December 21, 2024 | Investing, Pharmacy Benefit Managers (PBM), Stock Market Fall, Funding an HSA, Netflix, Inc. (NFLX), RH (RH), Broadcom Inc. (AVGO) & Occidental Petroleum Corporation (OXY)

Is investing just looking too good these days?

When everything is going up including stocks, commodities and cryptocurrencies, one has to stop and think is this the top? In November US equity trading increased by 38% compared to November 2023. The last time we saw this type volume was in 2021 when meme stocks were the major craze. The CEO of Robinhood, Vlad Tenev, stated a few weeks ago that they’re looking at expanding into sports betting. In my opinion that is not a far stretch from what they’re doing now. Over the past year, their stock has climbed 235% and it trades under the symbol HOOD. Polling by the US conference board on the bullishness of investors revealed that consumers expectations for equities compared to their own income has never been higher. Funny thing when I was drafting this post and I tried to put in bullishness, the auto spellchecks corrected it with foolishness. I would have to agree with the spellcheck on that. Lastly, I can’t help but comment on the most ridiculous thing in crypto I have seen yet. There is now a cryptocurrency and please excuse my language called Fartcoin that has a market value of over $900 million. Comparing that to something of value, that is greater than nearly 40% of all American publicly traded companies. Remember, if you are speculating, Wall Street will always have some type of crazy investment that they’ll make a lot of money off of, but yet in the end, you the speculator investor will more than likely lose big if not all your investment. It may be exciting for a while, but eventually the emotional roller coaster will wear on you.

 

Are pharmacy benefit managers, known as PBMs, costing consumers?

If you go back to the early 60s, PBMs were the heroes because they helped reduce and control spending on prescription drugs. Back then drug companies were charging high prices and the PBMs came in and negotiated contracts for large purchases of drugs so the drug companies would not have to fill an order of 20 pills. Instead, through a PBM the drug companies could fill an order of say maybe 20,000 pills and charge much less. The consumer received lower prices on drugs, the drug company made a good profit, and the PBM took a slice of the pie. The reason we receive such great prices at Costco on all items is because they buy large quantities of products and pass the savings on to the consumer. Obviously, Costco doesn’t pass all the benefit to the consumer and they keep part of the cost savings as a profit. Not to mention they also charge a subscription fee to gain access to these savings. This is the same way PBMs operate, they keep part of the discount or the spread for themselves so they can make profits. What all the hoopla is about is that the PBMs don’t show the discount or the spread that they are receiving. The FTC, also known as the Federal Trade Commission, already regulates PBMs to ensure compliance with antitrust and consumer protection laws. There’s also concern that six PBMs control roughly 90% of the market. I personally think that is OK especially when you compare it to how many options you have for your cell phone or cell phone service. There are many other services or products where you ultimately have limited options.

 

Stock market falls after disappointing Fed comments

It was widely anticipated the Federal Reserve would cut the Fed Funds Rate by a quarter of a point to a target range of 4.25%-4.5%. While the Fed followed through on those expectations and lowered the rate back to the level where it was in December 2022, it was the projection for 2025 that moved stocks lower. The Fed indicated it would probably only lower rates twice in 2025. This projection is based on the dot plot which is a matrix of individual members’ future rate expectations. Personally, I’m not a fan of the dot plot as Fed expectations have been wildly off in the last few years and the latest dot plot cuts in half the committee’s intention when the plot was last updated in September. I believe it is just too hard to predict out what inflation will be for the longer term, which then makes it difficult to get a gauge on where interest rates will be over the next few years. Given the current data I can see why the Fed wants to be patient, but the problem as we all know is data can change. If inflation does start to decelerate further next year it is absolutely possible the Fed cuts maybe four times instead of the current estimate of two cuts. The main takeaway I have from this meeting is the Fed is not on an aggressive rate cut cycle and they are going to be data dependent. Ultimately, the market did not like what Powell said and stocks fell greatly during his press conference. This led to another down day for the Dow Jones, which marked the 10^th straight losing day. This is the longest losing streak since 1974 when the Dow fell 11 days straight. I do believe with the excessive valuations there will be continued volatility in the markets, but I do see this as an overreaction to the Fed comments and we still see great upside for several companies in next years market.

 

Should you Fund a Health Savings Account?

A Health Savings Account (HSA) is an investment account that is primary used for medical expenses but also doubles as a retirement account.  Contributions to an HSA are tax deductible and can be invested.  Investment earnings in an HSA grow tax deferred and may be withdrawn tax free to cover medical expenses at any age, you do not need to wait until retirement.  You may also reimburse yourself for out-of-pocket medical expenses at any point for expenses that occurred while you had an HSA.  For example, if you paid for some medical expense in 2024 but chose not to withdraw from your HSA to cover it, you could keep those funds growing tax free and withdraw them in 2030 or any other future year.  Unlike Flexible Spending Accounts where funds must be used every year, balances in Health Savings Accounts rollover each year indefinitely, which is why they can be great retirement accounts. If you make a withdrawal that is not for medical expenses, it is taxable and comes with at 20% penalty.  At age 65 you may withdraw funds for any reason without penalty, but it is still taxable if not used for medical expenses, so you really just want to use these for medical expenses to avoid taxes and penalties.  In retirement there are typically plenty of medical expenses like Medicare premiums and elder care, so it is usually not a problem to withdraw all the funds tax free.   An HSA account must be paired with a high deductible health plan (HDHP) and in 2024 the annual maximum contribution is $4,150 for a self-only plan and $8,300 for family plans. If you are over 55 you can make an extra $1,000 catch-up contribution.  HSA accounts can be funded through payroll if your employer offers them or you can open your own account as long as you have a qualifying plan.  It is more tax advantageous to fund through payroll though because not only are contributions pre income tax, they are also pre–Social Security and Medicare tax which is an extra 7.65% savings.  Unfortunately, California does not recognize HSA accounts which means contributions are not deductible at the state level and earnings are taxable.  However, these are still extremely tax efficient and useful accounts and are not utilized enough.

 

Companies Discussed: Netflix, Inc. (NFLX), RH (RH), Broadcom Inc. (AVGO) & Occidental Petroleum Corporation (OXY)