Image Source: Canva
By Disha Gupta
In the United States of America, a lot of states are gradually reopening local economies after the first wave of COVID-19 halted most business operations due to rapid spread through contact. Most states were completely closed for two or three months; the country lost over 20 million jobs. The unemployment rate reached approximately 15%, a level last seen during the Great Depression of the 1930s - almost double the rate during the 2007-2008 financial crisis. Some companies and families have suffered grave financial damage to their income due to these economically silent months. In some cases, alleviating this damage requires more than dipping into their savings accounts to make the business bloom again. In these difficult times, families are turning to their future retirement funds to survive their harrowing present.
When talking about retirement, two terms come to mind: 401-k and Roth IRA. They both are retirement investment accounts; if magnified, however, they have several disparities. A 401-k is an employer-given retirement plan: a percentage of the pretax pay given is invested in this account. On the other hand, Roth IRA (Individual Retirement Arrangement) is, as the name suggests, created individually. A person can start a Roth IRA account by themself regardless of their employment status. The main differentiating factor of Roth IRA is that one can contribute to it with after-tax money and therefore allowing their savings to expand without further taxing burdens. Besides these aspects, Roth IRA and 401-k differentiate on the contribution limits and Required Minimum Distributions, or RMDs. The 401-k has its advantages with the Employer Contributions, where many employers offer a match based on the percentage of gross income going into one’s account even though it's not required by the government. On the other hand, The Roth IRA has its advantages with the investment menu, where one has an extensive variety of investment options and more power over how one invests. On a more similar note, both options come with the same penalties for withdrawing before the age of 59½. Currently, this is the concern of many who want to withdraw from their accounts due to the great pandemic but have yet to celebrate their 59th birthday.
Under normal circumstances, the penalty for withdrawing from 401ks and IRAs before the age of 59½ can be charged as 10% of the distribution. But circumstances are anything but normal right now with the virus over our heads; henceforth, the CARES Act has been put in place to ease some of the burdens off these families suffering from the virus. The Coronavirus Aid, Relief and Economic Security Act, or the CARES Act for short, has put aside 2 trillion dollars to economically protect and provide relief in the throes of the pandemic. As listed under this act, individuals affected severely by the coronavirus can make emergency withdrawals of up to $100,000 from both employed-provided retirement accounts like 401k as well as personal accounts like Roth IRAs. And those underage can also avail this offer without the usual 10% penalty for the distributions made in the year 2020. At first, the offer extended only to people who tested positive for the virus - or had a spouse who tested positive - and those laid-off or furloughed, but now the policy has been revised to include individuals whose jobs’ start dates were delayed. That being said, the money withdrawn early are still taxed as income spread evenly over these three years (2020, 2021, 2022). For example, if one receives a $12,000 distribution, you could report $4,000 in income on your income tax return for each year from 2020 to 2022. But the silver lining is that one can claim a refund on those taxes should they pay back the amount they took out within three years. One critical thing to keep in mind, however, is that this money is withdrawn during a relatively stagnant market, thus restraining its potential to grow and increase again when the market bounces back up.
Overall, the bottom line is that using cash from retirement accounts should always be one’s absolute last resort. The key to withdrawing early in these difficult times is to be maximally conservative: only take out what is irrevocably necessary and try to pay it back as soon as possible.
By Eric Liu
The Rapid Rise of Tesla
Tesla Inc. shares soared to a historical record high of 1794.99 per share on July 13th, about one week before its release of second-quarter financials. Although the stock price fell in the following few days, its six-month average trailing market value exceeded $150 billion dollars for the first time ever. The stock gained almost 260% in just a year.
More importantly, Tesla reached its highest market value of 186 billion dollars and became the top of the auto manufacturers globally surpassing Toyota (Market value of 190 billion dollars). An auto manufacturer founded 17 years ago with an annual production of fewer than 370 thousand vehicles (data of 2019) exceeds the market value of a traditional company with annual productions of more than 10 million cars, Tesla has made history again.
As Tesla’s stock price soars, CEO Elon Musk is also receiving a big stock option incentive. Satisfying the requirement of a six-month average trailing market value of 150 billion dollars, Musk is eligible for the second Tesla option incentive of 1.69 million shares. Based on the strike price of $350.02 per option contract, Musk will gain a profit of 2.1 billion dollars selling the stocks, although these stocks are restricted to be sold in five years.
The first time Musk receives the incentive is only less than two months ago when the six-month average trailing market capitalization hits 100 billion. He received about 1.7 million shares of stock which valued more than 775 million dollars.
According to Musk’s contract with Tesla, he is not receiving any compensation and reward for ten years from January 1st of 2019. He will only receive an option incentive which is directly correlated to the performance of the company. According to Tesla’s six-month trailing market value, Musk’s option rewards are divided into 12 progressive targets. The first two goals which were already reached were 100 billion and 150 billion dollars. Each of the next target market value is another addition of 50 billion dollars. The total incentive in this contract includes 20.3 million shares of options which approximates to at most 56 billion dollars. This could be the incentive option contract with the highest value granted in history.
The Journey to the S&P 500
By Jun 26, Tesla has a market value of 262.82 billion dollars, overtaking many giants in the market.
For a company to enter the S&P 500, it is expected to meet certain criteria. Tesla already met the requirements of liquidity, market cap, and geographical location of headquarters in the U.S. Its biggest challenge, however, was positive reported earnings under GAAP standard for four consecutive quarters. With the newest quarter report, Tesla has made this true despite a large number of concerns due to the global pandemic. Therefore, Tesla is on the fast lane of entering the S&P 500. If Tesla is added to S&P 500, it will be the 15th largest company in regard of market cap in the S&P 500, placing between UnitedHealth Group and Nvidia.
The last time a “Super Large-Cap” been added to S&P 500 is when Facebook was added in 2013. This change will definitely have a large impact on the market. Adding Tesla to S&P 500 is signally a huge opportunity for this electric vehicle manufacturer. This might also bring a considerable amount of attention to the whole market of vehicles with sustainable energy. As talking about auto manufacturers, it is unavoidable to mention the new star of the market – Nikola Motors.
Nikola’s Competition with Tesla
Nikola is a start-up company located in Arizona founded in 2014, focusing on the development of new energy heavy trucks powered by hydrogen fuel cells and batteries. Nikola announced a challenge to Tesla (Tesla) Semi by launching its own new energy semi-trailer in November 2018. Interesting enough, Nikola Motors, along with its direct competitor Tesla, are both named after the famous Croatian scientist Nikola Tesla who had many major contributions to the field of electromagnetic and designed the modern alternating current (AC) system which is used in daily life and is a crucial part of the designing and production of motor vehicles.
Nikola was listed in an unusual way where they merge with a publicly traded special purpose acquisition company (SPAC) VectoIQ Acquisition Corp. (already listed with NASDAQ., Stock code: VTIQ). This move also made Nikola the world's "first hydrogen energy heavy truck."
At that time, Trevor Milton, the founder of Nikola, announced that the company had begun accepting orders for its newest pickup truck - badger, which is loaded with hydrogen fuel and battery packs and has a range of 600 miles.
The news was enthusiastically welcomed by investors as Nikola's stock price rose 103.7% and its market cap reaching 26.314 billion dollars.
However, Nikola's share price soon fell drastically. The company has brought much attention and arguments since before its IPO. The founder Milton has said that he is one of the few in the world who are able to surpass Elon Musk. He also expressed multiple times that the direct competitor of the company would be Tesla. Both Tesla and Nikola offer electric trucks, but the latter believes that energy networks are more important than trucks. Milton said that hydrogen production efficiency has been steadily improving, and costs have been declining, which will give hydrogen fuel trucks an advantage over battery-powered trucks charged in cities.
Much like the early stage of Tesla, Nikola is now facing many challenges. It has not yet delivered one vehicle and it is uncertain how long it will take for Nikola to start to make profit. Due to the business model of the company, the constructing and spreading of the hydrogen energy network will be crucial and decisive to the success of the company.
Sources: MarketWatch, Barrons, Electrek, Yahoo Finance, TradingView
Image Source: Alamy Stock Photos
By Disha Gupta
In the throes of the COVID-19 pandemic, biotechnology stocks are rapidly attracting public attention as the world gradually understands more about the nature and implications of the coronavirus. With strong fear and uncertainty, the general populous has turned to experts in the field; there is a lot of talk about the roles of vaccines and potential cures and treatments, which has accelerated considerable growth in the biotechnology industry.
While riding this bullish macro-growth wave may seem alluring to investors as a high-profit, low-risk opportunity, it is also critical to keep in mind the lifespan of these movements. The two main elements to consider when researching sectors and industries are the gains offered as potentials and the risk involved. Regarding this, many biotechnology stocks have tipped in the bullish direction almost constantly for the past few months. However, it is important to realize that this happens only with certain biotechnology stocks that emerge under the makeshift limelight created by the pandemic, and that volatility and risk accompany bullish spikes in these stocks.
Biotechnology stocks face risks related to the business more often than average stocks since they are usually bought in light of introducing “the next big thing” which can often result in failure. This higher risk in the business translates into their stocks as well. biotechnology stocks have skyrocketed, something which isn't very common. The suspecting eye may see that and only that, not the rest of the story.
In quantitative aspects, the net profit growth of the biotechnology industry for the past 5 years is 10.7%; on the other hand, the net gain of Nasdaq has risen by 231% in the same time. What this indicates is that biotechnology stocks aren't for the light hearted; it requires an immense amount of risk tolerance. A suitable example is the Amarin Corporation (NASDAQ: AMRN). In 2018, they were booming because of positive results from a study done in the cardiovascular branch. This provided a solid momentum into 2019 as well. However, Amarin’s stocks were hammered down to approximately 70% as of Q2 2020.
Patent protection and regulation are also significant concerns in the biotechnology industry. Sometimes due to these problems, the product that investors have rallied for doesn't even make it to the market. Currently, Novavax Inc. (NASDAQ: NVAX) does not have an FDA approved product yet, due to positive results from their clinical trials on potential coronavirus vaccines, the company’s stocks are currently undergoing a robust rally; as a quantitative reference, Novavax’s share price has multiplied by approximately 30 times in the last year.
It is also important to note that the biotechnology industry is currently trading much higher than regular times because of the pandemic. The situation, to some degree, resembles that in 2014 when the Ebola virus outbreak elapsed. There were many speculation that NewLink Genetics would find a successful vaccine and their prices were up in the $25 and $45 range. However, because of testing and approvals, it took five long years to get the vaccine into the market. Today, NewLink Genetics are selling at $1.
In conclusion, the biotechnology industry can be exciting and daunting at the same time. Risks are high as well as benefits. It is important to thoroughly understand the progress of biotechnology companies and acknowledge the volatile and uncertain nature of vaccine development under the current situation. One must have sound exit strategies and a high risk tolerance to effectively trade biotechnology stocks.
Disclaimer: Content provided by The Compass Forum is for educational purposes only and does not recommend or promote certain stock-trading decisions. All materials owned by The Compass Forum aims to provide a platform for deeper research only.
Image Source: Shutterstock
Article by Shivam Shah
Edited by Yihan (Bradley) Tian
Throughout this pandemic, the US government has gone through a process of quantitative easing (QE), in which it seeked to stimulate the economy through reductions in financial market volatility. As current quantitative easing measures continue, financial institutions have noticed a sudden influx of people buying substantially larger amounts of assets (i.e., mortgages) from the financial sector than they otherwise would have been able to acquire. This occurred during both the depths of the financial crisis in late 2007 and early 2008 and throughout the QE era.
This article examines the relationship between QE and private-sector investments. There are two important components: first, QE provided significant infusions of liquidity to the mortgage market, both directly via the Fed's purchase of treasury bonds and indirectly via the purchase of "mortgage-backed securities.” Second, QE opened up considerable new credit markets that would otherwise have remained closed to private lending. It's worth noting that during this period, even more important than such credit markets are private-sector banks, which are not being subjected to this QE liquidity influx. Given that banks are not subject to the liquidity regulations that the Fed was imposing on other entities (which included mortgage-backed securities), they were able to rapidly make loans that would not have been made had the Fed not been there to meet its lending limits.
So what impact did these additional liquidity injections have on private-sector lending, investment, and growth? Looking at the US Bureau of Labor Statistics (BLS)’s data through 2009, a year in which QE as an overall policy set was relatively loose, BLS data demonstrate that, in raw dollar terms, QE significantly increased private-sector investment in real residential construction, real commercial real estate, and related equipment by roughly $0.13 trillion, $0.12 trillion, and $0.08 trillion, respectively. Since this investment was generally from private-sector banks, this credit expansion would have been heavily restricted by the federal restrictions on banks' lending. In addition, BLS data show that, in the same timeframe, the government-supported QE programs (stimulus, in other words) provided nearly $2 trillion in aggregate investment. However, it is important to remember that a large portion of the QE credit expansion did not directly contribute to the actual expansion of private-sector lending. The increase in private-sector lending via QE as an overall policy was largely due to QE's effect on the Fed's balance sheet—and in particular, to its ability to sell Treasury bonds to the Fed. This was known as the "Federal funds rate targeting effect."
For both the effects of the Fed buying Treasury bonds and the effects of QE in aggregate, the observed effects were, for the most part, small and rapidly reversed themselves when QE's effectiveness in spreading inflation-sensitive asset prices through the economy was dramatically reduced. In this context, the Federal Reserve's ability to sell Treasury bonds to lower funds rate became important. The central bank is authorized to purchase securities through the Federal Reserve System with its base funds to lower the Fed funds rate target; in particular, the Fed can buy securities that it has previously purchased, back to the day of purchase. Selling Treasury bonds to the Fed in order to sell to the public directly is known as the reverse repo program.
Overall, Increased private-sector investment, more so than before and allowed, could lead to rapid aggregation of economic bubbles. Therefore, this relationship between QE and the private sector is important to monitor as it influences not only the stock market but also the financial security of the common public.
By Yihan (Bradley) Tian
The Global Financial Crisis (GFC) of 2008 and the current one instigated by the COVID-19 pandemic have each claimed their respective titles as the largest global recession since the Great Depression. While both have inflicted significant contractions and volatility in financial markets worldwide, the two crises have notable differences in both their origins and their process of manifestation; the former was a financial crisis kindled by internal collapses of banking systems worldwide, while the latter is a global standstill induced by prevailing health threats. This article will focus on reviewing the progression of the 2008 GFC, as well as exploring key differences between the 2008 GFC and the COVID-19 pandemic.
Understanding the 2008 Global Financial Crisis
In 2001, the US economy underwent a periodic recession caused primarily by terrorist attacks, the dot-com crash, and massive accounting scandals. The federal government responded by reducing interest rates numerous times, which prompted the proliferation of cheap loans and credit. This influx of liquidity appealed to high-risk investors and desperate borrowers, especially those without income, jobs, or assets. As a result, the housing market flourished with subprime (low-credit) mortgages being distributed restlessly. Massive inflation in real estate prices followed suit. Furthermore, banks began to seek profit by distributing collateralized debt obligations (CDOs) to financial institutions. Essentially, these packages used the assets of borrowers (real estates, mostly) as collaterals, redirecting loan payments to contracted investors. The development of subprime loans drove exponential growth in the financial market - a bubble that began to burst in 2007.
The 2008 Global Financial Crisis began with subprime borrowers nationwide defaulting on their mortgages due to increased interest rates and saturations within the real estate sector. Financial institutions, overwhelmed with collateralized assets, faced significant liquidity problems. Consequently, market confidence plummeted sharply, and many financial institutions began filing for bankruptcy. Grave concerns arose all across the nation since bankruptcy within the financial market will result directly in the halting of all business activities. The federal government intervened heavily, providing bailouts and slashing interest rates to as low as 1%. It eventually enacted the National Economic Stabilization Act of 2008, releasing $700 billion to cover distressed assets.
As explained above, a prominent driver of the 2008 GFC is the lack of regulation on financial derivatives and credit policies. The crisis called for greater caution regarding high-risk financial instruments and scrutiny over mortgage distributions. While economic and financial damage generated by the COVID-19 pandemic is comparable to the result of the 2008 GFC, the current crisis has a vastly different origin and calls for different approaches for an eventual recovery.
Comparing the 2008 GFC with the COVID-19 Pandemic
While the two crises are vastly different in their origins and progression, both the 2008 GFC the COVID-19 pandemic are similar in igniting global uncertainties and massive economic contraction. Back in 2007, a lack of scrutinization on financial instruments and asset transactions resulted in skyrocketing uncertainties regarding the magnitude and severity of the underlying risks. This resulted in the freezing of international financial relationships, as well as increased volatilities in the forex market. Similarly, the COVID-19 pandemic also caused a spike in global uncertainty with the suspension of international business activities, stagnation in global supply chains, challenges in healthcare systems, dilemmas in governmental intervention, survival of physical retails & services, exacerbation of socioeconomic inequalities, and other dire concerns regarding the economic, financial, and political landscape.
Another significant factor is the impediments to economic prosperity. Both crises negatively impacted the US Gross Domestic Product and unemployment rates (see chart below). In its latest World Economic Outlook, the International Monetary Foundation (IMF) predicted that the global growth rate will decrease by 4.9% in 2020, which is particularly alarming for the lower class as the impediments may erase progress towards poverty reduction since the 1990s.
Nonetheless, the 2008 GFC and the COVID-19 Pandemic are more different than they are similar. Below are the key factors that distinguish the current situation from the past:
1. Supply and Demand Shocks
The financial crisis of 2008 began with the paralyzation of demands in the real sectors - a combination of falling housing prices, subprime mortgage collapse, and overall decreased customer spending - which then led to severe liquidity stagnations in the financial market. In 2020, however, the supply shocks came first due to the widespread lockdown in effect. In order to limit the spread of contagions, supply chain maintenance has been halted worldwide; for instance, the closure of Chinese factories have led to a lack of components for US firms. Furthermore, this sudden stagnation of supplies was followed by a shock in demand in the form of increased price sensitivity and a lack of customer activity. In regards to supply and demand, the two crises generated negative economic impacts through opposite directions.
2. Enforced Regulations for Banks
Banks were the epicenter of disaster during the 2008 GFC. Their general underestimation of risks within subprime mortgages contributed to the growing bubble in the housing market. During COVID-19, however, the economic downslide was because of the lockdown implemented to limit the outbreak. Today, the banking industry aims to serve as a buffer for the suffering population. Major banking institutions such as J.P.Morgan and Bank of America aim to collaborate with their rivals to establish support for struggling companies, and industry leaders have pledged to cancel stock buybacks in order to remove the industry’s stigma of selfishly profiting during times of crisis. In addition, enforced regulations such as the Dodd-Frank Act require banks to prepare more durable financial cushion, and President Trump’s tax overhaul from 2017-2018 helped the financial sector to retain more capital. The level of uncertainty may be similar for the two crises, but banks are better equipped to retaliate against a financial disaster this time.
3. Governmental Reactions
The federal reserve has become increasingly supportive of private businesses in the current crisis than before. In 2008, the federal government refused to provide sufficient aid to Lehman Brothers, leading to the collapse of the 158-year-old investment bank. Today, the federal reserve has responded boldly to the COVID-19 by reducing interest rates to 0% and purchasing corporate bonds from distressed companies. In addition, the stimulus packages, currently weighing over $2 Trillion overall, further expressed the government’s stance to prevent severe recessions “at all costs.” Although these rapid measures of quantitative easing have been effective in the short term, overuse of federal assistance can result in long-term liquidity problems.
The differing qualities of the 2008 GFC and the COVID-19 pandemic suggests that historical phenomena may overlap but never fully repeat. This exploration of the drivers and implications of the two crises calls for one to reflect upon historical progressions and developmental models but also remain keen and adaptive to changes exclusive to the current situation. Progression of the crisis of 2020 will depend on the recovery process targeted at the COVID-19 pandemic and the speed at which the world would return to “normality.”
By Shivam Shah
This time in our educational series, learn about the 401(k), an essential account used to plan for long-term financial freedom.
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By Yihan (Bradley) Tian
Welcome to our educational series, in which The Compass will provide introductory content on topics such as investing, economics, personal finance, and more.
In the first post of this series, learn about Exchange-Traded Funds (ETFs), an essential investment type that emphasizes a balance of diversification and liquidity.
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Author: Eric Liu
Editor: Yihan (Bradley) Tian
Image Source: Canva
When it comes to bearish markets or even black swan occasions, many think that the optimized solution for investors is to hold onto cash in order to preserve the value of assets. Meanwhile, some opportunists seek to profit through a process contrary to conventional buying and selling, known as shorting.
What is shorting?
Author: Andrew Shi
Editor: Yihan (Bradley) Tian
Image Source: Getty Images
The COVID-19 pandemic has instigated considerable changes in the political systems around the world, especially those of Western countries. From the rise of populist leaders in liberal states like the United States and Germany to the rollback of democratic institutions within authoritarian-leaning states such as Poland and Belarus, a global trend toward centralized power under individual leaders has been emerging since 2016.
Autocracies are defined by the consolidation of power of the ruling party. Recently, the COVID-19 pandemic has created the means for greater administrative measures and surveillance of individuals. What is to happen after the pandemic recedes will determine the nature of democracy within many countries around the world.
By Bradley (Yihan) Tian
In March of 2020, a rupture between Saudi-Arabia and Russia’s oil-producing relationships occurred. A prominent cause behind this disagreement was the reduced Chinese demand of oil due to the COVID-19 pandemic.
As one of the world’s most renowned oil producers, Saudi-Arabia is a leading member in the Organization of the Petroleum Exporting Countries (OPEC). Despite Russia not being in the council, Russian officials were still invited to the OPEC meeting on March 5th as Russia made agreements in coordinating its productions with OPEC+ three years ago.