Smart Investing is the radio show where Brent and Chase try to make investing easier to understand. They demonstrate long-term investment strategies to help you find good value investments.
Episodes
4 days ago
4 days ago
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 31st, 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)
Friday Jan 10, 2025
Friday Jan 10, 2025
The job report was good, but why is that bad?
Before we go into why the good report was bad, let’s talk about some of the data. The expected number of payrolls was 155,000, which came in well above that at 256,000 jobs for the month of December and also increased from November when it was 212,000 jobs. This high increase in payrolls caused unemployment to drop to 4.1% and came along with an increase in average hourly earnings of 0.3% for December. Over the last 12 months average hourly earnings have increased 3.9%, which is a decent number, but just under the expected growth in average hourly earnings. Job Growth was seen in healthcare with an increase of 46,0000 jobs. That was followed by leisure and hospitality which saw an increase of 43,000 jobs and government jobs, which includes Federal, state and local jobs were up 33,000. Because it was a holiday season there was an increase in retail jobs of 43,000 after the loss of 29,000 jobs in November. There are always revisions to the previous two months, but there was not much change here as October saw an increase of 7000 jobs and the November report was actually cut by 15,000 jobs which produced a total decline of only 8000 jobs for the past two months. Because the job report was so good compared to expectations, this put fear in the stock market and bond market that there may not be any interest rate cuts until the fall of this year. This also led to concerns that we could maybe see more inflation going forward. Maybe that makes sense for traders to sell, but investors should want a strong economy. That means your businesses will sell more goods and services and increase their profits. Interest sensitive equities like real estate were hit pretty hard with a good job report and banks also had a little trouble digesting the good report and declined as well. For investors I think this is a good report because it shows strength in the economy and based on the recent job openings from the JOLTS report, I think 2025 will be a good investment year for investors in fairly valued equities, but you will see a lot of scary volatility, which smart investors should use as a buying opportunity.
Job openings report sends the market lower!
The JOLTs report, which stands for Job Openings and Labor Turnover Survey showed an impressive increase in job openings in the month of November to 8.096 million. This easily topped the estimate of 7.65 million and October’s reading of 7.839 million, which was revised upward from the initial number of 7.744 million. While this points to a labor market that has continued to remain strong, there were some indications of softening. On a year-over-year basis, job openings fell by 833,000 and the quits rate moved from 2.1% in October to 1.9% in November. This indicates workers are less confident in finding another job if they quit their current one, which should put less pressure on wage inflation. The resiliency in the labor market is concerning for those that are looking for more rate cuts as a strong labor market allows the Fed to be patient and wait for inflation to cool further. The news paired with a December US services sector report that showed faster-than-expected growth and higher prices paid caused the ten-year Treasury to climb to around 4.7%. This spooked many speculative areas of the market including technology and cryptocurrencies.
Apple Intelligence, maybe not so intelligent?
Apple’s AI system, also known as Apple Intelligence, has been having some issues and has been spreading fake news. One of the AI features for iPhones summarizes users’ notifications, but some of the news stories it has been summarizing has been completely inaccurate. It recently attempted to summarize a BBC News notification that falsely claimed British darts player Luke Littler had won the championship. Unfortunately, this came a day before the actual tournament’s final, which Littler did end up winning. Maybe Apple Intelligence is so good it can predict the future? This was not the only false story though as Apple Intelligence has now wrongly claimed that Tennis star Rafael Nadal had come out as gay, Luigi Mangione, the man arrested following the murder of UnitedHealthcare CEO Brian Thompson, had shot himself, and that Israeli Prime Minister Benjamin Netanyahu had been arrested. The BBC in particular has been trying for a month to get Apple to fix the problem. In response, Apple apparently told the BBC it’s working on an update that would add clarification that shows when Apple Intelligence is responsible for the text displayed in the notifications. This compares to the current situation where generated news notifications show up as coming directly from the source. To me this doesn’t sound like a good solution as it doesn’t solve the problem and most people likely wouldn’t read past the headline anyway. This could still make the news organizations look bad, which I’m sure they are trying to avoid. Personally, I’m still not seeing the need to upgrade to the new iPhone, especially if these new AI features don’t provide any value. From an investment standpoint, as you likely know we still believe Apple is extremely expensive trading at nearly 30x future earnings and would not recommend the stock at this time.
The tariffs are coming, who could get hurt?
The retail industry will take a big hit on profits. It is estimated that about 23% of durable consumer goods like refrigerators, washers and dryers are connected to imported goods. About 19% of non-durable goods such as diapers, clothing, shoes and towels have some sort of dependency on imported products. These could be slightly higher because the only data available was from the Federal Reserve Bank of San Francisco that came out in a 2019 study. You may think that technology and the Mag Seven will be immune from the hit to profits, but even they could face problems. Nvidia has a 76% gross margin so they should be able to absorb most, if not all of any tariffs that come their way. Apple has half the gross profit margin of Nvidia at 37% and most of their products are built in China, which could be a huge dilemma for Apple. It is no guarantee but last time around the CEO of Apple, Tim Cook, was able to get an exemption on their products. Will that happen in 2025? That’s the big question. If they don’t get the exemption, their stock could take a massive hit that could be more than Apple investors have seen in a while. If you’re an Apple investor, you may want to use the sophisticated investing technique of crossing your fingers and anything else you’re able to cross as well and hope for the best. With the other Mag Seven such as Microsoft, Alphabet, Amazon and Meta, their products are safe but keep in mind that combined they spent roughly $200 billion in capital expenditures in the most recent quarter and about 60% was on imported equipment. The other industry that could take a big hit would be carmakers, such as Ford, General Motors and Stellantis and we could see hits to the operating profits anywhere from 20 to 30%. The big fear here is the estimate is between 50 to 70% of parts for the popular cars sold in the U.S. come from Canada or Mexico. Experts estimate that the consumers will see about a 6% increase in the price of new cars sold here in the US. I can’t even imagine what the increase on the price of a car will be if it’s a full import like a Porsche, Maserati or Ferrari. The good news is that the economy in the US is far stronger than Europe, China and Mexico, so we can weather the storm and be in a better negotiating position than those countries. With that said, I do believe we will go through some pain before things get better. I also believe if you have equities with high valuations in your portfolio that are affected by the tariffs, they could take a much larger hit than your low valuation companies that pay dividends.
Changes to Catch-Up Contributions
Every year the contribution limits for retirement accounts increase. This year is a little different because one of the provisions from the Secure Act 2.0 is now active. If you are under the age of 50, your contribution limit for an employer sponsored retirement plan like a 401(k) is now $23,500, an increase of $500 from 2024. If you will be 50 or older by the end of the year, you may make an additional catch-up contribution of $7,500 which means your total contribution limit is now $31,000. However, starting in 2025 thanks to the Secure Act 2.0, if you are between the ages of 60 and 63, you may make a catch-up contribution of $11,250 rather than $7,500, meaning your total contribution limit is $34,750. This age range is based on how old you will be at the end of the year, so if you are turning 60 this year, you are eligible to contribute the entire $34,750. However, if you are currently 63 but will be turning 64 this year, you may only contribute $31,000. If you are wanting to max out your retirement plan, make any necessary adjustments to your payroll contributions now so you don’t have to scramble at the end of the year. This addition catch-up contribution was implemented to help older workers prepare for retirement, but I don’t see how this will make much of a difference for anyone. It increases the contribution limit by $3,750 for 4 years, which is a total of $15,000. An extra $15,000 is not going to make or break anyone’s retirement, especially considering we already the option of funding non-retirement investment accounts after maxing out retirement accounts.
Companies Discussed: Expand Energy Corporation (EXE), Paychex, Inc. (PAYX), Cintas Corporation (CTAS) & United States Steel Corporation (X)
Friday Jan 03, 2025
Friday Jan 03, 2025
Watch out for record fraud when shopping.
With technology, shopping has become so easy and set records in 2024 of around $5.3 trillion. While this by itself is a problem as some people are over shopping, it has also invited more fraud than ever before and for the first three quarters of 2024 there was an increase of 14.5% to $8.7 billion of shoppers who lost money to fraud. Two things are happening here. First, consumers may be too emotionally excited about the purchase and they forget to look for scams that could be happening to them. The second item is the scammers are becoming smarter about how to scam people and they are making it more difficult to detect. To avoid being scammed, it is always wise to deal with a company that you know. However, even that may not guarantee your safety. Scammers can now use names that look very similar to the names you know. They can do this by simply adding or deleting a period or a letter somewhere in the title. So before you make that purchase, be sure it is the correct site that you want to be at and you’re not sending your money to some scammer from across the world!
Should you be investing in airline stocks with the record year they’ve had?
It has been quite the year for airline stocks and there have been huge one-year gains for United Airlines at 138% and Delta Airlines at 49%. While it was a laggard compared with its peers, American Airlines still posted a strong return of 29%. It is forecasted for holiday travel between December 19th and January 6th, there will be a record number of travelers at 54 million. Since our economy was reopened after Covid, consumers continue to enjoy traveling, which has benefited the airlines. Even with the record number of travelers and the large gains for the airline stocks, they still trade at reasonable price to earnings ratios of 9.7 for United Airlines, 10.1 for Delta and 10.5 for American Airlines. My concern is could this be a value trap going forward? The low price to earnings ratio might suck you in only to see a slowdown in travelers in 2025. We could also see a little bit higher oil prices based on production not coming online quick enough to keep up with demand, which would hurt the profit margins for these companies. While they might look enticing, I wouldn’t be interested in adding these positions to my portfolio at this time.
Could you benefit from the private prison boom that may happen in 2025?
In 2025 there could be a huge demand for detention centers and investors may benefit from investing in the private detention center called CoreCivic Inc, trading under the symbol CXW. CoreCivic has a market cap of about $2.4 billion and a FFO on a forward basis of $1.79. The company could benefit from recent statements from ICE saying it will need enough beds to detain a minimum of 100,000 migrants. The agency already has funding for 41,500 beds. Their competitor GEO has a head start already housing about 40% of ICE detainees. It should be noted that CoreCivic was at $14 the day before the election and it climbed to $22 the day after. There was concern that some banks would withdraw funding from companies who participated in the immigrant detentions, however it appears that CoreCivic does not need any new capital to bring on new facilities or bring back idle facilities. The high estimate for deportation would be 1 million people in one year at a cost of $88 billion. It is estimated that there were 11 million undocumented migrants in the US as of 2022. These higher dollars could benefit the private prisons as a quick alternative if there is no room in the county jails. I was disappointed that the company does not pay a dividend, but it has pulled back from a recent high of $24.99 a share to under $22 a share. At the price the stock would trade at a reasonable 12.29x the estimated FFO for 2025. An executive from the private company GEO group spoke about an unprecedented opportunity for their company, it could be a good investment opportunity for the small investor as well.
“Big Social Security Changes Coming”
The Social Security Fairness Act is set to be signed into law next week and will impact Social Security benefits for millions of Americans. This bipartisan bill will eliminate the “Windfall Elimination Provision (WEP)” and the “Government Pension Offset (GPO)” which currently reduce social security benefits for workers and spouses who have public pensions. The Windfall Elimination Provision applies when someone has worked a job where they paid into Social Security and also a job where they did not pay into Social Security and receive a pension instead. In this case, the Social Security benefits are reduced based on how many years they paid into Social Security. The Government Pension Offset applies when a spouse is entitled to a Social Security spousal or widow benefit but they also worked a job where they did not pay into Social Security themselves. In this case, the amount of their pension reduces the Social Security benefits they are entitled to receive. With the passing of this new Social Security act and the elimination of the WEP and GPO, Americans who were having Social Security benefits reduced will no longer see a reduction. This is one of the largest changes to Social Security in the last several years. The downside is, the increased benefits will cause the Social Security trust fund to run out sooner, even if the elimination results in a fairer benefit system.
Companies Discussed: Tidewater Inc (TDW), Constellation Brands, Inc. (STZ), Carvana Co. (CVNA) & VeriSign, Inc. (VRSN)
Friday Dec 27, 2024
Friday Dec 27, 2024
We could see a huge increase in oil demand in 2025!
With oil trading under $70 a barrel, gas prices have continued to fall. But unless the world starts producing more oil in 2025, we could see a big reversal in the price of oil. I base that on an estimate from the International Energy Agency as they expect a huge increase in the demand of oil. They are estimating oil consumption of 1.1 million barrels per day, which would be a 31% increase from the 840,000 barrels in 2024. I know from recent reports that there is concern that if we pump more oil, the price could drop dramatically causing difficulties and lower profits for oil companies. However, if the International Energy Agency is correct on their 31% increase in oil demand, that could actually cause shortages at certain times throughout the year. Also, it is somewhat amazing with how long electric vehicles have been out that they still don’t seem to be having at this time much of an impact. I do know that car manufacturers are having some difficulty selling their inventory of electric vehicles. I believe part of this is because of the abundance of oil on the market and low gas prices. Is it possible that we got too aggressive trying to build and force consumers into electric vehicles? What happens if in 2025 the federal tax incentives for electric vehicles go away?
Understanding compounding is why you should be cautious about the overvalued market!
Investing is great when everything is going up and the emotions tell you to stay the course because that will continue to happen. For two years now the S&P 500 has posted really strong gains because of a heavy concentration in the Mag Seven. There are now investors who say the market could be up another 20% in 2025. In our portfolio we will continue to remain cautious next year as we understand that compounding can work for you, but also against you. What do we mean by that? Let’s say that for three years the S&P 500 is up 20% per year, your $100,000 investment would grow to $172,800 because of compounding. You probably would feel pretty good about that and think it will to continue to increase. While it is possible it’s like riding a roller coaster. What I mean by that is if you’ve ridden a roller coaster you know as it gets to the very top, it slows down and it feels like it’s almost going to stop, then you go over that peak and you hit that big decline. That happened in 1935 and 1936 as big gains were followed by a 39% decline in 1937. I did not want to use 2002 when the S&P 500 had lost almost 50% of its value. I thought I would use something else from history that was not the worst-case scenario. Back to the three-years of 20% gains and a portfolio value of $172,800. If we saw a 39% loss again like 1937, your account value will drop all the way down to $108,864. You might be questioning how can that be? It’s because as your account grew in value the percent decline is now on a bigger amount than the initial $100,000 you started with. So in other words after four years of investing, you’re $100,000 investment was only up 8.9%. This is why for long-term investors I can continue to stay the course on a more conservative investment style and not try to figure out what the top is for many of these expensive companies. The other problem as well is once people lost 37% of the money on their investment, they would probably leave the stock market for years missing future gains. I can tell you many people think they know where the top is and they’ll get out in time, but unfortunately many people stay at the party too long. I can tell you managing money through the tech boom and bust many people thought the party would continue in the early 2000’s and they did not foresee the major declines that we saw during the tech bust.
AI stocks performed well in 2024, there are problems in 2025 that could cause a reversal
It is estimated that for every dollar invested on the AI infrastructure, revenue of four dollars needs to be produced. The AI leader so far has been Microsoft with their Copilot product that has a cost of $360 per user each year. At first glance that doesn’t sound too bad until you realize you still have to pay for the other software at a cost of anywhere from a low of $72 to over $650 per year. At $1000 is the AI expense worth the reward? Currently, there are places where you can get AI for free, will people be willing to pay for AI when they’re used to getting it at no expense? In a combined survey on using AI, 32% of respondents had used it in the previous week. This is a fast adoption rate compared to the Internet or the introduction of the PC. However, when asked what services they were using, most were using free services like open AI’s ChatGPT or Google’s Gemini. If people won’t pay directly for AI, then the companies will have to somehow monetize it through some means of advertising. Another big question is will AI really produce results in productivity? In the last couple of years, the US Bureau of Labor Statistics reported labor productivity has risen at an annual rate of 2.3%, which is 3/10 of a percent higher than the historical average. To make AI valuable we would have to see labor productivity increase to at least 2.5 to 2.6%. One question on many people’s mind is will AI replace a lot jobs? The answer to that question is it will replace jobs, but the hope is new jobs and opportunities will be created that we have not even thought of yet. They will likely require creativity, judgment and decision-making. I still think AI will be used and it is not going anywhere, but I worry the hype has carried many stocks to excessive valuations. 2025 may be a prove it year for AI and if we don’t see progress towards monetization those AI stocks could struggle!
Beware of Double and Triple Taxation
At the end of the year, it is helpful to check where your income stands so any last-minute adjustments can be made. These might be Roth conversions, IRA withdrawals, capital gain harvesting, capital loss harvesting, charitable donations, or retirement contributions to name a few. Before making any adjustments though, you need to fully understand the tax consequence of the transaction. Income activity like IRA withdrawals or pensions are fairly straightforward as they are considered ordinary income on the federal and state level. Income from Social Security or long-term capital gains and qualified dividends can be a little more complicated. Of the Social Security you receive, some is taxable and some is tax free. At most, 85% of Social Security benefits is reportable as income but it can be as low as 0%. The more other income you have, the more your Social Security will be taxed. Long-term capital gains and qualified dividends are subject to a different set of tax brackets and the tax is calculated after ordinary income sources are considered. Depending on your level of income, capital gains and dividends fall into either a 0%, 15%, or 20% bracket. What this means is by making one adjustment that increases your income, you could trigger more of your Social Security to be taxed and push capital gains into a higher tax bracket, resulting in a triple taxation event. For example, Roth conversions are popular at the end of the year, especially when taxable income is in the 12% tax bracket, but this doesn’t mean everyone should do it. You might be making a conversion that is taxed at 12%, but that also results in thousands of additional dollars from Social Security that were tax free to become taxable, and the income from the conversion and Social Security push capital gains that were in the 0% bracket into the 15% bracket. When added up that conversion at 12% ended up being taxed at over 37% because of the chain reaction of taxes, not including any state income taxes. In this situation it probably makes sense to find ways to reduce income instead. Year-end tax adjustments can be very helpful, but you want to make the right adjustments based on your situation.
Companies Discussed: Macy's, Inc (M), Xerox Holdings Corporation (XRX), PepsiCo, Inc (PEP) & Mastercard Incorporated (MA)
Friday Dec 20, 2024
Friday Dec 20, 2024
Is investing just looking too good these days?
When everything is going up including stocks, commodities and cryptocurrencies, one has to stop and think is this the top? In November US equity trading increased by 38% compared to November 2023. The last time we saw this type volume was in 2021 when meme stocks were the major craze. The CEO of Robinhood, Vlad Tenev, stated a few weeks ago that they’re looking at expanding into sports betting. In my opinion that is not a far stretch from what they’re doing now. Over the past year, their stock has climbed 235% and it trades under the symbol HOOD. Polling by the US conference board on the bullishness of investors revealed that consumers expectations for equities compared to their own income has never been higher. Funny thing when I was drafting this post and I tried to put in bullishness, the auto spellchecks corrected it with foolishness. I would have to agree with the spellcheck on that. Lastly, I can’t help but comment on the most ridiculous thing in crypto I have seen yet. There is now a cryptocurrency and please excuse my language called Fartcoin that has a market value of over $900 million. Comparing that to something of value, that is greater than nearly 40% of all American publicly traded companies. Remember, if you are speculating, Wall Street will always have some type of crazy investment that they’ll make a lot of money off of, but yet in the end, you the speculator investor will more than likely lose big if not all your investment. It may be exciting for a while, but eventually the emotional roller coaster will wear on you.
Are pharmacy benefit managers, known as PBMs, costing consumers?
If you go back to the early 60s, PBMs were the heroes because they helped reduce and control spending on prescription drugs. Back then drug companies were charging high prices and the PBMs came in and negotiated contracts for large purchases of drugs so the drug companies would not have to fill an order of 20 pills. Instead, through a PBM the drug companies could fill an order of say maybe 20,000 pills and charge much less. The consumer received lower prices on drugs, the drug company made a good profit, and the PBM took a slice of the pie. The reason we receive such great prices at Costco on all items is because they buy large quantities of products and pass the savings on to the consumer. Obviously, Costco doesn’t pass all the benefit to the consumer and they keep part of the cost savings as a profit. Not to mention they also charge a subscription fee to gain access to these savings. This is the same way PBMs operate, they keep part of the discount or the spread for themselves so they can make profits. What all the hoopla is about is that the PBMs don’t show the discount or the spread that they are receiving. The FTC, also known as the Federal Trade Commission, already regulates PBMs to ensure compliance with antitrust and consumer protection laws. There’s also concern that six PBMs control roughly 90% of the market. I personally think that is OK especially when you compare it to how many options you have for your cell phone or cell phone service. There are many other services or products where you ultimately have limited options.
Stock market falls after disappointing Fed comments
It was widely anticipated the Federal Reserve would cut the Fed Funds Rate by a quarter of a point to a target range of 4.25%-4.5%. While the Fed followed through on those expectations and lowered the rate back to the level where it was in December 2022, it was the projection for 2025 that moved stocks lower. The Fed indicated it would probably only lower rates twice in 2025. This projection is based on the dot plot which is a matrix of individual members’ future rate expectations. Personally, I’m not a fan of the dot plot as Fed expectations have been wildly off in the last few years and the latest dot plot cuts in half the committee’s intention when the plot was last updated in September. I believe it is just too hard to predict out what inflation will be for the longer term, which then makes it difficult to get a gauge on where interest rates will be over the next few years. Given the current data I can see why the Fed wants to be patient, but the problem as we all know is data can change. If inflation does start to decelerate further next year it is absolutely possible the Fed cuts maybe four times instead of the current estimate of two cuts. The main takeaway I have from this meeting is the Fed is not on an aggressive rate cut cycle and they are going to be data dependent. Ultimately, the market did not like what Powell said and stocks fell greatly during his press conference. This led to another down day for the Dow Jones, which marked the 10th straight losing day. This is the longest losing streak since 1974 when the Dow fell 11 days straight. I do believe with the excessive valuations there will be continued volatility in the markets, but I do see this as an overreaction to the Fed comments and we still see great upside for several companies in next years market.
Should you Fund a Health Savings Account?
A Health Savings Account (HSA) is an investment account that is primary used for medical expenses but also doubles as a retirement account. Contributions to an HSA are tax deductible and can be invested. Investment earnings in an HSA grow tax deferred and may be withdrawn tax free to cover medical expenses at any age, you do not need to wait until retirement. You may also reimburse yourself for out-of-pocket medical expenses at any point for expenses that occurred while you had an HSA. For example, if you paid for some medical expense in 2024 but chose not to withdraw from your HSA to cover it, you could keep those funds growing tax free and withdraw them in 2030 or any other future year. Unlike Flexible Spending Accounts where funds must be used every year, balances in Health Savings Accounts rollover each year indefinitely, which is why they can be great retirement accounts. If you make a withdrawal that is not for medical expenses, it is taxable and comes with at 20% penalty. At age 65 you may withdraw funds for any reason without penalty, but it is still taxable if not used for medical expenses, so you really just want to use these for medical expenses to avoid taxes and penalties. In retirement there are typically plenty of medical expenses like Medicare premiums and elder care, so it is usually not a problem to withdraw all the funds tax free. An HSA account must be paired with a high deductible health plan (HDHP) and in 2024 the annual maximum contribution is $4,150 for a self-only plan and $8,300 for family plans. If you are over 55 you can make an extra $1,000 catch-up contribution. HSA accounts can be funded through payroll if your employer offers them or you can open your own account as long as you have a qualifying plan. It is more tax advantageous to fund through payroll though because not only are contributions pre income tax, they are also pre–Social Security and Medicare tax which is an extra 7.65% savings. Unfortunately, California does not recognize HSA accounts which means contributions are not deductible at the state level and earnings are taxable. However, these are still extremely tax efficient and useful accounts and are not utilized enough.
Companies Discussed: Netflix, Inc. (NFLX), RH (RH), Broadcom Inc. (AVGO) & Occidental Petroleum Corporation (OXY)
Friday Dec 13, 2024
Friday Dec 13, 2024
You should be prepared for the upcoming stock market correction!
At Wilsey Asset Management we are prepared for an upcoming correction in the stock market. That doesn’t mean we or you should sell all your positions and go to cash. What it does mean is you should take a close look at your portfolio and see if you’re over concentrated in certain positions, especially those that are trading at lofty valuations based on earnings, sales, book value, and cash flow.
Many investors think that their stock or stocks will never decline and will just keep increasing forever. This is because they have no history or way of valuing what they hold in their portfolio. They are just happy because it keeps going up, which is obviously unsustainable. It is important for investors to realize that roughly every 19 months or so stocks go through a correction of 10% or more. If you look back in history, the last correction we had was roughly 20 months ago in March 2023 because of the regional banking crisis. What will cause the next correction? It could be concerns on tariffs, it could be due to global unrest, or perhaps it will be something that no one even thought of. The average correction lasts 3 to 4 months, but investors should be prepared for a longer period because an average is simply the average, and it will not be the same for every correction. Mentally, investors should be prepared for corrections, and they should understand it is not a matter of if it will it happen, but when it will happen, and you should not be emotionally disappointed when it does happen. As an investor, you have to realize it does happen, but if you have a strong diversified portfolio with investments that you understand you can weather the storm. If most of your stocks in the portfolio pay dividends that might make you feel better and also the income helps offset a potential decline in your portfolio. Also think like famed investor Warren Buffett that when a correction happens many equities go on sale and that is time to start buying. Don’t, however, buy with the intention that you make money in the next month or two. Realize that you’re buying a small piece of large company on sale that should do well for you in years to come.
Technology has changed and improved oil drilling
Thanks to advancements in technology and artificial intelligence, the United States now out produces any other country in the world when it comes to oil. Much of the success has come from the Permian Basin which is 75,000 square miles located in Texas and New Mexico. The area produces almost 50% of US oil. There have been huge efficiency advantages in US oil production which have increased 60% or more a day while using 40% less workers. It used to take 18 months to find oil when drilling in the ocean with seismic imaging. Thanks to advances in technology, it now takes only 18 days. Companies like Chevron also claim they can drill 80% more feet in a day than they did five years ago. When you think of oil drilling, you may think of the new show Landman on Paramount+ and all the dirty oil. While that is still part of it, it is to a much smaller degree because now there are workstations with computers and 20 to 30 workers controlling thousands of pieces of equipment from many miles away. All this new efficiency will benefit the consumer as this will stabilize oil prices to some degree. I believe this will occur because the breakeven for oil in the Permian has dropped over 50% to $40 a barrel and could fall even further. What this means is more and stable profits for the oil companies. The consumer will benefit as well as oil companies cost decline and the price of gasoline at the pump could decline further.
Should we start to question the progress on inflation?
The November Consumer Price Index (CPI) came in at 2.7%, which was in line with expectations but higher than October’s reading of 2.6%. Core CPI, which excludes food and energy came in at 3.3%, which also matched expectations. The concern here is that this was the sixth month in a row that we have been at 3.3 or 3.2%. I have spent a lot of time talking about shelter costs, but those are finally starting to decelerate. The shelter index showed a gain of 4.7% compared to last year and while it still accounted for 40% of the monthly CPI increase, it was the smallest 12-month increase since February 2022. I continue to believe this index will continue to decelerate moving forward. The big question here is should we be concerned with this report? It looks like since it came in right along expectations the market is now with near certainty pricing in a cut at the Fed’s meeting next week. I do have to say though it is somewhat concerning we are still a decent ways off from the Fed’s target and it appears we have stalled out. We have come a long way from when the CPI was 9% in June 2022, but I believe if the Fed sticks to being “data dependent” they will want to see further progress before cutting rates much further next year. There are still some positives with areas like shelter and auto insurance that should be less burdensome next year, but other areas like energy will have a tough comparison considering the lower prices this year. Overall, I continue to believe the economy is in a good spot, but this report confirms my thoughts that those hoping for a lot of rate cuts next year may be getting too far ahead of themselves.
Make your Charitable Gifts Count this Season
If you currently receive required minimum distributions (RMDs) from a retirement account and you make charitable donations, you should be using your required distributions to make those charitable gifts. This is called a qualified charitable distribution (QCD) and it is a tax advantaged way to make the donations to charity that you were already doing. After the tax changes in 2017, the number of tax filers who itemize dropped substantially. Charitable donations are typically an itemized deduction, so for the majority of tax filers, charitable gifts do not provide any tax benefit. When taking a required distribution from a retirement account, the distribution is reportable as income. However, any required distribution that is instead sent to a charity does not need to be recognized as income, meaning the giver is guaranteed to receive both the federal and state income tax benefit, even if they don’t itemize. Not only that, but since the charitable distribution is not included in income, it results in a lower adjusted gross income which is the income level that determines the cost of Medicare premiums (IRMAA). A normal itemized charitable donation only reduces taxable income, not adjusted gross income, so even people who itemize are still better off making qualified charitable distributions rather than itemized charitable donations. These QCDs are a great way to help a cause you believe in while getting the most tax benefits possible.
Companies Discussed: The Cigna Group (CI), The Kroger Co. (KR), The PNC Financial Services Group, Inc. (PNC) & The Hershey Company (HSY)
Friday Dec 06, 2024
Friday Dec 06, 2024
Job openings remain strong, what does that mean for our economy?
The Job Openings and Labor Turnover Survey, also known as the JOLTs Report, showed job openings of 7.74 million in the month of October topped expectations of 7.5 million and increased from September’s reading of 7.4 million. While it was nice to see the increase, I wouldn’t be surprised to see job openings decline further from here. Openings peaked in March 2022 at over 12 million and have been on the decline since then. While that may sound problematic, these numbers were greatly distorted by the Covid shutdown and then the reopening that followed. We had never seen more than 8 million job openings pre Covid and at the peak there were more than two job openings for every available worker. We still have a very healthy labor market considering there are still 1.1 available positions for every unemployed worker. I would actually say the labor market is in an even healthier place at this point in time. With the excessive amount of openings, we saw a lot of employee turnover and quits which I believe led to elevated wage inflation. The labor market is much more balanced at this point in time, which should lead to less concerns over wage inflation. This should then be positive for the overall inflation rate which the Fed has been battling the last couple of years now.
The labor market continues to produce strong results!
November payrolls showed a very nice increase of 227,000, which topped the estimate of 214,000. The two prior months also saw positive revisions with October now showing gains of 36,000 versus 12,000 and September showing an impressive growth of 255,000 versus 223,000. While the November gain may look quite strong, it’s important to put this in perspective and pair it with the weak October report. October was challenged as it was held back by impacts from Hurricane Milton and the Boeing strike. This essentially reduced the jobs in the October report and added them to the November report. If we instead look at an average of October and November, we would then see growth of 131,500, which is still strong but not nearly as impressive as the November headline number. Areas of strength in the report included health care and social assistance which was up 72,300, leisure and hospitality which was up 53,000, and government which was up 33,000. While the government number includes state, local, and federal, I am curious to see what these numbers look like next year with Elon Musk and DOGE taking a closer look at government spending. Instead of consistent gains from this sector, we could potentially see a decline in payrolls. Utilities which saw a decline of 100 and retail trade which saw a decline of 28,000 were the only areas that produced a negative result in the month. I was surprised to see retail trade on the list considering the busy holiday season, but it is believed the later Thanksgiving holiday had a big impact. With the report largely in line, expectations for a Fed rate cut jumped to nearly 90% when they meet on December 17th and 18th. At this point, I would be very surprised if they didn’t do a quarter point cut at that meeting. I do believe after that cut though, there could be a pause until we see further data.
Holiday spending is looking positive
We have now been seeing predictions for what spending will look like for the holiday season. It’s no surprise to me those numbers are looking pretty good with estimates for spending to increase somewhere between 3.8 and 4%. These estimates should be confirmed or may even be a little light with the success of the post-Thanksgiving deals. Data from Mastercard showed Black Friday retail sales, excluding automotive, increased 3.4% compared to last year. This came with a huge increase of 14.69% for online shopping compared to an increase of just 0.7% for in-store sales. According to Adobe Analytics, Cyber Monday then set a record with $13.3 billion of sales. This was an increase of 7.3% compared to last year. Overall, Adobe Analytics showed online spending for the Cyber Five rose 8.2% year over year to $41.1 billion. The spending looks good for a few different reasons. First, the election is finally over. Based on what I was reading, I believe people really stopped spending because of their uncertainty of what direction they thought our country would be heading. Now that the election is over, consumers are benefiting from and feeling good about a strong stock market that has done well this year and we still seem to be getting some price appreciation on our homes. According to the conference board, their recent report showed the strongest monthly gain in consumer confidence in over three years. We will continue to keep you informed and updated on holiday spending, but based on what I’m seeing I do expect consumer spending for the holiday season to have a strong increase from last year and perhaps when we see the real numbers in January, they could come in higher than those estimates!
Trading stocks 24 hours a day is coming soon!
With technology today I believe it will definitely happen, but the question is when? I think a more important question is do we really want it? Currently the market trades from 9:30 in the morning until 4 o’clock in the afternoon Eastern standard time. There is also currently low volume in after-hours trading. Companies like Robinhood and even Charles Schwab allow for trading of some equities after hours in a lite market. I have been managing money now for over 40 years and I’ve seen the good and the bad. What worries me is this could become too much stress for some people to handle. I can see people waking up at 2 o’clock in the morning to check to see whether their stock is trading up or down and this could become a regular habit which could happen anytime at night. It would also allow people to make impulsive decisions since you have your phone with you 24 hours a day. Once that trade is made it’s done in terms of its financial impact but will you then worry about it and not be able to sleep? Investing can cause a toll on your emotions and I think having that break from 4 PM until the next morning at 9:30 gives your body and mind an emotional break. If you’re a trader and you’re gambling you probably don’t care much about reading the news or digesting the most recent earnings release before making any financial decisions, but if you are a true investor and you invest for the longer term you don’t need 24 hours a day to trade. You will use the break to read and analyze your decisions because you want to do your research before buying or selling. Be careful what you wish for!
Tax Problems with Overconcentrated Portfolios
We’ve seen many cases where someone has a lot of unrealized capital gains in a taxable investment account and they are afraid to sell anything because they don’t want to pay taxes. This is more common with older people because they might have bought something decades ago that has appreciated substantially. Because of this appreciation, one position or a small number of positions may make up the majority of their entire portfolio resulting in a lack of diversification and a much higher level of risk. In turn they feel backed into a corner because selling results in taxes but holding continues the investment risk. There are many ways to deal with this such as charitable remainder trusts or collar strategies, but before any of that it is important to understand what that tax impact actually is, because in many cases it is not as bad as people think. Selling a long-term investment result in a capital gain which is reportable income, but long-term capital gains are taxed at lower rates than ordinary income like wages or IRA withdrawals. In many cases, that tax rate can be as low as 0%. For an elderly married couple who claims the standard deduction, if their total income, including long-term capital gains, is less than $126,350, those gains are taxed at 0%. If their income exceeds that level, only the capital gains above the threshold are taxed at the higher rate of 15%. This is important to know because we’ve spoken with people who have some social security income, maybe some RMDs, and a little interest income, but their adjusted gross income is only $80,000 and they are worried about selling stock and paying taxes on gains. What they don’t realize is they can handle over $46,000 of additional capital gains without paying any federal income taxes on them. They may be perpetually carrying an unnecessary level of risk in their overconcentrated investment portfolio because they are so worried about taxes when they have the ability to liquidate and diversify a portion of their portfolio every year tax free. By better understanding their tax situation, they can be more informed about making investment decisions.
Companies Discussed: Intel Corporation (INTC), Target Corporation (TGT), The Gap, Inc. (GAP)
Wednesday Nov 27, 2024
Friday Nov 22, 2024
Friday Nov 22, 2024
Changes in the SEC under Trump that you should know
There will be many changes under Trump, but for investors the SEC, which is also known as the Securities and Exchange Commission could be a big one. The current head of the SEC, Gary Gensler, is likely gone for sure. He has been tough on Wall Street and even tougher on cryptocurrencies. It is likely Trump will appoint a new SEC chairperson who will want to have less control over Wall Street. One name on that list is Hester Pierce. She was appointed by Trump in his first term and is one of two current Republican commissioners. She also voted against most of Gary Gensler’s initiatives and is much friendlier towards Wall Street. That doesn’t mean everything will run wild and in particular, she still would like to see regulation for the cryptocurrency business. It seems she disagrees with both Gensler and Trump-appointed predecessor, Jay Clayton, who sued crypto startups that didn’t register their products as securities. Instead, she would rather see new regulations for crypto’s technology. Her approach would be different than Gensler, but it seems that she still wants to protect the investor by using stronger regulations. One rule in the works that may not make it into the books that had much controversy was forcing companies to disclose climate related risks. The SEC voluntarily put the rule on hold while it is litigated. Another one in litigation is for rules that hedge funds and brokers must report on short positions and stocks lent for short selling. Unless these two can pass before the new administration takes over in January, I don’t believe they will have any chance of surviving. There are also other rules in litigation that are in limbo that will probably be dropped next year. Be sure to stay tuned to the Smart Investing Show for updates and changes in regulations by the SEC, as I’m quite confident it will look very different next year!
Is Michael Saylor, CEO of MicroStrategy, a genius or a crazy man?
If you’re not familiar with MicroStrategy, their symbol is MSTR. Their CEO is famous for not just buying bitcoin, but leveraging everything he can to invest all the assets into bitcoin. I listened to a podcast that Mr. Saylor did recently and I was shocked at many things he said. If you follow us on a regular basis, you know we’re not advocates of investing in cryptocurrencies or bitcoin, but this CEO takes it to the extremes on the other side. The company’s financial statements look like a disaster, I’m surprised they are still in business. Mr. Saylor stated they just borrowed billions of dollars to purchase $4.6 billion in bitcoin, which brings their bitcoin holdings up to about $40 billion. The company only has $60 million in cash. If you do the math, MicroStrategy currently owns about 1.6% of the market value of all the bitcoin. With all the rumors floating around about the US government being an advocate of bitcoin and perhaps even setting up a bitcoin reserve, the price of bitcoin is now around $100,000. Mr. Saylor was laughing as he spoke about the current value of bitcoin at $1.8 trillion and said he sees it going to $180 trillion in 20 years, at that level the price of one bitcoin would be $13 million. The host of the podcast did a quick analysis and said based on that projection, the market cap of your stock, which is currently $89 billion would be worth roughly $10.5 trillion in 20 years. The response was, yes that’s what the math says. The only reason I could come up with why Mr. Saylor is so optimistic is he feels in 20 years 7% of all the world’s money will be in bitcoin. I have read from many professors and experts on the global economy that have said this will never happen because governments will not be able to control their own economy. He also stated that bitcoin should be the world currency and in 20 years there should be $500 trillion in digital assets. I’ve been in the investment world now for over 40 years and none of this makes any sense to me. I do believe there will be a major storm someday in the future. As far as investing in the stock MSTR, the company has no earnings, no cash flow and nearly a 16% short holding betting on a stock decline. The stock has a 52 week low of about $44 a share vs a high of $505 a share and currently trades around $440 a share. I have to say this is not a company, but more of a management company of a non-diversified asset or a leveraged bet all in bitcoin.
The housing market has changed
It used to be couples would get married and buy a house in their late 20s, but now because of a different lifestyle and higher prices for homes, first time buyers are now nearly 40 years old. I also found it interesting that there are now more single people buying homes. Single women are generally about six years older than single men when buying homes. However, roughly 20% of single women are first time home buyers, which is more than double their male counterparts. People in their early 60s have become the most active in the current housing market. This is the generation that scratched and saved and sacrificed to buy a home back in the 1980s. Even then houses were not that affordable, not to mention interest rates looked a whole lot different! But now those buyers, some of which have accumulated close to 40 years of equity have benefited handsomely and account for a big portion of the $35 trillion in home equity across the US. For those looking to buy, there are some signs of relief in home prices with some areas in Texas and Florida that were not too long ago very hot markets starting to see price declines. I feel it could take another couple years to get a more normal housing market, especially with about 25% of people having a mortgage on their home of 3% or less. With such a low rate, they would probably be more likely to remodel or do an addition rather than sell their house.
Beware of IRA Income Limits
Saving money is obviously a great thing, but it is important to be aware of the income limits when making both Traditional IRA and Roth IRA contributions. Contributions to IRAs can be made at any age, but you need W-2 or self-employment income to contribute. However, if your total income from all sources is too large, this may prevent you from making contributions as well. With Traditional IRAs, you can make contributions at any income level, but your ability to deduct those contributions is phased out if your income is too high, assuming you have access to an employer retirement plan like a 401(k). Since getting a tax deduction is one of the main benefits of a traditional contribution, high-income earners would likely want to fund a different account instead. For a single filer this phase out begins at $77,000, and for married filers this begins at $123,000. If your spouse has access to a workplace retirement plan but you do not, your phase out for traditional IRA contributions begins at $230,000. Roth IRAs are subject to different limits. For single filers the ability to contribute begins to be phased out when income reaches $146,000 and for married filers at $230,000. So with traditional IRAs, your income determines if the contribution is deductible, with Roth IRAs your income determines if you can make the contribution at all. Unfortunately, I see people making Roth IRA contributions when they aren’t eligible to all the time. This can happen if you are used to making a Roth contribution every year and eventually through raises or bonuses or whatever your income exceeds the limit without you knowing. Now with Roth IRAs, there is a workaround called a Backdoor Roth contribution that can be used to make Roth contributions when income is over the limit. To do this effectively, the contributor cannot have any Traditional IRA money. If they do, they would need to roll it into a workplace plan like a 401(k) before implementing the Backdoor Roth contribution. The Backdoor Roth involves making a non-deductible contribution to a Traditional IRA, which again can be done at any income level, followed by a conversion into a Roth IRA. Conversions do not have income limits and because the initial contribution to the Traditional IRA was not deductible, it is not taxable when converted to the Roth IRA.
Companies Discussed: Comcast Corporation (CMCSA), Delta Air Lines, Inc. (DAL) & Alphabet Inc. (GOOG).
Friday Nov 15, 2024
Friday Nov 15, 2024
Friday Nov 08, 2024
Friday Nov 08, 2024
Friday Nov 01, 2024
Friday Nov 01, 2024
Don’t let the presidential election be your investment indicator
Presidential elections, especially this one, make people become very emotional, but don’t let that sway you away from investing. Looking back to 1950, the S&P 500 index gained 12.1% per year under Democrats and 7.1% under Republicans. So based on that tad bit of information, you would think that Democrats are better for the stock market than Republicans. If we dig deeper, we will see that Nixon had a major negative impact as he left office in August 1974. This was at the end of the 73-74 market crash when the S&P 500 was down 48%. The other Republican who had bad timing was George W. Bush, who was in office from 2001 to 2009. The S&P 500 dropped 38% in 2008 during the Great Recession and wiped out all the previous gains in the stock market while George W. Bush was in office. Looking more recently, there were investors who hated Trump as President and when he got into office, they sold their stocks missing an average annual return of 13.8% per year while he was President. The same thing happened in 2020 when Joe Biden became president, many Republicans thought the world was coming to an end and sold their stocks. The gain in the stock market under Joe Biden so far has been an 11.9% average annual return. The best advice I can give you is do not look at the President for any type of analysis on stocks, there are so many other factors at play rather than just who is in the White House. Instead, I recommend you look at the equities you are investing in and ask yourself how will they do going forward. Ultimately, businesses will find ways to succeed regardless who the President of the United States is.
Job openings continue to decline, is that a problem?
In the September Job Openings and Labor Turnover Survey (JOLTs), job openings declined to 7.44 million. This was below both the expectation of 8.0 million and the prior month’s reading of 7.9 million, which was revised lower by 179,000. This also marked the lowest level of job openings since January 2021. While this all sounds negative, there are still around 1.1 job openings per available worker. Also, this should be positive for inflationary concerns as the labor market is now more balanced when looking at the relationship between employers and employees. When employees have way more power like we saw over the last few years, it can have a big impact on wage inflation, which generally feeds through to overall inflation. While this isn’t an overly exciting report, I believe it still shows the labor market is in a good place. I think we could see job openings even fall a little further before it would become a concern.
Based on Friday’s job report, it looks like the economy is in trouble, but it’s not!
We have not seen numbers like these in the jobs report since 2020 with nonfarm payrolls only increasing by 12,000 for the month. The expectation was job creation of 100,000 jobs. Why the big miss? Right off the bat the strike of Boeing was a loss of an estimated 44,000 jobs and who can forget the two hurricanes we had in the south. It’s currently unclear how many jobs were lost during that timeframe due to those natural disasters. On the positive side, average hourly earnings did increase 0.4% for the month, which was above the estimate and the 12 month gain of 4% held steady. Revisions to August and September took out 112,000 jobs bringing the August number to only 78,000 and September’s gain declined down to 223,000 jobs. Temporary jobs are sometimes seen as underlying strength of a job market, but they have declined by 577,000 jobs since March 2022. We don’t feel this is the indicator that it used to be and we expect to see some reversal of temporary jobs for the holiday hiring season. This should start being reflected in the next month or two. The hurricanes in the south were a hit to leisure and hospitality as I’m sure many bars and restaurants were closed and the category saw drop of 4000 jobs in the month. Only two sectors in the job market saw increases which was healthcare as it added 52,000 jobs and government experienced an increase of 40,000 jobs. On the surface, the job report looks frightening, but we are out of hurricane season and heading into the holiday season. I think you’ll see a reversal in the job market in the next 2 to 3 jobs reports, which should be rather positive. Not as positive as it was during the expansion when we were recovering from Covid, but definitely better than a 12,000 job increase! There are two meetings left for the Federal Reserve and I think this job’s report would allow them to cut rates by a quarter point at the next meeting. For the last meeting of the year, we will wait for more economic data before predicting another rate.
Is the US economy still growing? The GDP shows it is.
While Q3 GDP, which stands for Gross Domestic Product, growth of 2.8% came in below the expectation of 3.1% and Q2’s reading of 3.0%, it is nowhere near signs of a recession. It also points to a US economy that remains in a good spot, even though it may be slowing. Remember slowing and declining are very different! The consumer continued to remain a bright spot in the economy as personal consumption expenditures added 2.46% to the headline number. This was thanks to growth of 3.7% as service spending growth was 2.6% and goods spending growth was 6.0%. Durable goods in particular were quite strong as they grew 8.1% in the quarter. Gross private investment had little impact on the headline number as it added just 0.07% to the headline number. The change in private inventories subtracted 0.17% and residential investment continued to be a problem as it fell 5.1% and subtracted 0.21% from the headline number. This was largely offset by growth in equipment spending of 11.1%. Government spending also was a large factor in the quarter as it added 0.85% to the headline number in large part due to growth of 14.9% for national defense spending. The only major category that subtracted from the headline number was trade as it had a negative impact of 0.56%. While exports were up 8.9% in the quarter, imports were up even more at 11.2%. Overall, I’d say this was a good report. I would warn people that I would not be surprised to see growth slow in the quarters ahead, but I’m still not looking for a recession in the near term.
Retirement Plan Allocations
The majority of working people have some type of retirement plan through their employer like a 401(k) or 403(b), but many of those people don’t pay enough attention to how those funds are invested. Employer retirement plans are great because they automate your savings so every paycheck you have a portion that gets invested. Over time this can build to a lot of money. There are also no income limits you have to worry about like with IRA accounts and you get the tax benefit from making tax-deferred or Roth contributions. However, in order to get the most out of the plan, you need to make sure you’re choosing the best investment options within that plan. Every plan has a list of options called a fund lineup. These may include stock funds, bonds funds, balanced funds, asset allocation funds, real estate funds, and cash funds, all of which will have different expected growth rates. In many cases we see people choosing a random fund that they don’t understand or the default option which is usually a target date fund or stable value fund. Target date funds generally have higher fees and an overconcentration of bonds which results in lower performance over time and a stable value fund is essentially cash which doesn’t grow. It only takes a few minutes to update the investment options but taking the time to do it can result in thousands of extra dollars per month in retirement without actually contributing any more. Once you choose your investments, you typically don’t need to adjust them too often, and in many cases, you can set up automatic rebalancing if you would like. Making sure your retirement plan is set up correctly is a simple thing everyone can do which will have a huge impact on your financial future.
Companies Discussed: Chewy, Inc. (CHWY), Genuine Parts Company (CPG) & ASML Holding (ASML)
Monday Oct 28, 2024
Monday Oct 28, 2024
T-bills could be your worst investment
Right off the bat you’re thinking what how could they say such a thing? Warren Buffett has hundreds of billions of dollars in T-bills! Why do we think it’s the worst investment? First off, Warren Buffett spends all day long reading, researching, analyzing and when he sees a good value investment, he will likely sell what he needs from T-bills to buy those good long-term investments. If you are someone that needs the money in 2 to 3 years, then this belief does not apply to you as T-bills are a great place to have your short-term money. But if you’re a longer-term investor, and you want your money to grow for you, I worry that T-bills are not a great place for you. What will likely happen is that you will feel safe for a while, especially when the correction comes. You’ll be glad you have money in T-bills, but you probably won’t pull the trigger when lower equity prices arrive because you will feel comfortable with the safety and no volatility of your T-bills. Unfortunately, what will then happen down the road is you will eventually get tired of getting a lower return as interest rates drop and your T-bill is only earning you 2 to 3%. You will then likely want to move to something else and maybe do something silly like look at the past performance of equities and buy after stocks go back up after the correction. When it comes to investing, be sure to use the right tool for the right job. A T-bill is not the right tool for long term investors unless you really are a skilled investor and know how to navigate the volatility in equities.
One forgotten component of Tesla’s business has a huge impact on profits!
Tesla reported numbers that were ahead of analyst expectations, but I wouldn’t say I was overly impressed. Sales increased 8% compared to last year and earnings per share of 72 cents did top expectations of 58 cents. This was a growth of 9.1% for EPS when compared to Q3 2023 EPS of 66 cents. The interesting component that people forget about is revenue from automotive regulatory tax credits. To comply with emissions regulations that are set by authorities including the United States and European Union, other automakers purchase credits from Tesla. In the most recent quarter, this added $739 million worth of revenue. While this is just under 3% of total revenue, this is essentially pure profit for the company, which means it likely accounted for close to 34% of the company’s $2.17 B worth of net income. As other companies continue to ramp up their own EV and hybrid plans, a big question I would have is will they need as many credits from Tesla? Also, if there is a change in leadership after this election, will there be a reduction in regulatory requirements that could decrease the need for other automakers to purchase these credits? This could cause problems for Tesla as it would lose a very high margin component of its business. It is hard to bet against Elon considering his successes, but I have a hard time recommending this stock since it still trades at around 70x 2025 expected earnings. With that type of multiple we need to see much higher growth for sales and earnings than what we saw this quarter. Elon did mention his “best guess” for vehicle growth next year is 20% to 30%, which is one reason the stock shot higher. This seems quite ambitious and I’d be curious where that growth is expected to come from. I would say Tesla bulls continue to point towards autonomy as a potential reason to buy the stock, but at this point I would say that is a huge gamble given the elevated level of uncertainty in that space. Elon did say on the earnings call that Tesla has developed a ride-hailing app that some employees in California have been able to use this year and he expects the service to roll out for public use next year in California and Texas. The company intends to use it for a robotaxi network in the future. With that said, according to a list of permits issued on the California Public Utilities Commission’s website, Tesla isn’t currently licensed to operate a commercial, transportation network company or ride-hailing service in California. From a regulatory standpoint, I would say Tesla is behind both Waymo and Cruise.
Luxury brands lose excitement as thriftiness takes over in this slowing economy
Luxury brands like Gucci, Louis Vuitton and Chanel have seen a big decline in their sales growth. These luxury brands have increased their prices so much to try and keep their products exclusive. The push back towards exclusivity came after the Covid giveaway years where many consumers became short term purchasers. Unfortunately, this has turned off their normal elite customers who saw how ridiculous it was to see prices climb from 2019 to 2024 by 50 to 100 percent. They may be rich, but they are not stupid. As things have slowed, on social media and YouTube frugality has become cool once again. This includes talking about the deals you got or even buying knockoffs, which have a new name called dupes. On many of the posts on social media and other places it is now cool to show off your dupe that you purchased and how much you saved. I remember a couple years ago I talked about how the hype for expensive purses and brand names would not continue to rise. I think we have now hit the turning point where many people who pay those higher prices for purses or shoes will not be able to sell them for anything close to what they paid for them. The reason for that is you’re no longer competing on price with the brand names but now many consumers buying secondhand will compare that price to the dupe and want to get a discount compared to the dupe price. I would not recommend investing any money into these ultra-luxury stocks, even though some are down between 40 and 50%. Many of them still trade at lofty valuations and sales growth has been cut from 20 to 30% down to 2%.
Inheritance Issues with Annuities
Annuities can be purchased with qualified (tax-deferred) funds or non-qualified (after-tax) funds. Because qualified money is tax-deferred all withdrawals or income taken is taxable at ordinary income rates to the owner or the beneficiaries. With non-qualified annuities, any gain in addition to the purchase amount will be taxable at ordinary income rates to the owner or beneficiaries. There is no step-up in basis at death and they do not receive the preferential lower tax rate treatment that capital gains and dividends do. The growth is tax-deferred, but it is deferred to a higher tax rate than other investment income. When a spouse inherits either a qualified or a non-qualified annuity, they may treat it as their own and retain all the options that their deceased spouse had. When someone other than a spouse inherits a qualified annuity, they have the ability to rollover those funds into an inherited IRA and will be subject to the 10-year rule like any other IRA. The most complicated situation is when you leave a non-qualified annuity to a non-spouse beneficiary. In this case the beneficiary is typically children of the owner and they have 2 options. They can either stretch the withdrawals from the annuity over their life expectancy, which is typically better for their tax situation as they can spread out the income over many years, or they can deplete the annuity in any way they want within 5 years. With the stretch option, they must take their first distribution within 12 months of the date of death of the owner or they will default to the 5-year option. This requirement often causes a problem for beneficiaries because if they forget to take that first withdrawal, they are forced to realize a potentially large amount of ordinary income in a short period of time. Owners of annuities need to understand their options so they can not only plan their own retirement income, but also have a plan for their estate.
Companies Discussed: Capri Holdings Limited (CPRI), Expedia Group, Inc. (EXPE) & Highwood Properties, Inc. (HIW)
Friday Oct 18, 2024
Friday Oct 18, 2024
Where does private equity invest the money, you give them?
Private equity invests money in many different areas, but the problem that they are having is that both them and venture-capital are sitting on $2.6 trillion, which is a record high. Ultimately, they are having a hard time finding where to invest. A private equity firm generally has to earn between 12 and 14% on their investments to cover their management fee and pay investors a worthwhile return. One area they have been attracted to is HVAC, also known as heating, ventilation, and air conditioning. Other areas of interest have included plumbing and electrical companies. Over the last two years, private equity has purchased nearly 800 big HVAC, plumbing and electrical companies. It is also estimated there are plenty of smaller deals that just don’t show on the radar. I do believe somewhere down the road someone whether it’s the consumer, the employee, the business owner or the investors is going to lose. Basically, private equity is trying to streamline these smaller businesses into bigger businesses to cut costs. Many times, this changes the way they do business and it could place a larger emphasis on making more new sales rather than doing repairs, which leads to bigger profits. I do worry about the business owners who are told they can still run their business the way they want and keep a 20 to 25% stake. If things get difficult, the private equity firm with a 75% ownership will override the small business owners’ decisions.
Are gas prices going up or down in the future?
A big factor in the price of gas is the price of oil. If you live in a state like California, then you can add other factors like taxes and regulations. Oil has remained somewhat reasonable falling under $70 a barrel in the last few weeks, it then recently crossed $80 a barrel on concerns in the Middle East. We know there is potential for a major disruption with tensions between Israel and Iran showing signs of escalation. The war in Ukraine continues to linger on, but so far it has not deterred Russia from selling their oil to countries like China and India. We also have a change in our president quickly approaching and everyone has to ask themselves, who would be more likely to tame the violence in the Middle East? If the next president cannot reduce or stop the fighting, we could see Israel start sending missiles towards Iran’s energy infrastructure. This could then lead Iran to try and restrict or block oil tankers flowing through the Strait of Hormuz. These actions would likely cause oil to skyrocket to over $100 per barrel, which could mean a 20 to 25% increase in the price of gas at the pump. What has kept oil and gasoline prices low so far has been slowing demand from a weak economy in China and talks of OPEC exporting more oil come December. It’s also important to know that there is less oil in storage than the historical average, which could mean there is pent up demand to refill that storage. If you’re an investor, I think it makes sense to have at least 5% of your portfolio in oil and natural gas companies because I believe the upside in the price of oil unfortunately is much greater than the downside.
Are you still spending money in this economy?
Retail sales have continued to prove resilient as in the month of September we saw growth of 1.7% when compared to last year. With the decline in the price of gasoline, gas stations saw a decline of 10.7% compared to last year and if this component was excluded from the headline number, retail sales would have grown at a stronger rate of 2.8% in the month. Areas of weakness included furniture and home furnishing stores (-2.3%) and electronics and appliance stores (-4.6%). One area that showed positive growth for the first time in a while was building material & garden equipment & supplies dealers. It was a very small annual gain of 0.5%, but could this finally be the turning point for a group that has struggled tremendously over the last couple years? Areas of strength in the report included nonstore retailers (+7.1%), health and personal care stores (+4.6%), and food services and drinking places (+3.7%). While the growth in retail sales isn’t setting the world on fire, I believe this report provides further evidence that this economy is in alright shape.
Income Tax vs Property Tax on Inherited Property
There are many factors to consider when inheriting real estate, especially in California, and the tax impact is one of the largest. When receiving an inheritance of property there is an income tax consideration and a property tax consideration. When capital assets, such as real estate, are sold for more than they were purchased for, the increase in value is considered a capital gain which is a type of income. When property is inherited, it generally receives a step-up in basis which means the original purchase price is no longer relevant and the new income tax basis is the value of the property as of the date of death of the owner. This means a parent who purchased a property for $200k and passes away when it is worth $1 million can leave it to their children who will not be responsible for the tax on the $800k gain. If they do sell, they will only need to report income on the appreciation after the date of death, or the amount over $1 million. This is obviously a benefit and applies to other assets as well such as stocks and bonds. However due to Prop 19, there may be a counteracting property tax implication when inheriting real estate. In California the property tax assessed value can only increase by a maximum of 2% per year, even if the fair market value of the property increases much more than that. Because of this people who have owned properties for many years are paying relatively little in property taxes compared to the actual value of their real estate. However, when the property is inherited, the property tax assessed value increases to match its fair market value, resulting in a much higher property tax bill every year going forward. As a result, vacation homes and rental properties that were great investments become unaffordable when the heirs receive them. This often causes the sale of the property, which fortunately can be done income tax free due to the step-up received at death. There is an exception to this property tax increase where if children inherit the primary residence of their parents and begin treating that property as their own primary residence, they may add up to $1 million to the property tax assessed value before being required to pay additional property taxes. Understanding these tax issues can help you determine when property should be held or sold before or after an inheritance.
Companies Discussed: Sirius XM Holdings, Inc. (SIRI), Vistra Corp. (VST) & Etsy, Inc. (ETSY)
Friday Oct 11, 2024
Friday Oct 11, 2024
Inflation comes in hotter than expected, is that a problem?
The Consumer Price Index (CPI) showed September headline inflation was up 2.4% compared to last year, which was a little higher than the estimate of 2.3%. Core CPI, which excludes food and energy was up 3.3% compared to last year and it also came in a little higher than the expectation of 3.2%. While the numbers were a little hotter than expected, headline CPI was down from last month’s reading of 2.5% and it registered the smallest increase since February 2021. It’s come a long way from the high that was reached in June 2022 when headline inflation grew 9%. The major discrepancy between the headline and core number was energy. The energy index was down 6.8% compared to last year and gasoline prices had a major impact as they were down 15.3% over the same time frame. Shelter costs continued to have an outsized impact on the report as the index was up 4.9% over last year and accounted for over 65% of the 12-month increase in core CPI. The decline in inflation has continued to moderate, but overall, it has continued to trend in the right direction. While this report was somewhat disappointing, I don’t think there is anything of major concern in this report. With the Fed’s next meeting coming in November, it will be interesting to see how they interpret all the data as there are several factors that will have hopefully just a short-term impact on inflation and the labor market. These factors include both Hurricane Helene and Hurricane Milton as well as a Boeing strike that has had roughly 33,000 union workers on strike since September 13th. Given all this my estimate at this point in time would be that the Fed will do a quarter point cut at that November meeting.
What is PPI and how it can affect you as a consumer
PPI stands for Producer price index. It’s important to understand these monthly numbers because it will eventually have an effect on consumers. If the cost of producing something increases, that cost will generally be passed to the retail level where consumers purchase.
While September headline PPI of 1.8% was higher than the expectation of a 1.6% increase, it is still a low level that shows no major concern on the inflation front. When excluding food and energy, PPI increased 2.8%. This was higher than the estimate of 2.7% and last month’s reading of 2.6%. It was somewhat disappointing to see a small increase over last month’s reading, but overall, it has continued to head in the right direction and at 2.8% I believe inflation at that rate is still manageable. It is worth keeping an eye on this data as the months progress, but it seems to have less impact on the markets now that inflation has become more manageable.
Gold is up about 28% year to date, here are a few important points to help you decide to buy, sell, or hold.
I hear the thoughts out there that as interest rates decline, gold should rise and so far, that has held true. But if you go back in history, in the early 80s as interest rates fell so did gold. Let’s say that correlation does hold true though, I’m not overly optimistic that we will see a large decline in the 10-year treasury as historically it yields about one and a half percent more than inflation. I believe inflation should be around 2-3% going forward. My other major concern for why I don’t see long term rates falling much further is the United States continues to struggle with a huge debt load. Looking at gold purchasing, central banks from around the world including countries like China, India, and Poland bought more than 1,000 metric tons of gold in both 2022 and 2023, but in 2024 we have seen those purchases slow down. The countries have become a little bit more concerned given the large gain this year. Some of these countries could even consider locking in some profits and sell some of the gold they own. If you still insist on buying gold, you can buy the gold bars at Costco, which has been a huge hit for them, but if you notice they don’t have a program to buy back gold. So when you want to sell those one ounce bars from Costco, you will have to go to a dealer who will charge a markup somewhere between five and 10%, which can eat into your gain more than you think. If you paid $2000 for gold and sold at $2700 you have a paper profit of 35%, but if you pay a 10% commission on that $2700, your gain drops to $430 which gives you an after commission gain of only 21.5%. Another option if you are looking to benefit from the price of gold is mutual funds and gold mining stocks, but because of the trading the returns don’t track the performance of gold very well. If you really insist on adding gold to your portfolio, then I would suggest the best way to do it is an ETF like GLD, which has low fees and tracks closely the price of gold. Full disclosure, we do not hold any gold in our portfolio now nor do we plan on buying it in the near future!
US consumers love their chicken!
In 2023 the average American consumed more than 100 pounds of chicken wings, legs, breasts and thighs, which was an all-time high. American farmers are cranking out about 10 million chickens per year. This includes various forms from organic, free range, antibiotic free, and the list goes on. Compared to beef and pork, chicken is a better value. Unfortunately, the price of chicken has increased dramatically over the last five years. Back in 2019, the average chicken was going for $3.11 per pound and today that average cost comes in at $4.08 per pound, which is $.97 more or a 31.1% increase. I personally consume a fair amount of chicken as I think it tastes good and it’s also easy on your digestive system. I know the cost of chicken is up, but are you consuming the same amount of chicken you were five years ago?
Prioritize the Right Retirement Goals
The most common goal when planning for retirement is to not run out of money. This is obviously important, but it should not be the only goal and in many cases, it should not even be the priority. If you get to the point where your assets and income greatly exceed what is needed for your lifestyle, the chances of outliving your money decline and the priority should shift to income tax minimization. For example, if you have a $2 million portfolio but only need $3,000 per month to supplement your social security or pension income, you probably won’t ever run out of money. However, if you don’t implement the right tax strategies, you will end up paying way more than you need to and the longer you wait the worse it gets. If your portfolio is $5 million to $10 million or more, you likely aren’t too concerned with running out of money and you hopefully are implementing income tax reduction strategies. However, at this point you should also be thinking about estate taxes. This has been largely disregarded because the currently exemption amount for a married couple is so large at about $27 million. In 2026 though this number is expected to be cut in half to around $14 million, and the tax rate on estates that exceed that will potentially increase from 40% to 45%. An estate worth $14 million is still quite large, but compounding interest is a powerful thing. A portfolio of $5 million can easily exceed $20 million after 20 years of growth, and waiting to address this until your estate reaches the exemption limit makes tax planning more difficult and more expensive because the value of assets will only grow faster over time. It is too common for people to fixate on not running out of money and end up neglecting their income and estate tax planning which ultimately just results in more taxes.
Companies Discussed: Roblox Corporation (RBLX), Tesla Inc. (TSLA) & Pinterest, Inc. (PINS)
Friday Oct 04, 2024
Friday Oct 04, 2024
More jobs data points to a healthy economy
The Job Openings and Labor Turnover Survey (JOLTs) showed a surprise increase in the month of August. Openings totaled 8.04 million, which topped the estimate of 7.64 million and July’s reading of 7.71 million. While this is still well off the highs from just a couple of years ago, there are still 1.1 available jobs for every person looking for one. On the inflation front, I believe it was positive to see the quits rate decline to 1.9%, its lowest level since June 2020. This indicates that the labor market has softened as employees are seeing less opportunity to quit their job in favor of another one. This should help put less pressure on wage inflation. The Fed will have to continue to walk the fine line of keeping the economy moving in a positive direction without stoking a rise in inflation. It’s a tough task, but the labor market has continued to hold up much stronger than many believed was possible.
Employment report surprises to the upside
I was surprised to see the continued strength in the labor market as the growth of headline nonfarm payrolls of 254k in the month of September easily topped the estimate of 150k. Strength came from leisure and hospitality, which saw payrolls grow 78k thanks to a nice spike of 69k jobs from food services and drinking places. Other positive sectors included health care and social assistance (+71.7k), government (+31k), and construction (+25k). Only two sectors saw declines in the month with manufacturing losing 7k jobs and transportation and warehousing down 8.6k jobs. Both July and August saw upward revisions to their reports for a combined total increase of 72k. Wage inflation was also stronger in the month as average hourly earnings grew 4% compared to last year. This is up from last month’s reading of 3.8%, but still remains substantially below last year’s high of 5.92%. Precovid, wage growth was in the low to mid 3% range. Overall, this report didn’t have many problems. The only concern is, did the Fed move to soon and could inflation still be the larger concern rather than a weakening labor market? This report did increase expectations for a November rate cut to be 0.25% rather than 0.5%. I would have been shocked if the Fed would have opted for another 0.5% cut even if the jobs report wasn’t this strong.
ILA Dockworkers strike
Good news for those that were concerned about the International Longshoremen’s Association’s (ILA) strike as the union and the United States Maritime Alliance reached a tentative agreement on wages and agreed to extend the Master Contract until January 15th, 2025. Wages will increase 61.5% over six years under the tentative deal, but the major point of conflict that still needs to be negotiated is port automation. With the increase in wages, it will be interesting to see how much the Maritime Alliance is willing to budge on automation as they will likely need to look for ways to improve efficiency to offset the higher wages. Efficiency is already a concern for US ports as a study from just a couple of years ago ranked the LA and Long Beach ports as the least efficient trade hubs for handling containers in the world. Other US ports including Savannah, Georgia, New York, and New Jersey also ranked in the bottom half of the list. Of the 370-member Container Port Performance Index, we did not have a single port in the top 10. While this resolution is positive, the problems could be delayed until early next year if the two sides still cannot come to an agreement. During my research on this strike, I learned some surprising things about the union leader, Harold Daggett. You may be shocked to learn that his combined income as president of two unions is around $900,000 per year with $728,000 coming from the ILA. He currently drives a Bentley, which is a high-end luxury vehicle with a price of $210,000 for a new one. He also recently sold his 76-foot yacht and based on the US boat group market index, the average price of a yacht in that range is $1.5 million and costs around 10 to 15% of the value to operate yearly. I was also surprised to see this is a “family business” as his son is employed by the same two unions as his dad and was paid a total of more than $700,000 last year. As for the workers, on the East Coast the union workers have an average pay around $81,000 per year. However, the waterfront commission of New York estimates 1/3 of the longshoreman made $200,000 or more last year with overtime.
Investors are still adding money to money market funds
Even with the recent rate cut by the Federal Reserve, investors still put nearly $130 billion into money market funds. This brought total assets in money markets to $6.8 trillion. I don’t believe this money will stay there very long as probably within 3 to 6 months investors will start seeing the interest rates decline and once, they fall below 4%, we could see a large drop in the assets held in money market funds. The big question for investors is where to go. If you need liquidity, you’re probably best off staying in the money market funds, but if you won’t need the money for the next 3 to 5 years, you should be looking at building a strong investment portfolio using patience and a lot of research to make sure you have the right investments.
A Lesser-Known Spousal Social Security Strategy
After 2015 many of the spousal strategies such as the file and suspend or restricted application options are no longer possible. This is because a “deemed filing” rule applies which means when someone files for Social Security benefits, they are deemed to be filing for all benefits they are eligible for such as spousal and their own benefits. When they apply, they will receive whichever benefit is larger, but not both. However, there is still a way to switch between benefits. In order to receive a spousal benefit, the spouse you are collecting from must also be collecting. If they are not, you would only be eligible for your own benefit until they begin collecting. Consider a wife who is no longer working and whose full retirement age 67 amount is $1,000 and who has a working husband with a full retirement age amount of $3,500. Because of the husband’s larger benefit, the wife is also eligible for a spousal benefit of half that amount, $1,750, if she collects it at her full retirement age. In this situation the wife may collect from her own record as early as age 62. Since she would be collecting 5 years early, her own benefit would be reduced from $1,000 to $700. Later on though, when her husband retires and starts his own social security, she could begin her spousal benefit at age 67 and boost her benefit by $750 up from $700 to $1,450. This $750 boost is because her spousal benefit of $1,750 is $750 larger than her own full retirement age amount of $1,000, even though she began collecting at 62. If she had waited to apply for anything until age 67, she would receive the full spousal benefit of $1,750, but she would have waited 5 years of collecting nothing just for an extra $300. From a Net Present Value perspective, it is better for the wife to collect her own benefit at 62 and later receive the spousal boost rather than wait completely until 67. Also, there are many spouses who collect early without knowing they are also eligible for a larger spousal benefit when their spouse retires. If they do not alert the Social Security Administration, they may not ever receive their increased benefit.
Companies Discussed: Costco Wholesale Corporation (COST), Humana Inc. (HUM) & LyondellBasell Industries (LYB)
Friday Sep 27, 2024
Friday Sep 27, 2024
We do have a housing problem in this country, but it may not be the one you’re thinking.
The price of homes has continued to rise and it has left some people out of the housing market, but that may not be a bad thing. I say that because people are doing anything they can to buy a home at these high prices. This includes risky endeavors like cashing in their retirement savings or borrowing from friends and family. The Atlanta Fed’s affordability index was recently at 68.5, which would mark its lowest levels since 2006. I worry people are getting in over their heads as ownership costs, which include mortgage, taxes, and insurance are now occupying nearly 44% of median household income. Generally the 30% level is considered a threshold for affordability and that was last seen in 2021. I worry when the economy slows down, you could see people selling their houses because they can’t afford them. I think it’s rather silly that some campaign promises have talked about giving $25,000 for down payments or expanded tax credits for developers to build affordable rental housing. These sound good as soundbites, but I think they’re terrible ideas because all they will do is pushup demand and that will continue to put more pressure on prices. People don’t realize that builders say roughly 25% of the cost of new homes is from regulatory costs like building codes and zoning issues. If we could get the local government to back off, you could see a nice reduction in prices. The problem is we have the federal government trying to give you money to buy a higher priced home and local governments are raking in the dough collecting fees on those higher priced homes. Throughout history, it has never been great to invest or buy into any type of asset when there is a buying frenzy going on. Look at the history books if you don’t believe me and then think ahead what will happen in the next 5 to 10 years. I know my opinion goes against many experts, but in our over 40 years in asset management, we have seen how things can change unexpectedly.
Is the new iPhone 16 going to move the stock price up?
Last weekend an article in Barron’s written by Alex Eule tried to convince people that Apple stock will increase based on looking back to the original iPhone and every iPhone release after that. Based on the research, Apple stock has returned an average of 11.7% six months after iPhone releases. But before you run out and buy the stock, one thing I noticed was there was no discussion around price/earnings ratios during those launces. I believe it is very important to not over pay for any company and I am curious what the PE ratios were during those last 24 iPhone launches. Holding Apple several years ago I know the multiple was not where it is now in many of those cases. Don’t get me wrong, I think Apple is a great company and has great products, but I worry with the stock trading at 31 times next year ‘s earnings it is more than fully valued. I also believe some of that data was skewed considering the first iPhone launch led to 63.7% return six months after the release and there are several instances where the stock did nothing or actually fell like the iPhone 12 (-3.4%), the iPhone 13 (-1.3%), or the iPhone 15 (-1.0%). I was surprised to see that analysts are more negative than I expected on the stock as currently nearly 1/3 of them have either a hold or a sell rating. Mr. Eule does correctly point out that if Apple beats expectations, the price earnings ratio will come down. However, that assumption would also mean that the stock price did not climb to offset the earnings beat. We have avoided investing in Apple for quite some time now, but I will still not break my discipline and I will not overpay for any company because history has proven eventually everything comes back to the norm.
ETFs have proven not to be as effective as mutual funds
When Jack Bogle, the founder of Vanguard, was CEO back in the 90s, he refused to add indexed ETFs (exchange traded funds) to their lineup. His concern was it was too easy for people to jump in out of the products and not be long-term investors. There are now long-term studies proving that he was right. A report from Morningstar shows there is a 0.9% per year gap over the study’s 10-year period favoring investors who used indexed mutual funds over investors who used indexed ETFs. While it might not sound like a lot, the compounding takes hold in the long-term and I believe it further illustrates why people should not trade. Unfortunately, even financial advisors who control about 2/3 of the ETF assets appear to be just as jumpy and emotional as their clients. Maybe they’re just trying to prove their worth due to the management fees that they charge on top of the ETF fees.
Is our tax code too complicated?
I know many people hate paying taxes, but have you ever thought about how much time you spend compiling all those documents? According to the Tax Foundation, it is estimated that the time and money individuals and businesses are spending on complying with the federal tax code this year could reach 7.9 billion hours and $133 billion in out-of-pocket expenses—or $546 billion when also accounting for lost productivity. I believe a major problem is that we keep adding more and more complications to the tax code and between 1994 and 2021 it grew in length by 40% to about four million words and has expanded steadily since. Regulations keep climbing and according to the National Taxpayers Union Foundation, from 2000 to 2022 the Department of Treasury’s annual volume of regulations grew 35% to 17,631 pages from 13,070. With all the complications, it’s no wonder most people don’t understand how taxes work and what they actually pay in taxes!
The Third Type of Retirement Account
When it comes to retirement accounts, most people are familiar with 401(k)s, Rollover IRAs, and Roth IRAs. These accounts have tax benefits when contributing and withdrawing money and allow either tax-deferred or tax-free growth. However, there are also restrictions such as annual contribution limits and age requirements to make qualified withdrawals. In addition to these pre-tax or Roth accounts, it can also be helpful to supplement retirement income with a third type of retirement account, which isn’t a retirement account at all – the taxable brokerage account. There are no limits when making contributions or withdrawals and technically withdrawals from this account are not taxable. This account produces income in the form of capital gains, dividends, and interest which must be reported every year whether withdrawals are taken or not, which is why the withdrawals are not a taxable event. However capital gains and dividends are taxed at a lower rate than other types of income and in retirement it is more common to be in lower tax brackets which means the tax rate on those gains and dividends can be as low as 0%. Retirees may have gross income of $125k or higher in some cases while still falling in that 0% tax rate. It is great and typically preferred to fund retirement accounts but if those are being maxed out, it can make sense to put addition savings into a taxable account. These types of accounts aren’t utilized as often as they should and they are more commonly used when receiving a large sum of money such as an inheritance or proceeds from selling a property; but combining them with other “retirement” accounts adds flexibility and tax diversification when structuring withdrawals in retirement.
Companies Discussed: Uber Technologies (UBER), Lennar Corporation (LEN) & Alibaba Group Holding Limited (BABA)
Friday Sep 20, 2024
Friday Sep 20, 2024
Friday Sep 13, 2024
Friday Sep 13, 2024
Friday Sep 06, 2024
Friday Sep 06, 2024
The labor market continues to soften
The Job Openings and Labor Turnover Survey (JOLTs) showed job openings continued to fall across the country in the month of July. It was reported that available positions fell to 7.67 million in the month, which 237,000 lower than June’s downwardly revised number and well below the estimate of 8.1 million. While this marked the lowest level since January 2021, there were still close to 1.1 job openings per available worker. I do believe we still have some room left for normalization before these declines in job openings becomes problematic. This news also caused the relationship between the 10- and 2-year Treasury yield to uninvert for the first time since June 2022. Generally long-term rates are higher than short term rates and I believe we will see the yield curve continue to steepen as the Fed cuts rates. While the curve usually reverts before a recession hits, I still believe we aren’t heading towards a problematic recession in the coming months.
The labor market is definitely slowing
Nonfarm payrolls increased by 142,000 in the month of August, which was up from 89,000 in July, but below the estimate of 161,000. Both June and July also saw downward revisions, which totaled a substantial 86,000. Leisure and hospitality (+46K), healthcare and social assistance (+44.1K), construction (+34K), and government (+24K) led the way for job gains in the month. Manufacturing (-24K), retail trade (-11.1K), information (-7K), and utilities (-200) all subtracted jobs from the headline number. I was also surprised to see professional and business services only create 8K jobs in the month and I believe that is a good indicator that the economy is definitely in a slowdown. While the numbers don’t look great, I still believe there is no cause for major concern at this point. With an unemployment rate of 4.2% and the major gains we saw coming out of Covid, it was unlikely we’d see that type of labor market continue. I still believe it’s possible we see a soft landing, but in that scenario, you wouldn’t see major payroll gains every month and the prints would likely be more muted and even softer than the readings we have seen the last few months. My expectation is for the Fed to cut rates by 0.25% at the September meeting followed by cuts of 0.25% at both the November and December meetings.
The economy is getting back to normal
It may feel like the economy is weak, but I believe that is because we are comparing it to an excessive economy that had too much money floating around and people spending it pretty much on anything they wanted while not caring about how much they paid. Now that extra cash is gone and we’re back to normal. That might feel uncomfortable for some people as they now can’t spend so easily on things like luxury items. Proof of this can be seen in the used luxury watch market which was very hot, but has now seen prices fall over the last 9 quarters because the demand is gone. I don’t care if you’re buying stocks, homes, or luxury items, if you overpay during the hype, you’ll probably end up losing money down the road. I believe it’s always best to buy things on sale, even if that means being patient for a few years.
There’s a lot of talk about company’s price gouging, but the numbers tell a different story!
There is no doubt that with inflation, prices for many items have increased over the last five years. But are businesses taking advantage of these higher prices to increase their profit margins? Looking at just the companies in the S&P 500, the average price markup between the selling price and the cost is 54%. That compares to 51% five years ago. According to research from financial company Bloomberg, they say the grocery business markup is actually down from five years ago and when looking at the average profit margins for grocery stores, it is now 0.3% lower than five years ago. You may not like the information because we want to blame somebody for paying higher prices, but based on these numbers companies are not price gouging. We do believe every business has a right to make a decent profit for being in business, but the free market and competition should eliminate price gauging and keep the market balanced.
How the Time Value of Money Impacts Roth Conversions
When you do a Roth conversion, the amount you convert into a Roth account is taxable when you do it. First, this means you are paying taxes now that you didn’t need to. Second, the question people have is, “If I don’t pay that tax now and instead got to keep those dollars invested, what would that grow to and does that offset the benefit of doing the conversion?” In other words, is having extra tax-free money in the future worth paying taxes now when considering the time value of money? Time value of money is the concept that dollars today are more valuable than dollars in the future because dollars today may be invested and grow over time while dollars in the future are worth less due to inflation. This is an extremely important concept and needs to be considered when making almost all financial decisions from Social Security to paying debt to investing in general. However, when it comes to Roth conversions this should not be considered. For example, let’s consider someone making a $50,000 Roth conversion who is in the 20% bracket and will be for the rest of their life. On that conversion they will owe $10,000 in taxes (20%) meaning the remaining $40,000 makes it into the Roth account. Money in a pre-tax account and a Roth may be invested exactly the same so we’ll assume an 8% compounded return. After 10 years, the $40,000 in the Roth grows to $86,357, which is all tax free. The question though is what would that $10,000 have grown to if it didn’t have to be paid 10 years prior? Well, if no conversion was done, all $50,000 would have remained in a pre-tax account growing at the same 8%, so after 10 years it would be worth $107,946.25, obviously more than the $86,357 in a Roth. However, that $107k has not yet been taxed so if accessing it still costs the same 20% tax that would be $21,589.25, meaning the after-tax amount is… $86,357 or the exact same as we would have in the Roth. What this means from a time value of money perspective is, since pre-tax and Roth accounts may have identical investments and returns, the present value of the tax on the conversion is the same as the future value of the tax if there is no conversion, assuming the tax rate is the same. In our example the future value of $10,000 is $21,589.25 assuming an 8% return over 10 years, which is true. Therefore, when considering a Roth conversion, it is not the time value of money that is relevant, but the tax rate during the conversion compared to the tax rate in the future. In our example we assumed a consistent 20% tax rate which is not realistic. Over time income levels and sources change as well as the tax rates themselves. If Roth conversions are performed when the individual tax rate is lower than it will be when pre-tax retirement withdrawals are being taken, the conversion is helpful. For instance, if we think our retirement tax rate will be more than 20%, a conversion should be done now if it is 20%.
Companies Discussed: DraftKings Inc. (DKNG), Dollar General Corporation (DG) & Dell Technologies (DELL)