5 days ago
5 days ago
The talk began Thursday morning about a rating downgrade for US debt. The bad news continues to make headlines and drive broader markets and value stocks lower. We took a look at the US debt versus GDP which is similar to looking at debt versus income and over the last three years the ratio has been declining. In the second quarter of 2020 the ratio was 134.8. The most recent data reported was for the fourth quarter of 2022 and the ratio has improved by over 10% to 120.2. I have said this many times before, what we should be focusing on is increasing the GDP by growing the economy. This would then reduce the burden of the debt.
Even though consumers have said they are worried about a potential recession, that has not stopped them from spending. In the month of April, spending rose 0.8% compared to March. This easily topped the estimate of a 0.4% gain. There was a $151.7 B increase in expenditures with $86.9 B of it coming from services and the remaining $64.8 B coming from an increase in spending on goods. Some have highlighted a concern over a depressed saving rate which fell to 4.1% in April from 4.5% in March. This was the first decline in the savings rate since last year. This rate has been depressed since the beginning of 2022, but I believe much of this is due to the over saving that occurred during Covid. There were some months in 2020 and 2021 that the savings rate was over 20% and in April 2020 it was 33.8%. If we look at the average savings rate from March 2020 - April 2023 it would be 10.1%. For comparison, if we look at the average savings rate from January 2017 - February 2020 it was 7.9%. I believe that Covid created a lot of excess savings in the economy that people can afford to spend more of their income each month due to the savings that were built during the pandemic. As we go out over the next couple years, I would expect to see excess savings continue to fall as the savings rate normalizes and continues to climb higher.
The five biggest companies in the S&P 500 account for nearly 25% of the entire index with a combined market cap of about $8.7 trillion. Those five companies are about 3.2 times the Russell 2000 which has a value of $2.7 trillion. This differential is now larger than the difference between the five biggest stocks and the Rusell 2000 during the dot-com boom. The five companies we're talking about are Apple, Microsoft, Alphabet, Amazon, and Nvidia. Something just doesn’t seem right investing in these companies at these levels.
You may have heard that recently there was a Bitcoin convention in Miami Beach. The excitement seems to be leaving Bitcoin based on the change in attendance. Last year, they had 26,000 attendees and this year it dropped to about 13,000 attendees. It was also noted at the entrance there was a sign that read “No bears allowed”. What does that tell you about the future of Bitcoin.
Monday May 22, 2023
Monday May 22, 2023
Based on retail sales it looks like the consumer is softening, but I would not say to problematic levels. In the month of April retail sales rose 0.4% compared to last month and were 1.6% higher compared to last April. One problem here is these sales do not adjust for inflation and with inflation increasing 4.9% compared to last year, it appears most if not all of that gain can be attributed to higher prices for goods and services. While the headline number looks soft there are still areas where the consumer remains extremely strong. Food services and drinking places saw an increase of 9.4% compared to last year, health and personal care stores were up 7.9%, and non-store retailers had a gain of 8.0%. With grocery prices remaining high, food and beverage stores also saw an increase of 3.7% compared to last year. Areas that received a covid boom continued to struggle as furniture and home furnishing stores saw sales fall 6.4%, electronics and appliance stores saw sales decline 7.3%, and building material and garden equipment and supplies dealers saw sales decline 3.7%. The biggest negative in the report was gasoline stations as sales fell 14.6%. Overall, it appears the consumer remains in a good spot. They just aren't spending as much on goods and would rather spend money on travel and dining out.
Existing home sales continue to remain under pressure as in the month of April they fell 3.4% compared to March and were 23.2% lower than April 2022. There are several factors which are likely contributing to the pressure which include higher mortgage rates, challenging affordability, and an extremely tight inventory picture. At the end of April there were only 1.04 million homes for sale. This was a 1% increase compared to last April, but at the current sales rate it represents a 2.9-month supply. Generally, 6 months is considered a balanced market. The affordability challenges have really hurt the first-time homebuyer and in the month of April they made up just 29% of sales. Historically, they are around 40%.
Over the last few weeks, the markets and equities have seemed to go nowhere. They go up for a few days and then go back down for a few days. This can be very discouraging for investors who get impatient and then settle for a 5% T-bill. Over the last 12 months institutions have pulled $333.9 billion from stocks and over that same period, individual investors have pulled $28 billion. As of May 10, 2023, money-markets reached a record in total assets of $5.3 trillion. For patient investors they will be rewarded, could be next week, next month or three months from now. By the time some people realize it, they will have missed perhaps a 5 to 10% increase in their portfolio. Don’t forget what Warren Buffett said, “investors should be greedy when others are fearful." I will add to that, a good dose of patience helps as well.
Monday May 15, 2023
May 13, 2023 | CPI, PPI, Regional Banks, Consumer Credit and Student Loans
Monday May 15, 2023
Monday May 15, 2023
Headline CPI of 4.9% came in below expectations of 5.0% and registered the slowest growth since April 2021. It also marked the 10th consecutive month of slower growth since the report peaked in June 2022 at 9%. Areas that continued to see a growth in prices were food (+7.7%), motor vehicle insurance (+15.5%), transportation services (+11.0%), admissions which includes concerts, movies and theaters (+6.9%), and electricity (+8.4%). There continues to be more components that are registering declines compared to last year. Energy was a big one as it was down 5.1% as gas and oil prices fell from high prices last year. Gasoline in particular was down 12.2%. Other areas that saw declines included major appliances (-10.4%), used cars and trucks (-6.6%), and even airfares (-0.9%). The Core CPI, which excludes food and energy, did come in higher than the headline number at 5.5% but over 60% of that increase came from shelter costs which grew 8.1% compared to last year. If those shelter costs were removed from the report the Core CPI would have grown at just 3.7%. Overall, I continue to see inflation heading in the right direction as costs continue to decelerate.
Big news on the Producer Price Index (PPI) as it came in with just a 2.3% increase in April. This was the lowest reading since January 2021, and it was well off the high of 11.3% in June 2022. This is so important because if businesses are not seeing costs increase as much, they should not need to increase prices as much for consumers to offset the costs. I really believe inflation will not be a problem as we exit 2023 and head into 2024.
The regional banks have really caused a lot of concern in the markets lately. Unfortunately, short sellers have stepped in and are magnifying movements of stock prices beyond belief. But if an investor looks at where some of these regional banks are trading, like Western Alliance at 2.3 times forward earnings or CoAmerica at 3.9 times forward earnings, it would appear that the worst is probably over. For the big banks, they have been beaten up somewhat as well, and are currently trading at 1.2 to 1.3 times tangible book value. If you back out the non-cash impact from potential bond portfolio losses, the price to tangible book value trades closer to one. The normal for big banks is more around two times tangible book value. For an investor looking down the road two or three years I think this is a good time to add some good bank positions to the portfolio after some strong research. I would also caution investors to be prepared for a bumpy ride for the next few months but if you wait and by the time everything looks good, you would’ve missed the opportunity.
You may hear how terrifying it is that revolving consumer credit outstanding is at record highs and recently in February it was at $1.2 T. What you don't hear though is how that number relates as a percentage of disposable income. In fact, in the chart below you'll see revolving consumer credit outstanding as a percent of personal income was just 6.2% in February and is actually still below pre-covid levels. It's important to understand that when the price of assets and incomes rise so will costs and debt levels. The absolute level is not nearly as important as the relationship that the numbers have.
Monday May 08, 2023
Monday May 08, 2023
The jobs report showed nonfarm payrolls increased 253,000 in the month of April, which easily topped the estimate of 180,000. On the negative side, the prior two months saw revisions to the downside that totaled 149,000. Gains continue to moderate in the report as the April gain was below the 6-month average of 290,000, but with an unemployment rate of 3.4% I can't see payroll growth accelerating at this point. Areas that were at the top of the report included professional and business services (+43,000), health care (+40,000), and leisure and hospitality (+31,000). The growth in leisure and hospitality slowed substantially considering the 6-month average has been an addition of 73,000 jobs per month. The industry remains 2.4% or 402,000 jobs below pre-pandemic levels. No major industry saw a contraction in the report, but one negative was temporary help services declined by 23,000 in the month and since its peak in March 2022 it is down 174,000. One other area that continues to remain a concern was wage inflation. Average hourly earnings in the month increased 4.4% over the last 12 months. This increased from last month's reading of 4.2%, but compared to last April's 5.8% gain it was a nice deceleration. Overall, this report continues to feed my belief that the economy is in ok shape and inflation should continue to slow.
While the headline Job Openings and Labor Turnover Survey (JOLTs) shows a slowdown, it is again important to compare to pre-covid level given the strange economy over the past few years. Job openings declined 384,000 in the month of March to 9.6 million. This is down 1.6 million when compared to the end of 2022 and is the lowest level since April 2021. While this may sound negative, there are still 1.6 job openings per available worker and in February 2020 job openings stood at just 7 million. Layoffs also increased in the report by 248,000 to a level of 1.8 million. Again, while this may sound troubling, it is important to note that in February 2020 layoffs were 1.97 million.
If you have made money investing in Apple, congratulations. I must say though I was not impressed with the most recent earnings from the company. The company saw sales decline 2.5% compared to last year and EPS was flat. Service revenue, which has been a nice growth catalyst for Apple in the past, saw sales grow just 5.4% compared to last year. The company also still has a huge reliance on iPhone sales with that component of the business making up over 54% of total revenue in the quarter. Some may point to excitement over Apple's $90 B stock buyback plan and its 4.3% increase to the dividend. Unfortunately, due to Apple's size the buyback plan would only amount to about 3.2% of the shares outstanding and the dividend yield would be just 0.55%. With Apple trading at about 26.5x estimated 2024 earnings the stock is just too expensive for lackluster growth.
We see different areas in the economy that appear to be slowing down, but that would definitely not be true for consumer spending on travel and entertainment. Both Visa and MasterCard stated during their earnings last week that this category continued to grow in the first quarter. Also, proving this fact is domestic airline ticket prices in the US increased to $393.85 at the end of 2022, that was an increase from $327.13 one year earlier. If you’re doing the math, that’s about a 20% increase. A recent look of people passing through the Transportation Security Administration (TSA) checkpoints on April 27 was up 11% from one year ago to 2.52 million people. The consumer is still spending. They are just spending in different areas, I guess they feel they have enough TVs and furniture in their homes now.
Monday May 01, 2023
Monday May 01, 2023
While the GDP report showed the economy grew at an annualized seasonally adjusted rate of just 1.1% and was below expectations of 2.0%, it showed the consumer is still spending. In total, the consumer portion of GDP grew 3.7% as goods increased 6.5% and services spending grew 2.3%. What really hurt the report was private investment as it subtracted 2.34% from the headline number. Within private investment, the change in private inventories subtracted 2.26% from the headline GDP number. Residential investment was a negative in the report as it fell 4.2% and investment in equipment was also lower by 7.3%. Positives in the private investment space included nonresidential structures which saw spending grow 11.2% and intellectual property was up 3.8%. This report continues to make me believe that while the consumer may slowdown overall the economy is still in an ok spot. Companies will also likely need to rebuild those inventories which should be a benefit to GDP in future quarters.
Positive news on the inflation fronts as the Fed's preferred measure, PCE, registered a year-over-year increase of 4.2%. This compares to last month's reading of 5.1%. Energy costs were a major benefit in the report as they were down 9.8% compared to last year. Critics will point to the Core PCE, which excludes food and energy. It came in at 4.6%, above expectations of 4.5% and barely below last month's reading of 4.7%. With that said I continue to believe energy is a core part of costs for businesses and with a leveling off in energy prices, I believe core inflation will continue to subside through the remainder of this year. Overall, I believe this was a good report as it continues to show inflation moving lower.
I continue to say I do not see how we would have any type of meaningful recession or perhaps even a recession at all. I have pointed out how strong the job market is and that when people have a job they will not pull back dramatically on their spending. Another reason why I do not see a major recession coming is because of what’s known as the M2 money supply. The M2 money supply is virtually all the liquid money in the economy, and it includes short-term CDs, checking accounts, savings, and money markets. It has pulled back from the peak one year ago of $21.6 trillion to a current level of $21.1 trillion. I continue to compare data to the great economy that we had back in 2019 before Covid and on December 31st of 2019 the M2 money supply was $15.3 trillion. So here we sit with anybody that wants a job can get one and liquid money in the economy (roughly $6 trillion more than back during the good economy in 2019). I have to ask how in the world could we have a major recession with so many people working and so much available money?
Maybe the pandemic is to blame or maybe it is the availability of too much food, but according to the Federal Centers for Disease Control and Prevention obesity has risen from 31% in 1999 to 42% in 2020. This is despite the fact that in 2020 there were $76 billion in sales for weight loss, medical programs, diet soda, low calorie frozen food and gym memberships. This all could be changing because of three diet drugs that have hit the market: Ozempic, Wegovy and Mounjaro. These new drugs don’t come cheap ranging from $900-$1400 for a one-month supply. Some side effects include nausea and diarrhea. I do question if it is different this time? I remember back in the 1990s the diet drug fen-phen was pulled from the shelves because users developed heart issues. Another over-the-counter diet drug Dexatrim was also linked to increased risk of strokes. Both drug companies, Novo Nordisk and Eli Lilly are hot now, but in this litigious society that we live in I just wonder how long it will be before the major billion-dollar lawsuits come out against these companies.
Monday Apr 24, 2023
Monday Apr 24, 2023
Another sign that workers will be coming back to the office was a report that showed tech companies over-hired and that working from home did not prove to be that effective. Year to date, tech companies have laid off approximately 168,000 people and the layoffs are occurring for a couple reasons. First, they discovered that people were working only 4 to 5 hours a day logging in at 11 o’clock in the morning and wrapping up and logging off by 4:30 that same day. It was also discovered that some tech companies did become overzealous and looked at hiring more people as an ego boost and an indication that they felt business was going to grow rapidly in the future and they would need a lot of employees. Part of the hiring was done to keep talented employees from going to the competition, a hoarding of employee talent so to speak. No matter how you slice it, this is not a problem with the economy, but more with tech companies and people working from home.
Special Purpose Acquisition Companies
Another year has passed, and more data is in on what a bad investment Special Purpose Acquisition Companies, also known as SPACs, were. I hate to tell people I told you so but back when these blind investment pools were hot, we warned people. In 2022 the total write downs amounted to $11.6 billion a huge increase from $2.7 billion in 2021. The reason for the write downs is based on what is known as goodwill. This comes about when a business is acquired for more than the value of its assets. Accounting rules require the measurement of fair value to the assets annually. If that figure is less than the amount recorded in the books, the value of goodwill must be reduced. I have been in the investment world for 40 years, and I continue to see these hype investments that make Wall Street a lot of money. Unfortunately, in many cases the average investor loses money. This is why I continue to be a value investor and invest in a company when it’s on sale and sell it when it’s overpriced.
I know people are fearful about investing now and when I tell them I expect to have a very good year come December 31st, I think they question my thoughts. Currently value stocks are very inexpensive compared to growth stocks. They are discounted more than they have been for four-fifths of the time in the history of the stock market. Another study also showed when inflation runs between 4% and 8% per year value stocks outperform growth stocks by 6 to 8%. People may be afraid of inflation, but it actually is a benefit to value stocks. I will keep investing!
Monday Apr 17, 2023
Monday Apr 17, 2023
Headline CPI came in at 5% compared to last year, which was the lowest level since the May 2021 report and well off the June 2022 high of 9%. Some reasons for the slower gain include gasoline which was down 17.4%, used cars and trucks down 11.2%, televisions down 14%, and uncooked beef roasts down 4.4%. Areas that remain elevated include transportation services up 13.9% (Airfare was up 17.7%), electricity up 10.2%, and food was up 8.5%. The big problem in the report continues to be the shelter index which accounts for about 1/3 of CPI and rose 8.2%. Some people may point to a concern over core CPI, which takes out the volatile food and energy components, as it rose 5.6% compared to last year and was higher than February's reading of 5.5%. But looking closer at the numbers, the shelter index accounted for about 60% of the increase in core CPI. Excluding shelter, the CPI rose just 3.4% from a year ago. I continue to believe the shelter index will level off as we progress through the year and have a much smaller impact on CPI. Overall, I would say this inflation report was a major positive and should provide evidence to the Fed that a pause in rate hikes could make sense.
Huge news on the inflation fronts as the Producer Price Index (PPI) showed a month over month decline of 0.5% in the month of March. This was well below estimates for the index to be flat in the month. Looking at the 12-month change, the index showed an increase of just 2.7%. This was the smallest increase since January 2021 and is well off the high from last March of 11.7%. The Fed has pointed to concerns over services pricing, but this report also indicated that prices for services fell 0.3% in the month which was the largest decline since April 2020. With a report like this I really believe the Fed should consider not raising rates at the next meeting.
The headline retail sales numbers may concern some, but digging through the numbers they indicate exactly what we've been anticipating, a slowing economy not a troubled economy. The headlines read that retail sales fell 1% in the month, more than the estimate of a 0.5% decline but looking at the numbers compared to last March sales increased 2.9%. It's important to point out that this is not adjusted for inflation, which was 5% in the month of March. The biggest negative weight on the numbers was the decline of 14.2% at gas stations largely due to the decline in gas prices. If we exclude gas stations from retail sales, they would have been up 4.8% compared to March 2022. Other negatives included electronics and appliance stores which were down 10.3%, building material & garden equipment & supplies dealers were down 3.5%, furniture and home furnishings stores were down 2.4%, and clothing and clothing accessory stores were down 1.8%. The major gainers in the report were food services and drinking places which were up 13%, non-store retailers were up 12.3%, health and personal care stores were up 7.1%, and food and beverage stores were up 5.0%.
Real estate transactions remain on the low side as housing prices are beginning to weaken. With the higher prices of homes and the higher interest rates many first-time buyers have been locked out of the housing market. The movement of the real estate market generally happens where people will trade up to perhaps a larger or more expensive home opening the lower priced homes for first time buyers. But with many of these homes the homeowners locked in mortgage rates in the 3% range, and they don’t see the benefit of buying a more expensive home with mortgage rates double what they’re paying now. I believe it will take years for the real estate market to adjust to a more normal market.
Monday Apr 10, 2023
April 8, 2023 | Jobs Report, Labor Market and Mutual Fund Managers
Monday Apr 10, 2023
Monday Apr 10, 2023
Given the concerns around the economy, I'd say the jobs report was a positive one. It wasn't too hot which would've provided evidence for the Fed to increase rates more than anticipated, but it also wasn't too far below expectations and overall, it showed a softening labor market not a bad labor market. Headline payrolls grew by 236,000 compared to the estimate of 238,000, but the big highlight came from the average hourly earnings which increased just 4.2% on an annual basis and was the smallest increase since June 2021. For most of 2022 the annual gains were over 5% with March being the peak at 5.9%. This is more evidence that inflation is becoming a much smaller problem. Also, another highlight was the labor force participation rate again ticked higher to 62.6% which was the highest level since pre-covid levels. For comparison, in February 2020 the labor force participation rate was 63.3%. Areas that led the way in job gains were leisure & hospitality at 72,000, healthcare and social assistance at 50,800, and the Government at 47,000. Leisure & hospitality still remains 2.2% or 368,000 jobs below pre-covid levels and Government employment is still lower by 314,000 jobs, or 1.4 percent. There were 4 declining groups in the report as retail trade was down 14,600, construction was down 9,000, and manufacturing and financial activities were both down 1,000 jobs.
The Job Openings and Labor Turnover Survey showed that job openings in February came in at 9.93 million. This was a fall of 632,000 job openings when compared to the month of January and it missed the estimate of 10.4 million openings. This was the first time since May 2021 that job openings fell below 10 million and while this may sound concerning, there are still about 1.7 jobs available for every available worker. Also, if we look back to January 2016-February 2020, the job openings ranged from 5.59 million - 7.59 million. Layoffs were also positive as they declined 215,000 from January to a level of 1.5 million. If we again look at January 2016-February 2020, layoffs ranged from 1.59 million - 1.97 million. Overall, I'd say this is a softening labor market but by no means is it a weak labor market.
Mutual Fund Managers
I knew there were a lot of mutual funds out there, but I was shocked to see how few managers actually participate in their fund. According to Morningstar, some 4,643 out of a total of 7,108 funds have zero manager investment. I think this is just crazy and as much as people talk about different objectives and risk tolerance, I have always been a big believer that a good investment for me should be a good investment for my clients. Ultimately, I believe that everyone shares the same main objective when it comes to investing and that is to make money. This is why I invest in the same companies as my clients when we manage money.
I continue to worry about people's overreliance on the internet/technology and even more so the so-called independent fact checkers. We recently did a post on the JOLTs report, and it was flagged for false information. When clicking on the reason for the false information, Facebook indicated it flagged the post because there is no record of Martin Luther King Jr saying, “Our lives begin to end the day we become silent about things that matter.” This was according to AAP FactCheck. Our post did not contain that quote or mention Martin Luther King. As a society, I believe we need to really emphasize critical thinking and doing more than just surface level research that relies on algorithms.
Tik Tok Statistics
The numbers are staggering when it comes to TikTok. It is estimated that about 95 million Americans use TikTok for about 90 minutes a day. It is estimated the company will generate about $14.2 billion in revenue which is an increase of 43% compared to 2022 and 10 times what it was just three years ago. The biggest users of TikTok are coming from Generation Z who were born from 1997 to 2012. What is concerning is that these 11- to 26-year-olds could be having their minds and ideals twisted in ways that no one could foresee. It was also pointed out about 26% of adults under age 30 are getting their news from TikTok on a regular basis which is up dramatically from 9% back in 2020. At first thought, I’m a hard liner that we ban TikTok because of the backing from the Chinese government and what it could be doing to the young minds of our country. Then there’s the other side of the coin if we do ban TikTok did we just throw out our freedom of speech? Also, there could be repercussions for American companies operating in China, who generate billions of dollars benefiting US businesses and shareholders. One thing is for certain, this will not be resolved for years to come and there’s no doubt in my mind that it will not be resolved before the presidential election in 2024, because if it were banned now, politicians would lose many Gen Z voters.
There has been some concern about economic data this week, but I believe this is exactly what we need for a healthy economy. Looking at the ISM Services PMI it registered 51.2 which was 3.9 percentage points below February's reading of 55.1. The reason this is important is because the economy is slowing, but a reading above 50 still indicates expansion. One of the most important components of the report was the Price index. It registered 59.5 which was 6.1 percentage points below the 65.6 recorded in February. It marked the 70th consecutive month of price increases, but it was the index's lowest reading since July 2020. This also marked a ninth consecutive reading near or below 70 which follows 10 straight months of readings near or above 80. I continue to believe that we can get a soft landing, or a small recession paired with a reduction in the massive inflation we have been seeing.
In the Office
There is more evidence that people are coming back to the office. One was a recent survey where it says 72% of business employees are now in the office full-time or work at home very little. In 2021 the same survey showed 60.1% were coming into the office. My own personal observation agrees with the survey as I have noticed when I call different businesses, I hear fewer barking dogs in the background or kids running around screaming.
The Silicon Valley Bank failure caused movements of dollars that has never been seen before. This is mostly because of the ease of transferring money from one institution to another. Banks below the top 25 banks experienced withdrawals of $108 billion, which is an all-time record.
OPEC and Oil Prices
In a surprise move OPEC cut their production which caused a big rally in oil prices today. It appears the Biden administration missed an opportunity to buy back oil for the Strategic Petroleum Reserve which would’ve helped to stabilize oil at a higher price. Since the administration did not do that OPEC took it upon themselves to cut production to support oil prices. Oil rose 6% today crossing the $80 per barrel level.
Wells Notice to Coinbase
The SEC recently issued a “Wells Notice” to Coinbase, which is saying a lawsuit is coming be prepared. What the SEC is saying is that Coinbase is trading tokens as an unregistered security and that they are not tokens but a security. If the SEC wins this suit against Coinbase it will virtually shut down all trading of most tokens in the US (imagine the price of Bitcoin if this happens) because they would have to register with the SEC as brokerages and exchanges, and they would also have to issue the tokens as securities. I do take the side of the SEC on this because more people buy and sell Bitcoin and other cryptocurrencies as a way to make a profit and not use it as a currency for exchange of goods and services. To me, it is the same as penny stocks, which really have no value and trade up and down on a daily basis.
Federal Reserve Raising Rates
You may be feeling the pinch on your credit from rising interest rates, but you are not the only one. The Federal Reserve, who is raising rates, is also feeling the pinch. How is that you may ask? The Federal Reserve has over $5 trillion that it has borrowed from financial institutions and money market funds at short term rates. Now that those short-term rates have risen the Fed is now paying 4 to 5% on that $5 trillion. The Federal Reserve makes profits off securities that it owns. In 2021, they made almost $108 billion which they sent to the Treasury. But now because of the amount they are paying on the $5 trillion that they owe, it looks like in 2023 the Treasury will not be receiving any money from the Federal Reserve.
Monday Apr 03, 2023
Monday Apr 03, 2023
I was happy to see the consumer confidence number come in today at 104.2 for March which was up from February’s 103.4. For me this is another positive sign that we will not have a major recession, and that consumers will continue to spend on goods and services. I want to emphasize this is a good number not a great number. The reason I say that was from 2008 to 2012 the confidence number was below 60 but in 2019 it rose to nearly 140. So, I am happy with the current number for now.
Apple and Disney
There is talk today, that Apple may be buying Disney. No numbers have been released yet but I do not believe this will take place or that it would make any sense for Apple. Apple may be looking for the media side to help grow Apple TV but if you buy Disney, you also must take care of the theme parks and the cruise lines which Apple has no experience or I feel no desire to do. They could spin those off, but I think if they are going down that path, they would be far better to buy either a Warner Bros. or Paramount, which are pure media plays. Also keep in mind Apple has not done any major purchases in recent years and its largest came in 2014 when it bought Beats for $3 billion. To buy Disney the current market cap is nearly $180 billion, versus Warner Bros. at nearly $37 billion and Paramount is just over $14 billion.
This has been quite the week for Binance which is the world’s largest crypto exchange. You wouldn’t know it from the price of Bitcoin, which has now climbed to over $28,000. It defies logic, and I’m sure more people will get burned once again. The CFTC known as the Commodity Futures Trading Commission has charged Binance with operating illegally in the US and violating rules to prevent illicit financial activity. Billions of dollars have been walking out the door from the company, and as I said months ago, Binance would be the next crypto company to fall. As these crypto companies continue to fall, I don’t know how Bitcoin can stay at these levels.
Money Market Funds
I was surprised to learn that roughly $120 billion flowed into money market funds in mid-March bringing the total assets to $5 trillion. The reason I was surprised is that money market funds are not insured, and if consumers were leaving the bank for safety the money was insured at the bank. Sometimes fear causes consumers to do silly things. One should stop and think before making financial moves.
Our banking industry has gone through major changes compared to just 15 years ago when the big banks were viewed as bad. They have now become the safest place to keep your money, or so people feel. In 2008 the feeling was we don’t want big banks, but that has shifted as the share of total banking assets controlled by the 25 largest banks is now at 68% which is more than double what it was 30 years ago. The number of US banks hit an all-time high of 30,456 banks in 1921 and as of 2021 there were just 4,236 FDIC insured banks. There is an ongoing consolidation of banks and I believe it will continue going forward.
LA Real Estate Tax
Starting April 1st, LA will begin implementing a large tax on real estate valued over $5 million. I think this is a terrible idea especially since it applies to not just mansions, but multifamily and commercial property as well. Sellers of property will have to pay 4% of the total sales price for properties between $5 and $10 million and for properties over $10 million the tax will be 5.5%. The tax is on top of the current 0.45% transfer tax. I don't know who in their right mind would buy in LA when you can buy in surrounding markets and avoid the tax. I believe this will make the supply problem even worse and reduce demand in the higher market in LA. Unfortunately, I don't believe this will fix the affordable housing/homeless problem in LA like the bill was intended.
Pending Home Sales
Pending home sales showed a small month over month increase of 0.8% in the month of February, but compared to last year sales were 21.1% lower. Pending home sales look at contracts that were signed in the month. I believe these sales will continue to have difficult year-over-year comparisons. There has been a slight increase in mortgage demand from recent weeks as rates have fluctuated, but compared to last year the demand for purchase applications was 35% lower. As for prices we did get data from the S&P CoreLogic Case-Shiller U.S. National Home Price index, and it marked the 7th straight month of declines. In January prices fell 0.5% compared to the prior month. They were still 3.8% higher than the previous year. Here in San Diego though prices were 1.4% lower compared to January 2022. I will say, be careful comparing this index against other ones as it does lag by a month. We are now getting data for the month of February in many cases, but this index is for the month of January. My expectation is that this index will turn negative on an annual basis in the coming months.
Buy Now Pay Later
Apple has entered the buy now pay later arena, which I believe will put a lot of downward pressure on the stock prices of some of those companies like PayPal. It makes it very convenient for consumers who use apple since it’s already on their phone. It is a simple concept, buy now up to $1000 and make four easy payments with no interest or fees. I do always worry about consumers loading themselves buy now pay later debt and becoming over extended, but for Apple, this is just another service that they provide to their customers for convenience.
In a recent trade agreement with China and Brazil, the deal was done using China’s currency the Yuan. You may be hearing that the dollar is not the strong currency any longer that is used in trade deals, but that is still far from true. Currently when it comes to global trade, the Yuan accounts for 3% of trade deals and the United States dollar accounts for 87%. We still have a very comfortable lead, but you must be aware that China is doing everything it can to get rid of using the dollar. Currently one Yuan trades for $.15.
I’ve always been a little suspect of going up to the checkout register as a person scans very quickly multiple items, wondering am I really getting the right price? Unfortunately, my fears have been verified from multiple states that retailer Dollar General is charging a higher price at the checkout register than the advertised price. Examples include a six pack of soda and a frozen pizza which were $1.25 higher than the shelf price, disposable cups were $1.70 higher and chicken strips were $2.80 higher. I was also disappointed to learn that state regulators on average allow up to a 2% failure rate on pricing. Dollar General has the highest penalties in states for over pricing the items, but it does happen at Walmart and even Circle K but to a lower degree. What I also thought was concerning was all the miss priced items that I read about were always priced higher, not one was priced lower. I guess this would be a good argument for self-scanning so you can verify the price, but now I’m thinking the price is not even listed on the item and you would have to write down each price you saw on the shelf for the product. Sometimes technology has its downfall.
Monday Mar 27, 2023
Monday Mar 27, 2023
Retirement Investment Rule
I was disappointed to see Joe Biden veto the resolution to overturn a retirement investment rule that allows managers of retirement funds to consider the impact of climate change and other environmental, social and governance factors when picking investments. Biden says he signed the veto because "legislation passed by the Congress would put at risk the retirement savings of individuals across the country." Unfortunately, I think the veto does the opposite. You know which bank had a good ESG score? Silicon Valley Bank. I believe if fund managers want to consider ESG when investing then they can go for it, but I worry this will allow them to hide behind poor investments like a Silicon Valley Bank in the name of ESG.
What is California's solution to the highest gas prices in the US? More regulation. I don't understand what these lawmakers look at. The bill will allow the state to set a maximum gross gasoline refining margin and penalize any CA based refiner that exceeds that margin. The bill will also allow for a new watchdog agency and politicians say the legislation creates new transparency over refinery shutdowns, transactions that compose the crucial spot market where retail prices are set, export, and import activity, pipeline activity, and other aspects of the industry. There will also be a new ledger that will be kept for transactions on the gasoline spot market and regulators will have to be informed of all trades. I'm not sure why these CA politicians believe that refiners are only screwing over their state, maybe they should look at the excessive regulations and taxes as a reason for higher prices. The easiest way to help prices would be to encourage supply, this bill does not do that.
When looking at the headline for existing home sales, some may be excited as they spiked 14.5% compared to the month of January. Looking compared to last February though, existing home sales were 22.6% lower. The median home price also saw its first year over year decline in 131 months, or nearly 11 years. It was a minor decline of just 0.2%, but I do believe that the decline will be larger in the upcoming months. Supply continues to remain problematic with just 980,000 homes for sale at the end of February. This continues to produce an imbalanced market with just 2.6 months of supply at the current sales pace. I still do not see a major decline in rates and believe the housing market will continue to struggle in 2023.
Harrison: "Home Buying vs. Renting"
Monday Mar 20, 2023
Monday Mar 20, 2023
Volatility of Stocks
It amazes me how people believe that stocks are too risky and real estate is a much safer investment. Looking back nearly 50 years the truth is stocks have more volatility than real estate, but the returns on stocks far outperform real estate. Using a nationwide real estate Index versus the S&P 500 from 1975 to 2022, a $100 investment in US real estate would be up about nine times to $928, a pretty good return. $100 invested in the S&P 500 from 1975 to 2022 would have grown to $19,351. From 1990 to 2006 there is a period known as the great moderation where real estate outperformed the S&P 500. Looking back on history and realizing how much real estate has increased because of Covid I begin to wonder if we could be in for a long-term period of slowly increasing real estate and after inflation, perhaps a negative return. People tend to look at the recent history which can fool one into making poor investment decisions. People think just because something went up in the past it will continue to do the same going forward, but they do not realize that great advancements can lead to moderation for years to come. Why do people do so poorly in stocks? They confuse the volatility with risk and many times during a short-term decline in equities they will head for the exits and miss the great long-term returns that good solid equities can provide investors.
Consumer Price Index
Inflation in the month of February continued its downward trajectory as the CPI increased 6% compared to last year. This was right in line with expectations and comes in lower than January's 6.4% reading and the peak of 9% in June of last year. Many of the normal culprits remained elevated with transportation services up 14.6% (airfares were up 26.5%), energy services were up 13.3% (electricity was up 12.9% and utility gas service was up 14.3%), and food was up 9.5%. There were some positives as gasoline was down 2.5%, citrus fruits were down 1.2%, beef & veal were down 1.4%, bacon was down 5.9%, major appliances were down 5.9%, used cars were down 13.6%, and televisions were down 14.8%. It is nice to see there are more categories in these reports showing a decline. When looking at core inflation, which backs out food and energy, it came in at 5.5%. A heavy weight in the report was shelter as costs were up 8.1%, if we backed this out from the core inflation it would have been 4%. I remain very optimistic over the trajectory of inflation especially when we consider the shelter index. It's important to remember that the index lags real time data as it takes time for leases to roll over into a new contract. Landlords typically renew leases every 12 months, which means current price dynamics won’t be reflected in new contracts for a year. I still believe CPI could end 2023 around 4%.
Producer Price Index
The Producer Price Index (PPI) came in with a huge surprise, declining 0.1% in the month of February vs the expectation for a 0.3% increase. Compared to last February, the PPI grew just 4.6% which was down from January's annual gain of 5.7% and well off the peak level of 11.7% in March 2022. This was the lowest annual increase since March 2021 when it was 4.1%. Retail sales did show a 0.4% decline in the month, which could be good news considering it indicates a slowing economy. Year-over-year retail sales were up 5.4%. Food services and drinking places remained a big destination for consumers dollars as sales were up 15.3% compared to last February. Non-store retailers were also strong, up 8.5%, and grocery stores were up 5.8%, likely benefitting from higher food prices. Areas of weakness included electronics & appliance stores down 2.8%, motor vehicles & parts dealers down 0.2%, and gas stations were down 1.9%. I continue to believe that the data is showing a softening in the economy, which is providing relief to the high inflation levels we experienced last year. I continue to believe the Fed should hold rates where they are for the time being. With that said I still do not believe they should cut rates at all in 2023.
You may not be able to tell by the price of gas at the pump here in California, but oil has dropped down to under $70/barrel this week. Remember last year, about nine months ago when crude prices hit $122/barrel? I’m glad those days are gone. The reason for the decline is with the bank failures and also a big selloff in the international bank Credit Suisse some are thinking the economy is slowing down and less oil will be used. It will take a little bit of time for the big reduction in the price per barrel to flow through to the pump at the gas station, but it may not last long. We have the reopening of China's economy which could increase demand for petroleum and remember all the oil that was taken out of the strategic petroleum reserves? Well, that must be replaced. The talk was they should be buying it back anywhere between $67/barrel to $72/barrel. Let’s see if the government follows through with their plan. If they do, that would be more upward pressure on the price of oil.
Harrison’s Topic: “Where should you put your cash?”
Monday Mar 13, 2023
Monday Mar 13, 2023
The headline jobs number of 311,000 easily topped the estimate of 225,000 but marks a slowdown from January's level of 504,000. Leisure and hospitality remained strong with an addition of 105,000 jobs. With this solid number, the sector is now just 2.4% or 410,000 jobs below the February 2020 level. Other areas of strength included health care and social assistance (+62,800), retail trade (+50,100), government (+46,000), professional and business services (+45,000), and construction (+24,000). Information was the weakest group as payrolls declined by 25,000 and transportation and warehousing also had a decline of 21,500. The unemployment rate came in at 3.6%, which was above the expectation of 3.4%, but the participation rate increased to 62.5%. This was the highest level since March 2020, but still remains below the pre-pandemic level of 63.3%. On the inflation front, I was happy to see the increase in average hourly earnings of 4.6% missed the estimate of 4.8%. While this is higher than last month's 4.4% gain, most of 2022 saw gains of over 5%. Overall, the report may have been too optimistic for the market and could fuel further fears of more rate increases. I do continue to believe the labor market will continue to see gains, but at a much softer rate than the last couple of years. There's nothing that really concerns me in this report.
Today SVB bank also known as Silicon Valley bank was closed by regulators. At first thought this sounds scary since this is the first bank closure since Washington Mutual back during the Great Recession. But when one digs under what assets this bank held, it is no surprise as they were very speculative. The assets of $212 billion pale in comparison to JP Morgan Chase with $4 trillion in assets but also the quality of assets or the lack thereof is what caused the bank's failure. Many of the assets were for either venture capitalists, or startup companies in the risky tech and life science world. The bank was also very loose with its valuations, where they would loan on the equity value before the stock would even go public. They also went as far as to loan against wineries wine inventories, which accounted for 2% of the asset value of the bank. It is important to note that when the economy slows down that is when all the speculative businesses come to light. It is important to understand that the big banks will not follow this road, because they base loans on true assets and income.
The 1% excise tax that the government imposed this year on companies for doing stock buybacks has not seemed to change the course of companies buying back their stock. Through February 17th, $220 billion of stock buybacks were authorized by companies which was an all-time record. We continue to support stock buybacks by companies as long as they are buying their stock back at a good price and not borrowing money to implement the buyback.
Oil companies have made a lot of changes over the last couple of years and are being run more as a business looking at profits and cash flow rather than just production. It was estimated in 2019 that 15% of executive bonus compensation was based on production goals. By 2022 that was just 6%. The companies are now looking more at free cash flow which 18% of the incentive will come from hitting those goals, up dramatically from 7% back in 2019. There are also more incentives now for hitting environmental, health and safety goals. This will probably hurt production going forward with estimated growth of only 3% this year. Looking at it from a business perspective, it makes more sense to run your business based on cash flow and profits, rather than just production.
Harrison: "Big tax bill? Here’s some causes and solutions.”
Monday Mar 06, 2023
Monday Mar 06, 2023
Some people wonder why I don’t get so upset over the negative economic news that comes out. In the first half of last year, I kept saying yes it will be a difficult year but we’re not going to have a major recession. Looking back at some headlines, in March 2022 Goldman Sachs economists were forecasting a 20 to 35% chance of an economic contraction within 12 months. The CEO of JP Morgan Chase, Jamie Dimon, used the word hurricane in the economy going forward. Bank of America predicted a mild recession would hit before the year closed. Fast forward from the fourth quarter of 2021 to the fourth quarter of 2022, the US economy grew at 1%. It’s easy to be negative but one really must look at the data and say where will we be 12 to 24 months from now. I think our economy will continue to move along and inflation will continue to decline slowly. With that said I will continue to invest in good quality public companies and see what they will be worth in the next 12 to 24 months.
As I suspected, the large increase in apartments is putting downward pressure on rents. Nationwide rents have fallen about 3 1/2% since last August. It was also the first time in five years that rent fell every month over the preceding six months. If one drives almost anywhere in San Diego, you see new apartment buildings going up and nationwide, we are seeing the biggest supply of apartments delivered since 1986 with nearly a half million apartments coming online. This is good for two reasons. First is that obviously people will be spending less on rent and the second reason is this will ease some of the inflation pressure since housing is a big part of the CPI.
Capital Gains Taxes
One of the major benefits of being a long-term investor is the benefit of capital gains taxes. Rather than ordinary income rates, at the federal level gains are taxed at 0%, 15%, or 20% as long as the position is held for more than 365 days. In 2023, the standard deduction and income thresholds for capital gains increased which is a benefit for investors. In fact, you may qualify for the 0% long-term capital gains rate with taxable income of $44,625 or less for single filers and $89,250 or less for married couples filing jointly. This means you still may be able to make over $100,000 as a married couple and be in the 0% range after the standard deduction.
Another hit to the crypto market! Silvergate Capital (SI), a cryptocurrency focused bank, plunged 58% in a single day of trading this past week. The reason for the massive decline was the company delayed its filing of the annual report as it needed more time to assess additional losses, regulatory scrutiny, and the big one its ability to continue as a going concern. In other words, they may not be able to operate for another 12 months, this is a major hint towards a potential bankruptcy. I've stayed away from crypto, and I'll continue to stay away from crypto. We've seen the fall of FTX and other exchanges and now the major concern from Silvergate leads me to believe there are more issues around the corner with more exchanges. This also continues to fuel my belief that the argument for wider adoption of these cryptos is fading fast.
Harrison: "Alternative Investments in Retirement Accounts”
Monday Feb 27, 2023
Monday Feb 27, 2023
For 12 months in a row existing home sales have been declining. Recent numbers coming out from December show a drop of 36.9% from December 2021, month over month we saw a decline of 0.7%. Not helping the situation is the median existing home sale price did increase 1.3% from a year ago to $359,000. The inventory of unsold homes has climb to 980,000 as of the end of January but that still is a low amount of supply at 2.9 months. Interest rates on a 10-year treasury continue to increase, this will put more downward pressure on the housing market throughout 2023. We will continue to see declining numbers in new and existing home sales.
Credit Card Fee’s
Running a small business is very hard, one must handle all the expenses, new accounts, and customers. But one thing that irritates me is when I go to a small business, and I use my credit card and they try to ding me for the 3% credit card fee. To me it’s just an easy out for them but it really is nothing more than a cost of doing business and is a convenient way for the customers to pay for their product. I’ve been going to the car wash place in Scripps Ranch for over 20 years and the last time I was there they charged me the 3% credit card fee, I told them that’s the last time they will see me. I’d rather see a business increase their prices and include all their expenses then try to hit me with a 3% credit card fee. What is next? Do they want us to pay their utilities? At my firm, we do allow our clients to pay for their financial planning fees by credit card and I would never think of charging them a 3% fee. I’m all for small businesses, but if you must charge a 3% credit card fee, you’re doing something wrong or you’re being greedy.
I continue to say that I believe we will see more of a decrease in inflation overtime because I look at the raw cost of the goods and the cost of shipping those goods. One cost is shipping a standard 40-foot container from China to California. The peak cost was in September 2021 with a cost of $12,000. Today the average cost for that same 40-foot container is $1444. That is a decline of $10,556 or 88%. Another reason why I think prices will continue to fall slowly going forward.
Short vs. Long Term Thinking
Last week’s strong economic information means we will probably see short term rates on the three- and six-month T-bill perhaps climb to 5% in the near future. Don’t get too excited about this. I want you to remember the old story about the tortoise and the hare. Do not drop your high-quality equities that are trading at reasonable valuations with decent dividends to rush into a 5% short term yield. Your short-term thinking will destroy your long-term investment results. Based on what we have in our portfolio, I would even be willing to bet that we should outperform the short-term treasuries. Remember in the fall equities are not looking where they are today but in the spring of 2024.
Tuesday Feb 21, 2023
February 18, 2023 | ChatGPT, Retail Sales, Option Contracts and 2023 Inflation
Tuesday Feb 21, 2023
Tuesday Feb 21, 2023
More hype has come into the markets, and it reminds me of the meme stocks and the cannabis companies. This time it is AI technology, and it is particularly around ChatGPT. Even large companies like Microsoft have seen a jump of nearly 20% in their stock price. The problem is ChatGPT doesn’t have an AGI or artificial general intelligence in which machines are able to learn and think for themselves. ChatGPT derives its information from word relationships found on the Internet and we know all the information on the Internet is not reliable which has led to incorrect responses from these AI products. So, while the excitement about ChatGPT is driving up stock prices, consumers will become disappointed with the responses they receive from ChatGPT, and I believe the stock prices will fall back again. One other potential pitfall could be litigation. We know how much our country loves lawsuits. To begin with who will be liable for misinformation? Also, another question mark is copyright protection. Copyrighted works are being used to train these AI services without consent, that could create more problems. For now, I'll avoid the hype!
People may complain about the economy and inflation, but they are still spending. Retail sales in the month of January increased 3% from December, which easily topped the estimate for a 1.9% gain. Compared to last year retail sales were up 6.4%, which was right in line with the CPI reading of 6.4%. Compared to January 2022, every category in the report showed a gain in sales except for electronic and appliance stores which were down 6.3%. The big winner in the report continues to be food services and drinking places as they saw a gain of 25.2% compared to January 2022. Other big gainers included grocery stores up 6.6% and clothing and clothing accessory stores up 6.3%. With higher energy prices gas stations continued to see gains with an increase of 5.7% compared to last year. This is much more muted as we are now lapping the higher energy prices in 2022. All in all, I'd say this was a very strong report showing the consumer is still active. It confirms my belief that if we see a recession, it will be very mild.
There’s a lot of risk in the market, especially with the technology companies and your expensive growth stocks. One indicator is the number of option contracts that are traded on a single day. In early February, 68 million option contracts were traded in a single day, that is an all-time record. I think this could also mean we could see a big drop again in the expensive growth stocks.
The January CPI report was a disappointment today as inflation climbed 0.5% compared to December and 6.4% compared to last January. This is compared to the estimates for respective increases of 0.4% and 6.2%. The headline number also did see a small decline from December's gain of 6.5%. Food costs remain stubbornly high with prices gaining 10.1% year over year and food at home costs grew even more with an 11.3% increase. Energy also was a problem in the report as there was an 8.7% increase. Electricity was a big contributor as it was up 11.9% compared to last year. Shelter costs were up 7.9% compared to last year, and the monthly increase of 0.7% accounted for about half the monthly gain on the index as it accounts for about 1/3 of the entire index. I've talked about this in the past, but I do believe this component will soften throughout the year which would have a major impact on the overall CPI. There were some positives in the report as used cars & trucks saw an 11.6% decline compared to last year, televisions were down 13.2%, computers were down 6.2%, major appliances were down 3.9%, and bacon and related products were down 3.9%. I continue to believe that inflation will continue to decelerate as we progress through 2023, but it will likely remain a bumpy ride.
Monday Feb 13, 2023
Monday Feb 13, 2023
We've talked a lot about the affordability problems when buying a new home, but one area we haven't discussed as much is the real estate investor. The short-term rental craze I believe created new investors who thought it would be easy to make money in real estate. Looking at the numbers, in 2021 investors made up 24% of single-family homes and in the first half of 2022 that number was still around 22%. This compares with a range of 15-16% annually going back to 2012. Unfortunately, things have started to change in the short-term rental market. According to the Wall Street Journal, one investor in Encinitas was able to rent her 2-bedroom condo for $1,000 per night on a holiday weekend, but she has had to drop her rates to $275 per night due to waning demand. The problem is not the demand, but it comes from the oversupply in the market. In fact, nights stayed were up 21.3% in the month of October when compared to last year, but listings surged 23.3% during the same time frame with 66,000 new rental properties listed in the month of October alone. With rising interest rates and lower rental rates, it becomes a whole lot harder to justify an investment in these properties and some prior investors could become at risk of not being able to keep up with the cash flow required to maintain the house. I believe this will lead to less demand in the housing market and a potential source of supply if investors need to sell underperforming properties. These factors could help bring down home prices even more.
Young investors across the nation who experienced big losses in investing are now pulling away from investing in stocks. Goldman Sachs estimates households will pull as much as $100 billion in 2023 from the stock market. This will hurt companies like Robinhood who encouraged young traders to do a lot of trading. Back in March 2021 Robinhood had as many as 4 million trades per day, that has now fallen to about 1.2 million trades per day. I personally think this is a good thing, many young investors just thought they could buy anything, and it would go up. Then they started using leverage and options which magnify the risk and that ultimately cost them even more. I have said for years if you’re averaging around 10% on your money over a 7-to-10-year period you’re doing pretty good. Unfortunately, some younger investors laughed at that and now have nothing left. And worse than that, they won’t come back to investing for many years missing out on some good growth over the years to come. Investing takes a lot of work and it’s not something that can be done quickly by trading stocks. There are very few people who can invest over the long term as their impatience and lack of discipline costs them good results.
Super Bowl Betting
America is excited about Super Bowl betting this year! A record 50.4 million Americans are expected to wager bets on the big game this Sunday. This a massive 61% increase from last year's record of 31 million Americans that said they would place a bet. In terms of the dollar amount this year it is anticipated there will be $16 B worth of bets on the game, which is more than double last year's amount of $7.6 B. From the financial standpoint, I must say this is a positive for the economy as consumers clearly have enough confidence and comfort in their financial situation to place bets. Personally, I won't be partaking in any bets this year. One thing that will be missing from this year's Super Bowl is those crypto commercials, especially from FTX. As for my pick, I'm going with the Eagles!
Approximately 6 to 9 months ago it was thought that the Eurozone was going to have an economic downturn that would destroy the region. That was mostly based on the fact that Russia had invaded Ukraine. In a surprise turn around, the Eurozone experienced economic growth in 2022 of 3.5%. That’s not the only surprise. It also surpassed the economic growth of the United States and China.
Last week we saw the US unemployment rate drop to 3.4%, a low not seen since 1969. Keep in mind that is the average across the country so there are states that are below the 3.4%. The state of Utah has the lowest unemployment in the nation, coming in at 2.2%. You may be asking what state has the highest unemployment in the nation? That honor would go to the state of Nevada with an unemployment rate of 5.2%.
AI & Home Prices
There is a lot of buzz around ChatGPT and Bard from Google. I'd be very careful falling into the hype around this AI trade. Just a couple of thoughts here for potential risks. At this time the chatbot can contain factual inaccuracies, one that was pointed out was inventing fictious names or books that don't exist. With all the concern around misinformation that was spread on social media, how quickly will lawmakers need to step in and regulate this AI. Also, there are potential cases that could be extremely harmful to society liking hackers using it to write malicious code or students using it to do their homework. I do see there are some potential benefits here, but I do believe we should be extremely careful with this technology, and it could be years away before it can be trusted. While there are some exciting trends we will miss as value investors, I never like to fall for the hype and get burned. Some examples of this in the past include 3-D printing, pot stocks, and blockchain.
I was listening to a conference call from one of the insurance companies that we hold in the portfolio. Their earnings were down mostly from bad returns on the auto insurance side. They stated two reasons. First, increasing used car costs which by the way are coming down and will help the insurance company. Second, were higher settlement claims. In 2022 settlement claims in the United States were over $62 billion. This ultimately is a cost that is passed on to consumers. I have talked about this before with some overzealous attorneys increasing settlement costs. Don’t get me wrong, there are some good attorneys out there, but there are some that are very greedy. What this does as I’ve been saying all along, and this was also stated from the insurance company, is they now must raise insurance premiums. The company also pointed out that they will be pulling out of five states. This is where the consumer loses because they must pay higher premiums for excess settlements from those bad attorneys and there’s less competition in those five states and auto premiums will probably be increasing in those states. More competition means lower prices, less competition, higher prices.
Movie Theaters Post Covid
Movie theaters have had a hard time since Covid returning to the pre-pandemic days when they had profits. AMC has come out with what they call Sightline for shows that start after 4 PM. You will now have assigned seats in the movie theater and pay more for prime seats which are in the middle of the theater. If you want to sit down in front and break your neck that will save you some money. I guess the days of standing in line and rushing to be the first in the movie theater to get the best seats are over. I don’t think this will do much to improve the stock price which currently trades around $5/share. If you remember, this is one of those meme stocks and back in June 2021, the stock traded as high as $62/share.
We continue to talk about the strong job market and how there are 11 million jobs that remain open. One obstacle for potential employees, specifically moms, has been daycare. There are currently about 58,000 fewer daycare workers in the US compared to February 2020. The cost of daycare for infants has also skyrocketed ranging anywhere from $8,000/year to as high $17,000/year in major metro areas. The cost may have to go higher because the average daycare employee earns about $19.74/hour. They just can’t compete with the national average of private sector workers earning around $32.93/hour. What is starting to happen is one of the spouses may elect not to go to work and instead stay home with the kids
Harrison - "When to file your taxes"
Monday Feb 06, 2023
Monday Feb 06, 2023
Even with all the negative headlines, the labor market data remains resilient. The recent JOLTs report for December showed job openings increased 572,000 to a 5-month high of 11 million. This easily surpassed the estimate of 10.25 million openings and would mean there are 1.9 job openings for every available worker. Quits continued to remain elevated at 4.1 million. This is down from the peak in 2021, but if you look at the chart below you will see prior to Covid we hadn't seen a quits level above 4 million. Layoffs did climb slightly in the month to 1.5 million, but looking at the pre-Covid levels we are still below historical norms. I would continue to say we will see a reversion to normalcy rather than a crisis.
The jobs report was impressive to say the least. Headline payrolls for January increased 517,000, which blew past the estimate of 187,000 and comes on top of upward revisions to November and December which netted a gain of 71,000. The household survey showed an even larger gain at 894,000 and produced an unemployment rate of 3.4%, which was the lowest level since May 1969. Job gains occurred in every major sector with leisure and hospitality leading the way with an addition of 128,000 jobs, professional and business services added 82,000 jobs, government added 74,000 helped by the end of a strike from university workers, and healthcare rose by 58,000 jobs. The leisure and hospitality sector are now just 2.9% or 495,000 jobs below is February 2020 pre-pandemic level. Wage inflation was also reasonable with a 4.4% gain compared to last year. This was a deceleration compared to December's gain of 4.6%. The only major negatives I see are the participation rate and employment to population rate as they both remain below pre-pandemic levels. The participation rate came in at 62.4% vs 63.3% pre-pandemic and the employment to population rate was 60.2% vs 61.1% pre-pandemic. Overall, I'd say this was a very strong report and it continues to provide data that makes me believe we will not have a major recession.
Tailored Shareholder Reports
Usually new regulation complicates the issue rather than clarifies it for the consumer. Recently, the SEC came out with a final rule called Tailored Shareholder Reports (TSR) which deals with mutual funds and exchange traded funds (ETFs). What I like about the rule is it mandates a 2-3-page document that will outline a fund's performance and fees, and give a brief summary along with some other information using plain English and charts. For those that invest in mutual funds and ETFs, this could be a good tool for comparison where to invest. If you’re working with a broker who is putting your investments into mutual funds, or ETF’s I’d recommend asking for the TSR on the investments they are putting you in or recommending.
Super Bowl Streaming
The Super Bowl is now less than two weeks away and if you cut your cord from cable, you may have problems watching the Super Bowl. Last year it was easy because NBC carried the game, and you could simply switch over to Peacock and pay their $9.99/month subscription to watch the game. This year the big game is on Fox, and they don’t have a streaming service. You may have to look into sites like Hulu Plus, YouTube TV, or Sling TV. These are just a few suggestions but be prepared to pay more than $9.99/month. One other option you do have is good old rabbit ears antennas, which actually have advanced pretty well over the years. Fox still broadcasts over the air so that may be a free alternative. I’d start thinking about this soon, if you wait until Super Bowl Sunday morning, you may be running around to your neighbor's house to try to catch the big game.
Harrison – “Tax planning with the new RMD age”
Wednesday Feb 01, 2023
Wednesday Feb 01, 2023
Personal Consumption Expenditures
The Personal Consumption Expenditures index (PCE) for December came in with an annual growth rate of 5.0%. This is down from the November level of 5.5%. Looking at the Core PCE, which strips out energy and food and is the indicator, the Fed closely monitors the inflation number looks even better with an annual growth rate of 4.4%. I've heard people continue to use the CPI and say that inflation is running at more than 3 times the Fed's 2.0% target. That is extremely misleading as the Core PCE is not nearly as high as the CPI. Overall, we still have work to do on inflation, but it is still decelerating at a good rate and I'm optimistic it will continue to improve as we progress towards the end of 2023. My projection is still that we will see one maybe two quarter point hikes from the Fed and then that rate would be maintained through the rest of the year. I do not see any rate cuts this year from the Fed as I believe the economy will be better than many fear.
Tesla’s Reported Earnings
Tesla reported earnings and they did very well. This sent the stock up as much as around 11% in trading. I have been against Tesla for years not because it’s a bad company but because it was too richly valued. That is now changing, the earnings for December 2024 stand at $5.79 with a price of the stock around $150 that gives a forward PE of 25.9. That's not great, but not as terrible as in the past. When the stock was at the low of $102 that would’ve been a forward PE of 17.6, much more reasonable. I’m not saying that Tesla is a buy, it still has more to drop or needs to see a larger increase in earnings for it to be considered a value. It is getting close, maybe in a year or two it could become a buy?
Home Price Affordability
Even with the recent declines in home prices, there is still a major affordability problem. In fact, looking at an affordability index from the National Association of Realtors (NAR) shows we are still out of line with pre-pandemic levels. The index is based on home prices, median family incomes and mortgage rates. Over the 12 months prior to Covid the index averaged 162 and the current estimate for January is a level of 106. The lower the number means the higher the problem is for affordability. There are a few ways the number could get back to the pre-pandemic level of 162. First, the average mortgage rate would need to fall to about 2.6%. Next, family incomes would need to increase by about 50%. Finally, prices for homes would need to fall by about another third. The most likely case is a combination of all 3 factors, but unfortunately, I don't see rates coming anywhere close to the 2.6% level nor do I see incomes spiking close to 50%. Therefore, I believe there is still more downside for home prices ahead.
If you’ve been wondering why the yield on the 10-year treasury has been dropping it is because they have stopped issuing notes since we hit the limit. We just hit the debt ceiling, but anticipation of hitting that mark put a lot of downward pressure on the yield as demand and purchases of 10-year treasuries increased in anticipation of the debt ceiling. Once the limit is increased, then the government can go back to issuing more 10-year treasuries, and I believe the yield will increase.
Layoffs and Over-Hiring
You have heard about some major tech companies making big layoffs of 10,000 maybe 20,000 people and think, "oh my gosh this is huge." But if we go back just a few years to 2019, you will see that some companies may have over-hired. For instance, Meta-platforms back in 2019 had 44,942 employees. Now with data available for the 3rd quarter of 2022, the total headcount was at 87,314. That's an increase of 42,372 employees or over 94% in just a few years. Alphabet also over-hired with 2019 employees equaling 118,899 and as of the third quarter last year they increased their headcount by 67,882 to 186,779. The worst company with overconfidence in future growth would have to go to Amazon which had a 2019 headcount of 798,000 employees. That ballooned almost 100% to 1,544,000 employees, an increase of 746,000 employees. You may hear about more layoffs in 2023 for some tech companies, but keep in mind the 2019 numbers and realize that some companies let their hiring policies get out of control.
Companies that use stock-based compensation when their stocks were rising made both employers and the employees happy. But what happens when the stock goes in reverse? No one is happy and shareholders lose the most. As a stock declines in value employees want more shares to equal what they received before, and employers need to keep the game going. They will issue more shares, but what that does is dilute future earnings even more. Be careful of investing in companies that excessively use stock-based compensation, the stocks could be flat for many years. Two companies that come to mind are Snap and Roku.
You may not know it, but the Federal Reserve has the ability to actually make profits. In 2021 the Fed earned $107.9 billion in profits but in 2022 that profit was cut in half to $58.4 billion because of rising interest rates. You may be wondering where the profits go. The Fed does not get to keep them. They send all their profits to the US treasury and if the Fed loses money, they create an IOU on the balance sheet. This is known as a deferred asset. They will carry that IOU until they once again make profits, and they will pay that IOU down before sending any more profits to the treasury.
Declining Attention Span
In a recent research study at the University of California Irvine, it was no surprise to learn that the attention span of both younger and older people has declined over the years. Back in 2004 people on average spent 150 seconds on a screen before switching. It has now declined to 47 seconds, a drop of over 2/3. The research also found that on average, people check their inboxes 77 times a day. I was surprised by that number, but it is on average. To restore our attention spans, people need to be more disciplined about when they check emails and use social media. If you only check it during certain times of the day, your attention span will increase, and your stress level will decrease. Try it. Let me know what you think.
Working From Home
Some employees working from home are still living in the Covid years thinking that they control the narrative of working from home. I remember people saying this was the new way of doing business. I said no it will go back to people going into the office. Those employees who are saying they would rather quit than go back in the office, be prepared to be unemployed. Those employees forget that if it’s so easy to work from home and not go in the office, then the employer can find someone overseas or in other places who will do the same job remotely for perhaps half the pay, and no health insurance or 401(k). I think over time we will see more employees heading back into the office because like it or not, a business is in business to make a profit not provide a social service.
Offshore Oil Drilling
There’s some good news long-term on the energy front. As of December 2022, approximately 600 rigs worldwide are available to lease for offshore oil drilling. It has been estimated that approximately 90% are working or under contract to work in the future. Looking back just five years, that number was only 63%. Another positive, based on demand, is contractors are now receiving about $400,000 a day for leasing their drill ships, that is nearly double what it was just two years ago. This is a big positive to the supply side of the equation for oil.
The headline advanced reading for Q4 GDP came in at 2.9%, which surpassed the estimate of 2.8%. Consumption (adjusted for inflation) was up 2.1% and 1.42% added to the headline number as goods were up 1.1% and services were up 2.6%. Residential investment was hit extremely hard as it was down 26.7% in the quarter and subtracted 1.29% from the headline number. Overall, private investment had a benefit of 0.27% to the headline number as the change in private inventories added 1.46% and nonresidential had a small positive contribution of 0.09% which was mainly due to an increase of 5.3% for intellectual property products. Net exports added 0.56% to the headline number as imports fell 4.6% in Q4, but exports fell at a lower rate of 1.3%. Government consumption added 0.64% to the headline number as spending grew 3.7%. A large portion of this came from federal non-defense spending which jumped 11.2% in the quarter. Overall, the report was lackluster and points to an economy that is decelerating.
Chevron announced a $75 billion stock buyback to the shareholders. I can already hear the government and others saying how dare they do that; they should take that money and invest it in oil production to reduce prices. First off, shareholders take the risk of investing and should be rewarded when a company does well. The job of the CEO is to produce a good product and have returns for the owners of the company who are the shareholders. Why would a company invest billions of dollars into producing oil when down the road we know demand will be lower as we see more electric vehicles on the road not using oil. This is the best strategy for a company with a long-term time horizon. Remember, the government did add this year a 1% excise tax on stock buybacks which means the government will receive $750 million in extra tax from Chevron as it completes this buyback. Will that money go to something productive? Or will the government squander it away and waste it as usual on some silly programs. If you don’t like the company don’t buy their stock or gasoline.
I keep seeing the commercial for Peloton that 92% of owners are still active on their Peloton. As the stock has now fallen to around $12-$13/share from its all-time highs of around $170/share, I’m curious how many people are still using their Peloton? I'd still rate this stock a sell and would like to see it become a profitable company before investing.
One of my major concerns for the S&P 500 index remains its valuation. At the end of 2022 the index was trading at a Forward P/E of 16.65. That was down from the recent highs of over 22x, but I would still not consider it an attractive valuation as the 25-year average has been 16.82. There are two ways that the S&P could grow. There could be earnings growth, or the multiple could expand. For earnings growth I have seen estimates of around 4-5% earnings growth, which I think could still be optimistic. This means if the multiple were to remain constant, the S&P would grow around 4-5% this year. As for the multiple expansion, with interest rates rising and slowing growth I do not see the case to have the multiple rise. This is why I continue to believe the right stocks will outperform the market in 2023.
Harrison : "Shared Equity Agreements"
Monday Jan 23, 2023
Monday Jan 23, 2023
Big news on the inflation fronts today as the Producer Price Index (PPI) in December showed a monthly decline of 0.5% vs the estimate for a decline of 0.1%. Year over year the index showed an increase of 6.2% which is the lowest annual increase since March 2021 and is far from the high in March 2022 of 11.7%. This is a major positive as for over a year now I've been saying the CPI won't come down until the PPI comes down, as producers have needed to pass the higher costs onto consumers. A problem in the report is energy was a major benefit as the energy index fell 7.9% in the month and gasoline in particular was down 13.4%. Given the current landscape I do expect energy prices to increase from current levels, but not enough to make a dramatic difference to the inflation reports. Overall, this report gives me confidence in my estimate that we will see inflation in a range of 4-6% for 2023.
Retail sales for December fell 1.1% compared to the prior month, this missed the estimate of 0.8%. Looking at the results compared to last December, retail sales climbed 6.0%. This did not keep pace with the CPI increase in the month of 6.5%, which likely means most if not all of the growth in retail sales was a function of higher prices. Areas that saw good growth compared to the prior year included non-store retailers as they were up 13.7%, food services and drinking places were up 12.1%, and grocery stores were up 7.3%. With lower gas prices in the month, gas stations saw a month over month decline of 4.6% but compared to last December sales were still 5.2% higher. Areas that struggled in the month continued to be electronics & appliances as sales fell 5.6%, department stores saw a decline of 0.6%, and furniture & home furnishing stores had a small gain of just 0.3%. I would say this report wasn't good, but again it wasn't overly concerning. It appears consumers are still spending but continue to prefer experiences rather than the products they loaded up on during Covid.
You may have seen the news about the concerns regarding the debt ceiling of $31.4T being reached. Frankly, I'm not too concerned about major problems stemming from this as it has been a recurring issue. In fact, from 1997-2022 the debt ceiling has been increased 22 times, which is essentially once per year. I do believe a deal will be reached to avoid jeopardizing the creditworthiness of the government. My concern is that we need to fix spending as we should not have to keep increasing this debt ceiling every year.
Costco Buyback Program
I saw Costco announced a stock buyback program but looking at it closely it's unimpressive to say the least. The program authorizes $4 B worth of buybacks but that is through January 2027. The previous authorization was set to expire in April of this year and was adopted in 2019 with the same $4 B limit. Interestingly, the company only repurchased $1.4 B worth of shares under the program. Looking at the market cap for Costco of about $210 B, if the $4b was fully implemented that would only represent 1.9% of the overall shares. Also, considering the shares trade at about 30x 2024 earnings I believe repurchasing shares at this level would be a waste of capital.
Harrison – “Life Insurance Review”
Monday Jan 16, 2023
Monday Jan 16, 2023
Consumer Price Index (CPI)
As anticipated, the CPI report showed a deceleration in inflation as the index gained 6.5% for the 12 months ending in December. This compares to 7.1% in the month of November and the peak of 9.1% in the month of June. Areas that remained extremely elevated included eggs up 59.9% over the last 12 months, fuel oil was up 41.5%, and airfare was up 28.5%. There are some areas that showed year-over-year declines with televisions falling 14.4%, used cars and trucks were down 8.8%, beef and veal were down 3.1%, bacon and related products were down 3.7%, and gasoline was down 2%. Gas prices have declined substantially and were a major contributor to the month over month decline of 0.1% for the CPI. I do worry energy prices could struggle to maintain these levels as China reopens and the US no longer releases oil from the SPR. Shelter continues to be a major problem as it rose 7.5% compared to the prior year. This continues to weigh heavily on the report as it occupies a weighting of around 33% with close to 8% coming from rents and 24% coming from private housing. I do believe with the affordability issues this growth rate will slow as the year progresses. I believe inflation will continue on its deceleration path and will maintain a level of around 4-6% in 2023. It is important to note the Fed prefers to use a measure known as the PCE and that will be released on January 27th. It appears this report has continued to come in lower than the CPI. As examples, in November PCE was 5.5% when CPI was 7.1%, in October PCE was 6.1% when CPI was 7.7%, and in September PCE was 6.3% when CPI was 8.2%. If that trend holds, we could see a PCE number that has 4 at the front end of it. While still a concern, I believe inflation will be a much smaller problem in 2023.
Santa Claus Rally
The Santa Claus rally did happen this year, but you may not have noticed because it was only a gain of 0.8%. This is for the official Santa Claus rally which went from December 23 to January 4, 2023. It doesn’t happen every year, but this is the seventh year in a row that we have seen the Santa Claus rally. Don't be fooled by other imitations of the Santa Claus rally, the official one going back to 1971 is the last five trading days of the year and the first two trading days in January of the new year.
At my investment firm we like to invest in companies that pay and raise their dividends over time. We are happy to say that in 2022 the S&P 500 companies paid approximately $561 billion in dividends, up from $511 billion one year earlier. It's also worth noting that 373 companies in the S&P 500 increased their dividends in 2022 about 20 more than the 353 that increased dividends in 2021. Another benefit for shareholders is stock buybacks, which was about $960 billion in 2022. We believe this will decline somewhat because our wonderful lawmakers in Washington decided to add a 1% excise tax which will take effect in January on companies buying back their stock.
NFL ratings were down about 3% from a year earlier hurt by the Thursday Night Football games on Amazon. Nielsen ratings said viewership fell to 9.6 million viewers that streamed on Amazon during those Thursday night games. That was a large decline from the 16.2 million viewers last year when the game was on Fox, the NFL Network, and Amazon. There could be a problem with advertisers who were guaranteed by Amazon that they would average 12.6 million viewers per game as they missed that mark. Also, for comparison, normally Sunday afternoon game viewership is around 19 million viewers. Fox and CBS carried Sunday afternoon games.
Harrison Johnson, CFP®: "529 to Roth Rollover"