Posted by Martin June 15, 2016
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Fed keeps rates unchanged. Of course!


 

 

The Federal Reserve has wrapped up its latest two-day meeting and Janet Yellen is set to address the media in Washington, DC. Yahoo Finance has all the latest on the statement and Chair Yellen’s press conference.




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Posted by Martin June 14, 2016
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Just for the record: Will the market (S&P 500) reach 2,400 this year?


Today, we saw the market in its third day of selling, falling hard off of the highs and increasing fear among investors and speculators.

Yet I could find one who was optimistic enough to claim that the selling is far over and that the market will actually go a lot higher in a matter of a few months.

 

 · Why I decided to write about it?

 

There is tons of people, investors, traders, and speculators out there competing in predicting the next move of the market.

This guy, however, sparked my attention because he said something I could see myself and strongly agree with. So I wanted to record his prediction to see if he was right or not. This post will stay here for some time and in a few months I will be able to go back and see if his assessment was right.

Why bother doing it? Well, the trader, I am talking about, has a 6 year record of consecutive beating of the market by a quite large margin (really impressive in my opinion).

In 2010 he started trading in his own mutual fund (he traded and invested in the market longer than that, but started his own fund 6 years ago) and since then he beat the market every year. His average annual return is 18.34% while S&P average return is only 10.47% for the same period.

His name is Ivan Kollar and he is a manager of Marketocracy fund. You can check his performance on his track record page.

 

 · What is it that sparked my attention about this prediction?

 

Ivan says that many investors are wrong in counting the cycles of the market. They misinterpret cycle count counting the current rally as another corrective cycle. Investors and traders simply expect another selloff. Ivan says that it is wrong and that we corrected from $2134 down to $1810 in February and that was a bottom.

This claim wouldn’t be significant alone to me. I would normally consider it as yet another prediction from another crazy guy out there.

But I noticed one thing in the current market sentiment which supports his claim that investors are wrong about their assessment.

As a member of StockTwits I follow S&P on that website and it also shows the market sentiment.

And the current market sentiment can be summarized as the most sold rally ever. Why? What happened?

Since February 2016 the traders’ sentiment was 70% – 80% bearish. All the time! They simply refused to believe in this rally and they were bearish all the time.

Here, see an example:
Market Sentiment
 

The sentiment above shows “elevated data” as for the long time there were only 20% bulls!

However, I do not give too much credit to all claims of people on StockTwits. Their claims and trades are not verifiable. Many members claim driving Lamborghini and in reality they might not even have a drivers license yet. So, I am taking their claims and sentiments with a grain of salt.

But this sentiment could be seen at American Association of Individual Investors (AAII) where only 27% of members are bullish. The rest is neutral or bearish.

And I have noticed myself that investors have not believed the rally. Articles and posts on financial blogs were mostly gloomy and with every little price drop posts about perma-bears such as George Soros emerged describing why this market was going to crash.

This is why Ivan’s interview caught my attention and I am actually willing to give him a credit and accept that there is something to his claim.

 

 · Let’s put a time stamp on this prediction

 

Ivan says that “we are about to embark on the next upswing, (we might have already started) which will bring the market to 2400 and beyond before we take another break and move downward”.

He adds: “The market will be decidedly higher within the next few months and the seesaw action that has occurred since the beginning of the year will vanish.
With the market nearly flat for the entire year, we are about to embark on a protracted rally that should last about 3 months. The market move from February until April is part of a larger move which will continue upward again in either late May or early June”
. (source: Forbes)

I must admit I am bullish on the market and have a bias upward so I welcome this prediction and hope it will materialize. But I am not going to trade that. I would stick with a conservative put selling strategy against dividend stocks and see how this prediction plays.

I am recording this prediction on my SPX chart and will watch it over the next few months. Let’s see if this trader is good at counting market cycles:

SPX prediction

I will come back and review this prediction three months later.

 

 · What about you? Do you think we will reach $2400?

 

What do you think about this prediction? Will we reach this level or the guy is just one of many who are typically wrong? Let us know what you think and vote:

Will the S&P 500 reach $2,400 in the next 3 or 4 months?


View Results

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Or comment below in comments!

Good Luck!




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Posted by Martin June 11, 2016
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Trade Alert – ROTH IRA cash secured put (LGCY)


I am going to open a cash covered put trade (CSP) in my ROTH IRA account on Monday using LGCY stock.

The stock has been beaten up severely and I own it at $12.40 a share but it currently trades at $2.24 a share. It paid dividends, but about a year ago it suspended it. Time for recovery is too long.

 
LGCY trend
 

I decided to start selling puts and if assigned, selling covered calls using this stock and hopefully to improve my cost basis.

I only own 83 shares so I cannot sell calls yet so starting with puts.

But options for this stock are not very good, so thinking out of the box will be needed.

 

 · Trade Detail

 

On Monday, I will take the following trade:

STO 1 LGCY Sep16 5 put
@ 2.80 LIMIT DAY
DTE = 97
LGCY put selling

As you can see, the option is deep in the money (DITM), but if I get assigned I will buy at 5 a share, but because of collected premium my cost basis will only be $2.20 a share. The stock is trading at $2.24 a share, so I will be making a few cents profit.

 

 · Trading Plan

 

I will not be taking assignment unless I get early assigned or I would have to do it due to other circumstances such as inability to roll.

I would rather roll the option. I am selling September contract (97 DTE). When the time gets closer to September (I expect 2 to 3 weeks to expiration) if the stock will still be hoovering around $2.20 a share, I will roll the contract away in time with the same strike (maybe into January 2017) and collect more premium.

If I managed to keep the contract, I expect it to be worth approx. $2 (or whatever the intrinsic value will be) and I will roll to capture another time value further away in time.

Hopefully, I will be able to do this as long as the stock gets higher in price or I get assigned in which case I buy 100 shares and start selling covered calls.

I’ll keep you all posted on this trade and its development.

 




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Posted by TwillyD June 09, 2016
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Technology May Win In Minimum Wage Fight; Restaurant Space


The movement afoot to raise the minimum wage has frequently captured headlines as of late. Many understand the financial plight of people trying to live on minimum wage. On the flip side are observers who are raising concerns about the negative effects on the top and bottom lines of companies that will have to absorb the higher labor costs that come from raising the minimum wage.

Perhaps no other space is grappling with this like the fast food industry. Also referred to as quick serve, the space is estimated to have generated more than $200 billion in revenue in 2015, according to Franchisehelp.com. It notes that the industry is expected to enjoy annual growth of 2.5% for the next several years. This is below the long term average, notes the site, which added that the industry is rebounding from a slump that lasted several years.

So it should be no surprise that fast food companies would be willing to take the necessary steps to maintain and grow their companies. This is especially the case for publicly-traded companies that must answer to shareholders when there are rifts in revenue streams.

This was most recently highlighted during the first quarter earnings season for 2016, which is wrapping up now. Fast food restaurants reported dealing with a host of headwinds that are affecting their earnings, and a common theme among all of them deals with labor costs.

Take Popeyes Chicken (NYSE: PLKI) for example. Sales for its company-operated restaurants were $34.6 million during Q1 2016 quarter compared to $34.7 million during the first quarter of last year. Company-operated restaurant operating profit was $7 million, or 20.2% of sales, compared to $7.5 million, or 21.6% of sales in 2015.

Company officials noted that higher labor costs were a factor in its weaker earnings, along with lower sales and operating profit. During its conference call to discuss its Q1 2016 earnings, the company’s chief executive officer didn’t mince words when it came to higher wages. Cheryl Bachelder had this to say:
“Labor really is directly tied to the strength of the top-line. And so, that’s what we are managing, that’s what we are chasing is to get the top-line improved, so that we can properly service our guests and have labor in line with expectations.”

In the restaurant business, it’s all about margins, and raising the minimum wage can negatively impact those margins. Publicly-traded companies know that shareholders don’t like to see margins narrow, so they will take the necessary steps to control those costs.

Bachelder, like lead officials at other fast food operators, is trying to control the impact of rising labor costs through the use of technology. One way is through the use of technology. Popeyes is in the midst of finalizing a technology initiative called One Technology. The goal is to develop a unified technology platform that will transform how the company operates its restaurants, communicates with its employees and interacts with customers. Popeyes is also taking advantage of mobile apps so that customers can place orders and pay for them. The use of such technology can reduce the need for some employees who normally interact with customers.

At the end of the day, empathy will persist for those who work some of the lowest paying jobs in the fast food industry. However, publicly-traded companies will likely do whatever they can to maintain their labor costs, and it looks like leveraging technology is the best way to do that.




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Posted by TwillyD June 09, 2016
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Viacom Squabbling Troublesome for Investors


There has been quite a bit of drama playing out in the entertainment space lately as Viacom (NYSE: VIAB) is enthralled in an unprecedented fight over who will be in charge of the $17 billion company.

The power struggle antics over who will control the company are serving to aggravate shareholders who were already concerned about the mental health of the company’s controlling shareholder Sumner Redstone. They could be getting some idea of the future of the company soon, as the matter has made into the court system. Last week, Shari Redstone, the daughter of the company’s founder Sumner Redstone, filed papers with the courts, highlighting the increased likelihood that there may be no amicable solution to stop the squabbling.
 

 · What is going on?

 
Viacom is a well-respected media conglomerate that is best known for its media networks and film entertainment segments. It provides entertainment for consumers through channels that include Comedy Central, MTV, VH1, and Nickelodeon. Its film entertainment segment produces movies under brands that include Paramount Pictures and MTV Films.

If you recall, about 10 years ago, Redstone separated Viacom from CBS. He now reportedly owns 80% of the voting stake in the two companies.

In May, Redstone removed Viacom Chief Executive Philippe Dauman and board member George Abrams. Specifically, they were removed as trustees and members of the board of National Amusements, which the Redstone family uses as an investment vehicle. Observers have chimed in saying that the two and other members of the board could be replaced by people with ties to Sumner Redstone’s daughter, Shari. She’s thought to be pulling the strings, as opponents of the changes charge that the 93-year-old Sumner Redstone may be making such dramatic decisions because of a diminished mental capacity.

Crying foul over their removal, and the negative consequences they perceive the changes will have on the company, Dauman and Abrams are vowing to fight to get their positions back. A hearing over the matter has been set for June 7 over the matter.
 

 · What’s at stake for shareholders

 
Viacom shareholders had been preparing for the company to sell a significant portion of its minority stake in its Paramount film unit. A major concern is that these board and likely management maneuvers may threaten that deal.

Investors complained the unit should be sold due to weak advertising sales and poor ratings at cable networks. Possible buyers include Chinese firms and tech companies that want to develop original content. When the sale was proposed earlier this spring, June was set as a target date to complete it. However, Redstone’s camp has released statements that say he questioned the need for the sale.
 

 · Should you buy Viacom now?

 
Given that so much is up in the air for Viacom, I would not invest it in in the short-term. A long-term play would be more appropriate to allow time for all of this to shake out, which will most likely be in the courts. With many allegations and looming lawsuits at play, Viacom may not be a good stock to get into right now. You may want to consider some of Viacom’s competitors, such as SNI Scripps Networks (NYSE: SNI), CBS (NYSE: CBS) and Tegna (NYSE: TGNA). They are solid performers, and they are not in the midst of a power dispute.




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Markets higher, ugly, but still bullish


What a day on Wall Street today! As bullish the market was today as ugly it looked. My feelings about the market are totally derailed and I do not know what to think about it.

In the morning the S&P lost ground to turn bullish and during the day it rallied up. But on low volume.

The end of the day was ugly and S&P lost everything it ever gained during the day.

SPX intraday

Look at the chart above. It shows today’s intraday action. Quite ugly, right?

We broke up above 2100 level yesterday which was a good sign that we may see some follow up.

Unfortunately, today it all looks like a possible head fake. On a daily chart it looks like a shooting star and if confirmed tomorrow, we may be forming a double top.

It definitely doesn’t look great as of today.

SPX daily

There is one thing which may change all this outlook: there is still a lot of bearishness and denial out there. I do not give much about opinions on Stocktwits.com for example, but people in that group are 29% bullish and 71% bearish.

They have been bearish since the February low and one by one of the members out there were proven wrong and missed the rally.

With low volume, this bearishness and short selling at the sure top can be the catalyst to move this market even higher.

It is so obvious that we are topping that everybody expects it. And it usually won’t happen.

But I am not sure about the next price action at all. These are the waters I have no idea what’s going to happen next.

In February when we reversed, it was easy to ride the rally up. Now that we are already on top, we are at crossroads and we can head down or continue higher. Unlike many predictors out there guessing the next move, I want to wait and see what is going to happen.

But I do not want to be sitting on the sidelines completely.

I just will be unloading my trades and lowering my exposure. As of now, I will be sitting tight and waiting my open trades being closed one by one or let them expire (whichever comes first), but I will not be opening new trades until I unload enough to trade smaller trades.

We may also see the market drifting down from here. It will be a better outcome. But if a sell off happens, I may be closing some of my trades and reversing to selling calls strategy rather then put selling.

But now, we have to wait and see.
 




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Relypsa’s Drug Treatment Success Threatened By Looming New Player Entranceent as Big Pharma


Biopharmaceutical company Relypsa Inc. (NASDAQ: RLYP) continues to enjoy being the sole provider of a drug used to treat hyperkalemia. Its stock is up and analysts are bullish that it has more room to run.

However, there are some catalysts that could move the stock downward. Because of some issues that could affect shareholder value, investors considering whether or not they should jump on the bandwagon now and buy the stock may want to hold off for now.

The stock’s price has increased steadily since May 19, when it closed $14.14, just shy of its 52-week low of $14. The company is trading around $19 now. The catalyst behind that upward move stemmed from the bad news AstraZeneca received concerning a drug it has developed to compete with Relypsa’s drug.
 

 · Winner by default?

 
Relypsa has benefitted from being the only supplier of a drug meant to treat patients with potentially life threatening levels of potassium in their blood. The condition is called hyperkalemia. Relypsa’s drug, which is called Veltassa, had been the only FDA-approved drug in the market used to treat the condition.

But then came Big Pharma company AstraZeneca (NASDAQ: AZN) with its ZS-9 drug, which can also be used to treat hyperkalemia. Its approval by the FDA was thought to be a slam dunk, and observers thought Relypsa’s days of being the sole treatment provider would be over once ZS-9 was approved.

In May, the Food and Drug Administration shocked AstraZeneca and investors when it did not approve the company’s ZS-9 drug. The FDA found fault in the manufacturing of ZS-9, and rejected the drug’s approval. That means Relypsa maintains its position as the sole provider of an FDA-approved drug to treat hyperkalemia in the U.S. – at least for now.

That’s huge considering the market for treating the condition has been estimated to be potentially worth $6 billion.
 

 · Not so fast, say some observers

 
Morgan Stanley on Tuesday downgraded Relypsa to underweight from equal-weight. Morgan Stanley has a $9 price target on Relypsa.

Irina Rivkind Koffler, an analyst at Mizuho, noted that the delay of ZS-9 was the “best possible” outcome for Relyspa because it gives its drug “more time to gain traction in the market as first-mover.”

It may very well need that time.

Koffler is one of the naysayer’s about Relyspa’s future value to stockholders. Her stance is despite her acknowledgement that Veltassa received positive coverage around its launch with one reason being that it is the first drug in 50 years to be approved to treat hyperkalemia. Mizuhu upgraded Relypsa to neutral from underperform on June 1.

In addition to calling the Veltassa’s launch trajectory “quite slow.” Koffler said the stock is expected to remain relatively range-bound until growth becomes more tangible.

Koffler has a $12 price target on Relypsa, marking a 33% potential downside. but notes that this price target will be re-evaluated after speaking with management.
Despite Koffler concerns, of the analysts that cover Relypsa, 80% of them are bullish, 10% are neutral, and 10% are bearish, according to Tip Ranks, which TipRanks is a comprehensive investing tool that allows private investors and day traders to see the measured performance of anyone who provides financial advice.

TipRanks points out that the average 12-month price target between these analysts is $31, marking a 72% potential upside from where shares last closed. Koffler is one of the analysts featured on the site.

On the news of the FDA not approving ZS-9, Relypsa’s stock soared more than 23%, but observers had mixed feelings as to whether the small cap firm would be able to maintain its higher stock price.

For example, Maria Goldstein, an analyst at Cantor Fitzgerald, said the approval delay of AstraZeneca’s drug was a positive factor for Relypsa’s share price appreciation. Furthermore, the lack of competition could go a long way in removing what the firm sees as an overhang on Relypsa’s valuation. It could also drive short covering. The amount of Relypsa’s float that is shorted was a whopping 36.74%.

“We think Relypsa’s shares reflect execution risk for Veltassa’s launch in spite of what we see as a positive trend line,” Goldstein said. “We continue to believe that Veltassa sales will be back-end loaded in 2016, and the ultimate arrival of ZS-9 in the market at some point is likely to serve as a positive driver of market growth overall.”




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May Auto Sales Slip While Five-Year Loans Prosper

May Auto Sales Slip While Five-Year Loans Prosper

Last week was an interesting week in the automobile space. Top automakers reported declines in the number of cars sold, and auto loan financiers were highlighted for offering loans with historic terms in regards to how long they go out.

These issues show some of the headwinds that are facing the auto industries. The auto sector had been one of the positives that had been pointed to as an indication that the U.S. economy was improving. However, reports that indicate that the number of people who bought actual cars, not trucks and SUVs had dropped significantly. Those who were buying cars, or any vehicle for that matter, were financing loans for up to 68 months, which set a record.

The questions raised by these revelations create several questions, including:
Are consumers becoming more reluctant to purchase such big ticket items as vehicles?
Are consumers becoming less willing to part with their vehicles in fewer years than in the past, hence their willingness to sign up for loans that stretch out five years or more?
 

 · Auto industry and the economy

 
Auto sales are considered to be solid economic indicators in gauging how well the overall U.S. economy is performing. In light of the 2008 financial crash that led to bankruptcies in the auto sector, this indicator is extremely valuable in determining how well the U.S. economy is recovering.

We recently reported a story in which we noted that General Motors (NYSE: GM) ended up filing for bankruptcy in 2009 and received roughly $80 billion in government bailout money. Ford (NYSE: F)had to put up its Blue Oval as collateral for roughly $23 billion in loans it received from a syndicate of banks to keep it from filing for bankruptcy. That was in 2006, when the auto industry was in turmoil.

Automakers are recovering. Ford has its Blue Oval back and GM has paid back the government. The companies have reported growth in purchases of their vehicles, but their stocks have been range bound for the past five years. Ford has not managed to reach$18 a share; the closest it came was in 2014 when it traded around $17.42. GM has not been able to move above $50 a share. It nudged the number at the end of 2013 when it hit $40.99.

And while they are recovering, the issues noted above continue to hang a cloud over the industry.
 

 · A look at the numbers

 
So far this year, monthly auto sales have been mixed. The latest sales results released last week showed auto sales in the U.S. weakened in May. They were down 6% compared to May 2015.

May numbers show Fiat Chrysler (NYSE: FCAU) and Toyota beat estimates, while GM and Ford missed estimates. GM not only missed estimates, but it also so its sales drop in May.

Slowing production in North American and a decline in the estimated import of shipments played a role in the declines.

The month-to-month drop was not much above the typical April-to-May falloff, but could be a sign the industry will avoid a big summer sell-down of ’16 models prior to the start of the ’17 model year in the fourth quarter, according to WardsAuto.
 

 · So-called stretch-loans

 
As consumers search for ways to finance their vehicles, the so-called stretch-loans are becoming increasingly popular. In fact, last month marked the first time that the length of financing for such loans stretched out to 68 months. If you recall, these types of loans ran rampant during the Great Recession.

The theory that stretching your loan out longer could lower your payments is being proven to be incorrect. According to Experian, despite the longer terms, consumers are still seeing their payments increase. New loans during the first quarter of 2016 rose to $503 from $488 during the first quarter of 2015.

That can be chalked up to the average loan amount increasing to $30, 032, which is up from $28, 711 during Q1 2015.

CBS financial analyst Mellody Hobson in March warned of the ramification of auto loans that span more than five years. She said that consumers who pay for their vehicles over such a long period render them like homes, which can end up “underwater.” Furthermore, Hobson said that over the years, not only will these consumers end up paying more in interest, they also wind up with a car worth less than the payment they’re making.

Let’s hope that the next few months of auto sales will be stronger, reflecting the economy is regaining its footing due to consumer spending. If consumers are willing to spend on such big-ticket items as vehicles…even if it means financing them for more than five and a half years that could be a good thing. On that same note, it could be horrendous if consumers are buying things they cannot afford, as indicated with their willingness to accept longer financing terms. This could definitely create an economic situation rivaling the 2008 financial collapse.




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Investors Await Latest Round of Bank Stress Test Results


Bank officials and their shareholders are holding their breaths as they wait to see how they fared under the Federal Reserve’s stress tests.

They are also readying for even more stringent capital requirements that the Fed is putting in place for them for future stress tests. These measures are mainly meant to make sure that banks have enough capital, and acceptable debt exposure, to avoid, and deal with the mess we saw when the financial markets collapsed in 2008.
 

 · What’s there to stress about?

 
Investors that held bank stocks prior to 2008 had little to stress about. They enjoyed regular dividends from banks, like JP Morgan (NYSE: JPM), Bank of America (NYSE: BAC), Wells Fargo (NYSE: WFC) and Citigroup (NYSE: C).

However, after the markets collapsed in 2008, that changed. Banks were teetering on the edge of disaster. Lehman Bros. was the first casualty, filing for bankruptcy after not being able to cover its obligations. Concerned that other banks would go the way of Lehman, the federal government bailed out the others to the tune of $475 million. The program called Troubled Asset Relief Program (TARP) was meant to help stabilize America’s banking system during the financial crisis.

While the goal was admirable, many investors frowned. Investors in banks that received funds from the saw their dividend payments slashed shortly after 2008. Dividend.com pointed out that after TARP, dividend yields surged as the share prices fell.
 

 · The birth of the stress act

 
From TARP, came the Dodd-Frank act and these stress tests. The act requires national banks and federal savings associations with more than $10 billion of consolidated assets to conduct annual stress tests. The tests are meant to assess banks’ risk profiles and capital adequacies. The goal is to ensure that institutions have robust, forward-looking capital planning processes that account for their unique risks, and to help ensure that institutions have sufficient capital to continue operations throughout times of economic and financial stress, according to the Office of the Comptroller of Currency.

The OCC uses the stress test results to determine whether additional analytical techniques are needed to identify, measure and monitor risk. These stress test results can also be used to support ongoing improvement in stress testing practices when it comes to assessing a bank’s capital adequacy and overall capital planning.
 

 · More stringent requirements to come

 
The stakes are huge for banks when it comes to passing the stress tests. Passing allows them to make capital distributions like share buybacks and dividend payouts, without the Fed’s approval. Failing could negatively affect a bank’s share price as the main pluses of investing in them are not available until the failing bank passes and receives Fed approval.

Federal Reserve officials plan to go further in toughening the requirements for banks as they relate to the annual stress tests. This raises concerns about the Feds possibly going too far in their regulation of banks, which could negatively affect banks’ profitability.

The more stringent guidelines could make it harder for banks to pass the stress tests. When that happens, the regulations handicap them in being able to increase dividend payouts or participate in share buyback programs.

Fitch Ratings found that banks’ dividend and buyback requests through the annual comprehensive capital analysis and review (CCAR) process have increased in recent years. The median capital distribution request rose to 1.2% of stressed capital in 2015 from 0.8% of stressed capital in 2013. In a statement released on June 1, the rating agency stated that it believed dividend and buyback requests could rise again this year and that banks are likely to press the 30% dividend payout threshold, which the Fed has said it will scrutinize more closely.
 

 · It’s for the best

 
You may recall last year when Bank of America flunked the stress test, and the Fed rejected its request to increase its dividend. The bank went into proactive mode, and focused on building its capital and absorbing the losses from its mortgage business. This helped put it on a more solid financial footing.

Investors should take solace in the bank stress tests being key to banks being able to continually increase value to their shareholders. No one wants to see a repeat of 2008. On that same note, we don’t want to see the regulatory oversight, via increasingly stringent requirements, handicap banks.

The banking sector has enjoyed recovery over the past few years, although it has been a slow one. Banks seem to have become more comfortable with the stress test process, and they’ve become “creative” with their capital requests, notes Fitch.

For these reasons, I continue to see banks as providing long-term investment opportunities.




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Unprecedented FCC Change Helps Wireless Companies Obtain More Spectrum


Verizon, AT&T, Sprint, T-Mobile and even Dish are thought to be among the companies that are bidding on wireless spectrum that is being auctioned off by the Federal Communications Commission. These players are hoping to benefit from a first-of-its kind method being used by the FCC to allow wireless providers to bid for spectrum

These companies consider spectrum to be the life blood for the wireless industry because without it, they would not be able to meet the demands of customers who rely on wireless connections for everything from their smartphones to their tablets. This could spell disaster for these companies, which already face the challenge of operating in a highly competitive space.

Given the unprecedented move the FCC is making this year in auctioning off spectrum, investors should take solace in these companies having a better chance to secure the amount of spectrum they need to meet their customers’ demands.
 

 · Doling out the finite resource

 
The problem with spectrum is that there is a finite amount of it available. Some observers point to 2020 as the year when consumers will see their connections fail due to what has been named the “spectrum crunch.”

To get an idea of the magnitude of the demand for wireless connectivity in the U.S., consider this. It is thought that there are more connected devices than there are people living in the U.S. When you couple that with estimates that say 70% of Americans use smartphones, which are notorious for the amount of data they use, you can see why a shortage of spectrum can cause angst among providers.

This horrible, but very real, nightmare about a “spectrum crunch” is not loss upon wireless providers that already operate in a highly competitive space.

Nor is it loss upon the FCC, which is charged with keeping track of what companies are using spectrum. Back in 2010, it released its National Broadband Plan. In it, the FCC acknowledged that mobile broadband networks, devices and applications are critical components of the overall broadband landscape. Referring to spectrum as the nourishment for mobile broadband, the FCC began seeking new sources of spectrum to feed what it called the “rapidly accelerating demand for mobile broadband services.”

It zeroed in on broadcast television bands, which have the technical characteristics that are well-suited for current and next generation mobile broadband services. Wireless carriers are chomping at the bits to be able to offer 5G.

Also attractive, according to the FCC, is that the TV bands, in their current use, have a substantially lower market value than similar spectrum that has been auctioned primarily for mobile broadband use.
 

 · Who benefits

 
The top wireless carriers are Verizon (NYSE: VZ), AT&T (NYSE: T), Sprint (NYSE: S) and T-Mobile (NASDAQ: TMUS). Then there is satellite-TV provider Dish (NYSE: DISH), which wants to enter the wireless space, too.

As mobile broadband providers, they only have a certain amount of spectrum allocated to them. That’s where the auctions come into play as the providers are trying to get as many blocks as possible to keep up the demand.
Dish chief executive Charlie Ergen added a wrinkle to spectrum war when he started bidding on spectrum, too. It’s no secret that Ergen has been eager to get into the wireless broadband space. Unlike the others mentioned above, however, it does not have a network, and has slow to build one out.

Ergen has said that he may consider splitting Dish in half, with one side being made up of its satellite-TV business. The other half could be made up of its spectrum, which could be sold or leased. He’s also said that the best long-term choice for Dish shareholders would entail being able to “compete with the big guys.”

 

 · In conclusion

 
This year’s auction, which began at the end of May, could set precedent as spectrum that has traditionally been used for broadcast television will be re-purposed for wireless mobile services. Consumers are driving up demand for wireless connectivity as they increasingly use gadgets, such as smartphones and tablets.




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