Weekly Access

2 For the Bulls & 2 For the Bears

2/4/2016

By Michael McKeown, CFA, CPA - Chief Investment Officer

Let’s dive into some important charts.

Leading up to the past two recessions, people dramatically stopped looking for houses.  It began slowing down two years before, as people worry about making a big purchase on credit.  That is not the case today.  Consumers are looking for houses. The National Association of Home Builders shows sales and foot traffic increasing steadily for four straight years. 

There is a ton of noise in investor surveys and not clear signals.  At extremes though, the data gets more interesting.  Only in 2008-09, 2011, and briefly in 2015 have bearish advisors outnumbered bullish advisors.  This is typically a contrarian signal, as when too many people get bearish, there is not anyone left to sell and push prices lower.  Stock prices today are near the same level as the lows of August 2015 when bears outnumbered bulls, but it is important nonetheless for those with bullish outlooks.

It is a bloodbath in the energy sector.  Total asset writedowns for oil and gas companies hit a quarterly record.  The corporate bond market is telling us that energy today is as bad as the telecom bust in 2001 and the financial sector meltdown in 2008.  Will it feed into other sectors that require credit?  That is the bigger question now.

Both large and small banks tightened credit standards for commercial and industrial loans during the last two quarters of 2015.  This was the first consecutive drop during this economic expansion.  Demand for loans also fell in the last Federal Reserve survey of Senior Loan Officers.  This is certainly partly related to the energy fall, but could feed into other areas.  Tighter credit standards and a drop in demand for funds preceded the last two recessions. 

Stay tuned for more charts as we follow the evolving economy and markets.

 

This material is based on public information as of the specified date, and may be stale thereafter. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates.




Big Changes to Accredited Investor Definition & Crowdfunding

1/27/2016

By Michael McKeown, CFA, CPA - Chief Investment Officer

When Congress passed the Dodd-Frank Act, there was a provision that said the SEC would examine the accredited investor definition every four years.  Why does this matter?  Per the report (with our emphasis):

“The “accredited investor” definition is a central component of Regulation D.  It is
“intended to encompass those persons whose financial sophistication and ability to sustain the
risk of loss of investment or ability to fend for themselves render the protections of the Securities
Act’s registration process unnecessary.”  Qualifying as an accredited investor is significant
because accredited investors may, under Commission rules, participate in investment
opportunities that are generally not available to non-accredited investors, such as investments in
private companies and offerings by hedge funds, private equity funds and venture capital funds. 

Issuers of unregistered structured finance products and debt securities also may rely on
Regulation D.

The exemptions in Regulation D are the most widely used transactional
exemptions for securities offerings by issuers.  Issuers using these exemptions raised over $1.3
trillion in 2014 alone
, an amount comparable to what was raised in registered offerings."

The definition change also matters because of the ease of investing in private offerings via crowdfunding using online platforms today.  Many sites popped up offering access deals from real estate to technology startup companies and much more.

Since 1982, the accredited investor requirements have been the same - $200,000 of individual income, $300,000 of joint household income, or $1 million net worth (excluding primary residence).

Here is what the SEC recommends from its report issued in December 2015:

  • Grandfather in the previous income and net worth requirements, but subject to 10% investment limitation in any one issuer
  • Increase income threshold to $500,000 and net worth to $2,500,000 (no percentage limitation)
  • Index the threshold requirements for income and net worth to inflation
  • Grandfather issuers' existing investors that are accredited under current definition

In addition, the SEC also recommends the accredited investor definition be expanded to include individuals with the following attributes:

  • Certain professional credentials (Series 7, CPA, CFA, etc.)
  • A minimum amount of investments of $750,000
  • A minimum amount of experience investing in exempt offerings
  • Individuals who pass an accredited investor examination

The SEC estimates there are currently about 12.4 million accredited investor households.  The new inflation-adjusted requirements would impose a limit (10%) on 4.4 million households, which could lessen funds available for issuers under Regulation D.  The limit is probably a pretty good idea to prevent people from "putting all their eggs in one basket."  Including all of the new expanded definitions, the pool of accredited investor households would expand to 14 million.

All of these changes would have a big effect on the private capital markets over time. Record amounts of money flowed into venture capital (VC) the last few years.  Given easy capital access and lower levels of due diligence on crowdfunding platforms, I suspect there will be many failures and few winners of those using the VC platforms (like any portfolio of VC investments).  When VC investments hit though, they will be big, but a huge gamble rather than an ‘investment’ in the end.  Far more interesting to me are the real estate and private equity opportunities with more tangible businesses and quality cash flows.  While not knowing anyone personally, my inclination that those who fail to build a quality peer network of lenders or investors will be the ones using the platforms as sources of capital.  This could result in negative selection bias. At the same time, the pure convenience of the platform and quick execution may make crowdfunding platforms a viable solution for all or a portion of capital raising.

In the future, online crowdfunding platforms could become the norm rather than the exception.  Hopefully there will be an increase in quality and greater due diligence standards on a self-imposed basis by the industry.  Will more qualifying individuals consider crowdfunding as part of basic asset allocation?  Could this be offered in 401(k) plans in the future? 

It will be really interesting to see what, if any, of the SEC recommendations become law and the subsequent impact on crowdfunding and individual investors. Keep an eye on this, we sure will.

 

This material is based on public information as of the specified date, and may be stale thereafter. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates.




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