Investing, GDP Report, Interest Rates, Gasoline Prices, Taxes, Inflation Relief Checks, Shipping Costs, Starbucks, Electric Vehicles & Tirzepatide for Obesity
You may be feeling that this year so far is the worst year investing in a long time. I’m here to tell you, you are correct if you are investing in the indexes and not value investing. Regarding stocks this has been the worst six months to start the year since 1970 as the S&P 500 was down 21% through the first six months. And if you thought you were safe in bonds at the beginning of the year, well that hasn't been the case. For the first six months of the year, US Treasuries were down about 11% which according to Duetsche Bank would be the worst start since 1788. And yes, you read that correctly it’s been well over 100 years. And crypto, Bitcoin just lost more than 38% of its value in June which was the worst month ever. I have often said investing is simple but not easy. I think this year people who are investing in the indexes may have a little bit better understanding of what I was talking about.
I have been of the belief that we would not see a recession until 2023, but as more data continues to be presented, I believe we may now be in a recession. The most recent data from Q1 GDP now shows the economy contracted at an annualized rate of 1.6% which was deeper than the initial reading of 1.4%. My concern for Q2 is now that the consumer has not been able to keep up with inflation and a strengthening dollar will not bode well for our trade imbalance. The consumer is primarily what carries the economy as consumption makes up close to 70% of GDP. If we look at retail sales in April, they grew at an annual rate of 8.2%, but CPI came in at 8.3% for the month. In May retail sales grew at an annual rate of 8.1%, but inflation was 8.6%. I believe for June we will also see a similar picture. It is important to understand that GDP looks at real growth which factors in inflation. I believe that the inflation numbers may be too high for the consumer to provide real growth. I continue to hold the belief that this will not be a deep recession by any means, and this is not the time to sell strong companies that are trading at good valuations. The advance estimate for Q2 GDP is set to be released on July 28th.
What is giving the markets so much indigestion over the last few days? Comments from Federal Reserve chairman Jerome Powell. He said he was more concerned about the risk of failing to stamp out high inflation than the possibility of raising interest rates too high and pushing the economy into a recession. Once again, I hate to say it, but he was late to the party to start raising rates and now I think he will stay at the party too long and raise rates too high. I’m in hopes that he will change his tune as he sees negative results going forward. I believe this will put investors on a bumpy road for the next couple of months.
No surprise that the rising cost of gasoline is reducing the volume of gasoline sales. For the first full week of June gasoline sales declined 8.2% compared to the same week last year. This marked the 14th week in a row where sales have lagged compared to 2021 levels. With demand falling that could help ease prices going forward if we see a rise in inventories. Now all we must do is make sure that the federal and state governments do not temporally takeoff the gas tax which would artificially increase demand. Let market forces work through the problem.
Individual taxpayers paid $2.6 trillion in taxes for the last fiscal year. This was a record of 10.6% of the economy which surpassed the 9.1% in the previous year. Where is all that money going?
Inflation Relief Checks
California will be issuing "inflation relief" checks that can total up to $1,050/family. Single taxpayers who earn less than $75,000 a year and couples who file jointly and make less than $150,000 a year will receive $350 per taxpayer. Taxpayers with dependents will receive an extra $350. There are a couple of reductions at various income levels and for couples that make over $500,000 and single taxpayers that make over $250,000 you will not receive a relief check. I have a couple of problems with this. Number 1, this does nothing to curb inflation and in fact could put even more pressure on prices as increased demand would only pressure the supply problems further. Have we not learned anything from all the stimulus the last couple of years? Number 2, the payments will not be issued until late October. Doesn't that seem like a strange time with elections coming up in November?
Part of inflation comes from shipping costs. We still receive a large amount of goods from China and the good news is since the beginning of the year the price of a container shipped from China to the United States has declined 34%. This could help in easing prices a little bit going forward.
I have been known to go to Starbucks once or twice a month but even with the 35% drop in the stock price this year I won’t be buying the stock anytime soon. It has gotten bad enough that once again Schultz who founded Starbucks is coming back once again for the third time to turn the company around. The company is facing rising prices on commodities of 30% and additional $200 million expenses from wages, training, and technology. The analysts are singing the old song about it was trading at 27 times earnings per share but now at 22 times it’s on sale. I don’t believe a business goes on sale until it trades around 12 times earnings. What that means is I would not become interested in Starbucks stock until it fell into the 40s which would be another 30-40% decline. I’ve also pointed out before my fear of labor unions coming into Starbucks and destroying the great service that they have.
If you’re thinking about buying an electric vehicle to save on gas you may want to think again. In May electric vehicles were up 22% from a year earlier compared to an internal combustion vehicle which was up 14% and are $10,000 less expensive than an EV. That would buy a lot of gas even at current prices. People complain about all the money that oil companies are making but prices for lithium, nickel and cobalt used to make batteries are up almost 100% since the COVID-19 pandemic began. If you’re thinking about buying a Tesla to pick up that’s $7,500 federal tax credit, forget it, Tesla reached their sales cap of 200,000 and their vehicles no longer qualify. If you want an inexpensive option, look at the Chevy Bolt. GM cut the price $6000 to $27,000 after the largest safety recall. Now that the car is fixed and is a better car than before, it is on sale. Unfortunately, you can also forget about the federal tax credit here as well since General Motors also reached the 200,000 vehicles. But I still think one would be hard-pressed to find a better value for a car on the EV side than the $27,000 Chevy Bolt.
Tirzepatide for Obesity
I work out pretty regular, 4-5 days a week between 1 to 2 hours a day. Is it possible that there may be a quicker and easier way coming from drug company Eli Lilly trading under the stock symbol LLY which is very close to getting to market their obesity drug. The company presented proof at a diabetes conference in New Orleans that patients on the highest dosage drop 22% of their weight on average. The drug called Tirzepatide, did not reveal the timeframe of this weight loss but did reveal that side effects include nausea, diarrhea and also vomiting. The drug could be on the market within the next 12 to 24 months. With 42% of Americans now in the obese category sales of this drug are expected to be in the billions and the price tag on the drug appears to be about $20 per day. Even if this drug does help one lose weight exercise would still be needed to maintain muscle tone and cardiovascular fitness. Maybe down the road there will eventually be a pill one can take to replace the old fashion workout.
Harrison Johnson, CFP®: "Is now a good time for a Roth Conversion?"