4 days ago
4 days ago
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"
Monday Jan 09, 2023
Monday Jan 09, 2023
The jobs report brought plenty of welcome news as the headline payrolls grew by 223,000 in the month of December, which easily topped the estimate of 200,000. This was a decrease from November's gain of 256,000, but it's important to remember that we've been discussing a deceleration in the jobs market for months now. Areas that remained hot included health care and social assistance at 74,400, leisure and hospitality at 67,000, and construction also grew by 28,000 jobs. Interestingly, Julia Pollack who is the chief economist at ZipRecruiter pointed out, “Health care has recovered to its pre-pandemic levels, but nowhere near its pre-pandemic trend, and hospitality is still not back to its pre-pandemic levels.” On the downside, information jobs saw a decline of 5,000 and professional and business services saw a decline of 6,000 jobs in the month. Overall, the unemployment rate fell back to 3.5%, which ties the lowest level since 1969. Part of this stems from the lower participation rate which currently stands at 62.3%, a full percentage point below where we were in February 2020 before the pandemic. Also, another measure of unemployment that takes into account discouraged workers and those holding part-time jobs for economic reasons also declined, falling to 6.5%. This is the lowest-ever reading in a data set that goes back to 1994. Probably the biggest market mover was the fact that wage inflation was up just 4.6% compared to the estimate of 5.0%.
Supply Management (ISM)
One survey that doesn't get a ton of media coverage is the Institute for Supply Management (ISM) non-manufacturing PMI. This is an economic index based on surveys of more than 400 non-manufacturing (or services) firms' purchasing and supply executives. The recent report showed a reading of 49.6 which missed the estimate of 55.0 and was down from 56.5 in November. This was the first time since May 2020 the reading was below 50. A reading below 50 indicates a contraction in the service economy. The area I thought stood out the most was new orders received by service businesses as they fell 45.2 from 56.0 in November and marked the lowest level since May 2020 and was the weakest reading since 2009, excluding the collapse during the pandemic. The reason this is so important is that Fed Chairman Powell is pointed to concerns over price increases in the service economy, but if the demand is not there it will be harder to raise prices. Hopefully they will take this into account at their next meeting.
You have seen the headlines about all the laid off tech employees and may be thinking this is bad for the economy. What the media does not show you is the other side. A recent survey from ZipRecruiter shows that 79% of the laid off tech employees found a new job within three months. The job market remains strong, which I believe points to a recession that will be shorter and milder than other recessions.
Harrison Johnson, CFP®: "Secure Act 2.0"
Tuesday Dec 27, 2022
Tuesday Dec 27, 2022
Tuesday Dec 27, 2022
In this episode, Brent and Chase discuss the education and fundamentals of investing and why long-term investing strategies work best over time. They also talk through topics like, price earnings (PE) ratio, book value, cash flow, dividend payout ratio, what to look out for on a company’s balance sheet, inventory turnover, buying strategies, and more!
Monday Dec 19, 2022
Monday Dec 19, 2022
As expected, inflation continued to decelerate in the month of November. I was thinking there was a small possibility we might see a reading for the headline number in the high 6% range, but the headline number ended up coming in at 7.1%. This was lower than the expectation of 7.3% and below October's reading of 7.8%. As a reminder the peak came in June with a reading of 9%. Some areas that stood out were eggs which were up 49.1% compared to last year, airfare was up 36%, energy was up 13.1% as electricity was up 13.7% and unleaded gasoline was up 9.8% and shelter was up 7.2%. One item that hasn't been discussed much is that the US has had one of the worst bird flus in history, which has impacted the price of eggs. As for energy I continue to believe next year the comparisons will be much more favorable, especially considering the energy index fell 1.2% compared to last month as gas prices fell 2%. Housing costs, which make up about 1/3 of the entire index, have shown signs of cooling and I believe they will be much more muted in 2023. Also, I wanted to point out that used car prices fell 3.3% compared to last year. Remember at the beginning of the year when used car prices were up 40% in the month of February compared to the prior year? I believe like used car prices many of these categories that are extremely elevated will normalize next year also helping to reduce inflation. My expectation is that for December we will see a reading that shows at 6 at the front of it and for next year inflation will be in the range of 4-6% for the year. I believe this will bode well for the right stocks in 2023.
The Fed Report
Markets did not like what Fed Chair Jerome Powell had to say after the Fed's meeting. The decision to increase rates 50 basis points or 0.5% was widely anticipated. It brings the target level to a range of 4.25% - 4.5%, which is the highest level in 15 years. What the market did not like was the terminal rate, or the point where the Fed expects to end rate hikes as it was higher than expected at 5.1%. I continue to believe this would be too high as the Fed should give the rate hikes and quantitative tightening (QT) more time to work through the economy. The Fed has been allowing a capped total of $95 B worth of bonds to roll off the balance sheet each month and since early June the balance sheet has declined $332 B to $8.63 T. I believe that inflation will naturally continue to decelerate next year and a reduction in the terminal rate could occur in the first part of the year. A softer tone from the Fed would be beneficial for the right stocks.
I continue to watch the jobs market looking at both past information and future information because I believe a strong job market will keep a recession very mild and it may not even be noticeable. I continue to hear from people that they are seeing all these layoffs from tech companies, but I talk about how there are many other companies that are hiring in 2023. Based on a recent survey, a nationwide staffing firm, LaSalle Network, says about 84% of companies it works with are planning to hire in 2023. This is roughly 20% higher than those planned to hire a year ago. The CEO Tom Gimbel says he has seen a 50% increase from last year in demand for salespeople and this is a positive sign because when a firm increases staff in the sales department they believe they have room to grow. So don’t just look at the headlines of 10,000 employees being laid off at some big tech firm and think the entire job market is collapsing. Look at the overall economic job market.
Harrison – “Sole proprietor or S-Corp pt. 2”
Monday Dec 12, 2022
Monday Dec 12, 2022
Producer Price Index (PPI)
Although the headline Producer Price Index (PPI) number saw a gain of 0.3% compared to last month, I actually thought the report was in line with what we’d been expecting. If you look compared to last year the PPI increased 7.4% which is a nice deceleration from the 8% level in October and the peak of 11.7% in March. Part of the reason for the deceleration is the comps are getting harder. What I mean by that is last year the PPI showed an annual gain of 10% compared to the prior year. When we lap the 11.7% number in March, I believe it will be hard to grow another 7-8% off that number, especially with the decline in many commodities from their peak levels. As a reminder we don't believe inflation will be disappearing in 2023, we believe it will be decelerating to a level of around 4-6% for the full year.
More positives on the inflation front. Remember how constrained shipping was last year and how expensive it had become? Well now if you look at the prices, they have come way down. Freight costs from Asia-U.S. West Coast have fallen 90% compared to last year and now stand around $1,426/FEU (forty-foot equivalent unit). This pushed prices down by 5% when compared to 2019 levels. Freight costs from Asia-U.S. East Coast now stand around $3,723/FEU which is down 78% compared to last year and costs from Asia-Northern Europe are around $3,974/FEU which is 73% lower than last year.
Big Tech Companies
I learned a long time ago not to just read headlines and think you understand what is going on. People have been saying things are getting worse because they see the big tech companies laying off people with headlines showing numbers like 10,000 layoffs coming. We have said that’s only a small part of the big picture and if you look at the recent jobs report, you will see the information sector, which includes many tech jobs, had a net increase of 20,000 jobs. I know it takes time to read the details when information comes out but if you don’t, you won’t have a clear understanding of what is really going on.
Remember about three years ago the fad was no one was going to eat red meat and the company Beyond Meat was going to take over the meat aisle in the grocery store. Fast forward to today and the company has seen its grocery stores sales declining 12% even as they are cutting prices to try to boost their sales. In the most recent earnings report the revenue fell 23% year after year yielding a quarterly loss of $102 million. I still remember some people telling me I was missing out that I did not get it that people were switching over to plant-based meat. Back in the summer of 2019 the stock had peaked over $196 and is now down over 90% trading at $14 a share. When it comes to investing, I will always take strong fundamentals over the hype of the next best thing.
Harrison – “Sole proprietor or S-Corp”
Monday Dec 05, 2022
Monday Dec 05, 2022
Job gains showed a nice increase of 263,000 in November which easily topped the estimate of 200,000. Leisure and hospitality remained a major leader with job gains totaling 88,000 in the month as the sector continues to battle back from Covid. This sector still remains 5.8% or 980,000 jobs below February 2020. Retail trade and transportation and warehousing were the standout losers in the report as both sectors saw a decline in payrolls. Retail trade fell by about 30,000 jobs as general merchandise stores saw employment decline by 32,000 jobs and electronics and appliance stores saw employment decline by 4,000 jobs in the month. Transportation and warehousing had a decline of 15,000 jobs in the month. I was somewhat surprised to see these two sectors decline considering it's the holiday season, but the excess inventory levels could be weighing on employment as retailers could be trying to focus on expenses including labor and transportation and warehousing. The item I believe weighed most on the markets was the increase of 5.1% in average hourly earnings. It surpassed the estimate of 4.6% and it could give the Fed more ammo to continue on its rate hiking path as it tries to bring down inflation. I do believe this should not be a major concern for the Fed because, like inflation overall, I think wage gains will begin to slow to a more normalized level next year as the job market decelerates.
Personal Consumption Expenditures (PCE)
The PCE, which is known as the Personal Consumption Expenditures, came out at 6% for October over the last 12 months. As we had predicted months ago these inflation indexes would show signs of easing. This is why there has been some recovery in equities. The PCE is what the Federal Reserve looks at in regard to interest rates so there probably will not be any surprises going forward. We continue to believe that inflation will slow down and if you’ve been out of the market and in particular the right equities since summer you have missed out. There are still some opportunities to get back in for quality long-term investors but sitting on the sidelines for the next 6 to 12 months based on current data will be a mistake.
National Retail Federation (NRF)
You’ve probably heard that this is not going to be a great Christmas for retail. But as we say many times in our posts and other commentary, it’s important to understand what is being said and how it is being said. The estimate by the National Retail Federation (NRF) for holiday sales is expected to be between $942 billion to $960 billion, an increase of 6-8% over the $889 billion in 2021. This was a 13.5% increase over 2020. If we look back to 2019 when the economy was pretty strong, and everyone felt good, the NRF said holiday sales were $716 billion. Comparing the low end for 2022 of $942 billion, that’s a 31.6% increase from 2019. It does appear holiday shopping has gotten off to a good start considering the record of 196.7 million shoppers from Thanksgiving Day through Cyber Monday. This topped last year's level of 176 million shoppers and easily surpassed the NRF's estimate for 166.3 million shoppers. I don’t know about you, but I think those are pretty good numbers, all things being equal.
The SEC, also known as the Securities Exchange Commission, had a busy fiscal year, which ended September 30th. Their penalties were up 67% from the previous year, hitting an all-time record of $6.4 billion. I wonder where that money will go, or will it get lost in the tangled web of government administration? The money is supposed to go to a fund that either protects investors, a fund that refunds investors who lost money, or the third option, the US treasury general fund.
Harrison – “Change for charitable donations this year”
Monday Nov 21, 2022
Monday Nov 21, 2022
Consumer Price Index
Even with all the fear, the consumer is still shopping. In October, retail sales were up 1.3% compared to September and up 8.3% compared to October 2021. This outpaced the inflation rate in the October CPI report which saw prices grow 0.4% month-over-month and 7.7% year-over-year. There were definitely areas in the retail sales report that benefited from higher prices as sales at gasoline stations were up 17.8% compared to last year and grocery stores saw sales climb 8.0% during the same time frame. For reference, the CPI showed gas prices climbed 17.5% year-over-year and food at home prices were up 12.4%. Other areas of strength in the report compared to last October were food services and drinking places up 14.1%, non-store retailers up 11.5%, and building material & garden equipment & supplies dealers up 9.2%. The only two areas that saw declines were department stores, which fell 1.6% and electronics & appliance stores, which saw a decline of 12.1%. Two potential catalysts for the report included an additional Amazon Prime day in the month and the distribution of "inflation relief checks" of up to $1,050 in California. I hope that we do not see additional stimulus like this going forward as I believe it could create even more problems with inflation as it would create artificial demand.
Good news on the inflation fronts this morning as the October Producer Price Index (PPI) climbed 0.2% compared to last month. This was below the estimate of 0.4% and resulted in a year-over-year gain of 8%. It's crazy to think that an 8% increase is good news, but the numbers are decelerating. In September the year-over-year gain was 8.4% and back in March the report showed a gain of 11.7%. If commodity prices can stabilize/decrease even slightly and if we stop pumping money into the economy, I continue to believe inflation will be much less of a problem in 2023.
Mark down 9 straight monthly declines in existing home sales as there was a decline of 5.9% from September to October. With an annualized pace of 4.43 million units in the month of October, existing home sales fell 28.4% compared to October 2021 and registered the slowest pace since December 2011, excluding the brief drop that occurred during the beginning of Covid. Demand has clearly taken a drastic fall but supply still remains an issue. With just 1.22 million homes for sale at the end of the month there's still just a 3.3-month supply at the current sales pace. With prices still expensive and mortgage rates likely to remain high, I'm still expecting a weak housing market in 2023.
S&P 500 Companies
As interest rates are rising, corporations are paying off debt to reduce expenses. The S&P 500 companies have about $9.3 trillion in debt and with businesses performing well, they are sitting on about $2 trillion in cash which is close to $500 billion more than these companies had in 2019. This will strengthen the businesses even more, increasing the value of many of these companies.
Costco vs. Sam’s Club
We all feel that the price for everything is going up, but there is one thing I found that for nearly 40 years has stayed at the same price. That is a hotdog and drink at Costco. Since 1985 that price has stayed at $1.50 and also, they have not done any shrinkage to the product. If you want a better deal than that you can now head on over to Sam’s Club and get a hotdog and drink for $1.38. To keep prices low this is what the economy needs, more competition & more supply, not a reduction in demand.
Harrison Johnson (CFP) - Income Related Monthly Adjusted Amount (IRMAA)
Monday Nov 14, 2022
Monday Nov 14, 2022
The market rallied this morning on news inflation was not as bad as feared. The headline CPI number for October came in at 7.7% compared to last year, which was lower than the estimate of 7.9% and below last month's reading of 8.2%. Back in June the CPI hit 9.1%. I believe some investors believe this number could help lead to a Fed pivot, but I'm still not optimistic given their stance of being strong to fight inflation. With that being said, I believe they should slow down and let these rate hikes and Quantitative Tightening work through the economy. One major factor that I find interesting in the report is that rising shelter costs contributed more than half the monthly gain as it increased 0.8% compared to last month and was up 6.9% compared to last year. This was the highest annual increase since 1982, but one thing to take into consideration is that rising shelter costs don't necessarily have a large impact on the entire population. In fact, with more than 65% of the population owning their home, the monthly expense is much more fixed and shouldn't be subject to the current inflation we are seeing. I hope the Fed takes that into consideration as the report needs to be analyzed in its entirety.
I continue to believe that the feared recession will be mild. I have talked about how the strong job market has continued but one other aspect that is continuing is a lot of liquidity in the economy through what is known as the M2. M2 is a measure of the amount of money that includes currency, deposits, and shares in retail money market mutual funds. Like the job market this is holding strong at just under $22 trillion. Compare that to about three years ago when it was well under $16 trillion. So not only do consumers have a job to provide cash flow but savings accounts are flush with cash to continue to consume.
CBDC’s (Central Bank Digital Currency)
I have talked in the past about CBDC’s which are known as Central Bank Digital Currency and said that countries are moving in that direction. No surprise that governments move slowly, but as of today more than 100 countries and monetary authorities which include the European Central Bank, and the United States Federal Reserve are looking into how to digitize their currencies. But the direction they are going is not what you would think. They are not turning to the popular cryptocurrencies like Bitcoin or Ethereum for advice, they are turning to the big tech companies like Microsoft, Alphabet and even Amazon. The reason they are turning to these big tech companies is because of their development of digital wallets and smart phone apps. I still say if the world goes in this direction of Central Bank Digital Currencies the use of crypto currencies would be worthless.
Cryptocurrency Balance Sheets
Balance sheets matter! I did a post on these crypto exchanges a few months ago questioning the assets for many of these crypto exchanges and now we are seeing the repercussions for weak balance sheets and overleverage as FTX announced solvency issues. FTX and its CEO Sam Bankman-Fried were seen as leaders in the crypto space and now it is collapsing. Bitcoin fell to under $17,000 this morning and many other cryptos are faring even worse. As a reminder, Bitcoin's all time high was close to $70,000. There is nothing in the world of crypto at this point in time that entices me, and this only adds to my concerns for the "investment" category.
Monday Nov 07, 2022
Monday Nov 07, 2022
Another good report for the labor market as payroll employment climbed by 261,000 in the month of October. This topped the estimate of 205,000 but was the slowest pace of gains we have seen since December 2020. Although this may sound concerning, after recouping the losses that were generated from Covid we have anticipated the labor market to slow. There is a big difference between slowing and declining. For a good reference point, if you go back to 1939 the average monthly gain in payrolls is around 122,700. The job growth was broad-based as every category saw gains in the month. Healthcare and social assistance led the way with a gain of 71,000 jobs. That was followed by professional & business services at a gain of 39,000, leisure and hospitality at a gain of 35,000, and manufacturing was up 32,000. The major problem within the report is that it does not provide much evidence for the Fed to let off the brakes, especially considering the wage inflation of 4.7% compared to last year.
Even with the increase in interest rates, businesses have continued to remain active in the labor market. In the recent September JOLTs report there were 10.7 million job openings. This was an increase of 437,000 openings when compared to August and it easily beat the estimate of 9.85 million openings. At this level there are still 1.9 job openings per available worker. I've said it before, but I'll say it again, if the labor market remains this strong, I do not see a major recession on the horizon.
Facebook's (META) stock price has fallen through the floor from the 52-week high of $353/share as it now sits around $94/share. I’m sure some people are now thinking wow this is a steal. Before you jump you need to think about a couple of things. The most recent earnings release was the second revenue decline in a row as the company is fighting a tough macro-economic climate. This is coming from growing competition from TikTok and Apple's changes to ad tracking. On top of that, Meta’s reality labs unit had an operating loss of $3.7 billion and they expect the loss to grow even more next year. I think it’s important for an investor to have a very clear understanding of what the future holds for the metaverse. Be careful of earnings estimates for December 2023 of $9.80, I believe in the future weeks these estimates will fall dramatically.
I recently read an interesting survey from Microsoft which I think is true for the current work environment. A survey of 20,000 people at Microsoft found 87% of the employees said they were productive at work. Unfortunately, when asking the leaders at Microsoft only 12% said they have confidence that workers are being productive. There appears to be a big difference in what employees think they are doing and what employers believe they are doing. I feel perhaps maybe it’s always been that way over the last hundred years, but maybe now employees are more vocal since the job market is so strong and they feel confident that they could get another job somewhere else If they were to lose their current one.
Harrison - "Traditional and Roth IRA Income Limits"
Monday Oct 31, 2022
Monday Oct 31, 2022
I have been investing money for clients for over 40 years and it was not long into my career that I questioned rules of thumb like the best portfolio is a 60/40 split of stocks and bonds. I’ve always felt it was better to research deeply investments that were undervalued and would do well going forward. My fear has proven to come true over the years, especially now as according to Bank of America the 60/40 split portfolio is having its worst year in 100 years as the annualized change in its recent year-to-date value was down 34.4%. Year to date we are down a little bit in our portfolio but based on what we have I still believe we can have a positive return come December 31, 2022. With a 60/40 split based on what I see going forward I don’t think that has a break even for at least 3 to 5 years. I still stand behind my statement that rules of thumb when it comes to investing don’t work long-term.
Gross Domestic Product Report
Q3 GDP produced the first positive growth of the year as it increased at an annualized rate of 2.6%. The consumer continues to remain strong enough to produce growth as the consumption category grew 1.4% in the quarter. This was entirely due to the service economy, which was up 2.8% compared to consumption of goods, which fell 1.2% in the quarter. Gross private domestic investment continued to struggle as it fell 8.5% in the quarter. This was largely attributable to the decline in residential investment which fell 26.4%. Investment in equipment and intellectual property products were positives as they grew 10.8% and 6.9% respectively. The change in private inventories continued to weigh on the report as it subtracted 0.7% from the headline number and with the heavy inventories at retailers, I believe this could remain subdued for the next quarter as well. The major highlight came from the trade component which added 2.77% to the headline number. This came as exports climbed at an annualized rate of 14.4% and imports fell at an annualized rate of 6.9%. With the likelihood of the strong dollar remaining in place through the remainder of the year I'm skeptical that we will see another major benefit to trade as we close out the year. The final component, which is Government, was also a benefit as it added 0.42% to the headline number. Overall, I'd say the GDP report was good, especially considering a lot of the fear from people at this time.
You have heard all the bad news about the big profits that oil companies are making but what you don’t hear is how much they spend and what they are doing for a green future. Both Exxon and Chevron are building offshore wind farms which will supply millions of homes on the East Coast with electricity. They’re also preparing production of hundreds of millions of gallons of fuel which will come from plants, garbage and even kitchen grease. Oil giant BP just spent $4.1 billion acquiring a company that replaces fossil fuel gas from wells with natural occurring biogas from landfills. The oil companies know that the times are changing and while they are accused of paying out big dollars to the shareholders, they are investing their profits for a greener future as well.
Things have really changed 180° from less than a year ago when there were shortages of products available. Inventories are now so large warehouses are bursting at the seams. The vacancy rate in warehouses in the third quarter 2020 was 5% that has now declined to 3.2%. Currently, businesses are paying more per square foot in warehouses. Last year in the third quarter it was $7.13/square foot, the average has now climbed to $8.70/square foot. What does that mean to you as a consumer? Retailers want to get rid of these items costing them money just sitting in the warehouse. Consumers could see some great sales coming up in the future, keep your eyes open.
Harrison Johnson, CFP®: "How spouses age difference affects social security"
Monday Oct 24, 2022
Monday Oct 24, 2022
I see comparisons to the 70s and people say yes with the current inflation we’re going to have a major recession or depression just around the corner. One important area that people are not looking at is the strength of the US dollar. Back in October 1978 the dollar hit an all-time low of 80.52. The weakness in the dollar was very difficult for the United States. I’m sure you’re wondering where it stands today. Roughly 40% higher checking in around 112. There are many benefits to a strong dollar, the most important being confidence from around the world in our currency. It is easy to be emotional and get on the doom and gloom train but they’re just too many other positive factors that tells me we will get through this probably faster than many believe
Earnings season for the third quarter is underway and was kicked off with decent earnings from the big banks. Over the next few weeks, we will be seeing many companies report and investors should be looking at the growth of the earnings year over year along with the guidance going forward. In the last three months analysts have reduced estimates by about 7% which could make the estimates easier to meet. I would also recommend watching the sales along with the price to sales ratio to see how your companies compare with the industry and what investors are paying for the sales of the companies they're invested in.
With inflation comes an upward adjustment of 7% on tax brackets from the IRS. This is the largest increase in automatic adjustments to the tax brackets since it was first indexed to inflation in 1985. The top tax bracket of 37% for a married couple now starts at $693,750 when couples file the tax return in 2023 for 2022 income. The standard deduction will also climb 7% to $ 27,700 for married couples. All tax brackets across-the-board will increase by 7% so taxpayers will not be paying tax on inflation. The estate and lifetime gift tax exclusion will also increase to $12.92 million from $12.06 million per person. Gift tax exclusion will climb from $16,000-$17,000. Unfortunately, all the news is not good, the Social Security administration adjusted their inflation on payroll tax of earnings up to $160,200 from $147,000 in 2021
Existing home sales have now fallen for the past eight months as mortgage rates hit 6.92% and probably will soon crossed over into the 7% range. September sales for existing home sales declined 1.5% in September to an annual rate of 4.71 million homes. The percentage number looks far worse if you look at the September sales on an annual basis, the decline is 23.8%. Home inventories continue to rise which will be the beginning of more price declines in housing prices.
Harrison Johnson - "Last Chance for Series I Bonds"
Monday Oct 17, 2022
Monday Oct 17, 2022
Inflation numbers were released today rising 8.2% over the past year. Initially the markets were down about 2% but by the end of the day markets rallied up over 2%. Perhaps inflation is not as bad going forward as we think. One reason for that is the lapping of year over year. September 2021 inflation began increasing rising 5.4%, October 2021 at 6.2%, November 2021 up 6.8% and December 2021 inflation increased by 7%. What I believe is happening and why I think we will see inflation slow down its supply chains have improved, consumers have pulled back on some of their spending (reducing demand) and as we lap higher inflation numbers from the previous year the percent growth will not be as high.
Tomorrow morning Friday the 14th the big banks release their third-quarter earnings. Very important to hear what they say if there is not unexpected bad news in the reports I believe it would be seen as a positive and we could have another rally.
Earnings will be coming out over the next few weeks and the strong dollar which is up about 17% against the weighted index could play havoc on some companies with big earnings coming from overseas.
I was surprised to see that QUALCOMM gets 96% of its revenue from outside the US. Other companies that you need to watch out for would be caterpillar with 62% of revenue from outside the US and even meta-platforms and Netflix both receive 59% of the revenue from outside the US. Another surprise to me was Citigroup with 52% of revenue from outside the US.
With the decline in the crypto market, investors are becoming less comfortable with the space. According to a recent Bankrate survey, in 2021, nearly 35% of Americans said they had some level of comfort investing in digital currencies, compared to about 21% in 2022. Millennials saw an even larger fall with 49% in 2021 saying they had some comfort level investing in digital currencies and that fell to almost 29% in 2022. My guess of why this is the case is digital currencies have yet to show a meaningful use. It has not proven to be a viable currency for transactions, it has not proven to be an inflation hedge, nor has it proven to be a hedge against declining stock prices. I still don't see the allure of investing in this space.
The problems are starting already with the forced demand of electric vehicles. Lithium which is used to make the batteries have tripled in price this year and there’s no end in sight for supply meeting demand. Lithium is not used just for electric vehicles but also for grid energy storage. You may be thinking no problem just produce more lithium which is nice and theory but not reality. To bring new production online studies must be done, permitting, capital must be raised before any lithium is produced which can take 3 to 5 years.
It’s always a disaster when the government forces demand on any type of product, what it does is increase prices that the consumer ends up paying for.
The leaders of United States continue to put the country in peril trying to force green energy too quickly. We are now going to deal with the nasty regime of Venezuela to pump oil to help our situation. For this use of oil the best we got is that their dictator said he will open talks if the US eases sanctions. To me that’s the same as giving a kid who did something wrong a gold star and tell them not to do it again.
Since talks with OPEC did not go well the leaders of our country have decided to retaliate against OPEC and Saudi Arabia. They are now threatening legislation that would charge OPEC members and subject them to US antitrust law. Have our leaders forgotten the 70s how the oil embargo crushed our country on the energy. It’s like we are trying to play chicken with them and that’s a game we will lose. I wish people would write their Democratic congressman and everyone else to please get on the side of the oil companies and start pumping as much oil as we can.
And please vote in November not for who’s personality you like but who you think you do the best when it comes to running our country
People are concerned about the rising debt of the federal government, as they should be. We are also concerned about rising inflation but you may not realize that rising inflation is a positive for the debt situation of the government. The reason is that it makes the debt more manageable because it will be repaid in less valuable nominal dollars. The debt also declines in real value because with inflation of 10% cumulative $30 trillion is now $33 trillion and the debt remains at $30 trillion.
People on the green side want to completely eliminate oil and fossil fuels. We have spoke many times about how oil is also used for many things like plastics, IV bags and clothing that use synthetics along with thousands of other items. One can’t just use the refined oil for asphalt which makes up 94% of all US road miles that are paved. Asphalt is made from a byproduct that is left over after the process of making fuel.
I don’t think people who want to illuminate fossil fuels have thought this process through.
If you’ve been holding onto Nike since November 1 of 2021 you have seen the price fall from $177 a share to current price of around $88 a share, roughly a 50% decline. Unfortunately another number does not bode well for the stock and that is the inventory numbers for Nike which have climbed 65% from a year ago. You may want to sell the stock and buy those Michael Jordans you’ve been wanting to get.
Things in the third quarter 2020 was 5% that has now decline to 3.2%. Currently Businesses are paying more per square foot in warehouses, last year in the third quarter it was $7.13 a square foot, the average has now climbed to $8.70 a square foot. What does that mean to you as a consumer? Retailers want to get rid of these items costing them money just sitting in the warehouse. Consumers could see some great sales coming up in the future, keep your eyes open.
The used car market could be improving soon with vehicle inventories increasing to 33 days worth of supply in September. That was four points higher than August, one year ago inventories were only lasting 20 days. What is surprising to me is that car payments over $1000 hit a record 14% of sales nearly double 8% of sales one year ago. If you’re car shopping you may want to be patient, used vehicle prices came down 3% in September from August. There could be more to come, you may want to keep that old clunker running a little bit longer before spending more on a new ride.
I recently posted that lumber prices have fallen nearly 60% this year which will help ease inflation. Also dropping dramatically is PVC which is a plastic that makes pipes and other uses as well. It is down nearly 50% quarter over quarter. This could affect Warren Buffett‘s 20%purchase of occidental petroleum stock which is one of the three largest suppliers of PVC. I know Mr. Buffett purchases for the long term but it may take some time for the company to make up that lost revenue.
I was reading last night and the meme stocks popped into my head. I remember when this hype was going on people were saying fundamental analysis is over. Well once again the strong will prevail, let’s take AMC entertainment for instance, back in 2021 the stock traded as high as $56 a share. Where does it stand today? right around six dollars a share roughly 90% below the $56 peak. I feel kind of bad for people who were playing the special speculative game with the meme stocks. But on the other hand there was plenty of information out there telling the meme investors this was not going to last. Hopefully many have learned a valuable lesson about investing.
Monday Oct 03, 2022
Monday Oct 03, 2022
The global economy is dropping dramatically, but the US is the bright spot. I always tell people we do not depend on the world to buy our products we buy products from the world. Some bright news that might help you hold on during these difficult times is according to the Wall Street Journal, some US manufacturers are bringing production from overseas back to the US and are boosting investment. It should also be noted that contracting US business activity was better in September than in August. The US composite purchasing managers index, which includes both manufacturing and the service sector, climbed to 49.3 in September, a nice improvement from the August showing of 44.6. We are not out of the woods yet but do not sell your quality equities that are well priced and have a good business. And don’t forget to look down the road a year or two and not a week or two!
I love going to Costco as do many other people. You get some great deals in the warehouse but one deal that is lacking is the stock price. The stock is down roughly 20% from the $600 high but with the price/earnings ratio still over 37 that is no deal. They do have a great business model and there is a potential membership price hike perhaps next year. Even with that, 48% of Costco members in a recent survey say they’re willing to pay more for their memberships. Costco depends on increasing volume as the profit margin always hovers around 3.6%. If volume falls off the stock price could tumble as well.
Trying to time the market has always proven to be a dangerous game as it is heavily reliant upon one's emotions. In the long term you have a better chance of winning the lottery. Many people don't realize how quickly stock prices can move and by the time stocks have risen they are left asking the question of whether they should get back in or will they fall again. Looking back over the last 40 years the best 10 days (out of more than 10,000) accounted for almost two-thirds of the stock market return & in the last 20 years, the best 10 days accounted for 75%. Through the beginning of this year the market returned 284% over the last 20 years, but had you missed those 10 best days the total return was just 76%. The funny thing is the massive up days all came in the most difficult years of 2008, 2009, and 2020. The single day returns ranged from 6.3% - 11.6%. Nobody knows what is going to happen in the short term as there are too many variables to try and predict. That is why owning great businesses at great prices has proven to be a successful long term approach to investing.
US median household income was $71,000 for the year 2021 which was pretty much unchanged from 2020. That was quite a surprise, I believe we will see a jump in 2022 when those numbers are released about a year from now.
Luxury home sales have hit a brick wall dropping 28.1% across the US for the three months ending August 31st. No surprise California was hit the hardest with sales falling 64% in Oakland, and San Jose as well as our hometown San Diego saw decreases of more than 55%. So far prices have not dropped significantly, but as sales continue to drop, I believe people will reduce the sales price of their homes not wanting to see the big gains vanish and they will start cutting their prices to keep some of the profits. Those who wait too long could be very disappointed I believe we will see a far different luxury market in the spring of 2023.
Apple has dropped plans to increase production of the iPhone 14 saying demand is not as strong as anticipated. The stock fell while the market was up and could be a big problem if sales and earnings are worse than expected.
After the strategic petroleum reserve reached lows not seen since the 80s the government is considering the idea of getting into energy trading. Their idea is to buy oil when it is under $60/barrel and when it goes above $90/barrel to sell and use profits to fund electric vehicle infrastructure. I can’t wait to see how well the government does trading commodities such as oil.
I have often wondered if EVs are so great why are there so many subsidies to get people to buy them? The International Energy Agency says that by 2050 if projections go as planned annual global lithium production will be 28 times what it is today. In the past we have talked about the problems with how the batteries are made and the use of cobalt which comes from Congo using child labor. But with that type of high demand on lithium batteries, prices will multiply. In just one year they have increased by 300%, can you imagine the cost 24 years from now with a 28 times increase in demand? There’s also a new report from the US energy department laboratory that electric cars total lifetime cost will be 9% higher than a gasoline car. I believe there’s a lot of hype in electric vehicles and in the distant future we will question what we did and question electric vehicles.
As we anticipated September has been a difficult month, but we still remain extremely optimistic about our businesses with many now trading around 6-8x earnings. Remember the long-term historical average is 16.6. Much of the selloff has been driven by fears over the Fed hiking interest rates. I want to take you back to 2018 when Fed fears led to a stock market selloff in the month of December of close to 16% in that month alone. The Fed was raising rates and it was feared they were going to increase rates two more times in 2019. This ended up being an overreaction and the Fed ultimately ended up cutting rates in 2019. This led to a rapid increase in stock prices with the market climbing more than 19% from its low on December 26th, 2018, through February 22nd, 2019. For the full year in 2019, the market climbed 29%
Monday Sep 26, 2022
Monday Sep 26, 2022
Monday Sep 19, 2022
Monday Sep 19, 2022
The market is not liking the CPI report today as the inflation rate of 8.3% topped the expectation of 8.0%. It was down from July's 8.5% rate, but it remains stubbornly high and likely cements a Fed Funds Rate increase of 0.75% at next week's meeting. Energy was down 5.0% in the month and gasoline was down 10.6% in the month, but year over year energy is still up 23.8% and gasoline is 25.6% higher. Food remains one of the major concerns as prices increased 11.4% year over year. Shelter, which occupies close to 1/3 of the CPI, also remains high with the year-over-year gain at 6.2%. With the huge surge in housing prices over the last couple years I continue to believe this category has more room to run over the coming months. I also worry that while energy prices have come down month over month, companies have not been able to effectively offset these costs and more price increases could be on the way. This remains especially true in the transportation services component, which saw a year-over-year gain of 11.3%. Inflation remains a major problem in the economy, but I still believe we can exit 2022 with an inflation rate of around 6% barring a major supply chain disruption or a major spike in energy prices.
We keep saying we need to pump more oil here in the US and some people are saying the Biden administration is doing everything it can. In the first 19 months the administration will have leased federal acreage for oil drilling of 130,000. At first glance that may sound like a lot, but it is the lowest amount of acreage leased since President Kennedy in the early 1960s. Do you want to guess what our energy consumption is now compared to 60 years ago?
With a difficult market in 2022 initial public offerings also known as IPO‘s have really been rather scarce. It has now been over 115 days since the last traditional IPO of more than $25 million. The last time that happened was in 2008. I don’t believe much will be changing for the rest of 2022. At this point in time, we’re taking a wait-and-see attitude for 2023 and will be having a clearer view of what to expect from markets probably by mid-November.
When the country El Salvador made bitcoin its legal currency bitcoin advocates promoted this is the beginning of worldwide acceptance. You haven’t heard much about how bitcoin has done in El Salvador because it has been a disaster at best. The poor country which has $800 million in government bonds coming due in 2023 and 2025 is current looking like they will not be able to make that payment. Yet they’re authoritarian rule leader Bukele has spent $250 million on digital infrastructure including setting up 200 bitcoin ATMs which apparently have high fees and can take up to six hours for a transfer from dollars to bitcoin. The country set up digital wallets for its citizens with a $30 bitcoin bonus. After the citizens used the $30, 80 percent never used it again. 92% of the small and medium size businesses say it has been immaterial for them and prefer cash or credit cards. The IMF, the world bank and international bond markets still oppose bitcoin and no other country has followed El Salvador in making bitcoin their currency after a year in existence. The citizens of the country still prefer to use what they have use this 2001, the US dollar.
Amazon is really pushing forward in the entertainment industry spending $15 billion this year on that division. They face heavy competition from companies like Netflix, Disney, Paramount, and Warner Bros. discovery. The consumer could win here with all the competition prices should remain stable and not increase for a while
One potential event that could be absolutely disastrous for inflation and our economy would be a U.S. rail strike. Currently, 10 of the 12 railroad worker unions have struck deals with companies like Union Pacific, Norfolk Southern, and CSX, but the remaining two unions, Brotherhood of Locomotive Engineers and Trainmen and the International Association of Sheet Metal Air, Rail, and Transportation Workers continue to holdout due to disagreements over attendance policies. While a large majority of the unions have settled, these two unions represent over 90,000 rail employees or about half of railroad union workers. It's estimated that a shutdown of this magnitude could cost the US economy $2 B/day. It would also create a new supply chain crisis that would send shockwaves across many retailers, transportation companies like UPS and FedEx, and have a negative impact on food prices. I'm optimistic we'll see a deal by late Friday, but if not congress can step in to block the strike.
It doesn’t seem that long ago we were complaining about US jobs going overseas. Well, that trend seems to be reversing with an expectation of 350,000 jobs returning to the US this year. That is the largest increase since 2010.
Producer Price Index
As an update to our CPI post yesterday, the Producer Price Index (PPI) was released today and saw an increase of 8.7% compared to last August. This is the lowest increase we have seen since August of last year and it is well off the highs we saw of 11+%, but at this rate I believe companies will still need to pass on these higher prices which will continue to cause elevated rates in the CPI.
Banks get audited every year to verify that all the numbers are correct, and your money is safe. How would you feel if you found out that your bank has not gone through an audit in five years but was saying they will try to get one done in a few months? Well, that is what crypto firm Tether Holdings is saying. They are the firm that is promising each token can be redeemed for one dollar. They have been promising to do an audit since 2017 and now the chief technology officer of Tether Holdings Limited is saying it is just months away. I don’t know about you but when a company is avoiding audits for this long, I believe they have a lot to hide. Could this be the other shoe to drop on cryptocurrencies with no bottom in sight. I still wonder why anyone would hold onto any type of cryptocurrency with a hope that it will rebound in the future.
There are some big changes in the crypto world with Ethereum. It has changed from what is known as proof of work to proof of stake. The big benefit is it's change will improve energy efficiency by more than 99%, which has been one of the big concerns on cryptocurrency production. The risk with what is being called “The Merge” is there could be glitches, outages or even lost tokens as the current Ethereum blockchain merges with the new one called Beacon. It appears it went smoothly last night, but it's important to follow the next few days as well as the merge settles. There are also other losers such as mining companies who have spent hundreds of millions of dollars on hardware. And even the large chip maker Nvidia, who produces chips for miners, cannot predict how this will hurt their demand. Year to date the stock is down over 50% perhaps the writing was on the wall.
China exports to the US in August fell by 3.8% year over year. This is good and bad. It’s nice to see the decline in imports from China; however, that may be putting a squeeze on some products that we use and that could push up inflation on those products.
Office vacancy in the city was 17% in the second quarter compared with office vacancy in the suburbs at 16.8%. It's the first time that has flipped since 2002. More people are now going back to the office; however, it appears they prefer not to go into the city but to the suburban offices instead.
Thursday Sep 15, 2022
Thursday Sep 15, 2022
We knew the day was coming when streaming would have bigger viewership than cable TV. It officially happened this past July. Streaming services accounted for 34.8% of total US TV viewing compared with cable at 34.4%. The 34.8% streaming services viewing climbed dramatically from 23% one year earlier. We may see similar numbers in August but in September we may see a switch back to cable as major networks launch new seasons and new shows. Streaming businesses are still losing hundreds of millions of dollars as witnessed in the latest quarter. Part of this is because of the cost to create new content and it is so easy to switch from one streaming company after a specific show/series is over to another streaming company. Remember how difficult switching cable companies was? You had to have a cable guy come out for an appointment that was set a week ago and then wait half a day at home for them to show up to switch your service. Now you can switch your streaming service just sitting on your couch in the comfort of your living room. I think the winner long term in the streaming services will be those that have the most titles in their libraries, along with the best studios to produce new content in.
The news from President Biden around student loan debt is quite frankly idiotic and dangerous in my opinion. To begin with we are delaying payments on student loan debt again to the end of December 31st, because people have not had enough time to prepare? What about the last 2+ years of not making payments? Also, the $10,000 worth of forgiveness is estimated to cost another $300 B. In an inflationary environment the type of loose spending we have been seeing does nothing to help reduce the inflation burden for the average consumer and in fact likely fuels inflation higher. It is also just unfair to the people that have diligently paid off their debt, opted to join the military to receive the GI bill, or just avoided college due to the high cost. The biggest problem here is this does absolutely nothing to solve the root cause of the problem and in fact may just fuel the cost of college higher. Students borrowing money today will continue to rack up debt and will likely want another handout in just a few years. I don't see how this does our economy and our country any good.
I have been thinking both the stock and bond markets were taking the Federal Reserve and its interest rate policy too lightly. Powell has now made his intentions clear, making some strong comments like, "While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.” Unfortunately, I don't believe the battle with inflation is over and I believe interest rates will continue to rise.
Inflation / Interest Rates Rising
The Fed's preferred measure for inflation, the personal consumption expenditures price index (PCE), showed inflation easing somewhat as in the month of July the index climbed 6.3% year over year vs the 6.8% gain in the month of June. While inflation is easing, it is still well above the 2.0% level the Fed targets, which is why I believe they will continue to move forward with quantitative tightening and interest rate hikes. I'm still optimistic we will see inflation ease as we exit the year, but there is still a way to go before inflation is no longer a concern.
Bed Bath & Beyond
I hate to say it, but I really don't feel bad for these meme investors that are getting hammered the past few days. Traders in Bed Bath and Beyond (BBBY) saw shares fall more than 40% on Friday and they are down more than 60% if you bought last Wednesday morning. The reason for the crash is Ryan Cohen exited his position in the company and he was a major reason for the excitement from the Reddit crowd. He definitely capitalized off the small investor who will yet again be stuck holding the bag for these silly investments. When will they learn?
Subscriptions / Cell Phones
Wireless subscriptions are still growing at a rate of 3.9% year over year. One area that has grown dramatically is for children between the ages of 8 and 12-years-old. Back in 2015, 24% of that age group had their own cell phone. Today nearly half or 43% of kids in that age range have their own cell phone. I have no idea why an eight or nine year old needs a cell phone other than to talk to mom or dad.
Not everyone thinks that electric vehicles will be flooding our streets in the near future. Jack Hollis who is executive vice president of sales at Toyota Motor North America believes a high sticker price and a poor public charging infrastructure will likely keep customers from widely embracing battery powered vehicles. He also has concerns on the rising cost of raw materials such as lithium, cobalt and other crucial battery inputs which will be pushing electric vehicle car prices even higher. In the near-term Toyota will continue to focus on hybrids and plug-in hybrids believing they will appeal more to a mass market. The hybrids are also more affordable and another concern keeping people from going to full electric vehicles is range anxiety of being stuck on the road with a dead battery. However, 8 to 12 years down the road it appears to be a different story.
On Thursday morning Tesla investors will wake up to have three shares for every one share of Tesla stock they had on Wednesday. Going back to August 2020, for every one share you had of Tesla you will now have 15 on Thursday. That sounds like a big win, but valuations still matter in the long run. If Tesla stock drops by 30% that would be a decline of $90. That doesn’t sound like that much, but if you go back prior to August 2020 the equivalent share price would be about $4500, and the dollar drop would be $1350. Tesla still has a price/earnings ratio of around 109 which means based on current earnings it would take you 109 years to get back what you paid for the stock. Don’t be fooled by financial shenanigans as companies play with stock splits. With rising interest rates, a slowing economy, higher expenses on EV parts and competition coming from all of the car makers, the stock still remains way overpriced. The number of shares you have when it comes to splits does not matter, it is the value of each share based on the company's fundamentals.
The demand side of the equation in the housing market continues to show signs of weakness as pending home sales were 19.9% lower in the month of July compared to last year. We have discussed how the lack of supply has kept prices elevated, but pricing is starting to show some cracks as people simply can't afford these high home prices with higher mortgage rates. According to the National Association of Realtors, higher rates have pushed the typical mortgage payment up by 54% from a year ago. This has pushed housing affordability to its lowest level in 30 years. Assuming a 20% down payment, it currently requires 32.7% of the median household income to purchase the average home. This compares to about 20% of a household's median income before the pandemic. The 25-year average is 23.5%. The affordability appears to be starting to impact prices as in the month of July prices declined 0.77% compared to June. This was the first monthly decline in approximately 3 years and was the largest monthly drop since January 2011. Year over year price growth remained strong as prices were up 14.3% compared to July 2021. I believe we will continue to see double digit year over year gains as we conclude 2022, but as we lap these higher prices in 2023, I believe it is likely we will start to see year over year declines.
Harrison - "How interest rates affect pensions."
Monday Sep 12, 2022
Monday Sep 12, 2022
There are a few fund managers that I follow and respect their opinions. One of them is Dan Niles who is a Stanford University graduate in electrical engineering. He has focused on tech stocks for over 30 years, and I always enjoy his commentaries and analysis. I have continued to warn that I still believe Apple stock is too pricey. Dan runs a hedge fund so unlike my portfolio he can short stocks and take a bet on the downside. In a Barron’s article recently, Dan stated he owns Apple stock but after the iPhone 14 launches on September 7 he not only plans to sell the stock but short it as well. That is quite the commitment. If you hold Apple in your portfolio, you definitely need to reconsider your position.
Shipment of smart phones around the world in the second quarter experienced a decline of 9% to 286 million units. If this continues in the third quarter, it could put downward pressure on the stocks of Apple and Samsung.
Good news on the inflation front. Retailers like Walmart, Nordstrom and Macy's are saying their inventories are building and they need to clean out their inventory to make room for holiday items. What that means is they’ll be cutting prices dramatically which will help ease inflation in certain areas and overall. We are no longer hearing about supply chain issues which means there is plenty of product and demand has eased so prices should decline. This will take a couple of months to pass through to the numbers, but they should start seeing good numbers just in time for the holiday season which will hopefully make consumers feel more positive and deliver a good holiday shopping season. The one wild card is still the price of oil and gas.
One of the big culprits that helped cause inflation was the huge increase in shipping costs. Remember all the disruptions and port backlogs? Last September it cost around $20,000 to ship a 40-foot container from China to the US. That cost has now been cut by nearly 3/4 with the cost for shipping the same 40-foot container from China to the US dropping to $5400. It is also projected new ships coming into service for the next two years will increase growth and capacity by 9% in 2023 and 2024. This will be another factor that will help keep shipping costs under control and in the end, retailers will be paying less in shipping costs so they can reduce their prices, which will help ease inflation.
Middle East Oil
You may complain about US oil companies and their huge profits, but at Saudi Arabia’s Saudi Aramco they saw a 90% increase in quarterly profits to $48.4 billion. Compared to Exxon Mobil's quarterly profit it is nearly 3 times as much. Such a shame we are sending all that money to the Middle East as opposed to producing more oil here.
We may be complaining about the increases in our CPI and PPI, which is the producer price index. However, Germany would love to have a producer price index at 10%. In July Germany’s PPI hit a record increase of 37.2%. That is a staggering number!
It is now September and before you know it, we will be singing Christmas carols and hanging Christmas decorations, quickly followed by the beginning of 2023. I have been wondering could our current Fed Chairman, Jerome Powell changes his tune next year and increase the inflation target from 2% to 4%? Here are a couple reasons why I think that could happen. First, over the last 50 years inflation has averaged 3.8%, perhaps he will realize the 2% target is too low. We have also seen him change his mind in the past, who could forget how long he stood behind the idea not too long ago that inflation was transitory. Just put this in the back of your mind and let’s see how things develop over the next six months.
MongoDB (MDB) is a cloud-based database software provider and last week they said they have seen demand from customers falling as their own business is beginning to slow. Who would be their customers? AWS which are owned by Amazon, Azure which is owned by Microsoft and Google cloud which is owned by Alphabet. It could mean when they report the third-quarter earnings in October we could see larger declines in their stocks. These companies still have a large weighting in the indexes which means they could pull the indexes down as well.
FAST Recovery ACT
Unfortunately, Governor Newsom did sign the FAST Recovery Act which will create a 10-person council to set fast food workers minimum wage as high as $22 an hour. There is a push from restaurant owners and business groups to get this on the ballot to have voters decide if this is right. Thanks to Governor Newsom this will be a waste of time and money for many people over such a silly thing to do to our economy.
Tuesday Sep 06, 2022
Tuesday Sep 06, 2022
Unemployment / Job Openings
The jobs report today showed the labor market strength is slowing, but overall, it still remains in a very healthy spot. The headline number saw payrolls increase 315,000, which was essentially in line with the estimate of 318,000. While this was the slowest growth since April 2021, it is still a good growth rate and people need to realize the blockbuster job gains we saw from job recoupment are now in the past. One negative note for job growth was the previous two months were revised lower by a net 107,000 jobs. The headline unemployment rate rose 0.2% to 3.7%, but I view this as positive as it was driven by an increase in the labor participation rate of 0.3% to 62.4%. The labor force participation rate still remains 1.0% below the February 2020 level. The gains in employment were broad based with every category seeing growth, but business and professional services continued to lead the way with an addition of 68,000 jobs and healthcare and retail trade were close behind with additions of 48,200 jobs and 44,000 jobs respectively. Leisure and hospitality has seen some of the strongest growth but saw an increase of just 31,000 jobs in the month of August, which was substantially lower than the 91,000 job increase in the month of July. This sector continues to remain beaten down compared to pre-pandemic levels as the total number of payrolls is still 1.2 million jobs below where we were in February 2020. One area of the report I found interesting was the number of people that were counted as long-term unemployed (those jobless for 27 weeks or more). It currently stands at 1.1 million and accounts for 18.8% of all unemployed persons. I hate to say it, but with job openings nearly 2x higher than the total number of unemployed persons how have they not been able to find a job?
The JOLTs report continues to show strength as job openings in the month of July saw results of 11.24 million openings, easily top the estimate of 10.3 million. This was a slight increase from the month of June which saw openings total 11.04 million. The job openings level is still close to 2x the number of available workers as they totaled just 5.67 million in the month of July. While this report is a major positive for the labor market, it remains concerning on the inflation front. The discrepancy between openings and available workers adds pressure to wage inflation as companies compete over employees and it makes me wonder if we have enough people in the labor force to help resolve the supply chain issues we have been seeing in the economy.
We have seen speculation in cryptocurrencies falter along with the meme stocks. I’ve always said Wall Street is great with coming out with products that they can make money on investors who speculate on trying to get rich quick. You now will begin seeing what is known as single stock ETFs which use various high-risk techniques along with options and futures and in some cases leverage. Three very risky tools. This will allow investors to speculate more on short term moves up and down of popular stocks like Tesla, Apple, Nike and in the works, you may even find companies like Boeing and Salesforce. They promote the benefit that you can’t lose more than what you invested, and you don’t need to sign margin agreements or any other pesty paperwork. And of course, Wall Street will make their money off of fees that seem to range from 0.95% to 1.15%. Once again people with little knowledge of how these work and with the excitement and enthusiasm that they will get rich will jump into these new ETFs which they hope will fill their dreams of getting rich quick. I can see down the road I would guess 3 to 5 years people who lost their money complaining it was unfair and someone needs to reimburse them. It was not their fault they did not read the paperwork or understand what they invested in. Would someone please tell these people to stop speculating and invest in good quality companies for 3 to 5 years and be happy with a potential annual average return of 8 to 10%. Once again investors are being warned of another great moneymaker for Wall Street and a big loser for them.
Buckle your seatbelt as September is historically the worst month of the year for stocks. Going back to 1928 both the S&P 500 index and the Dow Jones industrials have an average loss of around 1% in the month of September. Keep in mind an average does mean there have been up months in the past. For September I see 3 things that can weigh on the market. First off would be another interest-rate increase of 3/4 of a percent, second would be oil rising back to $100 a barrel and lastly more bad news coming out of the war in Ukraine. This does not mean you sell your stocks and go to cash. It means be prepared for some pullbacks and be aware that September is the worst month of the year.
On August 31 we will get an update on where the strategic petroleum reserves now stand after taking 1 million barrels a day from the reserves. The most recent data shows there were 453.1 million barrels in the reserves, down from 621.3 million barrels one year ago. What worries me here are two things. First this was meant as a temporary fix with the hopes of increasing production, which does not appear to have happened. In addition to that there is talk that the Middle East may reduce their production. My second concern is in 30 days or so when this program is over it appears the levels in the SPR will be somewhere around 390 million barrels, not a good comfort feeling. In addition to not replacing the production of oil, what will the government be doing to replace the oil they took from the strategic reserves. I’m also assuming the oil they used to meet the shortfall was lower priced oil than what they will be buying it back at especially since they're buying will increase the demand for oil. I believe in a long-term program to a good clean energy policy, but in the short term they really need to focus on a fix for how to produce more oil and gas. I hope they had a plan for this when they began the 1 million barrel a day reduction in the SPR.
I have said I do believe the recession will not be as dramatic because people not only have a job but feel comfortable that their job is secure, or they could obtain another job if they wanted to at equal or greater pay. It has been estimated that the US labor market is still down about 7 million workers from the pre-pandemic days. It also has been estimated that those who took early retirements reduced the labor supply by 2% and those gig jobs that people picked up has been estimated to have reduced the labor force by another 4%. It is also estimated that roughly 3% on a floating monthly basis of US workers are infected with Covid -19 which still requires mandatory days to stay at home. To help with the supply of labor it is possible some of those who retired will become concerned about inflation and the recession and return to the workforce.
The S&P 500 has had a nice rebound since June 16 rising around 11%, but still remains down 15% for the year. Traders now seem to be getting nervous. Net short positions against the S&P 500 futures are reaching levels that have not been seen in two years. This could cause a lot more volatility in September, which is the worst month of the year in regard to performance. Check your investments and your equities to make sure they can handle the storm.
We just saw a great JOLTS Report, which stands for Job Openings and Labor Turnover Survey. I now see Honda and LG are going to build a $4.4 billion EV battery plant starting early next year in Ohio. Tesla announced recently they are building a $4 billion EV battery plant in Oklahoma and not to long ago, Intel announced spending $20 billion in two different cities to build chip manufacturing plants. What I’m thinking is jobs, jobs and more jobs. First off construction of these multi-billion-dollar production plants will take 2 to 3 years to complete. Then the workers to work on these plants will also be making good wages as well. This will also generate the ripple effect of more jobs as the money flows into these communities. I feel pretty good about the long-term job market here in United States.
FAST ACT Bill
The California legislature passed a bill known as the FAST act for fast food chains that establishes a fast-food council charged with setting pay and workplace standards for the entire industry. The bill would allow the council to set pay for workers up to $22 per hour next year. This is backed strongly by the unions of course who never seem to understand the fundamentals of running a business or making a profit. Governor Newsom has about 30 days to decide to approve or veto the bill, restaurant owners are pushing hard to obtain a veto. I believe if this passes you will see closures of some fast-food restaurants or food prices at the franchises climb by 20 to 25% so the business can make a profit. My other fear is this will creep into other businesses causing more closures of other businesses and much higher prices in California.
Russia Oil Revenue
You may have figured out that because of the increase in the price of oil Russia is now drowning in cash. Their oil revenues are up substantially compared to before the war in Ukraine. Russia is now averaging oil export earnings of $20 billion/month, an increase of 37% from the earnings of $14.6 billion/month in 2021. Indirectly the United States is helping Russia generate more revenues in oil by producing less. The United States needs to open all oil wells, pipelines, and do whatever it takes to produce oil anywhere they can to shut Russia down. Let’s put the green energy objective on hold for a year or so to shut down Russia. If we did that the war in Ukraine would be over rather quickly.
Harrison Johnson, CFP®: "Understanding all risks in retirement"
Monday Aug 22, 2022
Monday Aug 22, 2022
In the past we have posted about where will Apple find the next area of growth for their business. One area of growth for them could be the $452 billion mobile ad market which could grow to $680 billion in 2026. They also may take advantage of trying to get into the online advertising market which is about $600 billion. There are many different ways that Apple may end up putting advertising on your phone and through your apps. It will be interesting to see how they handle this over the next few years and how consumers accept more advertising on their phone.
The affordability index of homes in the US has fallen to 98.3 which is the worst since June 1989. With rising mortgage rates and the sale prices of homes not dropping yet, home buyers just cannot afford to buy a home. If you’re already in a home, you do have the appreciation to use for a down payment on a new home, but if you’re trying to get into your first dream home that is getting farther and farther away for first time home buyers. Not only are the payments harder to qualify for, but the 20% down payment on a home of is also much harder to achieve. If you look at a $400,000 home the 20% down payment would only be $80,000 versus a home of $600,000 that would require a down payment of $120,000. That's a 50% increase. This is also preventing homeowners from moving up to another level if they cannot sell their existing home to first time buyers.
Generation Z, who are ages 18 to 24, have been an active generation of investors with half of them investing and 26% buying stocks. They have really only experienced the decline from Covid and feel stocks always rebound quickly. This year they are learning a new lesson and a bank rate survey found that 73% of Gen Z traded actively this year compared with Gen Xers, who are 42 to 57, just 28% traded. With baby boomers only 25% traded. I think the problem could be is where Gen Z gets their information. Half of them learned investing on YouTube and watch other exciting videos and 1/3 receive their education on TikTok. In my opinion those are probably not the best sources. At their age and their experience level, they expect quick rewards as opposed to having long-term patience.
There's a lot to the Inflation Reduction Act that I don't like, but I think the thing that bothers me most is the name of the bill. Why don't we just call it what it is.... it's predominately a climate bill and has very little to do with inflation. I will say one of the benefits in the bill is that Medicare will be able to negotiate drug prices. Far too often I believe the government just has to pay top dollar for products and services, which makes little sense to me. The downsides are plentiful, but some of the main areas of concern include how we will be paying for this bill. The first that comes to mind is the 1% tax on stock buybacks. This creates value for shareholders and shareholders already pay capital gains tax when money is made after selling an investment. This is essentially a penalty for companies rewarding shareholders and it will be interesting to see how this impacts buyback behavior. The 15% alternative minimum tax is far too complicated for the average person to understand, and I will continue to monitor how this will ultimately impact businesses and their investment decisions. Most of the investments as I mentioned go to climate policy with $369 B out of the $437 B in investments going towards "energy security and climate change". This includes a bunch of fluff including something as silly as $27 billion for a national climate bank and $3 billion for so-called "climate justice".
China is having economic problems which is starting to show up in their top 100 property developers as of July. Sales for these top developers saw a decline of 39.7% in the month of July. This could be the start of some more issues for China!
Inventory and Sales
While the retail sales number for July today showed no gain compared to June, the year-over-year gain of 10.3% shows me the consumer is still willing and able to spend money. The only two areas that showed a decline compared to July 2021 were electronics and appliance stores which were down 9.9% and department stores which were down 1.4%. I believe the decline in electronics and appliance stores can be largely attributed to the demand pull forward we saw during covid and for department stores it could be due to discounted inventory. This was apparent in Target's report where they missed consumer demand and had to severely discount excess inventory. Although gas station sales fell 1.8% compared to the month of June as fuel prices declined, compared to July 2021 gas station sales were still 39.9% higher as fuel prices still remain elevated. Food services and drinking places still remained a popular area for consumers as sales were up 11.6% compared to last year. Overall, the consumer still looks to be in a good position as we enter the back part of 2022.
The US markets have recovered somewhat, however; I am not convinced it will last for the growth stocks. If you’re thinking it may be a good time to look at the emerging market stocks, they have been struggling as well. Over the past five months there has been $39 billion in outflows from emerging market stocks. That is the longest losing streak going back to 2005 when records begin.
With both mortgage rates and housing prices remaining elevated, demand has definitely pulled back in the housing market. In July, Existing home sales which look at closed contracts (likely signed in May and June) were down 6% compared to the month of June. Looking back to July of last year, existing home sales fell 20% to a seasonally adjusted annualized rate of 4.81 million units. If you exclude the craziness of Covid, this was the slowest rate since November 2015. The problem is supply remains extremely tight and there were just 1.31 million homes for sale at the end of July, which would generate a 3.3-month supply based on the current sales pace. Generally, 5-6 months is considered a healthy market. One of the major problems is first-time buyers are not playing an active role as they accounted for just 29% of buyers in the month of July. This compares to a historical level of around 40%. Much of this likely has to do with affordability. High rates and economic uncertainty have also led to an increased level of cancellations. In July, 17.6% of builder contracts fell through, compared with 8% in April and 7.5% in July 2021. For existing home sales about 63,000 of those agreements fell through in July, or about 16% of homes that went under contract that month, according to Redfin. Cancellations were 12.5% in July 2021. This indicates to me that either mortgage rates or housing prices have to give to create a stronger demand environment.
Saving Rates Due to Covid
The savings rate surpassed 30% when Covid hit because people had nowhere to spend the money they were receiving. It has dwindled back down to a normal savings rate of around 6%. The banks have not raised their rates on savings much and it may be a while before they do. You may think because the federal funds rate is increasing, banks must increase their savings rate. That is not correct. The reason the bank raises their rates is to attract more money. Well, the banks still have plenty of cash on their balance sheets so there’s no incentive for them to raise their rates. Banks are in the business of lending money, and they earn their money off the spread of what they pay for money and what they loan money at. I would not expect to see this change anytime soon but this is going to help the banks with some good profits over the next few quarters.
Harrison Johnson, CFP®: "Moving Out of State in Retirement"