Hey everyone, and welcome back to Chain Reaction.
Last week, we discussed $4.5 billion in new crypto funds from a16z. This week, we’re talking about the arrest that has everyone in the NFT space sweating bullets.
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crimes of the future
The crypto space has been moving so quickly over the past couple years that builders have generally seemed to believe existing rules didn’t apply to them. Well, after years of snails’ pace legal action, it seems U.S. prosecutors are starting to feel it’s time to challenge that perception.
This week, the U.S. Attorney’s Office in the Southern District of New York arrested and filed charges against a former OpenSea executive who used his position to front-run NFT projects that were going to be listed on the home page of the marketplace. Members of the community discovered his actions by tracking his activity on public blockchains.
I would’ve loved to rant on this during the podcast, but news broke while we were recording, so I’ll leave you with some thoughts here.
The arrest was pretty much a massive shock to people in the NFT space who generally believed that Nate Chastain had acted unethically but that it couldn’t be “insider trading” because NFTs weren’t securities. This is a framing that was held by many, including Chastain’s boss at OpenSea who fired him.
“I do think there was a misframing of it as insider trading. We don’t view NFTs as financial assets, so that does not apply. That’s a very specific term for a very specific thing,” OpenSea Devin Finzer told Decrypt in September.
There are an awful lot of people taking a very close reading of the SDNY press release, which states it specifically charged Chastain “with wire fraud and money laundering in connection with a scheme to commit insider trading in Non-Fungible Tokens.” They notably describe NFTs as “digital assets” later in the release. Also, it’s worth reiterating that this is the DOJ — not the SEC — charging him, though it is the Office’s Securities and Commodities Fraud Task Force handling this case.
Now, why don’t crypto people want NFTs to be classified as securities? Well, there’s a lot of existing regulatory guidance there, and most feel it would basically upend the industry if NFTs were unilaterally subjected to securities law; it would certainly raise the barrier of entry for creation of NFTs and curtail a lot of the experimentation happening in the space right now.
Another big reason that it would be bad if NFTs are treated as securities is that it would mean an awful lot of people have been doing illegal things for an awfully long time.
The NFT space made it through this latest crypto bull run without any meaningful regulation coming down on it. As NFT volumes start to show signs of slowing, there’s a fear that more regulation could be just around the corner.
the latest pod
What’s up, it’s Anita here to give you a preview of the latest episode of our Chain Reaction podcast, where we unpack the latest web3 news, block-by-block for the crypto-curious.
This week, we talked about Coinbase’s new approach to what can be one of the most anxiety-inducing aspects of corporate life — the performance review. Our colleague, Amanda, wrote about how the crypto exchange is trying to emulate Ray Dalio’s hedge fund, Bridgewater Associates, by letting employees give each other real-time feedback and ratings. Is this part of tech’s descent into a Black Mirror-style reality? Tune in to hear our thoughts.
We also recapped two recent crypto comeback stories, one from the OnlyFans founder and CEO who left the company after trying to ban sexually explicit content from the platform and another from the architect of the highly unstable stablecoin, Terra.
Our guest this week was Outdoor Voices founder Ty Haney, who shared details about her pivot from athleisure to crypto with her new venture, Try Your Best. Haney broke the news on our podcast that the startup just landed its second round of institutional funding.
follow the money
Where startup money is moving in the crypto world:
- New York-based enterprise blockchain startup Digital Asset took in a strategic investment of undisclosed size from Japanese banking giant SBI Holdings.
- InfStones, a blockchain infrastructure provider, nabbed $66 million in a round led by SoftBank and GGV.
- Indian music NFT startup FanTiger bagged $5.5 million for its seed round led by Multicoin Capital.
- LivingCities, a metaverse-focused social startup co-founded by Foursquare founder Dennis Crowley, banked $4 million in early funding led by DCVC.
- Zimbabwe’s FlexID received an undisclosed amount of funding from Algorand for its blockchain-based identity system for the underbanked.
- Web3 augmented reality gaming company Jadu raised $36 million in funding for its Series A led by Bain Capital Crypto.
- VillageStudio raised $2.3 million in an Animoca Brands-led round for its NFT-based Playken avatars.
- Web3 payments API Merge got $9.5 million in seed funding led by Octopus Ventures.
- GoSats, an India-based bitcoin rewards platform, raised $4 million in a pre-Series A funding round from investors including Y Combinator, Accel and Gossamer Capital.
- DAO management platform Utopia Labs closed a $23 million Series A led by Paradigm.
the week in web3
It was an uncharacteristically quiet week in web3, and our team members in the U.S. took some time to enjoy the rare, uneventful long weekend. Still, some big personalities made waves in the space, for better and for worse.
- OnlyFans founder Tim Stokely is pivoting to crypto after leaving the company last December following controversy over his push to ban sexually explicit content from the platform. Anita wrote about the new “family-friendly” NFT startup he’s launching alongside another former OnlyFans exec that will allow people to buy, sell and trade virtual cards featuring influencers and celebrities.
- NFT platform OpenSea had fired Nate Chastain, its head of product, back in September after he was accused of front-running trades on the platform. Now, he’s been arrested and charged with insider trading; Lucas has the details.
Here’s some of this week’s crypto analysis you can read on our subscription service TC+ (written by TC’s Jacquelyn Melinek):
VC funding for crypto projects fell in May, but many investors remain bullish
VC funding in crypto has fallen month-over-month from April to May, but many investors are not concerned. “For investors like us, it’s time to buy,” Stan Miroshnik, partner and co-founder of 10T Holdings, told TechCrunch. The pace of capital deployment might be more measured as investors and founders alike become more calculated, but VCs will still continue to have a robust amount of activity, Miroshnik said. Even though there might be a gloomy sentiment in digital asset markets, true crypto-native funds will continue to invest heavily, Saurabh Sharma, head of investments at Jump Crypto, said to TechCrunch.
As crypto becomes more mainstream, can it stay decentralized?
Whether it’s first-time buyers of cryptocurrency or people learning more about NFTs, Bitcoin and the general crypto ecosystem, there has been an uptick globally in awareness of crypto. But as it gains momentum, regulators worldwide will continue to monitor the space more closely, but the headline speaks for itself: what does this mean for the future of crypto? A number of founders and executives in the industry weighed in with their thoughts.
Longtime Bitcoiner Dan Held says this ‘crypto winter’ won’t be as harsh as others
As the cryptomarkets remain bearish, some longtime market participants, like Dan Held, director of growth marketing at crypto exchange Kraken, aren’t worried. Even though there is lots of talk of a crypto winter circulating through the community, Held said the sentiment for this current market cycle is different. While he — and many others — persisted through major market cycles over the years, the narratives have shifted a lot, thanks to more prominent institutional players and massive amounts of capital entering the space.
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The Holidays – Cheerful Or Challenging?
It’s that time of year again: The Holidays. As the year starts to wane, the accompanying festivities bring cheer to some hearts and a song to some lips, but it is a knife that cuts deep for others. These holidays are rooted in two things: family and religion. Many Americans believe that those are both sacred virtues, held by most people, and anyone who doesn’t enjoy them is a “scrooge” or a misfit of some sort. As we become an increasingly diverse society, this attitude can exclude many people and be hurtful to others.
For some people, the holidays are not a time of cheer and family warmth, they are a yearly ordeal to be endured. Holiday depression has been around for as long as psychologists have been in business. Any therapist will tell you it’s a palpable phenomenon. When you search the internet for evidence of this you will come up with dozens of articles. They mostly identify overload and stress as the major culprits for the melancholy, and that it can be an especially challenging period for introverts.
The holidays are stressful
These articles are filled with references to family traditions and the stress around preparations for a large meal and being around so many people at one time. Interestingly, very little reference is made to Solo Agers, older adults who don’t have family with whom to spend a holiday. It seems as though the common assumption, even among mental health professionals, is that everyone has family, even though they may not get along with them or may not even like them. However, this is increasingly not the case in American society.
Here is a description of the “holiday blues” from HealthPartners: “The holidays are a stereotypically cheerful time when everyone is meant to be surrounded by loved ones and enjoying every second of the season. But when someone isn’t feeling happy or cheerful, or if they can’t be near their loved ones, the apparent cheer surrounding them can make them feel even more down, and often alone with their feelings – which deepens symptoms of depression.” This is all fine except that it doesn’t address many immigrants from other cultures or people without family connections.
It also doesn’t help that the nights are long and the daylight short-lived at this time of year. In the later months of the year, we get increasingly less exposure to sun, which in turn reduces the amount of vitamin D our bodies produce. These low levels of vitamin D have been linked to depression and lower moods. In fact, this winter-time mood disruption is common enough that mental health experts have given it a name: Seasonal affective Disorder (SAD).
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Solo Agers are especially vulnerable
The childless rate among boomers is almost double what it has been throughout previous generations. Because boomers are all over 55 now, they will soon be the oldest generation in the country. Once they have left the workplace, isolation and loneliness can be a significant issue, especially for those who live alone, and that is now a very large number. Over 13 million older adults (about 28%) live alone in the United States. Of course, living alone is not an instant recipe for loneliness, but even the most gregarious and outgoing among us can feel the pangs of loneliness and isolation around the holidays if there is no one with whom to spend time.
The combination of holiday expectations and reduced sunlight is challenging for many people, no matter their familial circumstances, but those who have few family connections and/or live alone are particularly at risk. If you have friends or relatives who fit this profile, this is a great time to reach out to them and offer a connection. It might be an invitation to share a meal, an offer to get together for a walk, or even a phone call.
Average U.S. House Price Falls And Labor Market Shows Strength Despite Recession Speculation – Forbes AI Newsletter December 3rd
- Non-farm payroll numbers increased by 263,000 jobs in November, well above the estimate of 200,000
- The average hourly wage went up as well, with the 0.6% gain double what had been expected
- Even so, this week we also saw the average house price in the U.S. fall for the third month in a row, and consumer confidence also fell back after a rally throughout summer
- Top weekly and monthly trades
Subscribe to the Forbes AI newsletter to stay in the loop and get our AI-backed investing insights, latest news and more delivered directly to your inbox every weekend.
Major events that could affect your portfolio
Well, well, well what do we have here? Some very solid, some might even say downright impressive, economic data. Yes, amidst all the talk of recessions and layoffs, it seems the U.S. economy is doing its best impression of the ‘The Little Engine That Could’.
Where’s this coming from? Payroll and wage figures were announced today and the numbers have come as a bit of a surprise.
Non-farm payrolls increased by 263,000 in November, which was significantly higher than the 200,000 estimate. The unemployment rate was broadly in line with expectations but still remains low by historical standards at just 3.7%.
Wage growth also jumped, with average hourly earnings growing by 0.6%, which was double the projection for November. This takes the annual figure to 5.1% against the 4.6% expectation.
The strength in the labor market comes despite large scale layoffs in the tech industry, a Fed policy of aggressive rate hikes and continued speculation over an upcoming recession. These latest figures mean the Fed is going to have to think very hard about how they proceed at the next FOMC meeting in just under two weeks time.
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While the economy continues to show surprising levels of resilience, inflation has also started to come down. With the Fed hoping to bring down inflation without completely crashing the economy, they’ll be hoping that slower hikes will enable them to tread this fine line over the next six to 12 months.
But on the other hand…
Consumer confidence is down and the housing price index has slid further too.
The housing price index fell 0.8% in September, which marks the third consecutive month of negative growth. It comes at the same time that transaction numbers have plummeted, driven mainly due to the massive interest rates hike pushing new mortgage costs sky high.
Since the end of 2021, the average 30 year fixed mortgage has increased from around 3%, to hovering just below 7%.
At the same time, consumer confidence fell in November after gaining back some ground over the summer months. The University of Michigan consumer sentiment data fell back from 59.9 in October to 56.8 in November, though this is still markedly higher than the low of 50 in June.
This is the story right now. It’s not all good news out there, but it’s not all good either.
One day we get data that makes the economy look like it’s definitely about to tip into a recession, then a few days later we get some different statistics that make it seem like things aren’t actually that bad. I mean, don’t get us wrong, if we had to choose we’d rather the current status quo than an economy that’s in freefall.
But still, it makes planning for the future and structuring an investment portfolio a challenge. Do you prepare for the worst and go defensive, or do you swing for the fences and position your portfolio for growth?
This week’s top theme from Q.ai
There’s no way to know for sure what the markets have in store over the short term. We use AI to make predictions on what the likely performance is for all sorts of assets in the coming week, but we don’t expect it to be 100% correct 100% of the time.
The idea is simply to be right enough of the time to allow investors to make solid gains over the long term.
And besides, even the most impressive machine learning algorithm in the world can’t make the stock market go up. If the entire market goes down, picking the best stocks in the coming week just means they’ve gone down a bit less than the others.
That’s why Portfolio Protection can be so powerful. Downside protection is something that all the best hedge funds in the world do. They do it to provide security for their clients during volatile markets, allowing them to rebound from a higher base once markets turn.
At Q.ai, we use our sophisticated AI algorithms to do this. It means we can make a complex hedging strategy available for everyone, something that’s usually reserved for those high-flying hedge fund clients.
For investors with Portfolio Protection activated, our AI analyzes their portfolio every week and assesses the sensitivity to various forms of risk, such as interest rate risk, market volatility risk and oil risk. It then automatically implements hedging strategies to try to offset them.
It’s a powerful tool in a market who’s short term future is highly uncertain.
Top trade ideas
Here are some of the best ideas our AI systems are recommending for the next week and month.
One Gas Ince (OGS) – The natural gas utility company is one of our Top Buys for next week with an A rating in Low Momentum Volatility and a B in Quality Value. Revenue is up 38.5% over the past 12 months.
Applied Digital Corp (APLD) – The data center operator is our Top Short for next week with our AI rating them an F in Quality Value and a B in Low Momentum Volatility. Earnings per share was -$0.18 in the 12 months to the end of August.
Ideanomics (IDEX) – The commercial EV company is one of our Top Buys for next month with an A rating in Technicals and a B in Quality Value. Revenue has increased 13.9% in the 12 months to September 30.
Insulet Corp (PODD) – The medical device company is one of our Top Shorts for next month with our AI rating them an F in Low Momentum Volatility and Quality Value. The net income margin is just 1.5%.
Our AI’s Top ETF trade for the next month is to invest in South Korea, silver and U.S. natural gas and to short long term Treasuries and Pacific equities. Top Buys are the iShares MSCI South Korea ETF, the iShares Silver Trust and the U.S. Natural Gas Fund LP. Top Shorts are the iShares 20+ Year Treasury Bond ETF and the Vanguard FTSE Pacific ETF.
Recently published Qbits
Want to learn more about investing or sharpen your existing knowledge? Qai publishes Qbits on our Learn Center, where you can define investing terms, unpack financial concepts and up your skill level.
Qbits are digestible, snackable investing content intended to break down complex concepts in plain english.
Check out some of our latest here:
Squeeze 9%-Plus Out Of This Bond Mini-Portfolio
Bonds are finally an intriguing place for retirement income.
Safe Treasuries still pay a respectable (by their standards, at least) 3.7%. But we contrarians can do better.
Today we’re going to discuss three bond funds ready to rally. They pay 8.6%, 9.1% and—get this—9.6% per year.
Those are not typos. These are fat freaking yields.
Yes, These Bond Yields Are Real. And They Are Spectacular.
And even better still, you can buy these bonds for as low as 90 cents on the dollar! How is that? Well, the cheapest fund trades for just 90% of its net asset value (NAV).
It’s NAV is the street price of the safe bonds it owns. If the fund liquidated today, it would fetch 100% of NAV. But it’s a bear market, so bargains abound. And we can buy it for just 90% of NAV—or 90 cents on the dollar.
Why? Let’s thank our intrepid Fed.
The Fed Gamble
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Bonds have taken an absolute beating in 2022 amid a year’s worth of aggressive Federal Reserve interest-rate hikes—part of Chair Jerome Powell’s action plan to extinguish raging inflation.
For example, the iShares 7-10 Year Treasury Bond ETF (IEF IEF ), a proxy for medium-duration bonds, currently sits near decade-plus lows amid a 15% drop year-to-date. That might not sound like much compared to the beating stocks are taking, but that’s as precipitous a decline as you could reasonably fear in mid-length bonds.
I stress “near” because bonds have been rallying of late. A temporary snap-back? Maybe. But it comes amid budding, albeit uneven, optimism over the past month or so that maybe, just maybe, the Fed’s rate hiking is about to slow.
Just a week ago, the Fed released minutes from its most recent FOMC meeting showing that a “substantial majority” of the central bank’s officials believe it would “likely soon be appropriate” to slow its rate hikes.
And on Wednesday, Powell added more credence to the idea, saying smaller rate increases “may come as soon as the December meeting.”
Bonds aren’t a monolith, either. Short-term and long-term rates can indeed move in different directions, and that matters when determining your bond-buying strategy. Recall what I said a few weeks ago:
“The ‘short end’ (maturities closer to today) of the yield curve is grinding higher because the Fed head has said he has more work to do. Over time, the 2-year Treasury tends to lead the Fed Funds Rate because it anticipates the Fed’s next move. … The ‘long end’ (maturities farther away) of the yield curve, meanwhile, is catching its breath while it weighs the lesser of two evils: inflation today or a recession tomorrow.”
If we are at a point where, perhaps, Powell doesn’t have as much work to do as before, that could be an inflection point for short-term bond rates—and an inflection point for shorter-maturity bond funds.
In other words, the window might be closing on our chance to buy low.
Fortunately, we can make the most of that opportunity by buying not bond mutual funds or bond exchange-traded funds (ETFs), but bond closed-end funds (CEFs). That’s because, in addition to buying while short-term bonds are against the ropes, many of these CEFs are also trading for below their net asset value, meaning we’re buying the bonds for even cheaper than we could by purchasing them individually.
While the fate of these funds is ultimately up to the Fed, here are three intriguing opportunities right now: 3 CEFs yielding 8.6%-9.6% that are trading at high-single-digit and low-double-digit discounts to NAV:
PGIM Short Duration High Yield Opportunities Fund (SDHY)
Distribution Yield: 8.6%
Discount to NAV: 10.1%
As crazy as it might sound, you can wrest a nearly 9% yield—paid monthly, no less—from a bond portfolio with an average maturity of less than three years!
The PGIM Short Duration High Yield Opportunities Fund (SDHY) is a relatively new fund with inception in November 2020, so most of its short life has been spent weebling and wobbling. SDHY invests primarily in below-investment-grade fixed income, and it will typically maintain a weighted average portfolio duration of three years or less and a weighted average maturity of five years or less—the latter is considerably shorter than its target right now, at 2.9 years.
The short maturity helps tamp down on volatility, but SDHY is hardly your average short-term bond fund, including quite a bit more movement.
SDHY packs a mean yield punch in part because of its low credit quality. Just 11% of its portfolio is investment-grade; another 34% is in BB debt (the top tier of junk), and another 35% is in B-graded bonds.
Also helping is a decent amount of debt leverage—17% at last check, which isn’t exceptionally high, but still a fair amount of extra juice to performance and yield.
That juice works both ways, hampering SDHY’s performance during a bear climate for bonds. But clearly, given its performance of late, it has significant potential once the Fed starts slowing its hike pace (and especially once it actually throttles back rates).
Also alluring is a nearly 10% discount to NAV, implying that you’re buying SDHY’s bonds for 90 cents on the dollar. Granted, that’s not much more than its historical discount since inception of 10.3%, but it’s still a bargain no matter which way you slice it.
Western Asset High Income Opportunity (HIO)
Distribution Yield: 9.1%
Discount to NAV: 8.9%
The Western Asset High Income Opportunity (HIO) is a little farther along the maturity spectrum, at an average of 7.3 years, but it’s another compelling high-yield play that’s worth eyeballing in the current environment.
HIO is a classic junk-bond fund whose management team scouts out particularly attractive values. But focus on value doesn’t translate into more credit risk than its contemporaries—sure, its BB exposure of 34% is far less than its benchmark (50%), but that’s countered by some investment-grade debt (2% A, 13% B). (The rest of the portfolio is similar to its benchmark.)
Also, while this CEF is allowed to use leverage, it currently doesn’t. So the higher-than-junk-average yield you see (also paid monthly!) is simply a result of its management’s bond selections.
Despite not using leverage, this CEF’s performance is much more volatile than plain-jane ETFs—historically for the better, though the past year has been miserable for shareholders.
HIO’s 8.9% discount to NAV is attractive, at least in a vacuum—but it’s something of a wash considering that, on average over the past five years, the fund has traded at a 9.1% discount.
BlackRock Credit Allocation Income Trust (BTZ)
Distribution Yield: 9.6%
Discount to NAV: 5.7%
There’s hardly “a final word” with this Fed. Yes, Powell gave his strongest signal yet that rate hikes will slow down. But the Fed has already surprised some economists with its aggression on rate hikes and other quantitative tightening—and if high inflation persists, short-term bonds could remain in the doghouse longer than expected.
But longer-dated fixed income, especially with decent credit quality, could do OK.
The BlackRock Credit Allocation Income Trust (BTZ), which invests primarily in bonds but also other fixed income such as securitized products and bank loans, is an interesting choice here—one with an excellent track record, especially if you can stomach some deeper valleys along with those higher peaks.
BTZ’s average portfolio maturity is a hair over 18 years—not quite at the 20-year threshold for “long,” but plenty long nonetheless. Credit quality is an optimal blend, however: 55% is investment-grade (most, 42%, in BBB-graded bonds), another 22% in top junk tier BB, and most of the rest in B- and C-rated bonds.
This fund is an ideal example of how CEFs benefit from active management and more tools to work with. Managers can hunt down value-priced bonds rather than just plugging in whatever an index tells them to, and they’re also able to scour the credit world for other appealing instruments at times when bonds aren’t the top play.
Also, BTZ is at the high end of the leverage-use spectrum, at more than 28% currently. That can weigh on performance given a high cost of debt, but it can also drastically improve performance in a bond upswing—and that’s how its monthly payout stretches to nearly 10%!
My only gripe right now? BTZ isn’t much of a bargain right now, with its roughly 5.7% discount to NAV coming in higher than its 5-year average of around 8%.
But it still beats buying these bonds individually.
Brett Owens is chief investment strategist for Contrarian Outlook. For more great income ideas, get your free copy his latest special report: Your Early Retirement Portfolio: Huge Dividends—Every Month—Forever.
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