Monday Oct 17, 2022
Monday Oct 17, 2022
Inflation numbers were released today rising 8.2% over the past year. Initially the markets were down about 2% but by the end of the day markets rallied up over 2%. Perhaps inflation is not as bad going forward as we think. One reason for that is the lapping of year over year. September 2021 inflation began increasing rising 5.4%, October 2021 at 6.2%, November 2021 up 6.8% and December 2021 inflation increased by 7%. What I believe is happening and why I think we will see inflation slow down its supply chains have improved, consumers have pulled back on some of their spending (reducing demand) and as we lap higher inflation numbers from the previous year the percent growth will not be as high.
Tomorrow morning Friday the 14th the big banks release their third-quarter earnings. Very important to hear what they say if there is not unexpected bad news in the reports I believe it would be seen as a positive and we could have another rally.
Earnings will be coming out over the next few weeks and the strong dollar which is up about 17% against the weighted index could play havoc on some companies with big earnings coming from overseas.
I was surprised to see that QUALCOMM gets 96% of its revenue from outside the US. Other companies that you need to watch out for would be caterpillar with 62% of revenue from outside the US and even meta-platforms and Netflix both receive 59% of the revenue from outside the US. Another surprise to me was Citigroup with 52% of revenue from outside the US.
With the decline in the crypto market, investors are becoming less comfortable with the space. According to a recent Bankrate survey, in 2021, nearly 35% of Americans said they had some level of comfort investing in digital currencies, compared to about 21% in 2022. Millennials saw an even larger fall with 49% in 2021 saying they had some comfort level investing in digital currencies and that fell to almost 29% in 2022. My guess of why this is the case is digital currencies have yet to show a meaningful use. It has not proven to be a viable currency for transactions, it has not proven to be an inflation hedge, nor has it proven to be a hedge against declining stock prices. I still don't see the allure of investing in this space.
The problems are starting already with the forced demand of electric vehicles. Lithium which is used to make the batteries have tripled in price this year and there’s no end in sight for supply meeting demand. Lithium is not used just for electric vehicles but also for grid energy storage. You may be thinking no problem just produce more lithium which is nice and theory but not reality. To bring new production online studies must be done, permitting, capital must be raised before any lithium is produced which can take 3 to 5 years.
It’s always a disaster when the government forces demand on any type of product, what it does is increase prices that the consumer ends up paying for.
The leaders of United States continue to put the country in peril trying to force green energy too quickly. We are now going to deal with the nasty regime of Venezuela to pump oil to help our situation. For this use of oil the best we got is that their dictator said he will open talks if the US eases sanctions. To me that’s the same as giving a kid who did something wrong a gold star and tell them not to do it again.
Since talks with OPEC did not go well the leaders of our country have decided to retaliate against OPEC and Saudi Arabia. They are now threatening legislation that would charge OPEC members and subject them to US antitrust law. Have our leaders forgotten the 70s how the oil embargo crushed our country on the energy. It’s like we are trying to play chicken with them and that’s a game we will lose. I wish people would write their Democratic congressman and everyone else to please get on the side of the oil companies and start pumping as much oil as we can.
And please vote in November not for who’s personality you like but who you think you do the best when it comes to running our country
People are concerned about the rising debt of the federal government, as they should be. We are also concerned about rising inflation but you may not realize that rising inflation is a positive for the debt situation of the government. The reason is that it makes the debt more manageable because it will be repaid in less valuable nominal dollars. The debt also declines in real value because with inflation of 10% cumulative $30 trillion is now $33 trillion and the debt remains at $30 trillion.
People on the green side want to completely eliminate oil and fossil fuels. We have spoke many times about how oil is also used for many things like plastics, IV bags and clothing that use synthetics along with thousands of other items. One can’t just use the refined oil for asphalt which makes up 94% of all US road miles that are paved. Asphalt is made from a byproduct that is left over after the process of making fuel.
I don’t think people who want to illuminate fossil fuels have thought this process through.
If you’ve been holding onto Nike since November 1 of 2021 you have seen the price fall from $177 a share to current price of around $88 a share, roughly a 50% decline. Unfortunately another number does not bode well for the stock and that is the inventory numbers for Nike which have climbed 65% from a year ago. You may want to sell the stock and buy those Michael Jordans you’ve been wanting to get.
Things in the third quarter 2020 was 5% that has now decline to 3.2%. Currently Businesses are paying more per square foot in warehouses, last year in the third quarter it was $7.13 a square foot, the average has now climbed to $8.70 a square foot. What does that mean to you as a consumer? Retailers want to get rid of these items costing them money just sitting in the warehouse. Consumers could see some great sales coming up in the future, keep your eyes open.
The used car market could be improving soon with vehicle inventories increasing to 33 days worth of supply in September. That was four points higher than August, one year ago inventories were only lasting 20 days. What is surprising to me is that car payments over $1000 hit a record 14% of sales nearly double 8% of sales one year ago. If you’re car shopping you may want to be patient, used vehicle prices came down 3% in September from August. There could be more to come, you may want to keep that old clunker running a little bit longer before spending more on a new ride.
I recently posted that lumber prices have fallen nearly 60% this year which will help ease inflation. Also dropping dramatically is PVC which is a plastic that makes pipes and other uses as well. It is down nearly 50% quarter over quarter. This could affect Warren Buffett‘s 20%purchase of occidental petroleum stock which is one of the three largest suppliers of PVC. I know Mr. Buffett purchases for the long term but it may take some time for the company to make up that lost revenue.
I was reading last night and the meme stocks popped into my head. I remember when this hype was going on people were saying fundamental analysis is over. Well once again the strong will prevail, let’s take AMC entertainment for instance, back in 2021 the stock traded as high as $56 a share. Where does it stand today? right around six dollars a share roughly 90% below the $56 peak. I feel kind of bad for people who were playing the special speculative game with the meme stocks. But on the other hand there was plenty of information out there telling the meme investors this was not going to last. Hopefully many have learned a valuable lesson about investing.
Monday Oct 03, 2022
Monday Oct 03, 2022
The global economy is dropping dramatically, but the US is the bright spot. I always tell people we do not depend on the world to buy our products we buy products from the world. Some bright news that might help you hold on during these difficult times is according to the Wall Street Journal, some US manufacturers are bringing production from overseas back to the US and are boosting investment. It should also be noted that contracting US business activity was better in September than in August. The US composite purchasing managers index, which includes both manufacturing and the service sector, climbed to 49.3 in September, a nice improvement from the August showing of 44.6. We are not out of the woods yet but do not sell your quality equities that are well priced and have a good business. And don’t forget to look down the road a year or two and not a week or two!
I love going to Costco as do many other people. You get some great deals in the warehouse but one deal that is lacking is the stock price. The stock is down roughly 20% from the $600 high but with the price/earnings ratio still over 37 that is no deal. They do have a great business model and there is a potential membership price hike perhaps next year. Even with that, 48% of Costco members in a recent survey say they’re willing to pay more for their memberships. Costco depends on increasing volume as the profit margin always hovers around 3.6%. If volume falls off the stock price could tumble as well.
Trying to time the market has always proven to be a dangerous game as it is heavily reliant upon one's emotions. In the long term you have a better chance of winning the lottery. Many people don't realize how quickly stock prices can move and by the time stocks have risen they are left asking the question of whether they should get back in or will they fall again. Looking back over the last 40 years the best 10 days (out of more than 10,000) accounted for almost two-thirds of the stock market return & in the last 20 years, the best 10 days accounted for 75%. Through the beginning of this year the market returned 284% over the last 20 years, but had you missed those 10 best days the total return was just 76%. The funny thing is the massive up days all came in the most difficult years of 2008, 2009, and 2020. The single day returns ranged from 6.3% - 11.6%. Nobody knows what is going to happen in the short term as there are too many variables to try and predict. That is why owning great businesses at great prices has proven to be a successful long term approach to investing.
US median household income was $71,000 for the year 2021 which was pretty much unchanged from 2020. That was quite a surprise, I believe we will see a jump in 2022 when those numbers are released about a year from now.
Luxury home sales have hit a brick wall dropping 28.1% across the US for the three months ending August 31st. No surprise California was hit the hardest with sales falling 64% in Oakland, and San Jose as well as our hometown San Diego saw decreases of more than 55%. So far prices have not dropped significantly, but as sales continue to drop, I believe people will reduce the sales price of their homes not wanting to see the big gains vanish and they will start cutting their prices to keep some of the profits. Those who wait too long could be very disappointed I believe we will see a far different luxury market in the spring of 2023.
Apple has dropped plans to increase production of the iPhone 14 saying demand is not as strong as anticipated. The stock fell while the market was up and could be a big problem if sales and earnings are worse than expected.
After the strategic petroleum reserve reached lows not seen since the 80s the government is considering the idea of getting into energy trading. Their idea is to buy oil when it is under $60/barrel and when it goes above $90/barrel to sell and use profits to fund electric vehicle infrastructure. I can’t wait to see how well the government does trading commodities such as oil.
I have often wondered if EVs are so great why are there so many subsidies to get people to buy them? The International Energy Agency says that by 2050 if projections go as planned annual global lithium production will be 28 times what it is today. In the past we have talked about the problems with how the batteries are made and the use of cobalt which comes from Congo using child labor. But with that type of high demand on lithium batteries, prices will multiply. In just one year they have increased by 300%, can you imagine the cost 24 years from now with a 28 times increase in demand? There’s also a new report from the US energy department laboratory that electric cars total lifetime cost will be 9% higher than a gasoline car. I believe there’s a lot of hype in electric vehicles and in the distant future we will question what we did and question electric vehicles.
As we anticipated September has been a difficult month, but we still remain extremely optimistic about our businesses with many now trading around 6-8x earnings. Remember the long-term historical average is 16.6. Much of the selloff has been driven by fears over the Fed hiking interest rates. I want to take you back to 2018 when Fed fears led to a stock market selloff in the month of December of close to 16% in that month alone. The Fed was raising rates and it was feared they were going to increase rates two more times in 2019. This ended up being an overreaction and the Fed ultimately ended up cutting rates in 2019. This led to a rapid increase in stock prices with the market climbing more than 19% from its low on December 26th, 2018, through February 22nd, 2019. For the full year in 2019, the market climbed 29%
Monday Sep 26, 2022
Monday Sep 26, 2022
Monday Sep 19, 2022
Monday Sep 19, 2022
The market is not liking the CPI report today as the inflation rate of 8.3% topped the expectation of 8.0%. It was down from July's 8.5% rate, but it remains stubbornly high and likely cements a Fed Funds Rate increase of 0.75% at next week's meeting. Energy was down 5.0% in the month and gasoline was down 10.6% in the month, but year over year energy is still up 23.8% and gasoline is 25.6% higher. Food remains one of the major concerns as prices increased 11.4% year over year. Shelter, which occupies close to 1/3 of the CPI, also remains high with the year-over-year gain at 6.2%. With the huge surge in housing prices over the last couple years I continue to believe this category has more room to run over the coming months. I also worry that while energy prices have come down month over month, companies have not been able to effectively offset these costs and more price increases could be on the way. This remains especially true in the transportation services component, which saw a year-over-year gain of 11.3%. Inflation remains a major problem in the economy, but I still believe we can exit 2022 with an inflation rate of around 6% barring a major supply chain disruption or a major spike in energy prices.
We keep saying we need to pump more oil here in the US and some people are saying the Biden administration is doing everything it can. In the first 19 months the administration will have leased federal acreage for oil drilling of 130,000. At first glance that may sound like a lot, but it is the lowest amount of acreage leased since President Kennedy in the early 1960s. Do you want to guess what our energy consumption is now compared to 60 years ago?
With a difficult market in 2022 initial public offerings also known as IPO‘s have really been rather scarce. It has now been over 115 days since the last traditional IPO of more than $25 million. The last time that happened was in 2008. I don’t believe much will be changing for the rest of 2022. At this point in time, we’re taking a wait-and-see attitude for 2023 and will be having a clearer view of what to expect from markets probably by mid-November.
When the country El Salvador made bitcoin its legal currency bitcoin advocates promoted this is the beginning of worldwide acceptance. You haven’t heard much about how bitcoin has done in El Salvador because it has been a disaster at best. The poor country which has $800 million in government bonds coming due in 2023 and 2025 is current looking like they will not be able to make that payment. Yet they’re authoritarian rule leader Bukele has spent $250 million on digital infrastructure including setting up 200 bitcoin ATMs which apparently have high fees and can take up to six hours for a transfer from dollars to bitcoin. The country set up digital wallets for its citizens with a $30 bitcoin bonus. After the citizens used the $30, 80 percent never used it again. 92% of the small and medium size businesses say it has been immaterial for them and prefer cash or credit cards. The IMF, the world bank and international bond markets still oppose bitcoin and no other country has followed El Salvador in making bitcoin their currency after a year in existence. The citizens of the country still prefer to use what they have use this 2001, the US dollar.
Amazon is really pushing forward in the entertainment industry spending $15 billion this year on that division. They face heavy competition from companies like Netflix, Disney, Paramount, and Warner Bros. discovery. The consumer could win here with all the competition prices should remain stable and not increase for a while
One potential event that could be absolutely disastrous for inflation and our economy would be a U.S. rail strike. Currently, 10 of the 12 railroad worker unions have struck deals with companies like Union Pacific, Norfolk Southern, and CSX, but the remaining two unions, Brotherhood of Locomotive Engineers and Trainmen and the International Association of Sheet Metal Air, Rail, and Transportation Workers continue to holdout due to disagreements over attendance policies. While a large majority of the unions have settled, these two unions represent over 90,000 rail employees or about half of railroad union workers. It's estimated that a shutdown of this magnitude could cost the US economy $2 B/day. It would also create a new supply chain crisis that would send shockwaves across many retailers, transportation companies like UPS and FedEx, and have a negative impact on food prices. I'm optimistic we'll see a deal by late Friday, but if not congress can step in to block the strike.
It doesn’t seem that long ago we were complaining about US jobs going overseas. Well, that trend seems to be reversing with an expectation of 350,000 jobs returning to the US this year. That is the largest increase since 2010.
Producer Price Index
As an update to our CPI post yesterday, the Producer Price Index (PPI) was released today and saw an increase of 8.7% compared to last August. This is the lowest increase we have seen since August of last year and it is well off the highs we saw of 11+%, but at this rate I believe companies will still need to pass on these higher prices which will continue to cause elevated rates in the CPI.
Banks get audited every year to verify that all the numbers are correct, and your money is safe. How would you feel if you found out that your bank has not gone through an audit in five years but was saying they will try to get one done in a few months? Well, that is what crypto firm Tether Holdings is saying. They are the firm that is promising each token can be redeemed for one dollar. They have been promising to do an audit since 2017 and now the chief technology officer of Tether Holdings Limited is saying it is just months away. I don’t know about you but when a company is avoiding audits for this long, I believe they have a lot to hide. Could this be the other shoe to drop on cryptocurrencies with no bottom in sight. I still wonder why anyone would hold onto any type of cryptocurrency with a hope that it will rebound in the future.
There are some big changes in the crypto world with Ethereum. It has changed from what is known as proof of work to proof of stake. The big benefit is it's change will improve energy efficiency by more than 99%, which has been one of the big concerns on cryptocurrency production. The risk with what is being called “The Merge” is there could be glitches, outages or even lost tokens as the current Ethereum blockchain merges with the new one called Beacon. It appears it went smoothly last night, but it's important to follow the next few days as well as the merge settles. There are also other losers such as mining companies who have spent hundreds of millions of dollars on hardware. And even the large chip maker Nvidia, who produces chips for miners, cannot predict how this will hurt their demand. Year to date the stock is down over 50% perhaps the writing was on the wall.
China exports to the US in August fell by 3.8% year over year. This is good and bad. It’s nice to see the decline in imports from China; however, that may be putting a squeeze on some products that we use and that could push up inflation on those products.
Office vacancy in the city was 17% in the second quarter compared with office vacancy in the suburbs at 16.8%. It's the first time that has flipped since 2002. More people are now going back to the office; however, it appears they prefer not to go into the city but to the suburban offices instead.
Thursday Sep 15, 2022
Thursday Sep 15, 2022
We knew the day was coming when streaming would have bigger viewership than cable TV. It officially happened this past July. Streaming services accounted for 34.8% of total US TV viewing compared with cable at 34.4%. The 34.8% streaming services viewing climbed dramatically from 23% one year earlier. We may see similar numbers in August but in September we may see a switch back to cable as major networks launch new seasons and new shows. Streaming businesses are still losing hundreds of millions of dollars as witnessed in the latest quarter. Part of this is because of the cost to create new content and it is so easy to switch from one streaming company after a specific show/series is over to another streaming company. Remember how difficult switching cable companies was? You had to have a cable guy come out for an appointment that was set a week ago and then wait half a day at home for them to show up to switch your service. Now you can switch your streaming service just sitting on your couch in the comfort of your living room. I think the winner long term in the streaming services will be those that have the most titles in their libraries, along with the best studios to produce new content in.
The news from President Biden around student loan debt is quite frankly idiotic and dangerous in my opinion. To begin with we are delaying payments on student loan debt again to the end of December 31st, because people have not had enough time to prepare? What about the last 2+ years of not making payments? Also, the $10,000 worth of forgiveness is estimated to cost another $300 B. In an inflationary environment the type of loose spending we have been seeing does nothing to help reduce the inflation burden for the average consumer and in fact likely fuels inflation higher. It is also just unfair to the people that have diligently paid off their debt, opted to join the military to receive the GI bill, or just avoided college due to the high cost. The biggest problem here is this does absolutely nothing to solve the root cause of the problem and in fact may just fuel the cost of college higher. Students borrowing money today will continue to rack up debt and will likely want another handout in just a few years. I don't see how this does our economy and our country any good.
I have been thinking both the stock and bond markets were taking the Federal Reserve and its interest rate policy too lightly. Powell has now made his intentions clear, making some strong comments like, "While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.” Unfortunately, I don't believe the battle with inflation is over and I believe interest rates will continue to rise.
Inflation / Interest Rates Rising
The Fed's preferred measure for inflation, the personal consumption expenditures price index (PCE), showed inflation easing somewhat as in the month of July the index climbed 6.3% year over year vs the 6.8% gain in the month of June. While inflation is easing, it is still well above the 2.0% level the Fed targets, which is why I believe they will continue to move forward with quantitative tightening and interest rate hikes. I'm still optimistic we will see inflation ease as we exit the year, but there is still a way to go before inflation is no longer a concern.
Bed Bath & Beyond
I hate to say it, but I really don't feel bad for these meme investors that are getting hammered the past few days. Traders in Bed Bath and Beyond (BBBY) saw shares fall more than 40% on Friday and they are down more than 60% if you bought last Wednesday morning. The reason for the crash is Ryan Cohen exited his position in the company and he was a major reason for the excitement from the Reddit crowd. He definitely capitalized off the small investor who will yet again be stuck holding the bag for these silly investments. When will they learn?
Subscriptions / Cell Phones
Wireless subscriptions are still growing at a rate of 3.9% year over year. One area that has grown dramatically is for children between the ages of 8 and 12-years-old. Back in 2015, 24% of that age group had their own cell phone. Today nearly half or 43% of kids in that age range have their own cell phone. I have no idea why an eight or nine year old needs a cell phone other than to talk to mom or dad.
Not everyone thinks that electric vehicles will be flooding our streets in the near future. Jack Hollis who is executive vice president of sales at Toyota Motor North America believes a high sticker price and a poor public charging infrastructure will likely keep customers from widely embracing battery powered vehicles. He also has concerns on the rising cost of raw materials such as lithium, cobalt and other crucial battery inputs which will be pushing electric vehicle car prices even higher. In the near-term Toyota will continue to focus on hybrids and plug-in hybrids believing they will appeal more to a mass market. The hybrids are also more affordable and another concern keeping people from going to full electric vehicles is range anxiety of being stuck on the road with a dead battery. However, 8 to 12 years down the road it appears to be a different story.
On Thursday morning Tesla investors will wake up to have three shares for every one share of Tesla stock they had on Wednesday. Going back to August 2020, for every one share you had of Tesla you will now have 15 on Thursday. That sounds like a big win, but valuations still matter in the long run. If Tesla stock drops by 30% that would be a decline of $90. That doesn’t sound like that much, but if you go back prior to August 2020 the equivalent share price would be about $4500, and the dollar drop would be $1350. Tesla still has a price/earnings ratio of around 109 which means based on current earnings it would take you 109 years to get back what you paid for the stock. Don’t be fooled by financial shenanigans as companies play with stock splits. With rising interest rates, a slowing economy, higher expenses on EV parts and competition coming from all of the car makers, the stock still remains way overpriced. The number of shares you have when it comes to splits does not matter, it is the value of each share based on the company's fundamentals.
The demand side of the equation in the housing market continues to show signs of weakness as pending home sales were 19.9% lower in the month of July compared to last year. We have discussed how the lack of supply has kept prices elevated, but pricing is starting to show some cracks as people simply can't afford these high home prices with higher mortgage rates. According to the National Association of Realtors, higher rates have pushed the typical mortgage payment up by 54% from a year ago. This has pushed housing affordability to its lowest level in 30 years. Assuming a 20% down payment, it currently requires 32.7% of the median household income to purchase the average home. This compares to about 20% of a household's median income before the pandemic. The 25-year average is 23.5%. The affordability appears to be starting to impact prices as in the month of July prices declined 0.77% compared to June. This was the first monthly decline in approximately 3 years and was the largest monthly drop since January 2011. Year over year price growth remained strong as prices were up 14.3% compared to July 2021. I believe we will continue to see double digit year over year gains as we conclude 2022, but as we lap these higher prices in 2023, I believe it is likely we will start to see year over year declines.
Harrison - "How interest rates affect pensions."
Monday Sep 12, 2022
Monday Sep 12, 2022
There are a few fund managers that I follow and respect their opinions. One of them is Dan Niles who is a Stanford University graduate in electrical engineering. He has focused on tech stocks for over 30 years, and I always enjoy his commentaries and analysis. I have continued to warn that I still believe Apple stock is too pricey. Dan runs a hedge fund so unlike my portfolio he can short stocks and take a bet on the downside. In a Barron’s article recently, Dan stated he owns Apple stock but after the iPhone 14 launches on September 7 he not only plans to sell the stock but short it as well. That is quite the commitment. If you hold Apple in your portfolio, you definitely need to reconsider your position.
Shipment of smart phones around the world in the second quarter experienced a decline of 9% to 286 million units. If this continues in the third quarter, it could put downward pressure on the stocks of Apple and Samsung.
Good news on the inflation front. Retailers like Walmart, Nordstrom and Macy's are saying their inventories are building and they need to clean out their inventory to make room for holiday items. What that means is they’ll be cutting prices dramatically which will help ease inflation in certain areas and overall. We are no longer hearing about supply chain issues which means there is plenty of product and demand has eased so prices should decline. This will take a couple of months to pass through to the numbers, but they should start seeing good numbers just in time for the holiday season which will hopefully make consumers feel more positive and deliver a good holiday shopping season. The one wild card is still the price of oil and gas.
One of the big culprits that helped cause inflation was the huge increase in shipping costs. Remember all the disruptions and port backlogs? Last September it cost around $20,000 to ship a 40-foot container from China to the US. That cost has now been cut by nearly 3/4 with the cost for shipping the same 40-foot container from China to the US dropping to $5400. It is also projected new ships coming into service for the next two years will increase growth and capacity by 9% in 2023 and 2024. This will be another factor that will help keep shipping costs under control and in the end, retailers will be paying less in shipping costs so they can reduce their prices, which will help ease inflation.
Middle East Oil
You may complain about US oil companies and their huge profits, but at Saudi Arabia’s Saudi Aramco they saw a 90% increase in quarterly profits to $48.4 billion. Compared to Exxon Mobil's quarterly profit it is nearly 3 times as much. Such a shame we are sending all that money to the Middle East as opposed to producing more oil here.
We may be complaining about the increases in our CPI and PPI, which is the producer price index. However, Germany would love to have a producer price index at 10%. In July Germany’s PPI hit a record increase of 37.2%. That is a staggering number!
It is now September and before you know it, we will be singing Christmas carols and hanging Christmas decorations, quickly followed by the beginning of 2023. I have been wondering could our current Fed Chairman, Jerome Powell changes his tune next year and increase the inflation target from 2% to 4%? Here are a couple reasons why I think that could happen. First, over the last 50 years inflation has averaged 3.8%, perhaps he will realize the 2% target is too low. We have also seen him change his mind in the past, who could forget how long he stood behind the idea not too long ago that inflation was transitory. Just put this in the back of your mind and let’s see how things develop over the next six months.
MongoDB (MDB) is a cloud-based database software provider and last week they said they have seen demand from customers falling as their own business is beginning to slow. Who would be their customers? AWS which are owned by Amazon, Azure which is owned by Microsoft and Google cloud which is owned by Alphabet. It could mean when they report the third-quarter earnings in October we could see larger declines in their stocks. These companies still have a large weighting in the indexes which means they could pull the indexes down as well.
FAST Recovery ACT
Unfortunately, Governor Newsom did sign the FAST Recovery Act which will create a 10-person council to set fast food workers minimum wage as high as $22 an hour. There is a push from restaurant owners and business groups to get this on the ballot to have voters decide if this is right. Thanks to Governor Newsom this will be a waste of time and money for many people over such a silly thing to do to our economy.
Tuesday Sep 06, 2022
Tuesday Sep 06, 2022
Unemployment / Job Openings
The jobs report today showed the labor market strength is slowing, but overall, it still remains in a very healthy spot. The headline number saw payrolls increase 315,000, which was essentially in line with the estimate of 318,000. While this was the slowest growth since April 2021, it is still a good growth rate and people need to realize the blockbuster job gains we saw from job recoupment are now in the past. One negative note for job growth was the previous two months were revised lower by a net 107,000 jobs. The headline unemployment rate rose 0.2% to 3.7%, but I view this as positive as it was driven by an increase in the labor participation rate of 0.3% to 62.4%. The labor force participation rate still remains 1.0% below the February 2020 level. The gains in employment were broad based with every category seeing growth, but business and professional services continued to lead the way with an addition of 68,000 jobs and healthcare and retail trade were close behind with additions of 48,200 jobs and 44,000 jobs respectively. Leisure and hospitality has seen some of the strongest growth but saw an increase of just 31,000 jobs in the month of August, which was substantially lower than the 91,000 job increase in the month of July. This sector continues to remain beaten down compared to pre-pandemic levels as the total number of payrolls is still 1.2 million jobs below where we were in February 2020. One area of the report I found interesting was the number of people that were counted as long-term unemployed (those jobless for 27 weeks or more). It currently stands at 1.1 million and accounts for 18.8% of all unemployed persons. I hate to say it, but with job openings nearly 2x higher than the total number of unemployed persons how have they not been able to find a job?
The JOLTs report continues to show strength as job openings in the month of July saw results of 11.24 million openings, easily top the estimate of 10.3 million. This was a slight increase from the month of June which saw openings total 11.04 million. The job openings level is still close to 2x the number of available workers as they totaled just 5.67 million in the month of July. While this report is a major positive for the labor market, it remains concerning on the inflation front. The discrepancy between openings and available workers adds pressure to wage inflation as companies compete over employees and it makes me wonder if we have enough people in the labor force to help resolve the supply chain issues we have been seeing in the economy.
We have seen speculation in cryptocurrencies falter along with the meme stocks. I’ve always said Wall Street is great with coming out with products that they can make money on investors who speculate on trying to get rich quick. You now will begin seeing what is known as single stock ETFs which use various high-risk techniques along with options and futures and in some cases leverage. Three very risky tools. This will allow investors to speculate more on short term moves up and down of popular stocks like Tesla, Apple, Nike and in the works, you may even find companies like Boeing and Salesforce. They promote the benefit that you can’t lose more than what you invested, and you don’t need to sign margin agreements or any other pesty paperwork. And of course, Wall Street will make their money off of fees that seem to range from 0.95% to 1.15%. Once again people with little knowledge of how these work and with the excitement and enthusiasm that they will get rich will jump into these new ETFs which they hope will fill their dreams of getting rich quick. I can see down the road I would guess 3 to 5 years people who lost their money complaining it was unfair and someone needs to reimburse them. It was not their fault they did not read the paperwork or understand what they invested in. Would someone please tell these people to stop speculating and invest in good quality companies for 3 to 5 years and be happy with a potential annual average return of 8 to 10%. Once again investors are being warned of another great moneymaker for Wall Street and a big loser for them.
Buckle your seatbelt as September is historically the worst month of the year for stocks. Going back to 1928 both the S&P 500 index and the Dow Jones industrials have an average loss of around 1% in the month of September. Keep in mind an average does mean there have been up months in the past. For September I see 3 things that can weigh on the market. First off would be another interest-rate increase of 3/4 of a percent, second would be oil rising back to $100 a barrel and lastly more bad news coming out of the war in Ukraine. This does not mean you sell your stocks and go to cash. It means be prepared for some pullbacks and be aware that September is the worst month of the year.
On August 31 we will get an update on where the strategic petroleum reserves now stand after taking 1 million barrels a day from the reserves. The most recent data shows there were 453.1 million barrels in the reserves, down from 621.3 million barrels one year ago. What worries me here are two things. First this was meant as a temporary fix with the hopes of increasing production, which does not appear to have happened. In addition to that there is talk that the Middle East may reduce their production. My second concern is in 30 days or so when this program is over it appears the levels in the SPR will be somewhere around 390 million barrels, not a good comfort feeling. In addition to not replacing the production of oil, what will the government be doing to replace the oil they took from the strategic reserves. I’m also assuming the oil they used to meet the shortfall was lower priced oil than what they will be buying it back at especially since they're buying will increase the demand for oil. I believe in a long-term program to a good clean energy policy, but in the short term they really need to focus on a fix for how to produce more oil and gas. I hope they had a plan for this when they began the 1 million barrel a day reduction in the SPR.
I have said I do believe the recession will not be as dramatic because people not only have a job but feel comfortable that their job is secure, or they could obtain another job if they wanted to at equal or greater pay. It has been estimated that the US labor market is still down about 7 million workers from the pre-pandemic days. It also has been estimated that those who took early retirements reduced the labor supply by 2% and those gig jobs that people picked up has been estimated to have reduced the labor force by another 4%. It is also estimated that roughly 3% on a floating monthly basis of US workers are infected with Covid -19 which still requires mandatory days to stay at home. To help with the supply of labor it is possible some of those who retired will become concerned about inflation and the recession and return to the workforce.
The S&P 500 has had a nice rebound since June 16 rising around 11%, but still remains down 15% for the year. Traders now seem to be getting nervous. Net short positions against the S&P 500 futures are reaching levels that have not been seen in two years. This could cause a lot more volatility in September, which is the worst month of the year in regard to performance. Check your investments and your equities to make sure they can handle the storm.
We just saw a great JOLTS Report, which stands for Job Openings and Labor Turnover Survey. I now see Honda and LG are going to build a $4.4 billion EV battery plant starting early next year in Ohio. Tesla announced recently they are building a $4 billion EV battery plant in Oklahoma and not to long ago, Intel announced spending $20 billion in two different cities to build chip manufacturing plants. What I’m thinking is jobs, jobs and more jobs. First off construction of these multi-billion-dollar production plants will take 2 to 3 years to complete. Then the workers to work on these plants will also be making good wages as well. This will also generate the ripple effect of more jobs as the money flows into these communities. I feel pretty good about the long-term job market here in United States.
FAST ACT Bill
The California legislature passed a bill known as the FAST act for fast food chains that establishes a fast-food council charged with setting pay and workplace standards for the entire industry. The bill would allow the council to set pay for workers up to $22 per hour next year. This is backed strongly by the unions of course who never seem to understand the fundamentals of running a business or making a profit. Governor Newsom has about 30 days to decide to approve or veto the bill, restaurant owners are pushing hard to obtain a veto. I believe if this passes you will see closures of some fast-food restaurants or food prices at the franchises climb by 20 to 25% so the business can make a profit. My other fear is this will creep into other businesses causing more closures of other businesses and much higher prices in California.
Russia Oil Revenue
You may have figured out that because of the increase in the price of oil Russia is now drowning in cash. Their oil revenues are up substantially compared to before the war in Ukraine. Russia is now averaging oil export earnings of $20 billion/month, an increase of 37% from the earnings of $14.6 billion/month in 2021. Indirectly the United States is helping Russia generate more revenues in oil by producing less. The United States needs to open all oil wells, pipelines, and do whatever it takes to produce oil anywhere they can to shut Russia down. Let’s put the green energy objective on hold for a year or so to shut down Russia. If we did that the war in Ukraine would be over rather quickly.
Harrison Johnson, CFP®: "Understanding all risks in retirement"
Monday Aug 22, 2022
Monday Aug 22, 2022
In the past we have posted about where will Apple find the next area of growth for their business. One area of growth for them could be the $452 billion mobile ad market which could grow to $680 billion in 2026. They also may take advantage of trying to get into the online advertising market which is about $600 billion. There are many different ways that Apple may end up putting advertising on your phone and through your apps. It will be interesting to see how they handle this over the next few years and how consumers accept more advertising on their phone.
The affordability index of homes in the US has fallen to 98.3 which is the worst since June 1989. With rising mortgage rates and the sale prices of homes not dropping yet, home buyers just cannot afford to buy a home. If you’re already in a home, you do have the appreciation to use for a down payment on a new home, but if you’re trying to get into your first dream home that is getting farther and farther away for first time home buyers. Not only are the payments harder to qualify for, but the 20% down payment on a home of is also much harder to achieve. If you look at a $400,000 home the 20% down payment would only be $80,000 versus a home of $600,000 that would require a down payment of $120,000. That's a 50% increase. This is also preventing homeowners from moving up to another level if they cannot sell their existing home to first time buyers.
Generation Z, who are ages 18 to 24, have been an active generation of investors with half of them investing and 26% buying stocks. They have really only experienced the decline from Covid and feel stocks always rebound quickly. This year they are learning a new lesson and a bank rate survey found that 73% of Gen Z traded actively this year compared with Gen Xers, who are 42 to 57, just 28% traded. With baby boomers only 25% traded. I think the problem could be is where Gen Z gets their information. Half of them learned investing on YouTube and watch other exciting videos and 1/3 receive their education on TikTok. In my opinion those are probably not the best sources. At their age and their experience level, they expect quick rewards as opposed to having long-term patience.
There's a lot to the Inflation Reduction Act that I don't like, but I think the thing that bothers me most is the name of the bill. Why don't we just call it what it is.... it's predominately a climate bill and has very little to do with inflation. I will say one of the benefits in the bill is that Medicare will be able to negotiate drug prices. Far too often I believe the government just has to pay top dollar for products and services, which makes little sense to me. The downsides are plentiful, but some of the main areas of concern include how we will be paying for this bill. The first that comes to mind is the 1% tax on stock buybacks. This creates value for shareholders and shareholders already pay capital gains tax when money is made after selling an investment. This is essentially a penalty for companies rewarding shareholders and it will be interesting to see how this impacts buyback behavior. The 15% alternative minimum tax is far too complicated for the average person to understand, and I will continue to monitor how this will ultimately impact businesses and their investment decisions. Most of the investments as I mentioned go to climate policy with $369 B out of the $437 B in investments going towards "energy security and climate change". This includes a bunch of fluff including something as silly as $27 billion for a national climate bank and $3 billion for so-called "climate justice".
China is having economic problems which is starting to show up in their top 100 property developers as of July. Sales for these top developers saw a decline of 39.7% in the month of July. This could be the start of some more issues for China!
Inventory and Sales
While the retail sales number for July today showed no gain compared to June, the year-over-year gain of 10.3% shows me the consumer is still willing and able to spend money. The only two areas that showed a decline compared to July 2021 were electronics and appliance stores which were down 9.9% and department stores which were down 1.4%. I believe the decline in electronics and appliance stores can be largely attributed to the demand pull forward we saw during covid and for department stores it could be due to discounted inventory. This was apparent in Target's report where they missed consumer demand and had to severely discount excess inventory. Although gas station sales fell 1.8% compared to the month of June as fuel prices declined, compared to July 2021 gas station sales were still 39.9% higher as fuel prices still remain elevated. Food services and drinking places still remained a popular area for consumers as sales were up 11.6% compared to last year. Overall, the consumer still looks to be in a good position as we enter the back part of 2022.
The US markets have recovered somewhat, however; I am not convinced it will last for the growth stocks. If you’re thinking it may be a good time to look at the emerging market stocks, they have been struggling as well. Over the past five months there has been $39 billion in outflows from emerging market stocks. That is the longest losing streak going back to 2005 when records begin.
With both mortgage rates and housing prices remaining elevated, demand has definitely pulled back in the housing market. In July, Existing home sales which look at closed contracts (likely signed in May and June) were down 6% compared to the month of June. Looking back to July of last year, existing home sales fell 20% to a seasonally adjusted annualized rate of 4.81 million units. If you exclude the craziness of Covid, this was the slowest rate since November 2015. The problem is supply remains extremely tight and there were just 1.31 million homes for sale at the end of July, which would generate a 3.3-month supply based on the current sales pace. Generally, 5-6 months is considered a healthy market. One of the major problems is first-time buyers are not playing an active role as they accounted for just 29% of buyers in the month of July. This compares to a historical level of around 40%. Much of this likely has to do with affordability. High rates and economic uncertainty have also led to an increased level of cancellations. In July, 17.6% of builder contracts fell through, compared with 8% in April and 7.5% in July 2021. For existing home sales about 63,000 of those agreements fell through in July, or about 16% of homes that went under contract that month, according to Redfin. Cancellations were 12.5% in July 2021. This indicates to me that either mortgage rates or housing prices have to give to create a stronger demand environment.
Saving Rates Due to Covid
The savings rate surpassed 30% when Covid hit because people had nowhere to spend the money they were receiving. It has dwindled back down to a normal savings rate of around 6%. The banks have not raised their rates on savings much and it may be a while before they do. You may think because the federal funds rate is increasing, banks must increase their savings rate. That is not correct. The reason the bank raises their rates is to attract more money. Well, the banks still have plenty of cash on their balance sheets so there’s no incentive for them to raise their rates. Banks are in the business of lending money, and they earn their money off the spread of what they pay for money and what they loan money at. I would not expect to see this change anytime soon but this is going to help the banks with some good profits over the next few quarters.
Harrison Johnson, CFP®: "Moving Out of State in Retirement"
Monday Aug 15, 2022
Monday Aug 15, 2022
The highly anticipated inflation numbers for July came out today and were better than expected. July inflation was 8.5% a decline from June‘s inflation numbers of 9.1% and also below the forecast of 8.7%. One month does not make a trend however I believe this could be the start of the decline to December 31, couple reasons I think that.
We have continued to post about different commodities and how their prices have come down and it would take some time to get through to the consumer. I believe we’re starting to see the benefit of those declining commodity prices at those commodity prices will continue to decline. Supply chains at this time will not drop and will either stabilize or increase supply and continue to rise faster than demand. I also believe the consumer will not go back to high spending, they are still feeling the effects of the higher prices and will continue to reduce where they can.
I have also mentioned in the past about the higher base number for inflation which would make year over year inflation numbers lower.
Stay tuned we will continue to watch inflation closely
I have talked in the past how I expect inflation will ease as commodity prices decline and we are now seeing that unravel as hedge funds have continued to drop the contracts bringing prices way down for soybeans, wheat, and corn. The biggest decline has been seen in wheat, which is down 27% over the past three months, corn has fallen 24% over the same time while soybean is down 14%. This will not be reflected tomorrow at the grocery store and if we have a difficult harvest this summer and Ukraine exports of wheat stop again this could turn around and go back up. We will be watching this but as of now I think will see inflation cool over the next few months
On our radio show and podcast the Smart Investing Show, one of the valuations that we cover is the price to tangible book value which backs out intangible assets. When they economy slows down and markets decline this is when investors can begin to see intangible asset write downs. Currently intangible assets now account for about 30% of the total assets of the 500 largest US companies, which does not include banks and real estate firms. Compare that to 10 years ago when it was only 5%. With higher interest rates, lower growth projections and lower stock prices this can cause companies to do what’s called an impairment of assets and write down all or some of the intangible assets. Some analysts and others say it doesn’t matter because they are non-cash write downs. We choose to be more conservative and say that these intangible assets represent cash paid at the time of purchase and had the company not overpaid for the asset they would still have that cash on the balance sheet. It is also apparent that companies that are forced to write down their intangible assets tend to underperform the market for years after the impairment. This is why at my investment firm Wilsey Asset Management for well over 20 years when we are investing we always look at what the intangible assets are during good times and bad times and this is why when we go through difficult times like now we know we have very strong companies that can weather the storm.
The current world population is 7.96 billion people, and it is projected by the year 2050, (which is now only about 27 years away) the population will grow to 9.7 billion people. The question is how will we feed all these people? It is very interesting to note how farming more than ever needs to be extremely productive. There are companies now that are using drones, robotics, navigation systems and extensive use of data and analytics to make farmers more productive. Some companies making headway in this industry which may be good long-term investments would include Deere and CNH industrial. This may also be one of those investments that make you feel good because you’re doing something to help feed the world and yet make money on your investment. Please note this could be a very long term investment and we have not done the fundamental analysis on these companies.
Las Vegas has always been a popular tourist destination, but it is really hitting historical highs as consumers are looking for good value in their vacations. Caesars and MGM last week reported record performances for the operations in the gambling and entertainment Mecca in the latest quarter. They were saying that older consumers are returning to the strip as they are no longer concerned about the pandemic. Also, international travelers began coming back in recent weeks and businesses are booking conventions at a high pace filling up the calendar. This has come with a cost as in June 2020 the average daily hotel room rate on the strip was only $118 and in June 2022 that had skyrocketed to $167, a 42% increase. If you plan on staying at the higher end properties during the weekend, be prepared for a price around $500. And even if you’re willing to pay those higher rates occupancy at places like Caesars was at 97% so don’t expect any deals or the exact room you want. Year over year visitation to Las Vegas has increased by 12% from June 2021 to June 2022 and the gambling revenue in June was about $1.3 billion which is the 16th month in a row that the gambling revenue was over $1 billion.
I’ve always liked the railroads as an investment because they were rather simple. Unfortunately, over the last couple years they have become too expensive for us to hold in our portfolio, but that could be changing as labor issues continue to build for the railroads. President Biden and the government have stepped in, and Congress can force a deal to prevent a strike. Wall Street is predicting a 2 to 3% rise in wages which will hurt the railroads because labor is their largest expense at 20% of revenue. Working in the railroad industry may not be the most glamorous job but trainees can start at $50,000 for the first year while conductors and engineers can hit $80,000 on an annual basis plus benefits. There is a labor shortage at the railroads, but they are competing for workers with a shortage of 80,000 truckers, and over 10,000 pilots. I am hopeful one day in the future maybe we can see a railroad company in the Wilsey Asset Management portfolio.
The NASDAQ had a nice reduction in the year-to-date decline from nearly 28% to around 17% today. That was helped because of a large amount of inflows to growth stocks in July of $9.3B which was the largest on record. However, value stocks are still ahead of growth stocks by $74 billion year to date showing people are still cautious with their investing. I believe people are underestimating the Fed and still believe value will win come December 31st.
Strong Job Market
Some good news on the recession front, S&P 500 companies are still spending on capital expenditures at a good rate. Year over year their increase is 20% on capital expenditures. What this tells me at this point is the job market should remain strong and people should continue to have jobs. As always, we will be watching this closely for any changes!
Harrison - Charitable Remainder Trusts
Monday Aug 08, 2022
Monday Aug 08, 2022
Friday’s job report was a good surprise showing non-farm payroll increased by 528,000 jobs, this caused the unemployment rate to fall to 3.5%. We have now recovered all the jobs lost during the pandemic returning to levels not seen since February 2020. Average hourly earnings were up 5.2% over last year but it appears that wage growth could be slowing.
In a separate survey from Greenhouse a recruitment software company said that 70% of workers are optimistic about the job market. 66% of people surveyed said if their wages were cut, they would look for a new job. There are still about 5.9 million people in the labor force who want a job, based on the latest JOLT’s report there is still nearly two jobs for each person looking for a job.
The biggest gains in jobs were found in the Leisure and Hospitality, 96,000. These are not low paying jobs any longer, the nationwide average is $20.22/hr which is 26% higher than four years ago. Remember this is a national average, wages will be higher in California then in Arkansas.
Job growth was also seen in Professional and Business services up 89,000, Healthcare up 70, 000, Government climbed 57,000, lastly construction jobs increased 32,000.
The good news scared the markets and pushed the ten-year treasury to 2.84% with concerns of sharply higher and longer rate increases.
The JOLTS report came out this week and while the headline numbers may look concerning it is important to point out the levels, we have been seeing were extremely elevated and not sustainable. Total job openings of 10.7 million at the end of June missed the estimate of 11.14 million. This was a decline of 605,000 or 5.4% compared to the month of May and was well off the recent all-time high in March of 11.86 million. The level of job openings is well above the level of available workers as the difference is still 4.8 million. This means there were still 1.8 open jobs per available worker! Also, to give you an idea of where we were at pre pandemic, in December 2019 total job openings stood at 6.7 million. This was an elevated level historically and also, during a very healthy job market. Overall, this job's market still remains very strong.
We have been talking about the strong dollar that we are currently enjoying along with some of the benefits and unfortunately some of the negatives. Another example is recently the US dollar could by 80 Indian rupees, a high that has never been seen in history. Using the most recent trade report from 2019 (2020 was during Covid and not useable data) shows the US exported to India $59 billion but our imports were $87 billion. Our strong dollar means we will be paying less for the imports from India, hopefully we will not see a decline in what we export to them.
Credit Card Increases
Credit card balances increased $46 billion in the second quarter bringing total credit card debt to $890 billion. Inflation became the immediate concern, but maybe that is not the entire reason. Remember how much traveling has exploded in the second quarter with airlines and hotels seeing their businesses boom. When’s the last time you were at the airport and saw someone pay cash? Most of these reservations and transactions are done online via credit card. The JOLTs report came out yesterday and was strong at 10.6 million job openings. When people have a job, they feel confident that they won’t be losing it anytime soon and feel more comfortable running up some debt on credit cards. Two other facts should be pointed out. In the final quarter of 2019 credit card debt hit $930 billion, roughly $40 billion above where we are now. Also, consumers do have $2 trillion more in savings today than back in 2019.
Assets Under Management
A recent survey conducted by Bank of America of 300 fund managers with assets under management of $800 billion backed my optimism for our portfolio come the end of the year. It was revealed that cash holdings now stand at 6.1% which is the highest since October 2001, a month after the terrible event of 9/11. This may not mean that the decline is now over in equities, but it could signal that perhaps the worst is behind us. It was also notable that responses to the survey listed the three most popular sectors which included consumer staples, utilities, and healthcare. Unpopular in the survey was technology and consumer discretionary. Anyone want to guess what popular sectors Wilsey Asset Management agrees with? Please be aware we will not confirm nor deny.
Around 6 to 12 months ago we did a post about the crazy secondary sneaker market with sales of sneakers going at outrageous prices. We posted this was happening because of all the free money that was being given out and when the free money stopped the market on secondary sneakers would drop like a deflated basketball. Well that time has come with a glut of sneakers on the secondary market and prices are falling by nearly a third. Just like the meme stocks and cryptocurrencies, when the demand drops so do the prices, and if you did invest in some limited edition sneakers you may want to be one of the many who are unloading now to get better prices. If not, you may be using them for playing basketball on the weekends. As I write this post, I also remember writing another post about the high-end luxury purses and how they were going for outrageous prices. I have not read anything yet on their decline, but it would not surprise me to see that within the next six months as well. If people would just be satisfied earning around 10% on good quality equities many more people would have a much better retirement.
42% of Americans say they are not impacted financially from the recession but have become cautious with spending. However, consumer sentiment is at the lowest level on record going back to the late 70s which means consumers are more pessimistic than the 911 attack, the tech bust and the great recession from 2007 to 2009. On the positive side unemployment stands near record lows, savings for consumers are $2 trillion higher than before the pandemic and overall consumers seem resilient. So, what is a difference this time? The only thing I can think of is people have less faith in this current administration in Washington than they have in a long time.
I’ve been predicting we will see inflation by the end of the year somewhere between 4% and 6%. While that is good news from these levels, the problem is that the Fed's inflation target is 2%. This may result in a repeat of the 1980 and 81-82 double dip recession. If inflation gets stuck in the 4% to 6% range in 2023 the Fed may once again start increasing interest rates in late spring or early summer causing two consecutive quarters of negative GDP. In summary this means 2022 and 2023 will be low growth years which do not favor growth stocks and investors will have to find good values in value stocks along with being patient and happy with returns in the 6% to 10% range and high volatility.
We’re in the middle of earning season and you may be hearing or will be hearing some companies talk about the effects of the strong dollar on their earnings. Nearly a third of S&P 500 earnings come from overseas which can negatively affect their earnings. Be aware this negative affect could be gone in a year or so.
Harrison Johnson, CFP®: Medicare Irmad (Income related monthly adjusted amount)
Monday Aug 01, 2022
Monday Aug 01, 2022
In a search for value at Wilsey Asset Management we’re always looking for companies that have gone on sale with strong fundamentals. What follows are four companies from last week that were down substantially from their 52-week highs. We have not done the research to see if they’re fundamentally strong, but they are definitely on sale. Snap which trades under the symbol SNAP fell to $9.96 last week and back in the fall of last year it was trading in the low $80s. We’ve also talked about the cannabis stocks and once again cannabis company Canopy Growth has continued to fall reaching $2.57 last week well off the high reached about a year ago of $19 a share. Back in 2018 the stock was around $50. The company trades under the symbol CGC. A company called Silver Gate Capital symbol SI which is a crypto bank, back in November was trading around $220 a share and Friday it closed at $86.50. I know cryptocurrencies have rallied lately but I don’t think investors will find any value here. And lastly Carnival Cruise lines which trades under the symbol CCL closed at $9.26 last week and if you look back to September/October of last year you will discover the stock was trading around $24-$25 a share. I do believe this company has a very weak balance sheet but maybe there is some value there if one digs deeper.
Last week President Biden reported that he had COVID-19 along with Dr. Fauci. They also have been very cautious and have received the vaccination and the double boosters that were recommended. It seems to me that no one really cares any longer about COVID-19 and that there is no reason to get the vaccination or the boosters if you still get the virus. What I think about is how hard Pfizer, the drug company, has pushed the vaccinations and the boosters to everyone including even infants. Their stock rose on the news last year but year to date their stock has fallen over 9%. I know this company has many other drugs but I’m just thinking that less people will be getting the vaccinations and boosters going forward and that could hit them on the revenue side. The stock is not expensive trading just under 10 times forward earnings of $5.46 and has a decent dividend yield of 3%, but I worry with the fear of Covid dropping I presume the vaccinations and the booster shots worldwide will decline. What that tells me is perhaps there could be a better time to buy Pfizer over the next six months or so. It is worth watching.
Natural gas has been extremely volatile this year and just about a month ago it seemed like it was heading in the right direction. That has now changed as the prices for natural gas has surged 77% in the month and is on pace for its largest monthly increase on record. Natural gas hit a high of $9.75 per million British thermal units (MMBtu) this morning which is the highest level since July 2008. This comes as Russia has said Gazprom's Nord Stream 1 pipeline will operate at just 20% of its capacity due to "turbine maintenance". This is such an important energy source and will likely lead to continued problems for inflation. Just to give you an idea how important the commodity is, natural gas is the largest source of energy for electricity generation at 38%, it's used in the industrial sector to produce chemicals, fertilizer, and hydrogen, and it's used in both the residential and commercial sectors to heat buildings and water, to cook, to dry clothes, and to operate refrigeration and cooling equipment. If we cannot get energy price inflation under control, I believe we will be unable to resolve inflation overall.
I was definitely not impressed by Microsoft's (MSFT) earnings report and was surprised to see the stock rally. I think it is just traders trying to "buy the dip" as the results were quite unimpressive. The company reported sales of $51.87 billion, vs. expectations of $52.44 billion and EPS of $2.23 vs. expectations of $2.29 per share. Revenue growth was just 12% and net income was up just 2% in the quarter. I say just because for a company trading at a forward P/E over 25x based on 2023 earnings, the growth should be much more impressive. Even cloud was a disappointment as revenue from Azure and other cloud services grew by 40% which decelerated from last quarter's 46% and missed analyst expectations of 43%. First quarter guidance of $49.25 billion to $50.25 billion in revenue also missed expectations of $51.49 billion. I continue to believe the stock is just too expensive, especially with numbers like this!
Rising interest rates are continuing to impact the housing market. Pending home sales just came out for the month of June and they were 20% lower than last year. Looking at the sales compared to May, sales were down 8.6% which was much wider than the 1% drop analysts were looking for. Excluding the first two months of Covid, sales came in at the slowest rate since September 2011. Mortgage applications have also remained weak as the recent report showed applications to purchase a home were down 18% compared to last year and applications to refinance were down 83% compared to last year. With a higher amount going to interest, homebuyer affordability is just too much of a problem which I continue to believe will weigh on housing prices.
To be clear, I was initially excited about the CHIPs act, but now I think it is just silly. The whole point of the bill was to help with semiconductor manufacturing, but of course they snuck in a bunch of other money. The legislation includes $52B in subsidies for domestic production and a previously reported investment tax credit for chip plants that could be worth an estimated $24B over the next decade, but now it also includes $200B to boost scientific research. It's just silly that they call it a "chip bill" but close to 75% of the money is going towards "scientific research".
Gross Domestic Product (GDP)
Based on the advanced estimate for Q2 GDP we are technically in a recession which is constituted as two consecutive quarters of declining GDP. The National Bureau of Economic Research officially declares recessions and expansions, but their determination will not come for a few months. Going back to 1948 every time there were two consecutive quarters of declining GDP the economy was considered to be in a recession. Looking at current dollar GDP it actually increased 7.8% at an annualized rate, but due to inflation real GDP declined 0.9% in the quarter. The consumer portion of the report increased just 1% as spending on services accelerated during the period by 4.1%, but that was offset by declines in nondurable goods of 5.5% and durable goods of 2.6%. Gross private domestic investment weighed negatively on the report with the change in private inventories subtracting 2.01% from the headline number. Government spending also reduced the headline number by 0.33% and trade or net exports was a major surprise as it added 1.43% to the headline number. Overall, I'd say this report isn't extremely troubling, inflation has just made it harder for the economy to grow.
Last week we did a post about the problems with solar energy in regard to the solar panels. Another problem with solar energy is it would take 13,000,000 acres to generate enough electricity for the US. And you can double that if you include energy storage, electric vehicle charging stations and increases in electrical infrastructure. So, you might say OK what’s the big deal let’s go ahead and do it to save the planet. Here is the problem, you already know food prices are rising and companies that want to lease land for the solar panels are turning to farmland in Texas and the Midwest. It is starting already to where some solar companies are paying $800 an acre to lease the land with high numbers being quoted at $2000 an acre. That means farmers can make a lot more money for just leasing the land than putting all the time, effort, and expense to farming the land. As you know we always talk about supply and demand, well if this were to happen there would be a drastic cut in the supply of food which would cause extremely high increases in food costs and could lead to food shortages. I don’t know about you but the more I read and learn about solar as an alternative energy the less and less I’m excited about it.
Prices on raw materials are beginning to fall dramatically which will help inflation 3 to 6 months down the road. If one looks at the current price per ton of economically sensitive copper at $7000, since March that’s a decline of 32% and even since early June that’s a 26% drop.
In the United Kingdom the weather is cooler than here in the US, but they can still see days when the thermometer climbs over 100 degrees. What is shocking is that only roughly 5% of homes in the UK have air conditioning, a far lower number than the United States with 90% of homes having air-conditioning. With all the problems we have in our country we still have many things we take for granted compared to the rest of the world. Let’s remain cool on the problems that we have.
Harrison Johnson, CFP®:
Monday Jul 25, 2022
Monday Jul 25, 2022
I for one am glad to see positive news from the Senate regarding a bill designed to boost US semiconductor competition. After a key procedural vote that passed 64-34, the stage is now set for final passage in the chamber either late this week or early next week. It would then head to the house for passage and finally to Joe Biden to sign the bill into law. The bill would provide about $50 B in subsidies to aid chip manufacturing. Some chip companies like Nvidia, AMD, and Qualcomm aren't as pleased with the bill as they say the bill does not do enough to support them and it favors manufacturers like Intel. Personally, I do not believe we need a bill to help chip design as that has been a highly profitable business many chip companies have focused on. The manufacturing side is not as profitable and is much more capital intensive. Manufacturing is where the major issues are as we have seen 48% of chip sales come from US companies, but just 12% of the manufacturing takes place in the US. This is down from 37% in 1990. I was also glad to see the new bill was stripped down from other versions that included other areas of focus like taxes and climate policy. I hate when politicians try and bundle a bunch of crap into one bill, especially when a particular area has bipartisan support.
I have been getting a lot of questions about 529 plans lately and I must say for the most part I don't believe they are worth it. Looking at the tax benefits I do not think they are worth the potential risk. To begin some states, allow for a deduction on state income taxes, but here in CA there is no deduction for a contribution. The other benefit is the funds grow tax free and withdrawals are tax free if used for qualifying expenses. The downsides here are that if the funds are not used for qualifying expenses there is a 10% federal penalty, CA imposes a 2.5% penalty, and the gains are subject to income tax. Also, the investment options are limited to whichever plan you decide to pursue and if you go with a broker advised fund, watch out for the sales commissions on the funds they are recommending. For the most part I recommend building your investments which then gives you the option to pay for college down the road if that is what you would like to do and you believe your kids deserve it. I will say there are some cases the 529 plan makes sense, but for the average person I'd say building your net worth is the better option.
Apparently investing for green energy is not always going to work out well in the end. There has been a boom of buying solar panels for clean energy. Well now it is coming out that solar panels only last 20 to 25 years on average. After that many of these panels are being shipped overseas or end up in landfills because it turns out that to recycle them costs more than to manufacture them. You may be thinking wait a minute silicon is recyclable which is true but also mixed in with the silicone is cadmium and lead, and that is the problem.
The department of toxic substance control from the state of California has listed solar panels under the hazard waste title as universal waste. If you have panels that were installed 20 years ago, they also lose their efficiency by about a half percent per year. So, if your panels are 20 years old, you’re only getting 90% of the energy that you were when your first bought the panels. I would not want to be holding the public solar companies (SEDG, FSLR, MAXN) as I imagine in future years they will be blamed and be hit with lawsuits and penalties to clean up the mess.
Some people like the idea that trading cryptocurrencies is not regulated by the government, but some people trading cryptocurrencies don’t understand how much risk is involved. Let me give you a couple of examples on Wall Street that don’t exist in cryptos. On Wall Street there are market makers, stock exchanges and brokerages that are separate due to conflicts of interest. That is not the case with trading crypto, it is possible for crypto firms to trade against their own customers or do something that is known as front running which means they sell their positions before the customers to get the better price. There is no prohibition against wash trading on crypto exchanges and also there is no best execution rules, and no standardized reporting exists. If you think crypto‘s are good or bad the trading system has many holes and room for fraud.
If you walk through the beverage aisle at the grocery store you may have noticed that some cans are getting skinnier and not using the barrel type cans. Do not worry as it is still the same 12 ounces, and it is not shrunk inflation. This is done for a couple of reasons; they take up less room on the shelf and in transportation which saves some costs along with now maybe standing out from the competition. There’s also a psychological benefit that because they are slimmer it tricks the brain into thinking they are healthier with less calories. Sounds silly I know but it’s true. There is one problem, you may have noticed which I have, is they don’t work quite as well in the cupholders in cars because the car cup holders are designed for the barrel type cans.
Tort Litigation System
I was shocked to learn that back in 2016, the tort litigation system cost the US 2.3% of GDP which is roughly $429 billion a year in the United States. My guess is this has likely increased even further in recent years. This number is so high because it is estimated that there are more than 40 million lawsuits filed each year. What is also interesting is that just 57% of the money was paid as compensation to the plaintiffs, while the remaining 43% covered the cost of litigation, insurance expenses, and risk transfer costs. Part of the problem I believe is because now about 95% of pending lawsuits never make it to trial, they are settled. This avoids the aggravation of going to trial plus the added expense, but it also makes it more rewarding for people to file frivolous lawsuits in the hopes of getting some free money. And if you wondering the United States is the most litigious society in the world.
The Semiconductor Bill
Just a couple of days I said I was excited about a semiconductor bill that was making its way through congress. Today after looking at more details, I am reminded of why politics is so frustrating. On top of the spending designated for semiconductor manufacturing, it could include $81 B would go to the National Science Foundation (doubles the present budget), $9.6 B would go to the Commerce Department's National Institute of Standards and Technology, $11 B would go to the Commerce Department's regional technology hubs, $50 B would go to the Energy Department's Office of Science, $4 B would go to the national labs, and you can't forget about the $1 B for "distressed" communities and labor markets. All this fluff is exactly why nothing gets accomplished in DC. You finally have something that has bipartisan support and add a bunch of other areas that do not.
Harrison Johnson, CFP®: “Understanding Internal Rate of Return (IRR)”
Monday Jul 18, 2022
Monday Jul 18, 2022
Another month, another extremely high inflation rate. The CPI came in today for the month of June at 9.1% which topped the estimate of 8.8% and was the highest level since November 1981. Energy inflation was top of mind yet again as gasoline prices climbed close to 60% compared to one year ago, electricity prices grew 13.7% over the same time frame, and natural gas was up 38.4%. Food prices also remained hot as they rose 10.4% over the last 12 months and the shelter index was up 5.6% which was the highest level since February 1991. One area that is seeing a "reprieve" from what I believe is more difficult comparisons is car prices. The cost for new vehicles was up 11.4% compared to last year and the used car & truck index was up 7.1% during the same time frame. Remember recently this was around 30%! With that said I still believe inflation will be lighter as we exit the year, but all lighter means is not as high! We have started to see some reduction in commodity prices which could help with input costs for companies and could slow the CPI in the months ahead. Remember it takes time for these various costs to work through supply chains and the overall economy.
Producer Price Index (PPI)
After yesterday's CPI report, the Producer Price Index (PPI) remained around historic levels. In the month of June, Headline PPI was up 1.1% compared to the month of May and increased 11.3% compared to last year (Recent all-time high was 11.6% in March). Of the month over month gain almost 90% came from a 10% increase in final demand energy. One positive note was the core PPI which excludes energy, as well as food and trade service prices was up 6.4% compared to last year. This was a deceleration from May's 6.8% gain and off the 7.1% gain we saw in March. Unfortunately, with these elevated prices, the higher costs will likely continue to be passed on to the end consumer.
There may be a recession coming but it will be the best recession we may have seen in our lifetime. There's not enough room in this post to list all the reasons so I will have to summarize some of the facts briefly. Inventory levels at many companies are low. Profit margins at companies are high around 18%. For reference, profit margins heading into recessions in 1991 and 2001 fell to single digits. Businesses are sitting on a record $4 trillion in cash. Households still have $18.5 trillion in checking accounts, savings accounts, and money market mutual funds which is about $5 trillion higher than before the pandemic. The job market is still very strong and in the 12 recessions since World War II that has never been the case. And I forgot to mention in the second quarter many commodities like soybeans, wheat and corn have dropped double digits. You may hear the media and other worry warts screaming the sky is falling like chicken little. But I believe this will not even feel like a recession. Let’s see where we stand December 31, 2022. In the meantime, I’ll be keeping my eye on the important data not the media hype!
Historically, slowdowns in new home construction have been a leading indicator for past recessions. In the month of May we saw new home construction drop 14% from a month earlier, but before you hit the panic button it's important to look at the lessons home builders learned from the housing crisis in 2007. During that time frame they drastically overbuilt, which does not appear to be the case this time around. In fact, in the first quarter, total US spending on home building was 22% below the pace of building at the peak of the early 2000s. I believe we have an expensive housing market set for a pullback, but by no means do I believe we have a housing crisis that led to the Great Recession in 2008 and 2009.
People have been worrying about the increase in mortgage rates, but historically they are not out of control by any means. In fact, if you go back to 1971 the long-term average for 30-year mortgage rates is just under 8% and the record high that came about in 1981 was 16.64%! At around 6% I'd say we now have a more normalized interest rate environment and the days of getting under a 3% mortgage are in the past.
I’m glad to see in what we may call these crazy times that ethics are still important. The Securities Exchange Commission (SEC) fined the accounting firm Ernst and Young $100 million for cheating on ethics exams. It is so important to keep the integrity of our businesses and our young graduates coming out from higher education good ethics result in a good long-term career.
As the economy slows down job retention should be on more employees' minds. A couple of things to think about. First if you switch jobs and you’re the new hire at the company and there’s a layoff you’ll probably be the first one to go. Make sure your face is seen at the office, working remotely makes you less memorable and produces less of a connection with the employer which makes it much easier to put you on the list to go first. Make sure you’re doing extra training to be more valuable to your employer and also show up to work a little early and don’t leave right at 5 o’clock. Show your boss you care. If layoffs at your firm come around in the next 6 to 12 months, you want to make sure that you’re known as a hard worker and that you're dependable.
We have been continually talking about the strong job market and how it will soften a recession. The average increase in base pay in the US so far in 2022 is 4.8%. This is what employers are coming up with to retain their employees. This is not like the past 12 recessions since World War II where employers were trying to reduce their employees pay to save money. About a third of employers are considering or planning midyear raises and many employers are giving percentage bonuses in the month of July. This is great news for consumers and the economy. The downside is inflation is eating into these gains.
Retail sales came out today and I'd say it was an alright report. June retail sales were up 1% compared to May and compared to June 2021 they grew 8.4%. While that is a nice growth rate, it is important to remember inflation was 9.1% in the month which means the sales did not likely produce a real growth rate when accounting for inflation. Categories that drove the sales included gas stations which were up 49.1%, grocery stores up 8.3%, and food services and drinking places up 13.4%. Areas that were weak included electronics and appliance stores which were down 9.1%, department stores were down 2.9%, and auto & other motor vehicle dealers were down 1.1%. With the numbers now in for the full quarter I still believe it's possible GDP contracted again in Q2 as consumer spending was not able to keep up with inflation.
I don’t know about you, but I really like corn on the cob with a nice coating of butter. Unfortunately, corn is one of the food categories because of the Russia and Ukraine war that has shot up 27% since January. On the other side of the coin rice has fallen 17% since January so maybe I will have to switch over to fried rice. However, health wise that is probably not the healthiest decision.
Harrison Johnson, CFP®: "Tax-loss Harvesting"
Thursday Jul 14, 2022
Thursday Jul 14, 2022
Friday's job report will be a very important indicator for how the job market is holding up with inflation concerns and rising interest rates, but today we got the data for the JOLTs report. In May the labor market remained strong as there were still 11.25 million job openings. This far outweighed those counted as unemployed as it stood at 5.95 million people. This means there are still about 1.9 openings per available worker. The quits rate also declined but it still stood at 4.27 million for the month of May. While both data points have fallen from recent record highs, overall, I still believe the labor market remains strong. Due to the strong labor market and no signs of excessive leverage, I believe the recession being discussed will be mild.
The employment numbers did not disappoint today, and they provide further evidence for an economy that I believe will be ok. The establishment survey showed payrolls grew 372,000 in the month of June which blew past the estimate of 250,000. The previous 2 months were revised lower by a total of 74,000 jobs, but overall, I would still say it was a good gain. The establishment survey is now just 524,000 jobs lower than pre-pandemic levels and if you look at the private sector it is actually 140,000 payrolls higher than February 2020. The household survey showed unemployed persons now stood at 5.9 million, which is just slightly higher than February 2020 when it was 5.7 million. Two areas that remain troubling are the labor force participation rate and wage inflation. The labor force participation rate still stands at 62.2% which is below the February 2020 rate of 63.4%. Looking at average hourly earnings we saw an increase of 5.4% over the last 12 months, but that is still well below the 8%+ inflation rates we have been seeing.
Growth Stocks vs. Value Stocks
Numbers are in for the first six months of 2022 and for the first half of the year growth stocks fell 25% compared with value stocks falling 12%. That is a gap of 13% which is the widest in 20 years. I believe the difference in the next six months will be reduced but still expect value to outperform growth stocks.
Normally going into a recession or a slowdown, American car makers and their stocks get hit pretty hard. So far that appears to be the case with falling stock prices, but if one looks deeper investors should be less concerned this time around. In past recessions car makers were stuck with large inventories of vehicles that they had to discount dramatically to move the inventory. This then caused them to take large losses. That is not the case this time as the demand may not even be met in a slowing environment due to extremely low inventories. Another interesting point is that generally 40% of sales come from buyers with incomes under $50,000 who are hurt the most in a slowdown in the economy. Today that number has fallen to just 25%. It appears that two car manufacturers in the US could be drastically underpriced.
I am pro-business and believe in letting market forces work, but I’m very disappointed with Pfizer‘s handling of the Covid vaccination. I’m not talking about the effectiveness or non-effectiveness. I’m talking about how they just raised their price to the US government by 27%. I think it is a shame that they would take advantage of not just the US government but also taxpayers who are paying for this. I’m also disappointed that the administration did not fight this and tell Pfizer the 27% increase is not justified. And don’t forget how they have increased vaccinations all the way down to six-month-old babies which I think is uncalled for based on the minimal risk that kids face from Covid.
Even with the major selloff we have seen this year, I still have concerns about the S&P 500. The top 5 companies still make up close to 22% of the entire index. Those companies are Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), Alphabet (GOOG, GOOGL), and Tesla (TSLA). The major problem here is all these companies remain expensive as the average forward P/E for the group is over 30x. I also worry about the growth expectations for these companies. With Apple in particular I believe they are one bad iPhone cycle away from a major pullback in their stock. People like to ignore the fact the iPhone sales still make up over half of the company's revenue and if you add Mac sales to that those products account for about 60% of total sales. They have other areas of growth, but a decline in these product sales would outweigh the growth in other areas. I've questioned it before, but other than a nicer camera are the new iPhones really that much different? Could this be the year iPhone sales take a hit? Micron CEO Sanjay Mehrotra said on a recent earnings call that he expected smartphone unit volume to decline by around 5% versus last year. Analysts were expecting growth around 5%. And yes, Apple is a customer of Micron. Be careful of these companies that still remain expensive, especially with many other great opportunities now available in the market.
Harrison Johnson, CFP®: Social Security “Spousal” vs “Survivor” benefits
Wednesday Jul 06, 2022
Wednesday Jul 06, 2022
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?"
Monday Jun 27, 2022
Monday Jun 27, 2022
Stock Market Value Index
It's important to remember how quickly the right stocks can move and it's one of the many reasons I don't try to time market bottoms. If we look back to the last time the market was spooked by the Fed raising interest rates, it was December 2018 and the Russel 1000 Value Index lost 15.7% from November's close to the low in December. This is when we had an intra-day bear market or a loss of at least 20% from the high. Fast forward about 2 months to the end of February 2019 and the Russel 1000 Value Index gained 18.5% from the low and was about flat compared to the November 2018 close. With so much bad news currently being factored into the current stock prices, I believe the right companies can still end 2022 on a positive note. As always when you invest think about where you will be 2-3 years down the road and don't try and predict the absolute bottom.
With the markets falling, people keep asking me if they should hold and wait for their investments to come back. I always say it depends on what you have, and it could be dangerous to hold the high-priced tech stocks we have talked about. If we look at the Nasdaq which is a good barometer for many of the tech stocks, it is now down about 33.4% from its 52-week high. I still would not be surprised if the Nasdaq fell 50% from it's high as valuations were out of control before the recent sell off. If this fall did occur, that would be a fall of another 24.9% from current levels. It's important that we don't forget history and that in the tech bust the Nasdaq fell close to 80% from its highs. If that were to happen again it would be a decline of 70% from today's level. This is one of the main reasons I stick to value investing as people forget how risky these high-priced tech stocks can be.
United States Supply Chain
Morgan Stanley conducted a survey of more than 400 executives from large corporations in the US, Germany, and Japan. They discovered the most important factors in supply chain decisions are geopolitical stability, skilled labor, physical infrastructure, and a developed supply chain ecosystem. I’m happy to share that the United States outranked Europe, China, and Mexico. The good news is 18% of the companies plan to significantly expand US manufacturing in the next 12 months and 36% have a three-year plan for doing the same. I also observed more than 40% of the US companies are working hard to onshore supply chains. This could be a big benefit in our economy over the next 12 to 36 months.
Harrison Johnson, CFP®: Deducting California taxes for Business Owners
Tuesday Jun 21, 2022
Tuesday Jun 21, 2022
May Retail Sales
The retail sales numbers were again disappointing in May as month over month they declined 0.3%. Comparing to May 2021 they increased 8.1%, but inflation in the month was 8.6% meaning spending adjusted for inflation likely decreased. Many areas in the report did not keep up with inflation as clothing and clothing accessory stores only increased 6.1%, non-store retailers increased 7%, and some areas like electronics and appliance stores actually decreased compared to last year. One other major highlight was gasoline stations which increased 43.2% compared to last year.
Good News on the Inflation Front
With the US increasing interest rates it has boosted the strength of the dollar especially against the Japanese yen. The dollar has now advanced 22% against the yen to a level not seen in 20 years.
Bitcoin (BTC) Falls Below $23,000.00
Bitcoin has fallen below $23,000.00 today. So much for being an inflation hedge or safety from investing in the stock market. It is acting as we expected, a speculative investment that will not end well.
Apple (AAPL) Revenue
There is no doubt that Apple is one of the world's best companies, however; even with that standing the stock has fallen almost 30% from its high of around $183/share. What I wonder with this company having total revenues of nearly $400 billion, what will keep the excitement going and grow revenues?
Harrison Johnson, CFP®: Rule 72(t)
Monday Jun 13, 2022
Monday Jun 13, 2022
Inflation numbers were released, there was no surprise to the upside or the downside with a year over year increase of 8.6% which is the highest since 1981. I believe these numbers will be in the high range for another few months because of the low numbers one year ago. Once we get into August and September, I believe we will see lower increases in inflation numbers, more around the 5 or 6% range because of the higher number they are compounding on and also the effects of higher interest rates.
U.S Fertility Rate & Our Economy
One major problem for the long-term US economic outlook is the fertility rate. It is now expected that a woman will have 1.66 children over her lifetime. Back in 1960 this rate stood at 3.65 and even as recent as 2007 it was at 2.1. The current rate poses a problem for growing the population as the replacement-level fertility rate which is the rate that would keep the population at a constant size without accounting for immigration stands at 2.1 children per woman. The problem here is this creates an aging population which puts stress on GDP growth and benefit systems like Medicare and Social Security.
At my firm we have always recommended that employees contribute to their 401(k) with a 10% contribution as the goal and it seems like people are listening. Currently 70% of US retirement assets are in 401(k)s which is double the 35% the assets made up in 1980. Remember if you’re over 50 you can add an extra $6500 on top of the standard $20,500. Also, there is the bill in congress known as the Secure Act 2.0 with wording that adds an extra $10,000 for those 60 years and older. Invested properly, a 401K is one of the fastest ways to build good solid wealth over the long-term.
Signs in the Economy that the Supply Chain is Improving
There are signs in the economy that the supply chain is improving, and consumers could be cutting back a little bit with a rise in the first quarter retail inventories of 26% from a year earlier. This is not accounting for inflation, however; if there are more items on the shelves retailers must compete more for sales which benefits consumers with lower prices.
Monday Jun 06, 2022
Monday Jun 06, 2022
April Jolts Report
Although job openings declined in the recent JOLTs report they still remained elevated. The report showed job openings of 11.4 million in the month of April which was the second highest on record behind the upwardly revised 11.8 million in the month of March.
May Employment Numbers
Overall, the job numbers were good this morning as 390,000 jobs were recouped in the month of May. Leisure and hospitality continued to lead the way as there was a gain of 84,000 jobs.
A Major Reason Why We Do Not Recommend Leaving A 401k At An Old Employer
According to a recent estimate, at the end of 2021 nearly 25 million 401k accounts or about 20% of all 401k assets were counted as either lost or forgotten. This is a major reason why we do not recommend leaving a 401k at an old employer. Many times, your best option is to move the funds to an IRA rollover, so you take control and do not forget about those old accounts. If you are unsure if you had a 401k at a previous job, we highly recommend contacting your previous employer/HR to see if there are any funds in an account you may have forgotten about. If your old employer no longer exists, you do have a few different options. The National Registry of Unclaimed Retirement Benefits is a secure site that allows you to search for lost plans using your Social Security number. The National Association of Unclaimed Property Administrators operates a database that lets you search for plans by your first and last name. Your old employer may have rolled over your 401(k) into an IRA, in this case you can use FreeERISA to track it down. Finally, the Department of Labor’s abandoned plan database might offer some updated information on plans that have been or are about to be discontinued.
Harrison Johnson, CFP®: Tax Filing vs. Planning
Tuesday May 31, 2022
Tuesday May 31, 2022
Target (TGT) and Walmart (WMT)
We have seen companies like Target (TGT) and Walmart (WMT) get absolutely hammered this earnings season with WMT down close to 25% from its 52-week high and TGT down over 45% from its 52-week high. While valuations may start to appear attractive in the retail industry, be careful as inflation could weigh heavily on these companies. In an inflationary environment like this, you want to find companies that have pricing power and that can offset their cost inflation. In the retail space I am more interested in companies that own their own brands as I believe that right names can increase prices to offset rising costs.
Rising Interest Rates Impact the Real Estate Market
It appears those rising interest rates could now be impacting the real estate market. New home sales in the month of April fell 16.6% compared to March and were down 26.9% from April 2021. At an annualized rate of 591,000 units, the result greatly missed the estimate of 750,000 and was the slowest sales pace since April 2020. While new homes sales account for a smaller percentage of overall home sales it is based on signed contracts in the month which can be considered more up to date when comparing against closings. The slower sales pace resulted in a 9-month supply of newly built homes. A 6-month supply is generally considered a balanced market between buyers and sellers. One other major negative for builders is that they are starting to see an uptick in cancelation rates. This is just one indicator, but with affordability remaining difficult I am still looking for a small pullback over the next 6-12 months, which could present some buying opportunities.
Could rising mortgage rates and cooling housing demand actually increase housing supply? According to Realtor.com the supply for homes increased 9% last week compared to the same time period last year. This was the largest gain since the company began tracking the metric in 2017. Redfin also announced new listings rose nearly twice as fast during the 4-week period ending May 15th compared to the same time last year. The concern of perhaps a housing peak could cause more sellers to try and lock in gains before prices fall. This comes as pending home sales dropped 4% in the month of April and were down 9% compared to April 2021. Again, I want to be clear.... I do not foresee a housing crash but rather a reasonable pullback in housing prices to increase affordability.
Supply & Demand in the Energy Market
Last week I discussed the supply issues that are causing price increases for gas and diesel. On the demand side of the equation, it is not looking positive for prices. The US Department of Transportation reported Thursday that total miles driven in the US surpassed pre-pandemic levels. Americans drove 277.4b miles in March, up from 272.4 billion miles during the same month in 2019 (+1.8%), and up from 269.4 billion miles in March 2021 (+3.0%). Higher demand and lower supply will continue to produce an imbalance and higher prices in the energy markets.
Harrison Johnson, CFP®: Tax Filing vs. Planning