What’s In Your Rip Van Winkle Wallet?

By Rob McCreary

I have always been intrigued with the idea of a portfolio of assets you can sleep on for twenty years. In fact, it is probably a pretty good way to think about how you should invest.

To refresh memories, recall that Rip Van Winkle was the creation of Washington Irving. He was a pre- American Revolution Dutch farmer who was both lazy and hen pecked. As the story goes, he meets a bearded man wearing antiquated Dutch clothing who is struggling with a keg of beer. Rip helps him carry the keg up a hill and finds himself among a cohort of bearded men playing nine-pins. Rip joins in the fun and then wakes up 20 years later and finds the colonies have become a nation.

If Rip were around today, and knowing that he was prone to long comas after a pint too many, he would be besieged by his brokers from TD Ameritrade or Goldman Sachs to put all of his money in front end load products of indefinite duration. Knowing Rip is a student of all markets and observing this chart that overlays the rise of the S&P 500 to M-2 (a recognized proxy for liquidity that includes cash, checking accounts and near cash like money markets) what would he do with $5 million if he had to pick no more than 5 investments:



A Condo In Aspen

His first million might go for exclusive real estate- a pied a terre in Paris, an apartment in NYC, a ski chalet in Aspen or a summer house on Nantucket. Unfortunately, these real estate ideas all cost more than a million bucks and would all require lots of debt and Rip knows he is going to default on that loan and lose his equity. He ends up looking at a condo in Myrtle Beach for $700,000 with $300,000 in a maintenance, repair, taxes and insurance fund to carry the property for 20 years.

A Bullet Proof Bond

A sure bet should be US Treasury Bonds. He can buy a 30-year bond that will yield 3.0% backed by the full faith and credit of The United States Government, but he is a little bit unnerved about the high amount of National debt ($21 Trillion) and the high and growing Debt to GDP. Japan’s balance sheet looks even worse so his only real choices are long term bonds issued by Germany and Switzerland. Germany with a low yield of 1.23% is preferable because the Swiss 30-year bond offers only 0.635%. In fact, the yield on the Swiss 10-year bond has been negative which offends a Dutchman like Rip who does not think you should ever pay someone an annual fee just to return principal.

An ETF For the Ages

Rip is hip and he understands that active managers are blood suckers. He is just about to choose SPY, a low fee ETF that mimics the S&P 500 but then he remembers the chart above that shows an alarming correlation between the slope of creation of liquidity and the amazing ascent of the S&P 500. He also worries the market as a whole might fall if central bank liquidity really goes towards repaying debts rather than supporting the stock market and all other asset classes. He also remembers the crash and the long slumber the Japanese Nikeii has endured since 1991 under similar conditions. Instead he gets really interested in algorithmic robo advisers like Betterment with the hope that artificial intelligence will replace human stock picking over his long slumber.

Private Equity

Rip is friends with a few people in the private equity business and he understands from his pals at Cambridge Associates that PE performance has been exceptional over the last 20 years. He likes the idea of owning a portfolio of operating businesses. He is a little leery of the high reliance on borrowed money and the nosebleed valuations. He is also a little concerned about a 20-year commitment at this point in the economic cycle and he is not sure about splitting 20% of the profits with the managers.


Rip does not understand Bitcoin or the Blockchain Technology but being a Dutchman, he remembers 1630 and speculation in tulip bulbs called tulip mania. He is intrigued about owning an alternative to fiat currencies, but Bitcoin is just a little too speculative.

Physical Assets

Commodities, gold, silver, diamonds, art, raw land, forests, wine, coal mines in West Virginia- these are all possibilities, especially getting a coal mine on the cheap. In fact, the idea of buying farmland in upstate New York instead of a condo in Myrtle Beach and burying gold and silver rather than buying German bonds is pretty appealing. He probably will not grow his $5.0 million, but he probably won’t lose it all either.


Rip’s Lament

Rip is embarrassed to tell his investment advisors he is buying land and burying gold. There are pages and pages of completely liquid and highly rated investment products festooning the pages of The Wall Street Journal and Barron’s. Many of these have small investment fees and expenses. There are also highly respected asset managers with eye popping investment performance over the last 10 years who charge high fees but are probably worth it.

Rip is just concerned the conditions under which long term investments are made must be relatively stable and predictable. For a Rip Van Winkle portfolio to work you need constancy. That word would not describe Black Monday or the Tech Bubble or the credit induced real estate mania of the BIG Recession in 2008. Nor would it characterize its liquidity induced recovery. Shovel ready led to QE1 and, even though things were improving, to QE 2 and then QE3 and now a Trump tax cut. The bad actors in all of this are the Congress and the devil children from The Federal Reserve Bank.

They have good company. According to the International Monetary Fund Central Banks all over the world have manufactured more than $200 Trillion of debt and many central banks are taking unconventional approaches to managing their economies. For example, the Bank of Japan is openly buying ETFs to boost the Japanese stock market as part of Abenomics and the Swiss central bank is running a sovereign wealth fund. What happens when they run out of money?

Rob McCrearyWhat’s In Your Rip Van Winkle Wallet?

A Double Whammy For LBOs

By Rob McCreary

Since the end of last year, the three-month London interbank offered rate, known as LIBOR, has increased to 2.32% from 1.69%. LIBOR measures the cost for banks to lend to one another and is used to set interest rates on roughly $200 trillion in dollar-based financial contracts globally, including almost all LBO financing.  Throughout most of my career, 3 month LIBOR has been falling from almost 10% in 1989 to less than 1% in 2015.  Since then, it has inched forward, but recently has accelerated.  We typically borrow for our businesses at LIBOR + 350.  In 2015 that meant 3.8 %.  Today it is 5.8%.

Six Times Leverage Is Common

A majority of the buyout financing is variable rate debt priced off LIBOR.  Since the debt has been cheap, there is also a continuation of the trend by private equity firms to use more and more debt in the capital structures. Here is a chart from The Wall Street Journal Daily Shot on April 2 showing the rising amount of debt in the LBO capital structure.   Notice that more than 50% of the deals have greater than 6x leverage:

Trump Tax Reform May Hurt The Model

It is still uncertain whether Trump corporate rate cuts will compensate for the rising interest expense.  Also, for the first time in my career, the new tax law imposes limitations on the deductibility of interest in highly leveraged capital structures. That provision limits interest deductibility to no more than 30% of EBITDA. If you run a financial model on a $50 million EBITDA business that has 6x leverage ($300 million debt) at a blended rate of 8% that would mean $24.0 million of annual interest expense against a 30% annual deductibility limit of $15.0 million. $9.0 million of interest would not be deductible and taxable income for the LBO company would increase by $9.0 million. Even though corporate rates are now lower (21% vs 34%) it won’t take long before the net cash to pay principal will be worse than before tax reform.

This is mostly because, the deductibility of LBO interest will fall again in 2021 when the 30% limitation is applied to EBIT (a much smaller number) not EBITDA.  There is also a risk of large disallowances for cyclical companies whose earnings fall dramatically.

Valuations May Fall

The bottom line for leveraged buyouts is less taxpayer subsidy, less cash flow, and, maybe, a corresponding decrease in valuations? For the entire period I have been involved in leveraged buyouts since 1999 ,100% of the interest expense has been deductible. Leverage has been encouraged and rewarded.

Rising interest rates and limits on deductibility of interest are major changes in our business model and it comes just as interest rates are rising for the first time since 1982. A recent study by Goldman Sachs confirms my concern. They have demonstrated that shares of 50 public companies whose floating rate bonds account for more than 5% of their total debt have lost 5% of their market value through March of 2018 compared to an overall index decline of 1%. This report is confirmed by The Wall Street Journal Daily Shot which shows this trend for Kraft and General Mills (high amount of variable rate debt)compared to the SPX and Black & Decker.


If the variable rate is a major valuation concern for  public companies with small exposure, what does it portend for private equity firms with 10x the variable debt exposure?  The public markets are signaling that variable rate debt is now an enduring valuation issue.  When interest on LBO debt may be a non-deductible as well you may see the first valuation “double whammy” in a long time.  The debt magic may be done.

Rob McCrearyA Double Whammy For LBOs

New Variables For The Debt Debate

By Rob McCreary

I have written several blogs over the last six months about the national debt and how it may challenge many assumptions about the American economy as well as the American way of life. I am writing again because those challenges just became more imminent.

To refresh the facts this is a picture of our national debt:

This is a chart that shows the change in interest rates for the 10 year Treasury from 2016 to today:


The latest report from the US Treasury for the fiscal year ended 2017 suggests that the primary deficit ( not including interest on US debt as an expense) will shrink through 2021. Thereafter it will accelerate with the US Treasury concluding that the “debt-to-GDP ratio after 2026 indicates the current fiscal policy is unsustainable.”

From my point of view this prediction just got worse in light of two new variables that were not considered when the 2017 Annual Report was created:

  1. Tax reform makes revenue significantly less in 2018 and beyond so the primary deficit will be worse and the prediction of declines until 2021 is probably off the table?
  2. Interest rates on re-fundings of US Debt are rising and are likely to increase throughout 2018.
  3. So, the primary debt (before interest) will be worse than predicted and the total annual deficit (including interest payments) will be dramatically worse.

The Annual Report says that interest payments account for 6% of the $4.5 Trillion of costs or $270 Billion annually. There is no footnote suggesting the interest rate assumption but $270 Billion is about 1.3% of the $21 Trillion. This is an amazingly low cost of funding compared to the average interest rate on the 10-year treasury has been 6.23% since January of 1962.

Trump politics have made things worse. The prospect of Democrats controlling both houses of Congress and legislating more of a welfare state should scare anyone who can multiply.

Rob McCrearyNew Variables For The Debt Debate

Financial Literacy And Capitalism

By Rob McCreary

I am surprised  so few of the millennial generation are preparing for retirement by participating in tax deferred retirement plans. My generation was introduced to the miracle of compounding returns when the retirement system was revamped in 1976. Over 40 years later $1000 invested per year compounding at 8% tax deferred is now worth $349,726.  My employers all encouraged participation in tax deferred retirement plans by offering employer matches. Sometimes that match was 1:1 up to 3%.  Even more amazing has been the introduction of the Roth IRA. You don’t get the same tax benefits when you contribute, but when you take withdrawals they are taxed at capital gains rates. Most of my peers bought into the retirement system and saved.

Millennials Are Not Using The Tax Deferral

This is not true for the millennial group who are about the same age as I was when I began contributing to my 401k and IRA plans. According to Maurie Backman, writing for The Motley Fool on March 9, 2018.  

Very few the millennials are investing anything in a retirement plan:

“ Apparently, younger workers aren’t getting the memo. In fact, 66% of millennials have no money saved for their golden years, according to new data from the National Institute on Retirement Security.  But here’s the kicker: It’s estimated that two-thirds of millennials work for a company that sponsors a retirement plan, yet only about half that many younger employees opt to participate. All told, only 5% of millennials are saving appropriately for retirement, which means the bulk of younger workers risk coming up short once their careers draw to a close.”

This Correlates To Low Financial Literacy

Interestingly, this low participation also correlates with a pretty disturbing analysis by The Wall Street Journal in their Daily Shot at financial literacy among high school students. This chart shows that only 5 states mandate education on financial matters for high school students and under 10% of the high school population has any education about financial matters. Maybe this explains how the millennials missed the miracle of compounding tax deferred returns:


There is also an implicit threat to the whole capitalistic system. If you don’t begin with some sort of financial literacy at an early age you also do not begin to understand how the capitalist system diverges from socialist and central economies. When you are invested in the capitalist system you have an incentive to promote it by protecting its fundamental principles. I fear that the central authority is crowding out an informed and financially literate population.

Student loans are a great example. The government intervened in what had been a longstanding local bank product. The result has been a disaster because students without an ability to pay have been underwritten and encouraged to pursue an education that is increasingly irrelevant to job creation. In the private system the money would not have been chasing marginal customers.




Rob McCrearyFinancial Literacy And Capitalism

Who Is Going To Do The Work?

By Rob McCreary

A lightning rod in the political world is immigration but less so in the business world.  In the lower middle market every one of our portfolio companies is looking for qualified workers who can pass a drug test, and perform entry level work.  I am not sure why Americans do not want these jobs? They come with benefits and hourly pay that is substantially greater than minimum wage. Maybe unemployment compensation, or food stamps, or workers compensation, or any other safety net work replacement is crowding out the number of citizens who really want a 40-hour work week? What happened to the dignity of work?

I cannot understand why President Trump wants to keep young immigrants who are not likely terrorists out of our country? I also cannot support the Democrat’s idea of supporting only immigration policies that lead to Democrats being elected. These political positions on both sides virtually ensure that robots will replace people, and entry level jobs will disappear. Making immigration a political issue rather than a business and lifestyle issue is a huge mistake. Here is a census of our window company work force:

These immigrants are not stealing American jobs. Portland, Maine has a 2% unemployment rate. The truth is Americans do not want to work as hard as the Somalis, Serbs and Croats who came from nothing and are thrilled to be working 40 hours a week with benefits. Many of our employees commute 2 hours a day for the privilege of working in our Portland, Maine window factory.

Another endorsement for immigration comes from a consultant we are using who specializes in manufacturing processes for window industry, and has been involved in hundreds of different manufacturing situations. He thinks our factory in Portland, Maine is one of the most productive and well managed in the country. We have our own comparison with a similar window operation in Ohio where the opioid epidemic is real problem. We simply cannot recruit a sustainable workforce, even though there is a strong supply of skilled automotive workers.

If we permit immigration to exist as a transcendent political issue we will have missed the chance to sustain America’s greatness through the marvel of our business world. The resulting diversity and ambitions of immigrants will be necessary to compete in an international business order that will reward innovation and a trained work force.





Rob McCrearyWho Is Going To Do The Work?

Do Millennials Play Golf?

By Rob McCreary

My only first-hand experience with Martians was “My Favorite Martian” which was a TV sitcom that aired from 1963-1966. Uncle Martin had special powers like the ability to disappear and levitate objects. While not quite as talented as Barbara Eden in “I Dream of Jeannie”, he was nonetheless my closest encounter with a Martian up to the dawn of the millennial age.

Don’t get me wrong. I love Millennials. They are quirky, funny, and tribal. To call them weird would minimize their importance to the price of Bitcoin, and our society’s hope for an unconventional future.

Take Out Was Pretty Challenging 

My first interaction with Millennials was a highly recommended sandwich shop in Damariscotta, Maine. My wife and I entered the shop and dutifully moved under a sign that said “Place Your Order Here”. We’ve been around long enough to know that you order under the sign, then you pay at the cashier and they bring the sandwich to your table, or package it for takeout. But that was not the business model at Fernald’s Country Store. We were the only people in line, but noted a beehive of activity among the sandwich makers, the cashier, the table servers and a few floaters who never seemed to be doing anything but circulating from the kitchen to the table space, but never with any sandwiches, or drinks: no sign of any table clearing either.

We are old and have no patience, so after about three minutes of just standing there I joked to one of the floaters, “Do we have to stand here and text our order to you?” She responded in all seriousness that “It would be a lot faster if you just made your order online.”  We were kidding, but she was serious. It then occurred to me that the sign might be just some memorabilia from the lost century that went with all the posters on the walls. Luckily, the cashier who was obviously the owner, was also old enough to know about My Favorite Martian, and she understood we actually wanted a face to face experience. Our order was taken. The money was paid. Millennials are from Mars.

Half Caffeinated Coffee Was Worse

Thinking this was an isolated incident, I found my next millennial experience even stranger. I was at a coffee house in Tremont called “The Loop”. Tremont is a trendy downtown Cleveland neighborhood and a gathering place for the Millennial Nation. I ordered a small, “half-caf” dark roast and the millennial coffee barista looked at me like “I” was from Mars. I said “You know, half decaf and half hi-test!” She blinked once, and then again and asked with doe like sincerity, “What is hi-test?”  I was stunned, but recovered quickly and explained that hi-test means fully caffeinated, just like premium gasoline. She was enthralled, but let me know that she has never pumped gasoline so she really did not know what I was talking about.

Business As Usual Was Unusual

The coffee incident was nothing compared to the seating area. There were hundreds of vinyl records on display and a turn table, I was just about to search for the lava lamp and Jefferson Airplane’s “Surrealistic Pillow” when I heard what sounded like a cross between Leonard Cohen and Boy George waft from the speakers (might have been my old Harman Kardons). Like an Alice in Wonderland cartoon, things got “curiouser and curiouser!”.  As I scanned the room full of millennial patrons, there were tats everywhere and, even though there was business being conducted, it looked like the people at the tables were texting each other rather than talking face to face.

The patrons were also checking us out because we were wearing sport coats, penny loafers and at least one of the guys was taking photos of a building site out of his briefcase. I think the Millennials thought we were probably going to take phone pictures of our photos and text them to each other, but I secretly know they were thinking we were a sub species and wanted to demand “Earthlings Take Us To Your Leader”.

I wish I had more experiences with Millennials. I want to learn about Tatoos, their interesting hair styles, their music (I think it was music), and their fascination with Bitcoin and cryptocurrencies. Most of all, however, I want to find out whether Millennials play golf.

Rob McCrearyDo Millennials Play Golf?

We used to call it Winter

By Rob McCreary

January of every year is wonderful for the prediction industry. Almost everyone who made a prediction in the prior year is taking credit for the few things they got right and, conveniently forgetting or minimizing what they missed. There are only a few groups who actually score themselves like Barron’s and certain columnists in The Economist. The rest of us rely on failing memory and a complete lack of accountability.

Almost all of the January savants are quick to point out the macro trends and tailwinds that will influence the shape of 2018 like Tax Reform, the price of oil, reversals of Quantitative Easing in the US and Europe, the weak dollar, the travails of cryptocurrencies, capital spending, deficit spending, Fed interest rate increases and the VIX.  However, based on my experience in the first 20 days of 2018 in Cleveland, Ohio Betsy Kling had more impact on our local economy than Warren Buffet, Jamie Dimon and Jim Cramer.

Our Chief Meteorologist

Betsy Kling is our favorite weather personality and she has a following that can challenge Justin Bieber, Taylor Swift and Oprah Winfrey all rolled into one. Her resume is pretty modest. She graduated from Bowling Green State University and received her Certification in Broadcast Meteorology from Mississippi State University. She has been a Meteorologist for 20 years and the Chief Meteorologist at WKYC-TV for 14 years. Like the oracle from Delphi she divines millibars and winds aloft from Doppler radar and atmospheric sensors to predict weather, and most recently, end of days.

I watched her single-handedly shut down most of greater Cleveland for about 36 hours with her prediction of a cataclysm of sleet and ice on Friday, January 12, followed by several feet of snow and freezing temperatures on Saturday, followed by more freezing and more snow on Sunday, and again Monday. As far as I know, the only event that took place was the Browns “0-16 parade” – suggesting losing is inexorable. Except for the temperature, Betsy pooched this prediction in a big way (no ice/ little snow) and probably cost greater Cleveland businesses more money on Martin Luther King weekend, than Lebron has made in his career. The other thing about her job and most of the expert prediction business, is nobody seems to care. Just think where we would be in private equity if we were as consistently wrong about big predictions as Chief Meteorologists.

They Use To Just Call It Winter

When I was a kid they called this winter and we dealt with it. I can’t ever remember anything being cancelled. Gross Domestic Product (GDP) marched forward without interruption from the weather. Weather is now entertainment. It takes on tsunami proportions and is usually accompanied with a name or acronym that makes it memorable. It is frequently blamed for quarterly earnings shortfalls.

I have learned that The Weather Channel now has a materiality standard (population or geography) for naming not just hurricanes but also winter storms. Any storm on the East Coast, especially one that touches New York City is automatically a super storm. There is no worry or mention about the middle of the country. These are Red states in the fly over zone, devoid of economic impact and deserving of all the bad weather they get because their citizens are too stupid to live in New York or California. This is certainly supported by The Weather Channel’s naming criteria:

“The Weather Channel’s winter storm naming system is based on how many people or how much real estate is affected by the worst part of a storm. A localized but extremely impactful winter storm could affect 1,000,000 people, but since it doesn’t reach a 2,000,000-population requirement, it wouldn’t receive a name.”

Bad News For The Fly Over Zone

This is bad news for Buffalo, Bismarck, and Butte where a 90-year-old who dies shoveling eight feet of snow is remembered as having died of natural causes, but his counterpart in New York is remembered as having been ravaged, and ultimately slain, by Killer storm Kyle that shut down the entire East Coast and left millions without power.

All I know for sure is I want this job, I get the power to interrupt life based on Doppler radar predictions, and I am almost always wrong and no one cares. They call me an expert and I am more popular than free cell phones.

Rob McCrearyWe used to call it Winter

I Thought Medicare Was Free

By Rob McCreary

One of the most anticipated dates in your golden years is the time just before you turn 65 when you are thinking about the government starting to take care of you.  You probably have already applied for your AARP card and also are getting senior discounts at the movies. Like me, you were probably disappointed to find that the AARP group is a combination of a slick marketing organization and a political party. They want to program what you buy and how you think.  The senior discount at the movies really is not that great because you start attending matinées like you did when your parents dropped you off on Saturdays. Our last movie savings, for example, was 25 cents below the matinée price.

Finally A Free Lunch

But your expectation for Medicare was different because you have been paying premiums for 40 years.  I was simply quivering with anticipation because it was advertised as being free. Well not really – Only Part A is free and Part A only covers hospitalization. The day-to-day interaction with the rest of the health industry and prescription drugs are covered by Part B and Part D and they are not free. Part A also doesn’t cover the medigap which is about as wide as the Grand Canyon.

I’ll Stay On My Old Plan

                 When I found out that Medicare was not free and I was not retiring any time soon I asked the logical question. Am I better off waiting to enroll in Medicare and staying on my group plan as supplemented by a company sponsored HSA account? At first I was hopeful because I found advice that suggested you can defer enrollment if you are still employed and participating in the group plan. However, that advice was like the free Medicare. You are not permitted to remain on a group plan if you are a small group employer, which means less than 20 employees. This made no sense to me because there are thousands of small businesses with the financial ability to support healthcare plans as supplemented by Heath Savings Accounts. Aside from the premiums being reasonable, the high deductible plans we have always used made all kinds of sense to me as incenting careful first dollar expenditures and, ultimately, catastrophe insurance. I guess this is exactly the reason the insurance industry convinced the government to design Medicare to force small groups to jettison sick and sicker oldsters from their “Cadillac” plans. I had no choice but to enroll in Medicare within 90 days before or after my 65th birthday or else I would be forever barred.

 Your First IRMAA

                By now you can understand why I was starting to suspect retirement healthcare was rigged, but I was still in the early hours of my education. The next thing I got from Social Security was my IRMAA adjustment. Medicare did not advertise this adjustment when I was signing up, so I had no idea that in 2007, as a stop-gap funding plan, Congress elected to slam high earners even if they are in perfectly good health by having them pay up to 3 times what a lower wage earner pays for Part B. Maybe this is why the government accepted the sick and sicker oldsters? So now Medicare is morphing from free to not so free, and I am being asked to pay my fair IRMAA share after having contributed at the payroll max for more than 40 years. At this point I was surprised but resigned. What else could I do? Surely, the surprises had ended.

Unbeknownst to me, there was more to come because in my first few transitional months on Medicare I was still covered for the gap in Medicare insurance by my employer group plan. In essence Anthem served as the medigap insurer for the 20% that Parts A and B won’t cover. In fact, they did so happily at full premium!!!! What a deal for them- 20% exposure for 100% of the old premium.

A Hole in the Donut

               Fast forward seven months and now my wife and I are both 65 and we both are enrolled in Medicare and we are off the group plan, but we have a serious gap in our coverage. Welcome to the world of medigap- those insurers who charge premiums to insure virtually everything that Parts A and B won’t cover. This is Plan F coverage, and you can get Plan F insurance without any medical underwriting during the open enrollment period. This is a big deal. If you have a preexisting condition and you miss the enrollment period, you may have to get a medical exam. Also, if you elect Plan F coverage from so-called “Medicare Advantage “ providers and later on you change insurers, you will have to pass medical underwriting. These network plans are cheaper in the beginning, but if you don’t like their group restrictions, you may never get medigap insurance if you try to switch.

A Hole in the Donut Hole

                After A, B and F there is still a hole in the coverage. You have to think about prescriptions. Parts A and B and Plan F don’t cover meds. It is an altogether separate plan design also with open enrollment but with four phases of coverage that start with the patient deductible ($400), then the patient pays 25% up to $3750, then the patient pays 75% up to $5000, then the government pays 95% above $5000. Also, because our prescriptions are different I get my meds from Walmart/Humana and my wife gets hers from Aetna/CVS.

You’ll Need A Sherpa For This Journey

                I got the final bills from the wonderful consultant, Kelly Walter, who led me through this mine field of inscrutable legislation. I ended up paying almost 2.5x what my share of the group plan would have been with my employer. I also learned that the wonderful Health Savings Account that I so carefully built, cannot be tapped to pay most of the Part B, Part F or Medigap premiums.

I thought Medicare was free and now learn that all I can buy with my HSA is band aids and hearing aids.



Rob McCrearyI Thought Medicare Was Free

Bitcoin Futures – The Grizzly and the Salmon

By Rob McCreary

Anyone who owned Bitcoin for long enough to have experienced its wild appreciation was excited to learn in December that the Chicago Board of Options Exchange (CBOE) was authorized to permit trading in Bitcoin futures (CBOE,XBT). Somehow I knew this would not be what I expected and the game would be rigged in favor of insiders. I guessed this for four big reasons:

  1. Most of Bitcoin owners are retail investors.
  2. Retail investors were basically prohibited from shorting the XBT.
  3. The CBOE was designing a “cash settled” product.
  4. Institutional owners like Winklevoss twins saw a one time chance to lock in gains without selling much Bitcoin

I was not disappointed in the final rules and I was not surprised by the result. Up to and including the first 3 days after the CBOE began futures trading the price of Bitcoin futures, XBT, spiked. The price of Bitcoin actually bounced off $20,000 in intraday trading. Any speculator who was long Bitcoin knew enough to try to hedge his gains by shorting Bitcoin on the futures exchange.

Retail Investors Can’t Sell Short

It would be just like shorting General Electric (GE,NYSE) when you owned the underlying stock! If the stock went down, you made money on your short position but if the stock went up, you lost on your short bet but made money on the appreciation in GE. Unfortunately, in early trading there was only one securities firm in America who would allow its customers to short XBT on the CBOE. That firm required a cash margin of 45-50% which meant the retail investor had to deposit cash instead of Bitcoin. I called the CBOE and talked to a trader on the futures desk. He said that only institutional customers were permitted to short Bitcoin but retail investors were welcome to buy a futures contract betting that the price of Bitcoin would rise. In a recent article in the January 8, 2018 edition The WSJ implies that the smart money (institutional) is short and the dumb money (retail) is long. What they don’t says is how nearly impossible it is for a retail investor to short XBT. The chart below suggests the little guy is choosing the long position when, in fact, it is the only side he can buy.


When I saw this chart I immediately thought of spawning salmon all stacked up trying to get back to their spawning ground and a grizzly bear catching them in mid leap.

The Winklevoss Twins Controlled The Market

The salmon were retail investors in a frenzied state of wanting to get rich quick and jumping out of their shoes as their Bitcoin bet made higher and higher levels. I then thought of the Winklevoss twins as the grizzly bear who was allowed to go short but who also owned half a billion dollars of Bitcoin and had enough clout to actually condition the market frenzy. The little guy was only allowed to go one direction but the institutional investor could be on both sides of the trade.

When the little guy saw his Bitcoin at $20,000 per Bitcoin he wanted to lock in his good fortune. However, he was quickly disappointed to discover he could not hedge. Alternatively, many tried to sell. Meanwhile the Winklevoss twins probably shorted the XBT futures contract , but as experienced traders they also timed  actual sales of Bitcoin for maximum market pressure on the downside. Then the stories about Bitcoin energy consumption and government regulation began to emerge.The price of Bitcoin cratered.

The salmon also discovered that settling in cash is different than settling in the underlying security that you already own. As the price of Bitcoin declined holders of the long position on XBT forfeited their option premium to the Grizzly and then desperately sold Bitcoin to try to compensate for their cash option premium loss on the derivative product. This assured a tax bill and their complete destruction on their futures bet.

CBOE wins big. Winklevoss twins win big and lock in gains on their holdings without selling much in the primary market. Grizzlies get the salmon. Round Two may be starting soon because there are still a lot of salmon backed up at the dam.


Rob McCrearyBitcoin Futures – The Grizzly and the Salmon

Wall Street Journal Innovation

By Rob McCreary

Wall Street Journal Innovation


For those of us who are challenged by the pace of news and information or the great majority of us who simply do not have the time to dig into anything, The Wall Street Journal has an answer. Over the last six months subscribers to The WSJ have been encouraged to sign up for “The Daily Shot”. This is a graphical summary of the current news in the form of charts and graphs with a link to the longer article. After “speed reading” the Wall Street Journal this way for several weeks I am amazed at how well it paints a picture of macro concepts like the flattening of the yield curve, the growth of debt in China as a percentage of GDP, tightening of employment markets, currency swings, trends in the M&A markets and growth of Bitcoin.

I highly recommend subscribing to The Wall Street Journal just to get The Daily Shot. Here are a few examples:



I will continue to use this convenient source of information for my blogs as well as a general understanding of trends in finance and commerce throughout the world. This is the new “Heard on the Street” column in graphs and pictures for people with attention deficit disorder.


Rob McCrearyWall Street Journal Innovation