The Weekly Wrap: Fractional Investing, Energy Prices, Producer Prices
Fractional Investing: Owning Your Piece of the Pie
There is an old question that pops up from time to time in goal-setting sessions. It goes like this: “how do you eat an elephant?” The answer is, “One bite at a time.”
It is a problem for many people to swallow the elephant-sized price tags of most investments. However, the growing trend in fractional ownership offers a bite-size solution.
How Fractional Ownership Works
Fractional ownership allows you to buy a piece of an asset. In the case of stocks, you buy a piece of the stock. In other words, instead of buying a share of a stock at $300, you can buy a portion of a share for $25.
Platforms such as Robinhood have built their business on this model. However, more traditional firms, such as Charles Schwab, Fidelity, Vanguard, Merrill Lynch, and others, have joined the trend.
Fractional Ownership of Real Estate
About 60 years ago a prosperous middle class began buying timeshare vacations.
Timeshares are not investments. You did not own a property. You owned the time you are allowed to stay there.
However, thanks to fractional ownership, you can invest in deeded real estate and reap the benefits. Fractional assets can be sold, gifted, inherited, and placed in a trust.
Fundrise is one company that uses the fractional ownership model for real estate investing. You can start a portfolio for $10. However, with $1,000, you get more options.
Fractional Ownership of Other Assets
Fractional ownership is a form of crowdsourcing that can work for any investment.
What to own a piece of a Picasso or a Banksy? Firms such as Masterworks or Otis can take care of that. Masterworks requires an initial investment of $1,000. Conversely, you can invest through Otis for $100.
If art is not your thing, how about sneakers?
Rares is a new company headed by ex-NFL player Gerome Sapp. The company buys collectible sneakers and sells shares in the shoes. You can sell your shares or wait for them to be flipped. Conversely (pun intended), you can sell shares on your own.
The buy-in starts at $10.
You might want to investigate Rally Rd. if you really want to diversify your fractional ownership.
Rally Rd. offers fractional shares in a wide range of collectibles. Launched in 2016, the company began by acquiring rare sports cars. It has since diversified into a wide variety of collectibles including wine, whisky, memorabilia, watches, literature, comics, and more.
Something’s Gotta Give
If you own a business funded by investors, you want to make those investors happy. The best way to do that is to make a profit. You do that by keeping costs lower than the price consumers pay for your goods or services.
See, running a business is easy. Let’s all do it.
The only problem with the above scenario comes when costs rise dramatically. As a business owner, you have three choices. You can cut profits, increase prices, or combine the two. One choice will upset investors. The other will upset your customers. The third will anger everybody.
The Great Divide
There is a widening gap between rising costs and consumer prices.
The Producer Price Index (PPI) measures the cost producers pay for raw goods and services. For example, if you are a baker and the price of wheat goes up, the PPI would reflect that.
By contrast, the Consumer Price Index (CPI) measures what customers pay for that bread and many other products.
PPI and CPI on Upward Trend
The PPI rose to 8.3 percent year-over-year in August, according to the Bureau of Labor Statistics. The bureau says that is, “the largest advance since 12-month data were first calculated in November 2010.”
Meanwhile, the CPI has increased 5.3 percent year-over-year. The main driver there is energy costs.
So, we have a 3 percent gap between PPI and CPI. Therein lies the dilemma for businesses. Which of the three options listed above do they employ?
Your Options as an Investor
Do nothing if your investments forecast profits. However, if you see a change you do not like, it may be time to adjust your portfolio to include more guaranteed returns and value.
Your Options as a Consumer
Start and stick to a budget. Discipline is the key to cutting expenses and saving.
Look for sales. You may have to do some hunting, but they are out there.
Drive less. Take public transportation or walk when possible. A walk will improve your health. A train or bus will free you from the stress of traffic and give you time to read or listen to a podcast.
Energy Fuels Rising Consumer Costs
The price of Brent Crude oil topped $80 a barrel this week and U.S. oil prices followed close behind. Many analysts see it going higher. At the same time, natural gas prices are setting new records.
As a result, gasoline and utility bills are taking a bigger bite out of your budget. Meanwhile, oil company shares are racing upward.
Current oil prices are the result of an international recipe of good news, bad news.
On one hand, the economy is expanding. In addition, progress is being made on Covid. On the negative side, you have shipping snarls and supply chain problems. Blend those things together and you have heightened demand.
As a bonus, some power companies switched from natural gas to oil. That increased oil demand further.
The piece de resistance, however, is a low supply of oil.
There is plenty of oil. However, producers are reluctant to bring it out of the ground.
OPEC+ began tightening production late last year and made further restrictions in the Spring. Only recently has OPEC+ announced plans to modestly increase production in November.
Investment Sentiment Changes
Producers in the United States cite a lack of investment as one reason they are not producing to capacity.
“The banks have pulled away from financing,” Scott Sheffield, chief executive of Pioneer Natural Resources, told the New York Times.
Much of the money that used to go into oil now goes into renewable energy.
“Renewables dominate investment in new power generation,” according to an International IntEnergy Agency (IEA) report, “and are expected to account for 70% of 2021’s total of USD 530 billion spent on all new generation capacity.”
A recent market collapse might also be holding producers back from pumping more oil. The price of crude dipped below $30 a barrel in the Spring of 2020. That was the result of a dramatic drop in demand brought on by the pandemic.
Natural Gas and Electric Prices Spike
Natural gas prices have about doubled in the last six months. September’s $5 per million BTUs is the highest September price since 2008.
Your heating bill will increase if natural gas prices remain high this winter. That goes for electrical heat as well as gas. The reason gas prices impact electric bills is that gas powers the plants that produce electricity.
If you are looking for an explanation for the increase in gas prices, re-read the preceding explanation of oil price increases.
What to do
Consumers can only reduce consumption. That means limiting auto travel and weatherizing your home.
Long-term investors will want to follow the investment banks into renewables. High prices and environmental concerns are reducing the appeal of fossil fuels.
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