4 days ago
4 days ago
I always enjoy seeing advantages of the United States over China. In the recent book “Chip War” written by Chris Miller he writes that across the entire semiconductor supply chain, including chip design, intellectual property, tools, fabrication and other steps, the Chinese only has a 6% market share. That compares to 39% for the US, South Korea at 16% and Taiwan at 12%. The author also points out as China pushes forward with cloud computing, autonomous vehicles, and AI its market share will continue to grow. The x86 server chips will be the workhorse of modern data centers which are dominated by AMD and Intel.
Snacking in the US
I can’t remember the last time I had a Twinkie, but apparently, I’m in the minority. The snack business overall in the US is up 8% in the past two years with consumers eating three or more snacks a day. Overall, US snacks increased by 11% last year to a total of $181 billion. The demand has led to 1 million Twinkies being produced each day. This could be why J.M. Smucker recently paid $4.6 billion for Hostess brands which over the last 15 years has filed bankruptcy twice. Twinkies were started back in the 1920s by James Dewar who delivered pound cakes from a horse drawn carriage. If you want to know where the name Twinkie came from, Mr. Dewar came up with the idea after passing a billboard for Twinkie toes shoes. He thought Twinkies would be a great name for a snack. Hostess which owns Twinkies filed for bankruptcy back in 2004 and again in 2012 after the company failed due to a strike over a labor deal with the Baker’s union. It looks like this time being owned by J.M. Smucker; Twinkies will last longer. You may not know this, but they also prolonged the life of a Twinkie from 26 days to now they will last on the shelf for 65 days. I guess I will have to try a Twinkie and bring back the days of my school lunches when I was a kid.
You may be worried about investing because of the high levels of the stock market. At Wilsey Asset Management, we have talked about how it’s an overconcentrated market and overall, it is still expensive. Famed investor Warren Buffet also feels the market is expensive, he has what’s known as the Buffet indicator, which he uses to see when the market is expensive. He compares the Wilshire 5000 index to the GDP of the country. The perfect market price is when the market has the same value as the GDP. Buffet points out that the Wilshire 5000 is currently $49 trillion, well above the GDP at $26.9 trillion. To bring the Buffet indicator from a high level of 182% down to 100%, the market would need a decline of 45%. No one, including Buffet, expects to see a 45% decline in the market. What I have said, and agree with Warren Buffett on is that for the next 5 to 10 years we will not have much of a gain in the overall market as the GDP will increase to catch up to the index and normalize the ratio. To make money in your portfolio going forward one must remember it is not a stock market, but a market of stocks and one has to find good stocks that are of good value with good dividends. This will bring the investor better returns over the next 5 to 10 years.
Financial Planning: Premium Financed Life Insurance
Cash value life insurance is sometimes sold as a retirement planning vehicle. Premiums are paid with after-tax dollars which covers the fees, cost of insurance, and builds cash value. If enough cash value is accumulated, you can take out loans against it, which is not taxable because it is technically debt. In retirement, the cash value can continue to grow tax deferred while loans can be structured as a “tax-free” income source. The loan balance increases from the withdrawals and compounding interest, but the income/loans may continue as long as the loan balance does not exceed the cash value of the policy. At death, the life insurance death benefit is used to pay off the outstanding loan balance. One challenge for these types of plans is they require substantial amounts of cash value collateral to produce a worthwhile income stream. To build the necessary cash value, extremely large premiums are required which can be difficult to add into someone’s budget. This is where premium-financed life insurance comes in. Instead of the policy owner paying the premiums themselves, they obtain a 3rd party loan to pay the high premiums and then make payments on that loan. The hope is that the cash value will grow faster than the loan balance and at some point in the future, a second loan can be taken against the insurance cash value to repay the loan used to pay the premiums. At that point, additional loans can be taken from the cash value to produce the “tax-free retirement income”. It may go without saying but this type of plan can get complicated and risky pretty quickly. If structured correctly and with some luck, this strategy can produce some retirement income, but there are so many areas where it can fail, and when you invest using debt and fail, the losses are compounded. High net worth and accredited investors can be attracted to these plans from believing they need a more sophisticated and tax-advantaged strategy, and advisors are happy to sell them because of the massive commissions that come along. However, these plans are extremely risky and in pretty much every case there is a more appropriate alternative.
Monday Sep 11, 2023
Monday Sep 11, 2023
Based on recent readings, it looks like the UAW will strike against the auto makers. I’m certain the auto makers will need to increase pay for the auto workers, but this could perhaps cause them to raise the prices of their cars to cover the increase in labor costs. I hope the head of the union and union workers read the following. It now takes 42 weeks of income to buy the average new car. This compares with 2019 when it was 33 weeks. How far do the unions think carmakers can increase prices on consumers and still make a profit? I honestly don’t believe the union leaders explain to their workers the reality of running the businesses that they strike against. Financial statements of all the automakers are public information that could be read by a CPA and give the union and its workers a reality check.
Government Shut Down
Here we are in September and the end of the federal government's fiscal year is fast approaching ending on September 30th. The question is will the government shut down in October if the Democrats and Republicans can't agree on funding legislation. At our firm, Wilsey Asset Management, we don’t worry about short term movements in the market caused by political turmoil because we know that they will come up with some type of a settlement sooner or later. Looking back in history in 1978 and 1979 the market did decline when the government shut down. But, in total there have been six shutdowns since 1978 that lasted five days or more and on all other occasions since 1978 the market increased. This included a 10% climb during the December 2018 to January 2019 shutdown. I do believe investors have come to understand government shutdowns are now, sad to say normal and they will come to a resolution at some point. So, with that said, we will not be selling any positions in our portfolio based on a government shutdown. I'd recommend the same for all investors. We all know market timing does not payoff.
Apple in China
The news for Apple in China should concern shareholders. China recently announced that they would ban iPhones and other foreign-branded devices at work for officials at central government agencies and they would not be allowed to bring them into the office. It was then reported by Bloomberg that China is planning to extend the ban on iPhone use to state-owned corporations. China does make up a good chunk of revenue for Apple as it is currently accounts for around 19% of total revenue. I do find the timing of these reports somewhat odd as Huawei, which is a big competitor to Apple, recently announced their new smartphone known as the Mate 60 Pro that is capable of ultrafast data connectivity to rival 5G. This will definitely threaten Apple’s market share in the country. Back in 2019, Apple held 56% of smartphone sales over $600 in China while Huawei held 39% of the market share. As Huawei has had to battle limitations on components due to US restrictions their market share sank while Apple’s expanded. In 2022, Apple held 70% of the market share compared to just 11% for Huawei. As the battle between the US and China continues, I do worry this could cause a big sales hit to Apple. Not to mention, who knows what else China could look at banning when it comes to Apple’s service revenue in the country.
Last quarter Visa had $8.1 billion in revenue and earned $4.2 billion. MasterCard had similar results with $6.3 billion of revenue and net income of $2.8 billion. If you have been following me for a while, you know, how opposed I am to merchants now charging a 3% fee if you use a credit card on the purchase. They say if you pay cash, you can save that 3% credit card fee. Whether I like it or not that seems to be sticking and I have to believe this will be a big headwind to the credit card companies. One reason for the growth of these companies has been the increased use of credit cards. In 2016, 31% of purchases were in cash and credit card purchases were just 18%. In 2022 cash purchases dropped to 18% and credit card purchases climbed to 31%. I believe that trend will be changing going forward as consumers save 3% on their purchases by paying cash. Also adding to problems for Visa and MasterCard is what is known as FinTech and other non-bank financial firms which includes companies like PayPal that offer peer to peer payments bypassing the networks. I don’t see how these things cannot reduce the growth of the big credit card companies which trade at around 25 times forward earnings. The credit card companies point out they saw 22% of the revenue in the last quarter come from value added services such as fraud protection and data analytics. But I believe you would still have to use the credit cards to get the services. I’m confident that the financial industry is changing and this will hurt the revenue and earnings of Visa and MasterCard.
Tuesday Sep 05, 2023
Tuesday Sep 05, 2023
The Jobs Report reaffirmed exactly what the Fed should be looking for and that is a softening labor market. Nonfarm payrolls increased by 187,000 in the month of August. This beat expectations of 170,000, but the previous two months were revised lower by a total of 110,000 payrolls. This would put the three-month average at around 150,000 added jobs per month. This is well below the average monthly gain of 271,000 over the prior 12 months and is in line with 2019 when job gains averaged 176,000 per month. The unemployment rate also increased 0.3% in the month to 3.8%, but this was largely due to the increase in the labor force participation rate which increased 0.2% to 62.8%. This was the highest labor force participation rate we have seen since February 2020. With more people coming back to the labor market, more competition could be a big positive for lower wage inflation. In the month average hourly earnings came in slightly below expectations at 4.3%, which is off the high of 5.9% last year but likely still too high for the Fed. Health care and social assistance led the way in the report adding 97,300 in the month, leisure and hospitality came in second adding 40,000 jobs, and construction was also strong adding 22,000 jobs. The strength in construction does not come as a surprise considering the strength in the industry. The most recent construction spending report showed a 0.7% gain in the month of June to $1.97 T. This marked the 7th straight month of gains and it does not look like the industry is slowing. Areas in the report that were weak included transportation and warehousing which was down 34,200 and information which was down 15,000. The transportation industry was likely hit with the bankruptcy of Yellow as there was a drop of nearly 37,000 positions in trucking. The information sector was hit with the Hollywood strike as the sub-category for motion picture and sound recording dropped close to 17,000 jobs.
The amount of job openings declined to 8.8 million in the month of July. This was down from the original reading of 9.5 million in the month of June and marked the lowest level of job openings in 28 months. June’s reading was also revised lower to 9.2 million. The July reading greatly missed the estimate for 9.5 million openings. Job openings have fallen drastically from the record of over 12 million last year as companies have hired many new employees and have also become more cautious on the economy largely due to increasing interest rates. The number of job openings for each unemployed worker was still strong at 1.5 which compares to pre-pandemic levels around 1.2. For context, before Covid at the beginning of 2020 job openings totaled about 7 million. As the labor market has softened, the number of people quitting their jobs has also declined. Job quitters had topped 4 million for much of the post-pandemic period, but that has softened this year and in July the level was just 3.5 million which was the lowest level in two and a half years. This should be good news on the inflation front as less competition for workers should result in less wage inflation.
The Fed’s closely watch gauge for inflation, known as the PCE, showed little change and few surprises in the month of July. The headline number showed a gain of 3.3% compared to last year which did rise slightly from June’s reading of 3.0% and Core PCE which excludes food and energy was right in line with expectations at 4.2% compared to last year. This was a slight uptick compared to June’s reading of 4.1%. I do wonder how impactful summer spending was on prices as consumer spending was up 0.8% in the month of July. This was the biggest gain in six months. Spending was powered by the best ever Amazon Prime Day, the box office hits of Barbie and Oppenheimer, and the Taylor Swift concert. Without major events like these, there could be pressure on spending which would have an impact on pricing and inflation as well. I still believe hitting the 2% target will require some time, but inflation is still heading in the right direction and there should not be a need to hike rates at the Fed meeting in September.
A couple different bank fees have been coming down with the average overdraft fee falling 11% from last year to $26.61 and non-sufficient funds fees hitting an all-time low average of $19.94. One fee that has been rising is ATM fees. The average ATM fee rose to a record $3.15, this marks the 22nd record in 25 years. Fees for using an out-of-network ATM also jumped to a record high of $4.73. If you are using ATMs a lot, you should consider finding a banking network that is convenient for you to avoid the high ATM fees. I was also shocked to see in a Bankrate survey that 27% of checking account holders are regularly hit with fees, which can add up to an average of $24 per month, or $288 per year. There are many different banking options where you can efficiently use a checking account and avoid these fees. Many banks also waive these fees if you use direct deposit or maintain a certain balance. It is just silly to waste money on unnecessary fees. Make sure you understand your banking relationship and any fees that may be associated with it.
From time to time I hear from potential clients that they are afraid to invest because of the crazy times we are in. Many times, this has to do with the political landscape. I tell them that US politics has always been messy and crazy. I have included some examples you may remember, the others you will have to check the history book. During the mid-1960s through the mid-1970s the country was divided over civil rights. Remember in 1965 when Watts went up in flames? Or in the 1970s when the national guard killed four students at Kent State? This led to protests at 350 campuses, involving an estimated two million people. Also, you can’t forget when thirty-five thousand antiwar protesters assaulted the Pentagon in October 1967. The early 70’s was a crazy period to say the least as the U.S. experienced more than 2,500 domestic bombings in 18 months from 1971-72. Going back further, will require the history book but in 1888 Republicans won the White House, held the Senate and held the House but just by four people. During a floor vote if more than four Republicans were missing, House Democrats would demand a roll call and refuse to answer when their names were called. The measure would fail because there was the lack of a quorum. This kept the House from acting for months. In 1838 Whig William Graves of Kentucky shot and killed Democratic Rep Jonathan Cilley of Maine in a duel over charges of corruption. In 1824 Andrew Jackson led the four-way presidential race with 41% of the popular vote and carried 11 states but with 99 electoral votes came up 33 short of a majority. The contest went to the house where each delegate had one vote and they seated John Quincy Adams even though he was the runner up with 84 electoral votes. For the next four years, Andrew Jackson condemned the corrupt process and said it deprived the people of their right to a free election. In the next presidential election in 1828, Andrew Jackson defeated John Quincy Adams. These are just some examples of the craziness our country has been through. Unfortunately, crazy times will continue but ultimately good businesses will continue to survive and thrive. That is why I tell people to ignore the noise and focus on the businesses in your portfolio.
Financial Planning: IRMAA
There is a tax for over 5 million Americans known as IRMAA, which stands for Income-Related Monthly Adjusted Amount. It applies to Medicare Part B and Part D premiums for single filers over $97,000 and joint filers above $194,000 of income and can increase annual costs by thousands. This is in addition to the .9% tax on earned income and 3.8% tax on investment income for single filers above $200k and joint filers above $250k of income. In some cases, IRMAA can be appealed if income has reduced due to marriage, divorce, death of spouse, or reduction of work or income, but this can be difficult and time consuming so it is necessary to stay diligent. The most common income sources that trigger IRMAA are capital gains or Required Minimum Distributions from retirement accounts, so it is important to plan out your retirement income ahead of time to reduce not only federal and state taxes, but IRMAA as well.
Monday Aug 28, 2023
Monday Aug 28, 2023
Existing home sales fell 2.2% in the month of July from June. Compared to July 2022, sales were down 16.6% and homes sold as the slowest July pace since 2010. Demand has definitely been hit by rising interest rates and on Monday, the average interest rate on 30-year mortgages rose to 7.48%. This was the highest level since November 2000. It will be interesting to see how home sales are impacted in the reports over the next couple months as existing home sales are based on closings which means these contracts for the current report were likely signed in May and June. The supply of homes has also been a heavyweight on the sales levels as there were just 1.11 million homes for sale at the end of July. This is down 14.6% compared to last July and is the lowest level since 1999. Looking compared to pre-Covid levels, there are half as many homes available for sale. While the tight inventory has depressed the sales rate it has kept prices elevated and there was actually a 1.9% increase in the median price of a home compared to last July.
The headline number for durable goods orders may worry some and give them reason to question the strength of the economy, but as always you have to look deeper into those numbers. The headline showed orders fell 5.2% in the month of July, but much of this decline came from Boeing. Orders for commercial planes can be extremely volatile and in the month of June they soared 71%, but then in July fell 44%. If the volatile transportation sector, which includes automobiles and planes, is excluded orders actually increased 0.5% in the month. Excluding the volatility created by Boeing, durable goods orders have now increased three months in a row. With all the volatility from Covid, I do believe the manufacturing sector and the overall goods economy can continue to strengthen from a challenged level over the past year.
We said a few years ago that eventually workers would be coming back to the office and they would not have the same leverage for getting higher pay. That time may be just around the corner. According to ZipRecruiter, the average pay for the majority of jobs has declined from last year with some of the steepest declines being seen in technology, transportation, and other jobs that had big hiring back two years ago. ZipRecruiter conducted a survey in July with about 2000 employers and the results revealed that nearly half of the employers said they had reduced the pay for recent job openings. I don’t see the this reversing. I think in the next year or two we will see further declines in pay as competition for jobs comes back to a more normal level.
Monday Aug 21, 2023
Monday Aug 21, 2023
Real Estate Investment Trust
Months ago at my investment firm, Wilsey Asset Management, we made a decision to go into a real estate investment trust to begin buying class A commercial property that was on sale. I was happy to read recently that the big Wall Street firms are now raising billions of dollars to invest in commercial property that is on sale. If you’re considering doing this as well, be sure to understand where the properties are located and verify that they are class A buildings. You also want to make sure you are not overpaying based on the fundamentals of the real estate investment trust and you should understand the debt level and when that debt is coming due. An investor should be able to get a yield of around 5% or higher plus I believe there could be some great appreciation. Keep in mind your investment time horizon for this should be somewhere between 12 and 24 months, do not expect a turnaround in just a few months.
Retail sales came in with a good report as sales in July were up 0.7% compared to June. This easily topped the estimate of 0.4% and compared to last year sales were up 3.2%. Gas stations weighed heavily on the report due to lower gas prices as sales decline 20.8% compared to last year. If these were excluded from the headline number, retail sales grew at an even more impressive pace of 5.8% compared to last year. Areas of strength included food services and drinking places (+11.9%), nonstore retailers (+10.3%), and health and personal care stores (+8.1%). Areas that continued to be negative included furniture and home furnishing stores (-6.3%), building material and garden equipment and supplies dealers (-3.3%), and electronics and appliance stores (-3.1%). These categories were all beneficiaries from covid, but with the beginning of the pandemic now more than 3 years ago I do wonder when some of these items that were purchased then will need to be replaced. For example, I do know laptops have an expected life expectancy of around 3-5 years so sales there could start to turnaround in the coming months.
Move over Batman and hello Barbie! Barbie has now become Warner Bros. Discovery’s (WBD) highest grossing domestic film of all-time. The movie has now topped $537M which comes in above Christopher Nolan's The Dark Knight, which generated $536M in 2008. Barbie does have the benefit of inflation as prices are now higher than 2008, but considering the weak box office post Covid the feat is still quite impressive and it shows the potential reach and advertising power of the recently combined Warner Bros. Discovery. From a global box office perspective, Barbie has collected over $1.2B which would make it the second highest grossing movie worldwide for WBD after Harry Potter and the Deathly Hallows: Part II. I personally have not seen the movie, but apparently many people have!
Monday Aug 14, 2023
Monday Aug 14, 2023
United Auto Workers
I understand that unions want to try and provide benefits for their workers, but the United Auto Workers (UAW) seems to be asking for unachievable demands. The negotiations with Stellantis, Ford, and General Motors are underway and the UAW is demanding a 46% pay increase over the next few years. There would be a 20% increase effective once the new contract is signed and then there would be 5% raises annually until 2027. On top of the massive pay increase the list of demands includes the restoration of cost-of-living pay, defined benefit pensions for all workers, and restoring retiree health coverage. The President of the UAW, Shawn Fain, also brought up more paid time off and a 32-hour workweek. If the UAW was able to get their full list of demands this would destroy the US auto companies and limit their ability to compete. Bankrupting these companies helps no one. As of now the current contract is set to expire on September 14th and I believe there will be a strike as the two sides are likely very far apart.
26% of Americans believe gold is currently the best long-term investment, which is an increase from 15% one year ago. Unfortunately, people are investing in gold near the all-time high of $2,069/oz hit back in 2020. It is strange to me because gold is supposed to be a very good inflation hedge, but the risks of inflation seem to be subsiding. The Wall Street Journal recently did an article on gold and they mentioned a gentleman who lost thousands of dollars in his retirement plan by betting on biotech shares in early 2021. He has now invested in gold and feels comfortable and says he can now sleep at night. It makes no sense to me why someone would do a risky investment in biotech and then turn around and put all their money into a single commodity such as gold. This is why the average investor only earns on average around 3% per year. During periods like this, people tend to forget when investing in gold you can still lose money. In fact, if we look at GLD which moves with the price of gold, in 2013 shares fell more than 28%. The 10-year average return on GLD is also extremely lackluster at just 3.48%. At the end of the day gold is a just a piece of metal that is only worth what the next person will pay for it. Ultimately, I would not be investing in gold at this time.
The Consumer Price Index (CPI) continued to show positive signs in the month of July as the headline number of 3.2% was below expectations for 3.3%. Core CPI which excludes food and energy was still higher than the headline number at 4.7%, but it was the lowest reading since October 2021. Shelter continued to be a heavy weight on the report as prices were up 7.7% compared to last year. This increase in shelter costs accounted for more than 90% of the increase in the CPI report. Other areas that remained troublesome included motor vehicle insurance (+17.8%), motor vehicle maintenance and repair (+12.7%), and food away from home (+7.1%). Food at home was much less problematic as it was up just 3.6% compared to last year. Energy continued to be a major positive as prices were down 12.5% compared to last year and regular unleaded gasoline in particular was down 20.3%. Overall, I’d say this was a great report, but I will say oil prices have increased as of late and I do worry they could become problematic for inflation as a whole if they do not stabilize.
The Producer Price Index (PPI) showed wholesale prices in July were up just 0.8% compared to last year. Some may point to the month over month gain of 0.3% being higher than expectations of 0.2% as a problem, but considering the year over year number is under 1% I still believe it’s a good report. Looking at core PPI, which excludes food and energy, prices were up 2.4% compared to last year. This was tied for the lowest annual increase since January 2021. Services were a problem in the report rising 0.5% in the month. This was the largest gain since August 2022, but much of the increase came from a 7.6% surge in prices for portfolio management which likely can be attributed to the increase in stocks we have seen this year. There’s nothing in this report that leads me to believe the Fed needs to continue on its rate hiking path.
Monday Aug 07, 2023
Monday Aug 07, 2023
The Jobs report showed nonfarm payrolls grew by 187,000 in the month of July, which missed the estimate of 200,000. The unemployment rate ticked down to 3.5% vs the estimate it would hold at 3.6%. Areas of strength included healthcare and social assistance (+87,100), construction (+19,000), and leisure and hospitality (+17,000). Healthcare in particular has been on fire lately as it has accounted for 35% of the job gains in the past 3 months. There were some areas of weakness which included manufacturing (-2,000), professional and business services (-8,000), transportation and warehousing (-8,400), and information (-12,000). Professional and business services were weighed down by a loss of more than 22,000 jobs for temporary help services. Wages were a positive in the report as average hourly earnings grew 4.4% compared to last year which surpassed the estimate of 4.2%. At this rate I would say the growth is not excessive, but it is always growing above the recent inflation rate which is good for consumption. Overall, I would say this report is not very exciting as it really doesn’t show us anything new. The labor market is softening, but it still remains in a good spot.
Job openings in the month of June of 9.58 million were below the estimate of 9.7 million and they were at the lowest level since April 2021. Compared to last June they were down 12.6% or by 1.4 million openings. This sounds troubling, but it is important to understand there are still 1.6 job openings out there for every available worker. Also, even with the decline we still have a very strong labor market. Looking back to February 2020, job openings totaled just 7 million and in 2019 they averaged just 7.2 million per month. Layoffs were a positive in June as they came in at just 1.5 million. In February 2020, before Covid, layoffs were close to 2 million and in 2019 they averaged 1.8 million per month. The labor market will likely continue to soften as the economy normalizes from the Covid disruption just a few years ago.
It’s no surprise that malls that were big 10 to 20 years ago are now struggling. This has caused a problem where malls are now worth 50 to 70% less than the valuation peak back in 2016. Roughly 20% of all malls financed through commercial mortgage-backed securities are underwater because the loans are much higher than the value of the property. What has been hurting the malls is large anchors like Macy’s, JCPenney and Sears have closed nearly 900 department stores between 2018 and 2020. This is a big jump from the 175 they closed from 2016 to 2017. Not all malls will go out of business. What has worked is newer, well located properties that have strong tenants and have generated healthy traffic. A good comparison here in San Diego would be North County Fair in Escondido, which looks like a ghost town compared to Fashion Valley, which is in the middle of a remodel, and still has a good amount of traffic in stores worth going to. I would caution investors to be wary of trying to pick up bargain prices on these properties. I’m sure some will survive, but I would say overall in five years we will see many less malls and in my opinion they are not worth risking capital on as an investment.
The trucking company Yellow was forced into bankruptcy because of three things in my opinion. The first was bad management, which caused the second problem of acquiring companies and piling on debt. This includes acquisitions like in 2003 when they bought Roadway for $1 billion and just two years later USF for nearly $1.4 billion. Number three was labor costs that were pushed to high levels by unions and their 22,000 workers. Approximately 7,000 employees were nonunion. This company filed bankruptcy in 1951 then again in 2010 they wiped out most of the shareholder value to get the union to agree to cuts of benefits and pay. They also had issues with bankruptcy in 2014 and once again during Covid in 2020. The company may still continue to operate in bankruptcy, but the shareholders will likely lose most if not all of their money. Old contracts are worthless and the bond holders may get some type of a deal. Roughly half of the companies $1.5 billion in outstanding debt was owed to the federal government who loaned the company money during Covid to keep them afloat. This is why at my investment firm, Wilsey Asset Management, we pay close attention to the balance sheet and debt levels.
Monday Jul 24, 2023
Monday Jul 24, 2023
When it comes to managing our half billion dollar portfolio, we always talk about how it is a market of stocks and not a stock market. With that being said, it doesn’t mean we don’t have a clue what’s going on with the indexes. We continue to feel that the indexes will fall from the rapid upward climb this year. What do we base that on? With the S&P 500 index being up more than 17% year-to-date, people should realize that the seven stocks of Apple, Microsoft, Alphabet, Amazon, Meta, Nvidia and Tesla, which have a combined Market cap of $11 trillion, are responsible for 73% of that 17% year-to-date return. I don’t know what you think, but our thought at Wilsey Asset Management is that is not normal and it is a warning sign that the index could lose steam and begin to slide back down the hill.
With the Nasdaq up over 34% this year and the S&P 500 up over 18% this year, would you be surprised to find out the Dow is actually closer to its all-time high even though it is up just over 6% this year? Many times people do not realize how hard it can be to recoup major losses like the Nasdaq saw last year when it fell more than 33%. From their respective highs, the Dow is down 4.7%, the S&P 500 is down 5.7%, and the Nasdaq is still down 12.4%. It’s important to remember that a 1% gain does not full offset a previously witnessed 1% loss, so for the Nasdaq to return to it’s all time high it would actually need a 14.2% gain. While investing in fancy growth names can be exciting it’s these potential major turns that keep me out of the growth stocks as it can take you years to recover.
Existing home sales in the month of June fell 18.9% compared to last year. This marked the slowest pace of home sales for June since 2009. Even with the decline in sales, the median price of $410,200 held up well falling just over 1% compared to last June’s record number. The reason for this is the inventory level has struggled immensely as it fell 13.6% to just 1.08 million homes available for sale. Affordability has really challenged the first-time home buyer as the group made up just 26% of sales. This is down from 30% last year and it is the lowest level on record since the Realtors began tracking this number. I continue to believe home prices will be in a go nowhere trend for the next couple years as affordability will limit upside potential and the lack of inventory will prevent a substantial decline.
While Retail sales grew just 0.2% in the month and were below expectations of 0.5%, the numbers continue to feed my belief that a soft landing in the economy is possible. The consumer is slowing, but it appears by not enough to create a hard landing. Looking year over year retail sales were up 1.5%, but a decline at gas stations of 22.7% weighed heavily on the report. In fact if gas stations were excluded, retail sales would have climbed 4.2% compared to last year. Grocery stores also had a much lower impact as they saw an increase of just 1.1% compared to last year and were actually down 0.7% compared to last month. The goods economy continues to get hit as furniture and home furnishing stores saw a decline of 4.6%, department stores were down 5.2%, and building material and garden equipment and supplies dealers were down 3.2%. For the first time that I can remember in many months, electronics and appliance stores saw an increase of 0.9%. I do believe many of these industries that produce goods could be near a bottom and as we lap easier comparisons they could return to growth. Areas that remained strong in the report included health and personal care stores (+6.3%), food services and drinking places (+8.4%), and nonstore retailers (+9.4%).
Monday Jul 17, 2023
Monday Jul 17, 2023
If I told you last year we would see inflation at 3%, would you believe it? In the month of June that is exactly what we saw as the CPI rose 0.2% compared to May and it was up just 3% compared to last June. Energy prices continued to be a major positive as they fell 16.7% compared to last year with unleaded regular gasoline falling 27.1%. Other areas of the economy also saw nice declines with airline fares falling 18.9%, major appliances were down 10.7%, and used cars and trucks saw a decline of 5.2%. Food still saw an increase of 5% in the month, but there was a substantial difference between food away from home as it was up 7.7% and food at home was only up 4.7%. Grocery price inflation saw a peak of around 14% last summer so prices have slowed quite substantially with products like eggs (-7.9%) and bacon (-10.1%) showing nice declines compared to last year. Core inflation which excludes food and energy still remained higher than most would like to see at 4.8%, but it did fall from last month’s reading of 5.3% and it is well below the peak last year of 6.6%. As a reminder the headline CPI reached a peak of 9% last year. It is important to understand shelter prices continued to weigh on the report as they were up nearly 8% and accounted for approximately 70% of the monthly increase. I continue to believe shelter costs will decelerate substantially which would be a major benefit to both core and headline CPI. I think as we close at 2023 inflation will be a concern of the past.
The Producer Price Index (PPI) was even better than the CPI report as it showed positive signs for cooling inflation. In the month of June, the PPI was up just 0.1% compared to last year. In June 2022, the PPI showed a huge increase of 11.2%. Energy prices provided a major benefit to the report, but even core PPI, which excludes food and energy, was up just 2.6% compared to last year. As I said after the CPI report, I just don’t see inflation being a problem as we exit this year.
Real Estate Market
In recent data from the National Association of Realtors it was found the nearly 40% of Americans between the ages of 25 and 44 who bought homes last year plan to stay in them for 16 years or more. This sounds problematic given the current lack of inventory, but over the next 5 years I believe many of these survey respondents will change their minds. This mainly stems from life changes like marriage, having kids, and even divorce. On the other side I do not believe interest rates will remain this high on mortgages and we could see rates settle around the 5% level. While I believe they will not fall back into 3% range, it is much easier to give up your 3% mortgage for a 5% mortgage instead of trading it in for a 7% mortgage, especially if you’ve outgrown your current residence. The real estate market is very strange right now, but I believe with time it will normalize.
AT&T has seen its stock price struggle over the last few years and it could get worse. On Monday, July 10 in the Wall Street Journal there was an article from their investigative reporting team titled “Telecom Giants Left Behind Miles of Toxic Lead Cables”. It was on the front page and two full pages in the first section discussing how AT&T and other telecom giants have left behind a network of cables covered in toxic lead that stretches across the United States under the water, in the soil, and on poles overhead. Unfortunately, I know what follows which will be a number of lawsuits from legal firms across the country. We believe over the next six months or so as the company defends itself against these lawsuits it probably will have to cut the dividend and there could be a decline of at least 20% or more in the stock price. This company had such a bright future in the next six months as other expenses were falling off and their cash flow would increase. We now see the same future for AT&T as what 3M has been going through over the last couple years with their stock price cut in half and they will have to pay out billions of dollars in settlements. In today’s society, lawsuits continue to mount costing businesses of all sizes from small to large hundreds of billions of dollars in settlements and legal fees. Until there is more clarity on this situation I could not recommend a buy on this stock.
Monday Jul 10, 2023
Monday Jul 10, 2023
The employment report showed nonfarm payrolls increased 209,000 in the month of June which was well below the expectation for growth of 240,000. Payrolls were also revised lower by 110,000 in the months of April and May. The report marked the slowest month for job creation since December 2020 when payrolls fell by 268,000. So far this year, we have seen a 6-month average of 278,000 in monthly job creation which compares to the average of 399,000 in 2022. While this all may sound like bad news, I believe it remains positive as the labor market is softening, but it still remains strong. In fact, if we look back to 2018 job creation averaged 223,000 per month and in 2019 it was just 176,000 per month. Wage growth in the month was 4.4% compared to last year, which is in line with many readings this year and softer than last year's peak of 5.9% in March. Job growth remained strong in areas like health care and social assistance (+65,200), construction (+23,000), and professional and business services (+21,000). Growth in the leisure and hospitality sector has cooled as the group was up just 21,000 jobs in the month. It still remains 2.2% or 369,000 jobs below its February 2020 level. Government employment was a big gainer in the month as it added 60,000 jobs to the report. I generally don't like to see Government jobs leading the charge, but the sector still remains 161,000 jobs below its February 2020 level. Areas that were soft in the report included transportation and warehousing (-6,900) and retail trade (-11,200). The participation rate remains stuck at 62.6% as it has been there now for four consecutive months. In February 2020 it was at 63.3%. While some may point to the younger generation not working, I believe most of this stems from more people retiring. In fact, the prime-age participation rate which measures those between 25 and 54 years of age rose to 83.5%, its highest in 21 years. Overall, I think this report provides more evidence we could see that soft landing.
The Job Openings and Labor Turnover Survey (JOLTs) showed job openings fell by 496,000 in the month of May to 9.8 million. While this may sound concerning, this level still produces 1.6 jobs per available worker. It is important to understand this remains above pre-pandemic levels and I believe we can have job openings continue to decline and still have a good labor market. Layoffs also remained little changed at 1.6 million, this is also still below pre-pandemic levels.
Work From Home Productivity
You may hear some arguments from people that work from home about how productive they are, but data from the BLS, known as the Bureau of Labor Statistics, states otherwise. It was discovered that people working full-time from home put in 2 1/2 hours fewer per day than the workers who go into the office. If workers were to work at the same rate as they did back in 2019, our economy would be more productive, and the labor shortage would be less problematic. It was estimated that if workers filled up offices at the 2019 rate and worked 8.2 hours per day it would add roughly 800,000,000 weeks of more work, a nice boost to productivity. Maybe after Covid people have become used to not working and have become lazy?
Wednesday Jul 05, 2023
Wednesday Jul 05, 2023
The Fed's preferred gauge for inflation, the Personal Consumption Expenditures (PCE) price index, showed inflation is continuing to cool. The headline number came in at 3.8%, which is below last month's reading of 4.3% and well below last May's reading of 6.5%. This was the lowest rate we have seen since April 2021. Food prices have remained high and climbed 5.8% compared to last year, but energy prices have fallen dramatically as they declined 13.4% over the same time period. With consumers still spending in the service economy, prices in the service sector increased 5.3% while the prices for goods were up only 1.1%. Core PCE, which excludes food and energy, may have disappointed some people as it remained at 4.6%. So far this year, Core PCE has registered a reading of either 4.6% or 4.7% in every report. I continue to believe that both these rates will head lower as we exit the year. Although the Fed has indicated two more rate increases, I believe they should continue to hold rates steady as inflation looks to be pulling back due to the actions that were previously implemented.
You may be waiting for the other shoe to drop and then bam we have a Recession; but I constantly see data that contradicts any chance of a major recession. 10 years ago, the annual manufacturing construction and outlay was roughly $50 billion. That’s a lot of money. Would you have guessed for 2023 that is going to be nearly 4 times that number at $200 billion? In 2020 foreign direct investment in the US was $150 billion and in 2023 it is more than double that amount coming in at $350 billion. Look around the country and you will see major construction on airports, highways, electric vehicles, and battery charging stations. I’m sure you could add a few to this list as well. Are we going to have a major Recession? I don’t see how.
Rate of Return
How is that a 20% return can be better than a 100% return? It is based on the concentration of the portfolio. Many times, I hear people discuss how happy they are with the winners in their portfolio but come to find out they might only make up 1% of the entire portfolio. When we buy companies at Wilsey Asset Management, we start with a 6% investment as we have spent hours researching the company and feel very comfortable with it. A 20% return with a 6% allocation would produce a 1.2% overall benefit to your portfolio versus a 100% return with a 1% allocation would produce an overall benefit of 1%. I would rather understand the investments in my portfolio than take a chance on several businesses I know very little about.
Short selling is when an investor is betting the price of a stock will drop. There’s currently about $1 trillion of short interest as those investors speculate the market will turn and head lower. The gain in the market has caused a paper loss for these short sellers of around $120 B this year. One of two things will happen. The stocks will turn around and drop and the shorts will profit, or the shorts will have to come in and cover themselves by buying the stock which will put upward pressure on stock prices. Based on valuations, I believe the short sellers will continue to be patient and wait for the drop.
Monday Jun 26, 2023
Monday Jun 26, 2023
The tech boom and bust is often referenced as an example of the dangers of high valuations in the stock market, but one that is less talked about is the Nifty-Fifty. This was a group of 50 stocks back in the early 1970s that were known as "one decision stocks" meaning you could buy and hold forever. Investors became enamored by the group and pushed valuations to extremely high levels due to the companies and their strong balance sheets, high profit margins, and double-digit growth rates. The group included names like Polaroid which traded at over 90 times earnings and Xerox which traded at close to 50 times earnings. Come the stock market decline from 1973-1974 Polaroid fell more than 90% and Xerox was down close to 70%. Today, we know these names went bankrupt and serve more as a history lesson rather than serving consumers. The Nifty-Fifty wasn't just about stocks like these though as it included companies like McDonald's and Disney. McDonald's saw a P/E of over 85 and Disney traded at a little over 81 times earnings. During the stock market fallout, McDonald's fell close to 62% and Disney was down close to 85%. Ultimately, investors need to be very careful chasing high valuation stocks as the risk to the downside can be very high.
With all the talk about AI, I’m sure it’s come across people’s minds if it will replace financial advisors. I’m happy to report at this time the answer is no and as far as I can see in the future, I don’t see it. One has to remember that the information is still not 100% accurate. I also discovered from Andy Serwer, a writer Barron’s magazine, it doesn’t include content after September 2021. That’s a problem. A little over a week ago a question was asked of ChatGPT which weighs more, a pound of feathers or 5 pounds of lead. It said they weigh the same. Remember that ChatGPT scans everything that has been written, which may not be relative and can give the wrong answer. What I do think it will accomplish is to help smart advisers, who understand investing to obtain data quicker and perhaps more precisely. But whoever is reading that data still has to understand it or else it means nothing at all. I think it was a few years ago that the Robo advisor was going to replace many advisers. We see how that went, not very well. Overall, I think AI will make us smarter and it will allow us to do our jobs quicker but not replace jobs that still need the human brain to analyze the data or the human body to perform functions like a plumber or electrician.
I just saw an unfortunate report that the percentage of high school graduates ages 16 to 24 that were enrolled in college in 2022 has fallen to 62%. That’s over a four-percentage point drop from just 2019 when it was 66.2%. It could be because our colleges and universities are slowly pricing themselves out of the market to make it worthwhile to get a college degree, or it could be younger people don’t want to wait to start earning a living or start a career. It could also be a combination of the two.
I saw bitcoin was up 10% due to excitement over ETFs being launched for Bitcoin. Blackrock filed an application earlier in the week for a spot bitcoin ETF that would track bitcoin's underlying market price. This is just silly to me.... Why would somebody buy an ETF, which I'm sure Blackrock will charge a fee for, when all the ETF is doing is following the price of bitcoin. Wouldn't it just make more sense to buy bitcoin? Unfortunately, when an asset has no true fundamentals, this is the kind of news it will trade on.
Monday Jun 19, 2023
Monday Jun 19, 2023
Monday Jun 19, 2023
Inflation continues to retreat from the high levels we saw last year. May's CPI report showed headline inflation rose 4% when compared to last year. This is a nice deceleration from last month's 4.9% gain, and it is well off last June's 9% increase. Areas that remained hot in the report included motor vehicle repair (+19.7%), motor vehicle insurance (+17.1%), and food (+6.7%). Many energy costs have seen large year over year declines and gasoline in particular is down around 20%. There are also other areas in the report that are showing declines. This includes airline fares (-13.4%), used cars and trucks (-4.2%), major appliances (-10%), and televisions (-11.5%). Core inflation, which excludes food and energy, was somewhat of a disappointment as it rose 5.3% compared to last year. While core inflation has not cooled as much as the headline number, it is important to remember that the shelter index rose 8.0% compared to last year and accounted for over 60% of the gain in core inflation. We continue to believe the shelter index will decline substantially as we exit the year and will be a major help in reducing core inflation.
More positive news on the inflation front as the Producer Price Index (PPI) for the month of May came in at a gain of 1.1% compared to last year. This compares to last month's reading of 2.3% and it is the lowest reading since December 2020. It is also well-off last May's reading of 11.1%. This continues to fuel my belief that inflation will be a much smaller problem as we exit the year. Companies no longer have the need to pass on the huge increases in prices they saw last year to the consumer.
People may continue to complain about the economy, but the consumer is still spending. Retail sales in May showed a gain of 1.6% compared to last year. There are some areas that remain negative which include furniture and home furnishing stores (-6.4%) and electronics and appliance stores (-5.0%), but the biggest negative in the report was gasoline stations which saw sales decline 20.5%. Much of this is due to the decline in gas prices. This was a big weight on the report and if it was excluded from the headline number, retail sales would have risen 4.0%. I would actually consider this a positive as consumers are able to spend in other areas of the economy rather than wasting money at the gas station. Areas that were strong in the report included non-store retailers (+6.5%), health and personal care stores (+7.8%), and food services and drinking places (+8.0%). Overall, this report shows me the consumer still feels good enough to keep spending, which I believe is positive for the economy.
Have you ever showed up to a party early and were the only one there? It can be kind of boring, but you know the party will start soon and it will get better. That is happening to many investors now, unless you’re in a few tech companies that mentioned the term AI. If you hold in your portfolio healthcare companies, financials, real estate, or energy, it’s been very disheartening year-to-date with those sectors going down. Don’t give up yet, stay at the party a little longer as there is light at the end of the tunnel. We see such things as the American Association of Individual Investors shows that bears outnumber bulls by eight percentage points. Usually, the bulls outpace the bears by 6.5 points. A survey from Bank of America of managers overseeing trillions of dollars in assets shows their cash position is now nearly 6% of a portfolio. This is up from under 4% at the end of 2021. The average peak for cash is just over 6%. I believe in the second half of this year you’ll see these managers trying to play catch up and get their money invested soon. The S&P 500 has come out of the 248-trading day bear market, which was the longest since 1948. By the end of the year, I believe we will see a nice catch-up in the sectors of the S&P 500 that have been lagging. I would not expect to see much in the technology stocks, and I would say at best they'll probably be treading water. So grab a glass of wine and be a little more patient as I believe you’ll be celebrating during the holidays of 2023 if you hold the right companies.
Monday Jun 12, 2023
Monday Jun 12, 2023
After analyzing the recent jobs report further, I noticed some good news that was somewhat buried. There’s been concerns in this job market about the labor force participation rate remaining flat at 62.6%, which is still below the February 2020 pre-pandemic level of 63.3%. What appears to be happening is that the aging US population is causing more workers to retire. The good news that I have not seen or read before is that for workers ages 25 to 54, the participation rate is now 83.4%. This is a level not seen since 2007.
The SEC is back on the front-page news as they are fighting against cryptocurrencies. On Monday, they sued the large crypto firm Binance saying that they were operating an illegal trading platform in the United States and misused customer funds. The SEC also said they engaged in manipulative trading which made the volume of trading appear larger than it really was. It was also pointed out that they are commingling billions of dollars in customer assets and that they sent them to a third-party. The SEC has named the company and also the CEO Changpeng Zhao in the lawsuit. On Tuesday, the SEC filed a lawsuit against Coinbase, which is responsible for 53% of crypto spot trading volume in the US. The SEC pointed to the company not being registered as an exchange to trade securities. When a company is required to register with the SEC it involves giving investors financial statements and risk disclosures that have been approved by the regulators. Could these two major lawsuits bring cryptocurrencies to their knees? I would believe so. Where will the activity go if the major traders are gone? I was surprised to learn that some of the biggest shareholders of Coinbase are Vanguard, Fidelity, Blackrock, Morgan Stanley, and Goldman Sachs. In April 2021, Coinbase started trading at $381 per share, today it is trading around $53 a share. I think some of the big guys got sucked into the hype of cryptocurrencies. Unfortunately, their investors will pay the price.
As individual investors and institutional investors have become somewhat shy about investing in equities, companies in the Russell 3000 show plans to buy back more than $600 billion of their shares in 2023. Buying back shares lowers the share count and this can increase the earnings per share and show a better value with a lower price to earnings ratio. In a recent report, Goldman Sachs analysts announced that over the last 25 years companies who have bought back their stock have performed better than those companies using their extra cash for capital expenditures, mergers and acquisitions. The Russell 3000 is an index of the 3000 largest corporations in the United States and it represents nearly 98% of the entire market capitalization of all US stocks.
Good news on the food front if you like eggs. The bird flu, known as avian influenza, pushed egg prices up to four dollars per dozen in January. Fortunately, there now appears to be some good signs of improvements. The bird flu killed about 59 million birds in the US since February 2022, but it appears that farmers now have it under control. Average retail prices were $2.70 per dozen at the end of April, well below the four dollars just six months ago in January. Farmers are working hard to protect the flocks from infection, which means more expenses, so we may not see much more of a decline in prices for now. But if we can continue on this path and inventories rise dramatically, we could see some more price declines over the next six months or so. Time to go have yourself a nice egg and cheese omelet.
Monday Jun 05, 2023
Monday Jun 05, 2023
Overall, I'd say the jobs report showed some good numbers. The headline number was strong with an addition of 339,000 new hires, easily topping the estimate of 190,000. The prior two months were also revised upwards by a total of 93,000. Payrolls were particularly strong in health care and social assistance (+74,600), professional and business services (+64,000), and government (+56,000). I generally don't like to see government being a major contributor to the jobs report, but it is important to note that government employment is still 0.9% or 209,000 jobs below the pre covid level in February 2020. On the negative side, the household survey showed the number of unemployed persons climbed to 440,000 and the unemployment rate increased from 3.4% to 3.7% with no change in the participation rate. While I do like to look at both reports, I will say I give more credence to the establishment survey as it is based on a sample of businesses rather than a survey of households. I do think the report does not provide evidence for the Fed to hike and June and I still believe a skip, or a pause makes the most sense.
Good news/bad news in the JOLTs report. The good news is that the labor market remains extremely strong. The number of job openings climbed from 9.7 million in March to 10.1 million in April. This means that there were 1.8 job openings for each unemployed worker in the month of April. Layoffs also fell by 264,000 in the report to 1.6 million. It's important to remember in 2019, layoffs averaged 1.8 million per month. The bad news is that this does not give the Fed evidence that the economy is slowing and may give them another data point to argue for another rate increase in June.
I was in the restaurant last week and could overhear a conversation of two gentlemen next to us and they were talking about T-bills. It seems everybody is talking about T-bills these days and the yield and what a great investment they are. I agree with that statement if you’re looking for short term returns, but if you’re putting long term money into T-bills, you are making a big mistake. No one seems to be listening to this advice though. In January 2022, only $1.6 billion of T-bills were purchased by individual investors. In April 2023, that number has climbed nearly tenfold to $13.4 billion. Again, I encourage people not to invest your long-term money in short term instruments, even when they sound attractive around 5%.
Nvidia (NVDA) has now hit the $1 Trillion market cap club. I have said I am impressed by the company and the way it's been able to pivot into different businesses, but this valuation is just crazy. If we look at combining the market caps for Broadcom, AMD, Texas Instruments, Qualcomm, and Intel they would total $964 B. Last year's total sales for all of these chip companies combined would be over $180 B. For comparison, in 2023 Nvidia is estimated to have a little over $30 B in sales. Also, if we look at their sales compared to the other companies in the $1 Trillion market cap club, they need a lot of growth to catch up. The 2023 estimated sales for those companies: Apple $384.8 B, Microsoft $211.4 B, Alphabet $299.8 B, Amazon $559.7 B. It is likely Nvidia will continue to grow sales and earnings at a nice rate over the next few years, but at these valuations the company appears to be priced for perfection.
Tuesday May 30, 2023
Tuesday May 30, 2023
Tuesday May 30, 2023
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
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.