Category: Regulation

Bipartisan Marijuana Banking Bill Could Pass Senate Within Weeks

Posted on by slightbourne@noblecapitalmarkets.com

A bipartisan bill that would allow cannabis businesses access to banking services could see action in the Senate within the next six weeks, according to lawmakers.

The Secure and Fair Enforcement (SAFE) Banking Act has been a priority for advocates seeking to bring the marijuana industry into the financial mainstream. Currently, most banks will not work with cannabis companies due to federal prohibition.

Senate Banking Committee Chairman Sherrod Brown (D-OH) said he has discussed plans to move the bill forward soon with Majority Leader Chuck Schumer (D-NY). Schumer has also signaled marijuana banking reform is a priority issue requiring bipartisan cooperation.

“We want to get SAFE Banking. We want to do all that in the next six weeks,” Brown told reporters this week. The bill currently has 42 cosponsors split between Republicans and Democrats.

The SAFE Banking Act would protect financial institutions from federal penalties for working with state-legal marijuana businesses. Supporters say it would provide critical access to essential banking services that cannabis companies currently lack.

Take a moment to learn about Schwazze, a leading vertically integrated cannabis holding company with a portfolio spanning cultivation, manufacturing, dispensary operations and a nutrient line.
 
Click here for company information, including equity research from Noble Capital Markets.

However, some Senate Democrats want to amend Section 10 of the bill, believing it could undermine banking regulations. Republicans have resisted those changes, and it’s unclear if a compromise can be reached.

The lead GOP cosponsor, Senator Steve Daines (R-MT), believes the votes are already lined up to pass the current version of SAFE Banking if brought to the floor.

The bill’s progress has major implications for small cannabis businesses that have struggled without proper banking access. Industry leaders say the measure is urgently needed and could determine whether many companies survive or not.

Proper banking would help small marijuana firms process transactions, obtain financing, pay taxes, and gain legitimacy. This could level the playing field against larger cannabis corporations.

While the path forward contains hurdles, the increasing bipartisan momentum behind marijuana banking reform suggests historic progress could be on the horizon for the growing industry after years of being denied equal services.

A Huge Turnaround for Marijuana Stocks This Week

Posted on by phoffman@channelchek.com

Recapping the Cannabis Rally

In the U.S., Marijuana stocks have reawakened and have been enjoying investor attention. The last week in August has been one of their best since March 2020. The driver behind the surge in investor interest is the prospect of a significant shift in the regulatory landscape resulting from a potential reclassification of cannabis by the U.S. Drug Enforcement Administration (DEA). This development has provided optimism throughout the industry, causing notable gains in various cannabis stocks.

High Week for Marijuana Investors

The M.J. PurePlay 100 Index soared by as much as 4.6% at the open on September 1, extending its weekly gain to an impressive 29%. This performance marks the best stretch for the index since March 2020. Similarly a benchmark Cannabis ETF, known by its ticker WEED, enjoyed an extraordinary surge, reaching an all-time high with gains of 45% for the week.

Source: Market Screener

A Shifting Regulatory Landscape

The week brought unexpected excitement as the industry had begun to feel forgotten about. Then, surprisingly, Assistant Secretary for Health Rachel Levine made a groundbreaking recommendation that cannabis be reclassified as a Schedule III drug under the Controlled Substances Act. This strong support immediately drove up the industrys’ stocks as investors look to capitalize on the potential implications.

It then got even better for investors. A more pronounced turning point started when the DEA confirmed its intention to review the current classification of cannabis. This has been anticipated for years, and has not occurred.

For years, the classification of marijuana as a Schedule I drug, placing it alongside substances like heroin and LSD, has posed a significant challenge to the cannabis industry. This categorization has created hurdles for cannabis companies, particularly in their ability to access essential financial services due to conflicting federal laws.

Possible Investor Benefits

Reduced Regulatory Risk: If cannabis is reclassified as a Schedule III drug, it could significantly lower the regulatory risk associated with the industry. This shift would alleviate some of the financial obstacles that cannabis companies face under current federal law.

Take a moment to learn more about Schwazze, a leading vertically integrated cannabis holding company with a portfolio consisting of top-tier licensed brands spanning cultivation, extraction, infused-product manufacturing, dispensary operations, consulting, and a nutrient line.

Click here for company information, including equity research from Noble Capital Markets.

Banking Services: The reclassification could incentivize more banks and financial institutions to offer traditional banking services to cannabis companies, reducing their reliance on cash transactions and enhancing financial stability.

Research Opportunities: A Schedule III rating would facilitate more comprehensive research on cannabis, potentially leading to its removal from the controlled-substance category in the future. This could open doors to groundbreaking discoveries and innovations within the cannabis sector.

Tax Benefits: A change in classification may lead to the removal of certain tax credit and deduction bans for marijuana businesses, providing financial relief and potentially boosting profitability for the industry.

However, it’s important to note that despite these positives, the cannabis industry may still require additional regulatory clarity. The SAFE Banking Act, aims to address some marijuana stumbling blocks and issues by providing legitamate cannabis businesses with access to banking services. To ensure a smooth transition, further guidance may be necessary to ensure compliance with federal anti-money laundering statutes and other applicable laws.

Take Away

The reawakening of marijuana stocks this week reflects the industry’s growing optimism surrounding the potential reclassification of cannabis by the DEA. This transformative development could have far-reaching implications, ranging from reduced regulatory risks and tax benefits to improved access to banking services and expanded research opportunities. However, investors should stay up to date and informed as the regulatory landscape evolves, keeping a close eye on legislative developments and industry trends to make informed investment decisions. Part of that vigilance could include updates from Channelchek in your email each day by obtaining a free subscription here.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.marketscreener.com/quote/index/MJ-PUREPLAY-100-INDEX-GRO-56414425/

Heightened Anticipation in Cannabis Industry

Posted on by phoffman@channelchek.com

U.S. Department of Health Recommends Marijuana Reclassification – Boosts Cannabis Stocks

A letter with far-reaching implications for the cannabis industry has prompted double-digit gains for companies in the marijuana industry, both large and small. Making further headway toward a less restrictive federal government, the U.S. Department of Health and Human Services (HHS) has taken another step in reshaping the legal landscape of cannabis in the United States. In the latest move, as reported by Bloomberg News, the HHS has urged for the relaxation of restrictions on marijuana, this marks a potential turning point for the developing cannabis industry.

A Letter with Far-Reaching Implications

The letter written by U.S. Assistant Secretary for Health, Rachel Levine, to Anne Milgram, the Administrator of the Drug Enforcement Administration (DEA), has heightened anticipation for meaningful changes in marijuana’s classification. Currently categorized as a Schedule I drug under the Controlled Substances Act, marijuana’s potential reclassification to Schedule III, as proposed by Levine, could have far-reaching implications.

Divergent State Laws and Federal Stance

The ongoing contradiction between federal and state marijuana laws has long posed challenges for both cannabis businesses and users. Although around 40 U.S. states have embraced various forms of marijuana legalization, the federal stance remains staunchly prohibitive, creating a perplexing legal labyrin

A Presidential Push for Review

The DEA’s confirmation of receiving the HHS letter aligns with President Joe Biden’s call for a comprehensive review of marijuana’s classification. The administration’s objective to base its decisions on evidence and expert evaluations underscores a commitment to an impartial and well-informed process.

White House spokesperson Karine Jean-Pierre emphasized, “The administration’s process is an independent process led by HHS, led by the Department of Justice and guided by evidence … we will let that process move forward.”

Market Reaction and Future Prospects

The market response to this potentially pivotal development is what one might expect. Medicine Man Technologies, operating under the name Schwazze (SHWZ) is a vertically integrated cannabis company with roots in Colorado. Schwazze stock price jumped 18% on the news. Jushi (JUSHF) is a premium brand provider of cannabis products operating in Florida, Ohio, and Colorado. Jushi Holdings Inc. rose 34% once word of the letter spread through the markets. Charlottes Web (CWBHF), another Colorado-based company involved in farming, manufacturing, marketing, and selling hemp-derived cannabidiol (CBD) wellness products, was lifted by more than 12%.

Take a moment to learn more about Schwazze, a leading vertically integrated cannabis holding company with a portfolio consisting of top-tier licensed brands spanning cultivation, extraction, infused-product manufacturing, dispensary operations, consulting, and a nutrient line.

Click here for company information, including equity research from Noble Capital Markets.

The sharp reaction reflects tangible market optimism regarding the potential reshaping of the legal framework surrounding cannabis.

DEA’s Next Steps

The DEA, wields the final authority to determine drug scheduling under the Controlled Substances Act, it is set to initiate a comprehensive review process. HHS’s scientific and medical evaluation will serve as a crucial input in this review, potentially leading to a revision in marijuana’s classification.

Awaiting Further Insights

As this significant reevaluation unfolds, industry stakeholders, advocates, and the general public await further insights into the potential impacts of any regulatory shift. The eventual outcome could mark a defining moment in the trajectory of cannabis legalization, and ability for companies in the industry to have all the advantages non-marijuana companies enjoy.  

The evolving dynamics in the cannabis sector warrant close observation by interested investors as the regulatory landscape continues to transform.

Paul Hoffman

Managing Editor, Channelchek

Source

https://www.reuters.com/business/healthcare-pharmaceuticals/hhs-official-calls-move-marijuana-lower-risk-drug-category-bloomberg-news-2023-08-30/

Do Regional Federal Reserve Branches Put Banks in Their Region at Risk?

Posted on by phoffman@channelchek.com

The Fed Is Losing Tens of Billions: How Are Individual Federal Reserve Banks Doing?

The Federal Reserve System as of the end of July 2023 has accumulated operating losses of $83 billion and, with proper, generally accepted accounting principles applied, its consolidated retained earnings are negative $76 billion, and its total capital negative $40 billion. But the System is made up of 12 individual Federal Reserve Banks (FRBs). Each is a separate corporation with its own shareholders, board of directors, management and financial statements. The commercial banks that are the shareholders of the Fed actually own shares in the particular FRB of which they are a member, and receive dividends from that FRB. As the System in total puts up shockingly bad numbers, the financial situations of the individual FRBs are seldom, if ever, mentioned. In this article we explore how the individual FRBs are doing.

All 12 FRBs have net accumulated operating losses, but the individual FRB losses range from huge in New York and really big in Richmond and Chicago to almost breakeven in Atlanta. Seven FRBs have accumulated losses of more than $1 billion. The accumulated losses of each FRB as of July 26, 2023 are shown in Table 1.

Table 1: Accumulated Operating Losses of Individual Federal Reserve Banks

New York ($55.5 billion)

Richmond ($11.2 billion )

Chicago ( $6.6 billion )

San Francisco ( $2.6 billion )

Cleveland ( $2.5 billion )

Boston ( $1.6 billion )

Dallas ( $1.4 billion )

Philadelphia ($688 million)

Kansas City ($295 million )

Minneapolis ($151 million )

St. Louis ($109 million )

Atlanta ($ 13 million )

The FRBs are of very different sizes. The FRB of New York, for example, has total assets of about half of the entire Federal Reserve System. In other words, it is as big as the other 11 FRBs put together, by far first among equals. The smallest FRB, Minneapolis, has assets of less than 2% of New York. To adjust for the differences in size, Table 2 shows the accumulated losses as a percent of the total capital of each FRB, answering the question, “What percent of its capital has each FRB lost through July 2023?” There is wide variation among the FRBs. It can be seen that New York is also first, the booby prize, in this measure, while Chicago is a notable second, both having already lost more than three times their capital. Two additional FRBs have lost more than 100% of their capital, four others more than half their capital so far, and two nearly half. Two remain relatively untouched.

Table 2: Accumulated Losses as a Percent of Total Capital of Individual FRBs

New York 373%

Chicago 327%

Dallas 159%

Richmond 133%

Boston 87%

Kansas City 64%

Cleveland 56%

Minneapolis 56%

San Francisco 48%

Philadelphia 46%

St. Louis 11%

Atlanta 1%

Thanks to statutory formulas written by a Congress unable to imagine that the Federal Reserve could ever lose money, let alone lose massive amounts of money, the FRBs maintained only small amounts of retained earnings, only about 16% of their total capital. From the percentages in Table 2 compared to 16%, it may be readily observed that the losses have consumed far more than the retained earnings in all but two FRBs. The GAAP accounting principle to be applied is that operating losses are a subtraction from retained earnings. Unbelievably, the Federal Reserve claims that its losses are instead an intangible asset. But keeping books of the Federal Reserve properly, 10 of the FRBs now have negative retained earnings, so nothing left to pay out in dividends.

On orthodox principles, then, 10 of the 12 FRBs would not be paying dividends to their shareholders. But they continue to do so. Should they?

Much more striking than negative retained earnings is negative total capital. As stated above, properly accounted for, the Federal Reserve in the aggregate has negative capital of $40 billion as of July 2023. This capital deficit is growing at the rate of about $ 2 billion a week, or over $100 billion a year. The Fed urgently wants you to believe that its negative capital does not matter. Whether it does or what negative capital means to the credibility of a central bank can be debated, but the big negative number is there. It is unevenly divided among the individual FRBs, however.

With proper accounting, as is also apparent from Table 2, four of the FRBs already have negative total capital. Their negative capital in dollars shown in Table 3.

Table 3: Federal Reserve Banks with Negative Capital as of July 2023

New York ($40.7 billion)

Chicago ($ 4.6 billion )

Richmond ($ 2.8 billion )

Dallas ($514 million )

In these cases, we may even more pointedly ask: With negative capital, why are these banks paying dividends?

In six other FRBs, their already shrunken capital keeps on being depleted by continuing losses. At the current rate, they will have negative capital within a year, and in 2024 will face the same fundamental question.

What explains the notable differences among the various FRBs in the extent of their losses and the damage to their capital? The answer is the large difference in the advantage the various FRBs enjoy by issuing paper currency or dollar bills, formally called “Federal Reserve Notes.” Every dollar bill is issued by and is a liability of a particular FRB, and the FRBs differ widely in the proportion of their balance sheets funded by paper currency.

The zero-interest cost funding provided by Federal Reserve Notes reduces the need for interest-bearing funding. All FRBs are invested in billions of long-term fixed-rate bonds and mortgage securities yielding approximately 2%, while they all pay over 5% for their deposits and borrowed funds—a surefire formula for losing money. But they pay 5% on smaller amounts if they have more zero-cost paper money funding their bank. In general, more paper currency financing reduces an FRB’s operating loss, and a smaller proportion of Federal Reserve Notes in its balance sheet increases its loss. The wide range of Federal Reserve Notes as a percent of various FRBs’ total liabilities, a key factor in Atlanta’s small accumulated losses and New York’s huge ones, is shown in Table 4.

Table 4: Federal Reserve Notes Outstanding as a Percent of Total Liabilities

Atlanta 64%

St. Louis 60%

Minneapolis 58%

Dallas 51%

Kansas City 50%

Boston 45%

Philadelphia 44%

San Francisco 39%

Cleveland 38%

Chicago 26%

Richmond 23%

New York 17%

The Federal Reserve System was originally conceived not as a unitary central bank, but as 12 regional reserve banks. It has evolved a long way toward being a unitary organization since then, but there are still 12 different banks, with different balance sheets, different shareholders, different losses, and different depletion or exhaustion of their capital. Should it make a difference to a member bank shareholder which particular FRB it owns stock in? The authors of the Federal Reserve Act thought so.

About the Author

Alex J. Pollock is a Senior Fellow at the Mises Institute, and is the co-author of Surprised Again! — The Covid Crisis and the New Market Bubble (2022). Previously he served as the Principal Deputy Director of the Office of Financial Research in the U.S. Treasury Department (2019-2021), Distinguished Senior Fellow at the R Street Institute (2015-2019 and 2021), Resident Fellow at the American Enterprise Institute (2004-2015), and President and CEO, Federal Home Loan Bank of Chicago (1991-2004). He is the author of Finance and Philosophy—Why We’re Always Surprised (2018).

The Three Causes Crushing Crypto

Posted on by phoffman@channelchek.com

Bitcoin’s Throttleback Thursday Explained

Bitcoin and Ethereum had a bad day. After gaining a lot of upward momentum from late June after Blackrock, Fidelity, and Invesco filed to create bitcoin-related exchange traded funds (ETFs), the volatile assets have shown cryptocurrency investors that the bumpy ride is not yet over. What’s causing it this time? Fortunately, it is not fraud or wrongdoing creating the turbulence. Instead, three factors external to the business of trading, mining, or exchanging digital assets are at work.

 Background

On Thursday, August 17, and accelerating on August 18, the largest cryptocurrencies dropped precipitously. Bitcoin even broke down and fell below the psychologically important $26,000 US dollar price level before bouncing. While some are pointing to CME options expiration on the third Friday of each month, most are pointing to a Wall Street Journal article, and blaming Elon Musk, as the reason the asset class was nudged off a small cliff. There are other less highlighted, but important, catalysts that added to the flash-crash; these, along with the WSJ story, will be explained below.

Smells like Musk

What could SpaceX, the company owned and run by Elon Musk, possibly have to do with a crypto selloff? On Thursday, the crypto market had a downward spike around 5 PM ET. It was just after the Wall Street Journal revealed a change in the accounting valuation of SpaceX’s crypto assets. Reportedly, SpaceX marked down the value of its bitcoin assets by a substantial $373 million over the past two years. Additionally, the company has executed on crypto asset divestitures as well. When the reduction took place is uncertain, but cryptocurrency holdings have been reduced both in terms of the amount of coins and the value each coin is held for on the books.

Elon Musk’s reputation is that of a forward thinker, and one that embraces, if not leads, technology. He has significant influence over cryptocurrency valuations, often instigating pronounced market fluctuations brought about by Musk’s influential posts on his social media company, X. The reduction coincides with a similar crypto reduction on the books of publicly held, Musk-led, Tesla (TSLA). The electric car manufacturer had previously disclosed in its annual earnings report that it had liquidated 75% of its bitcoin reserves.

While it should not be surprising that two companies stepped away from speculation on something unrelated to their business or lowered support for the still young blockchain technology, it gave a reason for a reaction to this and other festering dynamics.

Wary of Gary

The Chairman of the Securities and Exchange Commission (SEC), Gary Gensler, is viewed as a “Whack-a Mole” to crypto stakeholders that prefer more autonomy than regulation. Every time the SEC gets knocked down as a potential regulator, it resurfaces, and crypto businesses have to deal with the agency again.  

Last month, Judge Analisa Torres made a pivotal decision in a case involving payment company Ripple Labs and the Commission. Her verdict declared that a substantial portion of sales of the token XRP did not fall under the category of securities transactions. The SEC claimed it was a security. This judgement was hailed as a triumph for the crypto sector and catalyzed an impressive 20% uptick in the exchange Coinbase’s stock in a single day.

On the same Thursday as the WSJ article, the SEC showed its face again with a strong response to the earlier ruling. Judge Torres allowed the SEC’s request for an “interlocutory” appeal on her ruling. This process will involve the SEC presenting its motion, followed by Ripple’s counterarguments. This is slated to continue until mid-September. Afterward, the Judge will determine whether the agency can effectively challenge her token classification ruling in an appellate court.

The still young asset class, its exchange methods, valuation, and usage techniques, once they are more clearly defined, will serve to add stability and reduce risk and shocks in crypto and the surrounding businesses. The longer the legal system and regulatory entities take, including Congress, the longer it will take for cryptocurrencies to find the more settled mainstream place in the markets they desire.

Rate Spate

The eighteen-month-long spate of rate hikes in the U.S. and across the globe is providing an alternative investment choice instead of what are viewed as riskier assets. Coincidentally, again on Thursday, August 17, the ten-year US Treasury Note hit a yield higher than the markets have experienced in 12 years. At 4.31%, investors can lock in a known annual return for ten years that exceeds the current and projected inflation rate.

Take Away

The volatility in the crypto asset class has been dramatic – not for the weak-stomached investor. On the same day in August, three unrelated events together helped cause the asset class to spike down. These include an article in a top business news publication indicating that one of the world’s most recognized cryptocurrency advocates has reduced bitcoin’s exposure to his companies. The SEC being granted a rematch in a landmark case that it had recently lost, where the earlier outcome gave no provision for the SEC to treat cryptocurrencies like a security. And rounding out the triad of events on crypto’s throttleback Thursday, yields are up across the curve to levels not seen in a dozen years. Investor’s seeking a place to reduce risk can now provide themselves with interest payments in excess of inflation.

But despite the ups and downs, bitcoin is up 56.7% year-to-date, 11.1% over the past 12 months, 110.5% over three years, 300% over five years, and astronomical amounts over longer periods. Related companies like bitcoin miners, crypto exchanges, and blockchain companies have also experienced growth similar to that found in few other industries over the past decade.   

Paul Hoffman

Managing Editor, Channelchek

Sources

https://finance.yahoo.com/video/bitcoin-sinks-below-28k-crypto-202201698.html

https://www.barrons.com/articles/sec-crypto-regulation-ripple-coinbase-d8143058?mod=hp_DAY_5

https://www.forbes.com/sites/siladityaray/2023/08/18/bitcoin-drops-to-lowest-level-since-june-amid-wider-crypto-sell-off/?sh=28df65ce55ff

https://app.koyfin.com/share/1d479a881a

The Other BlackRock, Citadel, Bitcoin Story

Unhyped Information to Improve Investment Success

The Ripple XRP Case Creates Many Questions

Is Gary Gensler on His Way Out at the SEC?

Posted on by phoffman@channelchek.com

The SEC May be Poised to Become more Accommodating to Cryptocurrency

In what is being reported as a developing story that can significantly impact securities and crypto regulation, rumors are circulating that SEC Chair Gary Gensler may be on the way out as head of the agency.  The reports are pointing to Hester Pierce as the most likely person to replace him. How would this impact public markets and the future state of cryptocurrency regulation? We discuss these questions and thoughts below.

Background

Whale (@whalechart) is a crypto news provider with an account on the microblogging platform X.  It is widely respected, with 363,000 followers. Whale announced this morning (August 14), “SEC Commissioner Hester Peirce is being considered to replace Gary Gensler as the head of the regulatory agency.”  This small post (or tweet) has triggered waves of speculation about the upcoming course of securities regulation for both registered products and cryptocurrencies like Bitcoin.

Ms. Peirce is known for her strong support of innovation and outside-the-box thinking. She has been a commissioner of the SEC since 2018, appointed by President Trump. Pierce is a former academic and lawyer who has specialized in securities law and financial regulation. She is known for her views on the regulation of cryptocurrencies and other emerging technologies.

What the SEC May Look Like Under Hester Pierce

Peirce, who has a reputation as being pro-innovation, has been a bold advocate for embracing disruptive technologies like cryptocurrencies and blockchain. If the rumors are accurate and she does find her way to the position of top securities cop, it could signal a shift towards a more accommodating regulatory stance, with a leader whose thoughts on fintech and digital assets are known.

If the days are indeed numbered for the SEC’s current head Gary Gensler, the traditional and digital asset markets would mainly view this as a positive. President Biden’s appointee, Gary Gensler, has been a catalyst behind the intensified scrutiny and rule-making within the overall cryptocurrency realm. His time in the position has led the SEC’s tightening its grip on digital asset exchanges and clamping down on many Initial Coin Offerings (ICOs).

Gensler has been acting to protect consumers, but many critics argue that the SEC under his lead, has been led to too much interference in free markets. With Peirce potentially in the drivers seat, the probability of the regulator embracing crypto assets in a less restrictive way increases dramatically.

Those impacted the most by a changed SEC head have weighed in already with diverse ideologies and opinions. Advocates assert that her penchant for innovation could sow the seeds for heightened financial growth. They contend that a friendlier regulatory outlook might be the medicine needed to embolden new ideas and investors to explore new opportunities – this, they say, could give the economy a lift.

Those opposed to a Hester Peirce nomination warn against a looser regulatory environment that could leave investors exposed to heightened risks. Their call is for the SEC to remain a vigilant guardian of investor interests, standing as a wall against potential deceit or market manipulation.

As the news regarding Peirce’s probable elevation continues to spread on social media and in articles like this, the pressing question many market participants are trying to discern is, will the SEC take a gentler road to new tech innovations or will it hold overly tight to its role concerning investor safety? If the change happens, there could be a celebratory bump in the value of crypto assets and others.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://publish.twitter.com/? Whale

https://foggymedia.in/blog/SEC%20Commissioner%20Hester%20Peirce%20Considered%20to%20Replace%20Gary%20Gensler/

https://cointelegraph.com/news/this-scenario-could-see-sec-gary-gensler-resign

https://coinmarketcap.com/community/articles/64d9f66a62115c7ccfb3c1ec

Is the 2024 Social Security COLA level a Foregone Conclusion?

Posted on by phoffman@channelchek.com

It Seems Likely that Grandma and Grandpa are Getting a Much Smaller Raise Next Year

In 2023, Social Security recipients received the highest COLA in more than 40 years, 8.7%. At the same time, the entire U.S., including those retired, was impacted by the highest annual inflation in over 40 years. The result is the increased pay impacted recipients differently. Those with a higher percentage of variable costs or expenses, especially where inflation was worst, such as rent, travel, or fuel did not benefit as much, if at all. Those with a greater percentage of fixed costs may have found themselves with more money at the end of each month.

Consumers in the U.S., including Social Security recipients, have not had their purchasing power eroded as much during the first seven months of 2023, as they experienced in 2022. Social Security cost of living adjustments (COLA) are based on a formula that will cause the increase paid next year to rise almost by a third of what it rose at the beginning of 2023.

While not yet official, the new forecast comes after the release of July’s Consumer Price Index (CPI), and is largely based on little change over the next 45 days.   

How is a COLA Calculated?

Ignore for a moment the inflation rate percentages you see in the news headlines. The 12-month CPI is calculated by using the set cost of a basket of goods during the month, divided into the cost of the same basket a year earlier. SSA COLA is calculated by the average price of the basket July, August, and September, and dividing it by the average of these months a year earlier. The CPI used in this case is not the CPI-U (all urban consumers) typically reported in the news, but instead, CPI-W (Urban Wage Earners and Clerical Workers). CPI-W is calculated on a monthly basis by the Bureau of Labor Statistics. The most recent release was August 10, 2023.

COLA increases are rounded to the nearest tenth. The adjusted benefit payments are effective as of the first month of the new year.

What to Expect

Social Security recipients could see a 3% bump up next year, based on July’s CPI data, and the current stagnation in the level of inflation. A 3% COLA would raise an average monthly benefit of $1,789 by $53.70 and the maximum benefit by $136.65 per month.

Retired Americans who find Social Security a nice addition to 401(k) or 403(B) investment returns or ample pensions may find themselves with a few extra dollars to take road trips or treat themselves to dining out, or gifts for grandchildren. But investors looking for industries that may benefit from the fatter checks older Americans will receive may find that there is little difference in spending for the majority.

In its recent survey of retirees, the Senior Citizens League found that more than 66% of those that completed its survey have postponed dental care, including major services such as bridges, dentures, and implants. Another 43% said they have delayed optical exams or getting prescription eyeglasses. Almost one-third of survey participants said they have postponed getting medical care or filling prescriptions due to deductibles, out-of-pocket costs, and unexpected bills.

Persistent high prices aren’t the only challenge. Findings from the survey suggest more than one in five Social Security beneficiaries (23%) report they paid tax on a portion of their benefits for the first time this past tax season.

Take Away

When economic numbers are released, they are of interest to a expansive variety of economic stakeholders. This includes investors determining how new statistics will impact corporate earnings, economists deciding how it could impact the Fed’s next move, equity analysts reviewing their industry and companies in the sector, the young couple looking to furnish a new home, and those past their working years that are in general more vulnerable.

The CPI number from July and those that will be reported for August and September will have a noticeable impact on the high percentage of elderly in the U.S. come January 2024.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.ssa.gov/oact/cola/latestCOLA.html#:~:text=The%20Social%20Security%20Act%20specifies,the%20Bureau%20of%20Labor%20Statistics.

https://www.wsj.com/articles/social-security-payment-increase-cola-2024-retirement-a3fce38e

https://www.ssa.gov/news/press/factsheets/colafacts2022.pdf

https://www.wsj.com/articles/social-security-payment-increase-cola-2024-retirement-a3fce38e

https://www.ssa.gov/news/press/factsheets/colafacts2022.pdf

Retail Investors Await Institutional Investors’ SEC Filings

Posted on by phoffman@channelchek.com

For the Third Time This Year, Investors Get to Peak Behind the “Smart Money” Curtain

What’s smart money doing?

If retail investors weren’t always eager to know what hedge fund managers, corporate insiders, and others building positions in a stock have been doing, shows like CNBC’s Closing Bell, news sources like Investors Business Daily, and communities like Seeking Alpha would get far less attention. Next week, the most followed institutional investors are expected to make their quarter-end holdings public. This will usher in a lot of buzz around the surprise changes in holdings and even short positions in celebrity investor portfolios.

Popular SEC Filings

The most popular SEC filings from the supposed “smart money” that small investors look to for ideas are:

Form 13D – This is a filing that is required to be made by any person or group that acquires 5% or more of a company’s voting securities. The filing must disclose the person’s or group’s intentions with respect to the company, such as whether they plan to take control of the company or simply invest in it.

Investors may recall Elon Musk’s accumulation of Twitter shares was incorrectly filed on form 13-G which is for passive investors. He later had to amend his filing on 13D as his accumulation of shares was discovered to be predatory.

Form 4 – This is a filing that is required to be made by any officer, director, or 10% shareholder of a company when they buy or sell shares of the company’s stock. The filing must disclose the number of shares bought or sold, the price per share, and the date of the transaction.

This is the filing that the public used to discover that in 2021, Mark Zuckerberg sold Meta (META) shares (Facebook) almost daily for a total of $4.1 billion. The same year Jeff Bezos sold $8.8 billion worth of Amazon (AMZN) stock, mostly during the month of November.

Both of the filing types mentioned above are as needed, they don’t have a recurring season. However, another popular filing is form 13-F, these much anticipated filings occur four times each year.

Form 13F – This is a quarterly report that is required to be filed by institutional investment managers with at least $100 million in assets under management. The report discloses the manager’s equity and other public securities, including the number of shares held, the CUSIP number, and the market value.

Investors will pour over the quarter-end snapshot of the account and measure changes from the prior quarter, especially from investors like Warren Buffett, Bill Ackman, and Cathie Wood for insights. When Michael Burry filed his 13-F in mid May 2022, he had a position showing that he was short Apple (AAPL). Headlines erupted across news sources, and this certainly had an impact on the tech company’s stock price as other investors questioned its high valuation against any positions they may have had.

The Consistency of the 13-F

The SEC 13-F is a regular filing for large funds. Interested investors can generally mark their calendars for when a funds 13-F will be released. The SEC requires a quarterly report filed no later than 45 days from the calendar quarter’s ends. Most popular managers wait until the last minute, as they may not be so eager to share their funds positions any sooner than needed. This means that most 13-F filings are on February 15 (or before), May 15 (or before), August 15 (or before), and November 15 (or before). In 2023, August 15th is next Tuesday. During the second quarter of 2023 there seemed to have been significant sector rotation, and a reduction in short positions among large funds. This will make for above average interest.

Famous Investors that file a Form 13F

The legendary investor Warren Buffett is the CEO of Berkshire Hathaway. His company’s Form 13F filings are closely watched by investors around the world.

Warren Buffett, last filed a 13-F on May 15, 2023

Ray Dalio is the founder of Bridgewater Associates, one of the world’s largest hedge funds. His company’s Form 13F filings are also very popular with investors.

Ray Dalio, founder of Bridgewater Associates, last filed a 13-F on May 15, 2023

Michael Burry is the investor who famously bet against the housing market in the lead-up to the 2008 financial crisis. His company’s Form 13F filings are often seen as positions of a highly regarded contrarian.

Dr. Michael Burry, last filed a 13-F on May 15, 2023

Cathie Wood is the CEO of ARK Invest, a firm that invests in disruptive technologies. Her company’s Form 13F filings are often seen as a bellwether for the future of technology. Wood is always open and transparent about her funds holdings. This may explain why she is among the earliest filers after each quarter-end.

Cathie Wood, last filed a 13-F on July 10, 2023 for the second quarter ended June 31, 2023

Drawbacks to Using Form 13F

While Form 13F filings can be a valuable source of information for investors, it isn’t magic. And if it is going to weigh heavily as part of an investor’s selection process, some drawbacks should be considered.

The information is delayed: Form 13F filings are not real-time information. They are usually filed 45 days after the end of the quarter, so the information is already outdated by the time it is available to the public.

The information is not complete: Form 13F filings only disclose the top 10 holdings of each fund. This means that investors do not have a complete picture of the fund’s portfolio.

It is not always clear if a position is based on expectations for the one holding, or should be viewed in light of the full portfolio, balancing risk and potential reward. For example, an investment manager may be bullish on tech and long a tech megacap with a lower than average P/E ratio and as of the same filing, short a similar amount of a tech megacap with a higher P/E ratio. The fund manager may be bullish on both, and the nature of the positions may indicate an expectation that the P/E ratios are likely to move toward a similar ratio. If there is just a focus on one side (long or short), the investor may read the intentions or expectations wrong.

Take Away

As earnings season fades, the third week in August will provide a mountain of information on what institutional investors were doing during the second quarter. This is a great place to find ideas and understand any changes in flows.

Investors should be cautioned that this is only a June 30th snap shot, and these holdings may have changed days later.’

Paul Hoffman

Managing Editor, Channelchek

Sources

https://fintel.io/search?search=ray+dalio+13-f

https://fintel.io/i13fs/ark-investment-management

https://whalewisdom.com/filer/scion-asset-management-llc

https://www.vrresearch.com/blog/learn-about-hedge-funds-from-13f-filings

https://www.forbes.com/sites/rachelsandler/2022/01/06/mark-zuckerberg-sold-facebook-stock-nearly-every-weekday-last-year-for-almost-11-months/?sh=6cebeeb03f71

https://www.sec.gov/Archives/edgar/data/1418091/000110465922045641/tm2212748d1_sc13da.htm

What Will It Take for Cryptocurrencies to Become Full-Fledged Money?

Posted on by phoffman@channelchek.com

Can a Currency Without a Country Survive?

The crypto-unit bitcoin holds out the prospect of something revolutionary: money created in the free market, money the production and use of which the state has no access to. The transactions carried out with it are anonymous; outsiders do not know who paid and who received the payment. It would be money that cannot be multiplied at will, whose quantity is finite, that knows no national borders, and that can be used unhindered worldwide. This is possible because the bitcoin is based on a special form of electronic data processing and storage: blockchain technology (a “distributed ledger technology,” DLT), which can also be described as a decentralized account book.

Think through the consequences if such a “denationalized” form of money should actually prevail in practice. The state can no longer tax its citizens as before. It lacks information on the labor and capital incomes of citizens and enterprises and their total wealth. The only option left to the state is to tax the assets in the “real world”—such as houses, land, works of art, etc. But this is costly and expensive. It could try to levy a “poll tax”: a tax in which everyone pays the same absolute tax amount—regardless of the personal circumstances of the taxpayers, such as income, wealth, ability, to achieve and so on. But would that be practicable? Could it be enforced? This is doubtful.

The state could also no longer simply borrow money. In a cryptocurrency world, who would give credit to the state? The state would have to justify the expectation that it would use the borrowed money productively to service its debt. But as we know, the state is not in a position to do this or is in a much worse position than private companies. So even if the state could obtain credit, it would have to pay a comparatively high interest rate, severely restricting its scope for credit financing.

In view of the financial disempowerment of the state by a cryptocurrency, the question arises: Could the state as we know it today still exist at all, could it still mobilize enough supporters and gather them behind it? After all, the fantasies of redistribution and enrichment that today drive many people as voters into the arms of political parties and ideologies would disappear into thin air. The state would no longer function as a redistribution machine; it basically would have little or no money to finance political promises. Cryptocurrencies therefore have the potential to herald the end of the state as we know it today.

The transition from the national fiat currencies to a cryptocurrency created in the free market has, above all, consequences for the existing fiat monetary system and the production and employment structure it has created. Suppose a cryptocurrency (C) rises in the favor of money demanders. It is increasingly in demand and therefore appreciates against the established fiat currency (F). If the prices of goods, calculated in F, remain unchanged, the holder of C records an increase in his purchasing power: one obtains more F for C and can purchase more goods, provided that the prices of goods, calculated in F, remain unchanged.

Since C has now appreciated compared to F, the prices of the goods expressed in F must also rise sooner or later—otherwise the holder of C could arbitrate by exchanging C for F and then paying the prices of the goods labeled in F. And because more and more people want to use C as money, goods prices will soon be labeled not only in F, but also in C. When money users increasingly turn away from F because they see C as the better money, the purchasing power devaluation of F continues. Because F is an unbacked currency, in extreme cases it can lose its purchasing power and become a total loss.

The decline in the purchasing power of F will have far-reaching consequences for the production and employment structure of the economy. It leads to an increase in market interest rates for loans denominated in F. Investments that have so far seemed profitable turn out to be a flop. Companies cut jobs. Debtors whose loans become due have problems obtaining follow-up loans and become insolvent. The boom provided by the fiat currencies collapses and turns into a bust. If the central banks accompany this bust with an expansion of the money supply, the exchange rate of the fiat currencies against the cryptocurrency will fall even further. The purchasing power of the sight, time, and savings deposits and bonds denominated in fiat currencies would be lost; in the event of loan defaults, creditors could only hope to be (partially) compensated by the collateral values, if any.

However, the bitcoin has not yet developed to the point where it could be a perfect substitute for the fiat currencies. For example, the performance of the bitcoin network is not yet large enough. At present, it is operating at full capacity when it processes around 360,000 payments per day. In Germany alone, however, around 75 million transfers are made in one working day! Another problem with bitcoin transactions is finality. In modern fiat cash payment systems, there is a clearly identifiable point in time at which a payment is legally and de facto completed, and from that point on the money transferred can be used immediately. However, DLT consensus techniques (such as proof of work) only allow relative finality, and this is undoubtedly detrimental to the money user (because blocks added to the blockchain can subsequently become invalid by resolving forks).

The transaction costs are also of great importance regarding whether the bitcoin can assert itself as a universally used means of payment. In the recent past, there have been some major fluctuations in this area: In mid-June 2019, a transaction cost about $4.10, in December 2017 it peaked at more than $37, but in the meantime for many months it had been only $0.07. In addition, the time taken to process a transaction had also fluctuated considerably at times, which may be disadvantageous from the point of view of bitcoin users in view of the emergence of instant payment for fiat cash payments.

Another important aspect is the question of the “intermediary.” Bitcoin is designed to enable intermediary-free transactions between participants. But do the market participants really want intermediary–free money? What if there are problems? For example, if someone made a mistake and transferred one hundred bitcoins instead of one, he cannot reverse the transaction. And nobody can help him! The fact that many hold their bitcoins in trading venues and not in their private digital wallets suggests that even in a world of cryptocurrencies there is a demand for intermediaries offering services such as storage and security of private keys.

However, as soon as intermediaries come into play, the transaction chain is no longer limited to the digital world, but reaches the real world. At the interface between the digital and the real world, a trustworthy entity is required. Just think of credit transactions. They cannot be performed unseen (trustless) and anonymously. Payment defaults can happen here, and therefore the lender wants to know who the borrower is, what credit quality he has, what collateral he provides. And if the bridge is built from the digital to the real world, the crypto-money inevitably finds itself in the crosshairs of the state. However, this bridge will ultimately be necessary, because in modern economies with a division of labor, money must have the capacity for intermediation.

It is safe to assume that technology will continue to make progress, that it will remove many remaining obstacles. However, it can also be expected that the state will make every effort to discourage a free market for money, for example, by reducing the competitiveness of alternative money media such as precious metals and crypto-units vis-à-vis fiat money through tax measures (such as turnover and capital gains taxes). As long as this is the case, it will be difficult even for money that is better in all other respects to assert itself.

Therefore, technical superiority alone will probably not be sufficient to help free market money—whether in the form of gold, silver, or crypto-units—achieve a breakthrough. In addition, and above all, it will be necessary for people to demand their right to self-determination in the choice of money or to recognize the need to make use of it. Ludwig von Mises has cited the “sound-money principle” in this context: “[T]he sound-money principle has two aspects. It is affirmative in approving the market’s choice of a commonly used medium of exchange. It is negative in obstructing the government’s propensity to meddle with the currency system.” And he continues: “It is impossible to grasp the meaning of the idea of sound money if one does not realize that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bills of rights.”

These words make it clear that in order for a free market for money to become at all possible, quite a substantial change must take place in people’s minds. We must turn away from democratic socialism, from all socialist-collectivist false doctrines, from their state-glorifying delusion, no longer listen to socialist appeals to envy and resentment. This can only be achieved through better insight, acceptance of better ideas and logical thinking. Admittedly, this is a difficult undertaking, but it is not hopeless. Especially since there is a logical alternative to democratic socialism: the private law society with a free market for money. What this means is outlined in the final chapter of this book.

About the Author:

Dr. Thorsten Polleit is Chief Economist of Degussa and Honorary Professor at the University of Bayreuth. He also acts as an investment advisor.

[This article is adapted from Chapter 21 of The Global Currency Plot.]

Gensler’s Appeal for Much More Oversight Over Cryptocurrencies

Posted on by phoffman@channelchek.com
Image: Gary Gensler on Bloomberg TV, July 27, 2023

SEC Chairman Pushes for More Crypto Cops on the Beat

Gary Gensler, the SEC chair, was asked on Bloomberg TV whether the efforts to protect the consumer related to cryptocurrency are complicated by non-compliance and lack of growth in the agency’s staff. Gensler discussed the need for more enforcement of current laws and lively debate with Congress to create new rules, “the capital markets really wouldn’t work without cops on the beat and rules of the road,” replied the SEC chair.

During his discussion on July 27, the head of the SEC demonstrated the Commission is still taking aim at the crypto markets despite what is seen as legal setbacks related to its authority. Gensler said that the cryptocurrency sector remains underhanded and unregulated. “The securities laws are there to protect you, and this is a field rife with fraud, rife with hucksters. There are good-faith actors as well, but there are far too many that aren’t.”

The overall theme of the conversation is that the crypto asset class lacks adequate protections for investors.

Gensler calmly appealed to investors not to assume that they are getting full protection despite the securities laws applied to many tokens in the crypto space. “A lot of investors should be aware that it’s not only a highly speculative asset class, it’s also one that they currently should not assume they are getting the protections of the securities law,” he said. He alleged that some crypto platforms were “co-mingling and trading against” investors.

As it relates to crypto exchanges and how they operate, the SEC chair said crypto violates laws that other exchanges abide by. “You as investors are not getting the full, fair, and truthful disclosure, and the platforms and intermediaries are doing things that we would never in a day allow or think the New York Stock Exchange or NASDAQ would do,” declared Gensler.

Earlier this month, a U.S. judge ruled that Ripple did not break securities law by selling its XRP token on public exchanges. The decision sent positive ripples through the entire crypto market and sent the value of XRP soaring. If tokens can not be deemed securities, transactions within the asset class may not fall under the SEC at all. This leaves open the question of who will regulate and oversee crypto and its exchanges.

Take Away

SEC chair Gary Gensler warned investors in late July about the lack of regulation for cryptocurrencies. He told Bloomberg TV the sector was rife with “fraud” and “hucksters,” leaving investors at risk. Gensler made listeners aware that some crypto platforms were “co-mingling and trading against” investors.

It is likely that there will ultimately be regulation handed down from Congress and enforced by an agency, which may include self-regulation, but after the Ripple decision, the oversight will not automatically be from the SEC. It appears Gary Gensler has taken to the interview circuit in order to sway opinion in favor of the SEC.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.bloomberg.com/news/videos/2023-07-27/sec-chair-says-crypto-rife-with-fraud-hucksters-video

https://www.bloomberg.com/news/videos/2023-07-27/sec-s-gensler-on-ai-stock-market-plans-and-crypto-video

The Ripple XRP Case Creates Many Questions

Posted on by phoffman@channelchek.com

Who Will Regulate Crypto if not the SEC?

The cryptocurrency developer Ripple Labs just won a legal victory against the U.S. Securities and Exchange Commission (SEC) that should provoke cheers from the entire industry, at least those that prefer that digital currency not be treated as a security. If crypto is not viewed as a security, the jurisdiction which the SEC has been pushing hard to cement, may fall apart. This ruling may eventually lead to any future legal framework for digital tokens being designed by the U.S. Congress.

Background

Ripple is a technology company that uses cryptocurrency and blockchain technology to offer financial solutions. Ripple and XRP are two distinct entities. Ripple is a fintech company that builds global payment systems, while XRP is an independent digital asset that can be used by anyone for a variety of reasons.

In 2020, Ripple was charged by the SEC on the grounds that the company illegally raised $1.38 billion in unregistered securities offerings. In a ruling on July 13 of this year, it was decided by a Federal court that Ripple Labs did not violate securities law by selling its XRP tokens on its exchange.  This is being seen as the first major setback for the SEC in a decade of enforcement against the cryptocurrency industry. Other crypto firms accused of illegally operating digital asset exchanges can now explore ways to take advantage of the ruling.

This is an important decision that may alter the expected path of the entire industry. The SEC and the cryptocurrency industry which includes exchanges, crypto-mining, and the tokens themselves, have been at odds, with increasing heat on the industry, mainly by the SEC. Gary Gensler, who chairs the SEC, has described the crypto market as a “Wild West” riddled with fraud. He claims that most crypto tokens are securities. The regulator has been cracking down on crypto exchanges, including the top U.S. exchange Coinbase. If crypto is considered a security, it will fall under the commission’s oversight.

What this Means for the Crypto Industry

Crypto firms have long disputed the SEC’s jurisdiction but until last week had no supporting precedence from a court. This win provides much needed ammunition for the industry to reassert its claims.  

U.S. District Judge Analisa Torres in New York ruled that sales on public cryptocurrency exchanges were not offers of securities because purchasers did not have a reasonable expectation of profit that depended on anything Ripple did. This profit expectation was used as a key in determining if XRP was a security at the time.

Crypto supporters are viewing the decision as a watershed and the judge’s reasoning as a new line of defense for the others being targeted by the SEC, such as Coinbase, Binance, and Bittrex.

SEC APPEAL?

It remains to be seen whether the SEC will challenge the ruling in the 2nd U.S. Court of Appeals which could cause judges to delay hearing other pending and new cases that other crypto assets sold on exchanges are not securities.

Ripple Chief Legal Officer Stuart Alderoty said in an interview with Reuters that the company “wouldn’t shy away from an appeal, because the judge was right on her core findings,” adding: “I believe any appellate court looking at this would amplify and endorse those rulings, which would certainly be welcome.”

An appeal is somewhat risky for the SEC. If the 2nd Circuit, whose rulings are binding on federal courts in New York, Connecticut and Vermont, adopts the logic in the Ripple ruling, other cases like the SEC vs. Coinbase case would leave the SEC without much of an argument. This could permanently eliminate any claim the Commission has to regulation over the industry.

With the district court having taken a sledgehammer to the main claim the SEC had to oversight,  the industry may find itself subject to a legislative agreement. Especially with an SEC deprived of the argument that their legal cases were sound, there’s nothing to stop an acceleration of efforts to find a bipartisan agreement on a regulatory framework for crypto assets by the legislative branch.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.coindesk.com/policy/2023/07/14/what-ripples-partial-xrp-win-means-for-other-crypto-firms-fighting-sec/

https://www.reuters.com/technology/crypto-firms-facing-us-sec-charges-find-hope-ripple-ruling-experts-say-2023-07-17/

https://www.fnlondon.com/articles/why-the-ripple-ruling-wont-spell-the-end-of-the-secs-crypto-crackdown-20230717?mod=hp_LATEST&adobe_mc=MCMID%3D04828691964107368544310185344499067435%7CMCORGID%3DCB68E4BA55144CAA0A4C98A5%2540AdobeOrg%7CTS%3D1689601964

New SEC Rules Could be Costly for Investors

Posted on by phoffman@channelchek.com

Do New SEC Rules Bubble Wrap Money Market Funds?

What if you bought a new home in what has historically been a trouble-free neighborhood? You are not one to take big risks with your family or belongings so you also pay extra for what are expected to be the best locks, install a security camera, motion detector lights, and build a state-of-the-art fence behind which sits your German shepherd named Patton. The first week after you move in, a town representative comes by and tells you that they are worried about your safety, so you and everyone else in town must also spend a little money each month on an alarm system they approve of. To you, even this small amount of money is a waste as Patton is generally always on the job, you have ample protection in other ways, and the extra money is better spent on dog food. 

This is what many investors feel the SEC has just done by changing the already extremely low-risk rules for money market funds this week. These investors believe they already had ample safety in the “cash” allocation and may have already given up return in order to secure that safety. So the forced added layer of protection to MM funds, which have in over five decades only seen two funds in the asset class inch down in value, is an example of a regulator forcing them to pay for the protection they don’t need.   

Money Market Fund Background

Money market funds are governed by the SEC under rule 2a-7 of the Investment Company Act of 1940. These rules are very specific in defining the underlying assets in the fund. The most common use of MM funds, and the restrictions governing the holdings, is to provide a very liquid alternative that can be viewed as cash among your other investments. Fund families at times use their MM funds as a funnel or gateway investment from which they hope to have investors venture beyond to other higher fee offerings.

Money market funds, typically purchased through a broker, are not insured, but the extremely high credit quality of underlying securities required by the SEC, along with the very short average maturity required by the SEC, along with the amount each fund is required by the SEC to hold in overnight investments, has provided investors with a very low-risk harbor for balances that may be used as savings, or as a parking place while waiting for more aggressive investment opportunities.

Unlike other mutual funds, where investors buy shares and over time the share price changes, money market funds shares are valued at $1.00. When the underlying investments accrue or pay interest, the non-fee portion of income is credited to account holders as a share dividend, always valued at $1.00. In this way it is designed to feel like a bank savings account. This minimal risk, savers to the tune of trillions of dollars, endure in exchange for higher returns than available in a bank passbook account, and the convenience of transferring money to purchase other investments.

What is the risk of a 2a-7 money market fund breaking the buck? You can count on two fingers. Since the first money market fund came to market in 1971, it has briefly occurred in two funds, and no investors lost money.  

The first time a MM fund broke the buck was in 1994, a fund named Community Bankers U.S. Government Money Market Fund saw it’s NAV plummet from $1.00 to $0.96. This was after financial engineers at top Wall Street investment banks created derivative instruments that were far from liquid, and stopped accruing interest if markets didn’t perform as expected. Imagine being the first MM fund manager in history to drop below $1.00 because you disregarded prudence.   

The second time was in 2008. The Reserve Primary Fund held Lehman Brothers commercial paper (very short-term notes). On September 16th of that year the fund company announced it had suffered losses in the fund to the extent that assets fell below $1.00 per share to $0.97.

The U.S. Treasury Department guaranteed the $1.00 share price in 2008 to prevent a run on MM funds. And in both occurrences, fund companies, in order to restore faith in their other products, made sure money fund holders were whole by redeeming shares when requested at $1.00.

SEC New Rules for Money Funds Beginning October 2023

In 2010 The SEC created new rules to enhance transparency, liquidity, and bolster the credit quality of MM funds. Despite having only experienced two brief brushes with breaking the buck.

The new rules for 2a-7 SEC-regulated money funds (any fund with “money” in the title is regulated under 2a-7) included that daily maturities must equal at least 10% of the fund. And further, each week at least 30% of the fund notes need to mature. The weighted average maturity of all holdings in any non-government MM fund can not extend longer than 60 days, down from 90 days. The rules essentially were a safe cash alternative and made it super safe, and along the way, they rduced average return to the investors.

A reminder, there has not been an incident since the new rules, but there was some concern in 2020 as the financial system took measures in response to the novel coronavirus.

On July 12, 2023 the SEC announced it has decided that investors in MM funds need to be protected even better. Or perhaps it is better protecting the fund industry by adding extra safety measures that they all have to play by, giving none a real competitive advantage, and increasing their competitiveness against FDIC insure bank money funds. Either way, it is sure to lower, once again, the interest rates paid on the average MM fund. Considering interest rate compounding and the time value of money, investors this coming October will begin “paying” more for protections than they are probably worth.

The SEC explained its reasons for the added protection.“Money market funds – nearly $6 trillion in size today – provide millions of Americans with a deposit alternative to traditional bank accounts,” said SEC Chair Gary Gensler. “Money market funds, though, have a potential structural liquidity mismatch. As a result, when markets enter times of stress, some investors – fearing dilution or illiquidity – may try to escape the bear. This can lead to large amounts of rapid redemptions. Left unchecked, such stress can undermine these critical funds. I support this adoption because it will enhance these funds’ resiliency and ability to protect against dilution. Taken together, the rules will make money market funds more resilient, liquid, and transparent, including in times of stress. That benefits investors.”

The SEC finalized the most recent amendments to Rule 2a-7 on July 12, 2023. The amendments are designed to improve the resilience and transparency of money market funds by:

  • Requiring money market funds to impose a mandatory liquidity fee of 2% when daily net redemptions exceed 5% of total assets.
  • Increasing the minimum daily liquid asset requirement from 10% to 15% of total assets
  • Increasing the minimum weekly liquid asset requirement from 30% to 35% of total asset
  • Giving money market fund boards the discretion to impose a liquidity fee if daily net redemptions exceed 2.5% of total assets.

Beginning in October 1, 2023, money market funds will also disclose more information about their liquidity risk, including the daily and weekly liquid asset requirements, the amount of liquidity fees imposed, and the reasons for imposing liquidity fees.

What Could the Impact Be?

In economics, everything has an impact. To address redemption costs and liquidity concerns, the amendments will require institutional prime and institutional tax-exempt money market funds to impose liquidity fees when a fund experiences daily net redemptions exceeding 5 percent of net assets, unless the fund’s liquidity costs are de minimis. This alone could cause investors to try to be first to the door if trouble is perceived thereby increasing the number of runs on these low-risk funds. The shorter average maturity, and higher percentage of holdings held maturing in one day and seven days will also reduce earnings in a normal sloping yield curve environment.

In addition, the amendments will require any non-government money market fund to impose a discretionary liquidity fee if the board determines that a fee is in the best interest of the fund. This could be perceived as the funds management punishing investors for expecting a MM fund to provide liquidity on demand. It could also have the impact of funds taking more chances, as the fund manager knows that if a sudden withdrawal spree occurs and a large percentage of their holdings have gone down in value, they can charge customers for wanting their money. 

Take Away

When it comes to investing, risk versus return is a top consideration. Many investors know this and are concerned that regulatory bodies try to protect investors from the downside of risk. By doing this they shield investors from the benefits of risk. It can be argued that some IPOs may not be suitable for every investor, but should ultra-safe money market funds be further shored up at an ongoing cost in return, to reduce the unlikely day when they may lose 3 cents a share? Write to me and let me know what you think.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.sec.gov/rules/proposed/2021/ic-34441-fact-sheet.pdf

https://www.investor.gov/introduction-investing/investing-basics/glossary/money-market-fund

How the US and the UK Intend to Improve Capital Markets

Posted on by phoffman@channelchek.com

Why Issuer-Sponsored Research Has Become a Priority in the UK (and US)

Why are the United Kingdom, The United States, and other countries providing an atmosphere that helps promote company-sponsored research?

Last year the SEC issued a report that was required by Congress on issues affecting the investment research of small companies. Last week the UK accepted, in its entirety, a recommendation on issuer-sponsored research. Both countries recognize the needs of investors, issuers, and the overall economy. Investors and issuers ought to be particularly interested in these changes and how they’ll improve the financial system.

Investment Research

Research is like the grease in the capital markets that keeps money from being stuck. It can be categorized into three types: sell-side research, buy-side research, and independent research.

Sell-side research is provided by full-service broker-dealers for clients to consume.

Buy-side research is created by institutional money managers for in-house use to help them make investment decisions on the money they manage.

Independent research is provided by firms that are neither broker-dealers nor institutional money managers, this service is paid for by investors or at no cost to investors as the company that has issued the security has sponsored the analysis.

Analysts often specialize in a specific industry and will regularly provide research on companies within that industry. This research includes written reports that discuss market developments, financial projections, target prices, and overall ratings or recommendations (such as buy, hold, or sell). The specific content and terminology used in research reports will vary.

These research reports can be published at any time, especially in response to important corporate events like earnings releases. While sell-side and buy-side research may have limited distribution, independent research is more widely available to money management firms and individual investors.

Research helps investors gain clarity about a company and its prospects. It can provide interpretations of significant events related to the company, such as media coverage or predictions from other analysts. Individual investors can also benefit from research reports by using them as part of their overall investment decision-making process.

In addition to producing written research reports, research providers may also assist issuers by arranging meetings or conference calls between investors and the senior management of companies. These roadshows help allow better understanding and communication between investors and the companies they may be interested in.

Overall, research is essential in the capital markets, it provides valuable information and insights that help investors make informed decisions about their investments. It helps reduce uncertainty and allows investors to assess the potential risks and rewards associated with different investment opportunities.

Analysts can also introduce or express their opinions about specific of covered companies using other forums such as video interviews, print media, or investor/issuer conferences. Additionally, sell-side analysts who work for broker-dealers that offer investment banking services may, within regulatory guidelines, be involved in investment banking transactions.

Benefits to Issuer

Research helps investors by discovering and delivering important information about companies. Well-rounded investors consider research an important part of the information they use to make investment decisions, including staying up to date on analyst forecasts for the company and industry, management forecasts, earnings announcements, and SEC filings. This fosters improved liquidity, which benefits price discovery and execution on demand.

According to the Congressionally mandated SEC report titled Staff Report on the Issues Affecting the Provision of and Reliance Upon Investment Research Into Small Issuers, research coverage of a company positively affects the liquidity of its stocks. When a company loses analyst coverage, its stock liquidity can decrease. This decrease in liquidity is more pronounced for smaller companies with fewer analysts covering them. Research coverage also helps investors recognize and pay attention to companies, which affects their value. Investor attention can be gained by engaging research and analysis firms to initiate coverage to gain investor attention.

Excerpt from the Securities and Exchange Committee Report, February 2022, (page 11):

“Studies have shown that research coverage of an issuer is positively related to its stock liquidity and that a reduction in research coverage of an issuer may reduce its stock liquidity. For instance, one study found that issuers that lose analyst coverage for at least one year suffer a ‘significant deterioration in bid-ask spreads, trading volumes, and institutional presence.’

Other studies have found that the reason for this deterioration is that decreases in analyst coverage increases information asymmetry, which can cause issuers to switch to financing that is less sensitive to information asymmetry, including decreasing their use of equity and long-term debt, or cause issuers to decrease their total investment (e.g., capital, research and development and acquisition expenditures) and financing. This decline in liquidity was shown in one study to be more significantly pronounced for smaller issuers, issuers with relatively less analyst coverage, and issuers with a bigger increase in information asymmetry resulting from the loss of an analyst.”

According to the SEC report, research analysts also serve as a comfortable third-party mechanism by monitoring a company’s management. Their scrutiny increases transparency and makes it harder for managers to engage in self-dealing activities. Analysts monitor financial statements, ask questions during earnings announcement conference calls, and distribute information to investors, helping detect any misconduct by management.

When a company loses analyst coverage, according to an SEC review, markets anticipate an increase in agency costs, such as the misuse of cash reserves by managers. The number of analysts covering a company is related to the compensation of chief executive officers and the likelihood of value-destructive corporate acquisitions. Decreased analyst monitoring is also associated with increased earnings management by companies.

The UK Goes All In

On July 10, 2023, the UK formally announced they are on a mission to improve capital markets. A large segment of the new, self-imposed mandate includes the consensus that investment research is an important part of the UK public capital markets and that the availability and quality of expert analyst research is significant in attracting (and retaining) issuers and investors. The Chancellor of the Exchequer is adopting seven action items aimed at “protecting and developing the UK as a centre of excellence for investment research.”

Source: UK Investment Research Review , July 10, 2023 (page 5)

The report states that introducing a research platform to help generate research would help improve research coverage and would help promote a greater interest in smaller cap companies where there is currently a scarcity of research coverage.

The plan is to allow additional optionality for paying for investment research. And would address some of the unintended consequences of the MiFID II unbundling requirements, this aims to increase choices regarding payment for research to permit asset managers to pay for research on a bundled basis and to ensure that UK investment managers remain able to procure research from elsewhere, particularly from the US.

Retail investors have always been at a disadvantage, the UK mission supports greater access to investment research for retail investors, helping to level the playing field.

In developing a research platform open to all, the UK wishes to involve academic institutions and explore situations to strengthen the collaboration between universities and the capital markets ecosystem.  

By providing rules, boundaries, and guidelines, the UK believes it can support issuer-sponsored research by implementing a code of conduct.

The Uk wishes to clarify aspects of the UK regulatory regime for investment analysis or better define it to help simplify access to investment research.

And the last on the UK’s “To Do” list is to review the rules relating to investment research in the context of IPOs with the following points to consider:

  • Changing the FCA Conduct of Business Rules, introduced in 2018, designed to encourage unconnected research analysts to produce research in connection with IPOs. These rules have not had the desired effect of increasing IPO coverage by unconnected analysts but have consequentially extended the UK IPO timetable, putting the UK at a competitive disadvantage.
  • Making IPO-connected analyst research available on a basis similar to the prospectus so that all investors can access the same information.
  • Lower the current restrictions on analysts meeting potential IPO candidates prior to an investment bank being mandated on the IPO are also seen as putting the UK at a disadvantage to other listing venues.

Take Away

Investor access to investment research is important to the capital markets system as it helps money to flow much more easily where needed. Offerings that are better understood and have an additional layer of third-party oversight can attract more needed capital. This reality has been echoed by the SEC and the UK regulatory bodies.

Third-party investment analysis particularly helps smaller companies that may be less understood, as studies show, research coverage improves liquidity among small cap stocks. Investors, particularly retail, benefit from unbiased research and are more likely to make decisions on companies they believe they have a firm understanding of.

All in all, the UK and US authorities understand research provides valuable benefits to investors and the market as a whole. It enhances stock liquidity, increases investor recognition of companies, and serves as an external governance mechanism by monitoring and deterring managerial misconduct.

To have free access to small and microcap company research from the veteran equity analysts at Noble Capital Markets, sign-up here. If you are responsible for the investor relations of a company that may benefit from well-respected coverage, please contact Channelchek here for more information on company-sponsored research.  

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.cfainstitute.org/-/media/documents/code/other-codes-standards/analyst-issuer-guidelines.ashx

https://www.sec.gov/files/staff-report-investment-research-small-issuers.pdf

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1168719/UK_INVESTMENT_RESEARCH_REVIEW_-_RACHEL_KENT_10.7.23.pdf

https://www.lexology.com/library/detail.aspx?g=d36aa9a5-d058-4ddc-93d1-ef430dbe3fe7