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What makes public pensions underfunded?

Debit and deficits continue to be in the news. This includes funding levels for public state pensions. But what does it mean to be underfunded or overfunded? What discount rate or investment return assumptions are they using and are they realistic? Derek Moore discusses and simplifies what makes up this discussion and ways that they could get on track. What makes a pension underfunded? Are investment return expectations realistic? Which states are the worst regarding funding...


Is the Lower Interest Rate Bond Trade Getting Crowded?

It seems like lately there has been more an more talk about interest rates moving closer to zero in the U.S. So which bonds will move the most when rates move lower (or higher)? Derek talks through various types of bonds and how they are different plus see how to tell how much a change in rates can hurt or help investors holding bonds. We even touch on bond convexity! How do interest rates change the value of a bond? What is modified duration and how it can project a rise or fall in...


How Low Interest Rates Can Benefit Corporations

Companies can issue debt via bonds to raise capital. But how can you tell whether they have too much debt issued? What are some key ratios to look at to evaluate for yourself? Derek Moore explains how interest rates effect the cost of capital (WACC) and how to see when a stocks debt is maturing and what interest rates they must pay. And what are Zombie Companies? Interest Coverage Ratios Debt Ratio (Total Debt/Total Assets) Debit to Equity (Total Debt/Stockholders Equity) WACC Weighted...


Is the Market Overvalued?

Commentators on CNBC are always opining about whether a market is overvalued or undervalued. But how would you look for yourself to make your own opinion? In this episode Derek Moore reviews the S&P 500 Index earnings per share, forward earnings estimates, PE Ratio, Forward PE ratio, and more. Plus, a review of what composes earnings per share growth including margins, share count, and revenue. Learn how to form you own opinions. S&P 500 Index Earnings Per Share S&P 500 PE Ratio and...


Is a Recession Coming?

Lately commentators have been trying to predict the next recession. But what would you look at to try and tell for yourself what the numbers are? In this episode Derek Moore reviews the 5 areas that the NBER per their site uses to develop their criteria to call recessions. What is a recession? NBER historical list of recessions Real GDP Growth Rate Real Median Income Growth in the U.S. Unemployment Rate Retail Sales Monthly Growth Rate Industrial Production Index Real versus...


Problems with Concentrated Stock Risk

How risky is just holding a single stock in a portfolio? Often either through company stock grants or holding company shares for very long periods where it has appreciated investors may wind up holding either a single stock or just a few. This creates single stock risk and has both systematic stock risk and idiosyncratic stock risk. Derek Moore reviews how the volatility via the standard deviation may increase as well as some interesting historical data on Apple stock regarding its annual...


Benefits of Options Time Decay Theta

Derek Moore explains the theory of time decay in options otherwise known as options theta. How does the erosion of time decay benefit option sellers? Plus, how much do position decay from day to day. How much of a factor is theta time decay relative to other things like volatility and underlying price movement? And how does options time decay work over weekends and long holiday weekends with regard to theta? Benefits of options time decay to option sellers What is options theta? How...


High Probability Option Strategies Explained

Derek Moore and Jay Pestrichelli team up once again to discus how probabilities are used to understand where to sell short options to generate premium. Discussed in this episode are who is on the other side of the short volatility trade, how changes in implied volatility impact expected multiple standard deviations of expected movement, and how value at risk VAR impacts option premiums. Plus, they discuss how professional management adds value especially when option spreads widen and...


Fear of Investing: Surprising Data Points to Markets Near All-time Highs 36% of the time?

Jay Pestrichelli once again joins host Derek Moore to discuss all things hedging and options. This week they talk through some surprising data Jay compiled that shows markets are within 3% its all-time highs 36% of the time. Many people like to try and time the market thinking markets are too high. Another data set shows often markets never get a pullback during bull runs. Plus, Jay and Derek test out new hedging analogies on the fly to see if they work. How often are stock markets within...


How Are Options Priced and What is Short Volatility?

See what factors determine how an option is priced. Whether on a stock index or underlying stock, time, implied volatility, interest rates, dividends, and distance in or out of the money all play a role. Known as the Black-Scholes model, Derek breaks down the inputs and which ones are more significant not only to option premium levels but also changes in price. Explaining the option greeks Delta, Gamma, Theta, Vega, Rho What is implied volatility and why is it so important in options...


Wacky Negative Yielding Bonds and Need for Alternative Income

There are now over $12.5 Trillion dollars outstanding of negative yielding bonds. That’s right, theoretically you are paying some country to lend them money. In reality you don’t write a check twice a year. The idea of a negative yielding bond may not make much sense. Derek Moore will explain how negative yielding bonds work and how much more sensitive (and therefore risk) they are to changes in interest rates. Plus explain how the time value of money is thrown off by these low or negative...


Explaining Bonds for Investors and Corporations

Want a Bond refresher? Derek Moore talks about how bonds work, what effects prices and rates, and how to look at corporations and their debt. How do bond ratings work and what do they mean? What is the interest coverage ratio? What is the corporate debt ratio? Differences between government and corporate debt How interest rates effect bond prices What is the yield to maturity? What is the yield to call and why do corporations call bonds early? What is a bonds coupon rate really...


Is The Federal Reserve Really That Bad At Long Range Economic Forecasts?

Broken Pie Chart | Episode 31 With Derek Moore Is The Federal Reserve Really That Bad At Long Range Economic Forecasts? Show Summary: In this episode Derek Moore discusses how the Federal Reserve economic survey projections have been off, especially for long run economic forecasts. He also clarifies the difference between the Fed Funds Rate, Discount Rate, and IOER or Interest on Excess Reserves. Plus, Derek explains where to find the probabilities for the Fed Funds rate by...


Importance of Real Returns Above Inflation and How to Calculate Them

In this episode Derek Moore helps to clarify the difference between a real return (adjusted for inflation) and a nominal return. This is especially important when looking to increase your purchasing power. Plus, Derek simplifies the difference between taking a simple average and a geometric average. The difference may surprise many people. What is a real return versus a nominal return? What is the formula to calculate an inflation adjusted real return? Difference between a simple...


Myths Around Options Plus Hedging Concentrated Positions

Jay Pestrichelli is back to join Derek Moore in a discussion around options. Particularly myths around options investing. Why we don’t do individual stock analysis and picking. How someone with low-cost basis in a concentrated stock position can hedge. And are coconut’s more dangerous than sharks? Mentioned in this Episode: Jay Pestrichelli talks options with Yahoo Finance ...


What the Options Market Tells Us About Expected Stock Moves Around Earnings

Often investors notice that after an earnings announcement a stock has the potential to move depending on the news. But what type of volatility or movement was expected before the announcement? Using implied volatility, we can look at how option premiums are pricing in potential expected moves. Derek Moore explains how the numbers work and how you can see what a one standard deviation expected move is once you know where to find implied volatilities of the underlying stock or...


Get the Facts To Win Your Debate Around US Deficits, Budgets, and Spending Including Universal Basic Income (UBI)

Lately things like the Universal Basic Income (UBI) and Social Security are debated on TV. Commentators throw around numbers and whether a program can be paid for. Plenty of debate on each side but why not understand for yourself where all these numbers are coming from. In this episode Derek Moore covers what makes up the Federal Budget, Tax Revenue, Interest Payments on Debt, and how much something like a UBI would cost so you can decide. Plus, the effect rising rates and increases in debt...


Part 2: Discussing Myths Around the Classic 60/40 Portfolio

Derek Moore and Jay Pestrichelli are back with part 2 of their discussion around the myths prevalent in the 60/40 portfolio. This week they highlight how bonds with low yields may have even more potential interest rate risk than investors think. Plus, they elaborate on why some diversification strategies fail touching on increased risk of the All-Weather Portfolios and Risk Parity Strategies. Finally, they expand on the “Hedgers Opportunity” where a good hedged equity strategy may allow...


The Unicorn IPOs are Coming: What Their S-1 Filings Divulge

You’ve probably heard about the so called “Unicorn” IPOs or Initial Public Offerings on CNBC. With Lyft already public and Uber, Pinterest, Air B&B, and more on the way, everyone will finally get a glimpse of the financials for all these names. Do they make money? How much or if they lose money, how big is the loss? For those looking forward to finally getting a look inside these companies it can be like Christmas morning. We’ll review what information is disclosed and then compare Amazon...


Discussing Myths Around the Classic 60/40 Portfolio: Part I

For years you’ve been told that to get better risk adjusted returns you should diversify with some percentage in stocks and some in bonds. Yet when you look at the inflation adjusted annualized returns, is the idea of a 60/40 portfolio to manage downside risk more of a myth? In this interesting conversation Derek Moore and Jay Pestrichelli discuss why bonds may not offer much of a real return given where rates are. Plus, they delve into whether a 60/40 portfolio offers better risk adjusted...