July 2016 Wrap

After announcing that I had no interest in making purchases on the secondary market, less than one week later, I had made two purchases. Prices on the secondary market are really quite diverse. There are some extraordinarily large premiums associated with some loans and some have very low premiums. I looked at the list of offered securities twice in the month and found none that were offered below par.

While I did purchase two very small loans, each had a premium of less than 2%. While that wasn’t a threshold, I now have an understanding of the secondary market. Purchases settle the next business day, which is as expected. These two fractional loans had a low premium even though the credit rating of the underlying payer had improved. I spent some time trying to figure out prices, but seemingly they were random. Maybe someday I will attempt to sell a loan and see if the system reminds me to update my price. My point being that perhaps these prices were stale.

Of course, people may have placed high prices on their loans just in case someone else was willing to pay it. Like a couple of homes in our neighborhood, it seems the seller is willing to sell but only at a specific price. Zillow calls that the Make Me Move price. I could put an amount on our home, but my wife and I are not at that point. Still, what would be the harm in placing a price that is double the current estimated value?

The new issue that I posted about two weeks ago was funded and issued. That means my portfolio consists of fractional ownership in three loans. My target is to have a portfolio of loans maturing monthly spread across 36 months. By purchasing a new issue plus another on the secondary market with 24 months to maturity, I can reduce the time to create the duration based portfolio from three years to two years. I could reduce it to one year by purchasing loans on the secondary market with one year left to maturity, but the market had extremely small principle amounts for sale. Constructing a list of fractional loans to reach my monthly principle objective seemed too time consuming. For now, I will accept the hole in the duration portfolio. Perhaps looking at the secondary market in August will provide a clue on how to work through the construction of that point in the duration curve.

To close the month, one of the loans purchased on the secondary market had a payment due. It successfully was paid on time. Lending Club takes a fee from the borrower upon loan origination and from the lender at each monthly payment. The loan origination fee seemed high to me and the monthly processing fee seemed low. Of course, the monthly fee happens every month, which is one of the annoying features of our banking system. It was too much for me to hope that Lending Club would be that different.

First Order

The Lending Club account was funded this morning and this afternoon I placed my first order. There is quite a bit of money in the account and I want to create a laddered portfolio. So my first order was just a fraction of the total portfolio.

One alternative I had considered was purchasing on the secondary market. Lending Club allows purchases and sales of individual loans through folioFn. It’s an interesting marketplace where people have placed portions of loans for sale and put their own price on the item. It reminds me of the homes for sale in my neighborhood where some prices are high and some are priced for sale right now. The site shows the Yield to Maturity which helps show where the price is set.

I decided not to follow that idea because the amounts of the loans are set by the original purchase and the remaining value. Given the value I want to have mature each month, it sure would be difficult to figure out what to buy and what priority to put on each. I imagine I could do it, but the amount of time it would take seems daunting.

That makes an interesting point that any purchase I make I should plan to hold on to the loan until maturity. I have structured the portfolio with that in mind. Three years is a long time and plenty to change my mind.

The first order I placed was for a person in Maryland looking to buy a car. I will have a very small portion of the total loan once it is fully funded. Updates to come.

Education Stop and New Frontier

The possibility of pursuing a doctorate came to an end. The educational institution estimated it would take ten to fifteen hours per week to work on the program. I could possibly do ten hours, but there is no way I could do fifteen hours since I already have two jobs. It was a fairly brief discussion with my wife and she agreed that I should not pursue it (something about wanting to see me occasionally). And thus ends the pursuit of another degree.

Recently, I have been looking into making a significant change in my investment portfolio. I have two parts of the portfolio that aren’t really investments, but instead are catastrophic insurance — bitcoin and gold. Neither gain interest and are only truly useful if people lose confidence in legal tender from federal reserve banks. While we have moved well past the financial crisis of 2008, only recently have I actually begun to think the end isn’t near. I think part of this should be credited to Torsten Slok from Deutsche Bank. I have far too many investment emails which portend the end of the world. Torsten has been making the case for over a year that inflation isn’t coming and the economy is stable and growing nicely. It has been interesting to see how my view is changing as I realize I should focus on the current investment landscape rather than worry about an end that is always somewhere out in the foggy future.

So I am going to sell my bitcoin and gold. Also for just about a year, I have been reading about peer to peer lending. Three companies stuck out — Lending Club, Prosper, and Payoff. Lending Club recently had an ethical crisis and has come out of it well positioned and likely sounder institutionally. This fits with the rest of my investment philosophy to buy when others are selling and sell when others are buying. I know that’s easy to say, but it can be easy to structure a buy and sell strategy with technical indicators to follow that mantra without emotion.

Peer to peer lending has been interesting to me for a few years. I have begun to question the banking system which has extraordinary rates for credit cards and equally extraordinary rates for savings accounts. I have mentioned many times in this space the horribleness of the financial repression we have been under for six years now. I have decided it is time to drop the investment direction of another financial collapse and to invest in people.

There is a fair amount of risk in peer to peer lending since a person with a loan can stop payment or default. I can accept that since I am not buying a government bond. The three companies I mentioned have spent some effort to filter out buyers with troubled pasts and have graded accepted requests based on multiple criteria. I suppose this is a simplified version of what banks do when I request a loan for a car or a house. Some of the requests I have seen on Lending Club are exactly for those items.

I will need to spend some time to work through each loan request to see if it matches my own feeling of safety. I have considered writing here about my experience of making a choice, of watching it over time, and seeing it either mature or become an issue. Obviously, the default rate is quite low or this type of financing wouldn’t work. I’ll start dipping my toe in the water next week when the funding of the account begins.

Next Education Opportunity?

I am looking into the possibility of pursuing a doctorate in business administration from City University of Seattle. It is a four year program. Goodness! this is a huge time and money commitment. It will take away all free time and really focus me into a particular line of thinking. I don’t know how I can pursue the degree while handling two jobs. I’m surprised I am even considering this.

Meanwhile, my main job is forcing me to learn SOA (Service Oriented Architecture), RFID data analysis, and blockchain technology. The coalescence of these technologies is leading me to think there is another major internet based revolution in the conduct of business coming very soon (less than five years now).

I have a lot to learn about the degree program. It sure seems like I could pursue the degree while learning these technologies on the job and how they impact business would be part of the dissertation.

I keep telling myself I need to use my blog to consolidate my thoughts. This may become even more necessary as I become busier.

Data Science Software

I have been using the Anaconda release of Python 3.x for a few months. The package updater makes it easy for the maintenance part of my computer. I have been playing around with integrating Python and R and tonight installed the package r-essentials with the command:

conda install -c r r-essentials

Obviously, this post is for myself so I do not forget that command. This should keep me busy for awhile.

February 2016 Employment

The February 2016 employment rates were released on Friday. It was a very good report. The participation rate increased to 62.7%. That is now right at the twelve-month moving average and an increase from January’s reading of 62.5%.

There are two parts of the report I watch closely. The narrative of the recovery has been that older people are staying employed longer or going back into the workforce because their savings isn’t enough to fund their retirement in this low interest rate environment. February was not a kind month to this story line. The participation rate for men and women between 16 and 24 years of age jumped to 53.7% from January’s rate of 52.9%. This was above February 2015’s rate of 53.6%.

Meanwhile, men over the age of 65 increased their participation rate to 23.6% from January’s rate of 22.9%. Women over the age of 65 maintained their participation rate of 15.6%.

Our calendar age may be increasing, but our activity level isn’t decreasing at the same pace as advances in health care can keep us active longer. I hear negative stories about how bad the savings rate was for the oldest section of the baby boom generation. Yet I do not consider it to be a bad thing they are staying in the workforce since it is a positive contribution they are making.

I also hear negative stories about how this increase in the participation rate was accomplished by low-wage jobs increasing at a quick pace. I think these are the same people who complained a year ago when the only jobs being created were very high skill jobs. The current broadening of the employment situation is a very good sign for the strength in the economy and should continue to push consumer based consumption higher in the coming months. I have resigned myself to the conclusion that some people are always critics and they are likely the ones who are not contributing to society.

There were a couple of other indicators that were released on Friday in addition to the employment report. The combination of these indicators caused the Atlanta Fed to raise its estimate of first quarter GDP to 2.2%. This is well above the fourth quarter second estimate of 1.0%. It is well past time to recognize there is a significant recovery happening in the US economy and we are leading the world in the recovery.

CPI Predictor

After last week’s post, I worked on the predictor for the direction of CPI. I’ll start with the construction of the predictor and then move on to the construction of the test.

The construction of the predictor uses the eight components of the CPI as factors. Two values are generated for each factor — the current year-over-year change in the price index and the previous year’s year-over-year change in the price index. These two numbers are compared with those showing an increase being included in the result.

Let’s use Medical Care as an example. From January 2014 to January 2015, the price index changed from 429.621 to 440.969. Then from January 2015 to January 2016, the price index changed from 440.969 to 454.175. This is an increase of 2.64% to 2.99%. Because the year-over-year price index showed a year-over-year increase in the percentage rate of change, the weight of the factor is included in the January 2016 result. Medical Care for January 2016 has a weight of 8.375.

Five of the eight factors showed a year-over-year increase in the percentage rate of change and their combined weights are 39.614. This number has been increasing since June of 2015 when the weighting result was 0.0.

The weighted year-over-year change of those factors showing a year-over-year percentage increase is 0.79%. This modest amount is nowhere near the Federal Reserve’s 2% target, but it is an increase from December’s reading of -1.32% (the Transportation factor had an unusual impact on the final result).

The test that I created was to compare the correlation of the result to the subsequent month’s annualized ten-year CPI percentage change. The hypothesis was an increase or decrease in the size of the weights in the result would cause an increase or decrease in the following month’s ten-year annualized CPI price change (this is purposefully worded to show the expectation of a positive correlation).

The correlation showed a positive result of 0.6655. Constructing the test statistic resulted in 4.4576. The 95% confidence interval of a two-tailed T test gave a critical T value of 2.0595. Since the test statistic is greater than the critical value, the null hypothesis can be rejected and there is sufficient evidence the predictor does lead to a change in the ten-year price change.

Using this data and calculating the test could not have been done without the class I am teaching this quarter — Introduction to Business Statistics. I know the students are wondering why they need to take this on the journey to their Business degree, but the logic of constructing a hypothesis and test will serve them later.