Smart Investing with Brent & Chase Wilsey

May 30th, 2025 | Homebuyers at Record Low, Bitcoin in 401k, Inflation Eases, Accredited Investor Explained, Regeneron Pharmaceuticals (REGN), Intuit (INTU), Target Corp (TGT) & Toll Brothers,(TOL)

First Time Homebuyers Hit a Record Low

With the high cost of housing and higher interest rates, people trying to get their first home dropped to a record low around 23% in 2024. The average age of the first-time homebuyer has increased 10 years over the historical average to 38 years old. The median income is now $97,000 and the first-time home buyers are coming up with an average down payment of 9% of the value of the home. Many of these young buyers are using FHA loans, which require a very small down payment and according to research roughly 30% of all FHA mortgages have a debt service ratio of over 50%. This means more than half of these buyers’ incomes is going toward servicing debt. This could be a hard pill to swallow for young buyers with not much money left over for luxuries like vacations and new cars. However, if when they buy the home, they understand that if they really tighten their belts for the next three to four years, they will probably be fine. New home builders are doing what they can to try and get rid of the largest inventory of unsold homes on their lots since 2009. The median price of a new home is currently less than one percent higher than the median price of existing properties, which historically has seen a 17% premium. The home builders are using profits from their homes to buy down mortgages. Even though the 30-year mortgage was recently around 6.8%, home builders can buy these mortgages down which led buyers of new homes to a rate around 5%. Buying down these rates has cost home builders about 8% of the purchase price of the home. This reduces their profits but better than the alternative of sitting on unsold homes with a carrying cost for the builder. I don’t see this situation getting better anytime soon because I’m not looking for a large decrease in mortgage rates and incomes over the next year will probably increase somewhere around 3 to 4%. We continue to believe the rapid increase in the price of homes over the last few years will not last and it will now take some time to get back to normal market. Maybe we will see a better real estate market in 2027 or 2028.

 

Is Bitcoin coming to your 401k?

I have been concerned with bitcoin and crypto as a whole for several years for many reasons including fraud, illicit activity, and the fact that there is really no way to derive an intrinsic value for it since there is no earnings, cash flow, or anything really backing the asset class. I was disappointed to see the current Labor Department removed language that cautioned employers to exercise “extreme care” before making crypto and related investments available to their workers. They cited “serious concerns” about the prudence of exposing investors’ retirement savings to crypto given “significant risks of fraud, theft, and loss.” While this isn’t necessarily a full-on endorsement for placing crypto in 401k plans, it definitely seems like the administration is continuing on its path to try and normalize crypto as an established asset class. Even with this change in language I would be surprised to see a huge surge in cryptocurrencies within 401k plans. Ultimately, ERISA bestows a fiduciary duty on employers and company officials overseeing 401k investments and that means legally employers must put the best interests of 401(k) investors first and act prudently when choosing which investments to offer (or not offer). Given the extreme volatility within crypto I believe it would be a huge risk for these companies to offer it as it could open them up to lawsuits if there are major declines. We’ll have to see what other changes are made as time progresses, but I don’t believe crypto has any place within a 401k plan at this time.

 

Inflation report shows continued progress

The personal consumption expenditures price index, which is also known as PCE and is the Federal Reserve’s key inflation measure, showed an annual increase of just 2.1%. Core PCE, which excludes food and energy, showed a gain of 2.5%. Both results were 0.1% below their respective estimates. Overall, inflation has continued to cool and is now quite close to the Fed’s 2% target. The question that remains is how will tariffs ultimately impact inflation? An economist from Pantheon Macroeconomics said that he believed core PCE would peak later this year between 3.0% and 3.5%, if the current mix of tariffs remained in place. I would say it is difficult to forecast the tariff impact since we don’t know what will ultimately be passed on to the end consumer. It will definitely be interesting to see what numbers look like in the coming months, but ultimately, I believe most of the concerns around inflation are overblown and even if the rate for PCE is around 3%, I don’t see that as being problematic for the economy.  

 

Financial Planning: What it Means to be an Accredited Investor

An accredited investor is someone who meets specific income or net worth thresholds—such as earning over $200,000 annually ($300,000 with a spouse) or having over $1 million in net worth excluding their home—and is allowed to invest in private securities offerings not registered with the SEC. These investments, which include private REITS, private equity, hedge funds, and startups, often promise high returns but carry significant risks such as illiquidity, limited transparency, and the potential for total loss. While many of these offerings are only available through fiduciary advisors—who are legally obligated to act in their clients’ best interest—investors must still exercise caution. Fiduciary duty applies only in certain contexts (such as investment advice) and may not extend to related areas like insurance or commission-based products. Additionally, what qualifies as “acting in your best interest” is often subjective and open to interpretation. Working with a fiduciary does not guarantee protection, and investors should remain vigilant, ask questions, and independently evaluate any recommendation. Also, private investments aren’t necessary better than public investments, so just because you qualify as an accredited investor doesn’t mean you should be investing in private securities.

 

Companies Discussed: Regeneron Pharmaceuticals, Inc. (REGN), Intuit Inc. (INTU), Target Corporation (TGT) & Toll Brothers, Inc. (TOL)

May 23rd, 2025 | U.S. Credit Downgrade, EV Declines, 401(k) Private Investments, New SALT Proposal, CAVA Group, Inc. (CAVA), First Solar, Inc. (FSLR), Levi Strauss & Co. (LEVI), & (UNH)

The U.S. just received a downgrade to its credit rating, should you worry?

Last week, Moody’s announced it downgraded the United States sovereign credit rating from AAA to Aa1. While a downgrade is important to understand and can have negative consequences for interest rates, this downgrade did not seem too problematic. I mainly say that because Moody’s was the last major credit rating agency to have the U.S. at the highest possible rating. The first downgrade carried the most weight in my opinion as it had the highest shock value. Standard & Poor’s was the first to move in August 2011 and the stock market fell 6.66% the session after the announcement. Fitch then lowered its rating on U.S. debt in August 2023 and the stock market lost 1.38%. After this Moody’s downgrade the stock market seemed to have little reaction as it actually had a small increase following the news. While this downgrade may sound scary, I don’t believe it will have long term consequences considering the fact that US debt is still viewed as a very safe asset. With that said, the US does need to address the growing deficit problem as further downgrades from these credit agencies could cause problems.

 

Demand for electric vehicles is falling dramatically

Electric vehicle sales in the month of April declined 5% while the overall car market grew by 10%. This is only the third monthly decline in four years for electric vehicles. The reason for the decline is consumers are watching their spending more than they have in a while and many of the deals and promotions for electric vehicles have disappeared. It was not just Tesla who had difficulty because of Elon Musk’s political association, but even Kia, Hyundai and Ford experienced drops. Rivian was hit hardest on their R1T pickup truck as it saw a 50% decline in sales for April. With some of the crazy electric vehicle lease deals gone, consumers are also asking the question about charging related concerns. There are some car buyers who were considering buying an electric vehicle but they said it’s not worth the stress of charging your vehicle all the time. It’s just much easier to pull into a gas station that is always easy to find. This is only one month of electric vehicle sales and not a trend that has been going on for a while, but with the increased production of oil from OPEC and a large potential supply of oil in the future, gas prices should decline which takes away the incentive of paying more for an electric vehicle.

 

High risk, private market investments are showing up in more 401(k) plans

Another big 401K provider called Empower who oversees $1.8 trillion in 401(k) assets for about 19 million people has decided it will start allowing private credit, equity and real estate in some of the accounts they administer later this year. I think this is a terrible idea for investors. I have seen the back end of these private deals and many times investors have made no money from them and can only get out a little bit of their money at a time, while they are suffering from low returns and high fees. No surprise Wall Street loves these private market investments because of high fees, which range anywhere from 1% to 2% of the portfolio balance on an annual basis. One way they are trying to sneak in the private market funds is with a 10% allocation in the popular target date funds. This is pretty sneaky because you may be thinking you’re getting a pretty conservative stock and bond fund that becomes more conservative as you get older, but with a 10% allocation in these private assets I believe it will increase the funds risk and lower the returns going forward. As always, the bankers on Wall Street only care about generating more fees, and don’t care if investors lose money as long as they bring in their billions of dollars in profits. If you see these in your 401(k) options, cross them off the list and stick to the traditional long-term investments that have worked for so many years now.

 

Financial Planning: Who Benefits from the new SALT proposal?

The current SALT deduction allows taxpayers who itemize to deduct up to $10,000 of certain state and local taxes, most importantly their state income taxes and property taxes, from their federal taxable income. The new proposal in the House bill would raise this cap to $40,000 for households earning under $500,000, with a phaseout that fully eliminates the expanded deduction at $600,000. Married and single tax filers alike with incomes over $600,000 would be subject to the $10,000 SALT limit. This change is intended to benefit middle- and upper-middle-income taxpayers in high-tax states, while limiting the benefit for higher earners. The proposal also includes annual 1% inflation adjustments beginning in 2026. If the bill is signed into law in its current form, the larger deduction would apply beginning in tax year 2025. If passed, tax payers who make less than $600k in high tax states who own a home with a mortgage will see the biggest tax benefit and they may want to adjust their tax withholdings or estimated tax payments to account for it. However, the bill has not passed the Senate, and the final terms are likely to change.

 

Companies Discussed: CAVA Group, Inc. (CAVA), First Solar, Inc. (FSLR), Levi Strauss & Co. (LEVI), & UnitedHealth Group Incorporated (UNH)

May 16th, 2025 | U.S. Tariffs and China, Inflation, AI and Jobs, Oil Prices, Trusts and Retirement Accounts, Dick’s Sporting Goods (DKS), Charter Communications (CHTR), Krispy Kreme (DNUT) & (LYFT)

U.S. Tariffs are hurting China

Exports from China have dropped dramatically which has weighed on China’s economy. This has caused protests due to lost jobs and wages in their economy. Exports from China to the United States dropped 20% in April, but China did pick up exports from other countries like Indonesia, Thailand and Africa. While this may help a little, the export dollars for China to these other countries pales in comparison to the mighty consumption of the US consumer. China’s economy depends on exports considering the fact that in 2024 1/3 of GDP growth came from exports. The Chinese government is panicking a little bit with the central bank in China saying it would cut interest rates and inject more liquidity into the financial system. Some factories in China are pausing their production and laying off workers until things pick up again. Goldman Sachs estimates that roughly 16,000,000 jobs in China come from exports to the United States. With the news that tariffs are being lowered for 90 days it will be interesting to see how companies and these countries react. The US will still have a 30% tariff on many Chinese products, but that is much more manageable than the 145% that was in effect. It is important to remember this is a pause and that rhetoric could pick back up as negotiations continue. I do believe a reescalation in the trade war would really hurt the Chinese economy more than ours and I’m optimistic we will see a trade deal reached, but it will likely take time. I believe it is worth waiting for as a better trade agreement will benefit us for decades down the road.

 

Inflation continues to cool

The headline Consumer Price Index (CPI) for the month of April came in at a 12-month rate of 2.3%, which was below the estimate of 2.4% and marked the lowest reading since February 2021. Core CPI, which excludes food and energy, came in at 2.8% which matched expectations and was in line with March’s reading. Energy was a major help to the headline number as it fell 3.7% compared to last year with gasoline in particular down 11.8% over that timeframe. While this is all great many economists are worried about what the next few months will look like on the inflation front due to tariffs. Joseph Gagnon from the Peterson Institute for International Economics said he believes a 10% average tariff rate would add as much as 1 percentage point to the CPI after about six to nine months. While I would agree with the idea that inflation will likely increase in the months ahead, I still don’t believe it will be to a problematic level for two reasons. First, we should remember there are several players that can absorb the costs from these tariffs. You have to consider the companies importing products can reduce their margin, there would be shipping/transportation companies that can reduce their costs, the company’s manufacturing products can lower their prices, and then yes, the consumer is the last piece of the puzzle that could now have higher prices. With all that said I don’t believe a 10% tariff would result in a 10% increase in prices due to all the places in the supply chain that can absorb some of the cost. The second reason I wouldn’t be overly concerned is I wouldn’t see the tariff as embedded inflation and it could likely be viewed as a one-time lift to prices that would then be lapped next year. Nonetheless this story will be interesting to monitor in the coming months to see what the actual impact is, but I do remain optimistic about our economy and the inflation outlook.

 

Could artificial intelligence create more jobs?

Many people think that artificial intelligence, also known as AI, is going to reduce jobs for people. The CEO of IBM, who admits that AI has replaced hundreds of workers, said it has created more jobs than it has eliminated. He went on to say it frees up investment that the employer can put to other areas that include such jobs as software engineering, sales, & marketing. Normal things like creating spreadsheets and other routine tasks can be done with artificial intelligence, but it still takes a human to do the critical thinking on how to use that data to enhance business for the company. If you’re working for a company and you don’t have much contact with other workers that relate to your job, your job could be at risk of being replaced by AI. Make sure your job involves using data to work with other people, which should give you job security in the growing world of AI.

 

Oil at $50 a barrel?

There is talk that we could see oil drop from around $60 a barrel down to $50 a barrel, which would be a big benefit for consumers at the pump. The reason for this is that OPEC and its allies are increasing production of oil faster than anyone expected. By June they could be producing nearly 1,000,000 more barrels of oil per day compared to current levels. The United States is currently the number one producer of oil in the world with production of nearly 15,000,000 barrels per day. If you’re wondering does that meet our consumption? It does not as that stands at 19.6 million barrels per day. OPEC is not taking this sitting down and they want to regain market share. To do it appears they’re willing to see lower oil prices. The reason why oil prices are expected to drop is that the demand is about the same as it was just one year ago, so the increase in production means we’ll probably have an oil glut for a while. At $50 a barrel most oil companies can still make money off of producing oil, but US oil companies might stop doing stock buybacks and could no longer build new wells. What this would do is hurt supply in the future and oil would turn around and increase once again. If you invest in oil companies, you have to realize that supply/demand of oil will rule the price of the stock. But fortunately, most of the big oil companies pay a good dividend, which makes it a little bit easier to hold on when the stocks have a temporary decline. For consumers, this means the average cost per gallon of gasoline across the country, which is now around $3.20 per gallon, could drop to levels around $2.50 per gallon. Consumers in California may not see declines in the prices at the pump as California continues to drive refiners out of the state and reject refined gasoline from other states that do not meet a ridiculously high standard. If you want to blame someone for higher gas prices in California you can blame the governor and Sacramento for ridiculous policies on gasoline.

 

Financial Planning: Trusts and Retirement Accounts Do Not Mix

Naming a living trust as the beneficiary of a retirement account—such as an IRA or 401(k)—is generally not a good idea due to potential tax inefficiencies and administrative complexity. Under the SECURE Act, the "stretch IRA" option has been largely eliminated for most non-spouse beneficiaries, and replaced with a 10-year rule requiring the entire account to be withdrawn within a decade of the original owner's death. If a trust is named as the beneficiary and it isn’t specifically drafted to be the beneficiary of a retirement account, it may not qualify for this 10-year treatment and could face even faster distribution requirements, such as a 5-year distribution period, accelerating taxes significantly. Instead, it’s typically better to name individual beneficiaries directly on retirement accounts to preserve flexibility and minimize tax impact. For those needing control over distributions—for example, to protect minor children or spendthrift heirs—a carefully drafted trust designed to meet IRS requirements should be used with the help of a qualified estate planning attorney. For most other cases, listing actual people or charities as beneficiaries is a much simpler and more efficient strategy.

 

Companies Discussed: Dick’s Sporting Goods, Inc. (DKS), Charter Communications, Inc. (CHTR), Krispy Kreme, Inc. (DNUT) & Lyft, Inc. (LYFT)

May 9th, 2025 | Palantir Technologies, Big Money Managers, Apple’s Stock, Retirement Income Taxation, The Scotts Miracle-Gro Company (SMG), Block, Inc. (XYZ), Amazon, Inc. (AMZN) & McDonald's (MCD)

Why I won’t be buying Palantir technologies anytime soon

When I’m out in public many times people ask me what my opinions are when it comes to investing, the markets or individual stocks. I have to say the one stock that people seem to be asking the most about recently is Palantir Technologies, their ticker symbol is PLTR. I believe I’m asked about this company because investors look at the hype of the past performance and the fact that this stock is up over 1,000% since going public in 2020. That creates excitement for investors, but is it worth buying now? The company currently trades around 60 times next year’s estimated sales, and again that is sales not earnings! That makes it the most expensive stock in the S&P 500. There are signs that growth outside of the US is slowing and I don’t like that they have three unnamed companies that accounted for 17% of the total revenue last year. Usually hype like this goes the same path, which ultimately results in large losses for buyers at this point in the cycle. A more recent example comes from the company Snowflake. In 2021, Snowflake hit an all-time high over $400 per share. Today that stock is down nearly 60% and trades around $167 per share. You don’t hear much about it now, but I remember back in 2021 many people were asking about this company as well. I’m also not thrilled with Palantir’s CEO, Alex Karp, who during an interview just a few months ago had some pretty nasty comments about analysts who don’t agree with him on the stock price. He said “I love the idea of getting a drone and having light fentanyl laced urine spraying on analysts who’ve tried to screw us.” Maybe I’m old school, but I don’t think that is anyway for the CEO of a company of any size to talk about anyone that does not agree with the CEO’s position. Especially considering many times they aren’t knocking the business, just the fact that this company’s valuation is extremely crazy! I will also try my best to refrain from making any comments on Mr. Karp’s hairstyle, but it just seems a little bit outlandish for a CEO to have that type of hairstyle. As far as the stock goes, maybe the craziness will continue and perhaps it does go higher, but if people ask me if they should buy, sell, or hold the stock, I would definitely say sell! I guess I now have to be careful of drones flying above my head that could be spraying fentanyl laced urine on me.

 

Good news, only 26% of big money managers are bullish

A recent poll from Barron‘s magazine, which they conduct twice a year, found that only 26% of big money managers were bullish and thought stocks would go up while 74% were either neutral or bearish on stocks. They said 32% of respondents were bearish and that was the highest percent since 1997 while the 26% that were bullish marked the lowest reading since 1997. I think Barron’s Magazine is a good source of information, but I was disappointed that they did not list the years of experience of the managers that were being polled. The reason for my concern is that the last big negative in the economy and the market was in 2008, which was 17 years ago. A current manager that graduated school at age 23 would now be 40 years old and they did not experience managing money through 2008. Living through and managing money through a challenge like that provided me with extremely valuable lessons that younger managers would not understand. But why is this negative report a good sign in my opinion? Their current asset allocation is only 64% in equities with 36% in other investments like fixed income and cash. They will not stay bearish forever and if they change direction in the next 6 to 12 months, they will start buying equities again, which will push up prices. If you’re looking for value, the least attractive sectors were energy, real estate, and utilities. I have talked about my concerns around the Magnificent Seven and now only 10% of these managers think the Mag Seven will lead the market over the next six months. Even looking out 12 months only climbed 32% thought the group would lead the market. When asked about the strength of the US dollar going forward 12 months, 68% of the money managers said it will be weaker, which I agree with. Only 15% of the managers think it will be stronger a year from now. These surveys also provide an interesting insight into what other money managers are thinking.

 

Apple’s stock continues to amaze me

There seems to be so much negative news that continues to come out against Apple, but the stock continues to remain relatively steady given the amount of negativity. We all know about the tariffs and the delayed AI rollout, but I was definitely concerned by a couple announcements that would have large impacts on Apple’s service revenue. This segment has been a bright spot for Apple, but in the most recent quarter it missed expectations and grew at just 11.6% compared to last year. The big concern I have is around Alphabet’s estimated payment of around $20 billion annually to be the default search engine. There is concern if this will hold up given the ruling that Alphabet holds a monopoly and the need for remedies, but also this week Apple executive, Eddy Cue, added additional concerns. He stated the searches in Apple’s Safari browser fell for the first time in April, something that has never happened in 20 years. He then added that the iPhone maker is looking at adding AI search options to the Safari browser. If they did this, would Alphabet really want to keep paying $20 billion a year for that right? I don’t think so! The other major concern that seemed to get little attention was the fact that in a recent ruling a judge ordered Apple to immediately stop imposing commissions on purchases made for iPhone apps through web links inside its apps. This has enabled developers like Amazon and Spotify to update their apps to avoid Apple’s commissions and direct customers to their own website for payments. This commission rate was around 27% for Apple and it could cost Apple billions of dollars annually. All this comes with the fact that Apple still trades around 25x 2026 earnings even though revenue is only estimated to grow low to mid-single digits. In my opinion, Apple really needs some good/exciting news to get this stock moving higher and at this time I don’t see where that is going to come from.

 

Financial Planning: Breaking Down Retirement Income Taxation
Retirement income varies widely in tax treatment, with some sources being far less tax-friendly than others. In order from worst to best, pension payments and traditional IRA withdrawals are among the least favorable—they're fully taxable as ordinary income at both the federal and state levels. Interest income from bonds, CDs, and savings accounts, as well as annuity earnings from non-retirement accounts, are also taxed as ordinary income at both levels and can trigger the additional 3.8% Net Investment Income Tax (NIIT) if income thresholds are exceeded. Rental income is similarly taxed but allows deductions and depreciation to offset some of the tax burden. Long-term capital gains and qualified dividends receive preferential federal tax rates—as low as 0%—but are still taxed as ordinary income in California and many other states. Social Security is partially taxed at the federal level—between 0% and 85% is included as taxable income depending on total income—but is not taxed in most states, including California, making it relatively tax-favorable. Roth IRA withdrawals are the most tax-friendly, being completely tax-free at both the federal and state levels if qualified. Understanding how each income type is taxed can help guide investment decisions during working years and inform how to structure withdrawals in retirement for optimal tax efficiency.

 

Companies Discussed: The Scotts Miracle-Gro Company (SMG), Block, Inc. (XYZ), Amazon, Inc. (AMZN) & McDonald's Corporation (MCD)

May 2nd, 2025 | Chinese Stocks, Jobs Report, Job Openings, Recession, Home Title Theft, Zimmer Biomet Holdings, Inc. (ZBH), Take-Two Interactive Software, Inc. (TTWO), Northrop Grumman (NOC) & (GOOG)

Should the United States delist Chinese stocks?

At first thought with all the craziness of the trade war it sounds like delisting all the Chinese companies from the American stock markets may be a good idea. It is important to know that there are 286 Chinese companies listed on major US stock exchanges. You’ll recognize some of the names like Alibaba, Baidu and JD.com. It is estimated by analysts at Goldman Sachs that US institutional investors currently own about $830 billion worth of Chinese stocks. That is more than two times what the Chinese own of US stocks as that is estimated around $370 billion. But a quick sell off could bring down stock valuations and make it difficult to get out of many of these stocks on both sides. An important piece of information I brought up a couple years ago was the Accountable Act which came to be in 2020. This allows the Securities Exchange Commission to ban foreign companies from trading if American regulators are not allowed to inspect the auditors for three years in a row. I always worry about Chinese companies because of what I call government accounting. They are not held to the same accounting standards there and I believe companies may list financial statements based on what the government tells them. There have been some Chinese companies that delisted themselves rather than going through an audit. I think that tells you quite a bit. My feeling is we should not delist all the Chinese stocks that trade on American stock exchanges under what is known as ADRs, but be sure that the Chinese companies have the same transparency as American companies when it comes to their financial statements. If we can’t get that transparency, then those companies should be delisted. 

 

Jobs report shows more evidence the economy is in good shape

US nonfarm payrolls grew by 177k in the month of April, which easily topped the estimate of 133k. Jobs remained robust in health care as the sector added 51k jobs in the month of April and employment in transportation and warehousing and financial activities was also strong as the groups added 29k and 14k jobs respectively in the month. Other categories like construction, manufacturing, leisure and hospitality, and retail trade saw little or no change in payrolls, while government declined by 9k jobs in the month. Government jobs are now down by 26k since January, but remember employees on paid leave or receiving ongoing severance pay are still counted as employed. This likely means we will continue to see losses accelerate in this category as the year continues. Negatives in the report included the fact that employment numbers were revised down by a total of 58k in the previous two months. Also, April’s reading was lighter than March’s reading of 185k, but considering the unemployment rate remains at 4.2%, I still see these jobs gains as impressive, especially with all the negativity that people have been discussing. With that said, I still do anticipate weaker numbers in terms of the payroll additions in future months, but if the unemployment rate remains low I don’t see that as a problem. On the inflation front, we also got good news with average hourly earnings rising just 3.8%. I see this as a healthy increase that does not put pressure on inflation like when wages were growing over 5% in 2022.  

 

Job openings look problematic on the surface

In the March Job Openings and Labor Turnover Survey, job openings totaled 7.2 million. This was below February’s reading of 7.5 million and the estimate, which also stood at 7.5 million. This is still not super concerning to me. We tend to forget how strong the labor market has been and while we continue to see a softening, there is plenty of room before I see cause for concern. Just for reference, job openings in 2019 averaged approximately 7.2 million, in 2018 they averaged approximately 6.8 million, and in 2017 they averaged approximately 6.2 million. Compare that to where we are today and that should give you more comfort. Another area I saw as positive in the report was the fact that quits totaled 3.3 million, which produced a quit rate of 2.1%. This is important because if people were truly concerned about a major slowdown and thought they would not be able to find work elsewhere, I don’t believe they would be quitting their jobs. These quit numbers are still quite close to 2019 levels, which many considered as a very strong economy. That year quits averaged approximately 3.5 million and there was an average quit rate of about 2.3%. Also in the report, we saw layoffs remained quite low at 1.6 million. Back in 2019, layoffs averaged around 1.8 million per month. There is no doubt that uncertainty remains and that will have some impact on businesses and their hiring plans, but in terms of it pushing the economy into a major recession, since we are coming from such a healthy level, I just don’t see that happening.

 

Are we in the middle of a recession?

The first reading of Q1 GDP showed a decrease of 0.3%. A recession is generally defined as two consecutive quarters of declining GDP, so some may argue we are half way there. Let us not forget in 2022 we did see two consecutive quarters of declining GDP as Q1 declined 1.4% and Q2 showed an advance estimate that was down 0.9%. After further research the second quarter ended up seeing a total reversal and it is now reported to have actually grown by 0.3%. Even with the difficult start, that year ended with a 2.1% growth rate. We also can’t forget that the National Bureau of Economy Research (NBER) makes the official call on recession and they use a broader set of indicators that led them not to declare a recession in 2022. I say all of this because I still believe even if we hit a technical recession, if employment remains strong, I don’t believe we would have an “official” recession. I am still unsure that we will even see Q2 GDP decline and we could also see revisions to Q1 that lift it to a positive reading. I say this because if you look at the actual underlying numbers in the report, it is not nearly as bad as the headline decline. On the positive front, consumer spending actually grew 1.8% in the quarter as services showed a nice increase of 2.4%. Also, private domestic investment saw a surge of 21.9%, this was led by investments in equipment as they grew 22.5% in the quarter. You might be asking with numbers like these how did we see a negative GDP? To start, government spending fell 1.4% in the quarter. This was led by a decline of 5.1% in spending by the federal government. The group as a whole ended up subtracting 0.25% from the headline GDP number. While this was impactful, the real reason for the decline in GDP was trade. Companies were trying to get ahead of looming tariffs and imports surged 41.3%. This compared to an increase of just 1.8% for exports. The huge discrepancy caused the trade component of GDP to decrease the headline number by 4.83%! While the economy is no doubt digesting these trade conversations and the tariffs, I still believe the economy is in alright shape when you look at the underlying numbers. I did also want to mention more good news on inflation as the March headline PCE showed an increase of 2.3%, which compares to last month’s reading of 2.7% and core PCE came in at just 2.6%, which was a nice decline from February’s reading of 3.0%. I believe these numbers will likely increase with the tariffs, but underlying inflation looks to be quite healthy.

 

Financial Planning: Protecting Yourself from Home Title Theft

Home title theft is a type of real estate fraud where someone illegally transfers the ownership of your home by forging your name on title documents.  This is often done using stolen personal information to file fraudulent deeds with the county recorder’s office. Once the title appears to be in their name, the thief may try to take out loans against the property, sell it to an unsuspecting buyer, or use it in other schemes that could put your home and finances at risk. This crime can go undetected for months if property owners aren’t actively monitoring their title.  Having a mortgage or HELOC on your house can make it more difficult for a thief to steal your title since the bank has a lien against the property, but it is still possible. There are private companies that charge monthly fees to alert you of changes to your home title, but they do not prevent the title from being stolen.  You can also purchase home title insurance that will help pay for legal fees if you have to go to court if your title is stolen.  Homeowners in San Diego County can access a free alternative called “Owner Alert”. Jordan Marks who is the San Diego County Assessor/Recorder/County Clerk was behind this, and it is a great benefit that all San Diego property owners should take advantage of.  This service works by notifying you by email whenever a document is recorded against your property, helping you catch potential fraud early.  Signing up is simple and can be done on the San Diego County Assessor’s website. You just need your name, email address, and parcel number and it provides the same type of monitoring offered by paid services, making it unnecessary to spend money for peace of mind when this tool is already available for free.

 

Companies Discussed: Zimmer Biomet Holdings, Inc. (ZBH), Take-Two Interactive Software, Inc. (TTWO), Northrop Grumman Corporation (NOC)Alphabet Inc. (GOOG)

April 25th, 2025 | Gold Investment, University Endowments, Trade Wars & Home Prices, Converting Pretax, Netflix (NFLX), The Walt Disney Company (DIS), Albertsons Companies, Inc. (ACI) & (UNH)

Should you invest in gold for the long term?

Gold has been a great asset to hold over the last year, but I remain a skeptic of investing in gold long term. I personally don’t own any gold nor would I recommend buying gold at this point in time. While the recent gains in the price of gold look attractive, given the fact it is up over 20% so far this year in a difficult market, the long-term results aren’t enticing. There are periods of time where gold has been a strong performer, but trying to guess those periods is extremely difficult. If we look at January 1980 gold reached $850 per ounce, but the important number here is that the inflation adjusted price was $3,486 per ounce. This means it was not until recently when gold hit $3,500 per ounce, we see an all-time high on an inflation adjusted basis and essentially you made no real gain for over 45 years. At the end of the day gold is just a piece of metal worth only what the next person will pay for it. It has no earnings, no interest, no rents. This makes it extremely difficult to value and given the added expenses for trading and holding gold, it just does not make sense to me. I will continue to invest in good strong businesses at fair prices as I believe that is the best strategy for long term wealth creation.

 

Why is the government supporting universities with large endowments?

I’ve never really thought about this before. I have known that some big universities have multibillion dollar endowment funds, but I did not realize that 658 institutions have approximately $874 billion, which is nearly $1trillion in endowment funds. When I dug a little bit deeper, I discovered that in addition to these universities receiving money from the federal government via grants, some pay little or no income tax and also get a waiver on property taxes. If you’re starting to get a little bit irritated at this point because your hard-working dollars are going to universities like Harvard that has a $53 billion endowment or Yale with a $41 billion endowment, you might be like me and think it’s time that things change. The cost of tuition at Harvard is $57,000 per year and the President makes about $1.3 million a year. The president of San Diego State University has a salary of $531,000 and the cost for one year of tuition is about $8700. I’m sure the students at Harvard do receive a more prestigious education than at San Diego State University, but is it 6 1/2 times better? Do the students that graduate from Harvard make a salary that’s 600% more than a graduate from San Diego State University? I don’t think so. I wondered where money from these endowments goes and basically 48.1% of endowment distributions go to fund student financial aid, 17.7% goes to academic programs and research, 10.8% is used for endowment faculty positions and nearly 17% of the endowment funds are used for other purposes. Wouldn’t it be nice to know what those purposes are? I think we need to take a hard look at what universities have in their endowment funds, their tax benefits and grants, and let’s have more students here in the United States benefit from those billions of dollars to get a good education as opposed to the fat cats in the Ivy League towers of the universities. One other point I found interesting was the investing philosophy for these endowment funds. The goal is to earn around 8% per year and pay out 4.5% to 5% to fund those various expenses. This should then allow the endowment fund to continue growing. A big problem is many have not been able to achieve that goal with only 25% of 152 schools that were surveyed being able to meet the 8% return over the last 10 years. The other concern is if they can’t cut expenses if there is a lack of grants, many endowments are not liquid. Harvard for example had 39% in private equity, 32% in hedge funds, 5% in real estate, 3% in real assets, and just 3% in cash. With all this said I really believe this system should be reviewed to better the entire country, rather than just the Ivy League system.

 

Could the trade wars hurt home prices?

We are starting to see some cracks in the housing market, such as the delinquency rate on FHA mortgages, which cater to the high-risk borrowers who can’t qualify for a conventional mortgage because they either have a small down payment or weak credit. The delinquency rate for FHA currently stands at 11% according to the Mortgage Bankers Association, it has not been at this level for 12 years. Unfortunately, and we warned against it, but many people have stretched themselves too far financially to get into a home over the last few years. Because it’s only been two or three years since they bought their home, after fees and commissions they may not have much if any equity built up in that home. Another area of weakness that is being seen is with the homebuilders who have really increased their incentives because they have more completed but unsold homes. The builders are getting a little bit worried because they have not seen this many homes sitting on their lots with no buyers since 2009. The average incentives for homebuilders is usually around 5% of the total value of the home, but we are starting to see some incentives around 13% from big builders like Lennar. The volatility of the 10-year treasury, which mortgages generally trade off of, has not been helpful because it has had a wide trading range lately. This then makes it difficult for homebuyers to lock in a good rate. At this point in time, I think I would be waiting to buy a home until maybe late summer. I think there should be some good deals at that point in time as the tariff war should continue to progress and we should have a clearer picture of the economy by that time.

 

Financial Planning: Why converting 100% of pretax is bad

Roth conversions can be a powerful tax planning tool, but like any tool, using it the wrong way can do more harm than good. One of the most common mistakes we see is the idea that you should convert all of your pre-tax retirement savings, like a traditional IRA or 401(k), to a Roth account. Everyone loves the idea of a tax-free retirement. When you convert money from a traditional IRA to a Roth IRA, you're moving it from a pre-tax account to a tax-free account, but there’s a price, the converted amount is considered income and you must pay ordinary income tax in the year of the conversion. Once converted funds grow tax-free. The best way to think about money in a pre-tax account is that it is deferred income.  It will be taxed, it’s just a matter of when.  When you make contributions to a pre-tax account, you are not receiving a tax deduction, you are deferring income to a future year. When performing a Roth conversion, you are voluntarily deciding to pay tax on that income, even though you don’t have to yet.  This only makes sense if you are able to convert at a lower tax rate than you would otherwise be subject to if you did not convert.  This most commonly happens between the beginning of retirement, typically in your 60’s, and the beginning of your required distributions at age 75. During that period taxable income is generally lower which means conversions may be done at a lower tax rate than when required distributions begin at 75. Required distributions can be a problem because if you have too much in pre-tax accounts, your required taxable distributions may push you into a higher tax bracket and trigger IRMAA.  Roth conversions help this by shifting funds from pre-tax to tax-free, therefore reducing the level of taxable distributions beginning at 75.  However there is an efficient amount that should be converted for every person.  Converting 100% of pre-tax funds means you will likely be in a lower tax bracket after the conversions, and will potentially not have any tax liability at all.  This doesn’t sound bad, but it means you likely paid too much in tax to convert the funds in the first place.  Again, money in a pre-tax account is deferred income that will be taxed.  The goal is to have that income taxed at the lowest rate possible.  If you convert too aggressively you may be settling for a higher tax rate on the money coming out and not receive enough tax-free income from the Roth to justify it.  Instead, structuring withdrawals and conversions to keep your taxable income consistently low all through retirement will result in a higher level of after-tax income.

 

Companies Discussed: Netflix (NFLX), The Walt Disney Company (DIS), Albertsons Companies, Inc. (ACI) & UnitedHealth Group Inc (UNH)

April 19th, 2025 | Heartland States, Consumer Actions, TV Network Sports Deals, Life Insurance, Nvidia (NVDA), Hertz Global Holdings (HTZ), Car Max, Inc. (KMX) & (DOW)

Can the heartland states save our country?

The heartland states are 20 states pretty much in the center of the country. They have been regaining economic strength over the years and currently about 39% of the US population lives in these states, according to the census bureau for 2024. The population growth in this area was above the rest of the country for the last five years with numbers that have not been seen in over 65 years. Employers in this area grew by 13.2% between 2020 to 2023 and business capital expenditures totaled $76.9 billion in 2023 and have seen an average annual growth of 9.43% since the beginning of Covid. These 20 states on average have established more business-friendly policies along with tax incentives and grant programs that draw businesses to their area. The East and the West Coast just can’t seem to compete with the affordability of states in the middle of America. These mid America states have lower cost for land and utilities are far less being as much as 1/3 less than the rest of the country. This is according to the Energy Information Administration (EIA). The overall cost of living is lower, so wages can also be lower and still provide a good standard of living for their employees. In my opinion, states like California and others need to wake up and realize that perhaps stats in Middle America are on to something with policies that are attracting new residents. It would appear that foreign companies coming to the United States would build and prosper in one of these 20 states rather than states that are against business or have high taxes and other costs.

 

Consumer actions aren’t matching their words

We continue to see negative surveys about consumer confidence and sentiment, but you wouldn’t think consumers feel bad after looking at the recent retail sales report. March sales climbed 4.6% compared to last year and if gas stations, which fell 4.3%, are excluded the report was even more impressive as it climbed 5.3%. Some of this is likely due to concerns over looming tariffs as consumers pull forward demand before expected price increases. Some areas that are likely more impacted did see large gains as motor vehicle and parts dealers saw an increase of 8.8% and sales at furniture and home furnishing stores climbed 7.7%. With those said gains were quite widespread in the report and areas that would not see a pull forward in demand like food services and drinking places still saw a nice gain of 4.8%. If people were truly worried about the economy, they would not be spending money at restaurants, especially considering the fact that dining out has gotten quite expensive. While I am expecting the tariffs to have a short-term impact on the economy, we must remember the consumer is coming from a point of strength with relatively low debt levels, a low unemployment rate, and balance sheets that have seen asset prices significantly increase over the last several years. I continue to believe that our economy and the consumer will be able to whether this volatility, but the numbers will likely decelerate from here. We will continue to watch these reports closely, but I again remain confident we will get through the concerns about these tariffs.

 

Are TV networks tapped out on sports deals?

Last year Disney signed a $2.6 billion a year deal with the NBA; however, ESPN said goodbye after a 35-year relationship with the MLB where they were paying $550 million a year for their package of games. One area of growth that surprised me was Formula One car racing as over the last six years it has seen viewership double to 1.1 million viewers in a season. Liberty Media, who owns F1, is trying to get a rights package between $150-$180 million a year and all they’re hearing is crickets. Research firms estimate that it is worth over $100 million but it is not at the $150-$180 million that Liberty wants. Netflix, Warner Bros. Discovery, Fox, Amazon and NBC are not showing much interest in the asset. Netflix will probably not bid since there’s no real gain for them considering the estimate that 75% of F1 fans already have Netflix subscriptions. With so many people having Netflix, multiple big dollar sports packages probably don’t make much sense for the company. In a couple of months around June, Warner Brothers is distributing an Apple film called F1, starring Brad Pitt. If you want to watch this movie, which is projected to be a blockbuster, you must subscribe to Apple TV. I almost feel like I want to add Apple TV to the five or six other subscriptions I have, but I can’t watch everything I have access to now, so I should probably resist.

 

Financial Planning: Why Life Insurance Is a Poor Retirement Vehicle (And What to Do Instead)

Cash value life insurance is often pitched as a tax-free retirement strategy. On the surface it sounds great. You get tax-deferred growth, tax-free loans, no contribution limits, and a death benefit, but when you look under the hood the numbers often don’t work out. First, the returns simply don’t compare. With Indexed Universal Life (IUL) or Whole Life, your cash value growth is limited by caps and participation rates, and you miss out on dividends. Add in the cost of insurance, admin fees, and other hidden charges, and the actual return on cash value often falls well below the market. Second, the fees get larger over time. The older you get, the higher your cost of insurance becomes which directly eats into your cash value. If you’re taking policy loans and the policy lapses, you could even get hit with a massive tax bill in retirement. Third, the opportunity cost is huge. The high premiums needed to fund a policy could instead be invested in assets with better returns, more liquidity, and lower fees. Meanwhile, better tools for tax-free retirement income already exist. Most 401(k)s now offer a Roth option, allowing you to contribute after-tax dollars and grow your money tax-free, exactly what cash value life insurance offers. You can pair this with a Roth IRA or even a Backdoor Roth IRA if your income is too high to contribute directly. Together, these vehicles allow for substantial tax-free retirement savings without the complexity, high fees, or risk of policy lapse that come with life insurance. Don’t let marketing hype cloud your long-term strategy. Run the numbers and stick with what works.

 

 Companies Discussed: Nvidia (NVDA), Hertz Global Holdings (HTZ), Car Max, Inc. (KMX) & (DOW)

April 12th, 2025 | Tariffs, Timing the Market, Collecting Tariffs, China vs. US Trade War, Certificate of Deposit (CD), RH (RH), Caterpillar Inc. (CAT), Harley-Davidson, Inc (HOG) & (WBD)

Why I’m so excited about the tariffs

You may be thinking I’m a little bit crazy or blind to what is happening now, but I really wish people would be a little more patient and give this a few months to see the benefits. I want to remind people that the path we were on could’ve led to a collapse just like the great Roman Empire in 476 A.D. The United States in 2024 helped other countries grow their economies by sending them over $1 trillion in trade, not even close to fair trade and that is money we will never see again. Also in 2024, we saw our national debt climb to $35.5 trillion, an increase of roughly $2.5 trillion dollars in just one year! If that continued for the next 10 years, we would have debt of nearly $60 trillion, which would be unsustainable. Let’s not even talk about the interest payments on a debt level that high. What is already starting to happen is not the foreign countries, but rather the foreign companies themselves want to continue to be profitable and understand they must produce and be located in the United States. Companies like Siemens from Germany, Taiwan semiconductor and Foxconn along with others have already made huge financial commitments that will benefit their companies and also our country as well. As the days, weeks, and months pass along, I believe you will be hearing about more companies coming to the United States. I believe immigration will also change because we simply do not have enough workers to fulfill all these new jobs. This could lead these foreign companies to bring their workers along, which would make them part of the US consumer base that buys houses, cars, and simple things like go to the grocery store and go out to dinner and even get haircuts. This is quite a bit different from the problems we have with immigration now as it has become a big burden on the US economy. I believe this would create a major win for our country, please be patient!

 

Good luck if you are trying to time the market

If you have sold out of strong companies at good valuations during this market pullback, I believe you have made a huge mistake. As I have said there will be positive news that comes about and moves the market higher, which then leaves you with the question of what do you do now? Get back in? Wait for it to pull back? These trading mistakes can cost you immensely in the long run. I was surprised to see that going back over the last 20 years, seven of the top 10 days in stocks came within a two-week period of the worst 10 days. Which means many people that sold during the worst 10 days likely also missed those great days and the eventual recovery. A great example showing how quickly the tide can turn came on Wednesday after the announcement that there will be a 90-day pause on the full effect of tariffs since more than 75 countries have contacted US officials to negotiate a solution. There was also news that there is an “on the water clause” for cargo entering the US ports. This means any cargo “loaded onto a vessel at the port of loading and in transit on the final mode of transport on or after 12:01 a.m. EDT April 5, 2025, and before 12:01 a.m. EDT April 9, 2025, and (2) are entered for consumption, or withdrawn from warehouse for consumption, before 12:01 a.m. EDT on May 27 2025, are subject to the 10% additional rate in lieu of the country-specific rate of duty.” This is important as it will give companies more time to plan for elevated tariffs. These announcements led to a huge gain in stocks with the Dow climbing 7.87% on the day and the S&P 500 climbing 9.52%. The thing that surprised me was many companies that have China ties also rebounded substantially, but the tariff charged to China will be 125%, effective immediately. I’d be careful buying the dip here on all companies, but the important point I want to show is that the tide can turner quicker than you think!

 

How does the United States collect tariffs?

It is quite the system and it’s not as simple as a country/importer sending a check to the United States. The US doesn’t do the calculation for every shipment that comes into the country. No matter how it comes in, if it is by truck, plane or ships the country doing the importing is the one that calculates the tariffs and sometimes they use what are known as customs brokers to do the calculation for them. It may surprise you that it is somewhat on the honor system. Before a shipment approaches the border, the importer or the customs broker files electronically the paperwork and says what they are bringing and how much they owe. When the ship pulls into port, the information is reviewed by customs agents before they allow the goods to be unloaded and released. It is kind of like when we file our tax returns. It is on the honor system that you put in all the correct information and just like you may be audited on your tax return, customs do perform random inspections to verify what is being brought in and that the tariff amount is correct. Importers have an account with customs and pay the duties to them. If they use a licensed customs broker, then that broker would make the payment. After all this is completed, whoever imported the goods has 10 days to pay the duties. The penalties are pretty hefty if the importer does not pay within 10 days as they will be hit with admin fees, interest, and other penalties along with the biggest concern which would be suspension of deliveries to the United States. I would definitely say it is in the best interest pf these importers to pay the United States customs within 10 days.

 

China may look at other avenues to hurt the US in this trade war

I’ve said this before, but the tariffs on Chinese goods hurts them more than their tariffs on our goods. The simple math on it is the U.S. exported $143.5 billion of goods to China in 2024, while importing products worth $438.9 billion. Trade is way more important to their economy considering the fact they are a net exporter and a large one at that. In 2024, China exported roughly $3.58 trillion worth of goods, while importing just $2.59 trillion worth of goods for a surplus around $1 trillion. This makes trade a huge part of GDP as net exports contribute around 20% of GDP. The US on the other hand is a net importer so our trade deficit actually subtracts from GDP. What else can China do to harm the US? China did issue an alert warning its citizens of the potential risk of traveling to the US and attending schools there. Although there were approximately 1.6 million Chinese tourists that visited the US in 2024 and more than 250,000 students enrolled in schools, I don’t see this advisory as too problematic especially considering there was an estimated 77.7 million people from other countries that visited the US in 2024. The big concern people have is China selling our debt to drive up borrowing costs. I was disappointed by an article that said China could crush our housing market by selling mortgage-backed securities. Seemed a little dramatic to me considering foreign countries only owned 15% of the total outstanding mortgage-backed securities. Top owners did include China, Japan, Taiwan, and Canada, but I don’t see those other players selling at this point in time to harm US markets. It appears China holds just around 2-3% of these mortgage-backed securities and has been selling them over time with holdings down 8.7% year over year in the month of September and down 20% by the start of December. Even looking more broadly at U.S. treasury securities, China owned just $760.8 billion as of January 2025, which would represent about 2.2% of the total U.S. federal debt. Be careful falling for click bait, as I don’t believe China has the ability to “crush” our housing market. It would likely cause interest rates to increase slightly, but an outright crash would be extremely unlikely. Overall, while this trade war may hurt us, I still firmly believe it will have a far larger negative impact on the Chinese economy!

 

Why You Should Never Buy a Certificate of Deposit (CD) Again

For decades, certificates of deposit (CDs) have been a go-to option for savers looking to earn a little extra interest while keeping their money safe. However, in today’s financial landscape, CDs have become nearly obsolete, offering little to no advantages over more flexible and higher-yielding alternatives. One of the biggest drawbacks of CDs is their lack of liquidity. When you lock your money into a CD, you typically agree to keep it there for months or years. Withdrawing early results in penalties, often forfeiting several months' worth of interest. High-yield savings accounts, on the other hand, offer similar or even better interest rates while allowing you to withdraw funds at any time. Many online banks now offer savings accounts with yields that rival or exceed CD rates, giving you the best of both worlds: competitive returns and unrestricted access to your money. Another option is U.S. Treasury Bills (T-Bills) which are one of the best alternatives to CDs, offering higher returns with even greater security. Backed by the U.S. government, they are virtually risk-free and often yield more than CDs of similar durations. Additionally, T-Bills offer tax advantages, as the interest earned is exempt from state and local income taxes—something CDs cannot provide.  Money market accounts provide another strong alternative to CDs. They often have rates similar to or higher than CDs but come with added flexibility and liquidity. Additionally, money market funds that hold federal or municipal debt come with some tax-exempt income as well.  CDs may seem like a safe, simple choice, but in reality, they are an outdated savings vehicle that rarely makes financial sense anymore. Whether you choose a high-yield savings account, T-Bills, or money market funds, there’s always a better alternative that offers higher returns, more liquidity, or better tax advantages.

 

Companies Discussed: RH (RH), Caterpillar Inc. (CAT), Harley-Davidson, Inc (HOG) & Warner Bros. Discovery, Inc (WBD)

April 5th, 2025 | Tariff Announcements, Trade Barriers, Jobs Report, Solo 401k’s, LPL Financial Holdings Inc. (LPLA), Deckers Outdoor Corporation (DECK), Apple, Inc. (AAPL) & Delta Air Lines Inc.(DAL)

Tariff announcements cause market chaos          

In an effort to balance trade relationships across the globe, several new tariff announcements were made on April 2nd. This caused the markets to decline sharply in Thursday’s session with the Nasdaq closing down nearly 6% and the S&P 500 closing down nearly 5%. I must say I was not necessarily surprised by that decline, but was more surprised by the run up in the market in the days leading up to the announcement. The administration has been talking about these tariffs for months and I for one was not necessarily surprised by the actions they plan on taking. The U.S. will be implementing a baseline tariff rate of 10% on all countries and that goes into effect on April 5th. After research into trade practices from other countries including tariffs, currency manipulation, and trade barriers the U.S. will also be implementing higher duties on several countries. This includes an additional 34% on China, which comes on top of the previous tariffs for a new effective rate of 54%. According to the administration, this compares to a calculated tariff rate of 67% from China. Other tariffs included a 20% rate on the European Union vs a 39% calculated rate on our goods, a 46% rate on Vietnam vs a 90% calculated rate on our goods, a 32% rate on Taiwan vs a 64% calculated rate on our goods, and a 24% rate on Japan vs a calculated rate of 46% on our goods. This is just a small sample as more than 180 countries and territories will be facing these reciprocal tariffs. The problem here is the bottom for stocks might not be in as there will likely be continued announcements from other countries with their response. Some countries like China, France, Canada, and Germany have responded with a combative tone and a promise to fight back. I continue to believe this trade war will not be solved overnight, but I must say with the pullback there definitely appears to be some opportunities surfacing. I’d be careful waiting for the all clear on this as by the time that comes, you may have missed some great opportunities.  

 

Trade barriers increase around the world

It is not just the US that is increasing tariffs, many countries around the world are also increasing their tariffs. There are some economists predicting that we could be headed to the biggest increase in protectionism since the 1930s, when the Smoot-Harley tariff act was in place. Back then the average tariff rate in the US was nearly 30%. Today it is around 8.4%. When it comes to the group of 20 leading economies in the world, there are roughly 4650 import restrictions, of which the US has roughly 1000. The EU, China, Canada, Mexico account for roughly 700 restrictions with the other 15 countries accounting for 3000 restrictions. Some people feel the United States is being aggressive by adding all these tariffs to products coming in to our country, but when you look at the numbers and the facts, it appears we are just playing catch-up and we are way behind the rest of the world as they have been putting tariffs on our products going into their countries. I don’t understand why we are singled out as being such a bad country and unfriendly to other countries just because we want free trade in the world. I’m sure if they dropped their tariffs, we would do the same.

 

Jobs Report shows some positive news on a difficult day for the market

With all the news around tariffs and trade, it’s almost like everyone forgot that a jobs report was released on Friday. Job growth remained very healthy with nonfarm payrolls increasing by 228,000 in the month of March. This easily topped the estimate of 140,000 and was a nice increase compared to February’s reading of 117,000. The previous two months did see negative revisions of 34,000 in the month of February and 14,000 in the month of January. The unemployment rate did tick higher to 4.2% from last month’s reading of 4.1%, but this was largely due to an increase in the labor force participation rate. A major positive on the inflation front was wage inflation came in at annual rate of 3.8%, which was down from last month’s reading of 4.0% and was more in line with a healthy level that creates growing wages but puts less pressure on inflationary forces. I was surprised to federal government positions declined by just 4,000 in the month, but yet a report Thursday from Challenger, Gray & Christmas indicated Doge-related layoffs have totaled more than 275,000 so far. Apparently, the BLS noted that workers on severance or paid leave are still counted as employed, which would have a large impact on the employment numbers. It will be interesting to see how the employment situation shakes out in this category and if the private sector can absorb those lost jobs. It’s hard for some to look through the noise of all the trade announcements, but I still believe the economy is in alright spot and the growing concerns for recession may be overblown.

 

 

What is a Solo 401(k)?

A Solo 401(k) is a retirement savings plan designed for self-employed individuals or business owners with no employees. Also known as an individual 401(k), this plan offers significant tax advantages and higher contribution limits compared to other retirement accounts, such as SEP-IRAs.  One major advantage of a Solo 401(k) is the ability to contribute as both the employer and the employee. For 2024, the contribution limit as an employee is $23,000 (or $30,500 if age 50 or older), which can be made on a pre-tax or Roth basis. For employer contributions, the limit is up to 25% of compensation, bringing the total maximum contribution to $69,000 (or $76,500 for those 50+). Many plans now allow employer contributions to be made on a Roth basis as well. To be eligible, you must be a business owner with no full-time employees, which includes sole proprietors, independent contractors, freelancers, and small business owners. However, spouses of business owners may also participate, effectively doubling the possible contribution. Another key benefit is that a Solo 401(k) can be paired with backdoor Roth contributions, making it an attractive option for high-income earners looking for additional tax-advantaged savings. This offers a distinct advantage over Traditional IRAs and SEP-IRAs, which can trigger taxes on backdoor Roth conversions. A Solo 401(k) is an excellent retirement savings tool for self-employed individuals due to its high contribution limits and tax benefits. Additionally, some business owners may still be eligible to make a 2024 employer contribution if completed before the tax filing deadline.

 

Companies Discussed: LPL Financial Holdings Inc. (LPLA), Deckers Outdoor Corporation (DECK), Apple, Inc. (AAPL) & Delta Air Lines Inc. (DAL)

March 29th, 2025 | Tariffs Push Back, 401(K) Investors, Contradicting Inflation Readings, Credit Score Boost Before a Mortgage, Nike, Stanley Black and Decker (SWK), Wingstop (WING) & Viasat (VSAT)

US retailers push back against tariffs

I believe it is good news retailers are not pushing back against the US, but against countries where they buy products from. Companies like Home Depot, Walmart and Target are pushing back against production coming out of China. If a tariff is 10% the companies are pushing for the country to pick up the total cost and when tariffs jumped to 20%, they are getting push back on reducing costs by that amount but still having China producers pick up at least half. The companies are also looking at their profit margins and what they are doing is not increasing prices across the board, but perhaps raising prices on other items that are in higher demand and only raising the price slightly on products with less demand. The companies are also absorbing some of the cost themselves as opposed to passing the entire cost onto the consumer. In the end, the producer, the company, and the consumer will all absorb part of these tariffs and there may not be that much of an increase in price for many of these products. Unfortunately, I’m sure the regular media will find some products that went up dramatically and only discuss those. The big companies are also pushing for alternative places to produce products if China will not negotiate any reduction at all. Some companies are looking at producing the products here in the United States, which would be a win all the way around and I believe it would be the best thing for the United States.

 

Are 401(k) investors starting to panic?

A 401(k) is designed to be held for many years and should not be traded based on short term news. Unfortunately, the past month has seen the most trading activity in almost 5 years for 401(k)s. Individual investors added over $30 billion to money market funds in the first week of March alone. That type of activity in money markets has not been seen in the past year. In the first couple weeks of March, trading in 401(k)s was 400% above the normal level as people watched the market decline and they let their emotions take over as they headed to money markets. This is a huge mistake! Decision making seems to be politically driven. If people like the current administration, investors are seeing it as a buying opportunity. On the other hand, if they hate the new administration investors are either looking at going to cash or maybe shifting their investments internationally. Your retirement account is for the rest of your life and an investor should not be making decisions based on the current administration’s actions considering it’s such a small blip in the timeline of 30, 40 maybe 50 years of investing. Investors should go back to the basics and realize they are investing into American companies based on their earnings and what they are paying for those earnings. The country and the economy will always ebb and flow, but to try and figure out the best time to sell and buy has always been a losing game in the long term. If you have in your 401(k) good quality investments that are not overpriced, don’t worry about the short-term movements on a month-to-month basis. You should think about your investment plan not just year to year, but 5, 10, 15 years down the road, maybe even longer.

 

Inflation readings and consumer expectations are telling two different stories

The Fed’s preferred measure of inflation known as the core PCE showed an increase of 2.8% in the month of February, which was above the expectation of 2.7% and last month’s reading of 2.7%. Headline PCE includes the volatile categories of food and energy and showed an increase of 2.5%, which was in line with expectations and matched January’s reading. While the core PCE was a little hot, I don’t believe that rate of inflation is overly problematic. It would likely not be enough to get the Federal Reserve to lower rates, but it also would not be concerning enough for them to even consider increasing rates. Their wait and see approach is likely still in place and I’m optimistic, even with upcoming tariffs, there should be room to lower rates as we procced through the rest of 2025. Many consumers on the other hand seem very concerned about inflation with the final reading of the University of Michigan’s consumer sentiment survey showing expectations for inflation at a 5% rate one year from now and over a five-year horizon, the outlook now is for 4.1%. This marked the first time since February 1993 the reading was above 4%. I do believe these respondents are way off on their forecast and would be shocked if it came to fruition as that would be more than double the Fed’s 2% target. We talked about why we don’t like this survey in the past, but in case you missed it, the survey is tiny. It appears the survey typically interviews around 600 households each month for the preliminary report and around 800 for the final report. Considering there are over 130 million households in the US, I just don’t see the survey as a strong indicator.

 

US retailers push back against tariffs

I believe it is good news retailers are not pushing back against the US, but against countries where they buy products from. Companies like Home Depot, Walmart and Target are pushing back against production coming out of China. If a tariff is 10% the companies are pushing for the country to pick up the total cost and when tariffs jumped to 20%, they are getting push back on reducing costs by that amount but still having China producers pick up at least half. The companies are also looking at their profit margins and what they are doing is not increasing prices across the board, but perhaps raising prices on other items that are in higher demand and only raising the price slightly on products with less demand. The companies are also absorbing some of the cost themselves as opposed to passing the entire cost onto the consumer. In the end, the producer, the company, and the consumer will all absorb part of these tariffs and there may not be that much of an increase in price for many of these products. Unfortunately, I’m sure the regular media will find some products that went up dramatically and only discuss those. The big companies are also pushing for alternative places to produce products if China will not negotiate any reduction at all. Some companies are looking at producing the products here in the United States, which would be a win all the way around and I believe it would be the best thing for the United States.

 

Are 401(k) investors starting to panic?

A 401(k) is designed to be held for many years and should not be traded based on short term news. Unfortunately, the past month has seen the most trading activity in almost 5 years for 401(k)s. Individual investors added over $30 billion to money market funds in the first week of March alone. That type of activity in money markets has not been seen in the past year. In the first couple weeks of March, trading in 401(k)s was 400% above the normal level as people watched the market decline and they let their emotions take over as they headed to money markets. This is a huge mistake! Decision making seems to be politically driven. If people like the current administration, investors are seeing it as a buying opportunity. On the other hand, if they hate the new administration investors are either looking at going to cash or maybe shifting their investments internationally. Your retirement account is for the rest of your life and an investor should not be making decisions based on the current administration’s actions considering it’s such a small blip in the timeline of 30, 40 maybe 50 years of investing. Investors should go back to the basics and realize they are investing into American companies based on their earnings and what they are paying for those earnings. The country and the economy will always ebb and flow, but to try and figure out the best time to sell and buy has always been a losing game in the long term. If you have in your 401(k) good quality investments that are not overpriced, don’t worry about the short-term movements on a month-to-month basis. You should think about your investment plan not just year to year, but 5, 10, 15 years down the road, maybe even longer.

 

Inflation readings and consumer expectations are telling two different stories

The Fed’s preferred measure of inflation known as the core PCE showed an increase of 2.8% in the month of February, which was above the expectation of 2.7% and last month’s reading of 2.7%. Headline PCE includes the volatile categories of food and energy and showed an increase of 2.5%, which was in line with expectations and matched January’s reading. While the core PCE was a little hot, I don’t believe that rate of inflation is overly problematic. It would likely not be enough to get the Federal Reserve to lower rates, but it also would not be concerning enough for them to even consider increasing rates. Their wait and see approach is likely still in place and I’m optimistic, even with upcoming tariffs, there should be room to lower rates as we procced through the rest of 2025. Many consumers on the other hand seem very concerned about inflation with the final reading of the University of Michigan’s consumer sentiment survey showing expectations for inflation at a 5% rate one year from now and over a five-year horizon, the outlook now is for 4.1%. This marked the first time since February 1993 the reading was above 4%. I do believe these respondents are way off on their forecast and would be shocked if it came to fruition as that would be more than double the Fed’s 2% target. We talked about why we don’t like this survey in the past, but in case you missed it, the survey is tiny. It appears the survey typically interviews around 600 households each month for the preliminary report and around 800 for the final report. Considering there are over 130 million households in the US, I just don’t see the survey as a strong indicator.

 

Companies Discussed: Nike (NKE), Stanley Black and Decker (SWK), Wingstop (WING) & Viasat (VSAT)

March 22nd, 2025 | Stock Market Pain, Top Consumers, Long-Term Stocks, Form 5498, Tesla, Inc (TSLA), Lockheed Martin Corporation (LMT), Lear Corporation (LEAR) & Gilead Sciences, Inc.

Is there more pain coming for the stock market?
Both the NASDAQ and the S&P 500 have now hit correction territory and people are hoping that the worst is behind us. I would tell people to be prepared for more pain. The tariffs are still a big concern and the uncertainty around them has not cleared. Also, even with the pullback valuations for stocks are still high. We base our concerns on the fact that many valuation ratios are elevated compared to historical levels, but one that really stands out is the CAPE ratio, which stands for cyclically adjusted price-to-earnings. This was developed by professor Robert Shiller many years ago and the ratio uses a 10-year average of inflation adjusted earnings to value stocks. In January, it was at 37.74, which was the third highest level in the past 100 years. Not only was it the third highest level, but it was higher than what it was in 1929. After the ratio hit these high levels in the past, stocks declined dramatically. I believe with the headwinds ahead, we could be in for some stormy waters over the next 3 to 6 months.

 

How much more do top consumers spend?

When looking at consumer spending it is obvious that is not a constant level straight across the board and people making more money would obviously be spending more money in the economy. But just how much more is the high-end consumer spending than the average consumer? The top 10% of consumers account for 49.7% of consumer spending. If you’re thinking that sounds high, you are correct. You would have to go back to 1989 to match that type of imbalance for consumer spending. Is it a bad thing? Not really. The high-end consumer is what is keeping the economy going overall as it creates jobs and allows for the continued movement of money.

 

Holding stocks long-term doesn’t always pay off

You probably have heard that you should hold stocks for the long-term and you’ll be fine. I generally I agree with this statement, but there are always exceptions to the rule and that holds true here. If you look at different 10-year holding periods, you will see more losing periods than you probably expected. As an example, the 10-year period ending February 2009 had a loss of 37.4%. There are other 10-year holding periods such as the ones ending September 1974, August 1939, June 1921, October 1857 and April 1842 that all had losses ranging from 23 to 37.3 percent. Those losses are in real terms adjusted for inflation. One reason these periods had great losses is they were generally periods when there was high speculation that then caused prices to rise to elevated levels just to see them fall back to reality. This is why it is important for investors to not just buy into a story of a stock, but to understand what they are paying for the earnings, sales, book value, and cash flow of the business. If you don’t keep your eye on these valuation ratios, you would not realize when the stock becomes overpriced and you could end up with a big loss and then be left wondering what happened. I’ve been managing money for over 40 years and have continued to keep my eye on the ball as far as what we pay for any investment whether it is stock, real estate or bonds. If you invest blindly just based on the stock going up and the hype around the story, you could end up with a period of 10 years where you made no gains and then think stocks are risky or a bad investment. In a situation like that, it is similar to driving down the street with a bag over your head not seeing what is around you.

 

Financial Planning: What is Form 5498?

When funds are distributed from a retirement account, a 1099-r is generated and used to file your taxes to report what kind of distribution it was.  This is true whether the distribution is taxable or not.  For example, if you rolled money from a 401(k) to an IRA, it is a non-taxable rollover, but a 1099-r is still created since funds left the 401(k) which needs to be reported.  A Form 5498 is generated when funds are received by any type of IRA for any reason.  So, if you made contributions, conversions, or recharacterizations with a traditional, Roth, SEP, or Simple IRA, you will receive a 5498 stating what happened.  Depending on what you did, you will likely need to report the activity on your taxes.  The problem is, in many cases the Form 5498 is not ready until May of the following year, even though taxes are due the previous month, on April 15^th.  Here are some examples where this can create problems. If you did an indirect rollover where you withdrew retirement funds and replaced them within 60 days, the withdrawal should not be taxable.  However, if only the 1099-r from the distribution is reported because there is no 5498 that shows money was replaced, it may be reported as a taxable distribution rather than a rollover.  If you are doing backdoor Roth contributions, a 1099-r is generated when the funds are converted from the traditional IRA to the Roth.  If it is not also reported that a non-deductible contribution was first made to the traditional IRA, the conversion may be treated as a taxable conversion.  Lastly, if you have been making deductible traditional IRA contributions, but there is no 5498 showing the contributions, you may not receive the tax deduction.  I don’t know why this form comes later than other tax forms, but this is necessary to be aware of to correctly report tax information and avoid unnecessary tax.

 

Companies Discussed: Tesla, Inc (TSLA), Lockheed Martin Corporation (LMT), Lear Corporation (LEAR) & Gilead Sciences, Inc.

March 15th, 2025 | Private Equity in 401K’s, Bitcoin Strategic Reserve, Inflation Report, Inflation Front, State and Local Tax (SALT), DoorDash, Inc(DASH), Rocket Companies, Inc.(RKT) & Verizon (VZ)

Should private equity be allowed in your 401(k)?

70 million Americans have roughly $12 trillion in retirement accounts and the high fee private equity firms want a piece of that. Private equity comes with higher risk than traditional stocks and bonds that are found in retirement accounts. The big difference with private equity is they are generally illiquid investments in companies that are too small or risky to issue publicly traded shares. The businesses they invest in don’t issue quarterly reports on earnings and the valuations can at best be called questionable. It should be noted that private funds can tie up investors’ money for years and may give you some type of loose valuation of what your investment is worth. The fees that these funds charge is around 2 1/2%, which is well above the average fund of a half percent or so in current 401(k)s. Private equity tries to claim their investments far outperform the stock and bond markets, but a study from Boston College in 2024 found that long-term returns for pension funds, which allow alternatives, generated about the same investment return as a 60/40 split of stocks and bonds. Wall Street and the owners of these private equity funds just want to generate more fees even if it means putting your 401(k) in danger with high-risk investments with little to no liquidity. I’m in hopes that private equity’s pursuit of trying to get their hands on your retirement accounts hits a brick wall and the regulators protect your retirement plan. 

 

A bitcoin strategic reserve is a terrible idea

Last week there was an executive order signed to create a strategic bitcoin reserve for the United States. Crypto enthusiasts were pleased by the action, but disappointed that the order did not specify a buying schedule or clear strategy to buy more bitcoin. In the current fashion, the reserve will include coins that are already owned by the government that it seized from past law enforcement actions. The US currently owns more than 198,000 bitcoins that are worth about $17 billion. Given our large debt and the current deficit, I think it is just silly to borrow money and buy a volatile asset like bitcoin. The government is not here to make investment profits with our taxpayer dollars, if that were the case why wouldn’t they also buy individual stocks? Something like the Strategic Petroleum Reserve makes sense as that commodity plays such an important part in our day to day lives. Bitcoin has no impact on our day to day lives and I just can’t see what the strategic benefit would be outside of shooting for investment gains. We should be focused on paying down debt and reducing deficits rather than trying to generate investment returns with taxpayer money. I think even the action of keeping seized bitcoin is a mistake as that could be used to reduce debt. As for the price of bitcoin, I believe it could keep falling. There seems to have been a lot of catalysts that took place last year including the launch of ETFs and a more crypto friendly administration taking office. I don’t see many new catalysts in the near future, which could lead to steeper declines. For me, I don’t want my own dollars or my tax dollars in bitcoin or any other cryptocurrency for that matter.

 

Inflation report puts stagflation risks at ease

The headline Consumer Price Index (CPI) for February came in at 2.8%, which was below the estimate of 2.9% and less than January’s reading of 3%. Core CPI, which excludes food and energy came in at 3.1%, which was also below the estimate of 3.2%. This reading was less than January’s reading of 3.3% and it marked the lowest increase since April of 2021 when we saw inflation rise 3%. That was really the beginning of the inflation problems as the March 2021 core CPI rate was 1.6%. I’ve said it before, but with inflation at these levels I really don’t see it as a problem. There are some areas like eggs that increased 59% compared to last year, but outside of that most categories are quite tame. Shelter also continues to lift the inflation numbers as the index rose 4.2% in the month of February. This was the smallest increase for the shelter index since December 2021, but it still remains above both the headline and core numbers, which means it is putting upwards pressure on those reports. This report would have shown limited impact from the recent tariffs, so it will be interesting to see in the coming months what the numbers look like as the tariffs work their way through supply chains. I still believe inflation will not be a problem in 2025 and that the Fed will be able to cut rates a few times this year.

 

Another win on the inflation front

The February Producer Price Index (PPI) showed no change in the pricing level when compared to January. For the 12-month period it rose 3.2%, which was much better than last month’s reading of 3.7%. Core PPI, which excludes food and energy actually fell 0.1% from January and the annual increase of 3.4% was down from last month’s reading of 3.8%. This report helps us breathe a sigh of relief as December and January produced hotter readings. As we’ve been saying, inflation will not go down in a straight line and month to month the readings will be bumpy, but the general trend should be lower. As we said with CPI, it will be interesting to see how the tariffs impact these inflation reports in the coming months. One thing that does not get much coverage is that we had tariffs back in 2018 and inflation did not see a major spike. Hopefully that will be the case again and we can move on from this battle against inflation that has lasted a few years now.

 

Who Benefits from Repealing the “SALT” limit?

One of the more controversial changes in the Tax Cuts and Jobs Act of 2017 was the $10,000 limit placed on the State and Local Tax (SALT) itemized deduction.  Prior to 2018, those who itemized could deduct the full amount of state income taxes and property taxes on their federal tax returns.  Under current law through the end of this year, only the first cumulative $10,000 of these taxes is deductible.  This obviously hurts high earners in states like California.  Someone making half a million dollars per year and paying $40,000 in California income taxes only receives a deduction on the first $10,000 and receives no additional deduction for any property taxes they pay. While there isn’t as much public sympathy for high-income earners paying more tax, this limit also impacted California homeowners, especially first-time homebuyers.  When buying a home in California, property taxes are about 1.2% of the purchase price of that home. Thanks to Prop 13, property taxes increase minimally after purchase and generally much less than the property value increases. This means the longer you own a home, the lower your property taxes are relative to the fair market value of the property.  This also means that property taxes are most expensive when first buying a home.  In California, home values are high, mortgage rates are high, insurance costs are high, utilities are high, and because of the high value of homes, property taxes are also high. Virtually everything about homeownership in California is expensive, so it’s no wonder people are struggling to afford a house. This phenomenon has gotten worse in recent years, but it’s not new.  Regarding the SALT deduction, it is common for homeowners to have state income taxes and property taxes that exceed the $10,000 limit even if they’re not really “high-earners” because of the income needed to simply afford a home and its corresponding property taxes.  A young family could easily be looking at $20,000 to $25,000 just in state and local taxes, most of which would not be deductible due to the SALT limit.  While the SALT deduction is mainly thought of as a high-earner issue, a lot of normal people in California would benefit from its repeal, especially if federal tax rates do not increase back to their pre-2018 levels.

 

Companies Discussed: DoorDash, Inc (DASH), Rocket Companies, Inc. (RKT) & Verizon Communications Inc. (VZ)

March 8th, 2025 | Church Pension Plans, Structured Products, Job Report, Avoid State Taxes from Federal Debt, Sempra (SRE), The Mosaic Company (MOS), Zoom Communications (ZM), & Discover (DFS)

Church pension plans may be at risk

I hate to say this because we all want to believe that one of the safest places to go is church. Unfortunately, there are church pension plans like Saint Claire’s Hospital in Schenectady, New York and Saint Joseph Hospital in Rhode Island that had no or very little money left for retirees when it was time for their retirement. You may be wondering how can that be? Pension plans should be safe especially under federal law where there are protections from the Employee Retirement Income Security Act of 1974, which is commonly known as ERISA. You may also think if you know something about pension plans that employers must pay into the pension benefit guarantee corporation or what is also known as the PBGC. Unfortunately, when the government came up with the federal law on pension plans to protect retirees, there was concern about the constitutional separation of church and state and they did not want to cross that line. So they exempted churches and employers related to the church, which would include schools, hospitals and publishers. Church pension plans are allowed to contribute to the pension benefit guarantee corporation, but they’re not required to and unfortunately most do not. It is sad that we cannot trust some of our religious leaders to protect our financial future. If you or someone you know works for a type of association related to a church and they have a pension plan they may want to dig deep into it to make sure it’s really there. Unfortunately, there have been church pension plans that have exaggerated the returns on their investments in their pension plan and ultimately collapsed when people began retiring. It may be unfortunate but it could be wise to have a secondary retirement plan if you work for a church just to be on the safe side so you have something there in your golden years! 

 

Structured products are back from 2008

Structured products that destroyed the economy in 2008 are back once again. In 2008 there was nearly $1.8 trillion of structured products issued. For 2025, the experts are forecasting structured product issuance of $2 trillion. If you don’t understand what a structure product is, it is nothing fancy other than Wall Street creating loans that hide their true value. In 2008 these were mainly mortgage-backed loans that Wall Street sold and told people there’s no way that these borrowers would default on their real estate loans. Today, they are even riskier with the loans backed by weak assets such as credit card debt, lease payments on cars, airplanes, golf carts and even plastic surgery loans. Recently in Las Vegas there was a convention for four days that was packed with bankers from Wall Street and around the country that were all in the buzz about the hype of the profits they can make off of these structured products. So far investors have been safe and have not had any losses, but that will change in the years to come especially if the economy weakens. With higher demand, prices for these products are now higher and I believe overpriced. The higher demand also creates riskier investments that look similar to products with less risk but make no mistake, they have far greater risk. It appears to me that the greed on Wall Street is back and the bankers are trying to tell you that stock investing is out. They tell you that you should be putting your money into these structured products for diversification to avoid market fluctuations, but the real reason for this is the fees they make are so much higher than if you just invested in good quality equities that pay dividends and grow over the long-term. Wall Street makes nothing off of that!

 

Jobs report seems uneventful, which is a good thing

February nonfarm payrolls increased by 151k in the month, which was less than the estimate of 170k. While I wouldn’t say that’s a positive, it was better than last month’s reading of 125k and it still shows the labor market remained healthy. Revisions to the previous two months were extremely minor as December was revised up by 16k and January was revised down by 18k for a net impact of -2k. Many areas remained strong with health care and social assistance adding slightly over 63k jobs, construction saw growth of 19k jobs, transportation and warehousing was up close to 18k jobs, and manufacturing increased by 10k jobs. Some areas were a little disappointing with professional and business services declining by 2k jobs, retail trade fell by a little over 6k jobs, and leisure and hospitality was the biggest drag with a decline of 16k jobs. The big question many people had was if the cuts from the Department of Government Efficiency, also known as DOGE, would be felt in this report. It appears there was a minor impact as government jobs actually increased by 11k in the month, but that was in spite of a decline of 10k federal jobs. My estimation is that we will see the declines for government jobs increase in future months as the survey data came largely after many of these announced job cuts. In a separate report from outplacement firm Challenger, Gray & Christmas there were 62,242 federal job cuts in the month of February. The report also showed U.S. employers announced 172,017 layoffs in the month of February, which was the highest monthly amount since July 2020. Announced layoffs through the first two months of the year totaled 221,812, which was the highest for the period since 2009 and up 33% compared to the same period last year. While this may sound concerning, the big question that we will have to follow is can the private sector replace these cuts with new hiring? Based on the continued strength we have seen in job openings; I believe the labor market will remain in a good place. With that said, the data should definitely be much more eventful in the months to come.

 

Avoid State Taxes from Federal Debt

Interest rates have been higher than normal for the last several years, and many investors have been taking advantage of this by placing cash in areas that pay higher rates of interest.  A great way to do this is by buying U.S. Treasury Obligations such as Treasury bills, notes, and bonds.  These are guaranteed, often pay a higher interest rate than high-yield savings accounts or CDs, and the interest is exempt from income tax at the state level. By purchasing a money market mutual fund that holds exclusively U.S. Treasury Obligations, you keep all those benefits while also maintaining liquidity.  While this should not be viewed as a long-term investment, it is a great place for short-term cash.  However, in order to receive the tax benefit, the interest income must be property reported.  Every year investors receive 1099-INT’s for interest income and 1099-DIV’s for dividend income which includes interest from U.S. Treasury Obligations.  However, the tax-exempt status of the interest is not always obvious on the 1099 form, especially when the interest came from a fund.  Every year, custodians like Schwab, Fidelity, and Vanguard produce a supplementary tax information form that breaks down how much of their funds’ income was from non-taxable government debt.  This form along with the 1099 can be used to calculate exactly how much tax-exempt interest you had so that you can correctly report your investment income.  Whether you do your taxes yourself, or work with a tax preparer, make sure you are aware of any federal debt interest so that you don’t overpay on your state income taxes.

 

Companies Discussed: Sempra (SRE), The Mosaic Company (MOS), Zoom Communications Inc. (ZM), & Discover Financial Services (DFS)

March 1st, 2025 | Home Sales, Home Sellers, Overpriced AI, Berkshire Hathaway, Full Retirement Age, Freeport-McMoRan Inc.(FCX), Qualcomm Incorporated(QCOM), Super Micro Computer (SMCI) & (LLY)

Home sales are starting to look weak

Last week we saw the release of existing home sales in the month of January and the decline was far bigger than expected. The number of units sold on an annual basis was 4.08 million, which was a decline 4.9% compared to the prior month. Analysts were expecting a smaller decline of 2.6%. While inventory remains tight at a 3.5-month supply, it is improving. Month over month inventory increased 3.5% and when compared to last January, we saw an increase of 17%. For now, it appears that housing prices are stable with the median price of a home sold in January at $396,900, an increase of 4.8% over last January. The number of cash buyers slipped from 32% one year ago to now only 29%. What is more disturbing is the numbers on first time homebuyers. Over history, first time homebuyers have generally made up around 40% of home sales, but January data shows that has slipped to only 28%. I don’t see a crash in the housing market coming, but I do believe people buying a house thinking they will make 10 to 20% on their investment over the next year or so is a mistake as I’m pretty confident those days are gone. If you’re going to buy a home, buy it as a place to live and raise your family, do not try to make a quick investment return on the short term.

 

Some home sellers are giving up

As a whole, the US home selling market has had some cracks, which we have talked about in the past. The rising interest rates have kept buyers on the sidelines and people selling their homes still think they’re worth more than what they can get in today’s market. Also, sellers have been spoiled over the past few years thinking you put your house on the market and you should be able to sell it in less than a month. Over a longer period of time, which looks out further than just the last few years, it used to maybe take 3 to 6 months to sell a home. Home sellers really became discouraged in December as delistings soared 64% in the month compared to last year after not finding an interested buyer to purchase the home. At 73,000 delistings, this was the highest level since 2015. We could see that change if interest rates come back down, but at this point in time there’s no indications that that will happen in a major way. I’m still looking for a low growth environment for the price of real estate in the coming years.

 

Another comparison showing AI is overpriced

Many people have used the comparison of the tech boom and bust when looking at the high prices for a lot of these AI stocks, which I believe has a lot of relevance. But if you go back 100 years, there’s another comparison with Radio Corp. of America, which was a booming technology back then. If your company put radio in the name somewhere, you got to ride along on the upward trend. Sound familiar? RCA stock rose 200 times its value during the 1920s, but then by 1932 it fell 98%. What is even more amazing is in 1986 General Electric acquired RCA for about 72% higher than the price peak back in 1929. It has never been a wise investment strategy to overpay for any investment, which seems to mostly happens in technology. Over the years this hype cycle has happened with cannabis, electric vehicles, and 3-D printers just to name a few. No one knows where the top will be for AI, but one thing I know for certain is many people will lose far more than they could even imagine, which unfortunately will destroy their retirement portfolios.

 

Berkshire Hathaway historically high cash balance
It is no secret that Warren Buffett’s company, Berkshire Hathaway, is sitting on over $300 billion in cash, which is invested mostly in T-bills. As a percent of assets, it is now just over 25%, which has never been seen before. The excess cash is caused by two things, first reducing ownership of Apple and some other stocks. Last year alone Berkshire sold 605 million shares or about 70% of its holdings in the stock. It now has a market value of only $75 billion. The second reason for all the cash is likely because of his philosophy to invest when others are fearful and sell when they are greedy. We are definitely in the greedy stage, which we have been talking about at our firm for probably over a year now. No one knows when this will change, but it will. With the expensive nature of many companies and the markets, Warren Buffett likely cannot find anything on sale that he believes is worth buying. I don’t see a major crash coming in the near future, but I also don’t see any big gains coming either. I do continue to believe we will likely see a correction that leads to a short-term pullback of 10 to 20%. I hope you’re prepared for a few months of volatility, as I believe it is coming.

 

What’s so Special about your “Full Retirement Age”?

The Social Security Administration references your “full retirement age” quite often, so it is important to understand why that matters, and why it doesn’t. The main reasons this age is important is because at that point you are no longer subject to the earnings limit, and your benefit amount at that age is used to calculate spousal benefits. If you begin collecting Social Security before your full retirement age, you are subject to an earnings limit of $23,400.  For every $2 of wage or self-employment income you have above that limit, $1 of your Social Security benefit will be withheld from you.  Other income sources do not count and this rule no longer applies after reaching you full retirement age, meaning you can work and earn as much as you want.  If you do have Social Security withheld due to the earnings limit, you will receive a credit for that when you reach your full retirement age. As a spouse if you had a limited earnings history, you may collect a spousal benefit from the record of your higher earning spouse.  The spousal benefit is ½ of the higher earning spouse’s full retirement age benefit amount.  The age that the higher earning spouse actually collects does not change the spousal benefit.  In order to receive the full spousal benefit, the lower earning spouse needs to collect at their own full retirement age.  Waiting beyond that does not increase the spousal benefit, but collecting before full retirement age will reduce the spousal benefit. For those reasons full retirement age matters, but there are plenty of situations where it doesn’t. If you stop working before your full retirement age, then the earnings limit is irrelevant, and if you and your spouse both have an earnings history, then spousal benefits are irrelevant. Many retirees have the belief that something special happens to their benefit amount at their full retirement age, but the truth is, your Social Security window is from age 62 to 70.  Every month you wait to start, your benefit amount increases slightly.  There is no additional increase upon reaching a specific calendar year, birthday, or even your full retirement age.  For some it may be best to collect at their full retirement age, but for the majority of retirees it is more beneficial to collect at an age other than their full retirement age based on their individual income, asset, and tax situation.

 

Companies Discussed: Freeport-McMoRan Inc. (FCX), Qualcomm Incorporated (QCOM), Super Micro Computer, Inc. (SMCI) & Eli Lilly and Company (LLY)

February 22nd, 2025 | Senior Housing Market Boom, Young Investors, Weak Consumer Sentiments, Tax Traps with Rentals, Intel Corporation(INTC), Illumina Inc.(ILMN), The Kraft Heinz Company(KHC) & (HIMS)

Will the senior housing market boom continue going forward?

Investors may think with the population getting older that investing in senior housing could be a great investment going forward. They could be right as the oldest boomers turn 80 at the end of this year. What’s even more amazing is that the US population of 80-year-olds and older will hit 18.8 million in the next five years, that is a 27% increase from today. Senior housing hit a brick wall when the pandemic hit in 2020 and with the high infection rates, loss of life, and social distancing restrictions the demand fell drastically for senior housing. Both the high cost of labor and the shortage of it did not help either. It is estimated in five years they will need 560,000 new units to meet the expected demand. However, due to the high cost of development and the concern that about half of the seniors won’t be able to afford private senior housing costs, it’s estimated that only about 191,000 units will be added. The good news is more than 40% of seniors could afford senior housing on their income alone, which increased from 30% eight years ago. Unfortunately, those who can afford senior housing would rather not use it and prefer to age at home. Developers are willing to risk their capital on the higher end of the wealthiest seniors building luxury senior housing with fine dining, spas and movie theaters. One high end luxury senior housing project is expected to break ground this year at Rancho Santa Fe in San Diego with 172 units available. I think this sector for investing at this point is worth watching, but I don’t think I’d want to commit any capital at this time given there seem to be some substantial risks.

 

Are young investors taking too much risk?

A comparison of Gen Z, who were born between 1997 through 2012, versus baby boomers, who born from 1946 to 1964, show that Gen Z is taking on much more risk compared to when baby boomers were their age. In a study from the FINRA Investor Education Foundation, 36% of respondents between the ages of 18 to 34 had traded options. This compares to 8% of investors who were 55 years and older. Also revealed in the survey was younger and new investors were more likely to use margin when investing. This came at a surprisingly high rate with 23% of investors between the ages of 18 and 34 saying they had used margin when investing. This compares to just 3% of respondents age 55 and older. What was also interesting and informative is the lack of investing experience as 19% of investors with less than two years of investing experience stated they had used margin. However, just 6% of investors with experience of 10 years or more have used margin. I think many of these older investors are more cautious because they had learned their lesson. There’s no doubt that the younger investor today is taking on more risk than the more experienced investors. I believe this is for two reasons. First off, the access to trade and invest is so easy and it can be done on the phone in your hand at essentially any point in time. Compare that to 25-35 years ago when investors had to go through a broker to trade. The second reason I see is the Great Recession in 2008 was 17 years ago and the young investors today were only 5 to 15 years old and had no interest or care about the economy and the crash of the stock market. Investing successfully long-term involves many years of experience and research and unfortunately, I believe the younger investors will learn by experience that the risk they are taking today will not end well.

 

Weak consumer sentiment brings down stocks

Stocks fell on Friday after the headline consumer sentiment index came in at 64.7, which was down 9.8% from January and below the estimate for 67.8. This reading was also down 15.9% compared to this time last year. I was surprised to see the one-year expectation for inflation came in at 4.3%, which was the highest level since November 2023. The five-year outlook increased substantially to 3.5%, which would be the highest reading since April 1995. It was not a major surprise to see sentiment fall for Democrats and stay unchanged for Republicans, but it did fall for Independents. While I think it is important to look at various economic data, I wouldn’t say this survey is overly troubling. This survey comes from the University of Michigan and when I was researching how many people it encompasses, I found it includes at least 600 households and is conducted by phone each month. It is designed to be representative of all US households, excluding Alaska and Hawaii, but with such a small data set compared to total US households as of 2023 at 131.43 million, I must say I question how indicative of all US households it truly is. As I said, I don’t want to completely disregard this data point, but given the limited insight I would not be overly concerned. I do believe this shows how fickle the market is at this point and even an inkling of bad news could send stocks lower given the high valuations.  

 

Beware the tax trap of renting out your house

If you’re moving out of your current house, you may be considering converting your home into a rental property.  This may seem like an attractive way to generate additional income. However, before making this move, it’s important to be aware of the tax implications, especially the potential loss of the Section 121 capital gain exclusion.  When you sell a primary residence, you may exclude up to $250,000, or $500,000 for married couples, of capital gains if you owned and used the home as your primary residence for at least two out of the previous five years.  When renting out your home, you still own it, but it is no longer considered your primary residence.  If you decide to sell the property more than three years after beginning to rent it, it no longer qualifies for any capital gain exclusion, resulting in a potentially large tax bill, exceeding $185,000 in some cases.  Not only that, but while renting a property you claim depreciation each year.  This reduces your taxable income while owning a rental, but that accumulated depreciation must be “recaptured”, which means taxed, at ordinary income rates when the property is sold.  This recaptured depreciation tax also cannot be offset by the Section 121 exclusion regardless of the timing of the sale. If you want to rent out your home, make sure you either sell it before losing the exclusion, or be committed to being a real estate investor for the long haul.

 

Companies Discussed: Intel Corporation(INTC), Illumina Inc.(ILMN), The Kraft Heinz Company(KHC) & Him & Hers Health, Inc. (HIMS)

February 15th, 2025 | AI Electricity Usage, Mag Seven, Producer Prices, Credit Card Interest, Dollar Tree, Inc. (DLTR), Grand Canyon Education, Inc. (LOPE), Mondelez International, Inc. (MDLZ) & (PSX)

How much electricity will AI need?
To train AI models companies use graphics processing units, also known as GPUs. They are now starting to build larger clusters of GPUs, which requires even more electricity. How much electricity you may ask? AI data centers use about 30 Megawatts of electricity at a time. If you don’t understand megawatts, let’s just say it’s a lot of power. Picture 30 Walmart stores and how much electricity they use at any given time, that is estimated at 30 megawatts. Fast forward five years into the future when there will be more data centers and larger AI models. It is estimated they will require 5 gigawatts of electricity. 5 gigawatts is a huge amount of energy, it is about the same amount of energy needed to power a city like Manhattan in New York. Also, a big concern is within the next five years these massive data centers could consume up to 17% of US electricity. You may be thinking just build more power plants. The problem is data centers can be completed within 18 to 24 months, but to build a power plant can take over three years and that’s provided all permits and regulations are met on time. There’s also the concern of how do you get that energy to the data centers, you’re going to need more transmission lines, but that can take 10 years or longer to get that task completed. Wind and solar are not the answer because data centers need power 24 hours seven days a week and when the sun goes down or the wind stops, there’s no power. I see some roadblocks ahead with fast moving AI, maybe we need to slow down a little bit?

 

Mag Seven capital expenditures could be a big problem!

The Mag Seven, which includes Apple, Alphabet, Amazon, Microsoft, Meta, Nvidia, and Tesla has been a group that has dominated the stock market the last couple of years. Much of the excitement around the stocks have been tied to advancements in AI, but there has still been little evidence these companies (outside of Nvidia) have been able to profit from the trend. A major concern I have is these companies are investing tons of money and the big question is how profitable will these investments be? It is estimated Alphabet, Microsoft, and Meta will spend $200 billion on artificial intelligence this year alone and their budgets have continued to grow. If we look at total capital expenditures, also known as capex, the budgets have grown immensely for many of these companies. Amazon is projected to spend around $105 billion on capital expenditures in 2025, up 27% from 2024, which came after a 57% increase over 2023. Microsoft has guided to $80 billion in capex for its fiscal 2025, up 80% from 2024, which was up 58% from the year before. Alphabet estimated capex of $75 billion in 2025, up 43% from 2023, which was up 63% from 2022. Meta has a forecast of $60 billion to $65 billion of capex in 2025, up 68% at the midpoint from 2024, which was up by 37% from the year before. The big problem with major capex is investors won’t see much of a difference in earnings, but there will be major hits to free cashflow. Capex is generally expensed or depreciated over time, which means it won’t hit earnings in a major way initially, but it could weigh on earnings growth over time as that expense remains for years to come and potentially grows if capex budgets continue to climb. As an example, Meta is projected to see $68 billion of net income this year, but free cash flow could slide 25% to $40 billion. Investments of this magnitude need to pay off, especially considering the high valuations for these stocks. Time will tell if these investments work out for all these companies, but I must say I’m skeptical they will all be winners from this movement 5-10 years from now. Investors need to look at the full picture and understand all the moving parts, which includes how all the financial statements work together. At our firm we don’t just look at earnings, we also want to see good cash flow and a strong balance sheet.

 

Producer Prices come in hotter than expected   

The Producer Price Index, also known as the PPI, showed prices in January climbed 0.4% compared to last month. This topped the expectation of 0.3% and led to an annual increase of 3.5%. Core PPI, which excludes food and energy, produced an annual gain of 3.4%, which was lower than last month’s reading of 3.5%. While these data points were a little hotter than expected, economists now have inputs to estimate the closely followed PCE report. It is interesting that after the release of the CPI and PPI, which were both higher than expected, estimates for core PCE actually look quite favorable. On a monthly basis core PCE is expected to show a 0.22% increase, which would be a nice deceleration from December’s reading of 0.45% and on annual basis estimates are looking for a reasonable 2.5% increase. We will have to see what the actual results look like for the PCE later this month, but with these reports now in hand I continue to believe that while inflation is not at the Fed target, I still don’t see it as a major problem.

 

The True Cost of Credit Card Interest

Everyone knows that paying credit card interest is a bad thing, but it’s less well known how that interest is accrued.  Interest is calculated using an average daily balance method, which means every single purchase begins accruing interest immediately.  Purchases made on a credit card throughout a monthly statement period increase the outstanding balance.  After a month of spending, if the full statement balance is paid by the due date, which is generally 20 to 25 days after the statement period ends, no interest will be due, even though it was accruing during that time.  This is known as the grace period which is essentially an interest-free loan on those purchases. For example, if you spend a total of $5,000 through a statement period during January, you will not need to make a $5,000 payment until the end of February to avoid any interest. However, if you do not make that full payment by the due date in February, your grace period is void and you will owe accrued interest from the date those purchases were made in January, not from the due date in February.  Also, any additional purchases made in February and afterward begin accruing interest immediately without a grace period, even though those statement periods have not ended yet.  Since interest is calculated using the average daily balance method, the unpaid balance and interest compounds on itself making it more and more difficult to pay off. Credit cards have a monthly minimum payment, which is usually $25 to $50 dollars, which paying prevents a mark on your credit report, but it does not stop interest from accruing.  Credit cards can be a great tool as they can give you points and fraud protection, but those benefits are greatly outweighed when a balance is being carried.

 

Companies Discussed: Dollar Tree, Inc. (DLTR), Grand Canyon Education, Inc. (LOPE), Mondelez International, Inc. (MDLZ) & Phillips 66 (PSX)

February 8th, 2025 | Job Openings, Jobs Growth, Climate Mutual Funds, Private Equity, 401(k) Loans, Fox Corporation (FOXA), PVH Corp. (PVH), Dollar General Corporation (DG) & (UPS)

Job openings post a sharp decline

The Job Openings and Labor Turnover Survey, also known as the JOLTs report, showed job openings of 7.6 million in the month of December. This was below the estimate of 8 million and the reading of 8.09 million in the month of November. While this may sound disappointing, this still leaves the ratio of open jobs to available workers at 1.1 to 1. A softening labor market is still not a bad thing considering it is coming from such a strong spot where workers have had an immense amount of power over employers for a couple of years. The Fed wants to make sure the labor market isn't too strong as it could cause inflationary concerns, so I actually see this as a positive considering it is still a good report, but not too strong. I still believe the labor market could soften further without it being problematic for the economy.

 

Jobs growth still looks positive

Although the nonfarm payrolls growth of 143,000 in the month of January missed the expectation of 169,000, I still see the number as healthy for a growing economy. This number also came after upward revisions of 100,000 for December and November. The January number was slightly off the average of 166,000 in 2024, but I would expect to see a lower total in 2025 given the fact that the unemployment rate is extremely healthy at 4%. I was surprised to see wage growth accelerate to 4.1% in the month, which was higher than last month’s reading of 3.9% and was at the highest level since May 2024 when it also registered 4.1%. At this level I wouldn’t say wage inflation is problematic, but I would say it is worth watching. If it reaccelerated to a higher level that could pose problems for the battle over inflation. I would say overall the job report looked healthy with no major surprises and for the most part it would point to a labor market that is continuing to soften, which I believe is good for our economy as a whole.

 

Redemptions are high for climate mutual funds

Climate mutual funds, sometimes called green funds, grew quite rapidly from 2019 through the beginning of 2024. Apparently, investors began realizing that the equity concentration in these mutual funds really hurt their returns in 2024. Redemptions of $30 billion means investors wanted to leave these climate sensitive mutual funds to invest elsewhere. It is estimated worldwide that climate focused mutual funds are approximately $534 billion. Redemptions of $30 billion is a pretty big hit considering that equates to around 5 to 6% of fund assets. Based on how times are changing, I believe going forward investors should not expect their returns to keep pace with the overall market. Another problem for investors is when redemptions in these funds are high, the fund manager must sell off assets to raise cash, perhaps at lower prices which can really hurt the performance of the fund going forward. This is because the stocks have been sold out of the portfolio to raise cash and if the stocks rebound, the fund performance will lag because of the missing equities that had to be sold. On the other side, if they sell positions with a gain, this will create tax consequences for investors. 

 

Behind the curtain of private equity

Private equity over the last few years has become the cool thing in investing. Investors have been trying to get into private equity as an alternative asset, which I personally do not believe in because of the behind the curtain details no one knows what’s going on. Over the last 10 years, private equity assets have increase 300% to around $4 trillion. What’s even more amazing is that the fees collected by these private equity firms has increased 600%! A trade group by the name Institutional Limited Partners Association has had enough. They are pushing for new guidelines to standardize financial reporting for private equity investors including public pension plans, university endowments, and charitable foundations. What I thought was crazy is that private equity firms will vary how much they disclose to their clients based on how much they invest. The small investors will get less information than the bigger investors. In my opinion, it is not a wise place to put your money as I like to know what is going on with my investments. There are ways that the private equity firms are enhancing returns by using certain types of financial engineering as opposed to the old way of selling the companies they buy and returning cash to the investors. The most revealing thing I could find was the median fee that the small investors pay is somewhere around 2%. I have said many times in the past if your broker is trying to sell you or put you into the hot private equity market, I recommend saying no thank you and find another broker.

 

Are 401(k) Loans a Good Idea?

Taking a 401(k) loan may seem like an attractive option for quick access to cash, but it often comes with significant financial drawbacks that make it a bad idea. When you borrow from your 401(k), you are essentially taking money out of your retirement savings, which means losing potential investment growth and compounding returns that are crucial for long-term wealth accumulation. Although you repay yourself with interest, the interest rate is usually lower than what your investments could have earned if left untouched. Additionally, 401(k) loans must be repaid within a set timeframe, and if you leave your job, either voluntarily or involuntarily, the outstanding balance becomes due. Failure to repay results in it being treated as a distribution, triggering income taxes and, if you are under 59½, an additional 10% early withdrawal penalty, plus a 2.5% penalty in California. This can lead to a significant tax burden and further reduce your retirement savings. Moreover, and this is the biggest drawback in my opinion, when you repay the loan with interest, even though you are paying that interest to yourself, you are paying that interest with after-tax dollars which means you are being taxed twice.   First you have to earn that money and pay taxes on it in order to pay the interest, and you are taxed again when you withdraw that money in retirement. Many people also fall into the trap of taking multiple loans, which can create a cycle of dependency and derail long-term financial security. While a 401(k) loan might seem like a convenient way to borrow, the risks of lost investment growth, tax consequences, and potential repayment difficulties make it an unwise financial move in most situations.

 

Companies Discussed: Fox Corporation (FOXA), PVH Corp. (PVH), Dollar General Corporation (DG), United Parcel Service, Inc. (UPS)

February 1st, 2025 | 2025 Bank Earnings, DeepSeek News on AI, Custodians are not Fiduciaries, GDP Growth, Tax Time, Electronic Arts Inc. (EA), CSX Corporation (CSX), Dole PLC (DOLE), Juniper...

What bank earnings reveal for 2025

Most big bank earnings are out now and the news and the guidance did lean on the positive side. A concern was revealed, which was no surprise to us that loan growth was only up 1.1% from a year ago. It is expected to see loan growth for 2025 of around 2.6%. Bank of America was the big winner here reporting loan demand grew 5 % from last year, but regional bank KeyCorp disappointed investors with their guidance as they are estimating loan balances would drop 2 to 5% in 2025. A positive in their report was net interest income would rise 20%. That was not good enough for the analyst community as the stock sold off following the report. Net interest income, also known as NII is the difference of what a bank pays for money and what they loaned it out at. This is a big factor when one is investing in banks considering it is such a large part of their profits. We have talked before that we do expect to see more mergers and acquisitions, also known as M&A going forward. This could help banks like KeyCorp and other smaller banks that go on sale as their stock drops, as there may be a floor to the fall with bigger banks potentially having some interest in scooping up the smaller banks as they go on sale. There are over 4500 banks in the United States, that is a lot of potential for bank M&A. Expected reductions in regulations for banking would also be a great benefit to Wells Fargo and some other banks as well. I do believe in having a strong balanced portfolio and if you don’t have some type of financial bank or financial institution in your portfolio, I believe you are missing out.

 

DeepSeek news sends US AI stocks into freefall!

DeepSeek AI is a Chinese artificial intelligence start up that rivals US companies like ChatGPT, Anthropic, and several others. DeepSeek has seen it’s popularity surge after releasing its reasoning model known as R1. This model apparently tops or is in line with the US competition and on Monday the DeepSeek app took over OpenAI’s spot for the most downloaded free app in the US. Many of you can probably guess my thoughts on this after my concerns with TikTok, but I do feel this is extremely dangerous and users must be careful in understanding what type of data they are giving to China. The main reason this news sparked panic in the markets was DeepSeek was apparently able to launch its free, open-source large language model in just two months at a cost of under $6 million. That is million with an M and that is important considering all these US businesses that are spending billions and billions of dollars on AI. The first big question here is was all that money a waste and is there a more efficient way to achieve AI success like DeepSeek? Also, there have been curbs to insure China didn’t receive the best chips. Did they steal trade secrets, find a way to get their hands on the chips, or most troubling would be, did they create their own technology that would rival a company like Nvidia? Personally, I was not too troubled by the decline on Monday considering we have no exposure to the AI space. I continue to believe it is just way too early to invest in this space and there could be other future competition that comes in that we don’t even know of yet. I do also believe this points to how fickle the market can be and with a news story like this being able to take down some of the most beloved winners from 2024, the extremely high valuations for the market should concern investors in the broad-based S&P 500 or Nasdaq. I am still looking for value stocks to do well in 2025, but could this be the beginning of a decline for these overpriced tech names?

 

Custodians are not Fiduciaries, why that’s important to you?

Your financial advisor may be a fiduciary, but their custodian might not be and it could cost you money. Being a fiduciary registered with the SEC for around 20 years now, we take seriously our obligation to always do what’s best for our clients. That also includes choosing a custodian to hold our clients’ assets. We spent a lot of time looking for the right fit to make sure our custodian doesn’t charge any unnecessary fees. This may come as a surprise to you, but not all custodians are the same. There are custodians that advisors use that may charge little fees like trading fees or maintenance fees that are passed on to you the client, that the advisor should make you aware of. Something recently came to light called an asset shift where some custodians encourage investment advisors to switch out of certain funds so that the custodian will make more money off of the assets they recommend. Unfortunately, this may not be best for the client and they may receive a lower yield. Keep in mind this is not illegal because the custodian does not have a fiduciary responsibility to do what is best for the client. Also, if the custodian forces the investment advisor to switch some funds into funds where the custodian will make more fees off of the new recommended fund, it could also cause a taxable situation for the client. This may be more prevalent in your smaller advisory firms with maybe fifty to hundred million dollars in assets under management. The custodian could tell the advisor either you need to increase your assets with us or begin paying an annual custody fee of anywhere from $200-$400 a year. That fee could really hurt the advisor, as an example if the advisor had 100 clients and they were charged $400 a year per client that would cost them $40,000 a year. More than likely, the advisor would probably have to raise their management fee to their clients to help offset the expense. Investors should ask their financial advisor, even if they are fiduciary if any of their recommendations are being forced by their custodian, which would cost you the client more money. I’m happy to report at our firm the custodian that we have chosen and have used now for ten years puts no pressure on us at all. This could be perhaps because we do have nearly $700 million in assets under management.

 

GDP growth shows the consumer was still strong in Q4

Gross Domestic Product or GDP missed expectations for 2.5% growth in the fourth quarter, but the growth rate of 2.3% was still ok. For the full year we did see a small deceleration in growth as GDP growth fell from 2.9% in 2023 to 2.8% in 2024. While none of this sounds overly optimistic, the consumer really carried the GDP growth in Q4, which I see as positive. Personal consumption expenditures saw growth of 4.2% in Q4 thanks to growth of 6.6% for goods and 3.1% for services. It was surprising to see durable goods really saw nice growth of 12.1% in the quarter, which compared to nondurable goods growth of 3.8%. The miss compared to the expectations can largely be attributed to the change in private inventories as that subtracted 0.93% from the headline GDP number. This category is quite volatile and considering it subtracted 0.22% from the headline number in Q3, I would not be surprised to see it actually benefit the headline number in the first quarter of this year. Considering the strength of the consumer, I was actually quite pleased with this report and I believe it is a good sign for our economy as we look forward. I do believe we will see some bumps in the road this year, but I still think we should see GDP growth in the 2-3% range for the full year.

 

Get Organized for Tax Time

Tax season is upon us which means you are probably starting to receive tax documents that will be used to file your taxes.  Whether you file taxes yourself, or work with a tax preparer, make sure you gather all the information needed and have at least some understanding of what it means.  The tax documents alone do not always provide the information required to complete a tax return.  For example, contributions to a traditional IRA can either be tax deductible or non-deductible, such as when making a backdoor Roth contribution.  However, no tax form is generated to tell the tax preparer that a contribution was made at all which means the tax deduction would be missed, or your basis in the IRA would not be reported. In both cases you would be paying more tax than necessary.  With tax-deferred retirement accounts anytime money is distributed, a 1099-r is generated, but it is not always clear whether the distribution is taxable or not.  If the tax preparer is not aware that the 1099-r is from a direct or indirect rollover, a qualified charitable distribution, or the conversion from a non-deductible IRA, they may incorrectly report the distribution as taxable income.  When you are gathering your documents, make sure you are gathering everything.  If you have a taxable brokerage account, even if you didn’t withdraw any money, you will still receive a 1099 because any interest, dividends, or realized capital gains are reportable.    If you have a mortgage, you will receive at least one 1098 and you may receive multiple.  If you refinanced during the year or even if your mortgage was sold from one lender to another, which is quite common, you will receive a 1098 from each lender.  If you don’t include all of them, you won’t receive your full interest deduction. Most people don’t like dealing with taxes and everyone hates paying them, but take the time to understand your situation enough so you don’t pay more than you need to. 

 

Companies Discussed: Electronic Arts Inc. (EA), CSX Corporation (CSX), Dole PLC (DOLE), Juniper Networks, Inc. (JNPR)

January 25th, 2025 | Reduced Regulations for Businesses, Tariffs, Liquor Sales, Mortgages, Costco Wholesale Corporation (COST), Oracle Corporation (ORCL), The Walt Disney Company (DIS) & (GD)

Businesses should do well with reduced regulations going forward

Reducing regulations saves companies both time and money and time is always money. Starting in 2025, it is expected that for every new regulation that goes on the books, 10 regulations must be eliminated. I was unaware of what is known as the congressional review where a new President along with Congress can undo certain rules that the previous administration put on the books in the last few months. At this time, we’re not sure which ones will be eligible for elimination, but you will likely see some rules that perhaps made no sense to many people could be reversed in 2025. There could be a fight brewing between California and the federal government over some of these changes in regulations and California could lose their waiver and authority to ban the sale of new gasoline powered cars by 2035. The federal government wants control back over the auto industry, and does not want to allow states to come up with separate rules. That could ease pressure on both the auto companies and consumers as well. One that I’m not sure on is eliminating bank watchdogs like the FDIC. I like the idea of pulling back on the regulations, but maybe this is one that should be controlled not eliminated? Be prepared in 2025 for many changes in business, I believe most will be helpful. 

 

History has proven in the recent past that tariffs can cause problems in the economy and the markets as well.

We have talked for the past month or so that we have been lightening up on our investments, which does not mean we went to 100% cash but a more reasonable level of around 20% in cash and 80% invested. A big reason for this is I believe currently the markets are incorrectly ignoring what the potential tariffs will do in the short term. It was only about six years ago when we had tariffs and that caused disruption in supply chains and rising manufacturing costs along with declining profits for some corporations. Our trading partners did not simply give in to the demands. Looking at China in particular, in September 2019, an additional $113 billion of tariffs were imposed on top of roughly $50 billion of tariffs that were already in effect. Each time the tariffs were raised, there was retaliation from China. This began to cause wild swings in the stock and bond markets. It is important as well for investors to understand when tariffs were imposed in 2018, the economy was doing well. That was because of recent tax cuts that reduced the corporate income tax from 35% down to 21%, which was a 40% decline. Now in 2025 there are no big tax cuts that the economy and businesses are benefitting from, which could hurt corporate profits in the short term. There is a potential tax relief bill that must go through Congress, but that would not be felt by anyone until the summer or late fall of this year. No one knows for certain how long it takes tariffs to benefit the economy because last time the world and trade fell apart as Covid changed everything. So for now, we will just have to wait and see how long it will take before the United States sees a benefit to tariffs, which I do believe long-term they are a good thing. With some potential short-term headwinds from these trade conversations, I think it’s important to not be overly aggressive with your portfolio and to make sure you’re holding strong businesses with low valuations that do not rely heavily on overseas trade.

 

Liquor sales are declining and the bourbon boom seems to have passed

It used to be investing in alcohol companies like Brown-Forman, who is famous for Jack Daniels, and other alcohol companies was a relatively safe investment over the long-term. But it appears that peoples liquor cabinets are still full from the Covid years when they over bought many types of booze for drinking at home and they still have a good amount of that alcohol left. No help to the industry is the anti- obesity drugs, the legal use of cannabis and some people switching to non-alcoholic drinks. The recent warning from the US Surgeon General recommending alcohol bottles should have a warning label on them about cancer could also hurt sales temporarily. We can’t forget about the tariffs that are coming as this will likely be another heavy weight on alcohol and bourbon sales and profits. While writing about the decline in bourbon sales, I thought I would go to my bar to see if I had any bourbon to try. I took a shot of it and it burned all the way down. I personally don’t know why Bourbon is so popular in the first place. With that said I guess maybe others are agreeing with me, US whiskey sales declined 1.2% in 2023, which was the first decline in 21 years. In the first nine months of 2024 there was additional drop of 4%. Your bigger distillers have the balance sheets to whether the storm, but your smaller craft distillery companies are beginning to close. I do believe this will probably change course maybe not in 2025, but perhaps come 2026 more distillers could quit the business, which will leave room for the big companies to pick up that slack and see their sales and profits increase.

 

What Really Matters when Getting a Mortgage

When getting a mortgage, everyone’s top priority is to get the best rate. However, it is equally as important to understand what it took to get that rate.  When you get a mortgage, there are origination costs called points that you can buy to reduce your mortgage rate.  In other words, you can buy down that rate for a cost, and this typically doesn’t get analyzed correctly.  Let’s consider an example using current market rates. For a well-qualified buyer, the par rate is about 6.75%, meaning there are no added point costs.  If the borrower wanted, they could pay a point, which costs 1% of the mortgage balance, in exchange for a lower rate of 6.375%.  On a $600k loan, this point would cost $6,000.  The question is, how long would it take for the interest savings from the lower rate to recoup the additional $6,000 point cost?  In this example assuming a 30-year mortgage, it would take almost 3 years.  That may not seem like a long time, but in the current interest rate environment, most experts agree that mortgage rates will be coming down at least slightly, especially within 3 years.  This means if you forgo paying the point and accept the higher rate and higher accompanying monthly payment, as long as you are able to refinancing into a lower rate within 3 years, you will come out ahead.  On the contrary by paying a point, you believe that right now mortgage rates are at their lowest point for the next 3 years, which is a strong stance to take.  I believe there will be opportunities to refinance into lower rates, meaning the overall cheapest way to structure a mortgage now is with a higher interest rate.  You can even take this a step further by accepting a rate above the par rate in exchange for credits from the lender that can be used to pay closing costs and some of the mortgage interest.  In our $600k mortgage example, taking a rate of 7.125% would come with approximately $7,500 of credits.  A rate of 7.125% might look expensive, but as long as you can refinance within 3 years, that rate option gives you the lowest overall cost of borrowing.

 

Companies Discussed: Costco Wholesale Corporation (COST), Oracle Corporation (ORCL), The Walt Disney Company (DIS) & General Dynamics Corporation (GD)

January 18th, 2025 | Millennials and Home Buying, Inflation, TikTok, Capital Gains and IRMAA, Moderna, Inc. (MRNA), Signet Jewelers Limited (SIG), Teladoc Health, Inc. (TDOC) & Qorvo, Inc.(QRVO)

Millennials are a little gun shy on buying a home, but they have good reason to be concerned

Looking back 30 to 40 years ago when families purchased a home, they did it as a place to raise a family and they weren’t so focused on how much money the house would be worth in the short term. Millennials who were born between 1981 to 1996 and are now between the ages of 29 and 44 years old are old enough to remember the 2008 Great Recession. In 2008 there were 2,330,483 foreclosures, roughly 3 times 2006 when it was 717,522. If at the time the young millennials who were between the ages of 12 and 27 were not affected personally by a foreclosure, it was likely they knew somebody who was. Fast forward 12 to 13 years and millennials have experienced a rapid increase in housing prices that is essentially unprecedented. Experiencing such a wide swing in boom-and-bust cycles is etched in some of these millennial’s minds. By the time baby boomers hit age 30 52% were homeowners versus 30-year-olds today at only 43%. Surveys show almost 50% of millennials have stated that owning a home is more trouble than it’s worth, which is nearly double the feelings of Gen X and baby boomers on homeownership. If millennial home ownership continues to decline, we could see an oversupply in future years, which would probably mean a fall in housing prices.

 

Better than expected inflation fuels the market higher

The Consumer Price Index, also known as CPI showed inflation was up 2.9% compared to last year. While this was in line with expectations, it was the core CPI annual rate of 3.2% that beat the expectation of 3.3% and likely excited the market. This report followed the Producer Price Index which was largely in line to slightly better than expectations. The annual rate for both headline and core PPI rose 3.3%. Looking closer at the CPI, shelter continued to be a heavyweight considering it makes up about one-third of the CPI. While it registered the smallest one-year gain since January 2022, it was still at a high rate of 4.6%. It’s important to point out that if shelter was excluded from the core CPI, the annual inflation rate was 2.1%, which is right in line with the Fed’s 2% target. I believe there will be a lot of movement in various price groups this year, especially with new government policies in place. With that said, I do believe it is much more likely we continue to move towards the 2% target rather than seeing a sustained reacceleration in inflation. This leads me to believe we will not see the Fed hike rates this year and I think it is still possible to see a couple rate cuts come December 31^st, 2025.

 

The Supreme Court ruled against TikTok, why you should agree with them!

TikTok is very popular in America with 170 million people in the United States using the app. Many people love TikTok, but they don’t understand what the Supreme Court is seeing and why it unanimously confirmed the blocking of the app. It's important to understand the communist party of China ultimately has control of TikTok and that could be very dangerous as it believes in what was driven by Marxist Leninist ideology. The party believes that the CCP should silence dissent and restrict the rights and freedoms of Chinese citizens. This includes population control, arbitrary detention, censorship, forced labor, and very important pervasive media and Internet censorship. Do you really believe that China is our friend and they should be able to obtain data which they do on all the people using TikTok in the United States? Keep in mind that China does not allow Facebook or Instagram in their country. We would not let China own any of our major broadcasters because of the influence media can play and now social media also has that power. Think about this, China on a very low level begins to convince people in the US that it would be a good thing for China to take over Taiwan. Then, when they invade Taiwan, there’d be a backlash in the US of people who are siding with China against our government trying to keep Taiwan out of China’s hands. Taking over Taiwan would give China much more control and leverage over the United States. Think also about younger people today who post stuff that is there forever and when they are older it could be used against them as leverage. This could include future military leaders, perhaps members of our government or anyone else that when they became a more mature adult, they would not want those old posts to be released. I for one hope that TikTok is banned here in the United States or that it is purchased in full by a US company. At this point, China does not want that to happen because they do want to control the data and have access to it. What are your thoughts and why would you disagree with banning TikTok?

 

Navigating Capital Gains and IRMAA

If you are on Medicare or will be within the next two years, you will want to keep a close eye on your income because not only do you have to pay federal and state taxes on it, but you could also be forced to pay higher Medicare premiums because of it.  This is called IRMAA which stands for Income-Related Monthly Adjustment Amount, and your Modified Adjusted Gross Income, or total income, determines if you will be subject IRMAA and how much you have to pay.  This is basically an extra tax, but there are circumstances where it makes sense to pay it. Consider a situation where a married couple has income of $200,000 which means they are not yet triggering any extra Medicare premiums.  If they happen to hold some stock that was purchased for $450,000 and has a current market value of $500,000, selling would realize a $50,000 capital gain, push them into the next IRMAA tier, and cause them to pay about $1,800 in extra Medicare premiums.  Obviously, no one would want to pay an extra $1,800 if it is avoidable, but it may not be worth continuing to hold a $500,000 investment, especially if it’s an overconcentrated position or particularly risky.  An extra cost of $1,800 is less than half a percent of $500,000, so any market volatility has the chance to wipe out much more than $1,800.  We see people who are so concerned with IRMAA or paying other taxes that they never want to sell anything which causes them to lose more in the long run. Sometimes the best overall decision is to take profits and move on.

 

Companies Discussed: Moderna, Inc. (MRNA), Signet Jewelers Limited (SIG), Teladoc Health, Inc. (TDOC) & Qorvo, Inc.(QRVO)