Meet the Publicly Traded Company Paying Employees in Bitcoin

What if your paycheck for this December could be worth more than ten times its face amount next December? That’s the scenario that many employees of Japan’s GMO Internet Group who opt to be paid in Bitcoin will no doubt be hoping for when taking payment in the cryptocurrency becomes an option starting in March of 2018.

You may have seen some headlines flying around this week about the new company paying salaries in crypto bucks, but it’s not necessarily a sign that the Bit-revolution is swamping everything just yet. 

Getting paid in Bitcoin isn’t unheard of for employees in the Blockchain and crypto world, but GMO is a large, publicly traded company with thousands of employees. Some industry watchers see it as yet another sign Bitcoin is making baby steps into the mainstream. 

The problem, of course, is that Bitcoin’s stratospheric rise in value from less than $1,000 in 2016 to over $17,000 today is certainly not guaranteed to continue and could be a bubble ready to pop at any moment. Typically, you want employees with a stable and positive cashflow situation, so paying them in one of the most volatile currencies around can be problematic to say the least.

This is why it would be technically illegal if GMO employees were given no choice but to be paid via Bitcoin. The company’s program instead gives workers the option of having a portion of their pay deducted and used to purchase Bitcoin at current rates. Obviously, any worker could just as easily be paid in Japanese yen and exchange a portion of their salary for Bitcoin on their own; GMO is just offering to automate the process of investing in Bitcoin for workers.

It’s all a clever means of promoting a few of GMO Internet’s latest ventures in to Bitcoin trading, mining and mining hardware development. So getting paid in Bitcoin at GMO is really a way to show that you’re with the company program, not to mention that more circulating Bitcoin in the world is now also good for the company bottom line. 

When major companies not engaged with the Bitcoin universe in any other way start to conduct payroll and other big transactions with cryptocurrency, I’ll definitely take notice.

Until then, the bigger indicator of Bitcoin gaining mainstream acceptance is the steady stream of headlines about the currency during 2017 and the numerous new exchange accounts being opened everyday. 

However, this only indicates Bitcoin’s growing acceptance as a viable investment. Mainstream acceptance as an actual currency to purchase goods and services still seems a ways off, even for those working at GMO Internet.

Fortune Brainstorm Tech International 2017 Livestream

The inaugural Fortune Brainstorm Tech International conference convenes world leaders to discuss innovation, technology, and the economy from December 5 to 6 in Guangzhou, China.

The event taps into the strength of two Fortune powerhouse series: Brainstorm Tech, which takes place each July in Aspen, and Global Forum, our long-running CEO summit. (Indeed, Brainstorm Tech International will colocate with this year’s Global Forum.) It takes place in Guangzhou, China’s southern gateway and an emerging center of tech innovation.

Fortune Brainstorm Tech International will explore the innovation revolution unfolding in China, a trend that is not yet fully appreciated or well understood around the world. The old notion of China as a tech copycat nation is being rapidly replaced by the emerging new reality of home grown innovation and mass implementation in fields that include artificial intelligence, social media, biotech, fintech, VR, automotive, the sharing economy, and mobile platforms. The conference program will feature the China innovators who are rewriting the rules and reshaping the landscape, in combination with tech leaders from around the world.

Fortune Brainstorm Tech International is at capacity but you can watch most of the program right here on this page. The festivities begin at 7:00 a.m. local time on Tuesday, Dec. 5 (or 6:00 p.m. Eastern on Mon. Dec. 4).

This Year's Holiday Office Party Should Be Extremely Simple. Here Is a New Way to Do It.

Most of us celebrate too little, recognize the work of others too infrequently, and honor others’ contributions too timidly. The holiday season offers an opportunity to correct that. And yet, most company year-end parties end up being an obligatory time commitment —  and sometimes even a personal intrusion.

If the year-end forces phony holiday cheer or silent suffering (or self-medication!) something has gone wrong. I’d suggest taking a fresh look at how you can celebrate the progress your organization has made, and especially the people in your organization. With some intentional planning around inclusion, meaning, and tradition, year-end parties can become important annual celebration.

My family has a favorite year-end celebration that I’ve often wondered if its spirit might be transferred to a work-related setting. Every New Year’s Eve, we take a large sheet of paper and make a column for each month.

Then, we ask for everyone’s help to fill in the big moments and milestones of each month — whatever anyone wants to remember or be recognized for.  It could be chicken pox, or a first job, or a big school project — anything worth remembering by any family member.

Over the years, we’ve assembled the month-by-month tapestry of our family’s entire history, a summary of what mattered most to various family members along the way. It allows us to see in a single decade, for example, an evolution of losing baby teeth, getting their replacements straightened, and ultimately the liberation from braces.

Why a “year in review” moment is a great idea

Businesses go through toddler, childhood, adolescent and young adult stages, too, with similar and predictable milestones: first paying customer, first profitable quarter, new office location, opening cities, adding product lines, going global, going public or shooting for a different peak. 

If you’re not careful, business milestones can dissolve into never-ending deadlines of budgets, timetables and deliverables. You’ll never take the time to step back and admire your progress, celebrate even minor milestones, or honor those who made it all possible — including suppliers, investors, customers and team members. The year-end party is a way to celebrate the progress the organization has made that creates a running history of contributions and achievements that might not otherwise be acknowledged.

At JetBlue, former CEO Dave Barger used to make an annual word chart, which would be the jumping off point for the events and people who best illustrated something meaningful that happened that year and that bound us together as an enterprise. 

A variation on his year-in-review might feature video or photo highlights and milestones. Whatever your medium, taking stock of the year for the organization, and especially its people, should be an important part of every year. If done right, it should be an authentic celebration.

In any company, there’s a lot to celebrate — even if it’s prospective and still just out of reach. Stepping back at year-end to get the view at 30,000 feet and to share it is worth a party.

Doing something meaningful is more likely to create a tradition that celebrates the essence of the enterprise and its mission, and more focused on honoring those at every level who’ve made the company what it is. This kind of celebration can likely evolve over time into a meaningful year-end tradition that people will look forward to and plan for. 

Merry Christmas and Happy Holidays.

Does Europe have what it takes to create the next Google?

LONDON (Reuters) – Europe is making major strides to eliminate barriers that have held back the region from developing tech firms that can compete on the scale of global giants Alphabet Inc’s Google, Amazon.com Inc or Tencent Holdings Inc, a report published on Thursday shows.

An attendee interacts with an illuminated panel at Google stand during the Mobile World Congress in Barcelona, Spain, March 1, 2017. REUTERS/Paul Hanna

The region has thriving tech hubs in major cities, with record new funding, experienced entrepreneurs, a growing base of technical talent and an improving regulatory climate, according to a study by European venture firm Atomico.

While even the largest European tech ventures remain a fraction of the size of the biggest U.S. and Asian rivals, global music streaming leader Spotify of Sweden marks the rising ambition of European entrepreneurs. Spotify is gearing up for a stock market flotation next year that could value it at upward of $20 billion. (reut.rs/2wYORnI)

“The probability that the next industry-defining company could come from Europe – and become one of the world’s most valuable companies – has never been higher,” said Tom Wehmeier, Atomico’s head of research, who authored the report.

Top venture capitalists and entrepreneurs in the region told Reuters they are increasingly confident that the next world-class companies could emerge from Europe in fields including artificial intelligence, video gaming, music and messaging.

“What we still need to develop is entrepreneurs who have the drive to take it all the way – I think we are starting to see that now,” said Bernard Liautaud, managing partner at venture fund Balderton Capital, who sold his software company Business Objects to SAP for $6.8 billion a decade ago.

The Atomico report is being published in conjunction with the annual Nordic technology start-up festival taking place in Helsinki this week and set to draw some 20,000 participants.

STRONGER FUNDAMENTALS

Capital invested in European tech companies is on track to reach a record this year, with $19.1 billion in funding projected through the end of 2017 – up 33 percent over 2016, according to investment tracking firm Dealroom.co.

The median size of European venture funds nearly tripled to around 58 million euros ($68.7 million) in 2017 compared with five years ago, according to Invest Europe’s European Data Cooperative on fundraising investment activity.

Beyond the availability of funding, Europe has a range of technical talent available to work more cheaply than in Silicon Valley, enabling start-ups to get going with far less funding.

With a pool of professional developers now numbering 5.5 million, European tech employment outpaces the comparable 4.4 million employed in the United States, according to data from Stack Overflow, a site popular with programmers.

London remains the top European city in terms of numbers of professional developers, but Germany, as a country, overtook Britain in the past year with 837,398 developers compared with 813,500, the report states, using Stack Overflow statistics.

While median salaries for software engineers are rising in top European cities Berlin, London, Paris and Barcelona, they are one-third to one-half the average cost of salaries in the San Francisco Bay Area, which is more than $129,000, based on Glassdoor recruiting data.

PUSHING UP AGAINST LIMITS

Big hurdles remain. A survey of 1,000 founders by authors of the report found European entrepreneurs were worried by Brexit, with concerns, especially in Britain, over hiring, investment and heightened uncertainty in the business climate.

Although Europe has deep engineering talent, many big startups focus on business model innovation in areas such as media, retail and gaming rather than on breakthrough technology developments that can usher in new industries, critics say.

Regulatory frameworks in Europe put the brakes on development on promising technologies such as cryptocurrencies, “flying taxis” and gene editing, while autonomous vehicles and drones face fewer obstacles, the report says.

A separate study by Index Ventures, also to be published on Thursday, found that employees at fast-growing tech start-ups in Europe tend to receive only half the stock option stakes that are a primary route to riches for their U.S. rivals. Yet their options are taxed twice as much.

The Index report said employees in successful, later-stage European tech start-ups receive around 10 percent of capital, compared with 20 percent ownership in Silicon Valley firms.

“There is quite a gap today between stock option practices in Europe and those in Silicon Valley,” Index Ventures partner Martin Mignot said in an interview. “There are other issues where Europe is behind, but we think stock options should be at the top of the agenda.”

Another factor holding back Europe is that regional stock markets encourage firms to go public prematurely, Liataud said.

“Europe has markets for average companies. In the U.S., going public is hard. You have to be really, really good. You have to be $100 million, minimum, in revenue,” the French entrepreneur-turned-investor said. “Nasdaq and the New York Stock Exchange have not lowered their standards.”

($1 = 0.8442 euros)

Reporting by Eric Auchard in London; Additional reporting by Jussi Rosendahl and Tuomas Forsell in Helsink; Editing by Leslie Adler

Our Standards:The Thomson Reuters Trust Principles.

The 5 Most Likely IPOs of 2018

With the economy still strong and the stock market still flying high, some observers are predicting that 2018 will be a good year for IPOs–better than the past few years have been. That’s probably good news for the current crop of technology unicorns that have gotten deep into the alphabet of funding rounds and must at some point repay their investors. (A “unicorn” is a pre-IPO or M&A startup with a valuation of $1 billion or more.)

With the likely IPO boom in mind, the personal finance site GOBankingRates has come up with a list of likely IPOs for 2018, rating their likelihood of going public next year from high to low. These are the unicorns GOBankingRates thinks are most likely to go public in 2018. You can find the full list here

1. Airbnb

Valuation: $31 billion

Airbnb has raised $4 billion from investors, including series F funding. It now has 3 million listings and operates in nearly all nations on Earth. It also became profitable in 2016 and is expected to show a profit this year as well. It certainly sounds like a company that’s quite ready to have an IPO.

In an interview with Fortune in October, CEO Brian Chesky said the company “would be ready as absolutely soon as we can.” On the other hand, he said, people who expect the short-term rental company to go public in 2018 might be disappointed. “The vast majority of people are saying that you should take your time and do whatever you need to do on your timeline,” he explained, adding that some companies have had a tough time once they got out in the markets. “It’s a defining thing,” he said.

2. Dropbox

Valuation: $10 billion

Many observers have been expecting Dropbox to go public this year. It’s certainly given many signals that an IPO was in the works, raising a $600 million line of credit from several large investment banks (getting cash without giving up equity is a good sign). Dropbox CEO Drew Houston told Bloomberg earlier this year that the company had positive EBITDA (earnings before interest, taxes, depreciation and amortization–a measure of day-to-day profitability for heavily indebted companies). 

Dropbox has 500 million registered users worldwide, and 200,000 business customers (that is, people who actually pay for the service). It recently launched a $19.99 per month “Professional” level of service which some interpreted as a measure to beef up revenues in preparation for an IPO. This one could happen any day now.

3. Spotify

Valuation: $16 billion

Spotify is in the unique position of wanting to sell shares to the public but being blocked so far because the company does not want to go the traditional IPO route. Instead, it hopes to simply list its shares on the New York Stock Exchange without bothering with (or paying for) the rigmarole of having an investment bank set up an IPO. That carries some risks for Spotify, since its share price would immediately be set by the market, whereas an investment bank would work with investors to set the initial price and would likely have buyers lined up in advance. 

Still, with 60 million paying subscribers, Spotify is in a pretty good position to do what it wants. Its continued success in the crowded field of streaming music where competitors include Amazon, Apple, and Google, remains impressive. Spotify execs met with Security and Exchange officials to discuss its unusual plan and lobby for their approval. The company will also need a rules change from the NYSE before it can go forward. There’s a pretty good chance that both will be forthcoming next year. If that doesn’t happen, Spotify may change its mind and go the usual route. Stay tuned.

4. WeWork

Valuation: $20 billion

“One thing we’re not afraid of is going public,” WeWork CEO told Fortune back in July. Back then, there was a flurry of speculation that the coworking company would soon have an IPO but so far that hasn’t materialized. Instead, the company raised yet another round of funding, bringing its valuation to $20 billion. It used that money to expand into Asia and Latin America

WeWork has 120,000 members and revenues of about $1 billion a year, so it’s in a good position for an IPO. As GOBankingRates puts it: “WeWork is going public–we just don’t know when.”

5. Buzzfeed

Valuation: $1.7 billion

Buzzfeed seemed all set to go public in 2018–but now it looks like it will miss its revenue target for 2017 by 15 to 20 percent. That may mean that the media company’s hopes for an IPO next year may have to wait. 

Buzzfeed says it is growing both revenue and visitors to its site,which should be good news for investors. But the growth led to higher costs, and in the digital media industry, ad prices are notoriously low, leaving thin profit margins. So increased costs–and especially missing revenue targets–could be an ominous sign. Still, Buzzfeed has a total audience of $650 million and the site has been profitable. So you never know, it might still happen.

Indian telecom regulator recommends rules in support of net neutrality

MUMBAI (Reuters) – India’s telecom regulator on Tuesday recommended explicit restrictions on any discrimination in internet access as part of its much-awaited recommendations on net neutrality.

The Telecom Regulatory Authority of India (TRAI) said it was not in favor of any “discriminatory treatment” with data, including blocking, slowing or offering preferential speeds or treatment to any content.

In February 2016, TRAI ruled in favor of net neutrality by prohibiting discriminatory tariffs for data after an extended campaign by internet activists, who argued that Facebook’s Free Basics platform and other offerings by Indian telecom companies violated net neutrality principles.

Reporting by Rahul Bhatia

Our Standards:The Thomson Reuters Trust Principles.

This 11% Yielding, Fast-Growing Stock Is Killing It, But There's A Catch

Residential mREITs are one of the hardest high-yield industries to do well in over the long-term, which is why I generally avoid owning them.

However, I’ve made an exception with New Residential Investment Corp. (NRZ), because of its highly profitable niche, which means that it’s thriving in a challenging market environment that is grinding down its peers.

Let’s take a look at how NRZ is capable of delivering blow-out growth quarter after quarter, as well as impressive book value and dividend growth.

More importantly however find out why NRZ remains a high-risk stock, and one that I’ll be trimming substantially before the next recession when a combination of factors could put the dividend at risk of a severe cut.

Fortunately, there are several key trends you can watch to help minimize the chances of being caught unawares when the next economic downturn strikes.

Another Blowout Quarter From A World-Class Management Team

New Residential Investment Corp. was spun out of Fortress Investment Group back in 2013, and since then has been one of the fastest growing residential mREITs in the country especially compared to more traditional peers such as Annaly Capital (NLY) and AGNC Investment Corp. (AGNC).

Chart

NRZ Revenue (TTM) data by YCharts

The key to this torrid growth has been the niche nature of its business model, which is essentially a hedge fund that specializes in mortgage servicing rights (MSRs), excess MSRs, mortgage advances, and unsecured consumer debt.

As I’ll explain later, the nature of these loans is riskier than most traditional residential mREITs, but results in extremely high returns on investment.

Source: New Residential Investment presentation

Mortgage servicing is basically where a third party (non originator) owns the rights to service a mortgage, meaning collect payments from homeowners, as well as handles any delinquencies and foreclosure proceedings.

New Residential actually outsources this to several counterparties, including Ocwen Financial (OCN), which it recently bailed out in a $440 million deal that will greatly reduce its subservicing costs, and resulted in last quarter’s blow-out 100% earnings growth (due to a one-time accounting change).

However, this quarter, New Residential proved that its continued fast pace of new loan acquisitions can indeed continue an impressive growth rate, at least for now.

Metric Q3 YOY Change YTD YoY Change
Net Investment Income 46.6% 74.7%
Core Earnings 60.8% 88.8%
Shares Outstanding 28.2% 29.1%
Core EPS 25.4% 46.2%
Dividend 8.7% 7.2%
Core EPS Payout Ratio 77.6% 66.6%
Book Value Per Share 19.0% 14.4%

Source: Earnings release, YCharts

That’s because the overall markets in which New Residential operates are staggeringly large ($27.5 trillion), and thus pose a rich hunting ground for the top-notch management team to continue to find new and highly profitable investment opportunities.

This is precisely what New Residential has been doing with very steady large purchases of new servicing rights over the past few quarters.

In addition, New Residential has also been growing its call rights business, as well as its portfolio of unsecured consumer loans at a breakneck pace.

However, what truly stands out about New Residential’s business model is that unlike most residential mREITs, which are being hammered by a compressing yield curve (more on this later), and declining book value, NRZ’s loan portfolio is among the best suited to survive and prosper in a rising rate environment.

In fact, NRZ has seen its book value per share steadily rise over time, while rivals such as Annaly and AGNC have struggled with decreasing BVPS because higher rates decrease the value of their assets and a compressed yield curve makes it harder to replace maturing loans with equally profitable ones.

Chart

NRZ Book Value (Per Share) data by YCharts

The bottom line is that NRZ is experiencing a sweet spot in growth right now, where a combination of improving fundamentals are putting the growth winds at its back including:

  • Declining delinquency rates on its loans.
  • Rising value of its MSR assets (due to rising rates lowering debt prepayments).
  • Plentiful opportunities to grow its high-yield loan portfolio.
  • Steady and accelerating economic growth (helps keep delinquencies and defaults low).

This is why New Residential has been able to generate the industry’s best dividend growth record since its IPO.

And with earnings growth continuing to rise quickly, it’s likely that for as long as NRZ continues to bask in these positive fundamentals, investors may be looking forward to even more dividend growth in the years ahead.

However, while all these beneficial trends make NRZ one of the largest holdings in my high-yield retirement portfolio, there are nonetheless numerous pitfalls that still make this a high-risk stock, one that I plan to eventually trim substantially ahead of the next recession.

BUT Lots Of Risks To Keep In Mind

There are three major risks to keep in mind with New Residential that in my opinion make it a high risk stock, and why I plan to eventually lower my position (over time) to 2.5% of my portfolio.

The first is that this is essentially a hedge fund, where management pays itself first and foremost.

  • Base fee is 1.5% of gross equity, which it defines as the equity of the original spinoff, plus net proceeds of stock offerings (selling new shares).
  • Incentive fee of 25% of adjusted funds from operations (basically net interest income adjusted for asset sales), above a 10% growth hurdle rate.

Now I’m not necessarily opposed to management getting well paid for the kind of success we’ve seen so far. After all NRZ’s generous yield, and industry leading dividend growth have resulted in returns since its IPO that not only just crushed its larger peers but also handedly beat the market as well.

Chart

NRZ Total Return Price data by YCharts

However, the rate of management incentive pay has been growing even faster than either NII, Core EPS, or dividends.

  • Q3 2017 up 175% YOY
  • YTD 2017 up 446% YOY

Now it’s actually normal for management pay to increase this quickly, given the growth rate and rapid rise in shareholder equity (which boosts the base management fee).

In other words, because of how NRZ is structured (as a hedge fund paying itself 1.5% and 25%), management pay is likely to rise much faster than investor gains.

However, while this is less of an issue today, when growth is proceeding at a torrid pace, high management pay could well become a major growth headwind in the future.

Which brings me to the second biggest risk for the stock, replacing its maturing loan portfolios.

Remember that New Residential is basically a collection of loans, and those mature and roll off over time. That means that going forward NRZ’s growth will almost certainly slow as its asset base grows larger (harder to grow quickly once you get to a certain size), and proportion of maturing loans rises over time.

For example, take the mREIT’s most successful investment, the SpringCastle portfolio of unsecured consumer debt.

NRZ has been able to generate astonishing 89% returns on this portfolio because since it purchased the risky loans (at great prices), the strong economy has caused the charge-off rate to fall 50%.

However, newer consumer loans, while still highly lucrative, have been far less impressive.

NRZ Prosper Portfolio

For example, NRZ’s Prosper portfolio of peer-to-peer loans has only generated 20% returns so far.

Combined with the fact that management has said it’s passing on a growing number of MSR deals, and it may very well be that the same improving economic conditions that are benefitting NRZ’s book value right now, is making it harder for management to find sufficiently profitable deals to keep the growth rate at today’s high levels.

That’s especially true given that NRZ has always been focused on riskier loans, with a focus on smaller sizes, lower FICO scores, and older loans (that will mature faster).

In addition we can’t forget that NRZ’s access to growth capital has been greatly aided by the fact that its shares have historically traded at a premium to book value.

Chart

NRZ Price to Book Value data by YCharts

A premium to book value basically means the market is valuing the company for more than the value of its loan portfolio, which is a strong endorsement of management’s skill.

For example, with shares currently trading at 20% above book value, it means that shareholders are saying that each $1 in NRZ assets they buy will be worth at least $1.20 later, because of confidence that management will continue executing well on its long-term growth strategy.

Or to put another way, at the current share price, NRZ is able to effectively print free money ($0.17 per $1 in shares sold) with which to invest in its highly profitable loans.

However, as you can see, at times fickle investor sentiment means that NRZ’s shares sometimes trade below book value, meaning that any shares sold at those times (to raise equity growth capital) will be destructive to shareholder value.

The bottom line is that NRZ is a highly complex, “black box” of a financial company, which has so far enjoyed stupendous growth courtesy of excellent investments by management, but also a steady, long, and accelerating economic recovery.

And as its loans mature, there is a large risk that management will find it much harder to invest as profitably as in the past without taking on a larger amount of credit risk that could blow up in its face come the next recession (more on this in a moment).

Payout Profile Is POTENTIALLY Great, But Highly Uncertain

Stock Yield YTD Payout Ratio 10 Year Projected Dividend Growth 10 Year Potential Total Return
New Residential Investment Corp 11.2% 66.6% -5% to 5% 6.2% to 16.2%
S&P 500 1.9% 44.5% 6.1% 8.0%

Sources: GuruFocus, Fast Graphs, CSImarketing, Multpl.com

The only reason for owning any high-yield stock is ultimately the payout profile, meaning a combination of: yield, dividend security, and long-term growth prospects.

My goal as an investor is to avoid dividend cuts whenever possible, including during recessions. This makes mREITs a highly challenging industry because even the best mREITs, both residential and commercial, have a poor history of maintaining steady dividends during economic downturns.

Chart

NLY Dividend data by YCharts

This is why I’m planning on eventually reducing my holding of NRZ to 2.5% of my portfolio, which is my targeted position size for high-risk stocks, meaning those whose dividends I’m uncertain can survive the next recession.

The high risk is also a function of the unpredictability of NRZ’s underlying business model, one in which it’s impossible to predict how profitable the company’s future loans will be.

That means that the variability in the long-term dividend growth rate is very wide. In fact, I estimate that over the next decade, NRZ’s CAGR payout could vary anywhere from -5% (bad recession) to 5% (no recession). Analyst consensus is basically for the midrange of that estimate, at 1%.

Or to put another way, NRZ’s highly uncertain dividend growth rate means that its total returns could be anywhere from 6.2% (market loser) to 16.2% (double the market’s likely return from current valuations).

Valuation Is Reasonable… Maybe

Chart

NRZ Total Return Price data by YCharts

Over the past year, NRZ has crushed the market, which isn’t surprising given Wall Street’s love of fast growth. However, that means that NRZ is far from a deal today.

Price/Book Value Historical P/BV Yield Historical Yield Percentage Of Time Since IPO Yield Has Been Higher
1.20 1.18 11.2% 11.2% 62.6%

Sources: GuruFocus, Yieldchart

I like to value mREITs on two main metrics, the price to book value and yield, both on an absolute basis and relative to historical norms.

Today NRZ is trading right smack in the middle of its historical price to book value and yield ranges, meaning that shares are likely fairly valued.

However, note that the yield has been higher than today’s 62.6% of the time since its IPO, indicating that if you’re patient, you can likely get a better price and higher yield.

Of course, that’s assuming you are comfortable with owning a high-risk mREIT at all, because it’s extremely challenging to model the intrinsic value of this company.

Forward Dividend 10 Year Projected Dividend Growth Projected Dividend Growth Years 11-20 Fair Value Estimate Dividend Growth Baked Into Current Price Discount To Fair Value
$2.00 -5% (bearish case) 0% $13.39 -0.4% -33%
0% (likely case) 0% $18.26 -0.4% 2%
5% (best case) 5% $27.64 -1.6% 35%

Sources: GuruFocus, Fast Graphs

For example, with high-yield stocks like this, I generally like to determine intrinsic value based on a discounted dividend growth model.

That means using a 9.0% discount rate (historically the post expense CAGR return on an S&P 500 index ETF since 1871, and thus the opportunity cost of money) to determine the net present value of a stock’s future (20-year) dividend flow.

Of course because NRZ’s business model is highly unpredictable that means we get a huge variance in estimated fair values, ranging from $13.39 in a bearish scenario (33% overvalued) to $27.64 (35% undervalued) assuming that management can maintain strong dividend growth over time.

The likely case, at least according to analysts, is for NRZ to basically maintain a flat payout over time, which means its shares are fairly priced today.

However, remember that any valuation model is a best guess at future earnings and payouts. That means that any fair value estimate is always a moving target, one that’s adjusted as actual results come in.

Which brings me to the biggest risk for NRZ, a recession, and how I plan to not just reduce my position before that happens, but how I plan to recognize when the next downturn is likely on its way.

Winter Is Coming So Be Prepared

I view residential mREITs, including New Residential Investment Corp., as mostly “fair weather economic friends” meaning that a recession is likely to wreak havoc on earnings due to rising loan delinquencies and outright defaults.

That means that investors need to manage their risk when it comes to how large a percentage of your portfolio any stock is, based on its dividend risk profile.

  • Low risk (dividend likely safe and growing for at least 5+ years): 10% max size (core holdings)
  • Medium risk (dividend likely safe for two to three years): 5% max size
  • High-risk (dividend likely safe for one year): 2.5% max size

That’s how I think of dividend risk, and the long-term plan I have for right sizing my position sizes to adjust for long-term risk to the dividend.

Now I’m gradually updating my portfolio (as one must do in a rapidly evolving world), which means that today NRZ is about 10% of my holdings and about 4X overweight.

However, given the strong fundamentals so far, and the fact that the growth winds remain at NRZ’s back for now, and as long as the economy keeps growing, there is no need to run out and immediately sell 75% of my position.

Rather my plan for trimming NRZ down to an appropriate size is based on my best guesstimate of when the economy will peak.

Of course this is very hard to do in real life, which is why the common joke is that economists have predicted nine of the last five recessions.

Which means that rather than simply “ringing a bell at the top,” I’m focused not so much on any individual economic metrics, but longer-term trends of several key metrics.

The first is the yield curve, specifically the 2- and 10-Year US Treasury spread.

An inverted 2-10 curve, meaning that 2-year US bonds yield more than 10-year bonds, has “predicted” five of the last recessions (going back to 1976), with an average lead time of 12 to 24 months.

Of course in reality things aren’t that simple or clear cut. Basically the idea behind a yield curve inversion is twofold.

First, because bonds markets are largely a long-term vote by investors on future economic growth and inflation, if a short-term bond yields equal or more than a long-term bond, it basically means that bond investors are expecting little or no economic growth or inflation in the future.

In other words, there is no risk premium for owning longer duration bonds (tying up your money for longer) because bond investors are bearish on growth and potentially expecting inflation to remain flat or even potentially negative.

Fundamentally there is also a plausible reason that an inverted yield curve can potentially signal a recession.

That’s because financial companies, such as banks or mREITs effectively borrow at short-term rates, to invest in longer-duration assets. The spread between these is where profits are generated.

Which means that if the yield curve is steep, banks and other financial institutions have large incentives to do brisk business, such as loan to consumers and businesses (or buy mortgage backed securities and thus help fund the housing market).

However, if the curve inverts, then financial companies can’t make a profit, then loans dry up, credit slows or shrinks, and consumer and business spending ends up declining; potentially triggering a recession.

So those are the basic theories behind the yield curve and why it’s worth watching. However, keep in mind that while the correlation between inverted yield curves and recessions is strong, that doesn’t necessarily mean that the causation is real.

For example, the US has had 47 recessions or depressions since its founding, or an average of one every 5.1 years. Thanks to greater involvement by the Federal Reserve, this has now increased to about a recession every 8 to 10 years.

However, with a one- to two-year lead time, it’s possible that the yield curve’s predictive power is potentially overstated (since it covers a relatively large amount of time).

Source: St. Louis Federal Reserve

That being said, I do consider the yield curve to be worth watching, and since the start of the year (when optimism about reflation and faster economic growth was at its peak), it has been steadily declining.

Going forward, the Fed’s accelerating roll-off of its balance sheet should help to push up long-term rates (due to less Fed buying of long-term mortgage and US Treasury bonds), however, that could be offset by up to six rate hikes the Fed is currently planning through the end of 2019.

While short-term rates aren’t directly controlled by the Fed (it only raises and lowers the Fed Funds rate which is the overnight interbank lending rate), the Fed’s rate hikes do have an indirect effect on borrowing rates because they are one of the benchmarks used by financial institutions for determining what rates they lend at.

In other words, the current yield curve trend, while troubling, is far from spelling economic doom anytime soon.

Of course trying to predict something as complicated as economic growth and recessions requires more than just a single metric. Which is why I’m also looking at a meta analysis of leading economic indicators, which is tracked brilliantly by Jeff Miller in his weekly market/economic updates.

Currently the economic outlook is largely positive, with economic data, according to the New York and Atlanta Feds, signaling accelerating economic growth. Meanwhile the three- and nine-month recession risk of about 4.4% and 15%, respectively.

While no economic model, including the Atlanta and New York Feds’ is perfect, should US economic growth indeed come in at 3.4% to 3.7% in Q4 that would mark the first time since 2004 that the US has seen three consecutive quarters of economic growth.

What’s more, the growth rate in all three quarters would be accelerating indicating a potentially very positive trend.

That’s especially true given that the labor market remains strong, and eventually, wage growth should start to rise faster than the 2.5% YOY pace we’ve seen most of this year.

Higher wages with muted inflation would mean stronger real purchasing power and could further boost consumer spending and economic growth, as might tax reform (about 0.3% by most analyst estimates).

Add to this numerous other positive trends and you have the potential for economic growth to continue for quite some time:

  • The continued strength in consumer and business confidence (highest since 2000).
  • The fact that 75% of major world economies are now growing simultaneously.
  • S&P 500 earnings forecast to grow 9.5% this year, and 11.1% next year (without tax reform that would add about 8% to that figure) which could keep the bull market (and wealth affect) running for a few more years

The bottom line for recession risk is that chances of a near time economic downturn are far lower than most would think, given the length of this economic recovery.

That being said, any given data point is just a snapshot in time so it’s important to keep in mind the longer-term trends of these metrics.

So how exactly do I plan to use a holistic approach to watching economic trends to time my trimming of my NRZ position in the future?

  • If yield curve inverts, sell 25% of my position
  • When nine-month recession risk hits 33%, sell 25%
  • When nine-month recession risk hits 50%, sell final 25%

Now these are somewhat arbitrary exit points, and everyone needs to manage their portfolio risk in whatever way they are most comfortable.

However, I believe that the above plan will maximize the chances of reducing my position in NRZ to an appropriate risk-adjusted size for my goals, and do so long before the next recession strikes (whenever that may be).

Bottom Line: New Residential Is Literally The Best At What It Does, But This Stock Is A High Risk Black Box That Will Likely Work Until It Doesn’t

Don’t get me wrong, when it comes to residential mREITs, literally no one does it better than New Residential Investment Corp. The highly profitable niche that management has proven itself an expert in makes it by far the most appealing choice in this high-risk industry.

But that doesn’t change the fact that NRZ is still a high-risk dividend stock, one that should only make up a small to modest position in a very well diversified high-yield portfolio.

Because, while the current risk of a near-term recession is low, at some point one will invariably strike, and at that time, the last thing you want to do is be overly exposed to a highly risky dividend that may end up getting slashed.

Disclosure: I am/we are long NRZ.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Why I Just Sold Half Of My Bitcoin

I am a believer in the long-term value of blockchain technology. I also think that cryptocurrency is here to stay, though the value of it will continue to fluctuate. I do not think Bitcoin (OTCQX:GBTC) is comparable with tulip mania. I strongly suspect that the current banking system will be circumvented at an increasing rate in the future, thanks to cryptocurrency and the innovations being created thanks to it. But I just sold half of my investment in Bitcoin. In this article I will explain why.

Some background about myself

I have been an owner of a very small amount of Bitcoin since 2013. I bought them on a whim, after a sudden drop in price. In one of my previous articles about Bitcoin, I have stated that I was never comfortable with the volatility of cryptocurrencies. In my investing experience, I tend to focus on stable, dividend-growing companies. Bitcoin was truly an investment which was outside of my regular investing spectrum.

Still, I was committed for the long term. I wanted to hold Bitcoin because I thought (and still think) there is much future value in cryptocurrency. So let me explain why I recently changed my mind.

Reason #1: The forks are like stock splits of the 90s all over again

Crypto forks are a lot like stock splits. Instead of one share splitting in 2 or more of exactly the same shares, a cryptocurrency splits in 2 separate types of entities. Logically, the value of the pre-fork currency should be the same as the value of the two post-fork currencies. But recently, forks are said to be boosting the price of Bitcoin; some people even call the forks a type of dividend. This is ridiculous.

During the fully-fledged stock market bubble in the 90s, companies were often not hesitant in using stock splits. During this bubble, many people were stock picking, and companies viewed stock splits as a way to keep shares affordable for small investors. Though they did not change underlying value, these stock splits often generated excitement and a short-term price surge for the companies involved.

Cryptocurrency forks have a drawback which stock splits do not have: they complicate everything. One year ago, a Bitcoin investor would just own their Bitcoin. If he continued to hold this Bitcoin, he currently would also have Bitcoin Cash and Bitcoin Gold, not to mention all the potential forks which could happen in the future. Not all of these forked-off cryptocurrency is supported by the same wallets, and though they all have a quoted value on exchanges, it is sometimes not easy to trade them.

Reason #2: Bitcoin is technologically inferior compared to other cryptos

I always argued that Bitcoin is so popular compared to other cryptos because it is still profiting from its first mover advantage on the cryptocurrency market. This could be valid at the moment, and it might also still be the case in a few years. Maybe even in a few decades if Bitcoin can consolidate its position as the gold standard of crypto. I am far from sure about this, though. Many other cryptocurrencies are much better in a technological sense, and it would need many Bitcoin forks or innovations to make up for that difference. One of the most glaring problems of Bitcoin is that its mining process unnecessarily consumes an extreme amount of electricity.

A brief overview of some cryptocurrencies which are better than Bitcoin in their niches:

– Litecoin is basically a more efficient version of Bitcoin with regard to financial transactions
– Ethereum is suitable for smart contract or distributed applications
– Zcash is more secure than Bitcoin
– Ripple is a quick and efficient way of payment, which does not need mining and consumes little computing power
– Monero is a secure, private and untraceable way of transferring money

Bitcoin only has their first mover advantage to compete with these and many other cryptocurrencies. Though Bitcoin becoming the gold standard of cryptocurrency looks like an attractive future for it, I am getting more and more doubtful that this will be enough to thrive in the future. I simply feel I have too much trouble picking winners in the cryptocurrency world.

Reason #3: The late majority starts becoming enthusiastic

This is not a very straightforward argument, albeit my most important one and the reason which finally tipped the balance and made me sell half of my Bitcoin. It also seems counterintuitive: if a part of the population becomes enthusiastic, this would rather be reason for optimism, right?

Let me first explain what I mean with late majority. The adoption of almost every technology happens in phases, which are characterized by specific types of people which start using a technology. After the birth of a specific technology, people who start using it quickly are called innovators. They have a higher risk tolerance than other parts of the population and are not afraid to try new things. After the innovators, the early adopters start using a technology. Early adopters generally have a high degree of opinion leadership, which means that their opinion is held in high esteem by other parts of the population. Though they are more discrete with their adoption choices than innovators, they generally have a larger influence on the general population. The early majority and late majority are by far the biggest part of the population. These people generally start adopting a new technology if it has proven their worth to people before them, and are less likely to try new things straight away. A difference between the early and the late majority is that the latter is usually more skeptic about an innovation. Last to adopt are the laggards, which are usually characterized by a big aversion to change and focus on traditions. They are least likely to adopt a new innovation quickly.

In the graph below, you can see a depiction of the market share and the proportions of the population with regard to technological adoption.

laggards

Source: Rogers: Diffusion of innovations

When applying this theory to Bitcoin, we should adopt it a bit: I do not think that Bitcoin ever will achieve a 100% adoption rate among the population; but instead, a 100% adoption rate means everyone who is willing to adopt it did it. I would use a notion of awareness here: only a part of the population will start using Bitcoin or cryptocurrency, so I will consider ‘adoption’ to be an active decision to use it or not.

Innovators in the Bitcoin adoption process are for instance the early miners and developers which have invested in it from the beginning. Early adopters are people who started investing in it shortly after the innovators. I believe the early majority started to get interested in Bitcoin during the last year. Public knowledge and media coverage of Bitcoin reached a much higher gear since then: the late majority might be joining in right now.

But this is good news, right? Well, history often proves otherwise. Many a stock market crash was preceded by relatively inexperienced investors joining in. Though tulip mania is in many ways not comparable at all with Bitcoin, here the market crash also happened after regular folks started getting involved in the tulip trade. Therefore, I usually get nervous when I see all sheep are moving in the same direction.

There are definitely signs that we are reaching the late majority at this moment:
– I don’t know about you, but in my surroundings more and more people are starting to talk about Bitcoin or cryptocurrency. These include people who admit themselves that they know very little about it. I always get suspicious when these things happen: these are not the early adopters, this might be the late majority joining in.
– Big media start focusing ever more attention on Bitcoin: The Big Bang Theory will air an episode named ‘The Bitcoin Entanglement’ in which Bitcoin will play a major role. It will air on the 30th of November. Also, a family from my home country The Netherlands which sold all their possessions and invested all their money in Bitcoin has been getting quite some attention in the media lately.
– The hype cycle of innovation also shows that we are likely at or around the peak of inflated expectations with regard to cryptocurrency.

Reason #4: I am happy with my returns

Wait, let me rephrase this: I am extremely happy with my returns. This has been an extraordinary journey, one which has resulted in a profit of more than 1200% over the course of 4 years, or 90% annually. I’m fully aware that I will likely never achieve such returns again. I started out with Bitcoin being a very insignificant part of my investments, which eventually grew to a part which was too large to be insignificant. Let me just say that as a buy and hold investor, if your crypto holdings grow to be larger than your largest stock position, it is probably wise to re-balance. I am happy with my returns and sold half of it.

I am not renouncing ever adding to my Bitcoin position or any other cryptocurrency altogether. If there is going to be a big correction, I will be ready to step in again. I am fully aware that this big correction could never happen and I might slap myself in my face in a couple of years for selling now. So be it. I will still profit from the other half which I have left.

I’m not calling the top of the Bitcoin price. I am neither saying it is certainly a bubble, though it might very well be. Still I sold half, and I am considering to sell the rest of my Bitcoin holdings as well if I get more signs that the late majority of the people have joined the party. But it would be a goodbye, not a farewell.

Thank you for reading, please tell me what you think about my reasons for selling Bitcoin below! If you have any opinion about the other half of my holdings, please let me know as well. If you liked this article please click the “Follow” button next to my name.

Disclosure: I am/we are long BITCOIN.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Black Friday, Thanksgiving online sales climb to record high

CHICAGO (Reuters) – Black Friday and Thanksgiving online sales in the United States surged to record highs as shoppers bagged deep discounts and bought more on their mobile devices, heralding a promising start to the key holiday season, according to retail analytics firms.

Customers push their shopping carts after making a purchase at Target in Chicago, Illinois. REUTERS/Kamil Krzaczynski

U.S. retailers raked in a record $7.9 billion in online sales on Black Friday and Thanksgiving, up 17.9 percent from a year ago, according to Adobe Analytics, which measures transactions at the largest 100 U.S. web retailers, on Saturday.

Adobe said Cyber Monday is expected to drive $6.6 billion in internet sales, which would make it the largest U.S. online shopping day in history.

In the run-up to the holiday weekend, traditional retailers invested heavily in improving their websites and bulking up delivery options, preempting a decline in visits to brick-and-mortar stores. Several chains tightened store inventories as well, to ward off any post-holiday liquidation that would weigh on profits.

TVs, laptops, toys and gaming consoles – particularly the PlayStation 4 – were among the most heavily discounted and the biggest sellers, according to retail analysts and consultants.

Commerce marketing firm Criteo said 40 percent of Black Friday online purchases were made on mobile phones, up from 29 percent last year.

No brick-and-mortar sales data for Thanksgiving or Black Friday was immediately available, but Reuters reporters and industry analysts noted anecdotal signs of muted activity – fewer cars in mall parking lots, shoppers leaving stores without purchases in hand.

People shop for items in Macy’s Herald Square in Manhattan, New York. REUTERS/Andrew Kelly

Stores offered heavy discounts, creative gimmicks and free gifts to draw bargain hunters out of their homes, but some shoppers said they were just browsing the merchandise, reserving their cash for internet purchases. There was little evidence of the delirious shopper frenzy customary of Black Fridays from past years.

However, retail research firm ShopperTrak said store traffic fell less than 1 percent on Black Friday, bucking industry predictions of a sharper decline.

A cashier handles money in Macy’s Herald Square in Manhattan, New York. REUTERS/Andrew Kelly

“There has been a significant amount of debate surrounding the shifting importance of brick-and-mortar retail,” Brian Field, ShopperTrak’s senior director of advisory services, said.

“The fact that shopper visits remained intact on Black Friday illustrates that physical retail is still highly relevant and when done right, it is profitable.”

The National Retail Federation (NRF), which had predicted strong holiday sales helped by rising consumer confidence, said on Friday that fair weather across much of the nation had also helped draw shoppers into stores.

The NRF, whose overall industry sales data is closely watched each year, is scheduled to release Thanksgiving, Black Friday and Cyber Monday sales numbers on Tuesday.

U.S. consumer confidence has been strengthening over this past year, due to a labor market that is churning out jobs, rising home prices and stock markets that are hovering at record highs.

Reporting by Richa NaiduEditing by Marguerita Choy

Our Standards:The Thomson Reuters Trust Principles.

U.S. prosecutors' letter spurred orders in self-driving car lawsuit

SAN FRANCISCO (Reuters) – The judge overseeing a lawsuit between Uber Technologies Inc [UBER.UL] and Alphabet Inc’s (GOOGL.O) Waymo self-driving car unit issued a series of orders this week, prompted by information shared with him by the U.S. Department of Justice.

FILE PHOTO: The Uber logo is seen on a screen in Singapore August 4, 2017. REUTERS/Thomas White/File Picture

U.S. District Judge William Alsup in San Francisco disclosed on Wednesday that he had received a letter from Justice Department attorneys about the case, which is set for trial in December. The judge did not reveal the letter’s contents.

However, Alsup issued two subsequent orders, including one on Saturday, that discussed some details. He ordered Uber to make three witnesses, including a former Uber security analyst and a company attorney, available to testify on Tuesday at a final pretrial hearing. Trial is scheduled to begin on Dec. 4.

It is unusual for the Justice Department to share information with a judge days before a civil case is set to begin.

Earlier this year Alsup, who is hearing the civil action brought by Waymo, asked federal prosecutors to investigate whether criminal theft of trade secrets had occurred. That probe is being handled by the intellectual property unit of the Northern California U.S. Attorney’s office, sources familiar with the situation said. No charges have been filed.

Representatives for Waymo, Uber and the Justice Department declined to comment. The former Uber security analyst could not be reached for comment.

FILE PHOTO: The Waymo logo is displayed during the North American International Auto Show in Detroit, Michigan, U.S., January 8, 2017. REUTERS/Brendan McDermid/File Picture

Waymo sued Uber in February, claiming that former Waymo executive Anthony Levandowski downloaded more than 14,000 confidential files before leaving to set up a self-driving truck company, called Otto, which Uber acquired soon after.

Uber denied using any of Waymo’s trade secrets. Levandowski has declined to answer questions about the allegations, citing constitutional protections against self-incrimination.

Since the case began, Uber said its personnel have spent thousands of hours scouring its servers and other communications devices but have not found Waymo trade secrets.

In an order on Friday, Alsup referred to a former Uber security analyst in connection with the letter from the U.S. Attorney’s office and to certain “devices” the former employee said were maintained by Uber.

Alsup asked Uber to disclose whether it had searched those devices for relevant evidence in the case.

Reuters is part of a media coalition seeking to maintain public access to the trial.

Reporting by Dan Levine; Editing by Sue Horton and Marguerita Choy

Our Standards:The Thomson Reuters Trust Principles.