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Financial terms you never knew you needed to know

Financial terms you never knew you needed to know

| May 24, 2021

The 1st quarter is in the books for 2021.  Markets for the most part are behaving constructively, with the exception of a quick rise in interest rates seen at the beginning of the year.  Rates, at the time of this writing, have stabilized.  Globally, we are seeing continued economic improvement that is largely correlated with positive vaccine and virus trends (and expectations).  For our clients, many of the changes made to portfolios late 3rd and early 4th quarter have performed well.  And our expectations for continued growth for the coming quarters is optimistic in connection to the improving pandemic trends. 

We are seeing booming growth in global manufacturing.  We also believe from our personal experience there is significant pent-up demand for services as folks are looking to get out and about as we return to a more normal lifestyle.  We are seeing continued monetary support for the economy from the Federal Reserve, while further fiscal support is being hotly debated in Congress.  While politicians continue to spar, we do believe that there is broad public support for items like infrastructure spending, maintaining an anti-China stance, made-in-America policies, especially US self-sufficiency in particular sectors and/or enhancing the robustness of our supply-chains, as well as some modest level of tax increases on corporations and on individuals making very high incomes.

Putting these issues aside, we have also been faced with the expansion of our financial vocabulary.  As an added service to our clients and friends, we have put together a brief list of some of the concepts and buzz words making headlines so far this year.  Without any further ado, here are some terms we incorrectly believed that most folks would never need to know.

Robinhood: This is an app-based trading platform designed for beginning investors.  Individuals can open accounts and buy or sell stocks and other financial instruments at no cost.  Robinhood made headlines when individuals banded together in early 2021 using Robinhood’s platform to buy stock in the company GameStop, a retailer specializing in video games, sending the price soaring at a time when others expected it to go bankrupt.

Payment for Order Flow: This refers to compensation received by trading platforms such as Robinhood for directing its clients’ trades to market makers.  It is a controversial practice and is sometimes referred to as a kickback.  This payment for order flow enables firms like Robinhood to provide free services to its customers. 

Reddit: A community-based webpage that allows individuals to post comments and communicate with one another.  Reddit was the communication platform used by the Robinhood band of traders who pushed GameStop stock from less than $20 to over $480 in 11 trading days.

Short Sale: In the financial world, a “short sale” is an investment strategy that seeks to profit from an asset as it loses value.  While the typical steps of making a profit require one to buy low and subsequently to sell high, investors who “short sell” a stock reverse the order of those steps: they sell while values are high and hope to buy the stock back in the future at a lower price.   This strategy is not for the faint of heart and can expose the “short seller” to unlimited risk.  Imagine shorting GameStop at $20 only to buy it back at $480.  Ouch!

Steepening of the Yield Curve: The yield curve is a graph of the interest rates for different maturities: 1 year, 2 years, 3 years, etc.  The curve formed by the graph typically slopes upward and to the right, meaning that interest rates for 1-year (short term) loans, for example, are lower than the interest rates for 10-year (long term) loans.  During the first quarter of the year, long term rates rose more than the short-term rates (the yield curve steepened) on fears of increased inflation.  This caused long-term bond prices to decline rapidly.  Not a good scenario for the bond investors.  Inflation fears have since stabilized.

Transitory Inflation: The word transitory means brief or temporary.  Fed Chair Jay Powell used the term “transitory inflation” to express his view that the recent rise in inflation was going to be short lived.  It was also meant to calm markets and reassure investors that the Fed was managing its balancing act of providing sufficient support to ensure the economy’s recovery while avoiding sustained inflation.

SPAC: A Special Purpose Acquisition Company is a shell company whose sole purpose is to acquire another company, typically a privately held one.  Private companies may like being acquired by SPACs because this allows them to become a publicly listed company without going through the traditional initial public offering (IPO) process, which can be lengthy and expensive, and which is a SEC-regulated process.  Investors in SPACs like them because they hope to participate in the IPO of the next “Amazon”.  While this type of investment vehicle has been around for more than two decades, a record $82 billion has been raised in SPACs so far this year according to the Wall Street Journal.  However, these are very speculative investments, and their success depends heavily on their management’s ability to buy the right company at an appropriate price.

Cryptocurrency: This is a decentralized digital asset that uses strong cryptography to create very secure transaction records (called a ledger) of all transactions, coin creations and transfers.  We hope to provide more information in the coming months on cryptocurrency.

We hope this was helpful.  Let us know if there are any other “buzz words”, topics or concepts you would like us to discuss in future “Notes”.