Jack Dorsey: You Can Buy A Fraction of Berkshire Stock or ‘Stack Sats’
Jack Dorsey, CEO of Twitter and Square, announced that Square’s Cash App is poised to enable users to purchase fractions of stocks — with an entry of as little as $1. Jack Dorsey: You Can Buy A Fraction of Berkshire Stock or ‘Stack Sats’
In a tweet posted on Oct. 24, Dorsey wrote:
“Now anyone can buy $42 or even $1 worth of Berkshire Hathaway A ($BRK.A, or $TSLA or $SFIX or…) instantly and for free right in @CashApp. Really proud of the team for making buying stocks and building wealth accessible to more people. Rolling out now! @WarrenBuffett!”
As CashApp’s Twitter handle indicated the same day, app users will soon be able to own a piece of hundreds of different stocks — rather than an entire share.
This, as Dorsey tweeted, includes the most expensive stock on the market — Berkshire Hathaway Class A — which regularly trades above $300,000 per share.
The irony of Square — which saw its own stock jump $1 billion within 5 days when it first announced its BTC trading option back in 2017 — promoting its new investing product with the example of Berkshire Hathaway shares will not go unnoticed in the crypto community.
Berkshire CEO’s billionaire chairman Warren Buffett is notorious for his by-now ritual opprobrium toward Bitcoin and cryptocurrencies.
In addition to share fractions, Dorsey also reiterated that users, who aren’t into stocks, can buy fractions of Bitcoin (BTC) using the same interface.
He used the hashtag #Stacksats to refer to one Satoshi; the name (after Bitcoin creator Satoshi Nakomoto) given to the smallest, indivisible unit of the cryptocurrency — one hundred millionth of one Bitcoin.
Earlier this year, during an earnings call devoted to Square’s Q2 2019 results, Dorsey recognized the eye-popping impact that introducing Bitcoin support had on the company’s Cash App revenue.
At the time, Square’s latest shareholder letter had revealed that Cash App had raised $135 million in subscription, services and transaction-based revenue — and that separately, Bitcoin revenue alone accounted for $125 million.
“We love you Bitcoin,” Dorsey said.
In his own annual shareholders’ meeting back in 2018, Warren Buffett, for his part, memorably characterized Bitcoin as being “probably rat poison squared.”
Charles Schwab’s Move To Sell Fractions Of Shares Could Be A ‘Game-Changer’ For Investors
It could also spell more trouble for traditional mutual funds, some experts say.
If you’re still a small-bucks investor and you want to put, say, $100 every month into the SPDR S&P 500 SPY exchange-traded fund, you’re out of luck.
The ETF, the world’s biggest by assets, sells for $298 a share. At most brokerage houses there’s no way to buy less of it at a time than one share.
But that may be about to change.
Online broker Charles Schwab is planning to launch “fractional stock” ownership in a bid to woo younger investors, the company’s founder and president Charles R. Schwab said in a recent interview with The Wall Street Journal. That could make it possible for individual investors to buy shares in companies, and exchange-traded funds, in smaller, or exact dollar amounts.
Schwab spokesman Michael Cianfrocca declined to comment further. “We’re always evaluating and working on new services to improve how people can invest, but we don’t have anything specific to share on this right now as far as additional details or timing,” he said by email.
Financial advisers say such moves — by Schwab and other big brokers — are long overdue and could be great news for investors. Newer online brokerage houses have already introduced fractional stock ownership as a way to lure younger retail investors.
“This could potentially be a ‘game-changer,’” says Peter Palion, a certified financial planner at Master Plan Advisory, Inc. in East Meadow, N.Y. “It would be a game changer if you could specify the dollar amount and say, ‘I want to buy, say, $100 of the Gold SPDR,” he says.
That would be a win for investors who are handling small amounts of money, and for those who want to invest a certain amount of money each month into retirement accounts, he says. It would allow some investors to buy $25 or $50 at a time of individual stocks or ETFs, he says. It could also allow investors to invest, say, exactly $500 a month in one or more ETFs as part of a regular investment plan.
“I think it’s a great idea,” agrees Dennis Nolte, a financial adviser at Seacoast Bank in Oviedo, Fla. “Why wouldn’t you want to buy the S&P 500 ETF when you could buy $25 worth?”
Currently, stocks and exchange-traded funds can only be bought in whole units through most brokers. That means the minimum investment in, say, Amazon is the price of a single share, currently more than $1,700. Dow Jones Industrial Average component Boeing trades for around $350 a share. Apple is more than $230 per share. Tesla is more than $250.
Fractional ownership of ETFs could be a big advantage for investors
But the bigger advantage for most investors, say financial planners, is likely to come from fractional ownership of ETFs, which are open-ended mutual funds that are bought and sold much like stocks. Such funds have allowed investors to hold diversified portfolios much more easily. They typically charge far lower costs than traditional actively managed mutual funds.
The Investment Company Institute, which represents the mutual fund and ETF industries, says that although it has already been theoretically possible for ETFs to be traded in fractional amounts, it is not common. Brokers have to set up structures so that ownership can be pooled, and fractional shares can be credited to different customers. Currently the main way fractional shares of ETFs are owned are through dividend reinvestment plans, where investors effectively take an ETF’s dividends in the form of extra partial shares in the fund.
Trouble For Traditional Mutual Funds?
A move to make fractional ownership more widely available could spell further trouble for traditional mutual funds, advisers say. It’s “definitely a threat to mutual funds,” says Nolte. Allowing fractional ownership of ETFs would take away one of those funds’ last remaining advantages over ETFs, which is the ability to invest a specific amount — say $1,000 — at a time.
That is a big reason such funds remain the staple of most 401(k) plans, many experts believe.
Exchange-traded funds, which you buy and sell on the stock market, remain in total much smaller than traditional mutual funds, which you buy or sell directly from the fund manager. According to the Investment Company Institute, traditional funds have about $16.6 trillion in net assets, not including money-market funds. The figure for ETFs is less than $4 trillion.
Exchange-traded funds have seen their net assets quadruple since 2009 as investor money has flowed in. Meanwhile, traditional funds have seen heavy outflows. Equity-focused funds are on track for their fifth year in a row of net redemptions.
ETFs have been taking market share from traditional open-ended funds for many years, the industry reports. That’s meant big savings for ordinary investors, who have swapped funds with average fees of around 1% or more a year for low-cost ETFs whose fees are typically a fraction of that. That has been bad news for money managers, who have seen revenues and profit margins squeezed.
Bridgewater Bets Big On Market Drop (#GotBitcoin?)
World’s largest hedge fund using options to wager that either S&P 500, Euro Stoxx 50—or both—fall by March.
Bridgewater Associates LP has bet more than $1 billion that stock markets around the world will fall by March, said people familiar with the matter.
The wager, assembled over a span of months and executed by a handful of Wall Street firms, including Goldman Sachs Group Inc. and Morgan Stanley, would pay off for the world’s biggest hedge fund if either the S&P 500 or the Euro Stoxx 50—or both—declines, some of the people said.
It is made up of put options, which are contracts that give investors the right to sell stocks at a specific price, known as a strike, by a certain date. They allow investors to shell out a relatively small amount of cash to hedge a larger portfolio or make a directional wager. The options expire in March and currently represent one of the largest bearish bets against the market.
Bridgewater paid roughly $1.5 billion for the options contracts, or just about 1% of the Westport, Conn., firm’s $150 billion in assets under management, according to people familiar with the matter.
The options contracts are tied to around $100 billion worth of the indexes, said people familiar with the matter. How much the firm stands to potentially make would depend on many factors, including the magnitude of any market decline and the timing of when the firm cashes in its bet.
It couldn’t be determined why Bridgewater made the investment. Several clients said it may simply be a hedge for significant exposure to equity markets the firm has built up. Funds often hedge, or take offsetting positions, against other exposure to protect against losses.
The massive size of the wager has prompted chatter among traders and caused the price of some options to rise.
There has been a surge in put options outstanding tied to the S&P 500 index. The number of S&P 500 put options outstanding hit the highest level in more than four years in September, according to data provider Trade Alert. There has also been growing interest in S&P 500 put options expiring in March, the data show.
The bet is one of a growing number of bearish trades that have been placed as stock markets reach new highs and as some investors worry about a correction. Some prominent money managers have also predicted that markets would fall if Sen. Elizabeth Warren wins the Democratic Party nomination, or the presidency; traders have started to place bearish wagers in sectors including health care.
Bridgewater declined to comment on its trades in a statement, adding: “We have no positions that are intended to either hedge or bet on any potential political developments in the U.S.” Bridgewater also said that its positions change often and are frequently hedges for others and that reading too much into a single position “would be a mistake.”
Ray Dalio, Bridgewater’s founder, wrote in a tweet Friday after the article was published that the firm doesn’t have a “net bet that the stock market will fall” and that “to convey us having a bearish view of the stock market would be misleading.” A firm’s net bet refers to its overall position, taking into account all trades, hedges and other factors.
Bridgewater’s bet is made up of a series of put contracts, said people familiar with the matter. The stock indexes wouldn’t have to fall to the contracts’ strike prices for Bridgewater to profit. Rather, Bridgewater could turn around and sell contracts that rise in value if markets start falling, even if the declines leave indexes short of the strike prices.
Most contracts aren’t exercised at their designated strike prices, but instead are commonly used as trading instruments for investors looking to profit from the market’s moves. Options prices typically rise as the underlying instrument gets closer to the strike price and as it appears more likely the instrument could hit that level by the expiration date.
Bridgewater’s counterparties could theoretically be on the hook should its wager pay off. A standard practice among Wall Street counterparties is to turn around and hedge the risk they have assumed.
Some investors have been unnerved by the near relentless march upward of the S&P 500 since March 2009—the longest bull run in the index’s more-than-90-year history. The index has hit 23 highs in 2019, in a year when hopes for lower interest rates and for a resolution to the trade dispute between the U.S. and China have continued to propel stocks.
March 2020 is significant in the Democratic primary because a majority of the party’s delegates, which are needed to capture a presidential nomination, will have been awarded by the end of the month.
Investors including Stanley Druckenmiller and Leon Cooperman have said in recent months a Warren presidency would cause markets to fall. Some traders say companies are likely to hold off on major spending decisions until it becomes clearer whether she’ll win.
Wall Street has begun offering analyses of what a President Warren could achieve by executive power and suggesting ways investors could trade a Warren candidacy. Morgan Stanley on Oct. 1 sent trading clients an “Elizabeth Warren Risk Basket” it described as a way to hedge the risk associated with her myriad plans. The basket and its ticker—MSXXWARR—were renamed later that day.
A person close to Morgan Stanley said the basket was meant to reflect the progressive agenda and was broader than any one candidate. Other big banks also have created baskets of stocks tied to Democratic presidential candidates’ policies.
The Warren campaign didn’t respond to requests for comment.
Key Square Capital Management, a $4.5 billion macro hedge fund founded by Scott Bessent, a former investment chief for George Soros, is betting against the dollar in a variety of currencies anticipating Ms. Warren’s continued strength, according to people familiar with the matter.
Key Square said in a Nov. 14 letter to investors that “intelligent people can argue whether Ms. Warren’s numerous programs will be good or bad for American society, but they are unequivocally negative for U.S. asset prices.”
There also have been bearish trades on one of the biggest exchange-traded funds tracking health care, the $18.5 billion Health Care Select Sector SPDR Fund, which holds shares of pharmaceutical companies and health-care providers, analysts said. Ms. Warren and Sen. Bernie Sanders, another leading Democratic presidential hopeful, have called for banning private health insurance and negotiating down drug prices.
Trying to time the markets or bet on political outcomes can be treacherous. Mr. Soros, a major Democratic donor, lost nearly $1 billion in the immediate months following Donald Trump’s unexpected election when the stock market rallied. Even spending money on simple hedges in recent years has often been a money loser as major U.S. indexes have ascended.
Bridgewater’s unorthodox management culture of “radical transparency,” which includes taping and posting most internal meetings for all employees to see, has made it one of the few hedge funds to fascinate both on and off Wall Street. Mr. Dalio, 70 years old, has laid out that philosophy in a book he has promoted as a management manifesto for companies, despite high-profile shake-ups in Bridgewater’s own leadership ranks in recent years.
Mr. Dalio, who has called for higher taxes on the wealthy and signed the Giving Pledge—a campaign started by Bill Gates and Warren Buffett to get the wealthy to promise to give away most of their wealth, has warned recently that rising populism around the world and extreme levels of inequality can cause conflicts. “Capitalism needs to be reformed. It doesn’t need to be abandoned,” Mr. Dalio said in an episode of “60 Minutes” earlier this year.
Credited with forecasting the financial crisis, Bridgewater made 8.7% in 2008 in its flagship Pure Alpha fund, then made a major shift into bonds that drove a 27.4% gain in 2010.
This year, the macro fund has lost 2.7% through October. Another fund it manages, All Weather, is up 14.5% for the period. Bridgewater typically makes many small bets across a broad array of instruments.
Options Traders Eye Insurance Even as Stocks Soar
Memories from last year, when stocks climbed before a selloff in the fourth quarter, are still fresh in many investors’ minds.
Options traders are paying up for bets that would profit if the S&P 500’s record run came to a halt.
Renewed optimism about the domestic economy and a preliminary trade pact between the U.S. and China have breathed fresh life into the stock market. The S&P 500 has surged 27% this year, on track for its best annual performance in six years.
Options traders are approaching those highs with caution. They are buying contracts that would pay out if the S&P 500 were to fall in the coming months.
The demand helped drive one options-based measure, the Cboe Skew Index, to its highest level since September 2018 on Friday, Cboe Global Markets data show. The gauge is known for measuring investor expectations of extreme and unusual moves in the stock market, known as “black swan” events. It is based on prices of options that are far from the S&P 500’s current level.
Heightened FearThe Cboe Skew Index is known as a measure of perceived “tail risks,” or extreme and unusual events in thestock market. It recently jumped to the highest level of the year.
“People still are traumatized by this time last year,” said Julian Emanuel, chief equity and derivatives strategist at BTIG. “The glass is still half empty…It’s shocking because you wouldn’t think that would be the case at all-time highs.”
Memories from last year are still fresh in many investors’ minds. U.S. stocks climbed for much of 2018 before a selloff in the fourth quarter pulled major indexes sharply lower for the year, catching many investors off guard.
Mr. Emanuel said demand for stock protection has been relatively high for contracts expiring in a few months to a whole year from now. This has driven up the cost of bearish put options on the index, bets that could pay out if there were a market swoon, analysts said. The cost of bearish options relative to bullish ones has been near the highest levels of the past year, according to BTIG data on contracts expiring late next year.
Options give investors the right to buy or sell stocks at a specific price, later in time. Call options give the right to buy stock, while put options give the right to sell stock. These types of contracts can be used to profit from a rise or fall in share prices or shield portfolios from big declines.
Some investors remain cautious, despite a thawing in trade tensions, developments surrounding Brexit and low volatility in markets, analysts said.
“There’s a signal out there that while we’re up at the highs, there’s still some kind of concern that we give back some of these gains,” said Ling Zhou, an equity derivatives strategist at Cowen.
Some big investors have made similar trades. Bridgewater Associates LP paid more than $1 billion for an options trade that would profit if markets around the world fell by March, The Wall Street Journal reported in November.
One potential source of volatility next year is the U.S. presidential election. Options markets have already been forecasting an increase in volatility in stock prices through late next year. Some investors have been concerned about the policy stances, especially toward businesses, that the final Democratic nominee will hold.
“The biggest risk for 2020 is the U.S. presidential election,” wrote JPMorgan analysts in a Dec. 11 note. The firm’s analysts recommended portfolio hedges that expire in March, after Super Tuesday.
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To be sure, some investors have also targeted bullish options that would pay out if stocks were to rise. Some of the demand for hedges could come from investors who are looking to protect strong gains they have booked this year, analysts said.
And many stock analysts expect the record run to continue, buoyed by three interest-rate cuts by the Federal Reserve. JPMorgan and Goldman Sachs analysts project the S&P 500 to hit 3400 by the end of 2020, a 6.5% jump from Tuesday’s close. Bank of America analysts peg a target of 3300.
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