trading futures because they can take a big position with a relatively small amount of cash, giving them the potential for greater leverage than just owning the assets outright.

But let's also not forget that these ETFs are far from cheap, each flashing an annual expense ratio of 0.95%. That means, for every $10K investment, the fund manager keeps $95 a year. Compare that to the average asset-weighted fee of 0.18% for an index equity ETF and 0.69% for an active equity ETF, according to ICI.org.

Bitcoin itself

One of the cases for a Bitcoin-backed ETF was that it made it easier for your average investor to buy into it. The thing is, this may be a bit exaggerated as using a crypto exchange with a hot wallet as a beginner is usually as simple, if not more so than opening a brokerage account. 

Bitcoin itself can be bought across numerous cryptocurrency exchanges and even some traditional brokerage firms now. More advanced crypto savants of course have the option of moving their coins offline to a cold storage device, but online exchanges are extremely user-friendly for most novices.

Ultimately though...

There’s more than one way to crack an egg, and investors should do what keeps them sleeping best at night. These ETFs will likely continue to evolve over time as traditional markets and crypto become increasingly intertwined. Best to keep on doing your DD (due diligence) and investing in things you understand. 

🤔 Got you wondering more about futures contracts? If so, take this bite-sized lesson on the basics of investing in commodities:

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CONSUMERISM

BOGO & the retail trap

BOGO⁠—buy one, get one... FREE

It’s nearing that time of year when we all start receiving piles of catalogs and coupons in the mail, not to mention the countless seasonal sales emails too. These sales are of course designed to look as if they’re for our benefit, but you know the truth. 

Marketing is out in full force here, and campaign designers craft up these tactics with increasingly personal messages as targeted marketing gets better and better. Sales can be great when used appropriately, but it’s easy to get caught up in the moment and find yourself with a $200 bill in no time.

Luckily, there are a few things that can help.

  • Fight flash sales: This is scarcity marketing at its finest, and all sales implement this to a degree. Notice that each promotional sale email you get has an expiration date, or it’s for a limited time only. Funny enough, you’ll probably get another promo email from that brand next week. It’s okay to be patient. 
  • The free shipping illusion: ‘Free’ shipping, if you spend $X amount or more that is. A good rule of thumb is to compare your original cart total plus shipping costs to what it needs to be in order to get that free shipping, and go with the lower. Ex: Free shipping on orders of $50+. Shipping is $10 and your cart is at $46. In this case, adding $4 to your cart actually just saved you $6. 
  • The BOGO markup: Buy one get one free seems like a great deal, and it can be, if the prices haven’t been adjusted. Sometimes retailers will up the price of the item slightly to encourage you to buy it, luring in consumers with the reward of getting one free. An easy way to avoid this? Just scan the item or look it up online to compare prices.


🔎 Looking to get started with budgeting? Learn the basics in 6 digestible minutes:

📊 ASHU'S CORPORATE CORNER

Today's Movers & Shakers

  • Comcast (+3%)  topped revs and earnings estimates
  • CAT (+2.5%) beat on profits but revenues trailed estimates despite demand for construction machinery remaining strong
  • Merck (+2.2%) beat the street on profits and sales
  • Tempur Sealy bounced 2.5% also on strong performance of top- and bottom-line numbers
  • Ford (+9.5%) reported great results and said that supply-chain issues will ease this quarter
  • eBay (-5%) mainly b/c of weaker guidance even though it topped the street on revs and profits 
  • Anheuser-Busch guzzled +10% in premarket on a surprise increase in profits and strong beer sales, especially in Brazil

This commentary is as of 9:11 am EDT.

🌊 TRENDING ON FINNY & BEYOND

  • Answer: World hunger could be solved with 2% of Elon Musk's wealth, says director of UN food scarcity organization (KSL.com)
  • California plans to vaccinate kids 5-11 years old against Covid as soon as next week (Deadline)
  • Refer your friends to Finny and earn 100 Dibs, aka gold coins, for each referral who signs up. 1000 Dibs gets you a free gift card to your favorite retailer! In case you didn't know, you can also earn Dibs by taking quizzes (lessons) and more! Check out Finny's Rewards.
  • Finny quiz of the day. Need a quick review on cryptocurrency basics? Bite-sized lesson on that topic right below 🔽

Sponsor Disclosures

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The Gist is Finny's twice a week (Tues & Thurs) newsletter covering personal finance & investing insights and money trends. Finny does not offer investment and stock advice. The editorial team: Austin Payne, Chihee Kim. Ashu's Corporate Corner is brought to you by Ashu Singh.

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