September 23, 2023 | US Advantages, Snacking in the US, Stock Market and Premium Financed Life Insurance

US Advantages
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.

 

Stock Market
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.