The Finatical
Week of November 1st, 2022 - Distressed Securities, White House Addresses “Junk Fees”, U.S GDP Growth
Topic Breakdown - Distressed Securities
Introduction
You probably know what securities (stocks, bonds, options, etc.) are. But what about distressed securities? A financial product issued by a firm that is on the verge of bankruptcy or has already declared bankruptcy is known as distressed security. Preferred and common stocks, bank debt, trade disputes, and bond funds are examples of distressed securities. The value of the issuing company's securities is significantly diminished as a result of its inability to meet its financial commitments. Distressed securities, however, can offer high-risk investors the possibility of significant profits due to their underlying volatility (rapid price changes).
Investing in Distressed Securities
So if you are willing to take some risk in your investment strategy, how do you start investing in distressed securities? Well, you can’t just use common brokerage platforms such as Robinhood; you need specialized brokers. According to buysidehustle.com, “To invest in distressed debt, you need to have accounts open with the large brokerage firms (GS/MS/BAML/JPM/Citi/etc.) where they connect buyers with sellers of distressed securities. Once you have accounts open with these institutions, you get trading prices sent to you for every piece of security that these firms buy and sell.” Once you open a trading account in which you can trade distressed securities, you should start looking for companies that are filing for bankruptcy, but seem like they are undervalued and can actually recover. This means that during this period of rough times for that company, you can take advantage of the low prices and hope they go up once you buy in.
Risks
Despite some of the unique opportunities to invest that you can find with distressed securities, there are many risks that must be taken into consideration. The rewards on distressed debt investments can be quite large, but the dangers are also very high. This is why, in the hopes of making some quick revenue, there are many high-risk investors who are willing to make investments in distressed stocks, despite the risks. Firstly, there is a lot of volatility in distressed securities. The price of your investment could go up drastically, but it could also go down just as quickly. There’s also the potential for long-term capital loss. If the business completely falls apart, its securities might not ever go up again as you hoped. Essentially, investing in distressed securities is mainly for professionals, so if you are ever looking into this strategy of investing, do a lot of research and prepare yourself for the risks.
Financial Trends
White House Addresses “Junk Fees” Two Weeks Before Election Day
President Joe Biden issued his initiatives to address “junk fees” from banks, airlines, cable companies, and other industries as a way to lower the cost of living two weeks before Election Day due to polls reporting the nation’s economy to be their main concern. Biden stated, “One of the things that I think frustrates American people is they know the world’s in a bit of disarray and there need to remark on new actions to provide families with more financial breathing room”. Democrats are under immense pressure to demonstrate their actions for addressing inflation before the midterm elections. In recent weeks, voters are increasingly ranking the nation’s economy and inflation to be their number one concern, over issues of abortion and threats to democracy.
Additionally, voters have shown to favor the Republicans’ ideas and their proposal to resolve the economic issues. Republicans have been primarily focusing on lowering and controlling gas prices as Biden is focusing on lowering the overall price at the pump and highlighting the average gas price dropping from its peak of $5 a gallon. There is serious progress being made in reducing gas prices close to what they were before and Biden is continuing on making sure that oil companies pass on the reduction in the price of a barrel of oil to the pump. The “junk fees” are a result of the regulatory agency's urgency to order companies to disclose and eliminate their myriad fees.
U.S GDP Growth Beats Projection
For the first time in 2022, the U.S. economy posted its first period of positive growth in the third quarter, temporarily easing fears of a recession. The nation’s GDP, a sum of all the goods and services generated from July to September, increased at a 2.6% annualized pace for the period which is above the Dow Jones forecast of 2.3%. However, the data also predicts consecutive negative quarters to start 2023, reaching a form of recession but the National Bureau of Economic Research is considered the arbiter of downturns and expansions. The unexpected growth was a result of the low trade deficit that economists consider to be a one-time thing and do not expect to occur in future quarters.
Additionally, GDP gains came from the increases in consumer spending, nonresidential fixed investment, and government spending. The reports have also reflected a non-stop transition to services spending from goods, as spending on the former has increased to 2.8% while spending on goods has dropped to 1.2%. The gains would have been higher if there weren’t any declines in residential fixed investment and private inventories of sting the gains. After the data had been released regarding the nation’s GDP, markets were starting to reap higher profits, with the Dow Jones Industrial Average gaining more than 300 points in early trading on Wall Street. Despite the Fed's expected to approve a fourth consecutive 0.75 percentage point interest rate hike, they might consider slowing down the pace of increasing further interest as federal officials will take time to assess the impact of their policy decisions on the economy.
Financial Guidance
“Yesterday ended last night. Today is a brand-new day.” — Zig Ziglar
Whatever happened yesterday is in the past, and it’s important to remember that today is a new day. There’s nothing that’s more detrimental than being stuck on what happened in the past, and being unable to move forward as a result.
Term of the Week
Junk Fees: Junk fees are costs for goods or services that either are worthless, provide nothing of value to the customer, and/or are available for free. They serve to boost the revenue and profits of those who provide the goods and services.